As filed with the Securities and Exchange Commission on April 11, 2005
Registration No. 333-________
============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
_________________________
HALLMARK FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0447375
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
777 Main Street
Suite 1000
Fort Worth, Texas 76102
(817) 348-1600
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
____________________________
Mark E. Schwarz
Chairman and CEO
Hallmark Financial Services, Inc.
777 Main Street
Suite 1000
Fort Worth, Texas 76102
(817) 348-1600
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
____________________________
Copies to:
Steven D. Davidson
McGuire, Craddock & Strother, P.C.
3550 Lincoln Plaza
500 N. Akard
Dallas, Texas 75201
(214) 954-6800
______________________________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration
statement.
_________________________
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, please check the following
box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
============================================================================
Proposed Maximum
Aggregate Offering Amount Of
Title of Shares to be Registered Price(1) Registration Fee
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Common Stock, par value $.03 per
share, issuable upon exercise of
nontransferable rights $45,000,000(2) $5,296.50
============================================================================
(1) Estimated solely for the purpose of calculating the registration fee
in accordance with Rule 457(o) under the Securities Act of 1933, as
amended.
(2) Represents the gross proceeds from the assumed exercise of all
nontransferable rights issued.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that
this registration statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933, as amended, or until
the registration statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL __, 2005
PROSPECTUS
Hallmark Financial Services, Inc.
50,000,000 Shares of Common Stock
Our Board of Directors has declared a dividend of rights to purchase
our common stock to holders of record as of April 20, 2005. Through this
prospectus, we are offering the shares of common stock that rights holders
may purchase upon exercising such subscription rights.
You received one right for each share of common stock you owned on the
record date of April 20, 2005. Each right will entitle you to purchase 1.37
shares of our common stock at a subscription price of $0.90 per share.
The rights are currently exercisable and will expire if they are not
exercised by 5:00 p.m., Dallas, Texas time, on ________, 2005. We may
extend the period for exercising the rights in our sole discretion. If you
want to exercise your rights, you must submit your subscription documents to
us before the expiration date. Rights that are not exercised by the
expiration date will expire and will have no value.
The proceeds from the exercise of rights will be used for working
capital and general corporate purposes.
Shares of our common stock are traded on the American Stock Exchange
Emerging Company Marketplace under the symbol "HAF.EC." On ________, 2005,
the last reported sales price for our common stock was $_____ per share.
AN INVESTMENT IN OUR COMMON STOCK IS VERY RISKY. YOU SHOULD CAREFULLY
CONSIDER THE RISK FACTORS BEGINNING ON PAGE 5 OF THIS PROSPECTUS BEFORE
EXERCISING YOUR SUBSCRIPTION RIGHTS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
_______________________
The date of this prospectus ________, 2005.
TABLE OF CONTENTS
Page
----
Questions and Answers about this Offering...............
Risk Factors............................................
Our Company.............................................
Strategic Initiatives...................................
Use of Proceeds and Capitalization......................
Price Range of Common Stock.............................
The Offering............................................
Material United States Federal Income Tax Consequences..
Plan of Distribution....................................
Legal Matters...........................................
Experts.................................................
Material Changes........................................
Where You Can Find More Information.....................
Forward-Looking Statements..............................
You should rely only on the information in this prospectus and the
additional information described under the heading "Where You Can Find
More Information." We have not authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an
offer to sell these securities in any jurisdiction where the offer or sale
is not permitted. You should assume that the information in this prospectus
and the additional information described under the heading "Where You Can
Find More Information" were accurate on the date on the front cover of the
prospectus only. Our business, financial condition, results of operations
and prospects may have changed since that date.
QUESTIONS AND ANSWERS ABOUT THIS OFFERING
This section highlights information contained elsewhere or incorporated
by reference in this prospectus. This section does not contain all of the
important information that you should consider before exercising your
subscription rights and investing in our common stock. You should read this
entire prospectus carefully.
Q: What are we offering in this prospectus?
A: Our Board of Directors has declared a dividend of nontransferable
subscription rights to purchase shares of our common stock to each of
our stockholders of record on April 20, 2005. Through this prospectus,
we are offering the shares of common stock that holders of rights may
purchase upon exercise of their rights.
Q: Who may participate in this offering?
A: Only holders of record of our common stock as of April 20, 2005, are
entitled to participate in this offering. Any attempt to participate in
this offering by anyone that was not a holder of record of our common
stock on such date will be null and void.
Q: What is a subscription right?
A: Each subscription right is a right to purchase 1.37 shares of our common
stock and carries with it a basic subscription privilege and an over-
subscription privilege.
Q: What is the basic subscription privilege?
A: The basic subscription privilege of each right entitles you to purchase
1.37 shares of our common stock at a subscription price of $0.90 per
share. You may exercise any number of your subscription rights, or you
may choose not to exercise any subscription rights. We will not
distribute any fractional shares or pay cash in place of fractional
shares, but we will round down the aggregate number of shares you are
entitled to receive to the nearest whole number.
Q: What is the over-subscription privilege?
A: We do not expect all of our stockholders to exercise all of their
basic subscription rights. The over-subscription privilege provides
stockholders that exercise all of their basic subscription privileges
the opportunity to purchase the shares that are not purchased by other
stockholders. If you fully exercise your basic subscription privilege,
the over-subscription privilege of each right entitles you to subscribe
for additional shares of our common stock unclaimed by other holders of
rights in this offering at the same subscription price per share. If
an insufficient number of shares is available to fully satisfy all
over-subscription privilege requests, the available shares will be
distributed proportionately among rights holders who exercise their
over-subscription privilege based on the number of shares each rights
holder subscribed for under the basic subscription privilege. The
subscription agent will return any excess payments by mail without
interest or deduction promptly after the expiration of the subscription
period.
Q: How long will the subscription period last?
A: You will be able to exercise your subscription rights only during
a limited period. If you do not exercise your subscription rights
before 5:00 p.m., Dallas, Texas time, on ________, 2005, your
subscription rights will expire. We may, in our sole discretion, decide
to extend this offering until some later time. If we extend the
expiration date, we will give oral or written notice to the subscription
agent on or before such expiration date, followed by a press release no
later than 9:00 a.m., Dallas, Texas time, on the next business day after
the previously scheduled expiration date.
Q: Am I required to subscribe in this offering?
A: No.
Q: What happens if I choose not to exercise my subscription rights?
A: You will retain your current number of shares of common stock even if
you do not exercise your subscription rights. If you choose not to
exercise your subscription rights, then the percentage of our common
stock that you own may decrease. The magnitude of the reduction of your
percentage ownership will depend upon the extent to which you and the
other stockholders exercise your rights.
Q: How do I exercise my subscription rights?
A: You may exercise your subscription rights by properly completing and
signing your rights certificate and delivering it, with full payment
of the subscription price for the shares you are subscribing (including
any over-subscription privilege), to the subscription agent on or prior
to the expiration date. If you use the mail, we recommend that you
use insured, registered mail, return receipt requested. If you cannot
deliver your rights certificate to the subscription agent on time, you
may follow the guaranteed delivery procedures described under "The
Offering - Guaranteed Delivery Procedures."
Q: What should I do if I want to exercise my subscription rights but my
shares are held in the name of my broker, custodian bank or other
nominee?
A: If you hold shares of our common stock through a broker, custodian bank
or other nominee, we will ask your broker, custodian bank or other
nominee to notify you of this offering. If you wish to exercise your
subscription rights, you will need to have your broker, custodian bank
or other nominee act for you. To indicate your decision, you should
complete and return to your broker, custodian bank or other nominee the
form entitled "Beneficial Owner Election Form." You should receive this
form from your broker, custodian bank or other nominee with the other
offering materials. You should contact your broker, custodian bank or
other nominee if you believe you are entitled to participate in this
offering but you have not received this form.
Q: What should I do if I want to exercise my subscription rights and I am a
stockholder in a foreign country or in the armed services?
A: The subscription agent will mail rights certificates to you if you are a
rights holder whose address is outside the United States or if you
have an Army Post Office or a Fleet Post Office address. To exercise
your rights, you must notify the subscription agent on or prior to 5:00
p.m., Dallas, Texas time, on ________, 2005, and take all other steps
which are necessary to exercise your rights, on or prior to that time.
If you do not follow these procedures prior to the expiration date, your
rights will expire.
Q: Will I be charged a sales commission or a fee by Hallmark Financial
Services if I exercise my subscription rights?
A: No. We will not charge a brokerage commission or a fee to rights holders
for exercising their subscription rights. However, if you exercise your
subscription rights through a broker or nominee, you will be responsible
for any fees charged by your broker or nominee.
Q: What are the United States federal income tax consequences of exercising
my subscription rights as a holder of common stock?
A: A holder of common stock generally will not recognize income or loss for
federal income tax purposes in connection with the receipt or exercise
of subscription rights. We urge you to consult your own tax advisor
with respect to the particular tax consequences of this offering to you.
See "Material United States Federal Income Tax Consequences."
Q: How many shares may I purchase?
A: You will receive one nontransferable subscription right for each share
of common stock that you owned at the close of business on April 20,
2005, the record date. Each right contains the basic subscription
privilege and the over-subscription privilege. Each basic subscription
privilege entitles you to purchase 1.37 shares of our common stock for
$0.90 per share. Fractional shares will be eliminated by rounding down
the aggregate number of shares you are entitled to receive to the
nearest whole number. See "The Offering - Subscription Privileges -
Basic Subscription Privilege." The over-subscription privilege entitles
you to subscribe for additional shares of our common stock at the same
subscription price per share on a pro-rata basis to the number of shares
you purchased under your basic subscription privilege, provided you
fully exercise your basic subscription privilege. See "The Offering -
Subscription Privileges - Over-Subscription Privilege."
Q: When will I receive certificates for the shares purchased in this
offering?
A: We will issue certificates representing shares purchased in this
offering to you or to the Depository Trust Company on your behalf, as
the case may be, as soon as practicable after the expiration of the
subscription period and after all pro rata allocations and adjustments
have been completed. We will not be able to calculate the number of
shares to be issued to each exercising holder until 5:00 p.m., Dallas,
Texas time, on the third business day after the expiration date, which
is the latest time by which rights certificates may be delivered to the
subscription agent under the guaranteed delivery procedures described
under "The Offering - Guaranteed Delivery Procedures."
Q: If this offering is not completed, will my subscription payment be
refunded to me?
A: Yes. The subscription agent will hold all funds it receives in escrow
until completion of this offering. If this offering is not completed,
the subscription agent will return promptly, without interest, all
subscription payments.
Q: How was the subscription price established?
A: The subscription price was established by our board of directors and is
equal to the book value of our common stock as of December 31, 2004.
Other factors considered in setting the subscription price included
the historic and current market price of our common stock, the historic
volatility of the market price of our commmon stock, our business
prospects, our recent and anticipated operating results, general
conditions in the securities markets, our need for equity capital,
alternatives available to us for raising equity capital, the amount of
proceeds desired, the pricing of similar transactions, the liquidity of
our common stock, and the level of risk to our investors.
Q: Are there risks in exercising my subscription rights?
A: Yes. The exercise of your rights involves risks. Exercising your rights
means buying additional shares of our common stock and should be
considered as carefully as you would consider any other equity investment
in Hallmark Financial Services. Among other things, you should carefully
consider the risks described under the heading "Risk Factors," beginning
on page 5.
Q: After I exercise my subscription rights, can I change my mind and cancel
my purchase?
A: No. Once you send in your rights certificate and payment you cannot
revoke the exercise of your subscription rights, even if you later learn
information about us that you consider to be unfavorable and even if the
market price of our common stock is below the subscription price. You
should not exercise your subscription rights unless you are certain that
you wish to purchase additional shares of our common stock at the
subscription price. See "The Offering - No Revocation."
Q: May I transfer my subscription rights if I do not want to purchase any
shares?
A: No. Should you choose not to exercise your subscription rights, you
may not sell, give away or otherwise transfer your rights. However,
subscription rights will be transferable to affiliates of the recipient
and by operation of law (for example, upon death of the recipient).
Q: Why is Hallmark Financial Services engaging in this offering?
A: The purpose of this offering is to strengthen the financial condition
and underwriting capacity of our company sufficiently to enhance the
structure and broaden the scope of our operations. The $45.0 million in
new equity capital to be raised in this offering, together with $30.0
million in proceeds from new debt sought to be obtained, will be used as
working capital for our business and general corporate purposes. We
have initiated the regulatory process necessary to consolidate the
underwriting of all of our personal lines business (i.e., non-standard
automobile insurance) into one insurance subsidiary and to convert our
other personal lines insurance subsidiary to a commercial lines
insurance carrier. We believe the infusion of this additional working
capital and realignment of our insurance operations will (i) permit us
to write and retain additional personal lines business, (ii) permit us
to directly write commercial lines business presently being sold as
agent for a third party insurer, and (iii) enable both insurance
subsidiaries to achieve more favorable financial strength ratings from
A.M. Best. See "Strategic Initiatives." However, we cannot assure that
these objectives will be achieved.
Q: What is the board of directors' recommendation regarding this offering?
A: Our board of directors is not making any recommendation as to whether
you should exercise your subscription rights. You are urged to make your
decision based on your own assessment of this offering and our company.
Q: How many shares of our common stock will be outstanding after this
offering?
A: As of April 20, 2005, we had __________ shares of common stock issued
and outstanding. We expect to issue 50,000,000 shares in this offering.
After this offering, we anticipate that we will have __________ shares
of common stock outstanding.
Q: Will the new shares be initially listed on the American Stock Exchange
Emerging Company Marketplace and treated like other shares?
A: Yes. Our common stock is traded on the American Stock Exchange
Emerging Company Marketplace under the symbol "HAF.EC." We expect that
the shares of common stock issued in this offering will also be listed
on the AMEX Emerging Company Marketplace under the same symbol.
Q: Can the board of directors withdraw this offering?
A: Yes. Our board of directors may decide to withdraw this offering at any
time for any reason. If we withdraw this offering, any money received
from subscribing stockholders will be refunded promptly, without
interest. See "The Offering - Withdrawal and Amendment."
Q: What should I do if I have other questions or need assistance?
A: If you have questions or need assistance, please contact Mark J.
Morrison, our Chief Financial Officer, or Securities Transfer
Corporation, the subscription agent for this offering, at the following
addresses and telephone numbers:
Mark J. Morrison
Hallmark Financial Services, Inc.
777 Main Street, Suite 1000
Fort Worth, Texas 76102
(817) 348-1600
or
Securities Transfer Corporation
2591 Dallas Parkway, Suite 102
Frisco, Texas 75034
(469) 633-0101
For a more complete description of this offering, see "The Offering"
beginning on page 14.
RISK FACTORS
The exercise of your subscription rights for shares of our common stock
involves a high degree of risk. You should carefully consider the following
factors and other information presented or incorporated by reference in this
prospectus before deciding to invest in our common stock. If we do not
successfully address any one or more of the risks described below, there
could be a material adverse effect on our financial condition, operating
results and business. We cannot assure you that we will successfully address
these risks.
Risks Relating to Our Business:
------------------------------
Our results may fluctuate as a result of cyclical changes in the
property-casualty insurance industry.
All of our revenue is attributable to property-casualty insurance,
which as an industry is cyclical in nature and has historically been
characterized by soft markets followed by hard markets. A soft market is a
period of relatively high levels of price competition, less restrictive
underwriting standards and generally low premium rates. A hard market is a
period of capital shortages resulting in lack of insurance availability,
relatively low levels of competition, more selective underwriting of risks
and relatively high premium rates. Although the industry has recently
experienced increased premium rates and more selective underwriting of
risks, this trend has begun to moderate. Therefore, we cannot assure that
our current favorable underwriting results will continue.
Our industry is very competitive, which may unfavorably impact our
results of operations.
The property-casualty insurance industry, our sole source of revenue,
is highly competitive and, except for regulatory considerations, there are
very few barriers to entry. As of July 22, 2004, A.M. Best Company, Inc.
reported that there were 3,107 property and casualty insurance companies and
1,980 property and casualty insurance groups operating in the United States.
In the personal lines markets we compete with large national insurance
companies such as Allstate, State Farm, and Progressive, as well as a large
number of regional insurance companies and managing general agents. In the
commercial lines markets we compete with large national carriers such as
Hartford, St. Paul Travelers, Zurich and Safeco, as well as a number of
regional insurance companies and managing general agents. Our competition
includes entities which have, or are affiliated with entities that have,
greater financial and other resources than our company.
Estimating reserves is inherently uncertain and if our loss reserves are
not adequate, it will have an unfavorable impact on our results.
We maintain loss reserves to cover estimated liabilities for unpaid
losses and loss adjustment expenses for reported and unreported claims
incurred as of the end of each accounting period. Reserves represent
management's estimates of what the ultimate settlement and administration of
claims will cost. These estimates, which generally involve actuarial
projections, are based on management's assessment of facts and circumstances
then known, as well as estimates of future trends in claim severity,
frequency, judicial theories of liability, and other factors. These
variables are affected by both internal and external events, such as changes
in claim handling procedures, inflation, judicial trends and legislative
changes. Many of these items are not directly quantifiable in advance.
Additionally, there may be a significant reporting lag between the
occurrence of an event and the time it is reported to us. The inherent
uncertainties of estimating reserves are greater for certain types of
liabilities, particularly those in which the various considerations
affecting the type of claim are subject to change and in which long periods
of time may elapse before a definitive determination of liability is made.
Reserve estimates are continually refined in a regular and ongoing process
as experience develops and further claims are reported and settled.
Adjustments to reserves are reflected in the results of the periods in which
such estimates are changed. Because settling reserves is inherently
uncertain, we cannot assure that the current reserves will prove adequate.
During 2004 and 2003, loss and loss adjustment expense reserves were
decreased $1.2 million and increased $0.5 million, respectively, for prior
accident years. These adjustments represented, as compared to beginning of
year loss and loss adjustment expense reserves, a 5.6% decrease in 2004 and
a 5.5% increase in 2003.
If companies that have provided our reinsurance do not pay all of our
claims against them, we could incur losses.
Prior to April 1, 2003, we purchased reinsurance by ceding (i.e.,
transferring) part of the risk we had assumed to a reinsurance company in
exchange for part of the premium we received in connection with the risk.
Although this arrangement made the reinsurer liable to us to the extent of
the risk ceded to the reinsurer, it did not relieve us of our liability to
our policyholders. Accordingly, we bear credit risk with respect to our
reinsurers for claims arising under policies issued prior to April 1, 2003.
Since all of the policies subject to such reinsurance were for terms of one
year or less, our exposure to unpaid reinsurance claims is diminishing.
Nonetheless, we cannot assure that our reinsurers will pay all of our
remaining reinsurance claims or that they will pay such reinsurance claims
on a timely basis.
Catastrophic losses and the lack of reinsurance may adversely affect our
results of operations, liquidity and financial condition.
Property-casualty insurance companies are subject to claims arising out
of catastrophes that may have a significant effect on their results of
operations, liquidity and financial condition. Catastrophes can be caused by
various events, including hurricanes, windstorms, earthquakes, hail storms,
explosions, severe winter weather and fires and may include man-made events,
such as the September 11, 2001 terrorist attacks on the World Trade Center.
The incidence, frequency, and severity of catastrophes are inherently
unpredictable. The extent of losses from a catastrophe is a function of both
the total amount of insured exposure in the area affected by the event and
the severity of the event.
One purpose of reinsurance is to mitigate the impact of catastrophic
losses by ceding a portion of the risk to the reinsurer. Prior to April 1,
2003, we reinsured a portion of the risk under each policy underwritten by
us, and from April 1, 2003, to October 1, 2004, we only assumed a portion of
the risk for each policy produced by us and another insurer directly assumed
the balance of the risk. Effective October 1, 2004, we began retaining 100%
of the risk on all insurance policies underwritten by us. Therefore, we are
exposed to the full risk of any catastrophic or other losses incurred under
our policies issued after October 1, 2004.
Our results may be unfavorably impacted if the Commercial Lines Group
loses its general agency appointment prior to our qualification to
underwrite commercial insurance.
Our Commercial Lines Group is appointed as a general agent by Clarendon
National Insurance Company, which is our sole general agency appointment.
The general agency agreement with Clarendon began in 2001 and is continuous
until cancelled. Under the terms of the agreement, Clarendon is required to
provide at least 120 days notice prior to canceling the contract. We are
presently pursuing regulatory approval to directly underwrite commercial
insurance. If Clarendon canceled the general agency agreement prior to
approval of our license to underwrite commercial insurance, we would lose
substantial revenue unless we were able to enter into a new general agency
agreement with a different insurance company. In light of our pending
application to underwrite commercial insurance, it is unlikely that we would
be able to enter into such an agreement with another insurer on favorable
terms, if at all.
We are subject to comprehensive regulation, and our results may be
unfavorably impacted by these regulations.
We are subject to comprehensive governmental regulation and supervision.
Most insurance regulations are designed to protect the interests of
policyholders rather than the stockholders and other investors of the
insurance companies. These regulations, generally administered by the
department of insurance in each state in which we do business, relate to,
among other things;
* Approval of policy forms and rates,
* Standards of solvency (including risk based capital measurements
developed by the National Association of Insurance Commissioners
and used by state insurance regulators to identify inadequately
capitalized insurance companies),
* Licensing of insurers and their agents,
* Restrictions on the nature, quality and concentration of
investments,
* Restrictions on the ability of our insurance company subsidiaries
to pay dividends,
* Restrictions on transactions between the insurance company
subsidiaries and their affiliates,
* Requiring certain methods of accounting,
* Periodic examinations of operations and finances,
* Prescribing the form and content of records of financial condition
to be filed, and
* Requiring reserves for unearned premium, losses and other purposes.
State insurance departments also conduct periodic examinations of the
affairs of insurance companies and require filing of annual and other
reports relating to the financial condition of insurance companies, holding
company issues and other matters. Our business depends on compliance with
applicable laws and regulations and our ability to maintain valid licenses
and approvals for our operations. Regulatory authorities may deny or revoke
licenses for various reasons, including violations of regulations. Changes
in the level of regulation of the insurance industry or changes in laws or
regulations themselves or interpretations by regulatory authorities, could
have a material adverse affect on our operations.
State statutes limit the aggregate amount of dividends that our
subsidiaries may pay us, thereby limiting our funds to pay expenses
and dividends.
We are a holding company and a legal entity separate and distinct from
our insurance company subsidiaries and our non-insurance company
subsidiaries. As a holding company without significant operations of our
own, our principal sources of funds are dividends and other funds from our
subsidiaries. State insurance laws limit the ability of our insurance
company subsidiaries to pay dividends and require the insurance companies to
maintain specified levels of statutory capital and surplus. These
restrictions affect the ability of the insurance company subsidiaries to pay
dividends and use their capital in other ways. Our right to participate in
any distribution of assets of the insurance company subsidiaries is subject
to prior claims of policyholders and creditors (except to the extent that
our right, if any, as a creditor is recognized). Consequently, our ability
to pay debts, expenses and cash dividends to our stockholders may be
limited.
The maximum dividend that can be paid by American Hallmark Insurance
Company of Texas without prior regulatory approval is limited to the greater
of 10% of policyholders' surplus as of the end of the preceding calendar
year or the statutory net income for the preceding calendar year. The
maximum dividend which may be paid during 2005 without prior regulatory
approval is $1.5 million.
The maximum dividend that can be paid by Phoenix Indemnity Insurance
Company without prior regulatory approval is limited to the lesser of 10% of
policyholders' surplus as of the end of the preceding calendar year or net
investment income for the preceding calendar year. The maximum dividend
which may be paid during 2005 without prior regulatory approval is $0.8
million.
As of December 31, 2004, there was $0.6 million in cash at the holding
company level. The operating cash requirements of the holding company,
including all current debt obligations of the holding company, are
anticipated to be adequately funded from dividends, management fees and
other permitted payments from our subsidiaries.
Our insurance company subsidiaries are subject to minimum capital and
surplus requirements. Failure to meet these requirements could subject
us to regulatory action.
Our insurance company subsidiaries are subject to minimum capital and
surplus requirements imposed under the laws of Texas and Arizona. Any
failure by one of the insurance company subsidiaries to meet minimum capital
and surplus requirements imposed by applicable state law will subject it to
corrective action, which may include examination and issuance of a
corrective order by the applicable state insurance department, adoption of a
comprehensive financial plan, revocation of its license to sell insurance
products or placing the subsidiary under state regulatory control. Any new
minimum capital and surplus requirements adopted in the future may require
us to increase the capital and surplus of our insurance company subsidiaries
which we may not be able to do.
As of December 31, 2004, American Hallmark Insurance Company of Texas
and Phoenix Indemnity Insurance Company had statutory capital and surplus
that exceeded the minimum policyholders' surplus required by state
regulators by 477% and 836%, respectively.
The loss of key executives could disrupt our business.
Our success will depend in part upon the continued service of certain
key executives, including Mark E. Schwarz, our Chairman, President and Chief
Executive Officer; Mark J. Morrison, our Executive Vice President and Chief
Financial Officer; Brookland F. Davis, the President of our Personal Lines
Group; Kevin T. Kasitz, the President of our Commercial Lines Group; and
Jeffrey R. Passmore, our Senior Vice President and Chief Accounting Officer.
We do not have employment agreements with any of Messrs. Schwarz, Morrison,
Davis, Kasitz or Passmore. We do not have key person insurance on the lives
of any of Messrs. Schwarz, Morrison, Davis, Kasitz or Passmore. Our success
will also depend on our ability to attract and retain additional executives
and personnel. The loss of key personnel could cause disruption in our
business.
Adverse securities market conditions can have a significant and negative
impact on our investment portfolio.
Our results of operations depend in part on the performance of our
invested assets. As of December 31, 2004, 89.6% of our investment portfolio
was invested in fixed maturity securities. Certain risks are inherent in
connection with fixed maturity securities, including loss upon default and
price volatility in reaction to changes in interest rates and general market
factors. In general, the fair market value of a portfolio of fixed income
securities increases or decreases inversely with changes in market interest
rates, while net investment income realized from future investments in fixed
income securities increases or decreases along with interest rates. In
addition, some of our fixed income securities have call or prepayment
options. This could subject us to reinvestment risk should interest rates
fall or issuers call their securities and we reinvest proceeds at lower
interest rates. We attempt to mitigate this risk by investing in securities
with varied maturity dates, so that only a portion of the portfolio will
mature at any point in time. Furthermore, actual net investment income
and/or cash flows from investments that carry prepayment risk (such as
mortgage-backed and other asset-backed securities) may differ from those
anticipated at the time of investment as a result of interest rate
fluctuations. An investment has prepayment risk when there is a risk that
the timing of cash flows that result from the repayment of principal might
occur earlier than anticipated because of declining interest rates or later
than anticipated because of rising interest rates. The fair value of our
fixed income securities as of December 31, 2004 was $30.8 million. If
market interest rates were to change 1%, (e.g. from 5% to 6% or from 5% to
4%), the fair value of our fixed income securities would change
approximately $1.5 million as of December 31, 2004. The change in fair
value was determined using duration modeling assuming no prepayments.
Since 2003, we have classified our investment portfolio as "available
for sale." A classification of "available for sale" means that changes in
the fair market value of our securities are reflected in our other
comprehensive income section of stockholders' equity. Fluctuations in the
fair market value of fixed income securities may greatly reduce the value of
our investment portfolio and, as a result, our financial condition may
suffer. Although we maintain an investment grade portfolio of fixed income
securities (8.6% U.S. government or U.S. government agencies, 74.1%
municipals and 17.3% other), our fixed income securities are also subject to
credit risk. If any of the issuers of our fixed income securities suffer
financial setbacks, the ratings on the fixed income securities could fall
(with a concurrent fall in market value) and, in a worst case scenario, the
issuer could default on its obligations. Because of the classification of
investments as available for sale, future changes in the fair market value
of our securities will be reflected in other comprehensive income. Similar
treatment is not available for liabilities. Therefore, interest rate
fluctuations could adversely affect our shareholders' equity, total
comprehensive income and/or cash flows.
Since we are reliant on independent agents to market our products,
their failure to do so would have a material adverse effect on our
results of operations.
We principally market our insurance programs through independent
insurance agents. As a result, our business depends in large part on the
marketing efforts of these agents and on our ability to offer insurance
products and services that meet the requirements of our agents and their
customers. The agents, however, are not obligated to sell or promote our
products and many sell or promote competitors' insurance products in
addition to our products. The failure or inability of insurance agents to
market our insurance products successfully could have a material adverse
impact on our business, financial condition and results of operations.
During 2004, the top 10 independent agency groups produced 21%, and no
individual agency group produced more than 4%, of the total premium volume
of the Personal Lines Group. During 2004, the top 10 independent agency
groups produced 32%, and no individual agency group produced more than 7%,
of the total premium volume of the Commercial Lines Group.
Mark E. Schwarz, our Chairman, President and Chief Executive Officer,
through his affiliation with Newcastle Partners, L.P., has the ability
to exert significant influence over our operations and may have interests
that differ from those of our other stockholders.
Newcastle Partners, L.P. beneficially owns approximately 63.4% of our
common stock (including exercisable options) prior to this offering. If no
stockholders other than Newcastle exercise their subscription rights,
Newcastle will purchase all of the shares in this offering, thereby
increasing its beneficial ownership to approximately 84.5%. Mark E. Schwarz
has sole investment and voting control over the shares beneficially owned by
Newcastle and thus has the ability to exert significant influence over our
policies and affairs, including the election of our board of directors and
the approval of any action requiring a stockholder vote (e.g., amending
our Articles of Incorporation or Bylaws, approving mergers or selling
substantially all of our assets). The interests of Mark E. Schwarz and
Newcastle may differ from the interests of our other stockholders in some
respects and Mark E. Schwarz and Newcastle may take action adverse to our
other stockholders.
Risks Relating to Our Strategic Initiatives:
-------------------------------------------
The failure to obtain regulatory approvals could preclude the
realignment of our insurance operations and our direct underwriting
of commercial insurance.
Our ability to consolidate the underwriting of all of our non-standard
automobile insurance into one insurance subsidiary and to convert our other
personal lines insurance subsidiary to a commercial lines insurance carrier
is dependent upon the approval of our license applications by the insurance
departments of the various states in which we operate. The denial of our
license application in one or more states could impair or preclude our
ability to realign our insurance operations and directly underwrite
commercial insurance. In such event, we might not be able to achieve all of
the objectives for which this offering was intended.
An inability to borrow additional funds on satisfactory terms could
undermine the implementation of our future operating strategy.
In order to fully fund our growth strategy, we intend to incur $30.0
million in new debt in addition to the $45.0 million in equity capital to be
provided by this offering. If we are unable to borrow such funds, we will
be unable to fully implement the future operating plans our management has
developed. If the terms of any such borrowing are less favorable than
presently anticipated, our results of operations could be adversely
affected.
The failure to achieve and maintain more favorable financial strength
ratings could negatively impact our ability to compete successfully.
Third party rating agencies assess and rate the claims-paying ability
of insurers based upon criteria established by the agencies. Financial
strength ratings are used by agents and clients as an important means of
assessing the financial strength and quality of insurers. A.M. Best, a
nationally recognized insurance industry rating service and publisher, has
advised us that, if we successfully implement our strategic initiatives,
they will upgrade the financial strength rating of the resulting personal
lines carrier, Phoenix Indemnity Insurance Company, from "B (Fair)" to "B+
(Very Good)", and will upgrade the financial strength rating of the
resulting commercial lines carrier, American Hallmark Insurance Company of
Texas, from "B (Fair)" to "A- (Excellent)".
To achieve these improved ratings, we must raise $45.0 million in
equity capital from this offering, incur an additional $30.0 million in new
indebtedness and realign our insurance operations into one personal lines
carrier subsidiary and one commercial lines carrier subsidiary (including
obtaining required regulatory approvals). To maintain these ratings, the
capitalization and operating performance of our insurance subsidiaries must
be consistent with projections provided to A.M. Best. Our failure to
achieve and maintain these improved ratings from A.M. Best could adversely
affect our ability to sell insurance policies and inhibit us from competing
effectively.
The financial strength ratings assigned by rating agencies to insurance
companies represent independent opinions of financial strength and ability
to meet policyholder obligations and are not directed toward the protection
of investors. These ratings are not recommendations to buy, sell or hold
any security and are not applicable to the securities being offered by this
prospectus.
Our failure to effectively convert policyholders in connection with
the realignment of our insurance operations could adversely affect
our results of operations.
In order to achieve one of the primary objectives of our strategic
initiatives, our approximately 150 independent agents presently marketing
commercial insurance on behalf of Clarendon National Insurance Company
must successfully convert their customers to policies underwritten by
American Hallmark, our newly authorized commercial lines carrier. If we
do not effectively transition these policyholders to American Hallmark, our
realigned commercial lines subsidiaries may not achieve the anticipated
growth, or may suffer a decline, in premiums written, which could have a
material adverse impact on our results of operations.
Risks Relating to this Offering:
-------------------------------
The subscription price per share is not an indication of our value and
you may not be able to sell shares purchased upon the exercise of your
subscription rights at a price equal to or greater than the subscription
price.
The subscription price per share is equal to the book value of our
common stock as of December 31, 2004, which does not necessarily bear any
relationship to the market value of our assets or to our operations, cash
flows, earnings, financial condition or other established criteria for
value. As a result, you should not consider the subscription price as an
indication of the current market value of our company or our common stock.
We cannot assure you that you will be able to sell shares purchased in this
offering at a price equal to or greater than the subscription price.
This offering may cause the price of our common stock to decrease
immediately, and this decrease may continue.
The subscription price per share equals _____% of the current market
price of our common stock (based on the average closing price of our common
stock on the AMEX for the five trading days ending ________, 2005). This
discount, together with the number of shares we will issue if this offering
is completed, may result in an immediate decrease in the market value of our
common stock. This decrease may continue after the completion of this
offering.
As a holder of common stock, you may suffer significant dilution of your
percentage ownership of our common stock.
If you do not exercise your subscription rights and shares are
purchased by other stockholders in this offering, your proportionate voting
and ownership interest will be reduced and the percentage that your original
shares represent of our expanded equity after exercise of the subscription
rights will be diluted. For example, if you own 365,000 shares of our
common stock before this offering, or approximately 1.0% of our outstanding
common stock, and you exercise none of your subscription rights while all
other subscription rights are exercised by other stockholders, then your
percentage ownership would be reduced to approximately 0.4%. The magnitude
of the reduction of your percentage ownership will depend upon the extent to
which you exercise your subscription rights.
Once you exercise your subscription rights, you may not revoke such
exercise even if there is a decline in our common stock price.
The public trading market price of our common stock may decline after
you elect to exercise your subscription rights. If that occurs, you will
have committed to buy shares of common stock at a price above the prevailing
market price and you will have an immediate unrealized loss. Moreover, we
cannot assure you that following the exercise of subscription rights you
will be able to sell your shares of common stock at a price equal to or
greater than the subscription price.
You may not revoke the exercise of your rights even if we extend the
expiration date of the subscription period.
We may, in our sole discretion, extend the expiration date of the
subscription period. During any potential extension of time, our common
stock price may decline below the subscription price and result in a loss
on your investment from the exercise of rights to acquire shares of our
common stock. If the expiration date is extended after you send in your
subscription forms and payment, you still may not revoke or change your
exercise of rights.
You will not receive interest on subscription funds returned to you.
If we cancel this offering, neither we nor the subscription agent will
have any obligation with respect to the subscription rights except to
return, without interest, any subscription payments to you.
The subscription rights are not transferable and there is no market
for the subscription rights.
You may not sell, give away or otherwise transfer your subscription
rights. The subscription rights are only transferable to your affiliates
and by operation of law. Because the subscription rights are non-
transferable, there is no market or other means for you to directly realize
any value associated with the subscription rights. You must exercise the
subscription rights and acquire additional shares of our common stock to
realize any value.
Because we may terminate this offering, your participation in the
offering is not assured.
Once you exercise your subscription rights, you may not revoke the
exercise for any reason unless we amend this offering. If we decide to
terminate the offering, we will not have any obligation with respect to the
subscription rights except to return any subscription payments, without
interest.
You need to act promptly and follow subscription instructions to avoid
your subscription being rejected.
Stockholders who desire to purchase shares in this offering must act
promptly to ensure that all required forms and payments are actually
received by the subscription agent prior to 5:00 p.m., Dallas, Texas time,
on the expiration date. If you fail to complete and sign the required
subscription forms, send an incorrect payment amount, or otherwise fail to
follow the subscription procedures that apply to your desired transaction,
the subscription agent may, depending on the circumstances, reject your
subscription or accept it to the extent of the payment received. Neither we
nor our subscription agent undertakes to contact you concerning such errors
or to correct an incomplete or incorrect subscription form or payment. We
have the sole discretion to determine whether a subscription exercise
properly follows the subscription procedures.
Risks Relating to Our Common Stock:
----------------------------------
Our common stock is volatile and the value of any investment in our
common stock may fluctuate.
The market price for our common stock has been, and is likely to
continue to be, highly volatile. The market for our common stock is subject
to fluctuations as a result of a variety of factors, including factors
beyond our control. These include:
* current expectations of our future revenue and earnings growth
rates;
* changes in market valuations of similar companies;
* conditions or trends in the industry;
* general market and economic conditions; and
* other events or factors that are unforeseen.
Our common stock has traded on the American Stock Exchange's Emerging
Marketplace under the symbol "HAF.EC" since January 6, 1994. During the
past two years, the price per share of our common stock has ranged from a
low of $0.31 to a high of $____. See "Price Range of Common Stock."
Since we do not intend to pay dividends on shares of our common stock
in the foreseeable future, an investor will only see a return on his
investment if the value of the shares appreciates.
We currently expect to retain our future earnings, if any, for use in
the operation of our business. We do not anticipate paying any cash
dividends on shares of our common stock in the foreseeable future.
Therefore, an investor will only see a return on his investment if the value
of our common stock appreciates.
OUR COMPANY
We engage in the sale of property and casualty insurance products. Our
business presently involves (i) marketing and underwriting of non-standard
personal automobile insurance primarily in Texas, Arizona and New Mexico,
(ii) marketing commercial insurance in Texas, New Mexico, Idaho, Oregon and
Washington on behalf of a third party commercial carrier, (iii) affiliate
and third party claims administration, and (iv) other insurance related
services. Our principal executive offices are located at 777 Main Street,
Suite 1000, Fort Worth, Texas 76102, and our telephone number is (817) 348-
1600.
The Company pursues its business activities through integrated
insurance groups handling non-standard personal automobile insurance (the
"Personal Lines Group") and commercial insurance (the "Commercial Lines
Group"). The current components of the Personal Lines Group are a Texas
domiciled property and casualty insurance company, American Hallmark
Insurance Company of Texas; an Arizona domiciled property and casualty
insurance company, Phoenix Indemnity Insurance Company; a managing general
agency, American Hallmark General Agency, Inc.; and an affiliate and third
party claims administrator, Hallmark Claims Services, Inc. The current
components of the Commercial Lines Group are a managing general agency,
Hallmark General Agency, Inc., and a third party claims administrator,
Effective Claims Management, Inc.
STRATEGIC INITIATIVES
Our management has developed a strategic plan intended to enhance our
opportunities for profitable growth. The primary elements of this strategic
plan are (i) the infusion of additional working capital, (ii) the
realignment and expansion of our insurance operations, and (iii) the
enhancement of our financial strength ratings. Our management believes that
the successful implementation of these and other related initiatives will
position us to increase gross premium written, reduce reliance on
reinsurance, pursue geographic expansion, withstand soft market conditions
and explore strategic acquisitions. However, we cannot assure that all
elements of our strategic plan will be successfully completed or that any of
the desired objectives will be attained.
This offering is a part of the first element of this strategic plan.
The successful completion of this offering will add approximately $45.0
million to our working capital. In addition, our management is presently
evaluating alternatives for a $30.0 million private debt issuance to
further enhance working capital sufficiently to achieve the desired
financial strength ratings. This new indebtedness could be in the form of
trust preferred securities, senior or subordinated notes, surplus notes or
bank term loans, or could be comprised of any combination of these debt
vehicles. However, the structure and terms of this new indebtedness have
not yet been finalized. Therefore we cannot assure that we will conclude
this placement of debt instruments on acceptable terms.
We have filed applications with insurance regulators in Texas, New
Mexico, Idaho, Oregon and Washington to obtain a certificate of authority
for American Hallmark, as an admitted property and casualty company, to
underwrite commercial insurance policies similar to those presently marketed
by our Commercial Lines Group. Upon approval of these applications and
completion of our equity and debt working capital infusions, we intend to
consolidate the underwriting of all of our non-standard automobile insurance
in Phoenix and begin directly underwriting commercial insurance through
American Hallmark. As a result, American Hallmark would become a component
of our Commercial Lines Group. However, we cannot assure that the necessary
regulatory approval can be timely obtained or that we will successfully
implement the realignment of our insurance operations.
Our management believes that enhancing the financial strength ratings
of our insurance subsidiaries is critical to fully achieving the objectives
of our strategic plan. Our management has presented this strategic plan to
A.M. Best and has been advised that, conditioned upon the infusion of $75.0
million in additional working capital (of which at least approximately $37.2
million must be equity in order to satisfy the required debt to capital
ratio) and the realignment of our insurance operations pursuant to our
strategic plan, they will upgrade the financial strength rating of the
resulting personal lines carrier, Phoenix Indemnity Insurance Company, from
"B (Fair)" to "B+ (Very Good)", and will upgrade the financial strength
rating of the resulting commercial lines carrier, American Hallmark
Insurance Company of Texas, from "B (Fair)" to "A- (Excellent)". In order
to maintain these ratings, the capitalization and operating performance of
our insurance subsidiaries must be consistent with projections provided to
A.M. Best. We cannot assure that we will satisfy the conditions to obtain
and maintain these improved financial strength ratings.
USE OF PROCEEDS AND CAPITALIZATION
We intend to use the $45.0 million in gross proceeds from the exercise
of subscription rights in this offering as working capital for our business
and general corporate purposes. The following table sets forth a summary
of our capitalization on an historical basis as of December 31, 2004, and
should be read in conjunction with our financial statements and the notes
thereto incorporated by reference into this prospectus. The table also
summarizes our capitalization on a pro forma basis assuming the addition of
the net proceeds of this offering (after estimated expenses) and a $30.0
million private debt placement. See "Strategic Initiatives."
As of December 31, 2004
-----------------------
Actual Pro Forma
------ ---------
(in thousands) (in thousands)
Debt:
Short-term debt .......................... $ - $ -
Long-term debt ........................... - 30,000
---------- ----------
Total debt............................. $ - $ 30,000
========== ==========
Stockholders' equity:
Common stock, $.03 par value, authorized
100,000,000 shares, issued 36,856,610
shares (pro forma 86,856,610 shares)...... $ 1,106 $ 2,606
Capital in excess of par value ........... 19,647 63,037
Retained earnings ........................ 13,103 13,103
Accumulated other comprehensive income
(loss) ................................... (759) (759)
Treasury stock, 379,319 shares, at cost... (441) (441)
---------- ----------
Total stockholders' equity............. $ 32,656 $ 77,546
========== ==========
Total capitalization........................ $ 32,656 $ 107,546
========== ==========
PRICE RANGE OF COMMON STOCK
Our common stock has traded on the American Stock Exchange Emerging
Company Marketplace under the symbol "HAF.EC" since January 6, 1994. On
________, 2005, the closing price of our common stock was $____ per share.
The following table shows the high and low sales prices of our common stock
on the AMEX for the periods indicated.
Period High Sale Low Sale
2003:
----
First Quarter $ 0.75 $ 0.50
Second Quarter 0.95 0.65
Third Quarter 1.15 0.31
Fourth Quarter 0.80 0.50
2004:
----
First Quarter $ 0.79 $ 0.45
Second Quarter 0.90 0.60
Third Quarter 1.20 0.75
Fourth Quarter 1.40 0.75
2005:
----
First Quarter $ 1.60 $ 1.11
Second Quarter (through __________) ____ ____
On April 20, 2005, there were _____ record holders and approximately
_____ beneficial holders of our common stock.
We have never paid dividends on our common stock and we intend to
continue this policy for the foreseeable future in order to retain earnings
for development of our business.
THE OFFERING
Our Board of Directors has proposed that we attempt to raise equity
capital through this offering to all of our stockholders and to use the
proceeds from the subscription of such rights for working capital purposes.
The Board declared a dividend of rights to purchase our common stock to
holders of record as of April 20, 2005. Through this prospectus, we are
offering the shares of common stock that rights holders may purchase upon
exercising such subscription rights.
Reasons for this Offering
In approving this offering, our Board of Directors carefully considered
our need for additional working capital to implement our strategic plan.
The Board recognized that satisfying A.M. Best's conditions for upgrading
the financial strength ratings of our insurance subsidiaries would require
the infusion of at least $75.0 million in new capital. The Board further
considered the requirement of A.M. Best that debt represent 35% or less of
our total capitalization. Based on these and other factors, our Board
determined that we should attempt to raise $45.0 million in additional
equity capital and incur an additional $30.0 million in new debt. If we
are successful in completing both this offering and the private placement
of $30.0 million in debt instruments, our pro forma ratio of debt to total
capitalization as of December 31, 2004 will be approximately 27.9%. See
"Use of Proceeds and Capitalization."
In approving this offering, the Board also considered the substantial
dilution of the ownership percentage of our current stockholders which would
result from a private placement of our common stock. While the ownership
percentage of some of our current stockholders may decrease as a result of
this offering, the Board recognized that the magnitude of this dilution
would be subject to, and dependent upon, the decision of each stockholder
whether to exercise their subscription rights for additional shares of our
common stock in this offering. After weighing these and other factors, our
Board believes that this offering is the best alternative for raising equity
capital and is in the best interests of our company and our stockholders.
However, our board of directors is not making any recommendation as to
whether you should exercise your subscription rights.
Subscription Rights
Basic Subscription Privilege. We distributed to the holders of record
of our common stock, at the close of business on April 20, 2005, at no
charge, one nontransferable subscription right for each share of our common
stock they own. The subscription rights will be evidenced by rights
certificates. Each subscription right will entitle the holder to purchase
1.37 shares of our common stock. You are not required to exercise any or all
of your subscription rights.
If the exercise of your subscription rights would result in your
receipt of fractional shares, the aggregate number of shares issued to you
will be rounded down to the nearest whole number. You will not receive cash
in lieu of fractional shares.
Over-Subscription Privilege. Subject to the allocation described
below, each subscription right also grants the holder an over-subscription
privilege to purchase additional shares of our common stock that are not
purchased by other rights holders pursuant to their basic subscription
privileges. You are entitled to exercise your over-subscription privilege
only if you exercise your basic subscription privilege in full.
If you wish to exercise your over-subscription privilege, you should
indicate the number of additional shares that you would like to purchase in
the space provided on your rights certificate. When you send in your rights
certificate, you must also send the full purchase price for the number of
additional shares that you have requested to purchase (in addition to the
payment due for shares purchased through your basic subscription privilege).
If the number of shares remaining after the exercise of all basic
subscription privileges is not sufficient to satisfy all requests for shares
pursuant to over-subscription privileges, you will be allocated additional
shares (subject to elimination of fractional shares) in the proportion which
the number of shares you purchased through the basic subscription privilege
bears to the total number of shares that all over-subscribing stockholders
purchased through the basic subscription privilege. However, if your pro-
rata allocation exceeds the number of shares you requested on your rights
certificate, then you will receive only the number of shares that you
requested, and the remaining shares from your pro-rata allocation will be
divided among other rights holders exercising their over-subscription
privileges.
As soon as practicable after the expiration date, Securities Transfer
Corporation, acting as our subscription agent, will determine the number of
shares of common stock that you may purchase pursuant to the over-
subscription privilege. You will receive certificates representing these
shares as soon as practicable after the expiration date and after all
allocations and adjustments have been effected. If you request and pay for
more shares than are allocated to you, we will refund the overpayment,
without interest. In connection with the exercise of the over-subscription
privilege, banks, brokers and other nominee holders of subscription rights
who act on behalf of beneficial owners will be required to certify to us and
to the subscription agent as to the aggregate number of subscription rights
exercised, and the number of shares of common stock requested through the
over-subscription privilege, by each beneficial owner on whose behalf the
nominee holder is acting.
Subscription Price
The subscription price under the subscription rights is $0.90 per share
of common stock subscribed. The subscription price per share is equal to
the book value of our common stock as of December 31, 2004, which is
approximately ___% of the current market price of our common stock (based on
the average closing price of our common stock on the AMEX for the five
trading days ending ________, 2005). The subscription price does not
necessarily bear any relationship to our past or expected future results
of operations, cash flows, current financial condition, or any other
established criteria for value. No change will be made to the cash
subscription price by reason of changes in the trading price of our common
stock prior to the closing of this offering.
Determination of Subscription Price
Our board of directors set all of the terms and conditions of
this offering, including the subscription price. In establishing the
subscription price, our board of directors considered the book value of our
common stock and various other factors, including the historic and current
market price of our common stock, the historic volatility of the market
price of our commmon stock, our business prospects, our recent and
anticipated operating results, general conditions in the securities markets,
our need for equity capital, alternatives available to us for raising equity
capital, the amount of proceeds desired, the pricing of similar
transactions, the liquidity of our common stock, and the level of risk to
our investors.
After taking these factors into account, our Board determined that the
book value of our common stock as of December 31, 2004, represented a fair
subscription price. We did not seek or obtain any opinion of financial
advisors or investment bankers in establishing the subscription price for
the offering. You should not consider the subscription price as an
indication of the value of our company or our common stock. We cannot
assure that you will be able to sell shares purchased during this offering
at a price equal to or greater than the subscription price. On ________,
2005, the closing sale price of our common stock was $____ per share.
Expiration Date, Extensions and Termination
You may exercise your subscription right at any time before 5:00 p.m.,
Dallas, Texas time, on ________, 2005, the expiration date for this
offering. However, we may extend the offering period for exercising your
subscription rights from time to time in our sole discretion. If you do not
exercise your subscription rights before the expiration date, your
unexercised subscription rights will expire and become null and void. We
will not be obligated to honor your exercise of subscription rights if the
subscription agent receives the documents relating to your exercise after
the expiration date, regardless of when you transmitted the documents,
unless you have timely transmitted the documents under the guaranteed
delivery procedures described below.
We have the sole discretion to extend the expiration date from time to
time by giving oral or written notice to the subscription agent on or before
the scheduled expiration date. If we elect to extend the expiration of this
offering, we will issue a press release announcing the extension no later
than 9:00 a.m., Dallas, Texas time, on the next business day after the most
recently announced expiration date.
Withdrawal and Amendment
We reserve the right to withdraw or terminate this offering at any time
for any reason. In the event that this offering is withdrawn or terminated,
all funds received from subscriptions by stockholders will be returned.
Interest will not be payable on any returned funds.
We reserve the right to amend the terms of this offering. If we make an
amendment that we consider significant, we will:
* mail notice of the amendment to all stockholders of record
as of the record date;
* extend the expiration date by at least 10 days; and
* offer all subscribers no less than 10 days to revoke any
subscription already submitted.
The extension of the expiration date will not, in and of itself, be
treated as a significant amendment for these purposes.
Method of Subscription - Exercise of Subscription Rights
You may exercise your subscription rights by delivering the following
to the subscription agent, at or prior to 5:00 p.m., Dallas, Texas time, on
________, 2005, the date on which the rights expire:
* your properly completed and executed rights certificate with any
required signature guarantees or other supplemental documentation;
and
* full payment of the subscription price for each share subscribed for
under your basic subscription privilege and your over-subscription
privilege.
You should carefully read and follow the instructions accompanying the
rights certificate.
Signature Guarantee May be Required
Your signature on each rights certificate must be guaranteed by an
eligible institution, such as a member firm of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc., or from a commercial bank or trust company having an office
or correspondent in the United States, subject to standards and procedures
adopted by the subscription agent, unless:
* your rights certificate provides that shares are to be delivered
to you as record holder of those subscription rights; or
* you are an eligible institution.
Delivery of Subscription Materials and Payment
You should deliver your rights certificate and payment of the
subscription price or, if applicable, notice of guaranteed delivery, to the
subscription agent by mail, by hand or by overnight courier to:
Securities Transfer Corporation
2591 Dallas Parkway, Suite 102
Frisco, Texas 75034
The subscription agent's telephone number is (469) 633-0101.
You are responsible for the method of delivery of your rights
certificate with your subscription price payment to the subscription agent.
If you send your rights certificate and subscription price payment by mail,
we recommend that you send them by registered mail, properly insured, with
return receipt requested. You should allow a sufficient number of days to
ensure delivery to the subscription agent prior to the time this offering
expires.
Do not send your rights certificate or subscription price payment to
us. Your delivery to an address other than the address set forth above will
not constitute valid delivery.
Method of Payment
Your payment of the subscription price must be made in U.S. dollars for
the full number of shares of common stock you are subscribing (including any
exercise of your over-subscription privilege) by either:
* check or bank draft (cashier's check) drawn upon a U.S. bank or
money order payable to the subscription agent; or
* wire transfer of immediately available funds, to the subscription
account maintained by the subscription agent at Wells Fargo Bank
Texas, N.A., ABA # 111900659, Account #__________, Account Name:
Securities Transfer Corporation Trust Account for Hallmark Financial
Services.
Receipt of Payment
Your payment will be considered received by the subscription agent only
upon:
* receipt and clearance of any uncertified check,
* receipt by the subscription agent of any certified check or bank
draft drawn upon a United States bank, any money order or any funds
transferred by wire transfers, or
* receipt of good funds in the subscription agent's account designated
above.
Please note that funds paid by uncertified personal check may take at
least five business days to clear. Accordingly, if you wish to pay by means
of an uncertified personal check, we urge you to make payment sufficiently
in advance of the expiration date to ensure that the subscription agent
receives cleared funds before that date. We also urge you to consider
payment by means of a certified or cashier's check or money order.
Calculation of Subscription Rights Exercised
If you do not indicate the number of subscription rights being
exercised, or do not forward full payment of the total subscription price
for the number of subscription rights that you indicate are being exercised,
then you will be deemed to have exercised your basic subscription privilege
with respect to the maximum number of rights that may be exercised with the
aggregate subscription price payment you delivered to the subscription
agent.
Your Funds Will be Held by the Subscription Agent Until Shares of
Common Stock are Issued
The subscription agent will hold your payment of the subscription price
payment in a segregated account with other payments received from other
rights holders until we issue your shares to you. If this offering is not
completed, or we do not apply your full subscription price payment to your
purchase of shares of our common stock, the subscription agent will return
promptly, without interest, all excess subscription payments.
No Revocation
Once you have exercised your subscription privileges, you may not
revoke your exercise. Subscription rights not exercised prior to the
expiration date of this offering will expire.
Non-transferability of the Subscription Rights
Except in the limited circumstances described below, only you may
exercise the basic subscription privilege and the over-subscription
privilege. You may not sell, give away or otherwise transfer the basic
subscription privilege or the over-subscription privilege.
Notwithstanding the foregoing, you may transfer your rights to any of
your affiliates. Your rights also may be transferred by operation of law.
For example, a transfer of rights to the estate of the recipient upon the
death of the recipient would be permitted. As used in this paragraph, an
affiliate means any person (including a partnership, corporation or other
legal entity such as a trust or estate) which controls, is controlled by or
is under common control with you. If your rights are transferred as
permitted, evidence satisfactory to us that the transfer was proper must be
received by the subscription agent prior to the expiration date of this
offering.
Issuance of Stock Certificates
Stock certificates for shares purchased in this offering will be issued
as soon as practicable after the expiration date. Our subscription agent
will deliver subscription payments to us only after consummation of this
offering and the issuance of stock certificates to our stockholders that
exercised rights. Unless you instruct otherwise on your rights certificate,
shares purchased by the exercise of subscription rights will be registered
in the same name as the person exercising the rights.
Guaranteed Delivery Procedures
If you wish to exercise your subscription rights, but you do not have
sufficient time to deliver the rights certificate to the subscription
agent on or before the offering expiration date, you may exercise your
subscription rights by the following guaranteed delivery procedures:
* deliver your subscription price payment in full for each share you
subscribed under your subscription privileges in the manner set
forth in "- Method of Payment" to the subscription agent on or
prior to the expiration date;
* deliver the form entitled "Notice of Guaranteed Delivery,"
substantially in the form provided with the "Instructions as
to Use of Rights Certificates" distributed with your rights
certificates, at or prior to the expiration date; and
* deliver the properly completed rights certificate evidencing your
rights being exercised and the related nominee holder certification,
if applicable, with any required signatures guarantee, to the
subscription agent within three business days following the date
of your Notice of Guaranteed Delivery.
Your Notice of Guaranteed Delivery must be delivered in substantially
the form provided with the "Instructions as to Use of Rights Certificates"
which will be distributed to you with your rights certificate. Your Notice
of Guaranteed Delivery must come from an eligible institution, or other
eligible guarantee institutions which are members of, or participants in, a
signature guarantee program acceptable to the subscription agent.
In your Notice of Guaranteed Delivery, you must state:
* your name;
* the number of subscription rights represented by your rights
certificates and the number of shares of our common stock for
which you are subscribing (and over-subscribing); and
* your guarantee that you will deliver to the subscription agent
any rights certificate evidencing the subscription rights you
are exercising within three business days following the date the
subscription agent receives your Notice of Guaranteed Delivery.
You may deliver your Notice of Guaranteed Delivery to the subscription
agent in the same manner as your rights certificates at the address set
forth above under "- Delivery of Subscription Materials and Payment."
Alternatively, you may transmit your Notice of Guaranteed Delivery to the
subscription agent by facsimile transmission to (469) 633-0088. To confirm
facsimile deliveries, you may call (469) 633-0101.
Please call Mark J. Morrison, our Executive Vice President and Chief
Financial Officer, at (817) 348-1600, to request any additional copies of
the form of Notice of Guaranteed Delivery you may need.
Determinations Regarding the Exercise of Your Subscription Rights
We will decide all questions concerning the timeliness, validity, form
and eligibility of your exercise of your subscription rights, and our
determinations will be final and binding. We, in our sole discretion, may
waive any defect or irregularity, or permit a defect or irregularity to be
corrected within such time as we may determine. We may reject the exercise
of any of your subscription rights because of any defect or irregularity.
We will not receive or accept any subscription until all irregularities have
been waived by us or cured by you within such time as we may decide, in our
sole discretion.
Neither we nor the subscription agent will be under any duty to notify
you of any defect or irregularity in connection with your submission of
rights certificates and we will not be liable for failure to notify you of
any defect or irregularity. We reserve the right to reject your exercise of
subscription rights if your exercise is not in accordance with the terms of
this offering or in proper form. We will also not accept your exercise of
rights if our issuance of shares of our common stock to you could be deemed
unlawful under applicable law or is materially burdensome to us.
If you are given notice of a defect in your subscription, you will have
five business days after the giving of notice to correct it. You will not,
however, be allowed to cure any defect after 5:00 p.m., Dallas, Texas time,
on ________, 2005. We will not consider an exercise to be made until all
defects have been cured or waived.
Notice to Bankers, Trustees or Other Depositaries
If you are a broker, a trustee or a depositary for securities who holds
shares of our common stock for the account of others at the close of
business on the record date, you should notify the respective beneficial
owners of such shares of this offering as soon as possible to find out their
intentions with respect to exercising their subscription rights. You should
obtain instructions from the beneficial owners with respect to the
subscription rights, as set forth in the instructions we have provided to
you for your distribution to beneficial owners. If the beneficial owner so
instructs, you should complete the appropriate rights certificate and submit
it to the subscription agent with the proper payment. If you hold shares of
our common stock for the accounts of more than one beneficial owner, you may
exercise the number of subscription rights to which all such beneficial
owners in the aggregate otherwise would have been entitled had they been
direct record holders of our common stock on the record date, provided that
you, as a nominee record holder, make a proper showing to the subscription
agent by submitting the form entitled "Nominee Holder Certification" which
we will provide to you with your offering materials.
Notice to Beneficial Owners
If you are a beneficial owner of shares of our common stock or will
receive your subscription rights through a broker, custodian bank or other
nominee, we will ask your broker, custodian bank or other nominee to notify
you of this offering. If you wish to exercise your subscription rights, you
will need to have your broker, custodian bank or other nominee act for you.
If you hold certificates of our common stock directly and would prefer to
have your broker, custodian bank or other nominee exercise your subscription
rights, you should contact your nominee and request it to effect the
transaction for you. To indicate your decision with respect to your
subscription rights, you should complete and return to your broker,
custodian bank or other nominee the form entitled "Beneficial Owner Election
Form." You should receive this form from your broker, custodian bank or
other nominee with the other offering materials. If you wish to obtain a
separate rights certificate, you should contact the nominee as soon as
possible and request that a separate rights certificate be issued to you.
Shares of Common Stock Outstanding after this Offering
Upon the issuance of the shares of common stock offered in this
offering, __________ shares of our common stock will be issued and
outstanding. This would represent approximately a 137% increase in the
number of issued and outstanding shares of our common stock.
Effects of Offering on our Stock Option Plans and Other Plans
As of December 31, 2004, there were outstanding options to purchase
1,358,500 shares of our common stock granted by us. None of the outstanding
options have anti-dilution or other provisions to adjust the exercise price
or number of shares which will be automatically triggered by this offering.
Each outstanding option will remain unchanged and will be exercisable for
the same number of shares of common stock and at the same exercise price as
before this offering.
Subscription Agent
We have appointed Securities Transfers Corporation as subscription
agent for this offering. We will pay the fees and certain expenses of the
subscription agent, which we estimate will total approximately $5,000.
Under certain circumstances, we may indemnify the subscription agent from
certain liabilities that may arise in connection with this offering.
Fees and Expenses
Other than fees charged by the subscription agent, you are responsible
for paying any other commissions, fees, taxes or other expenses incurred in
connection with the exercise of the subscription rights. Neither we nor the
subscription agent will pay such expenses.
Other Matters
We are not making this offering in any state or other jurisdiction in
which it is unlawful to do so, nor are we selling or accepting any offers to
purchase any shares of our common stock from rights holders who are
residents of those states or other jurisdictions. We may delay the
commencement of this offering in those states or other jurisdictions, or
change the terms of this offering, in order to comply with the securities
law requirements of those states or other jurisdictions. We may decline to
make modifications to the terms of this offering requested by those states
or other jurisdictions, in which case, if you are a resident in those states
or jurisdictions, you will not be eligible to participate in this offering.
We will not be required to issue to you shares of common stock pursuant
to this offering if, in our opinion, you would be required to obtain prior
clearance or approval from any state or federal regulatory authority to own
or control such shares if, at the time the subscription rights expire, you
have not obtained such clearance or approval.
No Board Recommendation
An investment in shares of our common stock must be made according to
each investor's evaluation of its own best interests. Accordingly, our board
of directors makes no recommendation to rights holders regarding whether
they should exercise their subscription rights.
If You Have Questions About Exercising Rights
If you have questions or need assistance concerning the procedure for
exercising subscription rights, or if you would like additional copies of
this prospectus, the "Instructions as to Use of Rights Certificates" or the
"Notice of Guaranteed Delivery," you should contact Mark J. Morrison, our
Executive Vice President and Chief Financial Officer, or the subscription
agent at the following addresses and telephone numbers:
Mark J. Morrison
Hallmark Financial Services, Inc.
777 Main Street, Suite 1000
Fort Worth, Texas 76102
Telephone: (817) 348-1600
or
Securities Transfer Corporation
2591 Dallas Parkway, Suite 102
Frisco, Texas 75034
Telephone: (469) 633-0101
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material U.S. federal
income tax consequences of (i) the dividend by us of subscription rights to
holders of common stock that hold such stock as a capital asset for federal
income tax purposes, and (ii) the exercise of such rights. This discussion
is based on laws, regulations, rulings and decisions in effect on the date
of this prospectus, all of which are subject to change (possibly with
retroactive effect) and to differing interpretations. This discussion
applies only to holders that are U.S. persons, which is defined as a citizen
or resident of the United States, a domestic partnership, a domestic
corporation, any estate (other than a foreign estate), and any trust so long
as a court within the United States is able to exercise primary supervision
over the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust. Generally, for
federal income tax purposes an estate is classified as a "foreign estate"
based on the location of the estate assets, the country of the estate's
domiciliary administration, and the nationality and residency of the
domiciliary's personal representative.
This discussion does not address all aspects of federal income taxation
that may be relevant to holders in light of their particular circumstances
or to holders who may be subject to special tax treatment under the Internal
Revenue Code of 1986, as amended, including holders of options or warrants,
holders who are dealers in securities or foreign currency, foreign persons
(defined as all persons other than U.S. persons), insurance companies, tax-
exempt organizations, banks, financial institutions, broker-dealers, holders
who hold common stock as part of a hedge, straddle, conversion or other risk
reduction transaction, or who acquired common stock pursuant to the exercise
of compensatory stock options or warrants or otherwise as compensation.
We have not sought, and will not seek, an opinion of counsel or a
ruling from the Internal Revenue Service regarding the federal income tax
consequences of the distribution of the rights or the related share
issuance. The following summary does not address the tax consequences of
the distribution of the rights or the related share issuance under foreign,
state, or local tax laws. ACCORDINGLY, EACH HOLDER OF COMMON STOCK SHOULD
CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES
OF THE DISTRIBUTION OF THE RIGHTS OR THE RELATED SHARE ISSUANCE TO SUCH
HOLDER.
The federal income tax consequences for a holder of common stock on the
receipt of subscription rights and the exercise of such rights are as
follows:
* A holder will not recognize taxable income for federal income tax
purposes in connection with the receipt of subscription rights.
* Except as provided in the following sentence, the tax basis of the
subscription rights received by a holder will be zero. If either
(i) the fair market value of the subscription rights on the date
such subscription rights are distributed is equal to at least 15% of
the fair market value on such date of the common stock with respect
to which the subscription rights are received or (ii) the holder
irrevocably elects, by attaching a statement to its federal income
tax return for the taxable year in which the subscription rights are
received, to allocate part of the tax basis of such common stock to
the subscription rights, then upon exercise of the subscription
rights, the holder's tax basis in the common stock will be allocated
between the common stock and the subscription rights in proportion
to their respective fair market values on the date the subscription
rights are distributed. A holder's holding period for the
subscription rights received will include the holder's holding
period for the common stock with respect to which the subscription
rights were received. We believe that the fair market value of the
subscription rights will not exceed 15% of the fair market value of
the common stock to which the subscription rights relate.
* A holder that allows the subscription rights received to expire will
not recognize any gain or loss, and the tax basis of the common
stock owned by such holder with respect to which such subscription
rights were distributed will be equal to the tax basis of such
common stock immediately before the receipt of the subscription
rights.
* A holder will not recognize any gain or loss upon the exercise of
the subscription rights.
* The tax basis of the common stock acquired through exercise of the
subscription rights will equal the sum of the subscription price
for the common stock and the holder's tax basis, if any, in the
subscription rights as described above.
* The holding period for the common stock acquired through exercise of
the subscription rights will begin on the date the subscription
rights are exercised.
PLAN OF DISTRIBUTION
We are offering the shares of our common stock underlying the rights
directly to you. We have not employed any brokers, dealers or underwriters
in connection with the solicitation of exercise of subscription rights in
this offering and no commissions, fees or discounts will be paid in
connection with this offering. Securities Transfer Corporation is acting as
our subscription agent to effect the exercise of the rights and the issuance
of the underlying shares of common stock. Therefore, we anticipate that the
role of our officers and employees in this offering will be limited to:
* Responding to inquiries of potential purchasers, provided the
response is limited to information contained in the registration
statement of which this prospectus is a part; and
* Ministerial and clerical work involved in effecting transactions
pertaining to the sale of the common stock underlying the rights.
We intend to distribute and deliver this prospectus by hand or by mail
only, and not by electronic delivery. Also, we intend to use printed
prospectuses only, and not any other forms of prospectus.
We have distributed to the holders of record of our common stock at
the close of business on April 20, 2005, at no charge, one nontransferable
subscription right for each share of our common stock they own. Each
subscription right is a right to purchase 1.37 shares of our common stock
and carries with it a basic subscription privilege and an over-subscription
privilege. The basic subscription privilege of each right entitles you to
purchase 1.37 shares of our common stock at a subscription price of $0.90
per share. You may exercise any number of your subscription rights, or you
may choose not to exercise any subscription rights. We will not distribute
any fractional shares or pay cash in lieu of fractional shares, but will
round down the aggregate number of shares you are entitled to receive to the
nearest whole number.
We do not expect that all of our stockholders will exercise all
of their basic subscription privileges. By extending over-subscription
privileges to our stockholders, we are providing stockholders that exercise
all of their basic subscription privileges with the opportunity to purchase
those shares that are not purchased by other stockholders.
If you wish to exercise your over-subscription privilege, you should
indicate the number of additional shares that you would like to purchase in
the space provided on your rights certificate. When you send in your rights
certificate, you must also send the full purchase price for the number of
additional shares that you have requested to purchase (in addition to the
payment due for shares purchased through your basic subscription privilege).
If the number of shares remaining after the exercise of all basic
subscription privileges is not sufficient to satisfy all requests for shares
pursuant to over-subscription privileges, you will be allocated additional
shares (subject to elimination of fractional shares) in the proportion which
the number of shares you purchased through the basic subscription privilege
bears to the total number of shares that all over-subscribing stockholders
purchased through the basic subscription privilege. However, if your pro-
rata allocation exceeds the number of shares you requested on your rights
certificate, then you will receive only the number of shares that you
requested, and the remaining shares from your pro-rata allocation will be
divided among other rights holders exercising their over-subscription
privileges.
As soon as practicable after the expiration date, Securities Transfer
Corporation, acting as our subscription agent, will determine the number
of shares of common stock that you may purchase pursuant to the over-
subscription privilege. You will receive certificates representing these
shares as soon as practicable after the expiration date and after all
allocations and adjustments have been effected. If you request and pay for
more shares than are allocated to you, we will refund the overpayment,
without interest. In connection with the exercise of the over-subscription
privilege, banks, brokers and other nominee holders of subscription rights
who act on behalf of beneficial owners will be required to certify to us and
to the subscription agent as to the aggregate number of subscription rights
that have been exercised, and the number of shares of common stock that are
being requested through the over-subscription privilege, by each beneficial
owner on whose behalf the nominee holder is acting.
We will pay Securities Transfer Corporation, the subscription agent, a
fee of approximately $5,000 plus expenses, for its services in connection
with this offering. We also have agreed to indemnify the subscription agent
under certain circumstances from any liability it may incur in connection
with this offering.
We expect that shares of our common stock issued upon the exercise of
subscription rights will be traded on the American Stock Exchange Emerging
Company Marketplace under the symbol "HAF.EC," the same symbol under which
our currently outstanding shares of common stock now trade.
LEGAL MATTERS
The validity of the shares of common stock offered hereby, and the
description in this prospectus of the U.S. federal income tax consequences
of this offering, will be passed upon for us by McGuire, Craddock &
Strother, P.C., Dallas, Texas.
EXPERTS
The consolidated financial statements of Hallmark Financial Services,
Inc. as of December 31, 2004 and 2003, and for each of the years in the two-
year period ended December 31, 2004, appearing in our annual report on Form
10-K for the year ended December 31, 2004, have been audited by KPMG LLP,
independent registered public accounting firm, as set forth in their report
thereon included therein. The audit report covering the 2004 and 2003
consolidated financial statements refers to the January 1, 2003 adoption of
the prospective method provisions for stock-based employee compensation.
The financial statements incorporated in this Prospectus by reference to the
annual report on Form 10-K for the two-year period ended December 31, 2004
have been so incorporated in reliance on the report of KPMG LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of Hallmark Financial Services,
Inc. for the year ended December 31, 2002, appearing in our annual report on
Form 10-K for the year ended December 31, 2004, have been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as set forth in their report thereon included therein. The financial
statements incorporated in this Prospectus by reference to the annual report
on Form 10-K for the year ended December 31, 2002 have been so incorporated
in reliance on the report of PricewaterhouseCoopers LLP, an independent
registered public accounting firm, given on the authority of said firm as
experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934. Accordingly, we file reports, proxy statements and
other information with the SEC. You may read and copy any materials that we
file with the SEC at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549 upon payment of the prescribed fees. You may
obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements and other materials
that are filed through the SEC's Electronic Data Gathering, Analysis,
and Retrieval, or EDGAR, system. You can access this website at
http://www.sec.gov. Our common stock is listed on the American Stock
Exchange Emerging Company Marketplace. These reports, proxy statements and
other information can also be read and copied at the offices of the American
Stock Exchange at 86 Trinity Place, New York, New York 10006.
The SEC allows us to "incorporate by reference" into this prospectus
the information we file with the SEC. This permits us to disclose important
information to you by referencing these filed documents. Any information
referenced in this way is considered part of this prospectus, and any
information filed with the SEC after the date on the cover of this
prospectus will automatically be deemed to update and supersede this
information. We incorporate by reference the documents listed below and any
future filings made by us with the SEC with file number 0-16090 under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act of 1934, as amended,
until all of the securities described in this prospectus are sold:
* our annual report on Form 10-K for the year ended December 31, 2004,
* our current report on Form 8-K, filed on March 31, 2005, and
* the description of our common stock contained in our registration
statement on Form 8-A filed with the SEC on July 8, 1992, including
all amendments and reports filed for purposes of updating such
description.
This prospectus is part of a registration statement filed with the SEC.
This prospectus does not contain all the information contained in the
registration statement. The full registration statement can be obtained
from the SEC. This prospectus contains a general description of our company
and the securities being offered for sale. You should read this prospectus
together with the additional information incorporated by reference.
You can request a copy of any document incorporated by reference in
this prospectus, at no cost, by writing or telephoning us at the following:
Hallmark Financial Services, Inc.
777 Main Street, Suite 1000
Fort Worth, Texas 76102
Attention: Mark J. Morrison, CFO
Telephone: (817) 348-1600
FORWARD-LOOKING STATEMENTS
We believe that certain statements contained or incorporated by
reference in this prospectus are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 and are
considered prospective. The following statements are or may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995:
* statements before, after or including the words "may," "will,"
"could," "should," "believe," "expect," "future," "potential,"
"anticipate," "intend," "plan," "estimate" or "continue" or the
negative or other variations of these words, and
* other statements about matters that are not historical facts.
We may be unable to achieve the future results covered by the forward-
looking statements. The statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from the
future results that the statements express or imply. See "Risk Factors"
on page 5. Please do not put undue reliance on these forward-looking
statements, which speak only as of the date of this prospectus.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by us in connection with the
issuance and distribution of the securities being offered. All items below
are estimates other than the Securities and Exchange Commission registration
fee and the AMEX listing fee. Hallmark Financial Services, Inc. will pay
all of such expenses.
Securities and Exchange Commission registration fee $ 5,296.50
AMEX listing fee .................................. 45,000.00
Printing and engraving expenses ................... 1,000.00
Accounting fees and expenses ...................... 20,000.00
Legal fees and expenses ........................... 30,000.00
Subscription Agent fees and expenses .............. 5,000.00
Miscellaneous ..................................... 3,703.50
----------
Total ........................................ $110,000.00
==========
Item 15. Indemnification of Directors and Officers.
The Nevada General Corporation Law ("NGCL") provides that a director or
officer is not individually liable to the corporation or its stockholders or
creditors for any damages as a result of any act or failure to act in his
capacity as a director or officer unless (1) such act or omission
constituted a breach of his fiduciary duties as a director or officer, and
(2) his breach of those duties involved intentional misconduct, fraud or a
knowing violation of law. Under the NGCL, a corporation may indemnify
directors and officers, as well as other employees and individuals, against
any threatened, pending or completed action, suit or proceeding, except an
action by or in the right of the corporation, by reason of the fact that he
is or was a director, officer, employee or agent of the corporation so long
as such person acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction or upon a plea
of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation, or that, with respect to any criminal action or proceeding, he
had reasonable cause to believe that his conduct was unlawful.
The NGCL further provides that indemnification may not be made for any
claim as to which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to the
corporation or for amounts paid in settlement to the corporation, unless and
only to the extent that the court in which the action or suit was brought or
other court of competent jurisdiction determines upon application that, in
view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such expenses as the court deems
proper. To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding or in defense of any claim, issue or matter
therein, the corporation must indemnify him against expenses, including
attorneys' fees, actually and reasonably incurred by him in connection with
the defense. The NGCL provides that this is not exclusive of other rights
to which those seeking indemnification may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.
The registrant's articles of incorporation provide that the directors
and officers will not be personally liable to the registrant or its
stockholders for monetary damages for breach of their fiduciary duty as a
director or officer, except for liability of a director or officer for
acts or omissions involving intentional misconduct, fraud or a knowing
violation of law, or the payment of dividends in violation of the NGCL. The
registrant's bylaws and contractual arrangements with certain of its
directors and officers provide that the registrant is required to indemnify
its directors and officers to the fullest extent permitted by law. The
registrant's bylaws and these contractual arrangements also require the
registrant to advance expenses incurred by a director or officer in
connection with the defense of any proceeding upon receipt of an undertaking
by or on behalf of the director or officer to repay the amount if it is
ultimately determined by a court of competent jurisdiction that he or she
is not entitled to be indemnified by the registrant. The registrant's
bylaws also permit the registrant to purchase and maintain errors and
omissions insurance on behalf of any director or officer for any liability
arising out of his or her actions in a representative capacity. The
registrant does not presently maintain any such errors and omissions
insurance for the benefit of its directors and officers.
Item 16. Exhibits.
Exhibit # Description
--------- -----------
3.1 Articles of Incorporation of the registrant, as amended
(incorporated by reference to Exhibit 3(a) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1993).
3.2 By-Laws of the registrant, as amended (incorporated by reference
to Exhibit 3(b) to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1993).
3.3 Amendment of Article VII of the Amended and Restated Bylaws
of Hallmark Financial Services, Inc., adopted July 19, 2002
(incorporated by reference to Exhibit 10(b) to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 2002).
4.1 Specimen certificate for Common Stock, $.03 par value, of the
registrant (incorporated by reference to Exhibit 4 to the
registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1991).
5.1* Opinion of McGuire, Craddock & Strother, P.C.
23.1* Consent of KPMG LLP.
23.2* Consent of PricewaterhouseCoopers LLP.
23.3* Consent of McGuire, Craddock & Strother, P.C. (included in
opinion filed as Exhibit 5.1).
24.1* Power of Attorney (included on signature page hereto).
99.1* Form of Instructions as to Use of Rights Certificates.
99.2* Form of Notice of Guaranteed Delivery for Rights Certificate.
99.3* Form of Letter to Security Holders Who Are Record Holders.
99.4* Form of Letter to Securities Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.5* Form of Letter to Clients of Security Holders Who Are Beneficial
Holders.
99.6* Form of Nominee Holder Certification Form.
99.7* Substitute Form W-9 for Use with the Rights Offering.
99.8* Form of Beneficial Owner Election Form.
99.9* Subscription Agency Agreement between Hallmark Financial
Services, Inc. and Securities Transfer Corporation.
________________________
* Filed herewith
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to
include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
an action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on the
11th day of April, 2005.
HALLMARK FINANCIAL SERVICES, INC.
By: /s/ Mark E. Schwarz
----------------------------------------
Mark E. Schwarz, Chairman, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Mark E. Schwarz, Chairman,
President and Chief Executive Officer, and Mark J. Morrison, Executive Vice
President and Chief Financial Officer, and each of them individually, as his
true and lawful attorneys-in-fact and agents, with full power of
substitution, for him in his name, place and stead, in any and all
capacities, in connection with this registration statement, including to
sign and file in the name and on behalf of the undersigned as director or
officer of the registrant (i) any and all amendments or supplements
(including any and all stickers and post-effective amendments) to this
registration statement, with all exhibits thereto, and other documents in
connection therewith, and (ii) any and all additional registration
statements, and any and all amendments thereto, relating to the same
offering of securities as those that are covered by this registration
statement that are filed pursuant to Rule 462(b) promulgated under the
Securities Act of 1933 with the Securities and Exchange Commission and any
applicable securities exchange or securities self-regulatory body, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Mark E. Schwarz Chairman, President, Chief April 7, 2005
------------------------- Executive Officer and
Mark E. Schwarz Director (principal
executive officer)
/s/ Mark J. Morrison Executive Vice President and April 7, 2005
------------------------- Chief Financial Officer
Mark J. Morrison (principal financial officer)
/s/ Jeffrey R. Passmore Senior Vice President and April 7, 2005
------------------------- Chief Accounting Officer
Jeffrey R. Passmore (principal accounting officer)
/s/ Scott T. Berlin Director April 7, 2005
-------------------------
Scott T. Berlin
/s/ James C. Epstein Director April 7, 2005
-------------------------
James C. Epstein
/s/ James H. Graves Director April 7, 2005
-------------------------
James H. Graves
/s/ George R. Manser Director April 7, 2005
-------------------------
George R. Manser