CONFORMED COPY
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Commission file number 0-16090
HALLMARK FINANCIAL SERVICES, INC.
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(Name of Small Business Issuer in Its Charter)
Nevada 87-0447375
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(State or Other Jurisdiction (I.R.S. Employer I.D. No.)
of Incorporation Organization)
14651 Dallas Parkway, Suite 900, Dallas, Texas 75240
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (972) 404-1637
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock $.03 par value American Stock Exchange Emerging Company
Marketplace
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorte period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [ XX ] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of the registrant's knowledge, in
definitive proxy or informatio statements incorporated by reference
in Part III of this Form 10-KSB or an amendment to this Form 10-KSB.
Yes [ XX ] No [ ]
State issuer's revenues for its most recent fiscal year - $19,200,694.
State the aggregate market value of the voting stock held by non-
affiliates $3,759,502 as of March 21, 2000.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Common Stock, $.03 par value - 11,048,133 shares outstanding as of
March 21, 2000.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference
from the Registrant's definitive proxy statement to be filed with
the Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report. Risks
Associated with Forward-Looking Statements Included in this Form
10-KSB
This Form 10-KSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, which are intended
to be covered by the safe harbors created thereby. These statements
include the plans and objectives of management for future operations,
including plans and objectives relating to future growth of the
Company's business activities and availability of funds. The forward-
looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to
the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, regulatory
framework, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could be inaccurate and, therefore, there can be
no assurance that the forward-looking statements included in this Form
10-KSB will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives
and plans of the Company will be achieved.
Item 1. Description of Business.
Introduction
Hallmark Financial Services, Inc. ("HFS") and its wholly owned
subsidiaries (collectively, the "Company") engage in the sale of
property and casualty insurance products. The Company's business
primarily involves marketing, underwriting and premium financing of
non-standard automobile insurance, as well as claims adjusting and
other insurance related services.
Overview
The Company pursues its business activities through an integrated
insurance group (collectively, the "Insurance Group"), the members of
which are an authorized Texas property and casualty insurance company,
American Hallmark Insurance Company of Texas ("Hallmark"); a managing
general agent, American Hallmark General Agency, Inc. ("AHGA"); a
network of affiliated insurance agencies known as the American Hallmark
Agencies ("Hallmark Agencies"); a premium finance company, Hallmark
Finance Corporation ("HFC"); and a claims handling and adjusting firm,
Hallmark Claims Service, Inc. ("HCS"). The Company operates only in
Texas.
<PAGE>
Hallmark writes non-standard automobile liability and physical damage
coverages. Hallmark provides insurance through a reinsurance
arrangement with an unaffiliated company, State & County Mutual Fire
Insurance Company ("State & County"). Through State & County, Hallmark
provides insurance primarily for high risk drivers who do not qualify
for standard-rate insurance.
AHGA holds an appointment from State & County to manage the sale and
servicing of State & County policies. Hallmark reinsures 100% of the
State & County policies produced by AHGA under a related reinsurance
agreement. AHGA markets the policies produced by Hallmark through the
Hallmark Agencies and through independent agents operating under their
own names. Additionally, AHGA provides premium processing,
underwriting, reinsurance accounting, and cash management for
unaffiliated managing general agents ("MGAs").
HFC offers premium financing for policies sold by the Hallmark Agencies
and independent agents managed by AHGA.
HCS provides fee-based claims adjustment, salvage and subrogation
recovery, and litigation services to Hallmark and unaffiliated MGA's.
Insurance Group Operations
Formed in 1987, HFS commenced its current operations in 1990 when it
acquired, through several transactions, most of the companies now
referred to as the Insurance Group. HFS manages Hallmark, AHGA, the
Hallmark Agencies, HFC and HCS as an integrated Insurance Group that
shares common management, computer facilities and corporate offices.
AHGA manages the sale of State & County policies by the Hallmark
Agencies and by independent agents and provides premium processing,
underwriting, reinsurance accounting, and cash management to
unaffiliated third parties. HFC offers premium finance programs for
State & County policies marketed by the Hallmark Agencies and
independent agents. HCS provides claims services to Hallmark and
unaffiliated MGA's.
The Company offers both liability and physical damage (comprehensive
and collision) coverages. Hallmark's bodily injury liability coverage
is limited to $20,000 per person and $40,000 per accident, and property
damage liability coverage is limited to $15,000 per accident. Physical
damage coverage is limited to $40,000 and $30,000 for vehicles insured
under annual/six-month and monthly policies, respectively.
Substantially all purchasers of Hallmark policies are individuals.
No single customer or group of related customers has accounted for more
than 1% of its net premiums written during any of the last three years.
The Company writes annual, monthly and six-month policies. The
Company's core net premium volume was composed of a policy mix of 51%
annual, 47% monthly and 2% six-month policies in 1999, and 46% annual,
49% monthly and 5% six-month policies in 1998. The Company's typical
customer is unable or unwilling to pay either a half- or full-year's
premium in advance, and thus a monthly policy, or an annual or six-
month policy subject to financing, suits his/her budgetary needs.
<PAGE>
The Company finances annual and six-month policy premiums produced by
AHGA through a premium finance program offered by HFC. During both
1999 and 1998, approximately 92% of Hallmark's annual and six-month
policyholders financed their premiums through HFC's premium finance
program. During 1997, approximately 91% of Hallmark's annual and six-
month policyholders financed their premiums through HFC's premium
finance program.
HCS provides claims adjustment and related litigation services to
both the Company and unaffiliated MGAs. Hallmark currently assumes a
portion of the business produced by these unaffiliated MGAs. Fees are
charged either on a per-file basis, as a percentage of earned premiums
or, in certain instances, a combination of both methods. When the
Company receives notice of a loss, HCS personnel establish a claim file
and an estimated loss reserve. HCS's adjusters review, investigate and
initiate claim payments, with the Company utilizing a third-party
claims service only in unusual circumstances. The Company has an in-
house legal staff and thus handles much of its claims-related
litigation in-house. Management believes that the Company achieves
superior efficiency and cost effectiveness by utilizing its own trained
employee-adjusters and in-house litigation staff in most instances.
Underwriting and Other Ratios
An insurance company's underwriting experience is traditionally
measured by its statutory "combined ratio". The combined ratio under
statutory accounting practices ("SAP") is the sum of (1) the ratio of
net losses and loss adjustment expenses ("LAE") incurred to net
premiums earned (referred to as the "statutory loss ratio"), and (2)
the ratio of underwriting and operating expenses to net premiums
written (referred to as the "statutory expense ratio"). The
approximate SAP underwriting profit or loss is affected to the extent
the combined ratio is less or more than 100%. During 1999, 1998 and
1997, Hallmark experienced statutory loss ratios of 66.5%, 69.0% and
65.9%, respectively. During the same periods, it experienced statutory
expense ratios of 29.1 %, 38.2% and 39.2%, respectively, and statutory
combined ratios of 96%, 107% and 105%, respectively. These statutory
ratios do not reflect the deferral of policy acquisition costs,
investment income, premium finance revenues, or the elimination of
intercompany transactions required by accounting principles generally
accepted in the United States ("GAAP").
Hallmark's 1999 statutory loss ratio decreased in relation to 1998
principally due to the change in retention of policy fees to 100%
effective January 1, 1999 which increased net earned premium. This
decrease is partially offset by (1) generally lower premium rates in
1999 (2) the assumption of increased third party MGA business (which
has a higher overall loss ratio than the core State & County business),
and (3) hail-related claims incurred in May and June 1999. Hallmark's
1998 statutory loss ratio increased in relation to 1997 principally due
to the increased assumption of unaffiliated MGA business by Hallmark
during 1998.
<PAGE>
The decrease in the 1999 statutory expense ratio is primarily
attributable to (1) decreases in salaries and related expenses and
increased management resources spent on premium finance and
unaffiliated MGA operations, (2) a 1% increase in the minimum ceding
commission, and (3) change in certain underwriting procedures which has
served to decrease underwriting expenses. The decrease in the 1998
statutory expense ratio as compared to 1997 is primarily attributable
to decreased overhead expenses as a result of cost saving measures
initiated by management during 1998 in light of decreased premium
volumes of the core State & County business.
Under Texas Department of Insurance ("TDI") guidelines, property and
casualty insurance companies are expected to maintain a premium-to-
surplus ratio of not more than 3 to 1. The premium-to-surplus ratio
measures the relationship between net premiums written in a given
period (premiums written, less returned premiums and reinsurance ceded
to other carriers) to surplus (admitted assets less liabilities), all
determined on the basis of SAP. For 1999, 1998, and 1997, Hallmark's
premium-to-surplus ratios were 2.57 to 1, 2.13 to 1 and 2.35 to 1,
respectively. The increase in the 1999 premium-to-surplus ratio is
attributable to increased premium volumes of the core State & County
business as well as an increase in unaffiliated MGA premium volume
assumed during 1999. The decrease in the 1998 premium-to-surplus ratio
is attributable to the decreased premium volumes of the core State &
County business.
Reinsurance Arrangements
Hallmark shares its claims risk with non-affiliated insurance
companies. Commencing March 1, 1992, Hallmark and AHGA entered into a
reinsurance arrangement with State & County. Effective July 1, 1996,
this arrangement was supplemented by separate risk-sharing agreements
between Hallmark and three unaffiliated companies, all of which are
rated A- or better by A.M. Best: GE Reinsurance Company, formerly
Kemper Reinsurance Company ("GE RE"), Dorinco Reinsurance Company
("Dorinco"), and Odyssey Reinsurance Corporation ("Odyssey").
Effective July 1, 1997, the treaty was renewed with GE RE and Dorinco
under substantially the same terms and conditions
Under the Company's arrangement with State & County, AHGA is a
managing general agent appointed by State & County to issue State &
County policies, as well as to appoint producing agents to sell these
policies. As compensation for acting as managing general agent, AHGA
receives from Hallmark commissions equal to a percentage of premiums
written. It uses the majority of these commissions to compensate its
producing agents for selling State & County policies. AHGA issues
State & County policies in accordance with Hallmark's underwriting
standards and pursuant to rates approved by State & County. Although
State & County is required to file periodic rate adjustments with the
state, TDI approval is not required. Hallmark reinsures 100% of the
State & County business produced by AHGA. Ceding fees paid by Hallmark
to State & County are equal to a percentage of premiums written
(including policy origination fees). The ceding fee rate decreases as
the annual volume of premiums written exceeds specified levels.
<PAGE>
Under related reinsurance agreements effective July 1, 1997, GE RE
and Dorinco, collectively, assume 75% of the State & County business
produced by AHGA. From July 1, 1996 through June 30, 1997, GE RE,
Dorinco and Odyssey, collectively, assumed 75% of the State & County
business. In addition, these reinsurers unconditionally guarantee
Hallmark's and AHGA's obligations to State & County. Under the
current reinsurance agreements Hallmark retains 100% of the policy
origination fees, pays premium taxes and ceding fees on 100% of the
business produced, and receives a 30% provisional commission on the
portion of the business ceded. Prior to 1999, Hallmark retained 62.5%
and ceded 37.5% of policy origination fees to the reinsurers. Policy
origination fees are fees that the Company is permitted by law to
charge in addition to premiums to cover or defray certain costs
associated with producing policies. The provisional commission paid
under the reinsurance treaties is adjusted annually over a three year
rating period on a sliding scale based on annual loss ratios. Hallmark
can earn a maximum commission of 33.5% and is guaranteed minimum
commissions of 29% and 26% under the GE RE and Dorinco agreements,
respectively, regardless of loss experience. During 1998, the minimum
commission rates were 28% and 25%, respectively.
Marketing
Customers for non-standard automobile insurance typically fall into
two groups. The first are drivers who have had standard auto insurance
but no longer qualify due to reasons such as driving record, claims
history, residency status or deterioration in credit history. The
second group are drivers who live in areas of Texas in which standard-
rate insurers do not write insurance, do not meet credit guidelines, or
are declined coverage because of the standard-rate insurers' limits on
the amount of coverage they write for new customers. Although these
drivers may qualify for the lower standard rates, they cannot obtain
standard coverage.
As managing general agent, AHGA manages the marketing of the
Company's non-standard automobile insurance program through a retail
network of affiliated and independent agencies. At December 31, 1999,
there were five affiliated offices operating under the American
Hallmark Agencies name in Amarillo, Corpus Christi, Lubbock and the
Dallas metropolitan area. During 1998, the Company restructured the
Hallmark Agencies by closing seven of its offices and opening two new
offices (both of which were subsequently closed). In addition, the
Company is represented by more than 600 independent agents with offices
located throughout the State of Texas.
The Hallmark Agencies' business is developed primarily through
advertising in regional and local publications, direct-mail, telephone
solicitation and referrals from standard agents and existing customers.
In addition, field marketing representatives promote the Company's
insurance programs to prospective independent agents and service
existing agents. Both the Hallmark Agencies and the independent agents
represent other insurers and sell other insurance products in addition
to Hallmark policies. The Company's appointed independent agents are
located throughout Texas in major cities, as well as suburban and some
rural areas, with an emphasis in the central and southern regions of
Texas.
<PAGE>
Competition
Information available from industry sources indicates that the annual
private passenger automobile insurance market in Texas is approximately
$8.4 billion in premium volume. Annual premium volume of the non-
standard automobile policies written in Texas approximated $2.4
billion, according to 1998 data. The Company's gross premiums written
were approximately $38 million in 1999, $32 million in 1998 and $40
million in 1997. The Texas non-standard automobile insurance market
has become increasingly competitive in recent years as evidenced by a
significant number of new companies in the market place, introduction
of new programs by existing competitors and more competitive pricing of
new and existing programs. This has been caused predominately by
excess capital and surplus in major insurance and reinsurance
companies. To compete in this environment, the Company attempts to
promptly set rates that are directed toward the lower-risk segment of
the non-standard auto market, to continually improve its underwriting
criteria, and to provide superior service to its agents and insureds.
Insurance Regulation
The operations of Hallmark, AHGA and HFC are regulated by TDI. HFC
is also subject to further regulation under the Texas Credit Code.
Hallmark is required to file quarterly and annual statements of its
financial condition with TDI, prepared in accordance with SAP.
Hallmark's financial condition, including the adequacy of its surplus,
premium-to-surplus ratio, loss reserves, deposits and investments, is
subject to review by TDI. Since Hallmark does not write its insurance
directly, but rather writes through a county mutual, its premium rates
and underwriting guidelines are not subject to the same degree of
regulation imposed on standard insurance companies. However, State &
County must file rate changes with TDI. AHGA and the producing agents
who staff the Hallmark Agencies offices are also subject to TDI's
licensing requirements. In addition, HFC is subject to licensing,
financial reporting and certain financial requirements required by TDI.
Interest rates, note forms and disclosures, among other things, are
regulated by the Office of Consumer Credit Commissioner.
TDI has broad authority to enforce its laws and regulations through
examinations, administrative orders, civil and criminal enforcement
proceedings, and suspension or revocation of an insurer's Certificate
of Authority or an agent's license. In extreme cases, including actual
or pending insolvency, TDI may take over, or appoint a receiver to take
over, the management or operations of an insurer or an agent's business
or assets. In addition, all insurance companies which write insurance
in the State of Texas are subject to assessments for a state
administered fund which covers the claims and expenses of insolvent or
impaired insurers. The size of the assessment is determined each year
by the total claims on the fund that year. Each insurer is assessed a
pro-rata share based on its direct premiums written. Payments to the
fund may be recovered by the insurer through deductions from its
premium taxes at a rate of 10% per year over ten years. There were no
assessments during 1999 and 1998, thus Hallmark made no payments to the
fund during those years.
<PAGE>
HFS is also regulated as an insurance holding company under the Texas
Insurance Code. Financial transactions between HFS or any of its
affiliates and Hallmark are subject to regulation by TDI. Applicable
regulations require TDI's approval of management and expense sharing
contracts, intercompany loans and asset transactions, investments in
the Company's securities by Hallmark and similar transactions.
Further, dividends and distributions by Hallmark to HFS are restricted.
On May 13, 1996, TDI issued its formal report on the results of TDI's
regular, triennial examination of Hallmark's books and records as of
September 30, 1995. The report indicated that no significant items or
discrepancies were noted during the examination. In December 1999, TDI
completed the fieldwork for its triennial examination of Hallmark as of
December 31, 1998 and has subsequently issued the preliminary "draft"
report. The Company does not anticipate issuance of the formal report
by TDI until the second quarter of 2000. The preliminary report does
not propose to adjust any previously issued statutory financial
statements. On March 6, 2000, TDI began fieldwork for a market conduct
examination of AHGA. The Company does not anticipate issuance of a
formal report by TDI until the second quarter of 2000.
Effective December 31, 1994, the National Association of Insurance
Commissioners ("NAIC") requested property/casualty insurers to file a
risk-based capital ("RBC") calculation according to a specified
formula. The purpose of the NAIC-designed formula is twofold: (1) to
assess the adequacy of an insurer's statutory capital and surplus based
upon a variety of factors such as potential risks related to investment
portfolio, ceded reinsurance and product mix; and (2) to assist state
regulators under the RBC for Insurers Model Act (the "Model Act") by
providing thresholds at which a state commissioner is authorized and
expected to take regulatory action. TDI adopted the Model Act during
1998. Hallmark's 1999 and 1998 adjusted capital under the RBC
calculation exceeded the minimum TDI requirement by 67% and 46%,
respectively.
Analysis of Hallmark's Losses and LAE
The Company's consolidated financial statements include an estimated
reserve for unpaid losses and LAE of the Company's non-standard
automobile insurance subsidiary, Hallmark. Hallmark estimates its
reserve for unpaid losses and LAE by using case-basis evaluations and
statistical projections, which include inferences from both losses paid
and losses incurred. Hallmark also uses recent historical cost data,
periodic reviews of underwriting standards and claims management to
modify the statistical projections. Hallmark gives consideration to
the impact of inflation in determining its loss reserves, but does not
discount reserve balances.
The amount of Hallmark's reserves represents management's estimates
of the ultimate net cost of all unpaid losses and LAE incurred through
December of each year. These estimates are subject to the effect of
trends in claim severity and frequency. Management continually reviews
the estimates and adjusts them as claims experience develops and new
information becomes known. Such adjustments are included in current
operations, including increases and decreases, net of reinsurance, in
the estimate of ultimate liabilities for insured events of prior years.
(See Note 1 to the Consolidated Financial Statements.)
<PAGE>
The Company seeks to continually improve its loss estimation process
by refining its ability to analyze loss development patterns, claim
payments, and other information within a legal and regulatory
environment which affects development of ultimate liabilities.
Beginning mid-1995, the Company implemented significant changes and
enhancements in its claims operations. These changes have resulted in,
among other things, (1) faster payment of claims, (2) increased
conservatism in case reserving procedures to more promptly reflect
estimated, ultimate claim-settlements and LAE costs, and (3) more
aggressive claims handling resulting in a significantly lower average
liability claim payment. The 1999 accident-year continues to be
favorably affected by these changes. During late-1997 and 1998, the
Company significantly accelerated its use of voluntary mediations
(prior to court-ordered mediations) and began to more aggressively
participate in "settlement weeks" sponsored by the courts in various
counties throughout the state. These actions have increased the
timeliness in which litigation claims settle and have favorably
impacted ultimate settlements.
Changes in loss development patterns and claim payments can
significantly affect the ability of insurers to estimate reserves for
unpaid losses and related expenses. Future changes in estimates of
claim costs may adversely affect future period operating results;
however, such effects cannot be reasonably estimated currently.
<PAGE>
Reconciliation of Reserve for Unpaid Losses and LAE. The following
table provides a 1999 and 1998 reconciliation of the beginning and
ending reserve balances, on a gross-of-reinsurance basis, to the gross
amounts reported in the Company's balance sheet
1999 1998
(Thousands of Dollars)
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Reserve for unpaid losses and $ 4,580 $ 4,668
LAE, net of reinsurance
recoverables, at beginning
of year
Provision for losses and LAE 9,330 8,130
for claims occurring in the
current period
Increase in reserve for unpaid 14 317
losses and LAE for claims
occurring in prior periods
Payments for losses and LAE,
net of reinsurance:
Current period (5,724) (5,209)
Prior periods (2,791) (3,326)
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(8,515) (8,535)
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Reserve for unpaid losses and $ 5,409 $ 4,580
LAE, net of reinsurance
recoverable, at end of year
Reinsurance recoverable on 12,395 11,435
unpaid losses and LAE
at end of year
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Reserve for unpaid losses and $17,804 $16,015
LAE, gross of reinsurance ====== ======
at end of year
<PAGE>
SAP/GAAP Reserve Reconciliation. The differences between the reserves for
unpaid losses and LAE reported in the Company's consolidated financial
statements prepared in accordance with GAAP and those reported in the
annual statement filed with TDI in accordance with SAP for years 1999 and
1998 are summarized below:
1999 1998
-----------------
(Thousands of Dollars)
Reserve for unpaid losses and LAE on a SAP basis
(net of reinsurance recoverables on unpaid losses $5,196 $4,409
Add estimated future unallocated LAE reserve for
which HCS is contractually liable 213 171
----- -----
Reserve for unpaid losses and LAE on a GAAP basis
(net of reinsurance recoverables on unpaid losses) $5,409 $4,580
===== =====
Analysis of Loss and LAE Reserve Development
The following table shows the development of Hallmark's loss reserves,
net of reinsurance, for 1989 through 1999. Section A of the
table shows the estimated liability for unpaid losses and LAE, net of
reinsurance, recorded at the balance sheet date for each of the
indicated years. This liability represents the estimated amount of
losses and LAE for claims arising in prior years that are unpaid at the
balance sheet date, including losses that have been incurred but not
yet reported to Hallmark. Section B of the table shows the re-
estimated amount of the previously recorded liability, based on
experience as of the end of each succeeding year. The estimate is
increased or decreased as more information becomes known about the
frequency and severity of claims.
Cumulative Redundancy/Deficiency (Section C of the table) represents
the aggregate change in the estimates over all prior years. Thus,
changes in ultimate development estimates are included in operations
over a number of years, minimizing the significance of such changes in
any one year. The effects on income in the past two years of changes in
estimates of the liabilities for losses and LAE are shown in the table
under reconciliation of reserves for unpaid losses and LAE.
<PAGE>
<TABLE>
ANALYSIS OF LOSS AND LAE DEVELOPMENT
(Thousands of dollars)
Year Ended December 31 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99
---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A. Reserve for Unpaid Losses & LAE, 3039 2968 3353 4374 4321 4297 5923 5096 4668 4580 5409
Net of Reinsurance Recoverables
B. Net Reserve Re-estimated as of :
One year later 3186 3126 2815 3423 4626 5175 5910 6227 4985 4594
Two years later 3353 3001 2885 3285 4499 5076 6086 6162 4954
Three years later 3374 3090 2813 3147 4288 5029 6050 6117
Four years later 3408 3052 2700 3095 4251 5034 6024
Five years later 3384 2988 2699 3067 4238 5031
Six years later 3363 2994 2685 3065 4239
Seven years later 3359 2987 2686 3065
Eight years later 3359 2990 2686
Nine years later 3359 2990
Ten years later 3359
C. Net Cumulative Redundancy (320) (22) 667 1309 82 (734) (101) (1021) (286) (14)
(Deficiency)
D. Cumulative Amount of Claims Paid,
Net of Reserve Recoveries, through:
One year later 1991 2100 1958 2109 3028 3313 3783 4326 3326 2791
Two years later 2994 2760 2472 2768 3883 4442 5447 5528 4287
Three years later 3285 2956 2654 2958 4147 4861 5856 5860
Four years later 3363 2990 2668 3027 4207 4975 5933
Five years later 3369 2983 2669 3054 4218 5005
Six years later 3361 2981 2685 3056 4223
Seven years later 3359 2987 2686 3056
Eight years later 3359 2990 2686
Nine years later 3359 2990
Ten years later 3359
Net Reserve-December 31 $4,580 $5,409
Reinsurance Recoverables 11,435 12,395
Gross Reserve - December 31 $16,015 $17,804
====== ======
Net Re-estimated Reserve 4,594
Re-estimated Reinsurance Recoverable 10,975
Gross Re-estimated Reserve $15,569
======
Gross Cumulative Redundancy $ 446
======
</TABLE>
<PAGE>
Investment Policy
Hallmark's investment objective is to maximize current yield while
maintaining safety of capital together with sufficient liquidity for
ongoing insurance operations. Accordingly, the investment portfolio is
composed of fixed income securities: U.S. Government and U.S.
Government agency debentures and agency mortgage-backed securities,
municipal securities and U.S. Government bond mutual funds. The
average maturity of the portfolio (after taking into account current
assumptions regarding anticipated principal prepayments on mortgage-
backed securities and the call dates of certain securities held),
including short-term investments, is approximately three years, which
approximates Hallmark's claims payment patterns. It is Hallmark's
intent to hold investments until maturity. Maturities, bond calls and
prepayments of mortgage-backed securities totaling $2,426,532 represent
the securities liquidated in 1999. In addition, as part of the
Company's overall investment strategy, the Company utilizes an
integrated cash management system to maximize investment earnings on
all available cash. During 1999, the Company's investment income
totaled $789,584 compared to $778,932 for 1998.
Employees
On December 31, 1999, the Company employed 129 people on a full-time
basis. None of the Company's employees are represented by labor
unions. The Company considers its employee relations to be excellent.
Item 2. Description of Property.
The Company's corporate headquarters are located at 14651 Dallas
Parkway, Suite 900, Dallas, Texas. The suite is located in a high-rise
office building and contains approximately 23,641 square feet of space.
Effective January 1, 1995, the Company renegotiated its lease for a
period of 71 months to expire November 30, 2000. The rent is currently
$28,456 per month. The Hallmark Agencies' offices are located in five
Texas cities, including Corpus Christi, Amarillo, Lubbock and the
Dallas metropolitan area. These offices are located in office
buildings, shopping centers, store fronts and similar commercial
structures in low and middle income neighborhoods. They contain an
average of 900 square feet. All are leased, some on a month-to-month
basis and others for remaining terms ranging up to 36 months. The type
of space the Hallmark Agencies occupy is generally available at
moderate rentals. The Company does not consider the location of any
particular agency office to be material to its insurance marketing
operations.
<PAGE>
Item 3. Legal Proceedings.
Except for routine litigation incidental to the business of the
Company and as described in Note 11 of the Notes to Consolidated
Financial Statements, neither the Company nor any of the properties of
the Company was subject to any material pending or threatened legal
proceedings as of the date of this report.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of 1999, the Company did not submit any
matter to a vote of its security holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock has traded on the American Stock
Exchange's Emerging Company Marketplace under the symbol "HAF.EC"
since January 6, 1994. The following table shows the Common
Stock's high and low sales prices on the AMEX Emerging Company
Marketplace for each quarter since January 1, 1998.
<TABLE>
Period High Sale Low Sale
------ --------- --------
<S> <C> <C>
1998
----
First Quarter $ 1.44 $ 1.00
Second Quarter 1.38 0.94
Third Quarter 1.13 0.56
Fourth Quarter 0.81 0.38
1999
----
First Quarter $ 0.68 $ 0.19
Second Quarter 0.50 0.31
Third Quarter 0.50 0.31
Fourth Quarter 0.50 0.31
2000
----
First Quarter (thru March 21) $ 0.44 $ 0.38
</TABLE>
On March 21, 2000 there were 163 record holders and approximately 560
beneficial shareholders of the Company's Common Stock.
The Company has never paid dividends on its Common Stock. The Board
of Directors intends to continue this policy for the foreseeable future
in order to retain earnings for development of the Company's business.
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following discussion of the Company's financial condition and the
results of its operations should be read in conjunction with the
consolidated financial statements and related notes included in this
report.
Financial Condition and Liquidity
The Company's sources of funds are principally derived from insurance
related operations. Major sources of funds from operations include
premiums collected (net of policy cancellations and premiums ceded),
ceding commissions, processing fees, premium finance service charges
and service fees. Other sources of funds are from financing and
investment activities.
Net cash flow provided by the Company's consolidated operating
activities was $6.2 million greater for the year ended December 31,
1999 as compared to the same period of 1998. This increase is
principally due to the increase in annual policy production as well as
Hallmark's increased retention of policy fees (from 62.5% to 100%)
during 1999. During the same time period, net cash used by investing
activities increased $11.4 million principally due to increased annual
policy premium volume during 1999. As such, HFC originated more
premium finance notes than it received in premium finance payments.
Additionally, the Company increased its purchase of short-term
investments in order to capitalize on higher yields of discount notes
as compared to overnight investments. Cash provided by financing
activities was approximately $3.2 million greater for the year ended
December 31, 1999 as compared to the same respective period of 1998.
During the fourth quarter of 1999, HFC received proceeds of $6.5
million as a result of a secured financing arrangement structured as a
sale of premium finance notes to an unaffiliated third party. Of the
$6.5 million in proceeds, the Company utilized approximately $4.0
million to pay down a note payable to Dorinco (See Note 5).
On a consolidated basis, the Company's liquidity increased 10% as of
December 31, 1999 as compared to December 31, 1998. The Company's
consolidated cash, cash equivalents and investments at December 31,
1999 and 1998 were $16,134,118 and $14,629,134, respectively, excluding
restricted cash of $3,422,297 and $1,768,927, respectively.
<PAGE>
A substantial portion of the Company's 1999 consolidated liquid
assets are held by Hallmark and are not available for general corporate
purposes. Of the Company's consolidated liquid assets of $16,134,118
at December 31, 1999, $850,384 (as compared to $2,791,757 in 1998)
represents non-restricted cash. Since state insurance regulations
restrict financial transactions between an insurance company and its
affiliates, HFS is limited in its ability to use Hallmark funds for its
own working capital purposes. Furthermore, dividends and loans by
Hallmark to HFS are also restricted and, in certain instances, subject
to TDI approval. Based on surplus at December 31, 1999, Hallmark could
pay a dividend of up to $601,314 to HFS during 2000 without TDI
approval. In addition, TDI has sanctioned the payment of management
fees, commissions and claims handling fees by Hallmark to HFS and other
affiliates. Accordingly, management fees of $425,000 were paid or
accrued in 1999, and management fees of $610,000 were paid or accrued
in 1998. Management anticipates that Hallmark will continue to pay
management fees periodically during 2000, and this should continue to
be a moderate source of unrestricted liquidity. The Company has never
received a dividend from Hallmark, and there is no immediate plan to
pay a dividend.
Commissions from the Company's annual policy program for independent
agents represent a source of unrestricted liquidity when annual policy
production is level or increasing from the most recent previous
quarters. Under this program, AHGA offers independent agents the
ability to write annual and six-month policies, but commissions to most
independent agents are paid monthly on an "earned" basis. However,
consistent with customary industry practice, Hallmark pays total
commissions up-front to AHGA based on the entire annual/six-months
premiums written. Independent agent production of annual/six month
policies was approximately $16.5 million in 1999 compared to $11.0
million in 1998. During 1999, AHGA received $3.4 million in
commissions related to this annual policy program from Hallmark and
paid earned commissions of $2.1 million. This has resulted in increased
unrestricted liquidity for the Company during 1999. During 1998, AHGA
received $2.5 million in commissions related to this program from
Hallmark and paid earned commissions of $2.7 million to independent
agents.
Ceding commission income represents a significant source of funds to
the Company. Ceding commission income for 1999 increased $0.9 million
(representing a 17% increase) as compared to 1998. This increase is
primarily attributable to increased premium volume of the core State &
County business. In accordance with GAAP, a portion of ceding
commission income and policy acquisition costs is deferred and
recognized as income and expense, respectively, as related net premiums
are earned. Deferred ceding commission income increased to
approximately $2.2 million at December 31, 1999 from approximately $1.4
million at December 31, 1998. The increase in deferred ceding
commission income is principally due to the increase in the Company's
core State & County annual premium volume. Deferred policy acquisition
costs as of December 31, 1999 increased in relation to the prior year.
This increase is also primarily attributable to the increase in the
Company's core State & County annual premium volume.
Prepaid reinsurance premiums, unpaid losses and LAE and reinsurance
recoverable generally increased as expected in relation to increased
premium writings. (See Notes 3 and 4 to the Consolidated Financial
Statements.)
<PAGE>
At December 31, 1999, the Company reported approximately $9.3 million
in notes payable as compared to $7.1 million at December 31, 1998.
During the fourth quarter of 1999, HFC entered into a secured financing
agreement (the "Financing Agreement") and a servicing agreement with an
unaffiliated third party in order to fund HFC's premium finance
activities (See Note 5). As of December 31, 1999, HFC had an
outstanding balance on advances under the Financing Agreement of
$6,261,737. The Company used approximately $4.0 million of the
proceeds to reduce the Dorinco debt.
Accrued litigation costs reflect management's estimate of loss
contingencies related to a lawsuit currently being appealed. (See Note
11 to the Consolidated Financial Statements.)
At December 31, 1999, Hallmark reported statutory capital and surplus
of $6.0 million, which reflects an increase of $0.6 million over the
$5.4 million reported at December 31, 1998. Hallmark reported
statutory net income of approximately $0.4 million during 1999 compared
to a nominal loss in 1998. The remaining $0.2 million increase in
surplus is attributable to a reduction in the excess statutory reserves
over statement reserves recorded in 1998. At December 31, 1999,
Hallmark showed a premium-to-surplus ratio of 2.57 to 1, as compared to
2.13 to 1 for the year ended December 31, 1998.
Changing market conditions in the non-standard industry adversely
impacted premium volumes during 1998 and, to a lesser extent 1999.
Management has taken steps to stimulate volumes and more closely
correlate expenses with premium volumes. Although volumes trended
downward beginning in April 1998, an upward trend began in December
1998 and continued into 1999. Although liquidity increased during
1999, market conditions remain volatile and a reversal in the most
recent upward volume trend could negatively impact liquidity.
Management expects that 2000 liquidity generated from its current core
State & County business and third party service contract income will,
at a minimum, remain constant with 1999.
The Company continues to pursue third party claims handling and
administrative contracts. The Company provides program administration
for three unaffiliated MGAs and claims handling services for four
unaffiliated MGAs. Under these contracts, the Company, as program
administrator, performs certain administrative functions, including but
not limited to, cash management, underwriting and rate-setting reviews,
policy processing (on two of the programs) and claims handling.
Hallmark assumes a pro-rata share of the business produced under each
of the unaffiliated MGAs programs (ranging from 15% to 25%) with the
remaining percentage of the business assumed by Hallmark's principal
reinsurers.
Management is continuing to investigate opportunities for future
growth and expansion. Additional capital or strategic alliances may be
required to fund future expansion of the Company.
<PAGE>
Results of Operations
Gross premiums written (prior to reinsurance) of approximately $38.0
million for the year ended December 31, 1999 were approximately $5.5
million greater than gross premiums written of approximately $32.5
million in 1998, representing an increase of approximately 17%. The
increase in gross premiums written during 1999 was primarily due to the
increase in the core State & County premium volume and increased
premium volume from assumed business produced by unaffiliated MGAs as
compared to the prior year. Net premiums written (after reinsurance)
increased 34% during 1999 as compared to 1998. The increase in net
premiums written is due to the combined effect of the increase in
Hallmark's core State & County business, the retention of 100% of
policy fees (effective January 1, 1999) and an increase in business
written by four unaffiliated MGAs, a portion of which is assumed by
Hallmark. Since this business is not reinsured, the impact on net
premiums written is intensified.
Although gross premiums earned (prior to reinsurance) of $33.9 million
decreased approximately 7% during 1999 as compared to 1998, net
premiums earned (after reinsurance) increased approximately 16%. The
disparate change in premiums earned prior to and after reinsurance is
due to the assumption of premiums produced by third party unaffiliated
MGAs and Hallmark's full retention of policy fees (effective January
1,1999), both of which are fully retained by the Company.
Incurred loss ratios (computed on premiums earned both prior to and
after reinsurance), on a GAAP basis, for the year ended December 31,
1999, were approximately 79% and 65%, respectively, as compared to 70%
prior to and 67% after reinsurance for 1998. The increase in the gross
incurred loss ratio (prior to reinsurance) during 1999 is due to (1)
generally lower premium rates in 1999, (2) an increase of third party
unaffiliated MGA business assumed (which has a higher overall loss
ratio than the core State & County business), and (3) hail-related
claims incurred in May and June 1999. The decrease in the net incurred
loss ratio is principally due to Hallmark's retention of 100% of policy
fees during 1999, and to a lesser extent a decrease in loss adjustment
expense during 1999.
Finance charges, which increased approximately 10% during 1999,
represent interest earned on premium notes issued by HFC. This
increase is directly correlated to the increase in the core State &
County premium volume.
Processing and service fees, which increased 40% during 1999,
primarily represent income earned on third party processing and
servicing contracts. This increase is principally attributable to the
increased premium volume produced by the third party MGAs during 1999.
Additionally, all third party unaffiliated MGAs were in operation
during the entire year of 1999 compared to various periods during 1998.
<PAGE>
Other acquisition and underwriting expenses decreased approximately
15% as compared to the prior year. The decrease in other acquisition
and underwriting expenses is primarily due to decreases in salaries and
related benefit expenses and management resources spent on non-
insurance operations and certain changes in underwriting procedures.
Additionally, the minimum ceding commission rate was increased by 1%
during 1999. Management resources have been used to develop third party
processing and program administration business and are reallocated to
operating expenses (as discussed in the following paragraph). The
decrease in these expenses is partially offset by increased commission
expense related to increased core State & County premium volume and to
assumption of business written by third party unaffiliated MGAs.
Operating expenses include non-insurance operations expenses related
to premium finance operations, general corporate overhead, and third
party administrative and claims handling contracts. Related revenues
are derived from finance charges and service/consulting fees.
Operating expenses increased 38% in relation to the prior year. The
majority of this increase in operating expenses is attributable to the
deployment of management and staff resources devoted to the
development, administration and/or processing of third party contracts,
and increased expenses related to increased volume in the Company's
premium finance operations.
During 1998 the Company restructured the Hallmark Agencies by closing
seven of its offices and opening two new offices (both of which were
subsequently closed). The excess of the accrued restructuring reserve
over the costs actually incurred was recorded as a reduction of
expenses in 1998.
Item 7. Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are filed as part of this report.
Description Page Number
----------- -----------
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the Years
December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required by Part III, Item 9 is incorporated by
reference from the Registrant's definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
Item 10. Executive Compensation.
The information required by Part III, Item 10 is incorporated by
reference from the Registrant's definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The information required by Part III, Item 11 is incorporated by
reference from the Registrant's definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
Item 12. Certain Relationships and Related Transactions.
The information required by Part III, Item 12 is incorporated by
reference from the Registrant's definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits. The exhibits listed in the Exhibit Index appearing
at page 17 of this report are filed with or incorporated by reference
in this Report.
(b) Reports on Form 8-K. The Company did not file any Form 8-K
Current Reports during the fourth quarter of 1999.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HALLMARK FINANCIAL SERVICES, INC.
(Registrant)
Date: March 27, 2000 /s/ Ramon D. Phillips
----------------------
Ramon D. Phillips, President (Chief
Executive Officer)
Date: March 27, 2000 /s/ Johnny J. DePuma
----------------------
Johnny J. DePuma, Vice President
(Chief Financial Officer/Principal
Accounting Officer)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: March 27, 2000 /s/ Ramon D. Phillips
----------------------
Ramon D. Phillips, Director
Date: March 27, 2000 /s/ Linda H. Sleeper
----------------------
Linda H. Sleeper, Director
Date: March 27, 2000 /s/ Raymond A. Kilgore
----------------------
Raymond A. Kilgore, Director
Date: March 27, 2000 /s/ James H. Graves
----------------------
James H. Graves, Director
Date: March 27, 2000 /s/ C. Jeffrey Rogers
----------------------
C. Jeffrey Rogers, Director
Date: March 27, 2000 /s/ George R. Manser
----------------------
George R. Manser, Director
<PAGE>
EXHIBIT INDEX
The following exhibits are either filed with this report or
incorporated by reference.
Exhibit
Number Description
------ -----------
3(a) 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(b) 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 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).
10(a) Office Lease for 14651 Dallas Parkway, Suite 900, dated January
1, 1995, between American Hallmark Insurance Company of Texas
and Fults Management Company, as agent for The Prudential
Insurance Company of America (incorporated by reference to
Exhibit 10(a) to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994).
10(b) 100% Quota Share Reinsurance Agreement, as Restated, between
State & County Mutual Fire Insurance Company and American
Hallmark Insurance Company of Texas, effective March 1, 1992
(incorporated by reference to Exhibit 10(a) to Amendment No. 1
on Form 8 to the registrant's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1992).
10(c) General Agency Agreement, effective March 1, 1992, between State
& County Mutual Fire Insurance Company and Brokers General, Inc.
(incorporated by reference to Exhibit 10(b) to Amendment No. 1
on Form 8 to the registrant's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1992).
10(d) Quota Share Retrocession Agreement, effective March 1, 1992,
between American Hallmark Insurance Company of Texas and Liberty
National Fire Insurance Company (incorporated by reference to
Exhibit 10(c) to Amendment No. 1 on Form 8 to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1992).
10(e) 1991 Key Employee Stock Option Plan of the registrant
(incorporated by reference to Exhibit C to the definitive Proxy
Statement relating to the registrant's Annual Meeting of
Shareholders held May 20, 1991).
10(f) 1994 Key Employee Long Term Incentive Plan (incorporated by
reference to Exhibit 10(f) to the registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994).
<PAGE>
10(g) 1994 Non-employee Director Stock Option Plan (incorporated by
reference to Exhibit 10(g) to the registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994).
10(h) Addendum No. 2 to the Quota Share Retrocession Agreement,
effective March 1, 1993, between American Hallmark Insurance
Company of Texas and Liberty National Fire Insurance Company
(incorporated by reference to Exhibit 10(o) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1993).
10(i) Addendum No. 3 to the Quota Share Retrocession Agreement,
effective August 1, 1993, between American Hallmark Insurance
Company of Texas and Liberty National Fire Insurance Company
(incorporated by reference to Exhibit 10(p) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1993).
10(j) Administrative Services and Consulting Agreement, dated December
23, 1993, between American Southwest Insurance Managers, Inc.,
Liberty National Fire Insurance Company, Hallmark Financial
Services, Inc., Brokers General, Inc. and Citizens Adjustment
and Reporting Service, Inc. (incorporated by reference to
Exhibit 10(q) to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1993).
10(k) Form of Executive Compensation Agreement representing respective
agreements dated August 23, 1994, between registrant and Ramon
D. Phillips, Raymond A. Kilgore, Linda H. Sleeper, and Johnny J.
DePuma (incorporated by reference to Exhibit 10(p) to the
registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994).
10(l) Addendum No. 1 to the 100% Quota Share Reinsurance Agreement, as
restated between State & County Mutual Fire Insurance Company
and American Hallmark Insurance Company of Texas effective
November 22, 1994 (incorporated by reference to Exhibit 10(q) to
the registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994).
10(m) Second, Third, Fourth and Fifth Amendments to Office Lease for
14651 Dallas Parkway, Suite 900, dated January 1, 1995, between
American Hallmark Insurance Company of Texas and Fults
Management Company, as agent for The Prudential Insurance
Company of America (incorporated by reference to Exhibit 10(t)
to the registrant?s Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995).
10(n) Form of Shareholders Agreement dated January 1, 1996, between
American Hallmark General Agency, Inc., Robert D. Campbell,
Margaret Jones and American Hallmark Agencies, Inc.
(incorporated by reference to Exhibit 10(u) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995).
<PAGE>
10(o) Form of Facilities & Services Agreement dated January 1, 1996,
between American Hallmark General Agency, Inc., Robert D.
Campbell, Margaret Jones and American Hallmark Agencies, Inc.
(incorporated by reference to Exhibit 10(v) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995).
10(p) Form of Indemnification Agreement dated January 1, 1996, between
American Hallmark General Agency, Inc., Hallmark Financial
Services, Inc., Robert D. Campbell, Margaret Jones and American
Hallmark Agencies, Inc. (incorporated by reference to Exhibit
10(w) to the registrant?s Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995).
10(q) Form of Shareholders Agreement dated January 3, 1996, between
American Hallmark General Agency, Inc., Robert D. Campbell,
Richard Mason, Sr. and Hallmark Underwriters, Inc. (incorporated
by reference to Exhibit 10(x) to the registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995).
10(r) Form of Facilities and Services Agreement dated January 3 1996,
between American Hallmark General Agency, Inc., Robert D.
Campbell, Richard Mason, Sr. and Hallmark Underwriter, Inc.
(incorporated by reference to Exhibit 10(y) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995).
10(s) Form of Indemnification Agreement dated January 3, 1996, between
American Hallmark General Agency, Inc., Hallmark Financial
Services, Inc., Robert D. Campbell, Richard Mason, Sr. and
Hallmark Underwriters, Inc. (incorporated by reference to
Exhibit 10(z) to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995).
10(t) Form of 100% Quota Share Reinsurance Agreement between State &
County Mutual Fire Insurance Company and American Hallmark
Insurance Company of Texas effective July 1, 1996 (incorporated
by reference to Exhibit 10(a) to the registrant's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1996).
10(u) Form of Quota Share Retrocession Agreement between American
Hallmark Insurance Company of Texas and the Reinsurer
(specifically identified as follows: Dorinco, Kemper and
Skandia), effective July 1, 1996 (incorporated by reference to
Exhibit 10(b) to the registrant's Quarterly Report on Form 10-
QSB for the quarter ended June 30, 1996).
10(v) Form of Quota Share Retrocession Agreement between American
Hallmark Insurance Company of Texas and the Reinsurer
(specifically identified as follows: Dorinco, Kemper and
Skandia), effective July 1, 1996 (incorporated by reference to
Exhibit 10(b) to the registrant's Quarterly Report on Form 10-
QSB for the quarter ended June 30, 1996).
10(w) Guaranty Agreement effective July 1, 1996 provided by Dorinco
Reinsurance Company in favor of State & County Mutual Fire
Insurance Company (incorporated by reference to Exhibit 10(c) to
the registrant's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1996).
<PAGE>
10(x) Guaranty Agreement effective July 1, 1996 provided by Skandia
America Reinsurance Corporation in favor of State & County
Mutual Fire Insurance Company (incorporated by reference to
Exhibit 10(e) to the registrant's Quarterly Report on Form 10-
QSB for the quarter ended June 30, 1996).
10(y) Form of Guaranty of Performance and Hold Harmless Agreement
effective July 1, 1996 between Hallmark Financial Services, Inc.
and Dorinco America Reinsurance Corporation (incorporated by
reference to Exhibit 10(f) to the registrant's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1996).
10(z) Form of Guaranty of Performance and Hold Harmless Agreement
effective July 1, 1996 between Hallmark Financial Services, Inc.
and Kemper Reinsurance Company (incorporated by reference to
Exhibit 10(g) to the registrant's Quarterly Report on Form 10-
QSB for the quarter ended June 30, 1996).
10(aa) Form of Guaranty of Performance and Hold Harmless Agreement
effective July 1, 1996 between Hallmark Financial Services, Inc.
and Skandia America Reinsurance Corporation (incorporated by
reference to Exhibit 10(h) to the registrant's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1996).
10(ab) Form of Addendum No. 4 - Termination to Quota Share Retrocession
Agreement between American Hallmark Insurance Company of Texas
and Vesta Fire Insurance Company (incorporated by reference to
Exhibit 10(I) to the registrant's Quarterly Report on Form 10-
QSB for the quarter ended June 30, 1996).
10(ac) Form of Addendum No. 3 - Termination to 100% Quota Share
Reinsurance Agreement between American Hallmark Insurance
Company and State & County Mutual Fire Insurance Company
(incorporated by reference to Exhibit 10(j) to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996).
10(ad) Automobile Physical Damage Catastrophe Excess of Loss
Reinsurance Agreement effective July 1, 1996 between American
Hallmark Insurance Company of Texas and Kemper Reinsurance
Company (incorporated by reference to Exhibit 10(a) to the
registrant's Quarterly Report on Form 10-QSB for the quarter and
ended September 30, 1996).
10(ae) Form of 100% Quota Share Reinsurance Agreement, effective
January 1, 1997, between State & County Mutual Fire Insurance
Company, Vaughn General Agency, Inc. and American Hallmark
General Agency, Inc. (incorporated by reference to Exhibit
10(am) to the registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996).
10(af) Form of General Agency Agreement, effective January 1, 1997,
between Dorinco Reinsurance Company, State & County Mutual Fire
Insurance Company and Vaughn General Agency, Inc. (incorporated
by reference to Exhibit 10(an) to the registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996).
<PAGE>
10(ag) Form of Administrative Services Agreement between State & County
Mutual Fire Insurance Company, Vaughn General Agency, Inc. and
American Hallmark General Agency, Inc. (incorporated by
reference to Exhibit 10(ao) to the registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996).
10(ah) Form of Loan Agreement dated March 11, 1997, between Hallmark
Financial Services, Inc. and Dorinco Reinsurance Company.
(incorporated by reference to Exhibit 10(ap) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1996).
10(ai) Form of Promissory Note dated March 11, 1997, with Hallmark
Financial Services, Inc. as Maker and Dorinco Reinsurance
Company as Payee. (incorporated by reference to Exhibit 10(aq)
to the registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1996).
10(aj) Stock Pledge and Security Agreement dated March 11, 1997,
between ACO Holdings, Inc. and Dorinco Reinsurance Company.
(incorporated by reference to Exhibit 10(ar) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1996).
10(ak) Form of Endorsement No. 1, effective July 1, 1996, to the 100%
Quota Share Reinsurance Agreement between State & County Mutual
Fire Insurance Company and American Hallmark Insurance Company
of Texas, effective July 1, 1996. (incorporated by reference to
Exhibit 10(a) to the registrant's Quarterly Report on Form 10-
QSB for the quarter ended June 30, 1997).
10(al) Form of Endorsement No 1, effective July 1, 1997, to the
Guaranty of Performance and Hold Harmless Agreement between
Hallmark Financial Services, Inc. and Skandia America
Reinsurance Corporation, effective July 1, 1996. (incorporated
by reference to Exhibit 10(b) to the registrant's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1997).
10(am) Form of Endorsement No. 1, effective July 1, 1997, to the
Guaranty Agreement provided by Skandia America Reinsurance
Corporation in favor of State & County Mutual Fire Insurance
Company, effective July 1, 1996. (incorporated by reference to
Exhibit 10(c) to the registrant's Quarterly Report on Form 10-
QSB for the quarter ended June 30, 1997).
10(an) Form of Endorsement No. 1, effective July 1, 1997, to the
Guaranty Agreement provided by Dorinco Reinsurance Corporation
in favor of State & County Mutual Fire Insurance Company,
effective July 1, 1996. (incorporated by reference to Exhibit
10(d) to the registrant's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1997).
10(ao) Form of Endorsement No. 1 - Termination, effective January 1,
1997, to the Quota Share Retrocession Agreement between American
Hallmark Insurance Company of Texas and the Reinsurers (Dorinco
Reinsurance Company and Odyssey Reinsurance Corporation),
effective July 1, 1996. (incorporated by reference to Exhibit
10(e) to the registrant's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1997).
<PAGE>
10(ar) Form of Endorsement No. 1, effective July 1, 1997, to the Quota
Share Retrocession Agreementt between American Hallmar
Insurance Company of Texas and the Reinsurer (Dorinc
Reinsurancee Company), effective July 1, 1996. (incorporated by
reference to Exhibit 10(h) to the registrant'ss Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1997).
10(as) Automobile Physical Damage Catastrophe Excess of Loss
Reinsurance Agreement effective July 1, 1997 between American
Hallmark Insurance Company and Kemper Reinsurance Company.
(incorporated by reference to Exhibit 10(bf) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1997).
10(at) Endorsement No. 1, effective July 1, 1997, to the Quota Share
Retrocession Agreement between American Hallmark Insurance
Company of Texas and Kemper Reinsurance Company, effective July
1, 1996. (incorporated by reference to Exhibit 10(bg) to the
registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997).
10(au) Endorsement No. 2, effective January 1, 1997, to the Quota Share
Retrocession Agreement between American Hallmark Insurance
Company of Texas and Dorinco Reinsurance Company, effective
January 1, 1997. (incorporated by reference to Exhibit 10(bh) to
the registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997).
10(av) Endorsement No. 1, effective January 1, 1997, to the 100% Quota
Share Reinsurance Agreement between State & County Mutual Fire
Insurance Company, Vaughn General Agency, Inc. and American
Hallmark General Agency, Inc. (incorporated by reference to
Exhibit 10(bi) to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997).
10(aw) Form of Endorsement No. 2, effective July 1, 1997, to the 100%
Quota Share Reinsurance Agreement between State & County Mutual
Fire Insurance Company, Vaughn General Agency, Inc., American
Hallmark General Agency, Inc. and the Reinsurers (Dorinco
Reinsurance Company and Kemper Reinsurance Company) effective
July 1, 1997. (incorporated by reference to Exhibit 10(bj) to
the registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997).
10(ax) Form of Amendment No. 1 to the Loan Agreement dated March 11,
1997, between Hallmark Financial Services, Inc. and Dorinco
Reinsurance Company. (Incorporated by reference to Exhibit
10(bg) to the registrant's annual Report on Form 10KSB for the
fiscal year ended December 31, 1998.)
10(ay) Form of Retrocession Agreement effective March 1, 1998, between
American Hallmark Insurance Company of Texas, Dorinc
Reinsurance Company and Associated General Agency, Inc
(Incorporated by reference to Exhibit 10(bh) to the registrant's
annual Report on Form 10KSB for the fiscal year ended December
31, 1998.)
<PAGE>
10(az) Form of Retrocession Agreement effective June 1, 1998, between
American Hallmark Insurance Company of Texas, Dorinc
Reinsurance Company and Harold Loving, d/b/a Texas Insurance
Facilities. (Incorporated by reference to Exhibit 10(bi) to the
registrant's annual Report on Form 10KSB for the fiscal year
ended December 31, 1998.)
10(ba) Form of Quota Share Retrocession Agreement effective September
1, 1998, between American Hallmark Insurance Company of Texas,
Dorinco Reinsurance Company and Van Wagoner Companies, Inc.
(Incorporated by reference to Exhibit 10(bj) to the registrant's
annual Report on Form 10KSB for the fiscal year ended December
31, 1998.)
10(bb) Endorsement No. 5, effective January 1, 1999, to the Quota Share
Retrocession Agreement between American Hallmark Insurance
Company of Texas and the Reinsurer (Dorinco Reinsuranc
Company), effective January 1, 1997. (incorporated by reference
to Exhibit 10(a) to the registrant's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1999).
10(bc) Endorsement No. 4, effective January 1, 1999, to the Quota Share
Retrocession Agreement between American Hallmark Insurance
Company of Texas and the Reinsurer (GE Re Reinsurance Company),
effective January 1, 1996.(incorporated by reference to Exhibit
10(b) to the registrant's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1999).
10(bd) Addendum No. 1 to the Retrocession Contract effective June 1,
1998 between Dorinco Re and American Hallmark Insurance Company
of Texas and Harold Loving, d/b/a Texas Insurance Facilities.
(incorporated by reference to Exhibit 10(a) to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1999).
10(be) Endorsement No. 1 to the Retrocession Contract effective March
1, 1998 between Dorinco Re and American Hallmark Insurance
Company of Texas and Associated General Agency, Inc.
(incorporated by reference to Exhibit 10(b) to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1999).
10(bf) Automobile Physical Damage Catastrophe Excess of Loss
Reinsurance Contract effective January 1, 1999 between American
Hallmark Insurance Company of Texas and GE Reinsurance
Corporation. (incorporated by reference to Exhibit 10(c) to the
registrant's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1999).
10(bg) Form of Endorsement No. 2, effective July 1, 1997, to the 100% *
Quota Share Reinsurance Agreement between State & County Mutual
Fire Insurance Company, Vaughn General Agency, Inc. and American
Hallmark General Agency, Inc.
10(bh) Form of Amendment No. 3 to the Loan Agreement dated March 11, *
1997, between Hallmark Financial Services, Inc. and Dorinco
Reinsurance Company.
<PAGE>
10(bi) Form of Endorsement No. 6, effective January 1, 1999, to the *
Quota Share Retrocession Agreement between American Hallmark
Insurance Company of Texas and Dorinco Reinsurance Company,
effective January 1, 1997.
10(bj) Form of the Second Renewal Promissory Note dated November 19, *
1999, with Hallmark Financial Services, Inc. as Maker and
Dorinco Reinsurance Company as Payee.
10(bk) Form of Sale and Assignment Agreement dated November 18, 1999, *
with Hallmark Finance Corporation as Seller and FPF, Inc.
10(bl) Form of Premium Receivable Servicing Agreement dated November *
18, 1999 between Hallmark Finance Corporation and FPF, Inc.
22 List of subsidiaries of the registrant (incorporated by
reference to Exhibit 22 to the registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1991).
28 Schedule P of American Hallmark Insurance Company of Texas as *
filed with the Texas Department of Insurance for the year ended
December 31, 1999.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description Page Number
----------- -----------
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the Years
December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
Report of Independent Accountants
To the Board of Directors
Hallmark Financial Services, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity,
and cash flows, present fairly, in all material respects, the financial
position of Hallmark Financial Services, Inc. and Subsidiaries (the
"Company") at December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
Dallas, Texas
March 23, 2000
<PAGE>
<TABLE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
----------------------------
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
Investments:
Debt securities, held-to-maturity,
at amortized cost $ 3,831,657 $ 4,444,606
Equity securities, available-for-sale, at market
value 142,901 151,375
Short-term investments, at cost which approximates
market value 6,373,491 3,256,879
----------- -----------
Total investments 10,348,049 7,852,860
Cash and cash equivalents 5,786,069 6,776,274
Restricted cash 3,422,297 1,768,927
Prepaid reinsurance premiums 7,673,196 5,110,204
Premiums receivable from lender (net of allowance for 9,058,958 -
doubtful accounts $68,287 in 1999)
Premium finance notes receivable (net of allowance for - 5,287,945
doubtful accounts of $52,119 in 1998)
Premiums receivable 741,613 1,048,689
Reinsurance recoverable 15,673,241 13,900,496
Deferred policy acquisition costs 2,741,076 2,088,902
Excess of cost over net assets acquired (net of
accumulated amortization
of $1,485,080 in 1999 and $1,328,065 in 1998) 4,745,134 4,902,149
Current federal income tax recoverable - 150,031
Deferred federal income taxes 212,059 43,636
Accrued investment income 52,721 68,042
Other assets 547,820 622,798
----------- -----------
$ 61,002,233 $ 49,620,953
=========== ===========
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 9,288,366 $ 7,098,383
Unpaid losses and loss adjustment expenses 17,804,254 16,014,569
Unearned premiums 11,761,723 7,733,624
Reinsurance balances payable 2,623,603 2,097,564
Deferred ceding commissions 2,142,097 1,349,142
Drafts outstanding 901,471 739,817
Current federal income taxes payable 46,124 -
Accrued ceding commission refund 1,251,614 744,686
Accounts payable and other accrued expenses 2,516,222 1,958,920
Accrued litigation costs 950,000 950,000
----------- -----------
49,285,474 38,686,705
----------- -----------
Stockholders' equity:
Common stock, $.03 par value, authorized 100,000,000
issued 11,854,610 shares in 1999 and 1998 355,638 355,638
Capital in excess of par value 10,875,212 10,875,212
Retained earnings 1,543,304 755,994
Accumulated other comprehensive income (14,228) (9,429)
Treasury stock, 806,477 shares in 1999 and 1998, at (1,043,167) (1,043,167)
---------- -----------
Total stockholders' equity 11,716,759 10,934,248
----------- -----------
$ 61,002,233 $ 49,620,953
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements
F-3
</TABLE>
<PAGE>
<TABLE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1999 and 1998
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Gross premiums written $ 37,956,953 $ 32,477,325
Ceded premiums written (22,512,285) (20,956,533)
----------- -----------
Net premiums written $ 15,444,668 $ 11,520,792
=========== ===========
Revenues:
Gross premiums earned $ 33,928,854 $ 36,347,183
Ceded premiums earned (19,949,293) (24,260,579)
----------- -----------
Net premiums earned 13,979,561 12,086,604
Investment income, net of expenses 789,584 778,932
Finance charges 1,820,311 1,658,226
Processing and service fees 2,248,563 1,611,510
Other income 362,675 452,278
----------- -----------
Total revenues 19,200,694 16,587,550
----------- -----------
Benefits, losses and expenses:
Losses and loss adjustment expenses 26,777,314 25,568,892
Reinsurance recoveries (17,658,138) (17,442,185)
----------- -----------
Net losses and loss adjustment expenses 9,119,176 8,126,707
Acquisition costs, net 140,781 146,854
Other acquisition and underwriting expenses 4,397,249 5,151,527
Operating expenses 3,473,515 2,510,813
Interest expense 625,770 745,573
Amortization of intangible assets 157,015 183,765
Restructuring costs - (171,673)
----------- -----------
Total benefits, losses and expenses 17,913,506 16,693,566
----------- -----------
Income (loss) from operations before federal 1,287,188 (106,016)
Federal income tax expense (benefit) 499,878 (59,430)
----------- -----------
Net income (loss) $ 787,310 $ (46,586)
=========== ===========
Basic and diluted earnings per share
Net income (loss) $ .07 $ -
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements
F-4
</TABLE>
<PAGE>
<TABLE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999 and 1998
------------------------------
Capital Accumulated
Number in Other Total Comprehensive
of Par Excess of Retained Comprehensive Treasury Stockholders' Income
Shares Value Par Value Earnings Income Stock Equity (Loss)
---------- ------- ---------- -------- ------ --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 10,962,277 $328,868 $10,349,665 $802,580 ($9,855) ($600,000) $10,871,258
Comprehensive loss:
Net loss (46,586) (46,586) ($46,586)
Other comprehensive income,
net of tax
Unrealized gains on
securities, net of
tax of $219 426 426 426
-------
Comprehensive loss ($46,160)
=======
Issuance of common stock 6,000 180 1,970 2,150
Exercise of outstanding
stock warrants 886,333 26,590 416,577 443,167
Purchase of treasury stock (443,167) (443,167)
Expiration of stock warrants 107,000 107,000
---------- ------- ---------- -------- ------ --------- ----------
Balance at December 31, 1998 11,854,610 $355,638 $10,875,212 $755,994 ($9,429) ($1,043,167) $10,934,248
Comprehensive income:
Net income 787,310 787,310 787,310
Other comprehensive loss,
net of tax (4,799) (4,799) (4,799)
Unrealized losses on
securities, net of
tax of ($2,473)
-------
Comprehensive income $782,511
=======
---------- ------- ---------- -------- ------ --------- ----------
Balance at December 31, 1999 11,854,610 $355,638 $10,875,212 $1,543,304 ($14,228) ($1,043,167) $11,716,759
========== ======= ========== ========= ====== ========= ==========
The accompanying notes are an integral
part of the consolidated financial statements
F-5
</TABLE>
<PAGE>
<TABLE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1999 and 1998
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 787,310 $ (46,586)
Adjustments to reconcile net loss to cash
Depreciation and amortization expense 314,385 369,331
Change in deferred Federal income taxes (168,423) 28,979
Change in prepaid reinsurance premiums (2,562,992) 3,304,046
Change in premiums receivable 307,076 (204,549)
Change in deferred policy acquisition (652,174) 1,054,476
Change in deferred ceding commissions 792,955 (907,527)
Change in unpaid losses and loss 1,789,685 (1,717,720)
Change in unearned premiums 4,028,099 (3,869,858)
Change in reinsurance recoverable (1,772,745) 2,648,856
Change in reinsurance balances payable 526,039 (862,476)
Change in current federal income tax 150,031 489,185
Change in current federal income tax 46,124 -
Change in accrued ceding commission refund 506,928 (878,709)
Change in all other liabilities 718,955 (865,400)
Change in all other assets 14,471 815
----------- -----------
Net cash provided by (used in) 4,825,724 (1,457,137)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (80,610) (72,531)
Premium finance notes originated (26,416,178) (24,079,880)
Premium finance notes repaid 22,645,165 26,670,692
Repayment of note receivable - 1,149,280
Change in restricted cash (1,653,370) (427,990)
Purchases of debt securities (1,810,839) (974,913)
Maturities and redemptions of investment 2,426,532 1,497,432
Purchase of short-term investments (14,337,813) (12,797,720)
Maturities of short-term investments 11,221,201 12,511,679
----------- -----------
Net cash (used in) provided by investing (8,005,912) 3,476,049
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 6,500,000 750,000
Repayment of borrowings (4,310,017) (1,808,915)
Issuance of common stock -
----------- -----------
Cash provided by (used in) financing 2,189,983 (1,056,765)
----------- -----------
(Decrease) increase in cash and cash equivalents (990,205) 962,147
Cash and cash equivalents at beginning of year 6,776,274 5,814,127
----------- -----------
Cash and cash equivalents at end of year $ 5,786,069 $ 6,776,274
=========== ===========
<PAGE>
Supplemental cash flow information:
Interest paid $ 653,424 $ 704,021
=========== ===========
Income taxes paid $ 675,000 $ 100,000
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements
F-6
</TABLE>
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. Accounting Policies:
General
Hallmark Financial Services, Inc. ("HFS") and its subsidiaries
(collectively, the "Company"), are engaged primarily in the
marketing, underwriting and premium financing of non-standard
automobile insurance, as well as claims adjusting and other
insurance related services. The Company pursues its business
activities through an integrated insurance group (collectively,
the "Insurance Group"), the members of which are an authorized
Texas property and casualty insurance company, American Hallmark
Insurance Company of Texas ("Hallmark"); a managing general agent,
American Hallmark General Agency, Inc.("AHGA"); a network of
affiliated insurance agencies known as the American Hallmark
Agencies ("Hallmark Agencies"); a premium finance company,
Hallmark Finance Corporation ("HFC"); and a claims handling and
adjusting firm, Hallmark Claims Service, Inc. ("HCS"). The Company
operates only in Texas.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts and operations of HFS and its subsidiaries. Intercompany
accounts and transactions have been eliminated.
Basis of Presentation
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States which, as to Hallmark, differ from
statutory accounting practices prescribed or permitted for
insurance companies by insurance regulatory authorities.
Investments
Debt securities are reported at amortized cost. The Company has
the intent and ability to hold all investments in debt securities
to maturity. Provisions for possible losses are recorded only on
other-than-temporary declines in the value of an investment.
Equity securities available-for-sale are reported at market value.
Unrealized gains and losses are recorded as a component of
stockholder's equity.
Short-term investments are carried at cost which approximates
market. Short-term investments include U.S. Government
securities maturing within one year.
<PAGE>
Realized investment gains and losses are recognized in operations
on the specific identification method.
Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Recognition of Premium Revenues
Insurance premiums are earned pro rata over the terms of the
policies. Effective late-July 1998, the Company changed its
recognition of policy fees on annual policies from a fully-earned
policy fee at the time of issuance to a pro rata earned policy fee
over the term of the policy to reflect changed contractual terms.
Upon cancellation, any unearned premium and policy fee is
refunded to the insurer. Prior to the change in July 1998, policy
fees were fully-earned and not refunded to the insurer. Insurance
premiums written include gross policy fees of $4,718,289 and
$3,559,557 and policy fees, net of reinsurance, of $4,741,428 and
$2,285,286 for the years ended December 31, 1999 and 1998,
respectively.
Finance Charges
The majority of Hallmark's annual insurance premiums are financed
through the Company's premium finance program offered by its
wholly-owned subsidiary, HFC. Finance charges on the premium
finance notes are recorded as interest earned. This interest is
earned on the Rule of 78's method which approximates the interest
method for such short-term notes.
Property and Equipment
Property and equipment, aggregating $1,307,340 and $1,281,231, at
December 31, 1999 and 1998, respectively, included in other
assets, is recorded at cost and is depreciated using the straight-
line method over the estimated useful lives of the assets (five to
ten years). Depreciation expense for 1999 and 1998 was $156,781
and $141,636, respectively. Accumulated depreciation was
$1,044,484 and $888,616 at December 31, 1999 and 1998,
respectively.
Premiums Receivable from Lender
Premiums receivable from lender represents premiums due to HFC as
a result of a secured financing agreement with an unaffiliated
third party. (See Note 5.)
<PAGE>
Premium Finance Notes Receivable
Premium finance notes receivable is composed of notes receivable
from insureds for premiums on annual and six-month policies
produced by AHGA and financed by HFC.
Premiums Receivable
The majority of the balance in premiums receivable is premiums due
to Hallmark on unaffiliated MGA business assumed from Dorinco.
(See Note 4.)
Deferred Policy Acquisition Costs
Policy acquisition costs (mainly commissions, underwriting and
marketing expenses) that vary with and are primarily related to
the production of new and renewal business, are deferred and
charged to operations over periods in which the related premiums
are earned. The method followed in computing deferred acquisition
costs limits the amount of such deferred costs to their estimated
realizable value. In determining estimated realizable value, the
computation gives effect to the premium to be earned, related
investment income, losses and loss expenses and certain other
costs expected to be incurred as the premiums are earned. Ceding
commissions from reinsurers, which include expense allowances, are
deferred and recognized over the period premiums are earned for
the underlying policies reinsured. The change in deferred ceding
commission income is netted against the change in deferred
acquisition costs.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses represent the estimated
ultimate net cost of all reported and unreported losses incurred
through December 31, 1999 and 1998. The liabilities for unpaid
losses and loss adjustment expenses are estimated using individual
case-basis valuations and statistical analyses.
These estimates are subject to the effects of trends in loss
severity and frequency. Although considerable variability is
inherent in such estimates, management believes that the
liabilities for unpaid losses and loss adjustment expenses are
adequate. The estimates are continually reviewed and adjusted as
necessary as experience develops or new information becomes known;
such adjustments are included in current operations. The
liabilities for unpaid losses and loss adjustment expenses at
December 31, 1999 and 1998 are reported net of recoverables for
salvage and subrogation of approximately $180,000 and $122,000,
respectively.
<PAGE>
Reinsurance
Hallmark is routinely involved in reinsurance transactions with
other companies. Reinsurance premiums, losses, and loss
adjustment expenses are accounted for on bases consistent with
those used in accounting for the original policies issued and the
terms of the reinsurance contracts. (See Note 4.)
Income Taxes
The Company files a consolidated federal income tax return.
Deferred federal income taxes reflect the future tax consequences
of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year end. Deferred
taxes are recognized using the liability method, whereby tax rates
are applied to cumulative temporary differences based on when and
how they are expected to affect the tax return. Deferred tax
assets and liabilities are adjusted for tax rate changes.
Net Income Per Share
The computation of net income per share is based upon the weighted
average number of common shares outstanding during the period,
plus (in periods in which they have a dilutive effect) the effect
of common shares potentially issuable, primarily from stock
options and exercise of warrants. (See Notes 6 and 8.)
Intangible Assets
When Hallmark, AHGA, HFC, and HCS were purchased by HFS, the
excess cost over the fair value of the net assets acquired was
recorded as goodwill and is being amortized on a straight-line
basis over forty years. Other intangible assets consist of a
trade name, a managing general agent's license, and non-compete
arrangements all of which were fully amortized at December 31,
1999.
The Company continually reevaluates the propriety of the carrying
amount of goodwill and other intangibles as well as the
amortization period to determine whether current events and
circumstances warrant adjustments to the carrying value and/or
revised estimates of useful lives. At this time, the Company
believes that no significant impairment of the goodwill has
occurred and that no reduction of the estimated useful life is
warranted.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date(s) of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
<PAGE>
Fair Value of Financial Instruments
Cash and Short-term Investments: The carrying amounts reported in
the balance sheet for these instruments approximate their fair
values.
Investment Securities: Fair values are obtained from an
independent pricing service. (See Note 2.)
Premiums Receivable from Lender: The carrying amount reported in
the balance sheet for this instrument approximates its fair value
as the term of the receivable is less than one year.
Premium Finance Notes Receivable: The carrying amounts reported
in the balance sheet for these instruments approximate their fair
values as the terms of the receivables are one year or less.
Notes Payable: The carrying amounts reported in the balance sheet
for these instruments approximate their fair values. (See Note
5.)
Stock-based Compensation
The Company recognizes its compensation expense for grants of
stock, stock options, and other equity instruments in accordance
with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"). (See Note 8.)
Reclassification
Certain previously reported 1998 amounts have been reclassified to
conform to current year presentation. Such reclassification had
no effect on net income or stockholders' equity
<PAGE>
2. Investments:
<TABLE>
Major categories of net investment income are summarized as follows:
Years ended December 31,
-------------------------------
1999 1998
----------- ----------
<S> <C> <C>
Debt securities $ 199,629 $ 285,281
Equity securities 8,170 8,588
Short-term investments 375,252 288,585
Cash equivalents 204,643 190,492
Other 2,730 6,706
----------- ----------
790,424 779,652
Investment expenses (840) (720)
----------- ----------
Net investment income $ 789,584 $ 778,932
=========== ===========
</TABLE>
No investment in any entity or its affiliates exceeded 10% of
stockholders' equity at December 31, 1999 and 1998.
<PAGE>
<TABLE>
The amortization cost and estimated market value of investments in
debt and equity securities by category is as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Market
--------- --------- -------- -----------
<S> <C> <C> <C> <C>
At December 31, 1999
--------------------
U.S. Treasury $2,944,133 $ 19,527 $ (9,599) $ 2,954,061
securities and
obligations of U.S.
government
corporations and
agencies
Mortgage backed
securities 887,524 6,780 (38,303) 856,001
--------- --------- -------- -----------
Total debt 3,831,657 26,307 (47,902) 3,810,062
securities
Equity securities 164,459 - (21,558) 142,901
--------- --------- -------- -----------
Total debt and equity
securities $3,996,116 $ 26,307 $ (69,460) $ 3,952,963
========= ========= ======== ===========
At December 31, 1998
U.S. Treasury $3,248,987 $ 18,014 $ (1,710) $ 3,265,291
securities and
obligations of U.S.
government
corporations and
agencies
Mortgage backed 1,120,630 14,885 (2,034) 1,133,480
securities
Obligations of state 74,989 948 - 75,938
and local govt -
--------- --------- -------- -----------
Total debt 4,444,606 33,847 (3,744) 4,474,709
securities
Equity securities 165,661 - (14,286) 151,375
--------- --------- -------- -----------
Total debt and equity $4,610,267 $ 33,847 $ (18,030) $ 4,626,084
securities
========= ========= ======== ===========
</TABLE>
<PAGE>
The amortized cost and estimated market value of debt securities at
December 31, 1999, by contractual maturity, are as follows. Expected
maturities may differ from contractual maturities because certain
borrowers may have the right to call or prepay obligations with or
without penalities.
Amortized Market
Maturity: Cost Value
--------- ---------
Due in one year or less $2,298,296 $2,311,240
Due in one year through five years 499,233 495,450
Due after five years through ten years 146,604 147,371
Mortgage backed securities 887,524 856,001
--------- ---------
$3,831,657 $3,810,062
========= =========
At December 31, 1999 and 1998, investments in debt securities, with an
approximate carrying value of $100,000 were on deposit with the Texas
Department of Insurance (the "TDI") as required by insurance
regulations.
Proceeds from investment securities of $2,426,532 and $1,497,43
during 1999 and 1998, respectively, were primarily from maturities
bond calls and prepayments of mortgage-backed securities.
3. Liability for Unpaid Losses and Loss Adjustment Expenses:
<TABLE>
Activity in the liability for unpaid losses and loss adjustment
expenses (in thousands) is summarized as follows:
1999 1998
------- -------
<S> <C> <C>
Balance at January 1 $ 16,015 $ 17,732
Less reinsurance recoverables 11,435 13,064
------- -------
Net Balance at January 1 4,580 4,668
------- -------
Incurred related to:
Current year 9,330 8,130
Prior years 14 317
------- -------
Total incurred 9,344 8,447
------- -------
Paid related to:
Current year 5,724 5,209
Prior years 2,791 3,326
------- -------
Total paid 8,515 8,535
------- -------
Net Balance at December 31 5,409 4,580
Plus reinsurance recoverables 12,395 11,435
------- -------
Balance at December 31 $ 17,804 $ 16,015
======= =======
</TABLE>
<PAGE>
4. Reinsurance:
Hallmark is involved in the assumption and cession of reinsurance
from/to other companies. The Company remains obligated to its
policyholders in the event that the reinsurers do not meet their
obligations under the reinsurance agreements.
Effective March 1, 1992, Hallmark entered into a reinsurance
arrangement with State & County Mutual Fire Insurance Company
("State & County"), an unaffiliated company, to assume 100% of the
nonstandard auto business produced by AHGA and underwritten by
State & County. The earned premiums assumed under this agreement
in 1999 and 1998 were $30,859,991 and $34,010,499, respectively.
Funds generated from business produced under this agreement are
maintained in accounts for the benefit of State & County. At
December 31, 1999 and 1998, Hallmark held for the benefit of State
& County, cash and cash equivalents of $4,280,910 and $2,727,611,
respectively, and investment securities at amortized cost of
$7,831,540 and $6,447,083, respectively.
The arrangement is supplemented by a separate retrocession
agreement between Hallmark, GE Reinsurance Company, formerly
Kemper Reinsurance Company ("GE RE"), and Dorinco Reinsurance
Company ("Dorinco"), under which Hallmark retains 25% and cedes
75% of the risk to the reinsurers.
Under the retrocession agreement with GE RE and Dorinco, Hallmark
receives a provisional ceding commission of 30%. This provisional
commission is adjusted annually over a three year rating period on
a sliding scale based on annual loss ratios. Based upon its loss
experience, Hallmark can earn maximum commissions of 33.5% and
34.5%, respectively, and is guaranteed minimum commissions of 29%
and 26%, respectively, regardless of loss experience on business
reinsured by GE RE and Dorinco. During 1998, the guaranteed
minimum commission rates were 28% and 25%, respectively. As of
December 31, 1999 and 1998, the accrued ceding commission refund
was $1,251,614 and $744,686, respectively. This accrual
represents the difference between the ceding commission received
and the ceding commission earned based on current loss ratios.
Effective July 1, 1999, Hallmark renewed its Excess of Loss
Reinsurance Agreement with GE RE whereby GE RE reinsures Hallmark
for physical damage catastrophe losses in excess of 95% of the
ultimate net loss over and above an initial ultimate net loss of
$100,000 on each and every loss occurrence, subject to a limit of
liability to GE RE of $142,500 on each and every loss occurrence.
Hallmark assumes business from Dorinco on various unaffiliated MGA
programs. Under these programs, HCS also provides claims
processing, and AHGA provides premium processing. At December 31,
1999 and 1998, Dorinco held cash of $2,049,291 and $451,470,
respectively, to secure balances ceded to Hallmark. These amounts
were included in restricted cash in the accompanying Consolidated
Balance Sheets.
<PAGE>
5. Notes Payable:
<TABLE>
A summary of the Company's notes payable
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Note payable to unaffiliated insurance $2,993,330 $7,000,000
Balance under Financing Arrangement 6,261,737 -
Note payable to individual 33,299 98,383
--------- ---------
$9,288,366 $7,098,383
========= =========
Scheduled annual principal payments on note payable to
unaffiliated insurance company and note payable to individual
are as follows:
Year
----
<S> <C>
2000 $ 761,298
2001 727,999
2002 727,999
2003 727,999
2004 81,334
</TABLE>
The balance under the Financing Arrangement will be repaid during
the coming year as associated premium finance notes are repaid
(See below).
Effective March 11, 1997, the Company entered into a loan
agreement with Dorinco, whereby the Company borrowed $7,000,000
(the "Dorinco Loan") to contribute to HFC. Proceeds from this
loan were used by HFC primarily to fund premium finance notes. The
loan agreement provides for a seven-year term at a fixed interest
rate of 8.25%. During the fourth quarter of 1999, the Company
paid $4,006,670 on the principal, reducing the note balance to
$2,993,330.
<PAGE>
As long as certain financial covenants defined as "triggering
events" are maintained, collateral for the Dorinco Loan is limited
to the stock of HFC and a covenant by the Company not to pledge
the stock of Hallmark or AHGA. To avoid a triggering event,
Hallmark must (1) maintain a combined ratio and loss ratio which
do not exceed 107% and 83%, respectively, and (2) maintain
statutory surplus of $4,200,000 and experience no decreases to
surplus in any one year that exceeds 15% of the prior year
surplus. If a triggering event should occur, the Company has ten
days to pledge the stock of AHGA and Hallmark as additional
collateral for the Dorinco Loan. The loan agreement also contains
covenants which require the Company to satisfy certain financial
ratios which are less restrictive than the triggering event ratios
and, among other things, restrict capital expenditures, payment of
dividends, and incurrence of additional debt. For the years ended
December 31, 1999 and 1998, the Company was in compliance with the
covenants of the loan.
Effective November 18, 1999, HFC entered into a secured financing
arrangement (the "Financing Arrangement") and a servicing
agreement with an unaffiliated third party in order to fund HFC's
premium finance activities. The Financing Arrangement provides
that HFC sell to the third party all eligible premium finance
notes generated by HFC in connection with the financing of
insurance policies. Though structured as a sale, the transaction
is accounted for as a secured financing transaction as it does
not meet the requirements for application of SFAS 125, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Under the Financing Arrangement,
HFC may from time to time specify the amount to be advanced by the
third party and secured by the premium finance notes (up to
maximum of 90% of the face amount of the premium finance notes).
Collections on the premium finance notes are remitted to HFC to
the extent they exceed the sum of (a) the aggregate amount of all
prior advances, (b) interest on the aggregate advance balance from
time to time outstanding, and (c) certain other fees and expenses
payable to the third party. The interest payable under the
Financing Arrangement is at the prime rate plus a spread ranging
from one-half percent to one percent depending on the unpaid
balance of the advances. As of December 31, 1999, HFC had an
outstanding balance on advances under the Financing Arrangement of
$6,261,737 and the applicable interest rate was 9.5%. Under the
Financing Arrangement, the maximum purchase commitment by the
third party is $8,000,000. At December 31, 1999, the unused
portion of the commitment was $1,738,263.
The note payable to an individual is collateralized by most assets
of AHGA and requires monthly principal and interest payments of
$6,000 through May 1, 2000, with interest at 10%.
<PAGE>
6. Earnings per Share:
<TABLE>
The Company has adopted the provisions of SFAS No. 128, Earnings Per
Share, requiring presentation of both basic and diluted earnings per
share. A reconciliation of the numerators and denominators of the
basic and diluted per-share computations (does not include
outstanding options or warrants as these were determined to be anti-
dilutive), as required by SFAS No. 128 is presented below:
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
For the year ended December 31, 1999:
Basic Earnings per Share
Income available to
common stockholders:
Net Income $787,310 11,048,133 $ .07
======= ====
Effect of Dilutive Securities:
Options and warrants - - -
Diluted Earnings per Share
Income available to
common stockholders
+ assumed conversions:
Net income $787,310 11,048,133 $ .07
======= ====
For the year ended December 31, 1998:
Basic Earnings per Share
Income available to
common stockholders:
Net loss ($ 46,586) 11,048,133 $ -
======= ====
Effect of Dilutive Securities:
Options and warrants - - -
Diluted Earnings per Share
Income available to
common stockholders
+ assumed conversions:
Net loss ($ 46,586) 11,048,133 $ -
======= ====
</TABLE>
<PAGE>
7. Regulatory Capital Restrictions:
Hallmark's 1999 and 1998 net income (loss) and stockholders'
equity (capital and surplus), as determined in accordance with
statutory accounting practices, were $357,451 and ($19,777), and
$6,013,143 and $5,399,528, respectively. The minimum statutory
capital and surplus required for Hallmark by the TDI is
$2,000,000. Texas state law limits the payment of dividends to
stockholders by property and casualty insurance companies. The
maximum dividend that may be paid without prior approval of the
Commissioner of Insurance is limited to the greater of 10% of
statutory surplus as regards policyholders as of the preceding
calendar year end or the statutory net income of the preceding
calendar year. No dividends were declared or paid by Hallmark in
1999 or 1998.
8. Stock Option Plans:
The Company has two stock option plans for key employees, the 1991
Key Employee Stock Option Plan and the 1994 Key Employee Long Term
Incentive Plan, and a non-qualified plan for non-employee
directors. The number of shares reserved for future issuance
under the 1991 employee plan, the 1994 employee plan and the non-
employee director plan is 500,000, 1,500,000 and 1,350,000,
respectively. The option prices under the plans are not to be
less than the closing price of the common stock on the day
preceding the grant date. Pursuant to the stock option plans,
the Company has granted incentive stock options under Section 422
of the Internal Revenue Code of 1986. The stock options granted
to employees vest over a 3 year period on a graded schedule, 40%
in the first 6 months and 20% on each anniversary date of the
grant date. The stock options granted to the directors vest over
a 6 year period on a graded schedule, 40% in the first 6 months
and 10% on each anniversary date of the grant date. In accordance
with APB 25, the Company has not recognized compensation expense
for the stock options granted in 1999 and 1998.
In October 1992, the Company issued warrants to purchase 981,333
shares of its common stock ("Guaranty Warrants") to executive
officers and directors in consideration for the recipients'
agreement to pledge outstanding shares of the Company's common
stock they owned as security for a working capital line of credit
the Company proposed to obtain from a commercial bank. The
Company subsequently abandoned its efforts to obtain the working
capital line of credit. Each Guaranty Warrant covered the same
number of shares the recipient agreed to pledge. No value was
assigned to these warrants. The Guaranty Warrants were fully
exercisable between October 2, 1992 and October 1, 1996, at which
time they would have expired to the extent not exercised. On
March 28, 1996, the Board of Directors extended the exercisability
of the Guaranty Warrants through October 1, 1998. On October 1,
1998, the Guaranty Warrants were exercised to purchase an
aggregate of 886,333 shares of the Company's common stock. In
payment of the exercise price of $0.50 per share, 506,476
outstanding shares were surrendered at a price of $0.875 per
share, and subsequently recorded as treasury stock by the Company.
<PAGE>
Pursuant to SFAS No. 123, Accounting for Stock-based Compensation,
a company may elect to continue expense recognition under APB 25,
or to recognize compensation expense for grants of stock, stock
options, and other equity instruments to employees based on fair
value methodology outlined in SFAS No. 123. The Company has
elected to continue expense recognition pursuant to APB 25.
<TABLE>
A summary of the status of the Company's stock options and warrants as of
December 31, 1999 and December 31, 1998 and the changes during the years
ended on those dates is presented below:
1999 1998
----------------------- -----------------------
Number Number
of Shares of Weighted of Shares of Weighted
Underlying Average Underlying Average
Options and Exercise Options and Exercise
Warrants Prices Warrants Prices
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning
of the year 1,840,000 $ .525 2,857,333 $ .52
Exercised - $ - (892,333) $ .499
Forfeited ( 63,000) $ .988 ( 1,000) $ 1.188
Expired (502,000) $ .558 (124,000) $ .497
Outstanding at end of year 1,275,000 $ .504 1,840,000 $ .525
Exercisable at end of year 1,132,100 $ .468 1,546,100 $ .494
There were no options granted in 1999 or 1998.
</TABLE>
<TABLE>
The following table summarizes information about stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Avg.
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 12/31/99 Contr. Actual Life Exercise Price at 12/31/99 Exercise Price
--------------- ----------- ------------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .25 to $ .70 1,124,000 4.59 $ .44 1,041,500 $ .42
$ .71 to $ 1.00 151,000 6.04 $ 1.00 90,600 $ 1.00
$ .25 to $ 1.00 1,275,000 4.76 $ .50 1,132,100 $ .47
</TABLE>
<PAGE>
<TABLE>
The pro forma effects on net income and earnings per share for 1999 and 1998 from
compensation expense computed pursuant to SFAS No. 123 is as follows:
December 31, 1999 December 31, 1998
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
SFAS No. 123 charge $ - $ 14,044 $ - $ 83,211
Net income $ 787,310 $ 778,041 ($ 46,586) ($ 101,505)
Net income per common share $ . 07 $ .07 $ - ($ 0.01)
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative
of future amounts. SFAS No. 123 does not apply to awards prior to 1995, and the
Company anticipates making awards in the future under its stock-based compensation plan.
</TABLE>
9. Income Taxes:
<TABLE>
The composition of deferred tax assets and liabilities and the
related tax effects as of December 31, 1999 and 1998, are as
follows:
1999 1998
---------- ---------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs ( $ 931,966) ($ 710,227)
Other ( 121,781) ( 101,107)
---------- ---------
Total deferred tax liabilities ( 1,053,747) ( 811,334)
---------- ---------
Deferred tax assets:
Unearned premiums 278,020 178,939
Loss reserve discounting, net of salvage 175,934 151,702
and subrogation
Deferred ceding commissions 728,313 458,709
Unrealized gains (losses) on securities 4,857 4,857
Net operating loss carry forward 33,171 33,171
Other 78,681 60,762
---------- ---------
Total deferred tax assets 1,298,976 888,140
---------- ---------
Net deferred tax asset 245,229 76,806
Valuation allowance 33,170 33,170
---------- ---------
Net deferred tax asset $ 212,059 $ 43,636
========== =========
A valuation allowance is provided against the Company's deferred tax
asset to the extent that management does not believe it is more
likely than not that future taxable income will be adequate to
realize these future tax benefits
<PAGE>
A reconciliation of the income tax provisions based on the prevailing
corporate tax rate of 34 percent to the provision reflected in the
consolidated financial statements for the years ended December 31,
1999 and 1998, is as follows:
1999 1998
-------- -------
Computed expected income tax expense
at statutory regulatory tax rate $ 437,644 ($36,045)
Amortization of excess cost over 53,385 53,385
net assets acquired
Meals and entertainment 2,243 11,183
Adjustment to prior year's deferred taxes (5,235) ( 91,088)
Other 11,841 3,135
-------- -------
Income tax expense (benefit) $ 499,878 ($59,430)
======== =======
The Company has available, for federal income tax purposes, unused
net operating losses of $97,562 at December 31, 1999, which may be
used to offset future taxable income. The net operating losses
will expire, if unused, as follows:
Year
----
2002 $ 1,325
2003 96,237
-------
$ 97,562
=======
10. Restructuring Costs:
During 1998 the Company restructured the Hallmark Agencies by
closing seven of its offices and opening two new offices (both of
which were subsequently closed). The excess of the restructuring
reserve over the costs actually incurred was recorded as a
reduction of expenses in 1998.
11. Commitments and Contingencies:
The Company has several leases, primarily for office facilities
and computer equipment, which expire in various years through
2002. Certain of these leases contain renewal options. Rental
expense amounted to $595,572 and $650,268 for the years ended
December 31, 1999 and 1998, respectively.
<PAGE>
Future minimum lease payments under noncancelable operating leases
as of December 31, 1999 are as follows:
Year
----
2000 $ 452,739
2001 32,388
2002 7,918
-------
Total minimum lease payments $ 493,045
========
The Company has a 401(K) savings plan. Employees who have completed
three months of service are eligible to participate. Under this
plan employees may contribute a portion of their compensation, and
the Company may contribute a discretionary amount each year. The
Company's contribution for 1999 to be paid in 2000 was $84,000 and
for 1998 was $28,000.
In March 1997, a jury returned a verdict against the Company and
in favor of a former director and officer of Hallmark in the
amount of approximately $517,000 on the basis of contractual and
statutory indemnification claims. The court subsequently granted
the plaintiff's motion for attorneys' fees of approximately
$271,000, court costs of approximately $39,000 and pre-judgment
and post-judgment interest, and rendered final judgment on the
verdict. The Company believes the outcome in this case was both
legally and factually incorrect and has appealed the judgment.
During the fourth quarter of 1997, the Company deposited
$1,248,758 into the registry of the court in order to stay
execution on the judgment pending the result of such appeal. The
amount on deposit with the court of $1,373,006 as of December 31,
1999 has been included as restricted cash in the accompanying
balance sheet.
Although the Company intends to aggressively pursue its appeal,
the Company is presently unable to determine the likelihood of a
favorable result. Further, a favorable ruling on some portions of
the appeal could entail the necessity for a new trial. Therefore,
the Company established a reserve of $950,000 during the fourth
quarter of 1997 for loss contingencies related to this case.
This reserve remains unchanged at December 31, 1999. The possible
range of loss in the event of an ultimately unfavorable outcome to
this case exceeds the amount presently reserved. Conversely, in
the event of a favorable resolution of the case, the expenses
incurred could be less than the reserve amount. Therefore, future
adjustments to the reserve may be required.
<PAGE>
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's financial position
or results of operations.
From time to time, assessments are levied on the Company by the
guaranty association of the State of Texas. Such assessments are
made primarily to cover the losses of policyholders of insolvent
or rehabilitated insurers. These assessments can be partially
recovered through a reduction in future premium taxes. There were
no assessments for 1999 and 1998.
12. Concentrations of Credit Risk:
The Company maintains cash equivalents in accounts with two
financial institutions in excess of the amount insured by the
Federal Deposit Insurance Corporation. The Company monitors the
financial stability of the depository institutions regularly, and
management does not believe excessive risk of depository
institution failure exists at December 31, 1999.
All of the Company's business activity is with customers and
independent agents located within the State of Texas.
</TABLE>
Exhibit 10 (bg)
ENDORSEMENT NO. 2
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY
MUTUAL FIRE INSURANCE COMPANY, an insurance company organized under the
laws of the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
corporation organized under the laws of the State of Texas ("General
Agent") and AMEREICAN HALLMARK GENERAL AGENCY, INC., a corporation
organized under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, effective 12:01 A.M., Central Standard Time on July 1,
1997 that ARTICLE XXX - PARTICIPATION, the first paragraph will read as
follows and not as heretofore:
This Agreement obligates the Reinsurer for 60.00% of the interests and
liabilities set forth under this Agreement.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IN WITNESS WHEREOF, the Parties hereto by their respective duly
authorized representatives have executed this Agreement as of the dates
first above mentioned.
DATED: June 22, 1998 STATE AND COUNTY MUTUAL FIRE
INSURANCE COMPANY
By:_______________________________
IT'S:____________________________________
Exhibit 10 (bh)
AMENDMENT NO. 3
Loan Agreement Between Hallmark Financial Services, Inc.
And Dorinco Reinsurance Company
This Amendment No. 3 is made and entered into effective as of
November 19, 1999, by and between Hallmark Financial Services, Inc., a
Nevada corporation (the "Borrower"), and Dorinco Reinsurance Company, a
Michigan corporation (the "Lender").
WHEREAS, Borrower and Lender have entered into a Loan Agreement
dated March 10, 1997, which Loan Agreement has previously been amended
by an Amendment No. 1 executed by Borrower on July 31, 1998 and by
Lender on August 14, 1998, and an Amendment No. 2 effective as of March
5, 1999 (as amended, the "Agreement");
WHEREAS, Borrower has prepaid $3,966,670 of the original principal
amount of the Promissory Note and has executed a renewal Promissory
Note of even date herewith reflecting the new principal balance of
$3,033,330 and certain revised payment terms;
WHEREAS, Borrower and Lender desire to set forth certain
additional agreements and further amend the Agreement as provided
herein;
THEREFORE, in consideration of the mutual covenants contained
herein the parties hereby agree as set forth below.
A. Lender acknowledges receipt from Borrower of reduced monthly
principal payments on the Promissory Note of $20,000 on September 30
and October 31, 1999, as well as a principal prepayment of $3,966,670
on November 19, 1999. Lender hereby waives any default under the
Agreement resulting from such reduced monthly principal payments and
waives all prepayment penalties set forth in the Promissory Note.
B. Subsections 1.s. and 1.t. of the Agreement are hereby deleted
in their entirety.
C. Subsection 1.x. of the Agreement is hereby deleted in its
entirety and the following Subsection 1.x. is substituted in its place:
"x. 'Flatiron Documents' means that certain Sale
and Assignment Agreement and that certain Premium Receivable
Servicing Agreement, each dated to be effective as of
November 18, 1999, between HFC and FPF, Inc."
D. Subsection 1.z. of the Agreement is hereby deleted in its
entirety and the following Subsection 1.z. is substituted in its place:
"z. 'Outstanding Debt' means any obligation,
indebtedness or liability now or hereafter owed by HFC
pursuant to the Flatiron Documents."
<PAGE>
E. Subsection 1.ac. of the Agreement is hereby deleted in its
entirety and the following Subsection 1.ac. is substituted in its
place:
"ac. 'Promissory Note' means the Promissory Note
dated November 19, 1999, in the original principal amount of
$3,033,330.00 from Borrower, as maker, payable to the order
of Lender, and all extensions, renewals, substitutions and
modifications thereof."
F. Section 2 of the Agreement is hereby deleted in its entirety
and the following Section 2 is substituted in its place:
"2. Promissory Note Commitment. Lender will loan to
Borrower the sum of $3,033,330.00 upon the terms and
conditions set forth in this Agreement and the Promissory
Note for the purposes set forth in Subsection 6.k. of this
Agreement."
G. The introductory paragraph of Section 3 of the Agreement is
hereby deleted in its entirety and the following introductory paragraph
of Section 3 is substituted in its place:
"3. Collateral. In order to secure the Indebtedness,
Borrower has caused ACO to pledge to Lender the Pledged Stock
pursuant to the terms of the Pledge Agreement attached hereto
as Exhibit B. Lender shall not presently have or claim any
security interest in the Restricted Stock. Upon the
occurrence of any "triggering event" specified below,
Borrower shall, and shall cause ACO to, within ten (10) days,
execute and deliver to Lender a Stock Pledge and Security
Agreement in substantially the same form as Exhibit B
(without any material change thereto) covering the Restricted
Stock, together with certificates representing the Restricted
Stock, and thereafter such Restricted Stock shall be deemed
Pledged Stock for purposes of this Agreement; provided,
however, that the pledge of the Restricted Stock to Lender
shall in all events be subject to any required regulatory
approval by the Commissioner or otherwise. For purposes of
this Section 3, a "triggering event" means:"
H. Subsections 3.c. and 3.d. of the Agreement are hereby deleted
in their entirety.
<PAGE>
I. Subsection 4.e. of the Agreement is hereby deleted in its
entirety and the following Subsection 4.e. is substituted in its place:
"4. Conditions to this Agreement.
"e. Reinsurance Treaty. Borrower shall have caused
AH to offer, for the time period set forth in the table
contained in this paragraph, to reinsure a portion of its
Personal Lines Auto Quota Share Reinsurance with Lender, the
form and content of such reinsurance treaty to be
substantially similar to Exhibit D attached to and made a
part of this Agreement, in amounts sufficient to allow for
the following schedule of ceded premiums:
Treaty Years Ceded Premium
07/01/99 to 06/30/00 $ 9,000,000
07/01/00 to 06/30/01 $ 9,000,000
07/01/01 to 06/30/02 $ 9,000,000
07/01/02 to 06/30/03 $ 9,000,000
07/01/03 to 06/30/04 $ 9,000,000
Premiums ceded to Lender pursuant to a reinsurance treaty
with a managing general agency for whom Borrower or an
Affiliate serves as the program administrator or similar
function will not be counted toward satisfaction of the
foregoing schedule of ceded premiums."
J. The words "NationsBank Loan Documents" in Subsections 5.i.,
5.m. and 5.o.(ii) of the Agreement are hereby deleted and the words
"Flatiron Documents" substituted in their place.
K. Subsection 6.k. of the Agreement is hereby deleted in its
entirety and the following Subsection 6.k. is substituted in its place:
"6. Affirmative Covenants.
"k. Use of Proceeds. Borrower may use up to
$1,000,000 of the proceeds of the Promissory Note for the
general corporate purposes of Borrower including, without
limitation, the acquisition of computer hardware and
software. Borrower shall use the balance of the proceeds of
the Promissory Note to purchase additional shares of the
capital stock or otherwise contribute to the equity capital
of HFC."
L. Subsection 6.m.(i) of the Agreement is hereby deleted in its
entirety and the following Subsection 6.m.(i) is substituted in its
place:
"6. Affirmative Covenants.
"m. Statutory Capital and Surplus.
"(i) Borrower shall cause AH to maintain
Statutory Capital and Surplus of at least $4,000,000 as of
the date of each reporting period required by law or required
by the Texas Department of Insurance."
<PAGE>
M. Subsection 6.m.(ii) of the Agreement is hereby deleted
in its entirety.
N. Subsection 6.o. of the Agreement is hereby deleted in its
entirety and the following Subsections 6.o. is substituted in its
place:
"6. Affirmative Covenants.
"o. Reinsurance Treaty. Borrower shall cause AH to
continue to offer, for the time period set forth in the table
contained in this paragraph, to reinsure a portion of its
Personal Lines Auto Quota Share Reinsurance with Lender,
the form and content of such reinsurance treaty to be
substantially similar to Exhibit D attached hereto, in
amounts sufficient to allow for the following schedule of
ceded premiums:
Treaty Years Ceded
Premium
07/01/99 to 06/30/00 $ 9,000,000
07/01/00 to 06/30/01 $ 9,000,000
07/01/01 to 06/30/02 $ 9,000,000
07/01/02 to 06/30/03 $ 9,000,000
07/01/03 to 06/30/04 $ 9,000,000
Premiums ceded to Lender pursuant to a reinsurance treaty
with a managing general agency for whom Borrower or an
Affiliate serves as the program administrator or similar
function will not be counted toward satisfaction of the
foregoing schedule of ceded premiums."
O. Subsection 7.a.(v) of the Agreement is hereby deleted in its
entirety.
P. The words "NationsBank Loan Documents" in Subsections 7.e and
7.g. of the Agreement are hereby deleted and the words "Flatiron
Documents" substituted in their place.
Q. Except as expressly amended hereby, all terms and conditions
of the Agreement shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment No. 3 to be effective as of the date set forth above.
BORROWER:
HALLMARK FINANCIAL SERVICES, INC.
By:_________________________________
Name: Linda H. Sleeper
Title: Executive Vice President
LENDER:
DORINCO REINSURANCE COMPANY
By:_________________________________
Name: _____________________________
Title: _____________________________
Exhibit 10 (bi)
ENDORSEMENT NO. 6
to the
QUOTA SHARE RETROCESSION AGREEMENT
Effective: January 1, 1997
issued to
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
Dallas, Texas
by
DORINCO REINSURANCE COMPANY
Midland, Michigan
IT IS HEREBY AGREED, as respects Adjustment Periods commencing on or
after January 1, 1999, that paragraph B of ARTICLE 9 - COMMISSION
ADJUSTMENT (as amended by Endorsement Nos. 2, 3 and 5) shall be deleted
and the following substituted therefor:
"B. As respects the second Adjustment Period hereunder, the
adjusted commission shall be:
1. If the ratio of losses incurred to premium earned is
70.0% or higher for the period January 1, 1999 through
June 30, 1999, then the adjusted ceding commission shall
be 26.0% for that period; plus
If the ratio of losses incurred to premium earned is
69.5% or higher for the period July 1, 1999 through the
end of the second Adjustment Period, then the adjusted
ceding commission shall be 26.5% for that period.
2. If the ratio of losses incurred to premium earned is
less than 70.0% for the period January 1, 1999 through
June 30, 1999, or 69.5% for the period July 1, 1999
through the end of the second Adjustment Period, then
the adjusted commission shall be determined by adding
one percent (1.0%) to the ceding commission for each one
percent reduction of loss ratio subject to a ceding
commission of 30.0% at a loss ratio of 66.0%. If the
loss ratio is less than 66.0%, then the commission shall
be further adjusted by adding one percent (1.0%) to the
ceding commission for each one percent reduction in the
loss ratio below 66% subject to a ceding commission of
32.0% at a loss ratio of 64.0%. If the loss ratio is
less than 64.0%, then the commission shall be further
adjusted by adding seven-tenths of one percent (.70%) to
the ceding commission for each one percent reduction in
the loss ratio below 64.0%, subject to a maximum ceding
commission of 35.5% at a loss ratio of 59.0% or less.
<PAGE>
3. If the ratio of losses incurred to premium earned is
greater than 70.0% for the period January 1, 1999
through June 30, 1999, 69.5% for the period July 1, 1999
through the end of the second Adjustment Period or less
than 59.0%, the difference between the actual loss
ratio and 70.0%, 69.5% or 59.0%, as applicable, will be
multiplied by the earned premium for the Underwriting
Year and carried forward as a debit or credit to the
ensuing Underwriting Year calculation. Following
termination of this Agreement any debit or credit
carryforward remaining after the final adjustment of the
concluding Underwriting Year will be null and void.
As respects the third and each subsequent Adjustment Period
hereunder, the adjusted commission shall be:
1. If the ratio of losses incurred to premium earned is
69.5% or higher, then the adjusted ceding commission
shall be 26.5%.
2. If the ratio of losses incurred to premium earned is
less than 69.5%, then the adjusted commission shall be
determined by adding one percent (1.0%) to the ceding
commission for each one percent reduction of loss ratio
subject to a ceding commission of 30.0% at a loss ratio
of 66.0%. If the loss ratio is less than 66.0%, then
the commission shall be further adjusted by adding one
percent (1.0%) to the ceding commission for each one
percent reduction in the loss ratio below 66% subject to
a ceding commission of 32.0% at a loss ratio of 64.0%.
If the loss ratio is less than 64.0%, then the
commission shall be further adjusted by adding seven-
tenths of one percent (.70%) to the ceding commission
for each one percent reduction in the loss ratio below
64.0%, subject to a maximum ceding commission of 35.5%
at a loss ratio of 59.0% or less.
3. Should the ratio of losses incurred to premium earned be
greater than 69.5% or less than 59.0%, the difference
between the actual loss ratio and 69.5% or 59.0%, as the
case may be, will be multiplied by the earned premium
for the Underwriting Year and carried forward as a debit
or credit to the ensuing Underwriting Year calculation.
Following termination of this Agreement any debit or
credit carryforward remaining after the final adjustment
of the concluding Underwriting Year will be null and
void."
The provisions of this Agreement shall remain otherwise unchanged.
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Endorsement to
be executed by their duly authorized representatives at:
Dallas, Texas, this ________ day of ______________________, ____.
_____________________________________________
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
Midland, Michigan, this _____ day of _____________________, ____.
_____________________________________________
DORINCO REINSURANCE COMPANY
Exhibit 10(bj)
SECOND RENEWAL PROMISSORY NOTE
$3,033,330.00 November 19, 1999
FOR VALUE RECEIVED, the undersigned, Hallmark Financial Services,
Inc., a Nevada corporation with its principal offices at 14651 Dallas
Parkway, Suite 900, Dallas, TX 75240, ("Maker"), hereby unconditionally
promises to pay to the order of DORINCO REINSURANCE COMPANY, a Michigan
corporation with its principal offices at 1320 Waldo Avenue, Midland,
MI 48642 ("Payee"), by wire transfer so as to constitute immediately
available funds, or as otherwise directed, the principal sum of Three
Million Thirty-Three Thousand Three Hundred Thirty Dollars
($3,033,330.00), in lawful money of the United States of America,
together with interest (calculated on the basis of a 360 day year), on
the unpaid principal balance from day-to-day remaining, computed from
the date hereof until maturity at the rate per annum which shall from
day-to-day be equal to the lesser of (a) the maximum rate allowable by
law, or (b) eight and one-quarter percent (8.25%).
The principal of and interest upon this Note shall be due and
payable as follows:
(a) Sixteen (16) quarterly installments of accrued interest plus
One Hundred Eighty-Two Dollars ($182,000.00) principal
reduction due on the last day of each March, June, September
and December commencing March 31, 2000, and continuing
through and including December 31, 2003; plus
(b) A final payment of all previously unpaid principal and
accrued interest due on February 29, 2004.
All past due principal and, to the extent permitted by applicable
law, past due interest upon this Note shall bear interest at the lesser
of the maximum rate allowable by law or thirteen percent (13%) per
annum.
All payments shall be made to Citibank, N.A., New York (ABA #021-
00-0089) for credit to the account of Payee, Account Number 3900-6944,
if by wire, or, if by check, to Box #8157, Citibank, P.O. Box 7247-
8157, Philadelphia, PA 19170.
The occurrence of any one or more of the following events shall
constitute an Event of Default under this Note:
(a) the failure to pay any amount hereunder within ten
(10) business days of the due date (whether at maturity, by
reason of acceleration or otherwise); or
(b) any other event of default under that certain Loan Agreement,
dated as of March 10, 1997, between Maker and Payee, as
amended by an Amendment No. 1 executed by Maker on July 31,
1998 and by Payee on August 14, 1998, an Amendment No. 2
dated March 5, 1999, and an Amendment No. 3 dated November
19, 1999.
<PAGE>
Maker agrees that if such Event of Default under this Note occurs,
then, at the option of Payee, all or any part of the unpaid principal
balance of this Note and accrued interest shall immediately become due
and payable without notice or demand. Failure of Payee hereof to
assert any right contained herein shall not be deemed to be a waiver
thereof.
Maker may prepay this Note, in whole or in part, at any time or
from time to time, without liquidated damages or other penalty.
In the event any one or more of the provisions of the Note shall
for any reason be held to be invalid, illegal, or unenforceable, in
whole or in part or in any respect, or in the event that any one or
more of the provisions of this Note operate or could prospectively
operate to invalidate this Note, then and in either of those events,
such provision or provisions shall be modified to the minimum extent
necessary to make the application of such provision or provisions valid
and enforceable and shall not affect any other provision of this Note
and the remaining provisions of this Note shall remain operative and in
full force and effect and shall in no way be affected, prejudiced, or
disturbed thereby.
Maker hereby forever waives presentment, demand for payment,
protest, notice of protest, notice of dishonor of this Note, and all
other demands and notices in connection with the delivery, acceptance,
performance, and enforcement of this Note. Maker further agrees to
indemnify and hold harmless Payee for all costs of collection including
reasonable attorneys' fees and expenses that Payee may incur by reason
of Maker's failure promptly to pay when due the indebtedness evidenced
by this Note.
This Note shall be paid without deduction by reason of any setoff,
defense, or counterclaim of Maker.
No amendment or waiver of any provision of this Note nor consent
to any departure by Maker therefrom shall in any event be effective
unless the same shall be in writing and signed by Payee, and then such
waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given.
No failure on the part of Payee to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right hereunder preclude
any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive
of any remedies provided by law.
This Note shall be governed by and construed in accordance with
the laws of the State of Michigan and shall be binding upon the
successors and assigns of Maker and shall inure to the benefit of the
successors and assigns of Payee.
<PAGE>
THIS NOTE IS AN EXTENSION AND RENEWAL OF THE UNPAID PRINCIPAL
BALANCE OF THAT CERTAIN PROMISSORY NOTE FROM MAKER TO PAYEE DATED MARCH
11, 1997, IN THE ORIGINAL PRINCIPAL AMOUNT OF $7,000,000.00 AND THAT
CERTAIN RENEWAL PROMISSORY NOTE FROM MAKER TO PAYEE DATED MARCH 5, 1999
IN THE ORIGINAL PRINCIPAL AMOUNT OF $7,000,000.00.
HALLMARK FINANCIAL SERVICES, INC.
By:____________________________________
Name: Linda H. Sleeper
Title: Executive Vice President
Exhibit 10(bk)
-----------------------------
SALE AND ASSIGNMENT AGREEMENT
between
Hallmark Finance Corporation
and
FPF, INC.
Dated as of November 18, 1999
-----------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
Section 1. Definitions ....................................... 1
Section 2. Sale of Conveyed Property. ........................ 7
Section 3. Termination. ...................................... 9
Section 4. Purchase Price and Payment Terms for Conveyed
Property/Right of Set-Off. ........................ 10
Section 5. Notification of Sale .............................. 10
Section 6. Repurchase of Conveyed Property. .................. 10
Section 7. Delivery to FPF of Proceeds; Power of Attorney. ... 11
Section 8. Verification, Notification and Collection of
Premium Receivables................................ 11
Section 9. Financial Statements and Books and Records. ....... 11
Section 10.Seller's General Representations and Warranties. .. 11
Section 11.Seller's Representations and Warranties With
Respect to the Conveyed Property .................. 14
Section 12.Additional Covenants of Seller. ................... 17
Section 13.Taxes. ............................................ 19
Section 14.Further Assurances and Substituted Performance. ... 19
Section 15.Indemnification. .................................. 20
Section 16.Default. .......................................... 20
Section 17.Remedies. ......................................... 21
Section 18.Waiver. ........................................... 22
Section 19.Counterparts/Facsimiles. .......................... 22
Section 20.Essence of Time ................................... 22
Section 21.Assignment ........................................ 22
Section 22.Standard of Care .................................. 23
Section 23.Costs and Expenses/Attorneys Fees. ................ 23
Section 24.Notices. .......................................... 23
Section 25.Successors and Assigns. ........................... 23
Section 26.Severability. ..................................... 23
Section 27.Force Majeure. .................................... 24
Section 28.Governing Law. .................................... 24
Section 29.Jurisdiction and Waiver of Certain Damages. ....... 24
Section 30.Entire Agreement. ................................. 25
Section 31.Waiver of Jury Trial. ............................. 25
<PAGE>
SALE AND ASSIGNMENT AGREEMENT
This Sale and Assignment Agreement is dated as of the 18th day of
November, 1999 by Hallmark Finance Corporation ("Seller"), whose
address is 14651 Dallas Parkway, Suite 900, Dallas, TX 75240 and FPF,
Inc. ("FPF"), whose address is 600 Seventeenth Street, Suite 1900S,
Denver, Colorado 80202.
RECITALS:
A. Seller originated and/or owns Premium Receivables evidenced
by Premium Finance Agreements to finance payments by Obligors of
premiums for the purchase of insurance policies and, in connection
therewith, Seller has a security interest arising under statutory
authority or otherwise in unearned premiums, dividends and loss
payments with respect to such insurance policies and in state or
industry guaranty funds for the reimbursement of unearned premiums from
cancelled insurance policies and failed insurance companies; and
B. Seller wishes to sell from time to time during the Term of
this Agreement and FPF wishes to purchase all of Seller's Eligible
Premium Receivables and related interests under the terms and
conditions described in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the
covenants contained herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. DefinitionsSection 1. Definitions. The following
terms shall be defined in this Agreement:
"Additional Provisions" means the Additional Provisions of this
Agreement as set forth in Schedule A attached hereto.
"Amount Financed" means, with respect to each Premium Receivable
Sold to FPF, an amount equal to 100% of the premium and other
financeable amounts relating to the insurance policy that gives rise to
the Premium Receivable less any down payment made at the inception of
the Premium Finance Agreement.
"Affiliate" of any specified Person means any other Person
controlling or controlled by or under common control with such
specified Person. For the purposes of this definition, "control" when
used with respect to any specified Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise.
"Agent" means any Person licensed and qualified to sell or arrange
for the sale of insurance in the state in which any Premium Receivable
is originated.
"Agent Statement Unpaid Balance" means the amounts due from any
Agent as shown on the applicable Agent statement maintained by the
Servicer.
<PAGE>
"Agreement" means this Agreement together with all schedules,
and all amendments, modifications, replacements or substitutions
thereto and together with all documents and instruments contemplated to
be executed pursuant to this Agreement.
"Business Day" means any day that is not a Saturday, Sunday or
other day on which commercial banking institutions in Denver, Colorado
are authorized or obligated by law or executive order to be closed.
"Cancelled Premium Receivable" means each Premium Receivable for
which a request for cancellation has been sent to the Issuing Insurance
Company, and for which a reinstatement notice has not been received by
the Servicer from such insurance company.
"Capital Charge" means the charges, if any, described in
Schedule A attached hereto.
"Closing Fee" means the fee described in Schedule A attached
hereto.
"Collections" shall mean all amounts received daily by FPF, or the
Servicer on behalf of FPF, on all Premium Receivables Sold under this
Agreement including, but not limited to: (a) payments from Obligors,
(b) return of unearned commission from agents, (c) return of unearned
premium from Issuing Insurance Companies, and (d) amounts received from
a guaranty fund or other amounts paid by or on behalf of the Obligor,
agent or Issuing Insurance Company. The amounts referred to as
"Collections" shall exclude Obligor's down payment amounts, correction
amounts or amounts not lawfully eligible under applicable law to be
applied to the payment of amounts due under the Premium Receivables.
"Concentration Limits" means the Premium Receivable concentration
limits set forth in Schedule B attached hereto.
"Conveyed Property" means all of the Seller's right, title and
interest in, to and under the Premium Receivables Sold pursuant to this
Agreement, all related Premium Finance Agreements and all related
documents including, without limitation, all loan documents and
servicer documents, and all of the Seller's rights to any payment from
the Obligors and any and all rights against any Obligor with respect to
such Premium Receivables, all collateral and guaranties with respect to
such Premium Receivables, all other related rights and assets, and all
proceeds of the foregoing.
"Default" shall have the meaning specified in Section 16 of this
Agreement.
"Default Rate" shall mean the annual rate of interest as set forth
in Schedule A attached hereto.
"Defaulted Premium Receivable" means (without duplication) any
Premium Receivable which (a) has an amount due and unpaid for 180 days,
or (b) is a Cancelled Premium Receivable and has an unpaid principal
balance after application of all expected unearned premium received by
or on behalf of the Issuing Insurance Company, or (c) has been written
off by the Servicer.
<PAGE>
"Down Payment Requirement" shall have the meaning set forth in
Schedule A attached hereto.
"Effective Date" shall have the meaning set forth in Schedule A
attached hereto.
"Eligible Insurance Company" means (a) an insurance company which
is licensed and in good standing to do business in the state in which
the policy to which a Premium Receivable relates is issued by such
insurance company, (b) a joint underwriting organization, intercompany
insurance pool or intercompany reinsurance pool which is licensed or
otherwise permitted to do business in the state in which the policy to
which a Premium Receivable relates is issued by such joint underwriting
organization or intercompany insurance pool, (c) a foreign or alien
insurance company which is authorized or approved to issue insurance on
a nonadmitted basis, through a licensed surplus or excess lines broker,
in the state in which the policy to which a Premium Receivable relates
is issued by such foreign or alien insurance company. No such insurer
may be an Eligible Insurance Company (i) if such insurer is the subject
of a rehabilitation or liquidation proceeding commenced by a state or
foreign insurance regulatory authority, or (ii) if such insurer is not,
in the judgment of FPF, a creditworthy Person which FPF has full
expectations will return, on a timely basis, unearned premiums on
Cancelled Premium Receivables.
"Eligible Premium Receivable" has the meaning defined in Section
11.
"Endorsement Refunds" means all funds returned by an insurance
company to the Seller or any other Person arising out of a reduction in
the premium payable under an insurance policy relating to a change in
the coverage thereof.
"FPF Principal Balance" means for any day of determination, the
sum of the Up-front Purchase Price paid by FPF for the Premium
Receivables under this Agreement, less the sum of (a) all Collections
received by FPF representing principal payments, and (b) the principal
amount of repurchases of Premium Receivables by the Seller under
Section 6 of this Agreement.
"GAAP" means generally accepted accounting principles applied in
the United States of America in effect from time to time which are
recognized by the American Institute of Certified Public Accountants.
"Guarantor" means each guarantor of Seller's repurchase
obligations as described in Section 6(b) of this Agreement listed in
Schedule A attached hereto, if any.
"Independent Public Accountants" means any firm of public
accountants acceptable to FPF; provided, that such firm is independent
with respect to the Seller and FPF within the meaning of the Securities
Act of 1933, as amended.
"Issuing Insurance Company" means, with respect to any Premium
Receivable, the insurance company which issued the insurance policy
related to such Premium Receivable.
<PAGE>
"Interest Rate" means the rate of interest set forth in Schedule A
attached hereto.
"Lien" means any statutory, judicial, contractual or other lien,
security interest, encumbrance or claim of any kind.
"Loss" shall mean (i) with respect to Defaulted Premium
Receivables, an amount equal to the outstanding principal balance on
such Defaulted Premium Receivable, (ii) with respect to any Repurchase
Property not reacquired by Seller, an amount equal to the Repurchase
Price, and (iii) with respect to amounts due from Agents, any Agent
Statement Unpaid Balance amount over sixty (60) days past due.
"Loss Ratio" shall mean for any consecutive three month period the
percentage resulting from dividing (a) Loss incurred in such three
month period by (b) the average FPF Principal Balance for such three
month period.
"Loss Ratio Trigger" shall have the meaning set forth in
Schedule A attached hereto.
"Material Adverse Change" shall mean any material and adverse
change, either individually or in the aggregate, in the business,
prospects, management, financial position, results of operations or
general condition of Seller or any of its Affiliates as determined by
FPF in its reasonable discretion.
"Maximum Purchase Commitment" means the maximum outstanding
principal balance of the Eligible Premium Receivables Sold under this
Agreement, at the time of calculation, not to exceed the amount set
forth in Schedule A attached hereto.
"Minimum Yield Trigger" shall have the meaning set forth in
Schedule A attached hereto.
"Obligor" means, with respect to any Premium Finance Agreement,
the obligor or account debtor thereunder.
"Person" means an individual, partnership, limited liability
company, corporation (including a business trust), joint stock company,
trust, unincorporated association, joint venture or other entity, or a
government or any political subdivision or agency thereof.
"Premium Finance Agreement" means the premium finance agreement or
agreements which evidence a Premium Receivable in the form prescribed
under applicable law. The Premium Finance Agreements shall be in form
and substance acceptable to FPF in its sole discretion.
"Premium Receivable" means the entire interest in a Premium
Finance Agreement, all security interests relating thereto, all moneys
due or to become due thereon subsequent to the Sale of such Premium
Receivable to FPF, all related Realization Provisions, and any related
documents and the proceeds of any and all of the foregoing.
"Prohibited Agent" means any Agent that has been identified by
written notice from FPF to the Seller as being prohibited from
producing insurance policies financed by Premium Receivables that are
subject to purchase by FPF pursuant to this Agreement.
<PAGE>
"Purchase Premium" means the portion of the Purchase Price as set
forth in Schedule A attached hereto.
"Purchase Price" means the price paid by FPF for each Eligible
Premium Receivable equal to the sum of the (a) Up-front Purchase Price
plus (b) the Purchase Premium.
"Realization Provisions" means, with respect to any Premium
Receivable, collectively: (a) the security interest granted or assigned
by an Obligor, pursuant to the terms of the documents creating and
evidencing the respective Premium Receivable at the time of execution
thereof to the originator of such Premium Receivable, in all unearned
premiums, dividends, and loss payments which reduce the unearned
premiums under the respective insurance policy or policies, (b) any
interest arising under a state guaranty fund for all unearned premiums
from the cancelled policy or policies in the event the Issuing
Insurance Company becomes insolvent, (c) Endorsement Refunds with
respect to such Premium Receivable, (d) if applicable to such Premium
Receivable, all broker or agent guarantee agreements with respect
thereto, and (e) if applicable to such Premium Receivable, any interest
thereof in a cash collateral account established with respect to such
Premium Receivable.
"Required Documents" means the original signed Premium Finance
Agreement (or a facsimile thereof in the event an original is not
received by Seller), the signed power of attorney of the insured (if a
power of attorney signed by the insured is not included in the Premium
Finance Agreement), and all other documents necessary for the legal
origination of the Premium Finance Agreement.
"Repurchase Price" shall have the meaning set forth in Schedule A
attached hereto.
"Repurchase Property" shall have the meaning defined in
Section 6(a).
"Sale" or "Sell" or "Sold" means to absolutely sell, transfer,
assign or otherwise convey property.
"Servicer" means the servicer of the Premium Receivables described
in Schedule C attached hereto.
"Servicing Agreement" means the Premium Receivable Servicing
Agreement in the form attached hereto in Schedule C
"Servicing Fee" means the fee to be paid to the Servicer pursuant
to the Servicing Agreement.
"Static Pool Cancellation Rate" means the applicable rate set
forth in Schedule A attached hereto.
"Static Pool Cancellation Rate Trigger" shall have the meaning set
forth in Schedule A attached hereto.
<PAGE>
"Tangible Net Worth" shall mean the tangible net worth, determined
in accordance with GAAP, to be maintained by Seller in the amount set
forth in Schedule A attached hereto. For purposes of this definition
(i) Tangible Net Worth may be in the form of common or preferred equity
or unsecured debt, the terms and conditions of which shall be
satisfactory to FPF in its sole discretion ("Subordinated Debt"), and
(ii) tangible assets used to calculate net worth shall exclude all
intangible assets, goodwill and intercompany or Affiliate indebtedness
of any nature.
"Term" means the term of this Agreement as defined in Schedule A
attached hereto.
"Termination Fee" means the fee to be paid by Seller as provided
under Section 3 of this Agreement and as set forth in Schedule A
attached hereto.
"Up-front Purchase Price" means the portion of the Purchase Price
paid by FPF for a Premium Receivable as set forth in Schedule A
attached hereto.
Section 2. Sale of Conveyed Property.Section 2. Sale of Conveyed
Property.
(a) During the Term of this Agreement, Seller irrevocably
agrees to Sell to FPF all of the Eligible Premium Receivables
originated, acquired or otherwise owned by Seller and FPF agrees
to purchase up to the amount of the Maximum Purchase Commitment
all of Seller's Eligible Premium Receivables in accordance with
the terms and conditions of this Agreement. Seller shall Sell
Eligible Premium Receivables to FPF no less frequently than weekly
as originated, unless otherwise agreed by FPF in writing. The
parties agree that FPF shall have the exclusive right, during the
Term of this Agreement, to purchase all Eligible Premium
Receivables originated, acquired or otherwise owned by Seller.
(b) FPF's obligation to be bound by the terms of this
Agreement is subject to the satisfaction of each of the following
conditions by evidence in form and substance satisfactory to FPF
in its reasonable discretion:
(i) Seller shall provide evidence that it has the
necessary authority and has secured any required consents to
execute and deliver this Agreement and to enter into the
transactions contemplated by this Agreement, which evidence
shall include, at a minimum, good standing certificate of
Seller and any Guarantor (if not an individual), officers'
certificates regarding (together with copies of) the articles
and bylaws of Seller (or other organizational documents as
may be applicable) and any amendments thereto, UCC searches
regarding the Seller, proof of Seller's license to originate
the Premium Finance Agreements, the form of the Premium
Finance Agreements to be originated by Seller, and such other
evidence as FPF may require in its reasonable discretion
including, without limitation, any legal opinions that FPF
may require regarding Seller and Seller's ability to enter
into and perform under this Agreement;
<PAGE>
(ii) FPF shall have completed its due diligence of the
Seller and determined that the findings of such due
diligence, including the hardware and software for the
Seller's data processing system, are acceptable to FPF in its
sole discretion;
(iii) The Closing Fee has been paid in full by Seller to
FPF;
(iv) Seller shall have provided evidence that there are
no prior Liens or existing Uniform Commercial Code financing
Statements granting to any party a security interest in any
of Seller's Premium Receivables or other Conveyed Property;
and
(v) Seller shall have provided to FPF Uniform
Commercial Code financing statements in form and substance
acceptable to FPF establishing a first priority ownership
interest in favor of FPF in the Premium Receivable and
related Conveyed Property.
(c) Each Sale of a Premium Receivable hereunder is subject
to the satisfaction to FPF of each of the following conditions at
Seller's sole cost and expense:
(i) All covenants and conditions of this Agreement have
been complied with by Seller and no default (or event which,
with the passage of time or notice or both would constitute a
default) exists hereunder or under the Servicing Agreement;
(ii) No Material Adverse Change has occurred;
(iii) Each of the Loss Ratio Trigger, Static Pool
Cancellation Rate Trigger, Minimum Yield Trigger and Maximum
Purchase Commitment shall not be exceeded;
(iv) The Concentration Limits established in Schedule B
with respect to concentrations with Issuing Insurance
Companies, originators or Agents shall not be exceeded;
(v) The Premium Receivables shall be Eligible Premium
Receivables; provided, however, that any Premium Receivable
Sold on the Effective Date may include Premium Receivables
with respect to which any payment has been due and unpaid for
more than 30 days and for which a cancellation notice has
been delivered to the Obligor and to the Issuing Insurance
Company; and
(vi) Seller shall provide such additional evidence,
documents and instruments as FPF may reasonably request to
consummate the Sale of the Conveyed Property in accordance
with the terms and provisions of this Agreement.
(d) In connection with the Sale of each Premium Receivable
hereunder, Seller shall timely deliver to FPF the Required
Documents relating to each Premium Finance Agreement, which
delivery shall be made within twenty (20) days of receipt and
system entry by Servicer; and
<PAGE>
(e) The Sale of any Conveyed Property shall be effective (i)
with respect to the Conveyed Property Sold to FPF on the Effective
Date, upon delivery to FPF of an assignment in form and substance
acceptable to FPF or by other method of transfer as may be
directed by FPF, and (ii) with respect to all Conveyed Property
Sold after the Effective Date, upon the origination by the Seller
of each Premium Finance Agreement giving rise to the Premium
Receivable and other Conveyed Property without the need for
execution and delivery of any further assignments or instruments
of transfer unless specifically requested in writing by FPF. The
Seller shall cooperate with FPF and the Servicer in immediately
supplying to the Servicer the Premium Receivable data needed to
enter the Premium Receivables on the Servicer's data processing
system. All Sales shall be deemed to take place at the offices of
FPF described on the first page of this Agreement or such other
location as Seller and FPF may agree in writing.
(f) Seller and FPF intend and agree that each purchase and
Sale hereunder shall be treated as a true and absolute Sale of all
of Seller's right, title and interest in, to and under the
Conveyed Property and not a transfer intended as a security
interest. However, if, notwithstanding such intention, a
determination is made by a court or other body with appropriate
jurisdiction over the matter that such transfer shall not be
treated as a true and absolute Sale, this Agreement shall be
deemed to constitute a security agreement and the transaction
effected hereby shall be deemed to constitute a secured financing,
and Seller hereby pledges and grants to FPF a first priority Lien
on, and security interest in, to and under, all of Seller's right,
title and interest in, to and under the Premium Receivables and
all other related Conveyed Property as collateral for and as
security for all amounts paid and to be paid by FPF to Seller in
connection with the Conveyed Property and for all amounts due and
owing and all obligations arising under this Agreement.
Section 3. Termination.Section 3. Termination. Seller shall
have the right to terminate this Agreement upon sixty (60) days prior
written notice to FPF and payment to FPF of the Termination Fee. Upon
termination by Seller as provided herein, FPF shall continue to own all
Premium Receivables acquired by FPF to the date of termination and the
Servicer shall service the portfolio of Conveyed Property in the normal
course of its business and, in connection therewith, all provisions of
this Agreement or any Servicing Agreement with respect to such existing
portfolio shall remain in full force and effect and shall survive the
termination of this Agreement under this Section 3, including, without
limitation, the repurchase obligations of Seller or Guarantor relating
to such existing portfolio.
<PAGE>
Section 4. Purchase Price and Payment Terms for Conveyed
Property/Right of Set-Off.Section 4. Purchase Price and Payment Terms
for Conveyed Property/Right of Set-Off. FPF shall pay Seller the
Purchase Price for the Conveyed Property pursuant to the terms and
conditions set forth in this Agreement. The Up-front Purchase Price
shall be paid to Seller or a third party acceptable to FPF upon
satisfaction of the conditions set forth in Section 2(c). The Purchase
Premium, if any, shall be paid to Seller monthly in arrears, not later
than the eighth Business Day of each month. FPF shall have a right to
off-set from such Purchase Price amounts due to Seller any amounts due
FPF from Seller or Guarantor under this Agreement including, without
limitation, any Repurchase Price amounts due under Section 6 and any
Agent Statement Unpaid Balance amounts.
Section 5. Notification of SaleSection 5. Notification of Sale.
FPF shall send or cause to be sent notice of the Sale of the Premium
Receivables to FPF, (i) to each Obligor to the effect that the Premium
Receivables have been Sold to FPF and that all payments with respect
thereto are required to be made payable as specified in such notice,
and (ii) to each Issuing Insurance Company to the effect that the
Premium Receivables have been Sold to FPF and that all payments with
respect thereto are required to be paid to the Servicer as specified in
such notice. The Seller shall promptly respond to reasonable inquiries
from FPF or third parties confirming the Sale of the Conveyed Property
hereunder.
Section 6. Repurchase of Conveyed Property.Section 6. Repurchase
of Conveyed Property.
(a) Not later than five (5) Business Days after notice from
FPF, Seller shall repurchase from FPF any Premium Receivables and
other related Conveyed Property (collectively, the "Repurchase
Property") (i) that does not comply in all respects with Seller's
representations and warranties described in Section 11 of this
Agreement or (ii) for which the Required Documents have not been
timely delivered to FPF. The amount payable by Seller to FPF for
the Repurchase Property shall be equal to the Repurchase Price.
Upon its receipt of the Repurchase Price, FPF shall convey to
Seller all of its right, title and interest in such Repurchase
Property on an "AS IS, WHERE IS" basis without recourse and
without any warranties, written or oral, express or implied, of
any kind including, but not limited to, warranties of TITLE;
MERCHANTABILITY OR ABSENCE FROM LIENS.
(b) Each Guarantor (jointly and severally, if more than one
Guarantor) hereby agrees to repurchase (i) the Repurchase Property
referred to in Section 6(a) upon the failure of Seller to do so,
and (ii) any Premium Receivable originated in a fraudulent manner.
Upon its receipt of all of the amounts due under this Section,
FPF shall convey to Guarantor all of its right, title and interest
in such Repurchase Property on an "AS IS, WHERE IS" basis without
recourse and without any warranties, written or oral, express or
implied, of any kind including, but not limited to, warranties of
TITLE; MERCHANTABILITY OR ABSENCE FROM LIENS.
<PAGE>
Section 7. Delivery to FPF of Proceeds; Power of Attorney.Section
7. Delivery to FPF of Proceeds; Power of Attorney. FPF shall be the
owner of any Conveyed Property including any proceeds thereof.
Following the Sale of any Conveyed Property, if any proceeds of such
Conveyed Property are received by Seller, Seller shall hold such
proceeds in trust for FPF separate and apart from its own property and,
at its own cost, immediately endorse (if necessary) and deliver such
proceeds, as FPF directs. Seller hereby constitutes and appoints FPF
as its true and lawful attorney with the power to endorse the name of
Seller upon any instrument or other document pertaining to the Conveyed
Property and any related proceeds. This power is coupled with an
interest and is irrevocable.
Section 8. Verification, Notification and Collection of Premium
Receivables.Section 8. Verification, Notification and Collection of
Premium Receivables. FPF shall be entitled, in its own or any other
name and in form determined by FPF, to contact any Obligor or any other
Person and verify the payment of or inquire about any other issue
pertaining to any Conveyed Property that has been or is to be Sold to
FPF. Upon the Sale of any Conveyed Property, FPF shall be entitled to
notify and, upon the request of FPF, Seller shall notify the Obligors,
insurance companies and any other Persons that FPF is the owner of such
Conveyed Property and direct such Persons to pay FPF any amounts owing
with respect to such Conveyed Property.
FPF, as the owner of the Conveyed Property, shall be entitled to
amend, compromise, modify, release or settle the indebtedness and
obligations of the Obligors with respect to the Conveyed Property that
is Sold to FPF hereunder, and to take any legal action to collect any
amounts owing with respect to such Conveyed Property and to take or
refrain from taking any additional action with respect to such Conveyed
Property in good faith, without notice to or the consent of Seller and
without affecting any obligation of Seller to repurchase such Conveyed
Property as may be required by FPF under this Agreement. Seller, at
its own cost, shall execute and deliver to FPF any documents and take
any actions deemed necessary or desirable by FPF to assist FPF in
exercising any right or remedy pertaining to the Conveyed Property.
Section 9. Financial Statements and Books and Records.Section 9.
Financial Statements and Books and Records. Seller shall keep
accurate and complete books and financial records pertaining to the
Conveyed Property in accordance with GAAP and shall disclose the Sale
of any Conveyed Property to FPF and the respective date of such Sale in
Seller's books and records. FPF or its designated representative shall
have the right, upon written notice to Seller and during regular
business hours, to inspect, audit and copy Seller's books and records
relating to the Conveyed Property.
Section 10. Seller's General Representations and
Warranties.Section 10. Seller's General Representations and
Warranties. Seller hereby represents and warrants to and for the
benefit of FPF on the date of this Agreement and on any date of Sale of
Premium Receivables hereunder that:
<PAGE>
(a) Seller is duly organized and is validly existing as a
corporation in good standing under the laws of the state of its
organization with full power and authority to execute and deliver
this Agreement and to Sell the Conveyed Property to FPF and
otherwise to perform the terms and provisions thereof;
(b) Seller is duly qualified to do business as a domestic or
foreign business entity in good standing, and has obtained all
required licenses and approvals, if any, in all jurisdictions in
which the conduct of its business requires such qualifications,
and has complied with all federal, state and local laws and
regulations in connection with the origination of the Premium
Receivables and the Sale of the Conveyed Property under this
Agreement;
(c) The execution and delivery by Seller of this Agreement
and Seller's performance of the terms and conditions thereof have
been duly authorized by all necessary action of Seller, do not
require any approval or consent of any governmental agency or
authority or any other Person, and do not and will not conflict
with or result in a breach or (with or without notice or lapse of
time) a default under any agreement, law or governmental
regulation binding upon or applicable to Seller or the Conveyed
Property;
(d) No litigation or administrative proceeding of or before
any court, tribunal or governmental body is presently pending or
threatened, against Seller or its properties which have not been
previously disclosed in writing to FPF;
(e) This Agreement and any related documents to which Seller
or any Guarantor is a party constitute valid, legal and binding
obligations of Seller and any such Guarantor, enforceable against
Seller and any such Guarantor in accordance with the terms
thereof, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and other laws affecting the
enforcement of creditor's rights generally and to general
principles of equity, regardless of whether such enforcement is
considered in a proceeding in equity or at law;
(f) Seller does not have material liabilities or obligations
other than those previously disclosed in writing to FPF;
(g) No information, certificate, statement or report
furnished by or on behalf of Seller or any Guarantor to FPF
contains any untrue statement of a material fact or omits a
material fact necessary to make such information, certificate,
statement or report not misleading. There is no fact peculiar to
Seller or any Affiliate of Seller or, to its knowledge, any
Conveyed Property or Obligor, which it has not disclosed to FPF in
writing which could adversely affect Seller's ability to perform
the transactions contemplated by this Agreement and any related
documents to which Seller is a party;
<PAGE>
(h) All tax returns required to be filed by Seller, any of
its Affiliates, subsidiaries or any Guarantor in any jurisdiction
have in fact been filed, and all taxes, assessments, fees, claims
and other governmental charges upon Seller, such Affiliate or
subsidiary, such Guarantor or any of their respective properties,
income or franchises, shown to be due and payable on such returns
have been paid; provided, that neither Seller nor such Affiliate
or subsidiary or Guarantor shall be required to pay or discharge
any such tax, assessment, fee, claim or other charge which is
being contested in good faith and by proper proceedings and as to
which appropriate reserves are being maintained in accordance with
GAAP. To the best of Seller's knowledge, all such tax returns
were true and correct and Seller does not know of any contemplated
or proposed additional tax assessment against Seller or any of its
subsidiaries in any material amount or of any basis therefor;
(i) The provisions for taxes on Seller's and its
subsidiaries' books are in accordance with GAAP;
(j) At the close of any Sale of Conveyed Property, Seller
had a positive Tangible Net Worth;
(k) The principal executive office of Seller is located at
the address described on the first page of this Agreement, and has
been located at such address for a period of not less than four
months preceding the date of this Agreement or since its
formation;
(l) "Hallmark Finance Corporation" is the only legal name
under which Seller is operating its business upon the execution of
this Agreement. Seller has not changed its name in the last three
years (or such shorter period of time during which Seller was in
existence) and does not have any other trade names, fictitious
names, assumed names or "doing business as" names other than those
that have been previously disclosed in writing to FPF;
(m) The transactions contemplated by this Agreement are in
the ordinary course of Seller's business and Seller has valid
business reasons for selling the related Conveyed Property rather
than obtaining a secured loan with the Conveyed Property as
collateral. At the time of each Sale: (i) Seller Sold the related
Conveyed Property to FPF without any intent to hinder, delay or
defraud any current or future creditor of Seller; (ii) Seller was
not insolvent or did not become insolvent as a result of any Sale;
(iii) Seller was not engaged and was not about to engage in any
business or transaction for which any property remaining with
Seller would constitute unreasonably small capital or for which
the remaining assets of Seller are unreasonably small in relation
to the business of Seller or the transaction; (iv) Seller did not
intend to incur, and did not believe or reasonably should not have
believed, that it would incur, debts beyond its ability to pay as
they become due; and (v) the consideration paid by FPF to Seller
for the Conveyed Property was equivalent to the fair market value
of such Conveyed Property;
(n) No Material Adverse Change has occurred since the
previous Sale of Conveyed Property;
<PAGE>
(o) Each Sale of Conveyed Property contemplated by this
Agreement and any related documents constitutes a true sale and
not a pledge of collateral in connection with a financing and such
Conveyed Property shall not be part of Seller's property for any
purpose under state or federal law;
(p) Each Sale of Conveyed Property (including all payments
due or to become due thereunder) by Seller pursuant to this
Agreement to the best of Seller's knowledge is not subject to and
will not result in any tax, fee or governmental charge payable by
Seller or FPF to any federal, state or local government;
(q) The consideration to be received by Seller in exchange
for each Sale of Conveyed Property (including the right to receive
all payments due or to become due thereunder) (i) is fair
consideration having value equivalent to or in excess of the fair
market value of the Conveyed Property and, except with respect to
the Purchase Premium (ii) is or will be paid in full to Seller
upon the consummation of each Sale thereof, and (iii) no provision
exists whereby the consideration will be modified after the date
of such Sale; and
(r) Any drafts provided by FPF to Seller shall be used
exclusively for the purchase of Eligible Premium Receivables in
accordance with the terms and conditions for use of such drafts
that may be provided to Seller by FPF from time to time.
The foregoing representations and warranties shall be continuing
in nature and shall survive the termination of this Agreement.
Section 11. Seller's Representations and Warranties With Respect
to the Conveyed Property.Section 11. Seller's Representations and
Warranties With Respect to the Conveyed Property. Upon each Sale of
Conveyed Property, each Premium Receivable Sold to FPF shall have all
of the following characteristics as of the date of Sale (such Premium
Receivables having all of such characteristics shall be referred to
herein as "Eligible Premium Receivables"):
(a) Each Premium Receivable represents the genuine, legal,
valid and binding payment obligation in writing of the Obligor
thereon, enforceable by the holder thereof in accordance with its
terms;
(b) Each Premium Receivable arises under a Premium Finance
Agreement which contains customary and enforceable provisions such
that the rights and remedies of the holder thereof are adequate to
enforce the Realization Provisions;
(c) Each Premium Receivable is not subject to any
proceedings or investigations pending or threatened, before any
court, regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over Seller or
its properties: (i) asserting the invalidity of such Premium
Receivable; (ii) seeking to prevent the enforcement of such
Premium Receivable; or (iii) seeking any determination or ruling
that may adversely affect the payment on or enforceability of such
Premium Receivable;
<PAGE>
(d) Each Premium Receivable was originated in a state where
Seller is licensed (if required to be licensed) to do business as
an insurance premium finance company;
(e) Each Premium Receivable does not (and did not at the
time of origination) contravene any federal, state or local laws,
rules or regulations applicable thereto or contract between Seller
and FPF applicable thereto, and no party to any such contract is
in contravention of any such law, rule or regulation;
(f) Each Premium Receivable was originated in the United
States of America by Seller or purchased by Seller from another
premium finance company in the ordinary course of Seller's
business of financing insurance premiums written through
independent insurance agents and brokers or insurance companies
directly, in either case, through the application of and
consistent with Seller's standard procedures in a fashion not less
stringent taken as a whole than those other Premium Receivables
owned by Seller;
(g) Each Premium Receivable is payable in U.S. Dollars by an
Obligor who at time of policy origination is located within the
United States of America;
(h) Each Premium Receivable is evidenced by only one
original contract, in the form of a Premium Finance Agreement,
properly completed and executed without variations, with notation
of the Sale to FPF, on or before the Sale of such Premium
Receivable;
(i) Each Premium Receivable provides, according to its
original or modified terms, that the amount payable thereunder
will be paid in consecutive equal monthly payments that fully
amortize such Premium Receivable by its stated terms and which
amount will be paid in a maximum of eleven (11) payments (if
financing an annual policy), and a maximum of five (5) payments
(if financing a six-month policy) with the first payment due not
later than 31 days following the inception date of the related
insurance policy;
(j) Each Premium Receivable relates to an insurance policy
issued by an Eligible Insurance Company;
(k) Each Premium Receivable relates to an insurance policy
for which the insured has paid a down payment amount of not less
than the Down Payment Requirement;
(l) Each Premium Receivable is evidenced by proof of payment
to the Issuing Insurance Company or its designated general Agent
equal to an amount not less than the original principal amount of
such Premium Receivable and the related down payment due under the
Premium Finance Agreement has been paid in full by, or on behalf
of, the related Obligor;
<PAGE>
(m) The information and related documents regarding the
Premium Receivables being Sold to FPF is true and correct in all
material respects as of the opening of business on the date of
Sale and no selection procedures believed to be adverse to FPF
have been utilized in selecting the Premium Receivables for
inclusion therein;
(n) Except for Premium Receivables Sold on the Effective
Date, no Premium Receivable or related Premium Finance Agreement
has been satisfied, cancelled or is more than 30 days past due or
is subject to a right of rescission, setoff, counterclaim,
subordination, recoupment or defense which has been asserted or
threatened with respect to such Premium Receivable nor have the
Realization Provisions securing such Premium Receivable been
released from the Lien granted by the Obligor;
(o) Except for assignments or pledges to lenders who have
provided financing to Seller and which assignments and pledges
have been released prior to the Sale of the Premium Receivables to
FPF, no Premium Receivable has been Sold or pledged by Seller to
any Person other than FPF; immediately prior to any Sale
contemplated by this Agreement Seller had good title to the
Premium Receivable sold to FPF free and clear of all Liens and,
immediately upon any Sale of the Premium Receivables contemplated
by this Agreement, FPF will have good title to the Premium
Receivables Sold to FPF free and clear of all Liens;
(p) No Premium Receivable has terms which have been extended
or modified other than through the customary process and
procedures of Seller, the originals of which have been included in
the Premium Finance Agreement loan documents delivered to FPF;
(q) No Premium Receivable has any Liens or claims which have
been filed or claims that would be Liens prior to or equal to the
Realization Provisions granted by the Obligor pursuant to such
Premium Receivable;
(r) At the time of Sale of any Premium Receivable which
finances a commercial line insurance policy, to the best of
Seller's knowledge, the Obligor with respect to such Premium
Receivable is not subject to any bankruptcy or insolvency
proceeding;
(s) No Premium Receivable relates to an insurance policy
which is deemed fully earned in the case of a claim;
(t) No Premium Receivable has been originated by a
Prohibited Agent; and
(u) No Premium Receivable has been originated in, nor is
subject to the laws of, any jurisdiction under which the Sale of
such Premium Receivable would be unlawful, void or voidable.
The foregoing and any additional representations, warranties and
covenants contained in this Agreement shall be continuing in nature and
shall survive the termination of this Agreement.
<PAGE>
Section 12. Additional Covenants of Seller.Section 12.
Additional Covenants of Seller. During the Term of this Agreement,
(a) Seller shall at its expense cause all Uniform Commercial
Code termination statements, satisfactions, releases or partial
releases, as the case may be, with respect to Liens on the
Conveyed Property to be filed on the date of Sale of the Conveyed
Property.
(b) Seller shall cause all Uniform Commercial Code financing
statements, continuation statements and any other documents,
reasonably requested by FPF, establishing the right, title and
interest of FPF, to and under the Conveyed Property, to be
promptly executed and filed by Seller, and shall deliver to FPF or
its designee file-stamped, complete copies of, or filing receipts
for, any document recorded, registered or filed as provided above,
as soon as available but in any event not later than thirty (30)
days following such recordation, registration or filing.
(c) At least thirty (30) days prior to Seller making any
change in its name, identity or organizational structure which
would make any termination statement, financing statement or
continuation statement filed by FPF or Seller seriously misleading
within the applicable provisions of the Uniform Commercial Code or
any title statute, Seller shall give FPF notice of any such change
and shall execute and file such financing statements or amendments
as may be necessary or reasonably required by FPF to continue the
perfection of the respective interests of FPF in the Conveyed
Property.
(d) Except for the Sale to FPF of the Conveyed Property and
Liens granted or caused by FPF in such Conveyed Property, Seller
shall not Sell to any other Person, or grant, incur, assume or
suffer to exist any Lien on such Conveyed Property or on any
interest therein, and Seller shall defend the right, title and
interest of FPF in, to and under such Conveyed Property against
all claims of third parties claiming through or under Seller.
(e) Seller shall not impair FPF's right, title and interest
in, to and under any of the Conveyed Property.
(f) Seller shall maintain Tangible Net Worth of not less
than the amount set forth in Schedule A attached hereto.
(g) Seller shall furnish to FPF:
(i) within forty-five (45) days after the end of each
of the first three fiscal quarters of Seller (commencing with
the first fiscal quarter ending after the date hereof) an
unaudited balance sheet and income statement (prepared in
accordance with GAAP without accompanying notes) for Seller
and its subsidiaries covering the preceding quarter, in each
case certified by the president or principal financial
officer of Seller to be true, accurate and complete copies of
such financial statements;
<PAGE>
(ii) within ninety (90) days after the end of each
fiscal year of Seller beginning at the end of the first
fiscal year after the date hereof an audited balance sheet
and income statement (prepared in accordance with GAAP) for
Seller and its subsidiaries covering the preceding fiscal
year;
(iii) such other information respecting the condition or
operations, financial or otherwise, of Seller, any of its
subsidiaries and any Guarantor as FPF may from time to time
reasonably request; and
(iv) prompt notice to FPF (but in no event more than
three (3) Business Days following) of any Material Adverse
Change.
(h) Seller shall provide prompt written notice to FPF if:
(i) Seller ceases to be managed and controlled by the
Person or Persons who manage and control Seller as of the
date of this Agreement;
(ii) any such Person which is a corporation,
partnership, trust or other entity is dissolved or liquidated
or merged with or into any other Person or for any period of
more than ten (10) days ceases to exist in its present form
and (where applicable) in good standing and duly qualified
under the laws of the jurisdiction of its incorporation or
formation and any jurisdiction in which such standing or
qualification is necessary or advisable in connection with
the conduct of business; or
(iii) Seller consummates a sale of all or substantially
all of its assets, except for the Sale of Conveyed Property
by Seller to FPF under this Agreement and any related
documents.
(i) Seller shall not dissolve or liquidate in whole or in
part.
(j) Seller shall not voluntarily institute any proceedings
to adjudicate Seller or any of its Affiliates bankrupt or
insolvent, consent to the institution of bankruptcy or insolvency
proceedings against Seller or any of its Affiliates, file a
petition seeking or consenting to reorganization or relief under
any applicable federal or state law relating to bankruptcy,
consent to the appointment of a receiver, liquidator, assignee,
trustee (or other similar official) of Seller or any of its
Affiliates or a substantial part of its or their property or admit
its or their inability to pay its or their debts generally as they
become due or authorize any of the foregoing to be done or taken
on behalf of Seller or any of its Affiliates.
(k) Seller shall maintain at its own expense, a blanket
fidelity bond or an errors and omissions insurance policy, in form
and content and in amounts acceptable to FPF and naming FPF as an
additional loss payee or beneficiary thereunder.
<PAGE>
(l) Seller shall comply with all Additional Provisions set
forth in Schedule A, if any.
Section 13. Taxes.Section 13. Taxes. Seller shall pay when due
all present and future income taxes, withholding taxes, worker's
compensation premiums, sales taxes, use taxes, excise taxes, personal
property taxes and all assessments and other amounts levied by or
required to be paid to any governmental or quasi-governmental authority
and pertaining to Seller, its business operations, its assets or the
Conveyed Property (except for FPF's income taxes) and provide FPF with
written proof of such payment upon the request of the latter party.
Section 14. Further Assurances and Substituted
Performance.Section 14. Further Assurances and Substituted
Performance. Seller shall take or cause any third party to take any
actions and execute or cause any third party to execute any additional
documents (including, but not limited to, Uniform Commercial Code
filings) deemed necessary or desirable by FPF to carry out the intent
or purposes of this Agreement and any related documents. FPF shall be
entitled, but not required, to take any action and execute any document
that was required to be, but not, taken or executed by Seller under
this Agreement and any related documents. This power is coupled with
an interest and is irrevocable. Upon demand, Seller shall reimburse
FPF for any amounts, attorneys' fees, expenses and costs paid by FPF in
connection with such actions together with interest thereon at the
Interest Rate from the date of payment until the date of reimbursement.
No action taken by FPF shall be deemed to relieve Seller's obligation
to take such action or cure Seller's default under this Agreement.
Section 15. Indemnification.Section 15. Indemnification. Seller
shall indemnify and hold FPF and its Affiliates harmless from all
claims, defenses, offsets, counterclaims, loss, costs, damages,
liabilities, causes of action, actions and suits (including, but not
limited to, attorneys' fees, expenses and costs) arising from
(i) Seller's breach of any representation, warranty or covenant
contained in this Agreement or any related documents, (ii) the
unauthorized use of drafts provided by FPF to Seller for the funding of
Premium Finance Agreements, or (iii) the failure of the Premium
Receivables Sold hereunder to be originated in compliance with all
requirements of law. These indemnity provisions are in addition to any
other obligations that the Seller may otherwise have hereunder and
shall survive the termination of this Agreement.
Section 16. Default.Section 16. Default. Seller shall be deemed
in default (a "Default") under this Agreement upon the occurrence of
any one or more of the following:
(a) Seller fails to pay any indebtedness, fails to perform
any obligation, or breaches any covenant, representation or
warranty (other than a breach of any representation or warranty
under Section 11 of this Agreement) to FPF under this Agreement
and/or any related documents and any other present or future
agreement with FPF;
<PAGE>
(b) Seller breaches any representation or warranty by Seller
under Section 11 of this Agreement pertaining to Conveyed Property
and Seller fails to repurchase such Conveyed Property within five
(5) Business Days from the date of written notification by FPF of
such breach in accordance with the terms and conditions of Section
6 of this Agreement;
(c) Seller permits the entry or service of any garnishment,
judgment, tax levy, attachment or lien against it or any of its
property;
(d) Seller or any Guarantor becomes insolvent or unable to
pay its debts in a timely manner;
(e) Seller or any Guarantor makes a general assignment for
the benefit of its creditors, a receiver or trustee is appointed
for all or a substantial portion of Seller's or Guarantor's
respective assets, or a bankruptcy, insolvency, liquidation or
reorganization proceeding is commenced by or against Seller or
Guarantor in any state or federal court;
(f) Seller challenges the validity of the true Sale of the
Premium Receivables hereunder or the priority, validity or
enforceability of any ownership interest granted by Seller in the
Conveyed Property to FPF;
(g) Seller ceases to operate its business, or is dissolved
or terminated for any reason;
(h) Any Guarantor dies or any Guarantor fails to perform any
obligation to FPF under this Agreement or challenges the validity
of its guaranty provision of this Agreement or provides FPF with
notice of its intent to terminate any guaranty provision of this
Agreement to FPF or its future obligations under such guaranty
provisions for any reason; or
(i) Following 30 days written notice to Seller that FPF, in
good faith, believes that Seller's or any Guarantor's ability to
pay and perform any of the obligations described in this Agreement
or any related documents is or shall be impaired or otherwise
deems itself insecure for any reason and such written notice
specifies the basis of its determination.
(j) An event of default by the Servicer under the provisions
of the Servicing Agreement.
Section 17. Remedies.Section 17. Remedies. In the event of
Seller's default under this Agreement, FPF may exercise one or more of
the following cumulative remedies without notice or demand of any kind:
(a) terminate immediately any of its remaining obligations
under this Agreement;
(b) collect all amounts due from Seller to FPF under this
Agreement or any other agreement, together with interest thereon
at the Default Rate until paid, with or without resorting to legal
process;
<PAGE>
(c) in the event FPF terminates this Agreement, collect, in
addition to the amounts set forth in (b) above, liquidated damages
in the amount of the maximum Termination Fee that would be
collectible in the event of termination hereunder, it being agreed
by the parties that damages would be difficult to assess under
this Agreement and that liquidated damages in addition to
collection of the amounts set forth in (b) above shall be due to
FPF to compensate FPF for the default by Seller or any Guarantor
and the termination of this Agreement by FPF as a result thereof;
(d) change Seller's mailing address, and as it relates to
the Conveyed Properly only, open Seller's mail, endorse Seller's
name on checks, bills of exchange, notes, acceptances, money
orders, drafts or other documents or forms of payment and retain
any proceeds of the Conveyed Property;
(e) terminate any Servicing Agreement or lock box agreement
pertaining to the Conveyed Property and change such servicers and
lock box arrangements;
(f) notify Obligors to make payment on Premium Receivables
Sold under this Agreement to FPF or its designee;
(g) enter Seller or any Affiliate's premises during normal
business hours and take possession of any Conveyed Property;
(h) require Seller, at its expense, to deliver and make
available to FPF any Conveyed Property Sold to FPF at a place
reasonably convenient to FPF;
(i) commence a suit for the turnover or replevin of the
Conveyed Property;
(j) collect, compromise, settle, sell or otherwise dispose
of any Conveyed Property that Seller was required to, but did not,
repurchase from FPF;
(k) set-off Seller's and any Guarantor's obligations owing
to FPF under this Agreement, any other written agreement or by
operation of law against any amounts owed by FPF to such Persons
under this Agreement or any related documents, respectively,
including, but not limited to, moneys, instruments and other
property deposited or maintained with FPF or any third party for
the benefit of FPF; and
(l) exercise all other rights available to FPF under any
other present or future agreement or applicable law.
FPF's rights and remedies are cumulative and may be exercised
together, separately and in any order.
<PAGE>
Section 18. Waiver.Section 18. Waiver. FPF shall not be deemed
to have waived any right or remedy described in this Agreement unless
FPF has executed and delivered to Seller a written waiver thereof. A
waiver of a right or remedy on one occasion shall not act as a waiver
of that or any other right or remedy on a future occasion. Without
limiting the foregoing, FPF's delay in exercising any right or remedy
shall not constitute a waiver of that or any other right or remedy
described in this Agreement.
Section 19. Counterparts/Facsimiles.Section 19.
Counterparts/Facsimiles. This Agreement may be executed by facsimile
signature and in one or more counterparts, each of which when taken
together shall constitute one complete Agreement.
Section 20. Essence of TimeSection 20. Essence of Time. Seller
and FPF agree that time is of the essence.
Section 21. AssignmentSection 21. Assignment. FPF shall be
entitled to assign or grant a Lien on its interests hereunder, and the
obligations, rights and remedies under this Agreement to any Person in
its sole discretion. Such Persons shall be deemed to be third party
beneficiaries hereunder and shall be entitled to rely on the provisions
hereof for the benefit of FPF including, without limitation, the
indemnification provisions of Section 15. Any assignee or designee of
FPF shall be entitled to enforce the provisions of this Agreement
against Seller. Notwithstanding any such assignment, no assignment by
FPF hereunder shall relieve FPF of its obligations to Seller hereunder.
Seller shall not be entitled to assign or grant a security interest in
any of its obligations, rights or remedies under this Agreement to any
Person without the prior written consent of FPF, or its assignees or
designees, which consent may be withheld in the sole discretion of FPF.
No person shall be deemed a third party beneficiary of Seller.
Section 22. Standard of CareSection 22. Standard of Care. FPF
shall not be liable to Seller for any action taken or not taken by FPF
in good faith in connection with this Agreement. FPF shall not be
deemed a fiduciary of Seller or be required to perform any of Seller's
obligations to FPF or any third party under any circumstances.
Section 23. Costs and Expenses/Attorneys Fees.Section 23. Costs
and Expenses/Attorneys Fees.
(a) Seller shall pay all costs and expenses incident to the
performance of its obligations under this Agreement;
(b) Seller shall pay on demand FPF's reasonable attorneys'
fees and other costs and expenses incurred before trial, at trial
and on appeal in the enforcement (whether through negotiations,
legal proceedings or otherwise) of this Agreement, including
without limitation, all costs, expenses and attorneys fees
incurred by FPF in connection with any bankruptcy or insolvency
proceeding involving the Seller.
<PAGE>
Section 24. Notices.Section 24. Notices. All notices, requests,
consents and other communications hereunder shall be in writing and
shall be delivered personally or mailed by first-class registered and
certified mail, postage prepaid, or by telephonic facsimile
transmission, electronic mail or overnight delivery service, postage
prepaid, to the parties at the following addresses or such other
addresses that they may provide each other with written notice of in
the future:
If to Seller: Hallmark Finance Corporation
14651 Dallas Parkway, Suite 900
Dallas, TX 75240
Attn: Linda Sleeper
Facsimile: (972) 788-0520
If to FPF, Inc.: 600 Seventeenth Street, Suite 1900S
Denver, Colorado 80202
Attn: President
Facsimile: (303) 571-1811
Such notices shall be effective upon the earlier of (i) receipt or
(ii) two (2) Business Days after the confirmed delivery by overnight
delivery service.
Section 25. Successors and Assigns.Section 25. Successors and
Assigns. Except as provided in Section 21 hereof limiting assignments
by Seller, this Agreement shall inure to the benefit of and be binding
upon the successors, assigns, trustees, receivers, heirs and personal
representatives of the parties hereto.
Section 26. Severability.Section 26. Severability. Any part,
provision, agreement, representation, warranty or covenant of this
Agreement which is prohibited or unenforceable or is held to be void or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by applicable law, the parties
waive any provision of law which prohibits or renders void or
unenforceable any provision hereof. If the invalidity of any part,
provision, agreement, representation, warranty or covenant of this
Agreement shall deprive any party of the economic benefit intended to
be conferred by this Agreement, the parties shall negotiate in good
faith to develop a structure the economic effect of which is as nearly
as possible the same as the economic effect of the transactions
contemplated hereunder without regard to such invalidity.
Section 27. Force Majeure.Section 27. Force Majeure. Neither
party shall be liable for damages due to delay or failure to perform
any obligation under this Agreement if such delay or failure results
directly or indirectly from circumstances beyond the control of such
party. Such circumstances shall include, but shall not be limited to,
acts of God, acts of war, civil commotions, riots, strikes, lockouts,
acts of the government, disruption of telecommunications transmissions
accident, fire, water damages, flood, earthquake or other natural
catastrophes.
<PAGE>
Section 28. Governing Law.Section 28. Governing Law. THIS
AGREEMENT AND ANY RELATED DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF COLORADO
WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS.
Section 29. Jurisdiction and Waiver of Certain Damages.Section
29. Jurisdiction and Waiver of Certain Damages. THE PARTIES HERETO
HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS
OF THE STATE OF COLORADO AND THE UNITED STATES DISTRICT COURT OF
COLORADO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT AND THE PARTIES HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN
RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN
SUCH COURTS. THE PARTIES HEREBY IRREVOCABLY WAIVE, TO THE FULLEST
EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM
TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING AND IRREVOCABLY CONSENT
TO THE SERVICE OF ANY SUMMONS AND COMPLAINT AND ANY OTHER PROCESS BY
THE MAILING OF COPIES OF SUCH PROCESS TO THEM AT THEIR RESPECTIVE
ADDRESSES AS SPECIFIED IN THIS AGREEMENT. THE PARTIES HEREBY AGREE
THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE
JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS
SECTION SHALL AFFECT THE RIGHT OF FPF TO SERVE LEGAL PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR PRECLUDE THE ENFORCEMENT OF ANY
JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION
UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR
JURISDICTION. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT TO
THE CONTRARY, NO CLAIM MAY BE MADE BY THE SELLER AGAINST FPF OR ANY OF
ITS AFFILIATES FOR ANY LOST PROFITS, OR ANY SPECIAL, INDIRECT OR
CONSEQUENTIAL DAMAGES IN RESPECT TO ANY BREACH OR WRONGFUL CONDUCT
(OTHER THAN WILLFUL MISCONDUCT CONSTITUTING FRAUD) ARISING OUT OF OR IN
ANY WAY RELATED TO THE TRANSACTIONS CONTEMPLATED HEREUNDER.
Section 30. Entire Agreement.Section 30. Entire Agreement. This
Agreement (including any Servicing Agreement between Seller and FPF )
contains the complete and integrated understanding and agreement
between the parties and their respective Affiliates pertaining to the
subject matter hereof, and all other prior and contemporaneous
discussions, negotiations, agreements and proposal letters, written or
oral, express or implied shall be of no force and effect.
Section 31. Waiver of Jury Trial. EACH OF THE PARTIES HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS
AGREEMENT.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the undersigned duly authorized officers of
the parties have executed this Agreement as of the day first stated
above.
SELLER:
By
Name:
Title:
FPF, INC.
By
Name: Bruce I. Lundy
Title: President
AGREED TO WITH RESPECT TO SECTION 6(b):
__________________________________
Hallmark Financial Services, Inc
By: ______________________________
Name:____________________________
Title:_____________________________
<PAGE>
SCHEDULE A
This Schedule A forms a part of the Sale and Assignment Agreement
("Agreement") to which it is attached and is incorporated therein.
Section A-1. Definitions. The following definitions shall have
the following meanings:
"Additional Charges" shall mean upon Default, the sum (a) the
additional interest due equal to the FPF Principal Balance multiplied
by a rate per annum equal to the difference between the Default Rate
and the Interest Rate, (b) all other expenses due from the Seller to
FPF under this Agreement, (c) the Termination Fee, as applicable, (d)
the amount of repurchase obligations, if any, under Section 6 of this
Agreement and (e) the costs and expenses set forth in Section 23 of
this Agreement.
"Advance Rate" shall mean a percentage from time to time specified
by Seller in writing to FPF but in no event to exceed ninety percent
(90.00%) reduced by the Reserve Percentage.
"Capital Charge" shall mean the sum of:
(a) The FPF Principal Balance multiplied by 1/360th of the
Interest Rate, plus;
(b) Any unpaid Capital Charge due for any prior day or
accounting period, plus;
(c) The Commitment Fee, plus
(d) Additional Charges.
"Closing Fee" shall be $12,500 of which $5,000 has been paid prior
to the Effective Date.
"Commitment Fee" shall mean for any month in which the Unused
Portion exceeds twenty percent (20%) of the Maximum Purchase
Commitment, a commitment fee payable to FPF, in an amount equal to the
product of (a) the Unused Portion and (b) one half percent (0.50%) per
annum.
"Default Rate" shall be the lesser of (a) the Prime Rate plus 8%
or (b) the highest interest rate permitted by applicable law.
"Down Payment Requirement" shall mean a down payment under each
Premium Finance Agreement in an amount not less than the amount
required by law or statute.
"Effective Date" means the Effective Date of this Agreement which shall
be the 18th day of November, 1999.
"Guarantor" means, Hallmark Financial Services, Inc., whose
address is 14651 Dallas Parkway, Suite 900, Dallas, TX 75240.
<PAGE>
"Interest Rate" shall be the Prime Rate plus a spread ("Spread")
shown below, based on an actual/360 day year.
a) From the Closing and for each day in which the prior month's
average daily FPF principal balance is $5,000,000 or below,
the Spread shall be one percent (1.00%); and
b) For any day in which the prior month's average daily FPF
principal balance is greater than $5,000,000 but less than
$7,500,000, then the Spread shall be three-quarters percent
(0.75%); and
c) For any day in which the prior month's average daily FPF
principal balance is greater than $7,500,000, then the Spread
shall be one-half percent (0.50%).
"Loss Ratio Trigger" shall mean any time at which the Loss Ratio
exceeds one and a half percent (1.50%).
"Maximum Purchase Commitment" shall be $6,000,000 as of the
effective date. So long as Seller is in compliance with this
Agreement, the Maximum Purchase Commitment may be increased up to
$8,000,000, in increments of $1,000,000, by Seller upon ten (10)
business days written notice to FPF. Any increase in the Maximum
Purchase Commitment above the $8,000,000 will be at the sole discretion
of FPF, upon the request and consent of Seller.
"Minimum Yield Trigger" shall mean, for any month, the failure of
FPF to receive payment in full of the Capital Charge.
"Parity Shortfall" means for each Premium Receivable (including
each Premium Receivable in any current Sale), the amount by which the
outstanding principal balance of the applicable Premium Finance
Agreement exceeds the expected return premium due from the Issuing
Insurance Company in the actual or prospective event of a cancellation
of such Premium Receivable. If the expected return premium due from
the Issuing Insurance Company exceeds such outstanding principal
balance, then no parity shortfall exists.
"Parity Shortfall Amount" means for all outstanding Premium
Receivables, the sum of (a) for Cancelled Premium Receivables, the
total Parity Shortfall on such Cancelled Premium Receivables, plus
(b) for all other Premium Receivables not in a cancelled status, the
total Parity Shortfall for such Premium Receivables calculated as if
the next payment due date is missed, times 150% of the projected
lifetime Static Pool Cancellation Rate for the portfolio of Premium
Receivables as determined by FPF, plus (c) the outstanding principal
balance of all Defaulted Premium Receivables.
"Prime Rate" shall be as published in the Money Section of The
Wall Street Journal. If more than one rate is published, then the
highest rate published shall apply.
<PAGE>
"Purchase Premium" shall be equal to the Collections (but not
including any unearned commissions from Agents) due the Seller as
provided herein. Collections shall be allocated in the following
order:
(a) Principal payments received shall be allocated to FPF
until the FPF Principal Balance is reduced to zero.
(b) FPF shall retain all Collections until the unpaid
Capital Charge is paid in full.
(c) If Seller is in Default, then FPF shall retain all
Collections until all amounts payable to FPF pursuant to
Section 17 of this Agreement are paid in full.
(d) The Servicing Fee shall be paid to the Servicer of the
Premium Receivables sold under this Agreement.
(e) Remaining Collections, if any, will be paid to the
Seller as a Purchase Premium.
"Repurchase Price" means (a) the lesser of (i) the Up-front
Purchase Price paid to Seller by FPF for the Premium Receivables and
other related Conveyed Property or (ii) the current outstanding balance
due on the Premium Receivable at the time of repurchase under the
applicable Premium Finance Agreement(s) with respect to the Repurchase
Property, plus (b) interest on the amount payable by Seller to FPF
under (a) above at the Interest Rate from the date that FPF advanced
funds to purchase the Premium Receivables and other related Conveyed
Property to the date of payment by Seller of the Repurchase Price
reduced by any payments previously received by FPF and allocated to
interest, plus (c) the Purchase Premium paid to Seller, if any.
"Reserve Percentage" means for all outstanding Premium Receivables
(including each Premium Receivable in any current Sale) the percentage
resulting from dividing (a) the total Parity Shortfall Amount plus the
total amount of Premium Receivables in excess of the FPF Concentration
Limits by (b) the outstanding principal balance of all Eligible Premium
Receivables at the time of calculation.
"Rule of 78's" means the method by which interest income will be
allocated on Premium Receivable payments and calculated for any payment
as a fraction, the numerator being the number of payments or days
remaining under the original payment schedule for such Premium
Receivable and the denominator being the sum of the digits for the
number of all scheduled payments or days remaining. Example: A 10
monthly payment receivable will recognize 10/55ths of the total
expected lifetime interest in month one and 9/55ths of the total
interest in month two and so forth.
"Static Pool Cancellation Rate" means for each monthly period, the
percentage resulting from dividing (a) the total number of Premium
Receivables Sold in such month that are or become Cancelled Premium
Receivables, by (b) the total number of Premium Receivables Sold in
such month. EXAMPLE: 100 Premium Receivables are originated in January
1999 and in a calculation on July 30, 1999, 32 of these January
Originated Premium Receivables had been cancelled since their
origination. The Static Pool Cancellation Rate for such January 1999
Premium Receivables would be 32% as of July 30, 1999.
<PAGE>
"Static Pool Cancellation Rate Trigger" shall mean any time at
which the average Static Pool Cancellation Rate exceeds sixty percent
(60%).
"Term" means the Term of this Agreement commencing on the
Effective Date and, if not earlier terminated as provided in this
Agreement, terminating on November 1, 2002.
"Termination Fee" shall be $30,000 if Seller terminates this
Agreement pursuant to Section 3 during the first eighteen (18) months
following the Effective Date. If such termination occurs in months
nineteen (19) through twenty four (24) following the Effective Date,
the Termination Fee shall be $15,000. No Termination Fee shall be due
after 24 months following the Effective Date.
"Unused Portion" means, as of each day of calculation, an amount
equal to (a) the Maximum Purchase Commitment, less (b) the average FPF
Principal Balance during the period of calculation.
"Up-front Purchase Price" shall mean the Amount Financed for all
outstanding Eligible Premium Receivables Sold by Seller to FPF
multiplied by the Advance Rate.
Section A-2. Additional Provision. The following Additional
Provisions shall be a part of this Agreement.
A-2(i). Identification of Collections. Collections shall
be identified for application against each Premium Receivable
balance and applied against the unpaid Premium Receivable balance
as follows:
(1) First, to any earned-at-writing Premium Finance
Agreement fees; then
(2) Principal calculated in accordance with the applicable
amortization schedule; then
(3) Interest or finance charge at the applicable annual
percentage rate determined in accordance with the Rule
of 78's (or determined as may otherwise be required
under applicable state law for the state in which the
Premium Receivables were originated); then
(4) Any late fees, cancellation fees and other allowable
charges; then
(5) From any remaining amounts, any amount required to be
paid to the Obligor as the insured party in accordance
with applicable state law governing the Premium
Receivables.
A-2(ii).Tangible Net Worth. Seller shall maintain Tangible
Net Worth equal to the sum of (a) $25,000, plus, (b) the
difference between the Amount Financed and the Up-Front Purchase
Price for all Premium Receivables sold to FPF.
<PAGE>
SCHEDULE B
CONCENTRATION LIMITS
This Schedule is part of the Sale and Assignment Agreement between
Hallmark Finance Corporation and FPF, Inc., dated as of the 15th day
of November, 1999. Capitalized terms used herein that are not defined
shall have the meanings ascribed to them in this Agreement.
Eligible Premium Receivables may not exceed the following limits:
A. Insurance Company Diversification Limits.
1. For Eligible Insurance Companies covered by the
Texas insurance guaranty fund, the following
allocations shall apply:
Maximum % of
Insurance Company's Eligible Premium
A.M. Best Rating Receivables per
Carrier
---------------- -------
"A-" or better no limit
"B++" or "B+" 25.0%
"B" or "B-" 15.0%
all others* 5.00%
*Note: under "all others" above, "C,"
"D," "E," "F," "N/F," "S" are not
eligible.
Exception:
The financed policies are issued by State and County Mutual Fire
Insurance Company ("S&C"). S&C acts as a "fronting" company and cedes
100% of the risk to American Hallmark Insurance Company ("AHIC") via a
100% Quota Share Reinsurance Agreement between S&C and AHIC.
<PAGE>
To administer this sales program, S&C has also entered into a General
Agency Agreement with an affiliate of AHIC, Brokers General, Inc. now
known as American Hallmark General Agency, Inc. ("AHGA"). AHGA acts as
the administrator of the program, appoints agents, processes policies,
returns unearned premium upon cancellation of policies, including
financed policies, and settles and pays claims.
AHIC in turn has reinsured 75% of its risk related to these policies
through Dorinco Reinsurance Company ("Dorinco") and GE Reinsurance
Company ("GE"). The reinsurance is accomplished through a Quota Share
Retrocession Agreement.
Each of GE and Dorinco have also entered into Guaranty Agreement with
S&C, providing for direct performance and payment by GE and Dorinco in
the event AHIC fails to perform any of its duties and obligations or
fails to make timely payment to S&C.
Finance contracts originated under the above described structure shall
be eligible. Further, if AHIC maintains reinsurance treaties that
accept a quota share of the insurance risk and guarantee the full
performance similar to those currently existing with companies that
are rated "A" or better by A.M. Best and have a Financial Size
Category Class of V there shall be no concentration limitations.
<PAGE>
2. For Eligible Insurance Companies not admitted to
the Texas insurance guaranty fund acceptable to
FPF, no more than fifteen percent (15%) of the
portfolio may be written by those non-admitted
insurance companies and the following per company
allocations shall apply:
Maximum % of
Insurance Company's Eligible Premium
A.M. Best Rating Receivables per
Carrier
---------------- -------
"A-" or better 7.5%
"B++" or "B+" 2.5%
B. Insurance Agent Diversification Limits.
Except for insurance agencies which are affiliates of
Seller, the outstanding balance of Eligible Premium
Receivables from an agency may not exceed 15.0% of the
pool and the next largest agent concentration may not
exceed 12.5%, unless an exception is approved in writing
by FPF.
C. Failure of Seller to request cancellation of the policy
from the Issuing Insurance Company pertaining to a
Premium Receivable for which payment is more than thirty
(30) days past due (or for such longer period as maybe
required under applicable state law or regulation) shall
deem said Premium Receivable as ineligible.
All exceptions, if any, are subject to adjustment by FPF in its sole
discretion.
<PAGE>
Schedule C
Servicing Agreement
Exhibit 10(bl)
=======================================================================
PREMIUM RECEIVABLE SERVICING AGREEMENT
by and among
FPF, INC.,
and
Hallmark Finance Corporation
Dated as of November 18, 1999
=======================================================================
<PAGE>
PREMIUM RECEIVABLE SERVICING AGREEMENT
This PREMIUM RECEIVABLE SERVICING AGREEMENT ("Servicing
Agreement") is made as of November 18, 1999 by and among FPF, INC., a
Colorado corporation ("FPF"), and Hallmark Finance Corporation, a Texas
corporation, as servicer (the "Servicer").
PRELIMINARY STATEMENT
WHEREAS, pursuant to the Sale and Assignment Agreement (the "Sale
Agreement") dated of even date herewith by and between FPF and Hallmark
Finance Corporation, FPF will acquire certain Premium Receivables
originated by the Seller, as seller, and FPF, as purchaser; and
WHEREAS, the parties hereto desire to enter into this Servicing
Agreement to provide for, among other things, the management,
administration, servicing and collections with respect to the Premium
Receivables for the benefit of FPF and its assignees and designees and
to perform certain duties as described herein.
NOW, THEREFORE, in consideration of the covenants and conditions
contained in this Servicing Agreement, the parties, intending to be
legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
Defined Terms. Capitalized terms used and not otherwise defined
in this Servicing Agreement shall have the meaning set forth in the
Sale Agreement. As used in this Servicing Agreement, the following
terms, unless the context otherwise requires, have the following
meanings (such meanings to be equally applicable to the singular and
plural forms of the terms defined):
"Allowable Coverage Change" means, with respect to a Premium
Receivable, a modification thereof approved by the Servicer in the
ordinary course of its business and in accordance with the standard of
care set forth in Section 2.16 of this Servicing Agreement, which
modification does not (a) provide that the principal and interest on
the Premium Receivable can be paid over an aggregate period extending
beyond the Term, (b) decrease the annual percentage rate of interest
payable on the Premium Receivable or (c) reduce the principal amount of
the Premium Receivable or release the Realization Provisions with
respect to such Premium Receivable.
"Approved Expenses" means, with respect to a Person, all
reasonable and documented direct out-of-pocket expenses incurred by
such Person including, without limitation, professional services (such
as attorneys, consultants and accountants), postage, courier services,
insurance, stationery, telephone, facsimile transmission and travel,
any of which are incurred specifically in the performance of its duties
under this Servicing Agreement, other than required reporting duties
thereunder and general office overhead.
<PAGE>
"Cancellation Standard" means, as of any date, the timely
cancellation by the Servicer of the underlying insurance policies
relating to at least ninety-seven percent (97%) of the Premium
Receivables on which payments are overdue by thirty (30) days or more.
"Change of Control" shall have the meaning set forth in Section
2.11(c) of this Servicing Agreement.
"Collections Account" means the lock box account or other accounts
established by Servicer in the name of FPF or its designee into which
the Collections are to be deposited pursuant to Section 3.01 of this
Servicing Agreement.
"Collections Depository Account" shall mean the financial
institution specified in Section 3.03 of this Servicing Agreement.
"Daily Servicer Report" means a report in the form of Exhibit A-1
to this Servicing Agreement pursuant to Section 2.10(a) hereof.
"Event of Servicing Default" shall have the meaning set forth in
Section 5.01 of this Servicing Agreement.
"Loan Documents" means the original signed Premium Finance
Agreement (or a facsimile thereof in the event an original is not
received by Seller), the signed power of attorney of the insured (if a
power of attorney signed by the insured is not included in the Premium
Finance Agreement), and all other documents necessary for the legal
origination of the Premium Finance Agreement.
"Monthly Servicer Report" means a report in the form of Exhibit A-
2 to this Servicing Agreement pursuant to Section 2.10(a) hereof.
"Reporting Period" shall mean the period beginning on the first
day of the calendar month and ending on the last day of such calendar
month; provided, that the initial Reporting Period begins on the
Effective Date.
"Scheduled Payment" shall mean the monthly payment relating to a
Premium Receivable required to be made by the Obligor thereunder in
order to fully amortize the principal balance of the Premium Receivable
under the method, term and rate stated in the Premium Finance Agreement
or similar agreement evidencing such Premium Receivable.
"Servicing Documents" shall have the meaning specified in Section
2.14 of this Servicing Agreement.
"Servicing Fee" shall have the meaning specified in Section 2.08
of this Servicing Agreement.
"Successor Servicer" means that Person succeeding the Servicer
under and pursuant to Section 5.02 of this Servicing Agreement as may
be designated by FPF.
<PAGE>
ARTICLE II
ADMINISTRATION AND SERVICING OF PREMIUM RECEIVABLES
Section 2.01. Appointment and Duties of Servicer.
(a) FPF hereby appoints the Seller, as the Servicer, and the
Seller shall remain as Servicer until the earlier to occur of
(i) the payment in full of all amounts due to FPF under a
termination of the Sale Agreement, (ii) written notice from FPF or
its designees to the Servicer of termination of the Servicer
hereunder due to the occurrence of a Default under the Sale
Agreement, or (iii) written notice from FPF or its designees to
the Servicer of termination of the Servicer hereunder due to the
occurrence of an Event of Servicing Default. The Servicer shall
perform the services required of it pursuant to the terms of this
Servicing Agreement. In performing its duties hereunder, the
Servicer shall have full power and authority to do or cause to be
done any and all things in connection with such servicing and
administration which it may deem necessary or desirable in
accordance with the standard of care specified herein.
(b) The Servicer, in making collections of Premium
Receivable payments pursuant to Section 2.02 hereof, shall be
deemed to be holding such funds in trust on behalf of, and as
agent for, FPF and its designees.
(c) FPF shall take all such lawful action in its discretion
to compel or secure the performance and observance by the Servicer
of its obligations to FPF under or in connection with this
Servicing Agreement, in accordance with the terms hereof, and
shall exercise any and all rights, remedies, powers and privileges
lawfully available to FPF under or in connection with this
Servicing Agreement.
(d) The Servicer may not delegate any or all of its duties
or obligations hereunder, and the Servicer shall not otherwise
permit any other Person to engage in any servicing, auditing,
administrating, managing, collecting or other activities with
respect to the Premium Receivables, unless approved in writing by
FPF or its designees in each such Person's absolute discretion.
(e) The Servicer, upon execution of this Servicing
Agreement, shall execute and deliver a power of attorney to FPF
and its assigns in substantially the form of Exhibit C attached
hereto.
<PAGE>
Section 2.02. Collection of Premium Receivable Payments. All
servicing of the Premium Receivables will be performed on a "private
label" basis using the name of Seller on a premium finance software
system approved by FPF in writing. The Servicer shall be responsible
for collection of payments called for under the terms and provisions of
the Premium Receivables as and when the same shall become due. In
addition, the Servicer shall be responsible for the collection of late
payments and enforcing the Realization Provisions with respect thereto,
and shall follow such collection procedures as are consistent with the
standard of care set forth in Section 2.16 hereof. In accordance with
the foregoing, the Servicer may grant extensions, rebates or
adjustments on a Premium Receivable, but shall not modify the original
due dates, interest rate or Scheduled Payments on the Premium
Receivables except as would constitute an Allowable Coverage Change.
The Servicer may in its discretion waive any late payment charge or any
other fees that may be collected in the ordinary course of servicing a
Premium Receivable.
Section 2.03. Past-Due Premium Receivables; Cancelled Premium
Receivables.
(a) In the event an Obligor has not made a payment with
regard to a Premium Receivable, the Servicer shall promptly, but
in no event later than 10 days after such due date, (i) notify the
defaulting Obligor that the Servicer shall request the Issuing
Insurance Company to cancel the insurance coverage pertaining to
the Premium Receivable if payment is not received within 10 days
of such Obligor's receipt of such notice (the "Ten Day Notice"),
(ii) upon failure to receive the payment due from Obligor
following the period stated in the Ten Day Notice (plus such grace
period, if any, as determined by the Servicer but in no event
longer than the date 25 days from the original due date, except as
may be required under applicable state law or regulation), request
cancellation of the policy from the Issuing Insurance Company
(such date stated in the cancellation request being the
"Cancellation Date") and (iii) enforce on behalf of FPF and its
designees, any and all Realization Provisions and other rights
relating to the Premium Receivable.
(b) The Servicer may, but is not obligated to, submit a
written request to the applicable Issuing Insurance Company
(whereupon the Servicer shall retain a copy of such request and
any response thereto) to reinstate the insurance policy underlying
a Canceled Premium Receivable; provided, that, prior to such
request for reinstatement, all past due payments have been
received by, or credited to, the Servicer in the form of a money
order, certified check, wire transfer or other means of
immediately available funds. In the event the underlying
insurance policy is reinstated by the Issuing Insurance Company,
the Servicer shall make appropriate adjustments in its records and
reports, and such Premium Receivable shall no longer be considered
a Cancelled Premium Receivable.
(c) The Servicer shall, upon receipt of unearned premiums,
unearned commissions, state guaranty funds, broker guarantee funds
or funds from a cash collateral account with respect to the
related Canceled Premium Receivable, remit such funds to the
Collections Account pursuant to Section 3.02 hereof.
<PAGE>
Section 2.04. Defaulted Premium Receivables. With respect to
each Defaulted Premium Receivable, the Servicer shall promptly provide
in its Monthly Servicer Report notice of such Defaulted Premium
Receivable together with the outstanding principal amount of such
Defaulted Premium Receivable and the number of days such Defaulted
Premium Receivable is delinquent. The Servicer shall use its best
efforts, consistent with the standard of care set forth in Section 2.16
hereof, to collect funds on a Defaulted Premium Receivable from the
Issuing Insurance Company, insured or otherwise (any such collections
from whatever source being a "Defaulted Premium Receivable Recovery").
All Defaulted Premium Receivable Recoveries shall be deposited by the
Servicer into the Collections Account by the close of business on the
Business Day following receipt thereof.
Section 2.05. Maintenance of Interests in Premium Receivables.
The Servicer shall take, or cause to be taken, such steps as are
necessary or reasonably required by FPF or its assignees and designees
to maintain perfection of the respective interests of FPF and its
assignees and designees in the Premium Receivables and the other
related Conveyed Property.
Section 2.06. Covenants of Servicer.
(a) The Servicer shall (i) not release any Realization
Provisions granted by an Obligor in whole or in part except in the
event of payment in full by the Obligor thereunder or upon
reacquisition of the related Premium Receivable by the Seller,
(ii) not impair the rights of FPF or its assignees in the Premium
Receivables, (iii) not modify the Scheduled Payments due under a
Premium Receivable except as expressly provided by Section 2.02
hereof, (iv) not Sell or pledge to any other Person, or grant,
create, incur, assume, or suffer to exist any Lien on any Premium
Receivable granted to FPF or any interest therein, (v) immediately
notify FPF of the existence of any Lien on any Premium Receivable
which was Sold pursuant to the Sale Agreement, (vi) defend the
perfected ownership interest of FPF, its designees and assigns in,
to, and under the Premium Receivables Sold to FPF under the Sale
Agreement against all claims of third parties claiming through or
under the Servicer, (vii) deposit into the Collections Account all
payments received by the Servicer with respect to the Premium
Receivables in accordance with Article III hereof, (viii) comply
in all respects with the terms and conditions of the Sale
Agreement and not amend, modify, or waive any provision of the
Sale Agreement, (ix) promptly notify FPF of the occurrence of any
Event of Servicing Default hereunder and (x) make at the sole cost
and expense of the Servicer any filings, reports, notices or
applications and seek any consents or authorizations from any and
all government agencies, tribunals or authorities in accordance
with the UCC and any state license or registration authority on
behalf of FPF as may be necessary or advisable to create, maintain
and protect a first-priority, perfected ownership interest of FPF
in, to, and on the Premium Receivables Sold to it or as may be
required by such government agencies, tribunals or authorities.
<PAGE>
(b) The Servicer shall promptly make available to FPF or its
designee all information relating to each Premium Receivable being
serviced hereunder in form and manner consistent with the data
processing system maintained by FPF or its designee and the
Servicer shall respond to reasonable directions or requests for
information that FPF or its designees might have with respect to
the Premium Receivables.
Section 2.07. Reacquisition of Premium Receivables Upon Breach
of Representations or Warranties. The Servicer shall inform FPF
promptly, in writing, upon the discovery of any breach by the Seller of
any of the representations, warranties or covenants contained in
Section 11 of the Sale Agreement. Unless the breach shall have been
cured within five Business Days after such discovery, the Servicer, if
directed by FPF in accordance with Section 6 of the Sale Agreement,
shall use its best efforts to cause the Seller, within five days
following such cure period, to acquire any Premium Receivable that FPF
has deemed as not being an Eligible Premium Receivable in accordance
with the terms of Section 6 of the Sale Agreement. The Servicer shall
remit all Repurchase Price funds received with respect to the
Repurchase Property to the Collections Account within one Business Day
of receipt thereof.
Section 2.08. Premium Receivable Servicing Fees.
(a) For so long as the Servicer is acting as Servicer
pursuant to this Servicing Agreement, FPF shall pay or cause to be
paid to the Servicer the following monthly Servicing Fee (the
"Servicing Fee") for each Reporting Period payable during the
following Reporting Period on the date specified in the Sale
Agreement:
(i) an amount calculated at a rate of 3.50% per annum
of the average daily FPF Principal Balance during the
reporting.
(b) In the event the initial Servicer is replaced by a
Successor Servicer (which may be FPF, Flatiron Credit Company,
Inc. or any successor designated by FPF) pursuant to this
Servicing Agreement, FPF shall pay or cause to be paid to any
Successor Servicer a monthly servicing fee (the "Successor
Servicing Fee"), which Successor Servicing Fee shall be, with
respect to each Reporting Period, an amount equal to the sum of
(i) the Servicing Fee plus (ii) all Approved Expenses. The
Successor Servicing Fee with respect to a Reporting Period shall
be paid to the Successor Servicer during the month immediately
following such Reporting Period on the date as provided in the
Sale Agreement.
<PAGE>
Section 2.09. Servicer's Certificate as to Compliance. Upon
the written request of FPF, the Servicer shall deliver to FPF, from
time to time, an officers' certificate, signed by an officer of
Servicer (including the President, any Vice President, and Assistant
Vice President, the Secretary, the Treasurer or any other officer
customarily performing functions similar to those performed by any of
such designated officers (a "Responsible Officer")) and dated effective
as of the last day of the preceding month, stating, as to each signer
thereof, that (a) a review of the activities of the Servicer during the
preceding six-month period and of performance under this Servicing
Agreement has been made under each such Responsible Officer's
supervision, and (b) to the best of each such officer's knowledge,
based on such review, the Servicer has fulfilled all its obligations
under this Servicing Agreement throughout such six-month period, or, if
there has been a default in the fulfillment of any such obligation,
specifying each such default known to each such Responsible Officer and
the nature and status thereof and remedies therefor being pursued.
Section 2.10. Reporting Obligations; Inspection and Audit Rights.
(a) The Servicer shall make available to FPF or its designee
information sufficient to allow FPF or its designee to generate
the Daily Servicer Reports and the Monthly Servicer Reports
regarding payments received from or on behalf of Obligors and
deposited to the Collections Account representing Collections and
other amounts with respect to Premium Receivables, including,
without limitation, Defaulted Premium Receivable Recoveries and
Endorsement Refunds. Such information shall be delivered (i) with
respect to the Daily Servicer Report, on the Business Day
following the date of such report, and (ii) with respect to the
Monthly Servicer Report, on the second Business Day following the
end of the immediately preceding Reporting Period.
(b) The Servicer shall promptly provide to FPF or its
designees such reports, information and documentation as any such
Person may reasonably request with respect to the Servicer, the
Servicer's operations, the Premium Receivables and any other
matters to which this Servicing Agreement relates, which reports,
information or documentation shall be provided to each such Person
by facsimile copy, hard copy, electronic certified copy or any
combination thereof as such Person may reasonably specify. In
addition, the Servicer grants to FPF and any of its designees and
hereby authorizes each of them the right to contact insurers
relating to the Premium Receivables, the Obligors and insurance
agents in order to verify, substantiate or reconcile reports,
information and documentation provided by the Servicer to FPF or
its designees pursuant to this Servicing Agreement.
(c) At all times during the term hereof, the Servicer shall
afford FPF and its assignees, authorized agents and designees
reasonable access during normal business hours to all of the
Servicer's books of account, reports, records and computer files
relating to the Premium Receivables and shall cause its personnel
to assist in any examination of such records by any such Person,
to make copies and extracts therefrom, and to discuss the
Servicer's affairs, finances and accounts relating to the Premium
Receivables with officers, employees and independent certified
public accountants of each such Person, all at such reasonable
times and as often as may be reasonably requested.
<PAGE>
(d) Any such report, information and documentation provided
by the Servicer to FPF or its designees pursuant to this Section
2.10 shall be, to the knowledge of the Servicer, true and correct
as of the time of transmittal and such transmittal (whether by
facsimile, hard copy, electronic transmission or otherwise) shall
constitute certification to such effect.
Section 2.11. Financial Statements and Other Reports.
(a) Reporting Requirements. The Servicer shall deliver to
FPF and its designees:
(i) within 45 days after the end of each calendar
quarter of the Servicer (commencing with the quarter ending
March 31, 2000, an unaudited balance sheet and income
statement (prepared in accordance with GAAP without
accompanying notes) for the Servicer and its subsidiaries
covering the preceding quarter, in each case certified by a
principal financial officer of the Servicer to be true,
accurate and complete copies of such financial statements;
(ii) within 90 days after the end of each fiscal year of
Servicer, an audited balance sheet and income statement
(prepared in accordance with GAAP) for the Servicer and its
subsidiaries covering such preceding fiscal year; and
(iii) such other information respecting the
condition or operations, financial or otherwise, of the
Servicer or any of its subsidiaries as FPF or its designees
may from time to time reasonably request.
(b) Report on Proceedings. Promptly upon (but in no event
more than three Business days following) the Servicer becoming
aware of:
(i) any proposed or pending investigation of the
Servicer, any of its Affiliates or any of their respective
employees by any governmental authority or agency;
(ii) any court or administrative proceeding which
involves or may involve the possibility of materially and
adversely affecting the properties, business, prospects,
profits, management, financial position, results of operation
or general condition of the Servicer or any of its
Affiliates;
(iii) an event or development (including, without
limitation, a change in any relevant law or regulation) which
could have a material adverse impact on the properties,
business, prospects, profits, management, financial position,
results of operations or general condition of the Servicer or
any of its Affiliates; or
(iv) any Event of Servicing Default hereunder or any
event which could likely become an Event of Servicing Default
hereunder;
<PAGE>
such information shall be provided by the Servicer to FPF and its
designees, as applicable.
(c) Change of Control. The Servicer shall provide prompt
written notice to FPF and its designees, as applicable, upon the
occurrence of any of the following events (each a "Change of
Control"): (i) the Servicer ceases to be managed and controlled by
the Person or Persons who manage and control the Servicer as of
the Effective Date, (ii) any such Person which is a corporation,
partnership, trust or other entity is dissolved or liquidated or
merged with or into any other Person or for any period of more
than 10 days ceases to exist in its present form and (where
applicable) in good standing and duly qualified under the laws of
the jurisdiction of its incorporation or formation and any
jurisdiction in which such standing or qualification is necessary
or advisable in connection with the conduct of business or (iii)
the Servicer consummates a Sale of all or substantially all of its
assets, except, if the Seller is then acting as Servicer
hereunder, for the Sale of the Conveyed Property by the Seller to
FPF under the Sale Agreement.
Section 2.12. Costs and Expenses. All Approved Expenses
incurred by any Successor Servicer and all direct extraordinary
out-of-pocket expenses incurred by FPF or its designees and assignees,
as the case may be, in carrying out their respective duties hereunder,
including payments of all fees and expenses incurred in connection with
the enforcement of Premium Receivables (including enforcement of
Defaulted Premium Receivables), and realization under the Realization
Provisions, shall be reimbursed to such Successor Servicer (in addition
to the compensation and expenses, as applicable, to be paid to such
Successor Servicer pursuant to Section 2.08) and paid according to the
provisions of the Sale Agreement.
Section 2.13. Responsibility for Ownership Interests. The
Servicer shall ensure that FPF has a valid, perfected first priority
ownership interest in, to and under each Eligible Premium Receivable by
taking all necessary action under applicable law and by assuring, among
other things, that UCC-1 financing statements and appropriate
continuation statements are filed in each jurisdiction in which filing
is necessary for such perfection which financing statements and
continuation statements (a) contain a general description of the
Premium Finance Agreements, amounts payable thereunder, and
after-acquired collateral, and (b) direct subsequent creditors to
sources containing more detailed information, such as the Premium
Finance Agreements themselves.
Section 2.14. Documents Held by FPF; Documents Held by the
Servicer; Indication of FPF Ownership.
(a) FPF or its designees shall be entitled to maintain
physical possession of the Loan Documents in its files with
respect to each Premium Receivable.
<PAGE>
(b) The Servicer shall maintain the following documents in
its files on behalf of FPF and its designees or have the following
immediately accessible on computer screen with respect to each
Premium Receivable:
(i) Copies of the Loan Documents;
(ii) Copies of all correspondence to the Obligor or the
Issuing Insurance Company, including any notification to the
Obligor and the Issuing Insurance Company of the Sale of the
Premium Receivable and delivery of possession of the related
Premium Finance Agreement to FPF or its designees, to the
extent required by applicable law to perfect an ownership
interest in the Premium Receivable and the related Conveyed
Property;
(iii) Copies of all late notices to the Obligor;
(iv) Copies of cancellation requests to the Issuing
Insurance Company and, if applicable, the Obligor;
(v) Copies of reinstatement notices and related
correspondence;
(vi) Payment history and status of each Premium
Receivable; and
(vii) Such other documents as the Servicer may
customarily retain in connection with its normal servicing
activities under this Servicing Agreement in order to satisfy
its standard of care under Section 2.16.
(c) The Servicer shall keep satisfactory books and records
pertaining to each Premium Receivable and shall make periodic
reports in accordance with this Servicing Agreement. Such records
may not be destroyed or otherwise disposed of, except as provided
herein and as allowed by applicable laws, regulations or decrees.
(d) The Servicer shall maintain physical possession of the
instruments and documents listed in Section 2.14(b) hereof, such
other instruments or documents that modify or supplement the terms
or conditions of any of the foregoing, and all other instruments
and documents generated by or coming into the possession of the
Servicer (including, without limitation, insurance premium
receipts, ledger sheets, payment records, correspondence and
current and historical computerized data files) that are required
to document or service any Premium Receivable. Collectively, all
of the documents described in paragraphs (b), (c) and (d) of this
Section 2.14 with respect to a Premium Receivable are referred to
as "Servicer Documents." All Servicer Documents shall remain the
property of FPF and shall be held in trust by the Servicer for the
benefit of FPF and its assignees and designees, to the extent of
their interests therein.
<PAGE>
Section 2.15. Maintenance of Computer Systems. The Servicer
shall provide computer backup in a format acceptable to FPF not less
than weekly or such other period as FPF may request. Such computer
backup shall contain the data necessary to enable FPF or its assignee
or designees to service the Premium Receivables in the event any such
assignee or designee becomes the Successor Servicer. The Servicer
shall (a) provide FPF and its designee or assignees, as applicable,
with a copy of its computer software used with respect to the servicing
of the Premium Receivables including any licenses needed or required
with respect thereto, and (b) not substitute or materially alter its
computer software or systems or vendor or document forms, without the
prior written consent of FPF.
Section 2.16. Standard of Care. In performing its duties and
obligations hereunder and in administering and enforcing the servicing
relating to the Premium Receivables pursuant to this Servicing
Agreement, the Servicer shall exercise that degree of skill and care
consistent with the degree of skill and care that the Servicer
exercises with respect to similar loans owned and/or serviced by it,
and, shall apply in performing such duties and obligations, those
standards, policies and procedures consistent with the standards,
policies and procedures the Servicer applies with respect to similar
loans owned or serviced by it, and to the extent more exacting than the
foregoing, shall act prudently and in accordance with customary and
usual servicing procedures for other servicers of insurance premium
finance receivables; provided, however, that notwithstanding the
foregoing, the Servicer shall not, except pursuant to a judicial order
from a court of competent jurisdiction, or as otherwise required by
applicable law or regulation, release or waive the right to collect the
unpaid balance on any Premium Receivable. In performing its duties and
obligations hereunder and in administering and enforcing the servicing
relating to the Premium Receivables pursuant to this Servicing
Agreement, the Servicer shall comply with all applicable federal and
state laws and regulations, shall maintain all state and federal
licenses and franchises necessary for it to perform its servicing
responsibilities hereunder, shall not impair the rights of FPF, its
designees or assignees in the Conveyed Property, and shall act with
respect to the Premium Receivables as will, in the reasonable judgment
of the Servicer, maximize the amount to be received with respect
thereto.
Section 2.17. Enforcement.
(a) The Servicer is hereby authorized and empowered to sue
to enforce or collect upon the Premium Receivables, in its own
name, if possible, or as attorney-in-fact and agent for FPF or its
designees. If the Servicer elects to commence a legal proceeding
to enforce a Premium Receivable, the act of commencement shall be
deemed to be an automatic assignment of the Premium Receivable by
FPF to the Servicer solely for purposes of, and to the extent
necessary for, collection only. If, however, in any enforcement
suit or legal proceeding it is held that the Servicer may not
enforce a Premium Receivable on the grounds that it is not a real
party in interest or a holder entitled to enforce the Premium
Receivable, FPF shall, at the Servicer's request and expense, take
such steps as FPF deems necessary or appropriate to enforce the
Premium Receivable, including bringing suit in its name or the
name of FPF.
<PAGE>
(b) The Servicer shall exercise any rights of recourse
against third Persons that exist with respect to any Premium
Receivable in accordance with the standard of care required by
Section 2.16 hereof.
Section 2.18. Fidelity Bond or Errors and Omissions Insurance.
The Servicer shall maintain, at its own expense, a blanket fidelity
bond or an errors and omissions insurance policy, in form and content
acceptable to FPF, in an amount not less than $400,000 and naming FPF
as an additional loss payee or beneficiary of each such insurance
policy and fidelity bond. The Servicer shall be deemed to have
complied with this provision if one of its respective Affiliates has
such fidelity bond and errors and omissions policy coverage and, by the
terms of such fidelity bond and errors and omission policy, the
coverage afforded thereunder extends to the Servicer. Any such
fidelity bond or insurance policy shall not be cancelled or modified
without ten days' prior written notice to FPF. Evidence of each such
insurance policy and fidelity bond shall be delivered to FPF by the
Servicer in conjunction with the Responsible Officers' certificate
required to be delivered pursuant to Section 2.09 hereof.
ARTICLE III
ACCOUNTS; COLLECTIONS
Section 3.01. Accounts. The Servicer shall establish in the
name of FPF or its designee the Collections Account with a Collections
Account Depository referred to in Section 3.03 hereof. All Obligors,
Issuing Insurance Companies and Seller shall be directed to cause all
Collections to be remitted to the Collections Account so established.
All Collections effectuated by pre-authorized debits of Obligor
accounts shall be deposited directly into the Collections Account. The
Servicer shall not alter the instructions to the Obligors, Seller, the
Issuing Insurance Company or any other party regarding payments to be
made to the Collections Account without the prior written approval of
FPF or its designee. All amounts in the Collections Account shall be
retrieved on each Business Day by FPF or its designee.
Section 3.02. Collections. The Servicer shall segregate all
Collections on the Premium Receivables from its general funds, shall
not use such funds for its benefit and shall hold such funds in trust
for the benefit of FPF and its designee. The Servicer shall remit to
the Collections Account and to no other account, on a daily basis, but
in no event later than the close of business on the Business Day
following the day of receipt thereof, all payments received on or in
connection with the Conveyed Property by the Servicer by or on behalf
of the Obligors, the Issuing Insurance Companies or any other party,
including, without limitation, Collections, Endorsement Refunds, broker
guarantee funds or funds from a cash collateral account or Defaulted
Premium Receivable Recoveries, all as collected, in respect of a
Premium Receivable being serviced by the Servicer. The Servicer shall
also deposit in the Collections Account the aggregate Repurchase Price
with respect to any Repurchase Property. All such deposits shall be
separately shown in the Daily Servicer Reports.
Section 3.03. Collections Account Depository. FPF has
appointed Bank of America as the initial Collections Account Depository
(the "Collections Account Depository") hereunder. The Collections
Account Depository shall transfer funds from the Collections Account as
instructed by the FPF or its designee.
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01. Representations and Warranties of the Servicer.
The Servicer hereby represents, warrants and covenants to FPF that as
of the date of this Servicing Agreement and, for so long as the
Servicer shall continue to act as Servicer hereunder, that the
representations, warranties and covenants contained in Sections 1 and 2
of Exhibit B hereto are true and correct and shall remain true and
correct.
Section 4.02. Representations and Warranties of FPF. As of the
date of the Servicing Agreement FPF represents, warrants and covenants
to Servicer each of the matters referred to in Section 2 of Exhibit B
hereto.
ARTICLE V
DEFAULT, REMEDIES AND INDEMNITY
Section 5.01. Events of Servicing Default. Any of the
following acts or occurrences shall constitute an Event of Servicing
Default under this Servicing Agreement:
(a) any failure by the Servicer to make any payment,
transfer or deposit to the Collections Account within one Business
Day after receipt;
(b) any failure by the Servicer to provide any notices to
FPF pursuant to this Servicing Agreement relating to the transfer
or calculation of funds which has not been cured within two
Business Days after the date of receipt of notice of such failure;
(c) any failure by the Servicer to request cancellation of
the policy from the Issuing Insurance Company pursuant to Section
2.03, unless otherwise approved by FPF or its designee in writing.
(d) failure on the part of the Servicer to either duly
observe or perform any covenants or agreements of the Servicer set
forth in this Servicing Agreement other than as set forth in this
Article 5, and which has not been cured within ten (10) business
days after the date of receipt of notice of such failure; or the
Servicer shall attempt to assign any of its duties hereunder;
(e) any representation, warranty or certification made by
the Servicer (or any officer of the Servicer) in this Servicing
Agreement, or any certificate delivered pursuant to this Servicing
Agreement, shall prove to have been incorrect when made, which
could have a material adverse effect on FPF and which continues to
be incorrect in any material respect;
<PAGE>
(f) the Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or
similar proceedings of or relating to the Servicer, or the
Servicer shall admit in writing its inability to pay its debts
generally as they become due, file a petition or commence an
action to take advantage of any applicable insolvency or
reorganization statute, make any assignment for the benefit of its
creditors or voluntarily suspend payment of its obligations;
(g) any Change in Control unless the same is approved in
writing by FPF, in its absolute discretion;
(h) following 30 days written notice to Servicer, an event
or development shall occur which is expected by FPF (in its sole
discretion) to have a material adverse impact on the ability of
the Servicer to perform its obligations under this Servicing
Agreement;
(i) the Servicer shall not be in compliance with the
Cancellation Standard.
Section 5.02. Remedies.
(a) If an Event of Servicing Default shall have occurred and
then be continuing, then by notice given in writing to the
Servicer (the "Terminated Party") (together with any termination
notice described in Section 2.01(a) hereof, a "Termination
Notice"), all of the rights and obligations of the Terminated
Party, shall be terminated upon the later of (i) the date, if any,
specified in the Termination Notice or (ii) upon receipt of the
Termination Notice.
(b) After receipt by the Terminated Party of a Termination
Notice, all authority and power of the Terminated Party under this
Servicing Agreement shall pass to and be vested in a Successor
Servicer; and, without limitation, FPF or its designees are hereby
authorized and empowered to execute and deliver, on behalf of the
Terminated Party, as attorney-in-fact, authorized agent or
otherwise, all documents and other instruments upon the failure of
the Terminated Party to execute or deliver such documents or
instruments, and to do and accomplish all other acts or things
necessary or appropriate to effect the purposes of such transfer
of servicing rights. The Servicer hereby agrees to cooperate with
FPF, its designees and such Successor Servicer in effecting the
termination of the responsibilities and rights of the Terminated
Party to conduct servicing under this Servicing Agreement,
including, without limitation, the transfer to such Successor
Servicer of all authority of the Terminated Party to service the
Premium Receivables provided for under this Servicing Agreement,
including, without limitation, the right to receive all
collections, all authority over all collections which shall on the
date of transfer be held by the Terminated Party for deposit or
which have been deposited by the Terminated Party in the
Collections Account or which shall thereafter be received with
respect to the Premium Receivables, and in assisting the Successor
Servicer in enforcing all rights to Realization Provisions. The
<PAGE>
Terminated Party shall immediately transfer its electronic records
relating to the Premium Receivables to the Successor Servicer in
such electronic form as the Successor Servicer may request. The
Terminated Party shall immediately relinquish all rights in, to
and under the Loan Documents and the Servicing Documents and shall
immediately transfer to the Successor Servicer all Loan Documents
and Servicing Documents with respect to the Premium Receivables in
the manner and at such times as the Successor Servicer shall
request. Immediately upon receipt of a Termination Notice, the
Terminated Party shall not amend, alter or modify any of the Loan
Documents or Servicing Documents without FPF's prior written
consent. The Terminated Party shall give notices of the transfer
of servicing to the Obligors, Issuing Insurance Companies and
state guaranty funds, all in the manner and at such times as the
Successor Servicer shall request.
(c) On and after the receipt by the Terminated Party of a
Termination Notice pursuant to this Section 5.02, the Terminated
Party shall continue to perform all servicing functions under this
Servicing Agreement until the date specified in the Termination
Notice or otherwise specified by FPF in writing.
(d) Upon its appointment, the Successor Servicer shall be
the successor in all respects to the Terminated Party, with
respect to servicing functions under this Servicing Agreement.
(e) In connection with such appointment and assumption, FPF
may make such arrangements for the compensation of itself and the
Successor Servicer out of collections of Premium Receivable
payments, as it and such Successor Servicer shall agree.
(f) All authority and power granted to the Servicer or the
Successor Servicer under this Servicing Agreement shall
automatically cease and terminate upon payment in full of all
Obligations and termination of the Sale Agreement, and shall pass
to and be vested in FPF or its designee.
Section 5.03. Indemnity by the Servicer. The Servicer shall
indemnify and hold FPF, its Affiliates, its designees and assigns and
each of their respective officers, directors, employees and agents and
any Person holding an interest in the Conveyed Property or acting as a
trustee therefor (collectively, the "Indemnified Parties") harmless
against any liability, loss, damage, penalty, fine, forfeiture, legal
or accounting fees, court reporting expenses, expert witness fees, and
all other fees or costs of any kind, judgments or expenses, resulting
from or arising out of a breach of this Servicing Agreement by the
Servicer; provided, however, the Servicer shall not be liable to the
Indemnified Parties by reason of any act, contract or transaction
performed in good faith by the Servicer pursuant to this Servicing
Agreement in accordance with the standard of care under Section 2.16
nor shall it be liable for any loss resulting therefrom, so long as
such act, contract or transaction shall, at the time at which it was
performed or entered into, have been reasonable and prudent under the
circumstances and shall have conformed to the express provisions of
this Servicing Agreement. The rights of the Indemnified Parties to
indemnity, reimbursement or limitation on its liability pursuant to
this Section 5.03 shall survive any Event of Servicing Default or
termination of the Servicer pursuant to the provisions hereof and the
transfer of the rights, duties and obligations of the Servicer to a
Successor Servicer.
<PAGE>
Section 5.04. Waiver of Events of Servicing Default. FPF may
waive any Event of Servicing Default by the Servicer in the performance
of its obligations hereunder and its consequences. Upon any such
waiver of an event of Servicing Default, such default shall cease to
exist, and any default arising therefrom shall be deemed to have been
remedied for every purpose of this Servicing Agreement. No such waiver
shall extent to any subsequent or other default or impair any right
consequent thereon except to the extent expressly so waived.
Section 5.05. Survival. The agreements in this Article V shall
survive the termination of this Servicing Agreement and the payment in
full of all sums and obligations owed to FPF under the Sale Agreement.
ARTICLE VI
TERMINATION OF SERVICING AGREEMENT
Section 6.01. Term. Unless terminated in accordance with the
provisions of Section 2.01(a), this Servicing Agreement shall remain in
effect until all obligations due to FPF pursuant to the Sale Agreement
have been paid in full.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.01. No Offset. Prior to the termination of this
Servicing Agreement, the obligations of the Servicer under this
Servicing Agreement shall not be subject to any defense, counterclaim
or right of offset which the Servicer may have against FPF or its
assignees or designees, whether in respect of this Servicing Agreement
or the Sale Agreement, any Premium Receivable or otherwise.
Section 7.02. Powers of Attorney. FPF shall, from time to
time, provide the employees of the Servicer with limited, revocable
powers of attorney or other such written authorizations as may be
appropriate to enable the Servicer to perform its obligations under
this Servicing Agreement; provided, however, that FPF shall not be
required to provide such powers with respect to any matter for which
FPF does not have authority to perform itself.
Section 7.03. Assignments; Third Party Beneficiaries. This
Servicing Agreement may be assigned by FPF and shall inure to the
benefit of FPF's assignees and designees (all of whom shall be deemed
third party beneficiaries hereunder). Without limiting the generality
of the foregoing, all representations, covenants and agreements in this
Servicing Agreement which expressly confer rights upon FPF shall be for
the benefit of and run directly to each assignee and designee, and each
such assignee and designee shall be entitled to rely on and enforce
such representations, covenants and agreements to the same extent as if
it were a party hereto. The Servicer shall not assign its rights or
obligations under this Servicing Agreement without the written approval
and consent of FPF. With such written approval and consent of FPF
contemplated hereby, this Servicing Agreement shall be binding upon the
parties hereto, and their respective successors, legal representatives
and assigns; no other Person shall have or be construed to have any
equitable right, remedy or claim under or in respect of or by virtue of
this Servicing Agreement or any provision contained herein. There
shall be no third party beneficiaries of Servicer without the written
approval and consent of FPF.
<PAGE>
Section 7.04. Amendment. This Servicing Agreement may be
amended from time to time by a written amendment duly executed and
delivered by each of the parties hereto and no waiver of any of the
terms hereof shall be effective unless it is in writing and signed by
the party or parties whose rights are being waived.
Section 7.05. Waivers. No failure or delay on the part of FPF
or any of its assignees or designees in exercising any power, right or
remedy under this Servicing Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power,
right or remedy preclude any other or further exercise thereof or the
exercise of any other power, right or remedy. No such waiver shall
extend to any subsequent or other default or impair any rights
consequent thereon, except to the extent expressly so waived. Each of
the rights, powers and remedies described in this Servicing Agreement
is cumulative and not exclusive of, and shall not prejudice, any other
right, power or remedy provided in this Servicing Agreement, the Sale
Agreement or by law. Each such right, power and remedy may be
exercised from time to time as deemed necessary by FPF or any of its
assignees or designees, as applicable, and in such order and manner as
such applicable party may determine. The parties hereto hereby
acknowledge and agree that with respect to a violation or breach by the
Servicer of any representation, warranty, covenant or other term or
provision of this Servicing Agreement, it shall be the Servicer's
obligation to prepare and obtain a written waiver for such breaches or
violations from FPF or its designee, as applicable. FPF or its
designee, as applicable, may grant or deny any such requested waiver in
its sole and absolute discretion. At no time may the parties hereto
infer a course of dealing among the parties that would negate the
requirement to obtain a written waiver from FPF or its designee, as
applicable.
Section 7.06. Notices. All notices, requests, consents and
other communications hereunder shall be in writing and shall be
delivered personally or mailed by first-class registered or certified
mail, postage prepaid, or by telephonic facsimile transmission,
electronic mail and overnight delivery service, postage prepaid, to the
parties to this Servicing Agreement; provided, that notices shall be
effective upon receipt, and in any case addressed to the Servicer as
provided in the introductory paragraph of this Servicing Agreement and
to FPF at 600 Seventeenth Street, Suite 1900S, Denver, Colorado 80202,
Attention: Robert A. Pinkerton.
Section 7.07. Governing Law. THIS SERVICING AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF
THE STATE OF COLORADO WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS.
<PAGE>
Section 7.08. Jurisdiction. THE PARTIES HERETO HEREBY
IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF
THE STATE OF COLORADO AND THE UNITED STATES DISTRICT COURT OF COLORADO
IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
SERVICING AGREEMENT AND THE PARTIES HEREBY IRREVOCABLY AGREE THAT ALL
CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN SUCH COURTS. THE PARTIES HEREBY IRREVOCABLY WAIVE, TO
THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN
INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING AND
IRREVOCABLY CONSENT TO THE SERVICE OF ANY SUMMONS AND COMPLAINT AND ANY
OTHER PROCESS BY THE MAILING OF COPIES OF SUCH PROCESS TO THEM AT THEIR
RESPECTIVE ADDRESSES AS SPECIFIED IN SECTION 7.06. THE PARTIES HEREBY
AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE
JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS
SECTION 7.08 SHALL AFFECT THE RIGHT OF FPF TO SERVE LEGAL PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW OR PRECLUDE THE ENFORCEMENT OF ANY
JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION
UNDER THIS SERVICING AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE
FORUM OR JURISDICTION.
Section 7.09. Waiver of Jury Trial. EACH OF THE PARTIES HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SERVICING
AGREEMENT.
Section 7.10. Severability of Provisions. Any part, provision,
agreement, representation, warranty or covenant of this Servicing
Agreement which is prohibited or unenforceable or is held to be void or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by applicable law, the parties
waive any provision of law which prohibits or renders void or
unenforceable any provision hereof. If the invalidity of any part,
provision, agreement, representation, warranty or covenant of this
Servicing Agreement shall deprive any party of the economic benefit
intended to be conferred by this Servicing Agreement, the parties shall
negotiate in good faith to develop a structure the economic effect of
which is as nearly as possible the same as the economic effect of the
transactions contemplated hereunder without regard to such invalidity.
Section 7.11. Counterparts. For the purpose of facilitating
the execution of this Servicing Agreement and for other purposes, this
Servicing Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed to be an original, and
together shall constitute and be one and the same instrument.
Section 7.12. Captions. The article, paragraph and other
headings contained in this Servicing Agreement are inserted for
convenience only and shall not in any way affect the meaning or
construction of any provision of this Servicing Agreement.
<PAGE>
Section 7.13. Legal Holidays. In the case where the date on
which any action required to be taken, document required to be
delivered or payment required to be made is not a Business Day in New
York, New York or Denver, Colorado, such action, delivery or payment
need not be made on that date, but may be made on the next succeeding
Business Day.
Section 7.14. Advice from Independent Counsel. The parties
understand that this Servicing Agreement is a legally binding agreement
that may affect such party's rights. Each party represents to the
others that it has received legal advice from counsel of its choice
regarding the meaning and legal significance of this Servicing
Agreement and that it is satisfied with its legal counsel and the
advice received from it.
Section 7.15. Judicial Interpretation. Should any provision of
this Servicing Agreement require judicial interpretation, it is agreed
that a court interpreting or construing the same shall not apply a
presumption that the terms hereof shall be more strictly construed
against any Person by reason of the rule of construction that a
document is to be construed more strictly against the Person who itself
or through its agent prepared the same, it being agreed that each party
has participated in the preparation of this Servicing Agreement.
(SIGNATURE PAGE FOLLOWS)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Servicing
Agreement to be duly executed by their respective authorized officers
as of the date first written above.
FPF, INC.
By
Name: Bruce I. Lundy
Title: President
Hallmark Finance Corporation, as Servicer
By
Name
Title
<PAGE>
EXHIBIT A-1
DAILY SERVICER REPORT
Date of Report
Date of Deposit
GROSS NSF OTHER NETTING NET
1. DEPOSITS DELETIONS INTEREST DEPOSIT
-------- --------- -------- -------
Specify Other Netting Items:
The undersigned [Name of Servicer] (the "Servicer") hereby
certifies that this report complies with the requirements of, and is
being delivered pursuant to, Section 2.10(a) of the Premium Receivable
Servicing Agreement (the "Servicing Agreement") dated as of
________________, 199__ by and among FPF and the Servicer. Capitalized
terms used and not otherwise defined herein shall have the meaning
ascribed to such terms in the Servicing Agreement.
Dated: [NAME OF SERVICER]
By
Name
Title
<PAGE>
EXHIBIT A-2
MONTHLY SERVICER REPORT
[To Be Provided]
The undersigned [Name of Servicer] (the "Servicer") hereby
certifies that this report complies with the requirements of, and is
being delivered pursuant to, Section 2.10(a) of the Premium Receivable
Servicing Agreement (the "Servicing Agreement") dated as of
________________, 199__ by and among FPF and the Servicer. Capitalized
terms used and not otherwise defined herein shall have the meaning
ascribed to such terms in the Servicing Agreement.
Dated: [NAME OF SERVICER]
By
Name
Title
<PAGE>
EXHIBIT B
REPRESENTATIONS AND WARRANTIES
Section 1. Representations and Warranties of the Servicer
with Respect to Section 4.01 of the Premium Receivable Servicing
Agreement.
(a) Power and Authority. The Servicer has the power and
authority to execute and deliver the Premium Receivable Servicing
Agreement and to carry out the terms thereof; there are no
injunctions, writs, restraining orders or any other order of any
nature which adversely affects the Servicer's performance of the
Premium Receivable Servicing Agreement or any transactions
contemplated thereby; and no consent, approval or authorization
which has not been obtained is required for the consummation by
the Servicer of the transactions contemplated by the Premium
Receivable Servicing Agreement.
(b) No Violation. The consummation of the transactions
contemplated by the Premium Receivable Servicing Agreement and the
fulfillment of the terms thereof do not conflict with, result in
any breach of any of the terms and provisions of, nor constitute
(with or without notice or lapse of time) a default under, the
certificate of incorporation or bylaws of the Servicer, or any
indenture, agreement or other instrument to which the Servicer is
a party or by which it or its properties is bound; nor result in
the creation or imposition of any Lien upon any of its properties
pursuant to the terms of any such indenture, agreement or other
instrument; nor violate any applicable laws, rules, regulations or
orders regarding the conduct of the Servicer's business or the
ownership of its properties; nor violate any law or any order,
rule or regulation applicable to the Servicer of any court or of
any federal or state regulatory body, administrative agency, or
other governmental instrumentality having jurisdiction over the
Seller or its properties except, in each case, for such
violations, conflicts, breaches, Liens and defaults which could
not, in the reasonable judgment of the Servicer, have an adverse
effect on the condition (financial or otherwise) of the Servicer,
any Premium Receivable or the Servicer's obligations under the
Premium Receivable Servicing Agreement.
(c) Ability to Perform. There has been no impairment in the
ability of Servicer to perform its obligations under the Premium
Receivable Servicing Agreement.
(d) Financial Statements. The Servicer's financial
statements dated as of December 31, 1998, as delivered to FPF and
the financial statements of the Servicer to be delivered pursuant
to Section 2.11 of this Servicing Agreement, present or will
present fairly, in all material respects, the information
presented therein, and no material adverse change has occurred in
the Servicer's financial status since the date thereof.
(e) No Material Liabilities. The Servicer does not have
material liabilities or obligations other than those disclosed in
the financial statements referred to in subparagraph (d) above or
for which adequate reserves are reflected in such financials.
<PAGE>
(f) No Material Misstatements or Omissions. No information,
certificate of an officer, statement furnished in writing or
report delivered to FPF by the Servicer contains any untrue
statement of a material fact or omits a material fact necessary to
make such information, certificate, statement or report not
misleading; provided, that the Servicer makes no representation or
warranty with respect to any information incorporated into or
forming the basis of any officer's certificate, information,
statement or report provided by the Servicer that is provided to
the Servicer by any other Person.
(g) Capability to Perform. The Servicer has the knowledge,
the experience and the systems, financial and operational capacity
available to timely perform each of its obligations under the
Premium Receivable Servicing Agreement.
(h) Other Agreements. The Servicer is not a party to any
indenture, loan or credit agreement, lease or other instrument or
agreement which is likely to have a material adverse effect on the
business, properties, assets, operations or operation, financial
or otherwise, of the Servicer or the ability of the Servicer to
perform its obligations under this Servicing Agreement.
(i) No Material Adverse Change. No material adverse change
has occurred in the business, properties, operating results,
prospects, assets, operations or condition, financial or
otherwise, of the Servicer since the date of the financial
statements referred to in subparagraph (d) above.
Section 2. Representations and Warranties with Regard to
Section 4.01 and 4.02 of the Premium Receivable Servicing Agreement.
(References in this Section 2 to "such Person" refer to the Person
making the representation and warranty pursuant to the Premium
Receivable Servicing Agreement.)
(a) Organization, Etc. Such Person is duly organized and is
validly existing as a corporation or limited liability company, as
the case may be, in good standing under the laws of the state of
its organization with full power and authority to execute and
deliver the Premium Receivable Servicing Agreement and to perform
the terms and provisions thereof.
(b) Due Qualification. Such Person is duly qualified to do
business as a foreign business entity in good standing, and has
obtained all required licenses and approvals, if any, in all
jurisdictions in which the ownership or lease of property or the
conduct of its business requires such qualifications except those
jurisdictions in which failure to be so qualified would not have
an adverse effect on the business or operations of such Person or
any Premium Receivable.
<PAGE>
(c) Due Authorization. The execution, delivery and
performance by such Person of the Premium Receivable Servicing
Agreement have been duly authorized by all necessary action of
such Person, do not require any approval or consent of any
governmental agency or authority, do not and will not conflict
with any provision of its constituent documents, and do not and
will not conflict with or result in a breach which would
constitute (with or without notice or lapse of time) a default
under any agreement binding upon or applicable to it or its
property, or any law or governmental regulation or court decree
applicable to it or its property.
(d) No Litigation. No litigation or administrative
proceeding of or before any court, tribunal or governmental body
is presently pending, or threatened, against such Person or its
properties, which, if adversely determined could, in the
reasonable opinion of such Person, have an adverse effect on the
transactions contemplated by the Premium Receivable Servicing
Agreement or on such Person's ability to perform any of its
obligations thereunder.
(e) Enforceability. The Premium Receivable Servicing
Agreement constitutes the valid, legal and binding obligation of
such Person, enforceable against such Person in accordance with
the terms thereof, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and other laws affecting the
enforcement of creditor's rights generally and to general
principles of equity, regardless of whether such enforcement is
considered in a proceeding in equity or at law.
Section 3. Survival of Representations and Warranties. The
representations and warranties set forth in this Exhibit B shall
survive the date of the Premium Receivable Servicing Agreement. Upon
discovery of a breach of any of the foregoing representations and
warranties, the party discovering such breach shall give prompt written
notice to the other party thereto; provided, however, that failure to
give such notice shall not affect the rights of such other parties with
respect to such breach.
<PAGE>
EXHIBIT C
POWER OF ATTORNEY
Hallmark Finance Corporation, a corporation organized and existing
under the laws of the State of Texas (the "Servicer"), hereby grants to
FPF, INC. ("FPF") pursuant to that certain Premium Receivable Servicing
Agreement, dated as of _____________ ___, 199_, among the Servicer and
FPF, Inc., as the same may be amended or otherwise modified from time
to time (the "Servicing Agreement"), an irrevocable power of attorney,
with full power of substitution, coupled with an interest, to take any
and all actions at the option of FPF or its assigns at any time after
the occurrence and during the continuance of any Event of Servicing
Default, in the name of the Servicer or its assigns, to execute such
documents or instruments and to do and accomplish all other acts or
things necessary or appropriate to effect the transfer of servicing
rights under the Servicing Agreement.
Capitalized terms used and not otherwise defined herein shall have
the meaning ascribed to such terms in the Servicing Agreement.
IN WITNESS WHEREOF, the undersigned a duly authorized officer of
[Name of Servicer] hereunto sets his hand this _______ day of
__________, 199_.
Hallmark Finance Corporation
By
Name
Title
STATE OF ___________ )
) ss:
COUNTY OF __________ )
BE IT REMEMBERED, that on this ___ day of ____________, 199_,
before me the undersigned, a Notary Public in and for the County and
State aforesaid, came ______________, a _________________ of Hallmark
Finance Corporation, a corporation duly organized, incorporated and
existing under and by virtue of the laws of Texas, who is personally
known to me to be such officer, and who is personally known to me to be
the same person who executed, as such officer, the within instrument on
behalf of said corporation, and such person duly acknowledged the
execution of the same to be the act and deed of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal, the day and year last above written.
Notary Public
My commission expires:
EXHIBIT A-1 FORM OF SERVICER'S DAILY REPORT
EXHIBIT A-2 FORM OF SERVICER'S MONTHLY REPORT
EXHIBIT B REPRESENTATIONS AND WARRANTIES
EXHIBIT C POWER OF ATTORNEY
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS 1
ARTICLE II
ADMINISTRATION AND SERVICING OF PREMIUM RECEIVABLES
Section 2.01...Appointment and Duties of Servicer 3
Section 2.02...Collection of Premium Receivable Payments 3
Section 2.03...Past-Due Premium Receivables; Cancelled Premium
Receivables 4
Section 2.04...Defaulted Premium Receivables 4
Section 2.05...Maintenance of Interests in Premium Receivables 5
Section 2.06...Covenants of Servicer 5
Section 2.07...Reacquisition of Premium Receivables Upon Breach of
Representations or Warranties 5
Section 2.08...Premium Receivable Servicing Fees 6
Section 2.09...Servicer's Certificate as to Compliance 6
Section 2.10...Reporting Obligations; Inspection and Audit Rights 7
Section 2.11...Financial Statements and Other Reports 7
Section 2.12...Costs and Expenses 9
Section 2.13...Responsibility for Ownership Interests 9
Section 2.14...Documents Held by FPF; Documents Held by the
Servicer; Indication of FPF Ownership 9
Section 2.15...Maintenance of Computer Systems 10
Section 2.16...Standard of Care 10
Section 2.17...Enforcement 11
Section 2.18...Fidelity Bond or Errors and Omissions Insurance 11
ARTICLE III
ACCOUNTS; COLLECTIONS
Section 3.01...Accounts 11
Section 3.02...Collections 12
Section 3.03...Collections Account Depository 12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01...Representations and Warranties of the Servicer 12
Section 4.02...Representations and Warranties of FPF 12
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
ARTICLE V
DEFAULT, REMEDIES AND INDEMNITY
Section 5.01...Events of Servicing Default 12
Section 5.02...Remedies 13
Section 5.03...Indemnity by the Servicer 14
Section 5.04...Waiver of Events of Servicing Default 15
Section 5.05...Survival 15
ARTICLE VI
TERMINATION OF SERVICING AGREEMENT
Section 6.01...Term 15
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.01...No Offset 15
Section 7.02...Powers of Attorney 15
Section 7.03...Assignments; Third Party Beneficiaries 16
Section 7.04...Amendment 16
Section 7.05...Waivers 16
Section 7.06...Notices 16
Section 7.07...Governing Law 17
Section 7.08...Jurisdiction 17
Section 7.09...Waiver of Jury Trial 17
Section 7.10...Severability of Provisions 17
Section 7.11...Counterparts 18
Section 7.12...Captions 18
Section 7.13...Legal Holidays 18
Section 7.14...Advice from Independent Counsel 18
Section 7.15...Judicial Interpretation 18
TABLE OF CONTENTS
(continued)
Page
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EXHIBIT A-1 FORM OF SERVICER'S DAILY REPORT
EXHIBIT A-2 FORM OF SERVICER'S MONTHLY REPORT
EXHIBIT B REPRESENTATIONS AND WARRANTIES
EXHIBIT C POWER OF ATTORNEY
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Due to format constraints of this Financial Data Schedule (FDS) certain
Balance Sheet items were omitted: i.e. Prepaid reinsurance premiums,
Premium notes receivable, Installment premiums receivable, Excess of cost
over net assets acquired and Other assets. Refer to actual 10KSB
submission.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 3,831,657
<DEBT-MARKET-VALUE> 6,373,491
<EQUITIES> 142,901
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 10,348,049
<CASH> 5,786,069
<RECOVER-REINSURE> 15,673,241
<DEFERRED-ACQUISITION> 598,979
<TOTAL-ASSETS> 61,002,233
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 11,761,723
<POLICY-OTHER> 2,623,603
<POLICY-HOLDER-FUNDS> 4,658,319
<NOTES-PAYABLE> 9,288,366
0
0
<COMMON> 355,638
<OTHER-SE> 11,516,759
<TOTAL-LIABILITY-AND-EQUITY> 61,002,233
13,979,561
<INVESTMENT-INCOME> 789,584
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 4,431,549
<BENEFITS> 9,119,176
<UNDERWRITING-AMORTIZATION> 140,781
<UNDERWRITING-OTHER> 7,870,764
<INCOME-PRETAX> 1,287,188
<INCOME-TAX> 499,878
<INCOME-CONTINUING> 787,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 787,310
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
<RESERVE-OPEN> 16,015,000
<PROVISION-CURRENT> 10,290,000
<PROVISION-PRIOR> 14,000
<PAYMENTS-CURRENT> (5,724,000)
<PAYMENTS-PRIOR> (2,791,000)
<RESERVE-CLOSE> 17,804,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
