SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934 (Amendment No. )
Filed by Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e) (2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
(Name of Registrant as Specified In Its Charter)
HALLMARK FINANCIAL SERVICES, INC.
___________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, If Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
___________________________________________________________________________
(2) Aggregate numer of securities to which transactions applies:
___________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
___________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
___________________________________________________________________________
(5) Total Fee Paid
___________________________________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
___________________________________________________________________________
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No:
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(3) Filing Party:
___________________________________________________________________________
(4) Date Filed:
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HALLMARK FINANCIAL SERVICES, INC.
14651 Dallas Parkway, Suite 900
Dallas, Texas 75254
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 19, 2003
_______________________
SOLICITATION AND REVOCABILITY OF PROXIES
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Hallmark Financial Services, Inc., a
Nevada corporation (the "Company"), to be voted at the 2003 Annual Meeting
of Shareholders (the "Annual Meeting") to be held on Monday, May 19, 2003,
at the time and place and for the purposes set forth in the accompanying
Notice of Annual Meeting of Shareholders (the "Notice"), and at any
adjournment(s) thereof. When proxies in the accompanying form are properly
executed and received, the shares represented thereby will be voted at the
Annual Meeting in accordance with the directions noted thereon. If no
direction is indicated on the proxy, the shares represented thereby will be
voted for the election of each of the nominees for director and in the
discretion of the proxy holder on any other matter that may properly come
before the meeting.
Submitting a proxy will not affect a shareholder's right to vote in
person at the Annual Meeting. Any shareholder who gives a proxy may revoke
it at any time before it is exercised by delivering written notice of
revocation to the Company, by substituting a new proxy executed on a later
date, or by making a written request in person at the Annual Meeting that
the proxy be returned. However, mere attendance at the Annual Meeting will
not of itself revoke the proxy.
All expenses of preparing, assembling and mailing this Proxy Statement
and the enclosed materials and all costs of soliciting proxies will be paid
by the Company. In addition to solicitation by mail, proxies may be
solicited by officers and regular employees of the Company by telephone or
in person. Such officers and employees who solicit proxies will receive
no compensation for their services other than their regular salaries.
Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of shares they hold, and the Company may reimburse them for
reasonable out-of-pocket expenses they incur in forwarding these materials.
The principal executive offices of the Company are located at 14651
Dallas Parkway, Suite 900, Dallas, Texas 75254. The Company's mailing
address is the same as that of its principal executive offices.
This Proxy Statement and the accompanying form of proxy are first being
mailed or given to shareholders on or about April 25, 2003. A copy of the
Company's Annual Report for the fiscal year ended December 31, 2002, is
enclosed herewith. Except as expressly incorporated by reference herein,
such Annual Report does not constitute a part of the materials used for the
solicitation of proxies.
PURPOSES OF THE MEETING
At the Annual Meeting, the shareholders of the Company will consider
and vote on the following matters:
1. Election of six directors to serve until the next annual
meeting of shareholders or until their successors are duly elected and
qualified; and
2. Transaction of such other business as may properly come
before the meeting or any adjournment thereof.
QUORUM AND VOTING
The record date for the determination of shareholders entitled to
notice of and to vote at the Annual Meeting was the close of business on
April 22, 2003 (the "Record Date"). On the Record Date, there were
11,166,800 shares of Common Stock of the Company, par value $0.03 per share
(the "Common Stock"), issued and outstanding, each of which is entitled to
one vote on all matters to be acted upon at the Annual Meeting. There are
no cumulative voting rights. The presence, in person or by proxy, of
holders of one-third of the outstanding shares of Common Stock entitled to
vote at the meeting is necessary to constitute a quorum to transact
business. Assuming the presence of a quorum, directors will be elected by a
plurality of the votes cast. The affirmative vote of the holders of a
majority of the shares of Common Stock actually voted will be required for
the approval of all other matters to come before the Annual Meeting.
Abstentions and broker non-votes will be counted solely for purposes of
determining whether a quorum is present at the Annual Meeting. Pursuant to
the Bylaws of the Company, abstentions and broker non-votes will not be
counted in determining the number of shares voted on any matter and will
have no effect on the election of directors or the approval of any proposal
submitted to a vote of the shareholders at the Annual Meeting.
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table and the notes thereto set forth certain information
regarding the beneficial ownership of the Common Stock as of the Record
Date, by (i) the current executive officers of the Company, (ii) each
current director and nominee for director of the Company, (iii) all current
executive officers and current directors of the Company as a group; and
(iv) each other person known to the Company to own beneficially more than
five percent of the presently outstanding Common Stock. Unless otherwise
indicated, the persons identified in the table have sole voting and
dispositive power with respect to the shares shown as beneficially owned by
them. Except as otherwise indicated, the mailing address for all persons is
the same as that of the Company.
No. of Shares Percent of Class
Shareholder Beneficially Owned Beneficially Owned
----------- ------------------ ------------------
Mark E. Schwarz 1 5,409,001 47.9
Timothy A. Bienek -0- -0-
Scott K. Billings -0- -0-
Scott T. Berlin 2 75,000 0.7
James H. Graves 3 252,500 2.2
George R. Manser 3, 4 203,200 1.8
James C. Epstein -0- -0-
All executive officers and current
directors, as a group (6 persons) 5 5,939,701 50.7
Thomas G. Berlin 6 1,909,600 17.1
Newcastle Partners, L.P. 7 5,334,001 47.6
-----------
1 Includes 75,000 shares which may be acquired by Mr. Schwarz pursuant to
stock options exercisable on or within 60 days after the Record Date,
5,284,001 shares owned by Newcastle Partners, L.P., a limited
partnership indirectly controlled by Mr. Schwarz, and 50,000 shares
which may be acquired by Newcastle Partners, L.P. pursuant to stock
options exercisable on or within 60 days after the Record Date. See
Note 7, below.
2 Includes 75,000 shares which may be acquired pursuant to stock options
exercisable on or within 60 days after the Record Date. Mr. Berlin
disclaims beneficial ownership of all shares owned by his parents, Mr.
& Mrs. Thomas G. Berlin.
3 Includes 175,000 shares which may be acquired pursuant to stock options
exercisable on or within 60 days after the Record Date.
4 Includes 9,000 shares held by Mr. Manser's spouse, over which shares
Mr. Manser shares voting and dispositive power.
5 Includes 550,000 shares which may be acquired pursuant to stock options
exercisable on or within 60 days after the Record Date.
6 As reported on Form 4 filed with the Securities and Exchange Commission
on September 17, 2002. Includes 40,600 shares over which Mr. Berlin
shares voting and dispositive power with his spouse. The address for
Mr. Berlin is 37500 Eagle Road, Willoughby Hills, Ohio 44094. Thomas
G. Berlin is the father of Scott T. Berlin.
7 As reported on Schedule 13D filed with the Securities and Exchange
Commission on January 28, 2003. Includes 50,000 shares which may be
acquired pursuant to stock options exercisable on or within 60 days
after the Record Date. Mark E. Schwarz is the managing member of
Newcastle Capital Group, L.L.C., which is the general partner of
Newcastle Capital Management, L.P., which is the general partner of
Newcastle Partners, L.P. The address for Newcastle Partners, L.P. is
300 Crescent Court, Suite 1110, Dallas, Texas 75201.
ELECTION OF DIRECTORS
(Item 1)
At the Annual Meeting, six directors will be elected for a term
expiring at the 2004 annual meeting of the Company's shareholders or when
their successors are elected and qualify. Directors will be elected by a
plurality of the votes cast at the Annual Meeting. Cumulative voting is not
permitted in the election of directors.
The Company's Board of Directors has proposed the following slate of
nominees for election as directors at the Annual Meeting. None of the
nominees was selected on the basis of any special arrangement or
understanding with any other person. None of the nominees bears any family
relationship to any other nominee or to any executive officer of the
Company. In the absence of instructions to the contrary, shares represented
by proxy will be voted for the election of each nominee named below. Each
nominee has accepted nomination and agreed to serve if elected. If any
nominee becomes unable to serve before election, shares represented by proxy
may be voted for the election of a substitute nominee designated by the
Board of Directors.
The Board of Directors recommends a vote FOR election of each nominee
below.
Director
Name Age Since Current Position(s) with the Company
---- --- ----- ------------------------------------
Mark E. Schwarz 42 2001 Chief Executive Officer, Director and
Chairman of the Board
Timothy A. Bienek 44 2002 President, Chief Operating Officer and
Director
James H. Graves 54 1995 Director
George R. Manser 71 1995 Director
Scott T. Berlin 33 2001 Director
James C. Epstein 44 None
Mark E. Schwarz was elected Chief Executive Officer of the Company
effective January 1, 2003. Mr. Schwarz has since 1993 served, directly or
indirectly through entities he controls, as the sole general partner of
Newcastle Partners, L.P., a private investment firm. Since 2000, he has
also served as the President and sole Managing Member of Newcastle Capital
Group, L.L.C., the general partner of Newcastle Capital Management, L.P., a
private investment management firm. From 1995 until 1999, Mr. Schwarz was
also a Vice President of Sandera Capital Management, L.L.C., a private
investment firm associated with the Lamar Hunt family. From 1993 until
1996, Mr. Schwarz was a securities analyst and portfolio manager for SCM
Advisors, L.L.C., an investment advisory firm. Mr. Schwarz presently serves
as a director of Bell Industries, Inc., a company primarily engaged in
providing computer systems integration services; Nashua Corporation, a
manufacturer of specialty papers, labels and printing supplies; Pizza Inn,
Inc., an operator and franchisor of pizza restaurants; SL Industries, Inc.,
a developer of power systems used in a variety of aerospace, computer,
datacom, industrial, medical, telecom, transportation and utility equipment
applications; Tandycrafts, Inc., a manufacturer of frames, framed art,
mirrors, and other wall decor products; and WebFinancial Corporation, a
banking and specialty finance company.
Timothy A. Bienek was elected President and Chief Operating Officer of
the Company effective January 1, 2003, after joining the Company as
Executive Vice President in September, 2002. Mr. Bienek came to the Company
from the position of Chief Operating Officer of Benfield Blanch Inc., a
reinsurance intermediary. Previously, he had served as a Senior Vice
President of AAM Capital Partners, a private equity fund for investing in
the insurance industry. Mr. Bienek has also served as the Director of
Corporate Finance and Planning for Allstate Insurance Company, the Director
of Corporate Planning and then Chief Financial Officer for the Personal
Lines Division of TIG Holdings, and a Vice President directing the property-
casualty insurance rating practice of Duff & Phelps Credit Rating Company.
He began his career in the insurance industry in 1983 with Allstate
Insurance Company, during which tenure he was promoted to Corporate Finance
and Planning Manager and then Controller of the Auto Products Group.
James H. Graves is a Partner of Erwin, Graves & Associates, LP, a
management consulting firm founded in 2002. Previously, he was a Managing
Director of UBS Warburg, Inc., an international financial services firm
which provides investment banking, underwriting and brokerage services. He
was a Managing Director of Paine Webber Group Inc. prior to its acquisition
by UBS Warburg in November 2000, and was Chief Operating Officer of J.C.
Bradford & Co. at the time of its acquisition by Paine Webber Group Inc. in
June 2000. Mr. Graves had earlier served as Managing Director of J.C.
Bradford & Co. and co-manager of its Corporate Finance Department. Prior to
its acquisition by Paine Webber Group Inc., J.C. Bradford & Co. provided
investment advisory services to the Company. Prior to joining J.C. Bradford
& Co. in 1991, Mr. Graves had for 11 years been employed by Dean Witter
Reynolds, where he completed his tenure as the head of the Special
Industries Group in New York City. Mr. Graves also serves as a director of
Cash America International, Inc., a company operating pawn shops and jewelry
stores, and is Vice Chairman and a director of Detwiler, Mitchell & Company,
a securities brokerage and investment banking firm.
George R. Manser is Chairman of Concorde Holding Co. and CAH, Inc. LLC,
each a private investment management company, and a director of State Auto
Financial Corp., an insurance holding company that engages primarily in the
property and casualty insurance business. Prior to his retirement in 2000,
Mr. Manser also served as Chairman of Uniglobe Travel (Capital Cities),
Inc., a franchisor of travel agencies; a director of CheckFree Corporation,
a provider of financial electronic commerce services, software and related
products; and an advisory director of J.C. Bradford & Co. From 1995 to
1999, Mr. Manser served as the Director of Corporate Finance of Uniglobe
Travel USA, L.L.C., a franchisor of travel agencies, and also served as a
director of Cardinal Health, Inc. and AmerLink Corp. From 1984 to 1994, he
also served as a director and Chairman of North American National
Corporation and its subsidiaries, Pan-Western Life Insurance Company,
Brookings International Life Insurance Company and Howard Life Insurance
Company.
Scott T. Berlin is a Director focused on the corporate finance and
mergers/acquisitions practice at Brown, Gibbons, Lang & Company, an
investment banking firm serving middle market companies. Prior to joining
Brown, Gibbons, Lang & Company in 1997, Mr. Berlin was a lending officer in
the Middle Market Group at The Northern Company.
James C. Epstein is Chairman of EWI RE, Inc., a reinsurance
intermediary and consulting firm which he founded in 1988 and led as
President until 2000. From 1985 to 1988, he served as a Vice President and
member of the reinsurance advisory board Sedgwick Group, PLC, an
international insurance, reinsurance and consulting firm. From 1984 to
1985, he worked as a reinsurance broker at E.W. Blanch Co. Mr. Epstein began
his insurance career in 1981 as an actuary with Tillinghast & Co. Mr.
Epstein is also a director of American Transportation and Trucking Insurance
Company, an insurer of long-haul trucking fleets.
Board Committees and Meetings
Standing committees of the Board of Directors of the Company include
the Executive Committee, the Audit Committee, the Compensation Committee and
the Stock Option Committee.
The Executive Committee is currently comprised of Mr. Schwarz
(chairman), Mr. Graves and Mr. Manser. Between meetings of the Board of
Directors, the Executive Committee has the full power and authority of the
Board in the management of the business and affairs of the Corporation,
except as limited by the Bylaws or statute. The Executive Committee meets
periodically between meetings of the Board of Directors, but held no such
meetings during 2002.
The Audit Committee is currently comprised of Mr. Manser (chairman),
Mr. Graves and Mr. Berlin. The Board of Directors has determined that all
of the current members of the Audit Committee are independent (as defined by
applicable rules of the American Stock Exchange). The Audit Committee
oversees the conduct of the financial reporting process of the Company,
including reviewing with management and the outside auditors the audited
financial statements included in the Company's Annual Report, the Committee
chairman reviewing with the outside auditors the interim financial results
included in the Company's quarterly reports filed with the Securities and
Exchange Commission, discussing with management and the outside auditors the
quality and adequacy of internal controls, and reviewing the independence
of the outside auditors. See, Audit Committee Report. The Audit Committee
met four times during 2002.
The Compensation Committee and the Stock Option Committee are currently
comprised of Mr. Graves (chairman), Mr. Schwarz and Mr. Berlin. At the
direction of the full Board, the Compensation Committee reviews and makes
recommendations with respect to compensation of the executive officers of
the Company. The Stock Option Committee administers the Company's 1991 Key
Employee Stock Option Plan and 1994 Key Employee Long Term Incentive Plan,
including the determination of participants therein and the grant of options
thereunder. Neither the Compensation Committee nor the Stock Option
Committee met during 2002.
The full Board of Directors acts in place of a nominating committee to
investigate qualified nominees for election to the Board when vacancies
occur. The Board has not implemented any formal procedures for
consideration of nominees submitted by shareholders of the Company.
The Board of Directors held four meetings during 2002. Various matters
were also approved by the unanimous written consent of the Board of
Directors during the last fiscal year. Each director attended at least 75%
of the aggregate of (i) the total number of meetings of the Board of
Directors and (ii) the total number of meetings held by all committees of
the Board on which such director served.
Director Compensation
Each non-employee director receives a fee of $1,500 for each Board
meeting attended and a fee of $750 for each committee meeting attended. No
other compensation was paid to any non-employee director during 2002.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company's executive officers, directors and beneficial owners of
more than 10% of the Company's Common Stock are required to file reports of
ownership and changes of ownership of the Common Stock with the Securities
and Exchange Commission. Based solely upon information provided to the
Company by individual directors, executive officers and beneficial owners,
the Company believes that all such reports were timely filed during and with
respect to the fiscal year ended December 31, 2002.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors of the Company is
composed of three independent directors and operates under a written charter
adopted by the Board of Directors in accordance with applicable rules of the
Securities and Exchange Commission and the American Stock Exchange.
The primary purpose of the Audit Committee is to assist the Board in
fulfilling its responsibility to oversee management's conduct of the
Company's financial reporting process. In discharging its oversight role,
the Audit Committee is empowered to investigate any matter brought to its
attention with full access to all books, records, facilities and personnel
of the Company and is authorized to retain outside counsel, auditors or
other experts for this purpose. Subject to any action that may be taken by
the full Board, the Audit Committee also has the authority and
responsibility to select, evaluate and, where appropriate, replace the
Company's independent certified public accountants.
The Company's management is responsible for preparing the Company's
financial statements and the independent accountants are responsible for
auditing those financial statements. The role of the Audit Committee is to
monitor and oversee these processes.
In this context, the Audit Committee has reviewed and discussed the
consolidated financial statements with both management and the independent
accountants. The Audit Committee also discussed with the independent
accountants the matters required to be discussed by Statement on Auditing
Standards No. 61 (Communication with Audit Committees). The Audit Committee
received from the independent accountants the written disclosures required
by Independence Standards Board Standard No. 1 (Independence Discussions
with Audit Committees), and the Audit Committee discussed with the
independent accountants their independence.
Based upon the Audit Committee's review and discussions with management
and the independent accountants, the Audit Committee recommended to the
Board of Directors that the audited financial statements be included in the
Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission for the year ended December 31, 2002. The Audit
Committee also retained PricewaterhouseCoopers LLP as the Company's
independent accountants for the 2003 fiscal year.
Audit Committee: George R. Manser
---------------- James H. Graves
Scott T. Berlin
EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES
Executive Officers
The following persons are currently the only executive officers of the
Company:
Name Age Position(s) with the Company
---- --- ----------------------------
Mark E. Schwarz 42 Chief Executive Officer, Director and Chairman of
the Board
Timothy A. Bienek 44 President, Chief Operating Officer and Director
Scott K. Billings 40 Chief Financial Officer and Secretary
No executive officer bears any family relationship to any other
executive officer or to any director or nominee for director of the Company.
No director, nominee for director or executive officer of the Company has
been involved in any legal proceedings that would be material to an
evaluation of the management of the Company. Information concerning the
business experience of Mark E. Schwarz and Timothy A. Bienek is provided
under Election of Directors.
Scott K. Billings became Chief Financial Officer of the Company as of
January 1, 2003, and was elected Secretary in March, 2003. Prior to joining
the Company, Mr. Billings was a Senior Vice President and Chief Financial
Officer of domestic operations for Benfield Blanch Inc., a reinsurance
intermediary, and the Chief Accounting Officer for E.W. Blanch Holdings,
Inc., the publicly-held predecessor to Benfield Blanch Inc. From 1994 to
1998, he served as the Controller for H.D. Vest Financial Services, a
provider of financial services to tax professionals. Mr. Billings was a
senior accountant with a private accounting firm from 1989 to 1994.
Other Significant Employees
The following persons are not executive officers of the Company but are
nonetheless expected to make significant contributions to the business of
the Company:
Name Age Position with the Company or Subsidiary
---- --- ---------------------------------------
John J. DePuma 65 Senior Vice President - Corporate Planning of the
Company
Brookland F. Davis 39 President of American Hallmark Insurance Company
of Texas
Kevin Kasitz 40 President of Millers General Agency, Inc.
Joseph G. Smith 48 President of Phoenix Indemnity Insurance Company
John J. DePuma joined the Company in 1990 as Vice President and Chief
Financial Officer and was promoted to Senior Vice President in 1994. He
relinquished his role as Chief Financial Officer to focus on corporate
planning effective January 1, 2003. For 10 years prior to joining the
Company, Mr. DePuma was Vice President and Chief Financial Officer of HiLite
Industries, Inc., a manufacturer of original equipment auto parts.
Brookland F. Davis became the President of the Company's Texas-based
non-standard automobile insurance company, American Hallmark Insurance
Company of Texas, and certain of the Company's other subsidiaries effective
January 1, 2003. Since 2001, Mr. Davis had been employed by Bankers
Insurance Group, Inc., a property/casualty and life insurance group of
companies, where he began as the Chief Accounting Officer and was ultimately
promoted to President of their Texas managing general agency and head of
their nationwide non-standard personal automobile operations. From 1998 to
2000, he served as Executive Vice President and Chief Financial Officer of
Paragon Insurance Holdings, LLC, a multi-state personal lines managing
general agency offering non-standard personal automobile and homeowners
insurance, which Mr. Davis co-founded. During 1997, Mr. Davis was a Senior
Manager with KPMG Peat Marwick focusing on the financial services practice
area. From 1993 to 1997, he served as Vice President and Treasurer of
Midland Financial Group, Inc., a multi-state property/casualty insurance
company focused on non-standard automobile insurance. Mr. Davis began his
professional career in 1986 in public accounting with first Coopers &
Lybrand and later KPMG Peat Marwick, where he ended his tenure in 1992 as a
Supervising Senior Tax Specialist. Mr. Davis is a certified public
accountant licensed in Texas and Tennessee.
Kevin Kasitz became the Chief Operating Officer of the Company's
managing general agency for the marketing of commercial lines policies,
Millers General Agency, Inc., effective April 1, 2003. Prior to joining the
Company, Mr. Kasitz had since 1991 been employed by Benfield Blanch Inc., a
reinsurance intermediary, where he served as a Senior Vice President in the
Program Services division (2000 to 2003) and Alternative Distribution
division (1999 to 2000), a Vice President in the Alternative Distribution
division (1994 to 1999) and a Manager in the Wholesale Insurance Services
division (1991 to 1994). From 1989 to 1991, he was a personal lines
underwriter for Continental Insurance Company and from 1986 to 1989 was an
internal auditor for National County Mutual Insurance Company, a regional
non-standard automobile insurer.
Joseph G. Smith has since 1998 been the President of Phoenix Indemnity
Insurance Company, an Arizona-based non-standard automobile insurer which
was acquired by the Company effective January 1, 2003. From 1994 to 1998,
Mr. Smith served as Vice President of Strategic Planning, Compliance and
Internal Audit for Acceptance Insurance Companies, Inc., a property/casualty
insurance company which was previously the parent of Phoenix Indemnity
Insurance Company. From 1982 to 1993, he was employed by The Redland Group,
a property/casualty insurance holding company, where he began as Controller,
then served as Vice President of Finance and Chief Financial Officer and
completed his tenure as Vice President of Administration, Treasurer and
Chief Financial Officer. Mr. Smith began his professional career as an
auditor with Ernst & Whinney in 1977.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning
compensation of the Chief Executive Officer and certain other persons who
were executive officers of the Company during the 2002 fiscal year.
Other Annual
Name and Year Ended Compensation
Principal Positions December 31 Salary ($) Bonus ($) 1 ($) 2
------------------- ----------- ---------- ----------- -----
Linda H. Sleeper 2002 216,000 -0- 872
President and Chief 2001 195,769 -0- 720
Executive Officer 3 2000 176,923 30,000 720
Raymond A. Kilgore 2002 113,135 -0- 12,152
Senior Vice President and 2001 109,340 -0- 10,750
Secretary 2000 106,469 10,000 12,000
John J. DePuma 2002 125,977 -0- 6,490
Senior Vice President and 2001 121,938 -0- 4,750
Chief Financial Officer 2000 119,954 18,000 6,000
-------------------------
1 Bonuses are reflected in the year paid, although accrued in the prior
year.
2 Represents car allowance and employee portion of medical coverage paid
by the Company.
3 Prior to her election as President in September 2000 and as Chief
Executive Officer in December 2000, Ms. Sleeper served as Executive
Vice President and Chief Operating Officer.
Option Grants in Last Fiscal Year
During the fiscal year ended December 31, 2002, no stock options or
stock appreciation rights were granted to any of the executive officers
named above.
Option Exercises in Last Fiscal Year and Fiscal Year-End Values
None of the executive officers of the Company exercised any options
during the fiscal year ended December 31, 2002. The following table shows
the value of unexercised options held by the executive officers named above
as of December 31, 2002.
Securities Underlying Value of Unexercised
Unexercised Options (#) In-the-Money Options ($) 1
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Linda H. Sleeper 440,000 60,000 128,000 15,750
Raymond A. Kilgore 240,000 10,000 75,500 2,625
John J. DePuma 240,000 10,000 75,500 2,625
------------------
1 Values stated are pre-tax and are based upon the closing price of $0.70
per share of the Common Stock on the American Stock Exchange Emerging
Company Marketplace on December 31, 2002, the last trading day of the
fiscal year.
Executive Compensation Agreements
The Company previously entered into an Executive Compensation Agreement
with each of Linda H. Sleeper, Raymond A. Kilgore, and John J. DePuma. The
term of the agreements with Mr. Kilgore and Mr. DePuma expired on December
31, 2000. The term of the agreement with Ms. Sleeper expired December 31,
2002.
In order to provide a smooth transition of responsibilities to new
management, the Company has entered into an agreement with Ms. Sleeper
pursuant to which she will provide certain consulting services to the
Company until the earlier of her commencement of other employment or June
30, 2003. The Company has agreed to pay Ms. Sleeper $8,750 per month and
satisfy the premiums to permit her to continue health insurance coverage
available under The Consolidated Omnibus Budget Reconciliation Act of 1986
(COBRA) during the period she provides such consulting services.
RELATED PARTY TRANSACTIONS
The Chief Executive Officer and Chairman of the Board of Directors of
the Company, Mark E. Schwarz, is the managing member of Newcastle Capital
Group, L.L.C., which is the general partner of Newcastle Capital Management,
L.P., which is in turn the general partner of Newcastle Partners, L.P.
("Newcastle"). On November 1, 2002, the Company entered into a promissory
note with Newcastle pursuant to which the Company could borrow up to
$9,000,000. The promissory note provides for a fixed interest rate of
11.75%. The unpaid principal balance and accrued and unpaid interest is due
and payable on demand at any time after September 30, 2003.
On November 1, 2002, the Company borrowed $6,500,000 from Newcastle to
purchase from a major bank all of the right, title and interest in a
promissory note (the "Millers Note") payable to the bank by Millers American
Group, Inc. ("Millers"), together with all related loan documentation and
collateral. At the time of such acquisition, the Millers Note was in
default and had an outstanding balance of approximately $15,070,000. The
Millers Note was guaranteed by Trilogy Holdings, Inc. ("Trilogy"), a wholly-
owned subsidiary of Millers, and was secured by all of the issued and
outstanding capital stock of Millers Insurance Company ("MIC"), a Texas-
based property and casualty insurance carrier, and Phoenix Indemnity
Insurance Company ("Phoenix"), an Arizona-based property and casualty
insurance carrier, each of which was a wholly-owned subsidiary of Trilogy at
the time of the acquisition. Effective January 1, 2003, the Company
acquired all of the outstanding capital stock of Phoenix in satisfaction of
$7,000,000 of the outstanding balance of the Millers Note.
On December 3, 2002, the Company borrowed an additional $2,100,000 from
Newcastle to purchase two inactive subsidiaries from Millers and to purchase
Millers General Agency, Inc. ("MGA"), an active Texas managing general
agency, from MIC.
OTHER BUSINESS
(Item 2)
The Board of Directors knows of no other business to be brought before
the Annual Meeting. If, however, any other business should properly come
before the Annual Meeting, the persons named in the accompanying proxy will
vote the proxy as they in their discretion may deem appropriate, unless they
are directed by the proxy to do otherwise.
INDEPENDENT PUBLIC ACCOUNTANTS
The Audit Committee has selected PricewaterhouseCoopers LLP ("PWC") as
independent certified public accountants to audit the consolidated financial
statements of the Company for the 2003 fiscal year. PWC also reported on the
Company's consolidated financial statements for the fiscal years ended
December 31, 2002, 2001 and 2000. Representatives of PWC are expected to be
present at the Annual Meeting, will have the opportunity to make a statement
if they so desire and are expected to be available to respond to appropriate
questions from shareholders.
The following table presents fees for professional services rendered by PWC
for the audit of the Company's consolidated financial statements for the
fiscal years ended December 31, 2002, and December 31, 2001, and fees billed
for other services rendered by PWC during those periods.
2002 2001
-------- --------
Audit Fees 1 $ 242,542 $ 198,000
Audit-Related Fees 1, 2 $ 81,000 -0-
Tax Fees 3 $ 37,000 $ 65,705
All Other Fees 4 -0- $ 3,400
1 Reflects fees for services attributable to the indicated fiscal year, a
portion of which fees were paid in the subsequent fiscal year.
2 Audit-related fees related to the preparation of required audited
financial statements for newly acquired subsidiaries.
3 Tax fees related to services in connection with federal, state and
local taxes.
4 All other fees related to services in connection with the investigation
of potential acquisitions.
SHAREHOLDER PROPOSALS FOR 2004 ANNUAL MEETING
Any shareholder desiring to submit a proposal for inclusion in the
proxy material relating to the 2004 annual meeting of shareholders must do
so in writing. The proposal must be received at the Company's principal
executive offices by December 26, 2003. In addition, with respect to any
matter proposed by a shareholder at the 2004 Annual Meeting but not included
in the Company's proxy materials, the proxy holders designated by the
Company may exercise discretionary voting authority if appropriate notice of
the shareholder proposal is not received by the Company at its principal
executive office by March 11, 2004.
By Order of the Board of Directors,
/s/ Scott K. Billings
----------------------------
Scott K. Billings, Secretary
April 25, 2003
Dallas, Texas
[FRONT]
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY
FOR THE ANNUAL MEETING OF SHAREHOLDERS OF
HALLMARK FINANCIAL SERVICES, INC.
TO BE HELD MAY 19, 2003
The undersigned hereby appoints Mark E. Schwarz, Timothy A. Bienek and
Scott K. Billings, and each of them individually, as the lawful agents and
Proxies of the undersigned, with full power of substitution, and hereby
authorizes each of them to represent and vote, as designated below, all
shares of Common Stock of Hallmark Financial Services, Inc. held of record
by the undersigned as of April 22, 2003, at the Annual Meeting of
Shareholders to be held on May 19, 2003, or at any adjournment thereof.
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote
(except as marked to the contrary) for all nominees listed below
INSTRUCTIONS: To withhold authority to vote for any nominee, mark the space
beside the nominee's name with an "X".
Mark E. Schwarz George R. Manser
Timothy A. Bienek Scott T. Berlin
James H. Graves James C. Epstein
2. In their discretion, the Proxies are authorized to vote on any other
matter which may properly come before the Annual Meeting or any
adjournment thereof.
When properly executed, this proxy will be voted in the manner directed
herein by the undersigned shareholder. IF NO DIRECTION IS SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE ELECTION OF DIRECTORS PROPOSED IN ITEM 1.
The undersigned hereby revokes all previous proxies relating to the
shares covered hereby and confirms all that said Proxies may do by virtue
hereof.
[BACK]
Please sign below exactly as your shares are held of record . When
shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate name by
President or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
Date: ___________________, 2003 Signature: _______________________________
PLEASE MARK, SIGN, DATE AND
RETURN THE PROXY CARD PROMPTLY,
USING THE ENCLOSED ENVELOPE.
Signature,
if held jointly: _________________________
PLEASE CHECK THIS BOX IF YOU INTEND TO BE PRESENT AT THE ANNUAL MEETING
OF SHAREHOLDERS. [ ]