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:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e) (2))
[ ] 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:
___________________________________________________________________________
HALLMARK FINANCIAL SERVICES, INC.
777 Main Street, Suite 1000
Fort Worth, Texas 76102
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 25, 2006
To Our Shareholders:
NOTICE IS HEREBY GIVEN that the 2006 Annual Meeting of Shareholders of
Hallmark Financial Services, Inc. (the "Company") will be held at Carter
Burgess Plaza, 777 Main Street, 11th Floor, Fort Worth, Texas, at 9:00 a.m.,
Central Daylight Time, on Thursday, May 25, 2006, for the following
purposes:
1. To elect four directors to serve until the next annual meeting of
shareholders or until their successors are duly elected and
qualified;
2. To approve an amendment to the Articles of Incorporation of the
Company to increase the authorized capital stock of the Company
from 100,000,000 shares of Common Stock to 200,000,000 shares of
Common Stock;
3. To approve permitting the conversion of an aggregate of
$25,000,000 of subordinated convertible promissory notes into
shares of the Common Stock of the Company; and
4. To transact such other business that may properly come before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on April 13, 2006, are
entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof.
All shareholders of the Company are cordially invited to attend the
Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Cecil R. Wise
------------------------
Cecil R. Wise, Secretary
Dated: April [19], 2006
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED STAMPED ENVELOPE. IF
YOU ATTEND THE MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON.
HALLMARK FINANCIAL SERVICES, INC.
777 Main Street, Suite 1000
Fort Worth, Texas 76102
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 25, 2006
_______________________
SOLICITATION AND REVOCABILITY OF PROXIES
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors (the "Board") of Hallmark Financial
Services, Inc., a Nevada corporation (the "Company"), to be voted at the
2006 Annual Meeting of Shareholders (the "Annual Meeting") to be held on
Thursday, May 25, 2006, 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 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, in favor of
amending the Articles of Incorporation to increase the authorized capital
stock of the Company, in favor of permitting the conversion of certain
subordinated convertible promissory notes, 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 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 777 Main
Street, Suite 1000, Fort Worth, Texas 76102. 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 [19], 2006. A copy of the
Company's Annual Report for the fiscal year ended December 31, 2005, 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 four directors to serve until the next annual
meeting of shareholders or until their successors are duly elected and
qualified;
2. Approval of an amendment to the Articles of Incorporation of
the Company to increase the authorized capital stock of the Company
from 100,000,000 shares of Common Stock to 200,000,000 shares of Common
Stock;
3. Approval for permitting the conversion of an aggregate of
$25,000,000 of subordinated convertible promissory notes into shares of
the Common Stock of the Company; and
4. 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 13, 2006 (the "Record Date"). On the Record Date, there were
[86,909,647] 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. Approval of the proposed increase
in the authorized capital stock of the Company will require the affirmative
vote of the holders of a majority of the issued and outstanding shares of
the Common Stock. 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. Therefore,
abstentions and broker non-votes will have the effect of a vote against the
proposed increase in the authorized capital stock of the Company, but will
have no effect on the election of directors or the approval of any other
proposal submitted to a vote of the shareholders at the Annual Meeting.
ELECTION OF DIRECTORS
(Item 1)
At the Annual Meeting, four directors will be elected for a term
expiring at the 2007 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 Board 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. The Board has determined that all
of its nominees other than Mark E. Schwarz meet the current independence
requirements of the American Stock Exchange ("AMEX").
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.
The Board recommends a vote FOR election of each nominee below.
Director
Name Age Since Current Position(s) with the Company
---- --- ----- ------------------------------------
Mark E. Schwarz 45 2001 Chief Executive Officer, Director
and Chairman of the Board
Scott T. Berlin 36 2001 Director
James H. Graves 57 1995 Director
George R. Manser 74 1995 Director
Mark E. Schwarz was elected Chief Executive Officer of the Company in
January, 2003, and also served as President from November, 2003, through
March, 2006. Since 1993, Mr. Schwarz has 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 Chairman of the boards of directors of Pizza Inn, Inc., an operator and
franchisor of pizza restaurants; Bell Industries, Inc., a company primarily
engaged in providing computer systems integration services; and New Century
Equity Holdings Corp., a firm focused on investment in alternative asset
management companies. Mr. Schwarz is also a director of Nashua Corporation,
a manufacturer of specialty papers, labels and printing supplies; SL
Industries, Inc., a developer of power systems used in a variety of
aerospace, computer, datacom, industrial, medical, telecom, transportation
and utility equipment applications; Vesta Insurance Group, Inc., a property
and casualty insurance holding company unrelated to the Company; and
WebFinancial Corporation, a banking and specialty finance company.
Scott T. Berlin is a Managing Director and principal of Brown, Gibbons,
Lang & Company, an investment banking firm serving middle market companies.
His professional activities are focused on the corporate finance and
mergers/acquisitions practice. 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 H. Graves is a Partner of Erwin, Graves & Associates, LP, a
management consulting firm founded in 2002. He is also Chief Operating
Officer and Vice Chairman of the board of directors of Detwiler, Mitchell &
Company, a securities brokerage and investment banking firm. Previously,
Mr. Graves 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.
George R. Manser is Chairman of Concorde Holding Co. and CAH, Inc. LLC,
each a private investment management company. From 1991 to 2003, Mr. Manser
served as a director of State Auto Financial Corp., an insurance holding
company engaged 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; as
a director of CheckFree Corporation, a provider of financial electronic
commerce services, software and related products; and as 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 various of its insurance
subsidiaries.
APPROVAL OF
INCREASE IN AUTHORIZED CAPITAL
(Item 2)
On [__________], 2006, the Board adopted a resolution proposing
amendment of the Articles of Incorporation of the Company to increase the
authorized capital of the Company from 100,000,000 shares of common stock,
$0.03 par value per share, to 200,000,000 shares of common stock, $0.03 par
value per share. Pursuant to the Nevada law, such proposal must be approved
by the affirmative vote of the holders of a majority of the issued and
outstanding shares of the Common Stock.
As of the Record Date, [86,909,647] shares of the Common Stock of the
Company were issued and outstanding. In addition, options to purchase
[1,491,500] shares of the Common Stock were outstanding as of the Record
Date, and 4,470,000 shares of the Common Stock were reserved for issuance
under the Company's 2005 Long Term Incentive Plan (the "2005 LTIP"). As a
result, the Company only had 7,128,853 shares of Common Stock available for
future issuance as of the Record Date.
The Board believes that increasing the number of authorized shares of
the Common Stock will benefit the Company by providing the flexibility to
issue shares for a variety of future business and financial purposes
including, without limitation, additional capitalization and acquisitions.
If the shareholders also approve the proposal to permit conversion of
certain subordinated convertible promissory notes into shares of the Common
Stock, a portion of the additional authorized shares will be necessary for
issuance upon such conversion. (See, Item 3 - Approval of Convertibility of
Convertible Notes.) In addition, the Board presently contemplates issuing
additional shares of the Common Stock in connection with a rights offering
to shareholders during 2006. The Company has no other current plans to
issue additional shares of the Common Stock.
Amending the Articles of Incorporation to increase the number of
authorized shares of the Common Stock will not alter the number of shares
presently issued or change the relative rights of holders of the issued and
outstanding Common Stock. If the amendment is approved by shareholders, the
additional shares of Common Stock will be identical in all respects to the
presently authorized shares of Common Stock. Holders of Common Stock have
no preemptive right to purchase or subscribe for any newly issued shares of
the Common Stock. Therefore, the authorization and subsequent issuance of
additional shares of Common Stock may, among other things, have a dilutive
effect on the voting power, earnings per share and equity of existing
holders of Common Stock. However, the actual effect on the present holders
of Common Stock cannot be ascertained until additional shares of the Common
Stock are issued in the future.
The Board recommends a vote FOR approval of the proposal to amend the
Articles of Incorporation to increase the number of authorized shares of the
Common Stock.
APPROVAL OF
CONVERTIBILITY OF CONVERTIBLE NOTES
(Item 3)
On January 27, 2006, the Company issued an aggregate of $25,000,000 in
subordinated convertible promissory notes ("Convertible Notes") to Newcastle
Special Opportunity Fund I, L.P. and Newcastle Special Opportunity Fund II,
L.P., which are investment partnerships managed by Newcastle Capital
Management, L.P., an entity controlled by Mark E. Schwarz, the Company's
Chairman and Chief Executive Officer. The proceeds from the issuance of the
Convertible Notes were used to establish a trust account securing payment of
future installments of purchase price and restrictive covenant consideration
payable in connection with the Company's recent acquisition of Texas General
Agency, Inc. and affiliated entities.
Conversion of the Convertible Notes is conditioned on the Company's
shareholders approving the issuance of shares of the Common Stock upon such
conversion. The purchase agreements pursuant to which the Convertible Notes
were issued obligated the Company to hold its annual meeting of shareholders
on or before May 31, 2006, and to solicit shareholder approval of both (i)
the issuance of shares of the Company's Common Stock upon conversion of the
Convertible Notes, and (ii) at least a 20,000,000 share increase in the
authorized shares of the Common Stock of the Company in order to accommodate
full conversion of the Convertible Notes. (See, Item 2 - Approval of
Increase in Authorized Capital.)
Subject to shareholder approval, the principal and accrued but unpaid
interest of each Convertible Note is convertible into shares of the Common
Stock of the Company at any time prior to maturity at the election of the
holder and, to the extent not previously converted, will be automatically
converted to shares of the Common Stock at the maturity date. The initial
conversion price of the Convertible Notes is $1.28 per share of the Common
Stock. In the event that, on or before October 27, 2006, the Company
completes an offering of rights to purchase shares of its Common Stock at a
price per share less than the initial conversion price of the Convertible
Notes, then the conversion price of the Convertible Notes will be reduced to
an amount equal to the rights offering price. The conversion price will
also be adjusted proportionally for any stock dividend or split, stock
combination or other similar recapitalization, reclassification or
reorganization affecting the Common Stock of the Company.
At the initial conversion price, and subject to shareholder approval,
the aggregate principal of the Convertible Notes is convertible into
19,531,250 shares of the Common Stock of the Company. If issued as of the
Record Date, such additional shares would have represented 18.3% of the
issued and outstanding Common Stock and would have increased the beneficial
ownership of Mark E. Schwarz and his affiliates from 78.1% of the Common
Stock of the Company to 82.1% of the Common Stock of the Company.
The Convertible Notes bear interest at the rate of 4% per annum, which
rate increases to 10% per annum in the event of default. Interest on each
Convertible Note is payable in arrears each calendar quarter commencing
March 31, 2006. Principal and all accrued but unpaid interest is due at the
maturity of each Convertible Note on July 27, 2007. The Company does not
have the right to prepay the Convertible Notes. In the event of a change in
control of the Company at any time prior to shareholder approval of the
convertibility of the Convertible Notes, the holders may require the Company
to redeem all or a portion of the Convertible Notes at a price equal to 110%
of the principal amount being redeemed, plus accrued but unpaid interest on
such principal amount. Each Convertible Note is subordinate in right of
payment to all existing and future secured indebtedness of the Company.
Subject to certain limitations, the holders of the Convertible Notes
have the right at any time to require that the Company effect one
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of the resale of all or any portion of the shares of the Common Stock
of the Company issuable upon conversion of the Convertible Notes. If the
Company at any time proposes to register any of its securities under the
Securities Act, then the holders of the Convertible Notes will have the
right to require that all or any portion of the shares of the Common Stock
issuable upon conversion of the Convertible Notes be included in such
registration, subject to certain limitations. In addition, subject to
certain limitations, on or before January 27, 2009, the Company is obligated
to file and maintain in effect for up to two years a registration statement
under the Securities Act covering the resale of all shares of the Common
Stock issuable upon conversion of the Convertible Notes which have not
previously been resold pursuant to an effective registration statement or
Rule 144 promulgated under the Securities Act.
The Board recommends a vote FOR approval of the proposal to permit the
conversion of the Convertible Notes.
OTHER BUSINESS
(Item 4)
The Board 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.
BOARD OF DIRECTORS
Board Committees
Standing committees of the Board of the Company include the Audit
Committee, the Compensation Committee and the Stock Option Committee. All
directors presently serve on both the Compensation Committee and the Stock
Option Committee. All directors except Mark E. Schwarz presently serve on
the Audit Committee.
George R. Manser currently serves as chairman of the Audit Committee.
The Board has determined that all members of the Audit Committee satisfy the
current independence and experience requirements of the AMEX and the
Securities and Exchange Commission ("SEC"). The Board has also determined
that Mr. Manser satisfies the requirements for an "audit committee financial
expert" under applicable rules of the SEC and has designated Mr. Manser as
its "audit committee financial expert." The Audit Committee oversees the
conduct of the financial reporting processes of the Company, including (i)
reviewing with management and the outside auditors the audited financial
statements included in the Company's Annual Report, (ii) the Committee
chairman reviewing with the outside auditors the interim financial results
included in the Company's quarterly reports filed with the SEC, (iii)
discussing with management and the outside auditors the quality and adequacy
of internal controls, and (iv) reviewing the independence of the outside
auditors. (See, Audit Committee Report.) The Audit Committee held eight
meetings during 2005.
James H. Graves currently serves as chairman of the Compensation
Committee and the Stock Option Committee. Because the Company is a
"controlled company," AMEX rules do not require that members of the
Compensation Committee be independent. The Compensation Committee reviews
and approves compensation of the directors, executive officers and senior
management of the Company. (See, Compensation Committee Report.) The
Compensation Committee also administers the 2005 LTIP. The Stock Option
Committee administers the Company's 1994 Key Employee Long Term Incentive
Plan and 1994 Non-Employee Director Stock Option Plan, both of which expired
during 2004 but have unexpired options outstanding. The Compensation
Committee and Stock Option Committee met twice during 2005.
Attendance at Meetings
The Board held six meetings during 2005. Various matters were also
approved by the unanimous written consent of the 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 and (ii) the total number of
meetings held by all committees of the Board on which such director served.
The Company has no formal policy with respect to the attendance of Board
members at the annual meeting of shareholders, but encourages all incumbent
directors and director nominees to attend each annual meeting of
shareholders. All of the incumbent directors and director nominees attended
the Company's last annual meeting of shareholders held on May 26, 2005.
Director Compensation
During 2005, each non-employee director received a fee of $1,500 for
each Board meeting attended in person and a fee of $750 for each committee
meeting attended in person. No other compensation was paid to any non-
employee director during 2005. Commencing in 2006, each non-employee
director will receive a $12,000 annual retainer plus a fee of $1,500 for
each Board meeting attended in person or telephonically and a fee of $750
for each committee meeting attended in person or telephonically. Also
commencing in 2006, the chairman of the Audit Committee will receive an
additional $5,000 annual retainer.
Nomination of Directors
Because the Company is a "controlled company," AMEX rules do not
require that the Company have a nominating committee. The Board has
determined that such a committee is not necessary to identify, evaluate and
attract qualified nominees. Therefore, the full Board acts in place of a
nominating committee to investigate qualified nominees for election to the
Board when vacancies occur. The Board has not adopted any charter or formal
procedures with respect to its consideration of director nominees.
The Board strives to identify and attract director nominees with a
variety of experience who have the business background and personal
integrity to represent the interests of all shareholders. Although the
Board has not established any specific minimum qualifications that must be
met by a director nominee, factors considered in evaluating potential
candidates include educational achievement, managerial experience, business
acumen, financial sophistication, insurance industry expertise and strategic
planning and policy-making skills. Depending upon the current needs of the
Board, some factors may be weighed more or less heavily than others in the
Board's deliberations. The Board evaluates the suitability of a potential
director nominee on the basis of written information concerning the
candidate, discussions with persons familiar with the background and
character of the candidate and personal interviews with the candidate.
The Board will consider candidates for nomination to the Board from any
reasonable source, including shareholder recommendations. The Board does
not evaluate candidates differently based on the source of the proposal.
The Board has not, and has no present intention to, use consultants or
search firms to assist in the process of identifying and evaluating
candidates.
Shareholders may recommend director candidates for consideration by the
Board by writing to the Chairman of the Board at the Company's headquarters
in Fort Worth, Texas, giving the candidate's name, contact information,
biographical data and qualifications. A written statement from the
candidate consenting to be named as a candidate and, if nominated and
elected, to serve as a director should accompany any such recommendation.
The Board has not implemented any formal procedures for consideration of
director nominees submitted by shareholders of the Company. The Board of
Director has not received any recommendations for director nominees from any
person or group beneficially owning more than 5% of the Common Stock of the
Company.
Shareholder Communications
The Board believes that, in light of the accessibility of its directors
to informal communications, a formal process for shareholders to communicate
with directors is unnecessary. Any shareholder communication sent to the
Board, either generally or in care of the Chairman of the Board, will be
forwarded to members of the Board without screening. Any shareholder
communication to the Board should be addressed in care of the Chairman of
the Board and transmitted to the Company's headquarters in Fort Worth,
Texas. In order to assure proper handling, the transmittal envelope should
include a notation indicating "Board Communication" or "Director
Communication." All such correspondence should identify the author as a
shareholder and clearly state whether the intended recipients are all
members of the Board or only specified directors. The Chairman will
circulate all such correspondence to the appropriate directors.
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 45 Chief Executive Officer, Director and Chairman
Mark J. Morrison 46 President, Chief Operating Officer and Chief
Financial Officer
Kevin T. Kasitz 43 Executive Vice President and President of
Commercial Insurance Operation
Brookland F. Davis 42 President of Personal Insurance Operation
Jeffrey R. Passmore 38 Senior Vice President and Chief Accounting Officer
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 is provided under Election of
Directors.
Mark J. Morrison was named President of the Company effective April 1,
2006. He joined the Company in March, 2004, as Executive Vice President and
Chief Financial Officer and was appointed to the additional position of
Chief Operating Officer in April, 2005. Mr. Morrison has been employed in
the property and casualty insurance industry since 1993. Prior to joining
the Company, he had since 2001 served as President of Associates Insurance
Group, a subsidiary of St. Paul Travelers. From 1996 through 2000, he
served as Senior Vice President and Chief Financial Officer of Associates
Insurance Group, the insurance division of Associates First Capital
Corporation. From 1995 to 1996, Mr. Morrison served as Controller of
American Eagle Insurance Group, and from 1993 to 1995 was Director of
Corporate Accounting for Republic Insurance Group. From 1991 to 1993, he
served as Director of Strategic Planning and Analysis at Anthem, Inc. Mr.
Morrison began his career as a public accountant with Ernst & Young, LLP
from 1982 to 1991, where he completed his tenure as a Senior Manager. Mr.
Morrison presently serves as a director of Vesta Insurance Group, Inc., a
property and casualty insurance holding company unrelated to the Company.
Kevin T. Kasitz was named Executive Vice President of the Company
effective April 1, 2006. He has served as the President of the Commercial
Insurance Operation, a functional segment of the Company handling commercial
insurance products and services, since April, 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.
Brookland F. Davis has, since January, 2003, served as the President of
the Personal Insurance Operation, a functional segment of the Company
handling non-standard personal automobile insurance products and services.
Since 2001, Mr. Davis had previously 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.
Jeffrey R. Passmore has served as Senior Vice President and Chief
Accounting Officer of the Company since June, 2003, and previously served as
Vice President of Business Development for the Company. Prior to joining
the Company in November, 2002, Mr. Passmore had since 2000 served as Vice
President and Controller of Benfield Blanch, Inc. and its predecessor E.W.
Blanch Holdings, Inc., a reinsurance intermediary. From 1998 to 1999, he
served E.W. Blanch Holdings, Inc. as Assistant Vice President of Financial
Reporting. From 1994 to 1998, he was a senior financial analyst with TIG
Holdings, Inc., a property and casualty insurance holding company. Mr.
Passmore began his career as an accountant for Gulf Insurance Group from
1990 to 1993. Mr. Passmore is a certified public accountant licensed in
Texas.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning compensation of
the Chief Executive Officer and all other executive officers of the Company
for the last three fiscal years or such shorter period as they have served
as an executive officer:
Long Term
Annual Compensation Compensation
-------------------------------------------------- ------------
Other Annual Securities All Other
Name and Year Ended Compensation Underlying Compensation
Principal Position December 31 Salary ($) Bonus ($) 1 ($) 2 Options (#) ($) 3
------------------- ----------- ---------- ----------- ----- ----------- -----
Mark E. Schwarz 2005 150,000 -0- 1,845 -0- 4,500
Chief Executive Officer 2004 150,000 -0- 2,223 -0- 1,289
2003 150,000 -0- -0- -0- -0-
Mark J. Morrison 2005 214,792 150,000 1,660 100,000 2,000
Chief Operating Officer; 2004 148,346 150,000 2,994 100,000 -0-
Chief Financial Officer
Kevin T. Kasitz 2005 160,160 150,000 2,564 100,000 4,805
President of subsidiaries 2004 160,160 150,000 4,635 100,000 1,890
2003 115,500 40,000 7,493 25,000 -0-
Brookland F. Davis 2005 156,000 150,000 3,869 100,000 4,680
President of subsidiaries 2004 156,000 150,000 7,014 100,000 1,862
2003 142,500 40,000 12,927 25,000 -0-
Jeffrey R. Passmore 2005 123,542 40,000 1,282 50,000 3,460
Chief Accounting Officer 2004 115,333 34,320 -0- 25,000 1,219
--------------------------
1 Bonuses are reflected in the calendar year earned. Bonuses for Messrs.
Morrison, Kasitz and Davis for 2005 and 2004 were payable 75% in the
following calendar year and the remaining 25% in two equal annual
installments, without interest, due on the first and second anniversaries
of the initial payment. All other bonuses were paid in the calendar year
following the year earned.
2 Represents employee portion of medical coverage paid by the Company.
3 Represents the Company's matching contributions to employee 401(k)
accounts.
Option Grants in Last Fiscal Year
The following table shows all individual grants of stock options to
executive officers of the Company during the fiscal year ended December 31,
2005.
% of Total
Securities Options Grant
Underlying Granted to Exercise Date
Options Employees in Price Expiration Present
Granted 1 Fiscal Year ($/Sh) Date 2 Value 3
--------- ----------- -------- ---------- -------
Mark E. Schwarz -0- -0- - - -
Mark J. Morrison 100,000 18.9 1.19 05/26/2010 $67,000
Brookland F. Davis 100,000 18.9 1.19 05/26/2010 $67,000
Kevin T. Kasitz 100,000 18.9 1.19 05/26/2010 $67,000
Jeffrey R. Passmore 50,000 9.4 1.19 05/26/2010 $33,500
-------------------
1 Options are to purchase shares of the Company's Common Stock. Options
vest on the first four anniversaries of the date of grant as to 10%,
20%, 30% and 40% of the shares, respectively, subject to acceleration
of vesting upon death, disability, retirement or change in control of
the Company.
2 All options are subject to earlier termination due to death, disability
or termination of employment.
3 The present value of each option is estimated as of the grant date
using the Black-Scholes option-pricing model assuming a five year
expected term, no dividend yield and a weighted-average 62.5% expected
volatility and 3.88% risk-free interest rate.
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table provides information regarding stock options
exercised by the executive officers during fiscal 2005 and unexercised
options held by the executive officers as of December 31, 2005.
Securities Underlying Value of Unexercised
Shares Unexercised Options (#) In-the-Money Options ($) 1
Acquired on Value -------------------------- --------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Mark E. Schwarz 150,000 115,000 -0- 25,000 -0- 16,813
Mark J. Morrison 10,000 6,700 -0- 190,000 -0- 80,900
Brookland F. Davis 15,000 9,050 -0- 195,000 -0- 91,650
Kevin T. Kasitz -0- -0- 15,000 195,000 11,450 91,650
Jeffrey R. Passmore 2,500 1,950 8,000 74,500 5,680 27,695
-------------------
1 Values stated are pre-tax and are based upon the closing price of $1.36
per share of the Common Stock on AMEX on December 30, 2005, the last
trading day of the year.
Equity Compensation Plan Information
The following table sets forth information regarding shares of the
Common Stock authorized for issuance under the Company's equity compensation
plans as of December 31, 2005:
(a) Number of (b) Weighted- (c) Number of securities
securities to average remaining available
be issued upon exercise price for future issuance
exercise of of outstanding under equity
outstanding options, compensation plans
options, warrants (excluding securities
warrants and and reflected in
rights rights column (a))
------------ -------- -------------
Equity compensation
plans approved by
security holders 1 1,416,500 $0.85 4,470,000
Equity compensation
plans not approved
by security holders 2 100,000 $0.38 -0-
--------- ----------
TOTAL 1,516,500 $0.82 4,470,000
-------------------
1 Includes shares of the Common Stock authorized for issuance under the
2005 LTIP, as well as shares of the Common Stock issuable upon exercise
of options outstanding under the 1994 Key Employee Long Term Incentive
Plan and the 1994 Non-Employee Director Stock Option Plan, both of
which terminated in accordance with their terms in 2004.
2 Represents shares of the Common Stock issuable upon exercise of non-
qualified stock options granted to the non-employee directors of the
Company in lieu of cash compensation for their service on the Board
during fiscal 1999. The options became fully exercisable on August 16,
2000, and terminate on March 15, 2010, to the extent not previously
exercised.
COMPENSATION COMMITTEE REPORT
Committee Organization and Duties
The Compensation Committee of the Board is presently comprised of James
H. Graves (chairman), Scott T. Berlin, George R. Manser and Mark E. Schwarz.
The Compensation Committee reviews, evaluates and recommends to the Board
compensation policies of the Company with respect to directors and senior
management, including the Chief Executive Officer and other executive
officers. The Compensation Committee also administers the Company's 2005
Long Term Incentive Plan. The members of the Compensation Committee also
serve as a Stock Option Committee to administer the Company's 1994 Key
Employee Long Term Incentive Plan and 1994 Non-Employee Director Stock
Option Plan, both of which expired during 2004 but have unexercised options
outstanding. The Compensation Committee met twice during 2005.
Compensation Objectives and Components
The Compensation Committee strives to ensure that the compensation
policies of the Company reinforce the Company's annual and long-term
performance objectives, reward and encourage quality performance, and assist
the Company in attracting, retaining and motivating directors, executive
officers and other senior management with exceptional leadership abilities.
Consistent with these objectives, the Compensation Committee has
established an executive compensation program consisting primarily of base
salary, annual bonus and stock options.
Base Salary. Base salaries of the Company's executive officers are
determined based on factors including scope of responsibilities, level of
experience, contributions to the achievement of business objectives,
leadership skills and overall management effectiveness. Base salaries are
generally intended to be competitive with those offered in the markets in
which the Company competes for executive talent. The overall assessment is
primarily subjective, reflecting the level of responsibility and personal
performance of the individual executive.
Annual Bonus. The Compensation Committee approved discretionary annual
bonuses for the executive officers (other than the Chief Executive Officer)
and certain other senior management of the Company for fiscal 2005 based on
an evaluation of the Company's financial performance and the job performance
of each executive officer, including characteristics of cooperation,
positive attitude and teamwork in achieving corporate goal.
Stock Options. The Compensation Committee believes that periodically
granting stock options to the executive officers and other senior management
can promote the Company's long-term performance by aligning the officers'
economic interests with shareholder value. Stock option grants are based on
various subjective factors primarily relating to the responsibilities of the
officer and his past and expected future contributions to the growth and
profitability of the Company. During 2005, each of the executive officers
(other than the Chief Executive Officer) was granted stock options under the
2005 LTIP which will vest on the first four anniversaries of the date of
grant as to 10%, 20%, 30% and 40% of the shares, respectively, and will
expire on the fifth anniversary of the date of grant.
Compensation of the Chief Executive Officer
The Company's Chief Executive Officer, Mark E. Schwarz, indirectly
controls Newcastle Partners, L.P., a private investment firm which is
the largest shareholder of the Company. Although Mr. Schwarz devotes
substantial time and attention to his duties as Chief Executive Officer, he
is not a full-time employee of the Company. The Compensation Committee
established a base salary for the Chief Executive Officer of $150,000 for
2005, which was unchanged from his base salary for 2004. Mr. Schwarz
declined to participate in either the annual bonuses or stock option grants
provided to the other executive officers. Based on his overall leadership
of the management team, his management of the Company's investment
portfolio, his significant efforts in expanding the Company through
strategic acquisitions, and the Company's improved operating results during
his tenure, the Compensation Committee believes that the total compensation
provided to the Chief Executive Officer during 2005 was significantly less
than was merited by his contributions to the success of the Company.
Deductibility of Compensation
IRC Section 162(m) generally imposes a $1 million per person annual
limit on the amount the Company may deduct as compensation expense for its
executive officers. The Compensation Committee has not established any
policy precluding the payment of compensation in excess of the amount
deductible under IRC Section 162(m). However, the Compensation Committee
does not presently anticipate that the compensation to any of the executive
officers for 2006 will exceed this limit on deductibility.
Conclusion
The Compensation Committee believes that the Company's executive
compensation program provides a competitive and motivational compensation
package to the Company's executive officers necessary to achieve the
Company's financial objectives and enhance stockholder value.
Respectfully submitted by the
Compensation Committee:
James H. Graves (chairman)
Scott T. Berlin
George R. Manser
Mark E. Schwarz
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Graves, Berlin and Schwarz comprised the Compensation Committee
during fiscal 2005. Mr. Schwarz has served as Chief Executive Officer of
the Company since January, 2003. Mr. Schwarz also indirectly controls the
investment partnerships which purchased Convertible Notes from the Company
in January, 2006. (See, Item 3 - Approval of Convertibility of Convertible
Notes.) During fiscal 2005, no executive officer of the Company served on
the board of directors or compensation committee of any other entity any of
whose executive officers served on the Board or Compensation Committee of
the Company.
PERFORMANCE GRAPH
The line graph below compares the cumulative total stockholder return
on the Common Stock from January 1, 2001, through December 31, 2005, with
the return on the Amex Market Value (U.S.) Index and the S&P Property &
Casualty Insurance Index for the same period. In accordance with SEC rules,
the measurement assumes a $100 initial investment in the Common Stock with
all dividends reinvested, and a $100 initial investment in the indices.
[ PERFORMANCE GRAPH APPEARS HERE ]
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN *
AMONG HALLMARK FINANCIAL SERVICES, INC., THE AMEX MARKET VALUE (U.S.) INDEX
AND THE S & P PROPERTY & CASUALTY INSURANCE INDEX
12/00 12/01 12/02 12/03 12/04 12/05
----- ----- ----- ----- ----- -----
HALLMARK FINANCIAL
SERVICES, INC. 100.00 62.55 101.82 114.91 174.55 221.05
AMEX MARKET VALUE (U.S.) 100.00 88.73 75.76 108.19 128.37 142.31
S & P PROPERTY &
CASUALTY INSURANCE 100.00 91.98 81.85 103.46 114.24 131.51
* $100 invested on 12/31/00 in stock or index-including reinvestment of
dividends. Fiscal year ending December 31.
CODE OF ETHICS
The Board has adopted a Code of Ethics applicable to all of the
Company's employees, officers and directors. The Code of Ethics covers
compliance with law; fair and honest dealings with the Company, its
competitors and others; full, fair and accurate disclosure to the public;
and procedures for compliance with the Code of Ethics. This Code of Ethics
is posted on the Company's website at www.hallmarkgrp.com.
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 in ownership of the Common Stock with the SEC. 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, 2005, except that Brookland F. Davis was late filing one Form 4
reporting the exercise of employee stock options.
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 67,825,787 78.1
Mark J. Morrison 2 132,220 *
Brookland F. Davis 3 407,489 *
Kevin T. Kasitz 4 95,555 *
Jeffrey R. Passmore 5 25,925 *
Scott T. Berlin 6 147,500 *
James H. Graves 7 736,024 *
George R. Manser 8 337,481 *
All executive officers and current
directors, as a group (8 persons) 9 69,707,981 79.9
Newcastle Partners, L.P. 10 67,520,362 77.7
-------------------
* Represents less than 1%.
1 Includes 12,500 shares which may be acquired by Mr. Schwarz pursuant to
stock options exercisable on or within 60 days after the Record Date
and 67,520,362 shares owned by Newcastle Partners, L.P., a limited
partnership indirectly controlled by Mr. Schwarz. (See Note 9, below.)
Does not include shares which, subject to shareholder approval, will
become issuable to Newcastle Special Opportunity Fund I, L.P. and
Newcastle Special Opportunity Fund II, L.P., each a limited partnership
indirectly controlled by Mr. Schwarz, upon conversion of the
Convertible Notes. (See, Item 3 - Approval of Convertibility of
Convertible Notes.)
2 Includes 30,000 shares which may be acquired pursuant to stock options
exercisable on or within 60 days after the Record Date.
3 Includes 10,000 shares which may be acquired pursuant to stock options
exercisable on or within 60 days after the Record Date.
4 Includes 50,000 shares which may be acquired pursuant to stock options
exercisable on or within 60 days after the Record Date.
5 Includes 20,000 shares which may be acquired pursuant to stock options
exercisable on or within 60 days after the Record Date.
6 Includes 87,500 shares which may be acquired pursuant to stock options
exercisable on or within 60 days after the Record Date.
7 Includes 50,000 shares which may be acquired pursuant to stock options
exercisable on or within 60 days after the Record Date and 437,442
shares owned by a limited partnership indirectly controlled by Mr.
Graves.
8 Includes 50,000 shares which may be acquired pursuant to stock options
exercisable on or within 60 days after the Record Date and 30,575
shares held by Mr. Manser's spouse, over which shares Mr. Manser shares
voting and dispositive power.
9 Includes 310,000 shares which may be acquired pursuant to stock options
exercisable on or within 60 days after the Record Date.
10 Mark E. Schwarz is the managing member of Newcastle Capital Group LLC,
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.
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
SEC and AMEX. A copy of the Amended and Restated Audit Committee Charter is
posted on the Company's website at www.hallmarkgrp.com.
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-K filed with the SEC for the year ended
December 31, 2005.
Respectfully submitted by the Audit Committee:
George R. Manser (chairman)
Scott T. Berlin
James H. Graves
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
The Audit Committee has selected KPMG LLP ("KPMG") as the independent
registered public accounting firm to audit the consolidated financial
statements of the Company for the 2006 fiscal year. KPMG also reported on
the Company's consolidated financial statements for the fiscal years ended
December 31, 2005 and 2004. Representatives of KPMG 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
KPMG for the audit of the Company's consolidated financial statements for
the fiscal years ended December 31, 2005, and December 31, 2004, and fees
billed for other services rendered by the independent accountants during
those periods.
Fiscal 2005 Fiscal 2004
----------- -----------
Audit Fees 1 $389,044 $363,846
Audit-Related Fees 2 $8,000 -0-
Tax Fees -0- -0-
All Other Fees -0- -0-
-------------------
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 pertained to services in connection with the
Company's shareholder rights offering.
The current policy of the Audit Committee is to review and approve all
proposed audit and non-audit services prior to the engagement of independent
accountants to perform such services. Therefore, the Audit Committee does
not presently have any pre-approval policy or procedures. Review and
approval of such services generally occur at the Audit Committee's regularly
scheduled quarterly meetings. In situations where it is impractical to wait
until the next regularly scheduled quarterly meeting, the Audit Committee
has delegated to its chairman the authority to approve audit and non-audit
services up to a pre-determined level set by the Audit Committee. Any audit
or non-audit services approved pursuant to such delegation of authority must
be reported to the full Audit Committee at its next regularly scheduled
meeting. During fiscal 2005 and 2004, all audit and non-audit services
performed by the Company's independent accountants were approved in advance
by the Audit Committee.
SHAREHOLDER PROPOSALS FOR 2007 ANNUAL MEETING
Any shareholder desiring to submit a proposal for inclusion in the
proxy material relating to the 2007 annual meeting of shareholders must do
so in writing. The proposal must be received at the Company's principal
executive offices by December [20], 2006. In addition, with respect to any
matter proposed by a shareholder at the 2007 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 [5], 2007.
By Order of the Board of Directors,
/s/ Cecil R. Wise
------------------------
Cecil R. Wise, Secretary
April [19], 2006
Fort Worth, Texas
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 25, 2006
The undersigned hereby appoints Mark E. Schwarz, Mark J. Morrison,
Brookland F. Davis and Kevin T. Kasitz, 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 13, 2006, at the Annual
Meeting of Shareholders to be held on May 25, 2006, or at any adjournment
thereof.
ITEM 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 _____ James H. Graves _____
Scott T. Berlin _____ George R. Manser _____
ITEM 2. APPROVAL OF INCREASE IN AUTHORIZED CAPITAL
[ ] FOR [ ] AGAINST [ ] ABSTAIN
ITEM 3. APPROVAL OF CONVERTIBILITY OF CONVERTIBLE NOTES
[ ] FOR [ ] AGAINST [ ] ABSTAIN
ITEM 4. OTHER BUSINESS. 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
by the shareholder. If no direction is specified, this proxy will be voted
FOR the election of all nominees proposed in Item 1, FOR approval of an
increase in authorized capital as proposed in Item 2, and FOR approval of
the convertibility of convertible notes as proposed in Item 3.
The undersigned hereby revokes all previous proxies relating to the
shares covered hereby and confirms all that said Proxies may do by virtue
hereof.
Instructions. 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: ___________________, 2006 __________________________________________
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. [ ]