CONFORMED COPY
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
Commission file number 0-16090
HALLMARK FINANCIAL SERVICES, INC.
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(Name of Small Business Issuer in Its Charter)
Nevada 87-0447375
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(State or Other Jurisdiction (I.R.S. Employer I.D. No.)
of Incorporation Organization)
14651 Dallas Parkway, Suite 900, Dallas, Texas 75240
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (972) 404-1637
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock $.03 par value American Stock Exchange Emerging Company
Marketplace
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ XX ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 40
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.
Yes [ XX ] No [ ]
State issuer's revenues for its most recent fiscal year - $23,885,406.
State the aggregate market value of the voting stock held by non-affiliate
- $4,657,765 as of March 23, 2001.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. Common Stock, $.03 par
value - 11,049,133 shares outstanding as of March 23, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the end of the
fiscal year covered by this report.
Risks Associated with Forward-Looking Statements Included in this Form
10-KSB
This Form 10-KSB contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the
safe harbors created thereby. These statements include the plans and
objectives of management for future operations, including plans and
objectives relating to future growth of the Company's business activities
and availability of funds. The forward-looking statements included herein
are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions, regulatory framework, and future business decisions, all of
which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that
the assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could be inaccurate and, therefore, there can be no
assurance that the forward-looking statements included in this Form 10-KSB
will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company
or any other person that the objectives and plans of the Company will be
achieved.
Item 1. Description of Business.
Introduction
Hallmark Financial Services, Inc. ("HFS") and its wholly owned
subsidiaries (collectively, the "Company") engage in the sale of property
and casualty insurance products. The Company's business primarily involves
marketing, underwriting and premium financing of non-standard automobile
insurance, as well as claims adjusting and other insurance related services.
Overview
The Company pursues its business activities through an integrated
insurance group (collectively, the "Insurance Group"), the members of which
are an authorized Texas property and casualty insurance company, American
Hallmark Insurance Company of Texas ("Hallmark"); a managing general agency,
American Hallmark General Agency, Inc. ("AHGA"); a network of affiliated
insurance agencies known as the American Hallmark Agencies ("Hallmark
Agencies"); a premium finance company, Hallmark Finance Corporation ("HFC");
and a claims handling and adjusting firm, Hallmark Claims Service, Inc.
("HCS"). The Company operates only in Texas.
Hallmark writes non-standard automobile liability and physical damage
coverages. Hallmark provides insurance through a reinsurance arrangement
with an unaffiliated company, State & County Mutual Fire Insurance Company
("State & County"). Through State & County, Hallmark provides insurance
primarily for high risk drivers who do not qualify for standard-rate
insurance.
AHGA holds an appointment from State & County to manage the sale and
servicing of State & County policies. Hallmark reinsures 100% of the State
& County policies produced by AHGA under a related reinsurance agreement.
AHGA markets the policies produced by Hallmark through the Hallmark
Agencies and through independent agents operating under their own names.
Additionally, AHGA provides premium processing, underwriting, reinsurance
accounting, and cash management for unaffiliated managing general agencies
("MGAs"). Hallmark assumes a portion of the business produced by these
unaffiliated MGA's.
HFC offers premium financing for policies sold by the Hallmark Agencies
and independent agents managed by AHGA.
HCS provides fee-based claims adjustment, salvage and subrogation
recovery, and litigation services to Hallmark and unaffiliated MGA's.
Insurance Group Operations
Formed in 1987, HFS commenced its current operations in 1990 when it
acquired, through several transactions, most of the companies now referred
to as the Insurance Group. HFS manages Hallmark, AHGA, the Hallmark
Agencies, HFC and HCS as an integrated Insurance Group that shares common
management, computer facilities and corporate offices. AHGA manages the sale
of State & County policies by the Hallmark Agencies and by independent
agents and provides premium processing, underwriting, reinsurance
accounting, and cash management to unaffiliated third parties. HFC offers a
premium finance program for State & County policies marketed by the Hallmark
Agencies and independent agents. HCS provides claims services to Hallmark
and unaffiliated MGA's.
The Company offers both liability and physical damage (comprehensive and
collision) coverages. Hallmark's bodily injury liability coverage is limited
to $20,000 per person and $40,000 per accident, and property damage
liability coverage is limited to $15,000 per accident. Physical damage
coverage is limited to $40,000 and $30,000 for vehicles insured under
annual/six-month and monthly policies, respectively.
Substantially all purchasers of Hallmark policies are individuals. No
single customer or group of related customers has accounted for more than 1%
of its net premiums written during any of the last three years.
The Company writes annual, monthly and six-month policies. The
Company's core net premium volume was composed of a policy mix of 57%
annual, 42% monthly and 1% six-month policies in 2000, and 51% annual, 47%
monthly and 2% six-month policies in 1999. The Company's typical customer
is unable or unwilling to pay either a half- or full-year's premium in
advance, and thus a monthly policy, or an annual or six-month policy subject
to financing, suits his/her budgetary needs.
The Company finances annual and six-month policy premiums produced by
AHGA through a premium finance program offered by HFC. During 2000, 93% of
Hallmark's annual and six-month policyholders financed their premiums
through HFC's premium finance program. During both 1999 and 1998 the
percentage was 92%.
HCS provides claims adjustment and related litigation services to both
the Company and unaffiliated MGAs. Fees are charged either on a per-file
basis, as a percentage of earned premiums or, in certain instances, a
combination of both methods. When the Company receives notice of a loss,
HCS personnel establish a claim file and an estimated loss reserve. HCS's
adjusters review, investigate and initiate claim payments, with the Company
utilizing a third-party claims service only in unusual circumstances. The
Company has an in-house legal department that closely manages its claims-
related litigation. Management believes that the Company achieves superior
efficiency and cost effectiveness by principally utilizing trained employee-
adjusters and an in-house litigation department.
Underwriting and Other Ratios
An insurance company's underwriting experience is traditionally measured
by its statutory "combined ratio". The combined ratio under statutory
accounting practices ("SAP") is the sum of (1) the ratio of net losses and
loss adjustment expenses ("LAE") incurred to net premiums earned (referred
to as the "statutory loss ratio"), and (2) the ratio of underwriting and
operating expenses to net premiums written (referred to as the "statutory
expense ratio"). The approximate SAP underwriting profit or loss is
affected to the extent the combined ratio is less or more than 100%. During
2000, 1999 and 1998, Hallmark experienced statutory loss ratios of 84.7%,
66.5% and 69.0%, respectively. During the same periods, it experienced
statutory expense ratios of 16.4 %, 29.1% and 38.2%, respectively, and
statutory combined ratios of 101%, 96% and 107%, respectively. These
statutory ratios do not reflect the deferral of policy acquisition costs,
investment income, premium finance revenues, or the elimination of
intercompany transactions required by accounting principles generally
accepted in the United States of America ("GAAP").
As discussed more fully below under Reinsurance Arrangements, Hallmark's
reinsurance treaties were changed effective July 1, 2000 to include 100% of
policy fees in the reinsurance treaty premium base thus directly impacting
the Company's 2000 statutory loss ratio. If treatment of policy fees had
not been changed during the last half of 2000, the statutory loss ratio
after reinsurance would have been 79%. The increase in loss ratios is
attributable to increased loss ratios on both the core State & County
business and the unaffiliated MGA programs. The increase in the loss ratio
of the core State & County business is the combined result of the following:
(1) the change in retention of policy fees from 100% to 30% effective July
1, 2000 as previously discussed; (2) depressed premium rates in 1999 and
part of 2000 that were still being earned throughout 2000; (3) weather-
related losses due to hail claims during the spring of 2000 and ice-related
claims during the fourth quarter of 2000; (4) increasing claim costs
principally due to rising medical, labor and repair costs; (5) unusually
high cancellation rate during the fourth quarter principally due to
enforcement of more stringent underwriting guidelines; and (6) some adverse
development of 1999 losses. Additionally, the loss ratios of assumed
unaffiliated MGA programs continued to adversely affect loss ratios. Two of
the unaffiliated MGA programs were cancelled effective July 1, 2000, but are
still in run-off. The loss ratios on these two programs for 2000 were 106%
and 99%, respectively. Another of the unaffiliated MGA programs had a loss
ratio during 2000 of 113%. This program has been cancelled effective March
1, 2001. Hallmark's 1999 statutory loss ratio decreased in relation to 1998
principally due to the change in retention of policy fees to 100% effective
January 1, 1999 which increased net earned premium. This decrease was
partially offset by (1) generally lower premium rates in 1999, (2) the
assumption of increased third party MGA business (which has a higher overall
loss ratio than the core State & County business), and (3) hail-related
claims incurred in May and June 1999.
The decrease in the 2000 statutory expense ratio is primarily
attributable to the increase in the minimum ceding commission rate to 31%
from 27.5% effective July 1, 2000 as well as an overall increase in ceding
commission income resulting from higher premium volume during 2000. The
increased ceding commission income is partially offset by increased
commission expenses, front fees, premium taxes and other variable expenses
directly related to premium volume. The decrease in the 1999 statutory
expense ratio as compared to 1998 was primarily attributable to (1)
decreases in salaries and related expenses and increased management
resources spent on premium finance and unaffiliated MGA operations, (2) a 1%
increase in the minimum ceding commission, and (3) change in certain
underwriting procedures which served to decrease underwriting expenses.
Under Texas Department of Insurance ("TDI") guidelines, property and
casualty insurance companies are expected to maintain a premium-to-surplus
ratio of not more than 3 to 1. The premium-to-surplus ratio measures the
relationship between net premiums written in a given period (premiums
written, less returned premiums and reinsurance ceded to other carriers) to
surplus (admitted assets less liabilities), all determined on the basis of
SAP. For 2000, 1999, and 1998, Hallmark's premium-to-surplus ratios were
2.98 to 1, 2.57 to 1 and 2.13 to 1, respectively. The increase in the 2000
premium-to-surplus ratio is attributable primarily to increased core State
& County premium volume as well as funds expended by Hallmark on systems
development and, to a lesser extent, the increase in unaffiliated MGA
premium volume assumed during 2000. For statutory purposes, systems
development is treated as a non-admitted asset and thus reduces statutory
surplus. For GAAP purposes, the systems development qualifies as an asset.
Reinsurance Arrangements
Hallmark shares its claims risk with non-affiliated insurance companies.
Commencing March 1, 1992, Hallmark and AHGA entered into a reinsurance
arrangement with State & County. Effective July 1, 1996, this arrangement
was supplemented by separate risk-sharing agreements between Hallmark and
three unaffiliated companies, all of which are rated A- or better by A.M.
Best: GE Reinsurance Company ("GE RE"), Dorinco Reinsurance Company
("Dorinco"), and Odyssey Reinsurance Corporation ("Odyssey"). Effective
July 1, 1997, the treaty was renewed with GE RE and Dorinco under
substantially the same terms and conditions. Effective July 1, 2000, the
treaty was renewed solely with Dorinco under modified terms and conditions.
Under the Company's arrangement with State & County, AHGA is a managing
general agency appointed by State & County to issue State & County policies,
as well as to appoint producing agents to sell these policies. As
compensation for acting as the managing general agency, AHGA receives from
Hallmark commissions equal to a percentage of premiums written. It uses the
majority of these commissions to compensate its producing agents for selling
State & County policies. AHGA issues State & County policies in accordance
with Hallmark's underwriting standards and pursuant to rates approved by
State & County. Although State & County is required to file periodic rate
adjustments with the state, TDI approval is not required. Hallmark reinsures
100% of the State & County business produced by AHGA. Ceding fees paid by
Hallmark to State & County are equal to a percentage of premiums written
(including policy origination fees).
Effective July 1, 2000, the Company entered into a new reinsurance
agreement with Dorinco whereby the Company, upon mutual agreement with
Dorinco, may elect on a quarterly basis to retain 30% to 45% of the risk.
During the period of July 1, 2000 through December 31, 2000, the Company
elected to retain 30%, and Dorinco assumed 70% of the State & County
business produced by AHGA. In addition, Dorinco unconditionally guarantees
Hallmark's and AHGA's obligations to State & County. Under the current
reinsurance agreement, 100% of policy origination fees are included in the
reinsurance treaty premium base. Policy origination fees are fees that the
Company is permitted by law to charge in addition to premiums to cover or
defray certain costs associated with producing policies. The minimum
commission rate under the new reinsurance agreement is 31% through February
28, 2001. Effective March 1, 2001, the minimum commission rate is 26%. The
commission rate increases 1:1 to any percentage decrease in the loss ratio
from an established benchmark to a provisional/maximum commission rate of
41%. From July 1, 1997 through June 30, 2000, GE RE and Dorinco,
collectively, assumed 75% of the State & County business produced by AHGA.
From July 1, 1996 through June 30, 1997, GE RE, Dorinco and Odyssey,
collectively, assumed 75% of the State & County business. For the period of
January 1, 1999 through June 30, 2000, Hallmark retained 100% of the policy
origination fees, paid premium taxes and ceding fees on 100% of the business
produced, and received a 30% provisional commission on the portion of the
business ceded. Prior to 1999, Hallmark retained 62.5% and ceded 37.5% of
policy origination fees to the reinsurers. During 1999 and the first six
months of 2000, the minimum commission rates were 29% and 26%, respectively,
under the GE RE and Dorinco agreements. During 1998, the minimum commission
rates were 28% and 25%, respectively.
Marketing
Customers for non-standard automobile insurance typically fall into two
groups. The first are drivers who do not qualify for standard auto
insurance due to driving record, claims history, residency status, type of
vehicle or adverse credit history. The second group is drivers who live in
areas of Texas in which there is limited availability of standard rate
insurance.
As the managing general agency, AHGA manages the marketing of the
Company's non-standard automobile insurance program through a retail network
of affiliated and independent agencies. At December 31, 2000, there were
four affiliated offices operating under the American Hallmark Agencies name
in Amarillo, Corpus Christi, Lubbock and the Dallas metropolitan area. In
addition, the Company is represented by more than 400 independent agents
with offices located throughout the State of Texas.
The Hallmark Agencies' business is developed primarily through
advertising in regional and local publications, direct-mail, telephone
solicitation, referrals and existing customers. In addition, field
marketing representatives promote the Company's insurance programs to
prospective independent agents and service existing agents. Both the
Hallmark Agencies and the independent agents represent other insurers and
sell other insurance products in addition to Hallmark policies. The
Company's appointed independent agents are located throughout Texas in major
cities, as well as suburban and some rural areas, with an emphasis in the
central and southern regions of Texas.
Competition
For the last several years, through mid-2000, the Texas non-standard
insurance market was characterized by an acceleration in competition. A
significant number of companies, many of which were newly formed, entered
the market place introducing programs with drastically reduced pricing. In
turn, existing competitors offered more competitive pricing of existing
programs and introduced increasingly competitive new programs. This climate
of intense competition occurred principally as a by-product of excess
capital and surplus of major insurance and reinsurance companies. However,
beginning approximately mid-2000, this trend started to abate. A number of
companies have withdrawn their non-standard automobile programs from Texas
and others are no longer writing business due to the inability to obtain
reinsurance. In this changing environment, the company has implemented
several rate increases and strengthened its underwriting standards while
continuing to provide superior service to its agents and insureds.
Insurance Regulation
The operations of Hallmark, AHGA and HFC are regulated by TDI. HFC is
also subject to further regulation under the Texas Credit Code. Hallmark is
required to file quarterly and annual statements of its financial condition
with TDI, prepared in accordance with SAP. Hallmark's financial condition,
including the adequacy of its surplus, premium-to-surplus ratio, loss
reserves, deposits and investments, is subject to review by TDI. Since
Hallmark does not write its insurance directly, but rather writes through a
county mutual, its premium rates and underwriting guidelines are not subject
to the same degree of regulation imposed on standard insurance companies.
However, State & County must file rate changes with TDI. AHGA and the
producing agents who staff the Hallmark Agencies offices are also subject to
TDI's licensing requirements. In addition, HFC is subject to licensing,
financial reporting and certain financial requirements required by TDI.
Interest rates, note forms and disclosures, among other things, are
regulated by the Office of Consumer Credit Commissioner.
TDI has broad authority to enforce its laws and regulations through
examinations, administrative orders, civil and criminal enforcement
proceedings, and suspension or revocation of an insurer's Certificate of
Authority or an agent's license. In extreme cases, including actual or
pending insolvency, TDI may take over, or appoint a receiver to take over,
the management or operations of an insurer or an agent's business or assets.
In addition, all insurance companies which write insurance in the State of
Texas are subject to assessments for a state administered fund which covers
the claims and expenses of insolvent or impaired insurers. The size of the
assessment is determined each year by the total claims on the fund that
year. Each insurer is assessed a pro-rata share based on its direct
premiums written. Payments to the fund may be recovered by the insurer
through deductions from its premium taxes at a rate of 10% per year over ten
years. There were no assessments during 2000 and 1999, thus Hallmark made
no payments to the fund during those years.
HFS is also regulated as an insurance holding company under the Texas
Insurance Code. Financial transactions between HFS or any of its affiliates
and Hallmark are subject to regulation by TDI. Applicable regulations
require TDI's approval of management and expense sharing contracts,
intercompany loans and asset transactions, investments in the Company's
securities by Hallmark and similar transactions. Further, dividends and
distributions by Hallmark to HFS are restricted.
On May 11, 2000, TDI issued its formal report on the results of TDI's
regular, triennial examination of Hallmark's books and records as of
December 31, 1998. The report indicated that no significant items or
discrepancies were noted during the examination. On January 29, 2001, TDI
issued its formal report on the results of TDI's market conduct examination
of AHGA. The report indicated that AHGA was materially in compliance with
TDI regulations governing market conduct.
Effective December 31, 1994, the National Association of Insurance
Commissioners ("NAIC") requested property/casualty insurers to file a risk-
based capital ("RBC") calculation according to a specified formula. The
purpose of the NAIC-designed formula is twofold: (1) to assess the adequacy
of an insurer's statutory capital and surplus based upon a variety of
factors such as potential risks related to investment portfolio, ceded
reinsurance and product mix; and (2) to assist state regulators under the
RBC for Insurers Model Act (the "Model Act") by providing thresholds at
which a state commissioner is authorized and expected to take regulatory
action. TDI adopted the Model Act during 1998. Hallmark's 2000 and 1999
adjusted capital under the RBC calculation exceeded the minimum TDI
requirement by 79% and 67%, respectively.
Analysis of Hallmark's Losses and LAE
The Company's consolidated financial statements include an estimated
reserve for unpaid losses and LAE of the Company's non-standard automobile
insurance subsidiary, Hallmark. Hallmark estimates its reserve for unpaid
losses and LAE by using case-basis evaluations and statistical projections,
which include inferences from both losses paid and losses incurred.
Hallmark also uses recent historical cost data, periodic reviews of
underwriting standards and claims management to modify the statistical
projections. Hallmark gives consideration to the impact of inflation in
determining its loss reserves, but does not discount reserve balances.
The amount of Hallmark's reserves represents management's estimates of
the ultimate net cost of all unpaid losses and LAE incurred through December
of each year. These estimates are subject to the effect of trends in claim
severity and frequency. Management continually reviews the estimates and
adjusts them as claims experience develops and new information becomes
known. Such adjustments are included in current operations, including
increases and decreases, net of reinsurance, in the estimate of ultimate
liabilities for insured events of prior years. (See Note 1 to the
Consolidated Financial Statements.)
The Company seeks to continually improve its loss estimation process by
refining its ability to analyze loss development patterns, claim payments,
and other information within a legal and regulatory environment which
affects development of ultimate liabilities. During late-1997 and 1998, the
Company significantly accelerated its use of voluntary mediations (prior to
court-ordered mediations) and began to more aggressively participate in
"settlement weeks" sponsored by the courts in various counties throughout
the state. These actions have increased the timeliness in which litigation
claims settle and have favorably impacted ultimate settlements.
Changes in loss development patterns and claim payments can
significantly affect the ability of insurers to estimate reserves for unpaid
losses and related expenses. Future changes in estimates of claim costs may
adversely affect future period operating results; however, such effects
cannot be reasonably estimated currently.
Reconciliation of Reserve for Unpaid Losses and LAE. The following table
provides a 2000 and 1999 reconciliation of the beginning and ending reserve
balances, on a gross-of-reinsurance basis, to the gross amounts reported in
the Company's balance sheet at December 31, 2000 and 1999:
2000 1999
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(Thousands of dollars)
Reserve for unpaid losses and $ 5,409 $ 4,580
LAE, net of recoverables,
January 1
Provision for losses and LAE 14,460 9,330
for claims occurring in the
current period
Increase in reserve for unpaid 97 14
losses and LAE for claims
occurring in prior periods
Payments for losses and LAE,
net of reinsurance:
Current period (9,286) (5,724)
Prior periods (3,229) (2,791)
------- -------
(12,515) (8,515)
Reserve for unpaid losses and $ 7,451 $ 5,409
LAE, net of reinsurance
recoverable, December 31
Reinsurance recoverable on 14,847 12,395
unpaid losses and LAE
at December 31
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Reserve for unpaid losses and $22,298 $17,804
LAE, gross of reinsurance ====== ======
at December 31
SAP/GAAP Reserve Reconciliation. The differences between the reserves for
unpaid losses and LAE reported in the Company's consolidated financial
statements prepared in accordance with GAAP and those reported in the annual
statement filed with TDI in accordance with SAP for years 2000 and 1999 are
summarized below:
December 31
2000 1999
--------------------------
(Thousands of Dollars)
Reserve for unpaid losses and LAE
on a SAP basis (net of reinsurance
recoverables on unpaid losses) $ 7,213 $ 5,196
Add estimated future unallocated LAE
reserve for which HCS is contractually
liable 238 213
-------- --------
Reserve for unpaid losses and LAE on a
GAAP basis (net of reinsurance
recoverables on unpaid losses) $ 7,451 $ 5,409
======== ========
Analysis of Loss and LAE Reserve Development
The following table shows the development of Hallmark's loss reserves,
net of reinsurance, for 1990 through 2000. Section A of the table shows the
estimated liability for unpaid losses and LAE, net of reinsurance, recorded
at the balance sheet date for each of the indicated years. This liability
represents the estimated amount of losses and LAE for claims arising in
prior years that are unpaid at the balance sheet date, including losses that
have been incurred but not yet reported to Hallmark. Section B of the table
shows the re-estimated amount of the previously recorded liability, based on
experience as of the end of each succeeding year. The estimate is increased
or decreased as more information becomes known about the frequency and
severity of claims.
Cumulative Redundancy/Deficiency (Section C of the table) represents the
aggregate change in the estimates over all prior years. Thus, changes in
ultimate development estimates are included in operations over a number of
years, minimizing the significance of such changes in any one year. The
effects on income in the past two years of changes in estimates of the
liabilities for losses and LAE are shown in the table under reconciliation
of reserves for unpaid losses and LAE.
ANALYSIS OF LOSS AND LAE DEVELOPMENT
(Thousands of dollars)
Year Ended December 31 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00
---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
A. Reserve for Unpaid 2968 3353 4374 4321 4297 5923 5096 4668 4580 5409 7451
Losses & LAE, Net of
Reinsurance Recoverables
B. Net Reserve Re-
estimated as of :
One year later 3126 2815 3423 4626 5175 5910 6227 4985 4594 5506
Two years later 3001 2885 3285 4499 5076 6086 6162 4954 4464
Three years later 3090 2813 3147 4288 5029 6050 6117 4884
Four years later 3052 2700 3095 4251 5034 6024 6070
Five years later 2988 2699 3067 4238 5031 6099
Six years later 2994 2685 3065 4239 5038
Seven years later 2987 2686 3065 4234
Eight years later 2990 2686 3057
Nine years later 2990 2686
Ten years later 2990
C. Net Cumulative (22) 667 1317 87 (741) (176) (974) (216) 116 (97 )
Redundancy (Deficiency)
D. Cumulative Amount
of Claims Paid, Net of
Reserve Recoveries,
through:
One year later 2100 1958 2109 3028 3313 3783 4326 3326 2791 3229
Two years later 2760 2472 2768 3883 4442 5447 5528 4287 3476
Three years later 2956 2654 2958 4147 4861 5856 5860 4387
Four years later 2990 2668 3027 4207 4975 5933 5699
Five years later 2983 2669 3054 4218 5005 6018
Six years later 2981 2685 3056 4223 5030
Seven years later 2987 2686 3056 4234
Eight years later 2990 2686 3057
Nine years later 2990 2686
Ten years later 2990
1999 2000
------- -------
Net Reserve-December 31 $ 5,409 $ 7,451
Reinsurance Recoverables 12,395 14,847
Gross Reserve - December 31 $ 17,804 $ 22,298
======= ======
Net Re-estimated Reserve 5,506
Re-estimated Reinsurance Recoverable 11,897
Gross Re-estimated Reserve $ 17,403
=======
Gross Cumulative Redundancy $ 401
=======
Investment Policy
Hallmark's investment objective is to maximize current yield while
maintaining safety of capital together with sufficient liquidity for ongoing
insurance operations. Accordingly, the investment portfolio is composed of
fixed income securities: U.S. Government and U.S. Government agency
debentures and agency mortgage-backed securities, municipal securities and
U.S. Government bond mutual funds. The average maturity of the portfolio
(after taking into account current assumptions regarding anticipated
principal prepayments on mortgage-backed securities and the call dates of
certain securities held), including short-term investments, is approximately
three years, which approximates Hallmark's claims payment patterns. It is
Hallmark's intent to hold investments until maturity. Maturities, bond
calls and prepayments of mortgage-backed securities totaling approximately
$3.4 million represent the securities liquidated in 2000. In addition, as
part of the Company's overall investment strategy, the Company utilizes an
integrated cash management system to maximize investment earnings on all
available cash. During 2000, the Company's investment income totaled
approximately $1.3 million compared to approximately $0.8 million for 1999.
Employees
On December 31, 2000, the Company employed 144 people on a full-time
basis. None of the Company's employees are represented by labor unions.
The Company considers its employee relations to be excellent.
Item 2. Description of Property.
The Company's corporate headquarters are located at 14651 Dallas
Parkway, Suite 900, Dallas, Texas. The suite is located in a high-rise
office building and contains approximately 25,570 square feet of space.
Effective June 7, 2000, the Company renegotiated its lease for a period of
71 months to expire November 30, 2007. The rent is currently $42,617 per
month. The Hallmark Agencies' offices are located in four Texas cities,
including Corpus Christi, Amarillo, Lubbock and the Dallas metropolitan
area. These offices are located in office buildings, shopping centers,
store fronts and similar commercial structures in low and middle income
neighborhoods. They contain an average of 900 square feet. All are
leased, some on a month-to-month basis and others for remaining terms
ranging up to 36 months. The type of space the Hallmark Agencies occupy is
generally available at moderate rentals. The Company does not consider the
location of any particular agency office to be material to its insurance
marketing operations.
Item 3. Legal Proceedings.
Except for routine litigation incidental to the business of the Company
and as described in Note 10 to the Consolidated Financial Statements,
neither the Company nor any of the properties of the Company was subject to
any material pending or threatened legal proceedings as of the date of this
report.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of 2000, the Company did not submit any matter
to a vote of its security holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock has traded on the American Stock Exchange's
Emerging Company Marketplace under the symbol "HAF.EC" since January 6,
1994. The following table shows the Common Stock's high and low sales
prices on the AMEX Emerging Company Marketplace for each quarter since
January 1, 1999.
Period High Sale Low Sale
1999
----
First Quarter $ 0.68 $ 0.19
Second Quarter 0.50 0.31
Third Quarter 0.50 0.31
Fourth Quarter 0.50 0.31
2000
----
First Quarter $ 0.44 $ 0.38
Second Quarter 0.50 0.38
Third Quarter 0.69 0.50
Fourth Quarter 0.69 0.44
2001
----
First Quarter (thru March 23) $ 0.63 $ 0.50
On March 23, 2001 there were 158 record holders and approximately 560
beneficial shareholders of the Company's Common Stock.
The Company has never paid dividends on its Common Stock. The Board of
Directors intends to continue this policy for the foreseeable future in
order to retain earnings for development of the Company's business.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following discussion of the Company's financial condition and the
results of its operations should be read in conjunction with the
consolidated financial statements and related notes included in this report.
Financial Condition and Liquidity
The Company's sources of funds are principally derived from insurance
related operations. Major sources of funds from operations include premiums
collected (net of policy cancellations and premiums ceded), ceding
commissions, processing fees, premium finance service charges and service
fees. Other sources of funds are from financing and investment activities.
Net cash flow provided by the Company's consolidated operating
activities was approximately $1.3 million greater for the year ended
December 31, 2000 as compared to the same period of 1999. This increase is
principally due to the increase in annual policy production. Additionally,
the Company commuted one of its reinsurance treaties during the third
quarter of 2000, thus generating additional cash flow from operations.
During the same time period, net cash used by investing activities increased
approximately $0.8 million. As a result of increased annual policy premium
volume during 2000, HFC originated more premium finance notes than it
received in premium finance payments. Cash provided by financing activities
was approximately $1.6 million greater for the year ended December 31, 2000
as compared to the same respective period of 1999 as a result of net
advances under HFC's secured financing arrangement with an unaffiliated
third party. (See Note 5 to the Consolidated Financial Statements.)
On a consolidated basis, the Company's liquidity increased 26% as of
December 31, 2000 as compared to December 31, 1999. The Company's
consolidated cash, cash equivalents and investments at December 31, 2000 and
1999 were $20.4 million and $16.1 million, respectively, excluding
restricted cash of approximately $4.3 million and $3.4 million,
respectively.
A substantial portion of the Company's 2000 consolidated liquid assets
are held by Hallmark and are not available for general corporate purposes.
Of the Company's consolidated liquid assets of $20.4 million at December 31,
2000, approximately $1.4 million (as compared to approximately $0.9 million
in 1999) represents non-restricted cash. Since state insurance regulations
restrict financial transactions between an insurance company and its
affiliates, HFS is limited in its ability to use Hallmark funds for its own
working capital purposes. Furthermore, dividends and loans by Hallmark to
HFS are also restricted and, in certain instances, subject to TDI approval.
Based on surplus at December 31, 2000, Hallmark could pay a dividend of up
to $0.6 million to HFS during 2001 without TDI approval. Although, TDI has
sanctioned the payment of management fees, commissions and claims handling
fees by Hallmark to HFS and affiliates, during the second half of 2000,
Hallmark did not pay all of the commissions allowed to AHGA. Additionally,
HFS made a capital contribution of $250,000 to Hallmark. These steps were
taken in order to bolster Hallmark's surplus to accommodate increased
premium volume and systems development expenditures. Management fees to HFS
of $150,000 were paid or accrued in 2000, and management fees of $425,000
were paid or accrued in 1999. Management anticipates that Hallmark will
continue to pay management fees periodically during 2001, and this should
continue to be a moderate source of unrestricted liquidity.
During the third quarter of 2000, the Company commuted loss reserves
under its previous reinsurance agreement (effective March 1, 1992 through
June 30, 1996) with Vesta Fire Insurance Corporation. The reserves were
commuted at 100%. The Company received approximately $0.5 million in cash
which was subsequently invested in government securities. It is anticipated
that related outstanding claims will be settled over the next two years.
Commissions from the Company's annual policy program for independent
agents represent a source of unrestricted liquidity when annual policy
production is level or increasing from the most recent previous quarters.
Under this program, AHGA offers independent agents the ability to write
annual and six-month policies, but commissions to substantially all
independent agents are paid monthly on an "earned" basis. However,
consistent with customary industry practice, Hallmark pays total commissions
up-front to AHGA based on the entire annual/six-months premiums written.
Independent agent production of annual/six month policies was approximately
$24.8 million in 2000 compared to approximately $16.5 million in 1999.
During 2000, AHGA received approximately $4.5 million in commissions related
to this annual policy program from Hallmark and paid earned commissions of
$3.4 million. This has resulted in increased unrestricted liquidity for the
Company during 2000. During 1999, AHGA received $3.4 million in commissions
related to this program from Hallmark and paid earned commissions of $2.1
million to independent agents.
Ceding commission income represents a significant source of funds to the
Company. Ceding commission income for 2000 increased $3.1 million
(representing a 50% increase) as compared to 1999. This increase is the
combined result of the increase in the minimum commission rate to 31% from
27.5% and the increase in premium volume of the core State & County
business. In accordance with GAAP, a portion of ceding commission income
and policy acquisition costs is deferred and recognized as income and
expense, respectively, as related net premiums are earned. Deferred ceding
commission income increased to $3.5 million at December 31, 2000 from $2.1
million at December 31, 1999. The increase in deferred ceding commission
income is the result of an increase in the minimum commission rate and an
increase in the Company's core State & County annual premium volume.
Deferred policy acquisition costs as of December 31, 2000 increased $1.1
million in relation to the prior year. This increase is also primarily
attributable to the increase in the Company's core State & County annual
premium volume.
Premium receivable from lender increased approximately $4.5 million
during 2000 as a result of increased annual policy production during 2000 as
compared to 1999. Prepaid reinsurance premiums, unpaid losses and LAE,
reinsurance recoverable and unearned premiums increased as expected in
relation to increased premium writings. (See Notes 3 and 4 to the
Consolidated Financial Statements.) Accounts payable and other accrued
expenses increased as a result of increased commissions due to independent
agents under the earned commission program.
During 2000, the amount of funding available to fund premium finance
notes under the secured financing arrangement with the unaffiliated third
party was increased to $12.0 million from $8.0 million. As of December 31,
2000, HFC had an outstanding balance on advances under the financing
arrangement of $ 11.4 million at an interest rate of 10%. Under the
financing arrangement, the maximum additional advances available to HFC at
December 31, 2000 were $0.6 million. At December 31, 1999, HFC had an
outstanding balance on advances under the financing arrangement of $6.3
million.
During 2000, the court ruled against the Company in its appeal of a 1997
verdict against the Company in favor of a former director and officer of
Hallmark. The increase in the accrued litigation costs during 2000
represents additional post-judgment interest and legal fees associated with
the appeal. This judgment will be paid out of restricted funds (which
includes accrued interest) that have been on deposit with the court and
earning interest since 1997. (See Note 10 to the Consolidated Financial
Statements.)
At December 31, 2000, Hallmark reported statutory capital and surplus of
approximately $6.4 million, which reflects an increase of $0.4 million over
the $6.0 million reported at December 31, 1999. Hallmark reported
statutory net income of $0.1 million during 2000 compared to $0.4 million
in 1999. During 2000, HFS made a capital contribution of approximately $0.3
million to Hallmark. At December 31, 2000, Hallmark showed a premium-to-
surplus ratio of 2.98 to 1, as compared to 2.57 to 1 for the year ended
December 31, 1999. The increase in Hallmark's premium to surplus ratio
during 2000 is a result of increased core State & County premium volume as
well as funds expended by Hallmark on systems development and, to a lesser
extent, the increase in unaffiliated MGA premium volume assumed during 2000.
For statutory purposes, systems development is treated as a non-admitted
asset and thus reduces statutory surplus. For GAAP purposes, the systems
development qualifies as an asset to the extent permitted by Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use".
The Company provides program administration and claims handling for
unaffiliated MGAs. The Company provides these services for one unaffiliated
MGA program which is currently producing new business. Under this
contract, the Company, as program administrator, performs certain
administrative functions, including cash management, underwriting and rate-
setting reviews, underwriting and policy processing and claims handling.
Hallmark assumes a 20% pro-rata share of the business produced under the
unaffiliated MGA program, and Dorinco assumes the remainder. Effective July
1, 2000, two other unaffiliated MGA programs discontinued writing new
business due to non-renewal of their reinsurance treaties. Additionally,
another unaffiliated MGA program discontinued writing new business effective
March 1, 2001 due to non-renewal of its reinsurance treaty. The Company
will continue to perform functions as defined in their respective contracts
during the run-off period.
Management is continuing to investigate opportunities to enhance and
expand its operations. While additional capital or strategic alliances may
be required to fund future company expansion, operational enhancements
through increased information technology capabilities is in progress. The
first phase is designed to enhance Company and agency relationships by
improving content and timeliness of information to support agents in
servicing their customers. The Company and selected agents have been
testing this web-based information system (named e-Integrity and referred to
as the Integrity System) for several months. The first of several stages of
full roll-out to all Company agents will commence late first quarter 2001.
The second phase of the Integrity System is to implement point-of-sale
technology to support agents in more promptly and efficiently producing new
business, as well as to improve the quality and timeliness of service to
existing policyholders. The Company anticipates that full implementation of
Phase I will be completed during second quarter of 2001. Implementation of
Phase II is targeted to commence by year end 2001 with full roll-out to be
completed early 2002.
Results of Operations
Gross premiums written (prior to reinsurance) of approximately $50.5
million for the year ended December 31, 2000 increased approximately 33% in
relation to gross premiums written in 1999. This increase in 2000 was
primarily due to an increase in core State & County premium volume. The
increase in core premium volume is principally attributable to a reduction
of competitive programs in the Texas marketplace. During 2000, softness in
nonstandard automobile rates due to intense competition over the last
several years prompted some companies to cease writing nonstandard
automobile insurance in Texas due to unacceptable underwriting results
and/or the inability to either obtain reinsurance at acceptable terms, or in
some instances, at any terms. Net premiums written (after reinsurance)
increased approximately 24% during 2000 as compared to 1999. The disparity
between the percentage increase in gross written premiums and net written
premiums is primarily due to a change in reinsurance terms governing
treatment of policy fees. Effective July 1, 2000, the reinsurance treaty
was amended to include 100% of policy fees as subject reinsurance premium
(compared to 0% during 1999 and the first six months of 2000). Thus, 100%
of the policy fees are included in both gross and net premiums written for
all of 1999 and the first half of 2000; only policy fees equal to Hallmark's
retention percentage are included in net premiums written during the last
half of 2000. Partially offsetting the impact of the change in policy fees
is an increase in Hallmark's retention rate to 30% from 25% effective July
1, 2000 and the assumption of business produced by unaffiliated MGA's.
Gross premiums earned (prior to reinsurance) of approximately $45.5
million increased 34% during 2000 as compared to 1999, and net premiums
earned (after reinsurance) increased 24%. The disproportionate change in
premiums earned prior to and after reinsurance is primarily due to the
change in policy fees discussed above partially offset by an increase in
retention by Hallmark and the assumption of premiums produced by third party
unaffiliated MGAs.
Incurred loss ratios (computed on premiums earned both prior to and
after reinsurance), on a GAAP basis, for the year ended December 31, 2000,
were approximately 95% and 84%, respectively, as compared to 79% prior to
and 65% after reinsurance for 1999. As noted above, Hallmark's reinsurance
treaties were changed effective July 1, 2000 to include 100% of policy fees
in the reinsurance treaty premium base. If treatment of policy fees had not
been changed during the last half of 2000, the loss ratio after reinsurance
would have been 79%. The increase in loss ratios is attributable to
increased loss ratios on both the core State & County business and the
unaffiliated MGA programs. The increase in the loss ratio of the core State
& County business is the combined result of the following: (1) the change in
retention of policy fees from 100% to 30% effective July 1, 2000 as
previously discussed; (2) depressed premium rates in 1999 and part of 2000
that were still being earned throughout 2000; (3) weather-related losses due
to hail claims during the spring of 2000 and ice-related claims during the
fourth quarter of 2000; (4) increasing claim costs principally due to rising
medical, labor and repair costs; (5) unusually high cancellation rate during
the fourth quarter principally due to enforcement of more stringent
underwriting guidelines; and (6) some adverse development of 1999 losses.
Additionally, the loss ratios of assumed unaffiliated MGA programs continued
to adversely affect loss ratios. Two of the unaffiliated MGA programs were
cancelled effective July 1, 2000 but are still in run-off. The loss ratios
on these two programs for 2000 were 106% and 99%, respectively. Another of
the unaffiliated MGA programs had a loss ratio during 2000 of 113%. This
program has been cancelled effective March 1, 2001.
Investment income increased 60% during 2000 as compared to 1999. The
increase is attributable to the combined effect of an increase in funds
available for investment resulting from increased premium volume and an
overall increase in the effective yield of the Company's investment
portfolio.
Finance charges, which increased 39% during 2000, represent interest
earned on premium notes issued by HFC. This increase is directly correlated
to the increase in the core State & County premium volume.
Processing and service fees, which decreased slightly during 2000,
represent fees earned on processing and servicing contracts with
unaffiliated MGAs.
Acquisition costs, net represents the amortization of acquisition costs
(and credits) deferred over the past twelve months and the deferral of
acquisition costs (and credits) incurred in the current period. The
increase in acquisition costs, net is primarily due to an increase in ceding
commission as a result of changes in the Company's reinsurance terms
partially offset by an increase in acquisition costs related to increased
annual premium volume.
Other acquisition and underwriting expenses decreased approximately 26%
as compared to the prior year. The decrease in other acquisition and
underwriting expenses is primarily attributable to increased ceding
commission income as a result of increased core State & County premium
volume and increased minimum commission rate to 31% from 27.5% due to
changes in the Company's reinsurance terms effective July 1, 2000. These
decreases are partially offset by an increase in commission expenses and
other variable expenses associated with increased premium volume.
Operating expenses include non-insurance expenses related to premium
finance operations, general corporate overhead, and third party
administrative and claims handling contracts. Related revenues are derived
from finance charges and service/consulting fees. Operating expenses for
2000 increased 25% in relation to the prior year. The majority of this
increase in operating expenses is attributable to variable expenses related
to increased volume in the Company's premium finance operations and the
development of technological improvements in information systems.
Interest expense increased approximately $0.5 million during 2000 as
compared to 1999. This increase is a direct result of an increase in
premium finance secured borrowings associated with the increase in annual
premium volume.
Litigation costs increased $0.4 million during 2000 as compared to
1999. During 2000, the court ruled against the Company in its appeal of a
1997 verdict against the Company in favor of a former director and officer
of Hallmark. The additional accrual primarily represents additional post-
judgment interest and legal fees associated with the appeal. This judgment
will be paid out of restricted funds (which includes accrued interest) that
have been on deposit with the court and earning interest since 1997.
The Company recognized a slight federal income tax benefit during 2000
despite a net pre-tax loss of $0.2 million principally due to differences
between financial statement and tax treatment of acquisition costs, net, and
changes in unearned premium reserves and loss/LAE reserves. Additionally,
the pre-tax loss included the additional $0.4 million of accrued litigation
costs as discussed above and directly impacted the Company's tax calculation
for 2000. Most of the additional $0.4 million is not deductible for tax
purposes in 2000 as the Company recognized the full deduction equal to funds
placed on deposit with the court in 1997 as allowed by federal tax
regulations.
Item 7. Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are filed as part of this report.
Description Page Number
----------- -----------
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity for the Years F-5
December 31, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended F-6
December 31, 2000 and 1999
Notes to Consolidated Financial Statements F-7
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required by Part III, Item 9 is incorporated by
reference from the Registrant's definitive proxy statement to be filed with
the Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Item 10. Executive Compensation.
The information required by Part III, Item 10 is incorporated by
reference from the Registrant's definitive proxy statement to be filed with
the Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by Part III, Item 11 is incorporated by
reference from the Registrant's definitive proxy statement to be filed with
the Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Item 12. Certain Relationships and Related Transactions.
The information required by Part III, Item 12 is incorporated by
reference from the Registrant's definitive proxy statement to be filed with
the Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits. The exhibits listed in the Exhibit Index appearing at
page 17 of this report are filed with or incorporated by reference in this
Report.
(b) Reports on Form 8-K. The Company did not file any Form 8-K
Current Reports during the fourth quarter of 2000.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HALLMARK FINANCIAL SERVICES, INC.
(Registrant)
Date: March 27, 2001 /s/ Linda H. Sleeper
----------------------------------
Linda H. Sleeper, President (Chief
Executive Officer)
Date: March 27, 2001 /s/ Johnny J. DePuma
----------------------------------
Johnny J. DePuma, Vice President
(Chief Financial Officer/Principal
Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Date: March 27, 2001 /s/ Ramon D. Phillips
----------------------------------
Ramon D. Phillips, Director
Date: March 27, 2001 /s/ Linda H. Sleeper
----------------------------------
Linda H. Sleeper, Director
Date: March 27, 2001 /s/ Raymond A. Kilgore
----------------------------------
Raymond A. Kilgore, Director
Date: March 27, 2001 /s/ James H. Graves
----------------------------------
James H. Graves, Director
Date: March 27, 2001 /s/ C. Jeffrey Rogers
----------------------------------
C. Jeffrey Rogers, Director
Date: March 27, 2001 /s/ George R. Manser
----------------------------------
George R. Manser, Director
Date: March 27, 2001 /s/ Scott T. Berlin
----------------------------------
Scott T. Berlin, Director
Date: March 27, 2001 /s/ Mark E. Schwarz
----------------------------------
Mark E. Schwarz, Director
EXHIBIT INDEX
The following exhibits are either filed with this report or incorporated
by reference.
Exhibit
Number Description
------ -----------
3(a) Articles of Incorporation of the registrant, as amended
(incorporated by reference to Exhibit 3(a) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1993).
3(b) By-Laws of the registrant, as amended (incorporated by reference to
Exhibit 3(b) to the registrant's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1993).
4 Specimen certificate for Common Stock, $.03 par value, of the
registrant (incorporated by reference to Exhibit 4 to the
registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1991).
10(a) Office Lease for 14651 Dallas Parkway, Suite 900, dated January 1,
1995, between American Hallmark Insurance Company of Texas and
Fults Management Company, as agent for The Prudential Insurance
Company of America (incorporated by reference to Exhibit 10(a) to
the registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994).
10(b) 100% Quota Share Reinsurance Agreement, as Restated, between State
& County Mutual Fire Insurance Company and American Hallmark
Insurance Company of Texas, effective March 1, 1992 (incorporated
by reference to Exhibit 10(a) to Amendment No. 1 on Form 8 to the
registrant's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1992).
10(c) General Agency Agreement, effective March 1, 1992, between State &
County Mutual Fire Insurance Company and Brokers General, Inc.
(incorporated by reference to Exhibit 10(b) to Amendment No. 1 on
Form 8 to the registrant's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1992).
10(d) Quota Share Retrocession Agreement, effective March 1, 1992
between American Hallmark Insurance Company of Texas and Liberty
National Fire Insurance Company (incorporated by reference to
Exhibit 10(c) to Amendment No. 1 on Form 8 to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended September 30,
1992).
10(e) 1991 Key Employee Stock Option Plan of the registrant (incorporated
by reference to Exhibit C to the definitive Proxy Statement
relating to the registrant's Annual Meeting of Shareholders held
May 20, 1991).
10(f) 1994 Key Employee Long Term Incentive Plan (incorporated by
reference to Exhibit 10(f) to the registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994).
10(g) 1994 Non-employee Director Stock Option Plan (incorporated by
reference to Exhibit 10(g) to the registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994).
10(h) Addendum No. 2 to the Quota Share Retrocession Agreement, effective
March 1, 1993, between American Hallmark Insurance Company of Texas
and Liberty National Fire Insurance Company (incorporated by
reference to Exhibit 10(o) to the registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1993).
10(i) Addendum No. 3 to the Quota Share Retrocession Agreement, effective
August 1, 1993, between American Hallmark Insurance Company of
Texas and Liberty National Fire Insurance Company (incorporated by
reference to Exhibit 10(p) to the registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1993).
Exhibit
Number Description
------ -----------
10(j) Administrative Services and Consulting Agreement, dated December
23, 1993, between American Southwest Insurance Managers, Inc.,
Liberty National Fire Insurance Company, Hallmark Financial
Services, Inc., Brokers General, Inc. and Citizens Adjustment and
Reporting Service, Inc. (incorporated by reference to Exhibit
10(q) to the registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1993).
10(k) Form of Executive Compensation Agreement representing respective
agreements dated August 23, 1994, between registrant and Ramon D.
Phillips, Raymond A. Kilgore, Linda H. Sleeper, and Johnny J.
DePuma (incorporated by reference to Exhibit 10(p) to the
registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994).
10(l) Addendum No. 1 to the 100% Quota Share Reinsurance Agreement, as
restated between State & County Mutual Fire Insurance Company and
American Hallmark Insurance Company of Texas effective November
22, 1994 (incorporated by reference to Exhibit 10(q) to the
registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994).
10(m) Second, Third, Fourth and Fifth Amendments to Office Lease for
14651 Dallas Parkway, Suite 900, dated January 1, 1995, between
American Hallmark Insurance Company of Texas and Fults Management
Company, as agent for The Prudential Insurance Company of America
(incorporated by reference to Exhibit 10(t) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995).
10(n) Form of Shareholders Agreement dated January 1, 1996, between
American Hallmark General Agency, Inc., Robert D. Campbell,
Margaret Jones and American Hallmark Agencies, Inc. (incorporated
by reference to Exhibit 10(u) to the registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995).
10(o) Form of Facilities & Services Agreement dated January 1, 1996,
between American Hallmark General Agency, Inc., Robert D
Campbell, Margaret Jones and American Hallmark Agencies, Inc.
(incorporated by reference to Exhibit 10(v) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995).
10(p) Form of Indemnification Agreement dated January 1, 1996, between
American Hallmark General Agency, Inc., Hallmark Financial
Services, Inc., Robert D. Campbell, Margaret Jones and American
Hallmark Agencies, Inc. (incorporated by reference to Exhibit
10(w) to the registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995).
10(q) Form of Shareholders Agreement dated January 3, 1996, between
American Hallmark General Agency, Inc., Robert D. Campbell,
Richard Mason, Sr. and Hallmark Underwriters, Inc. (incorporated
by reference to Exhibit 10(x) to the registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995).
10(r) Form of Facilities and Services Agreement dated January 3, 1996,
between American Hallmark General Agency, Inc., Robert D
Campbell, Richard Mason, Sr. and Hallmark Underwriter, Inc.
(incorporated by reference to Exhibit 10(y) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995).
10(s) Form of Indemnification Agreement dated January 3, 1996, between
American Hallmark General Agency, Inc., Hallmark Financial
Services, Inc., Robert D. Campbell, Richard Mason, Sr. and
Hallmark Underwriters, Inc. (incorporated by reference to Exhibit
10(z) to the registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995).
10(t) Form of 100% Quota Share Reinsurance Agreement between State &
County Mutual Fire Insurance Company and American Hallmark
Insurance Company of Texas effective July 1, 1996 (incorporated
by reference to Exhibit 10(a) to the registrant's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1996).
Exhibit
Number Description
------ -----------
10(u) Form of Quota Share Retrocession Agreement between American
Hallmark Insurance Company of Texas and the Reinsurer
(specifically identified as follows: Dorinco, Kemper and
Skandia), effective July 1, 1996 (incorporated by reference to
Exhibit 10(b) to the registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996).
10(v) Form of Quota Share Retrocession Agreement between American
Hallmark Insurance Company of Texas and the Reinsurer
(specifically identified as follows: Dorinco, Kemper and
Skandia), effective July 1, 1996 (incorporated by reference to
Exhibit 10(b) to the registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996).
10(w) Guaranty Agreement effective July 1, 1996 provided by Dorinco
Reinsurance Company in favor of State & County Mutual Fire
Insurance Company (incorporated by reference to Exhibit 10(c) to
the registrant's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1996).
10(x) Guaranty Agreement effective July 1, 1996 provided by Skandia
America Reinsurance Corporation in favor of State & County Mutual
Fire Insurance Company (incorporated by reference to Exhibit
10(e) to the registrant's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1996).
10(y) Form of Guaranty of Performance and Hold Harmless Agreement
effective July 1, 1996 between Hallmark Financial Services, Inc.
and Dorinco America Reinsurance Corporation (incorporated by
reference to Exhibit 10(f) to the registrant's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1996).
10(z) Form of Guaranty of Performance and Hold Harmless Agreement
effective July 1, 1996 between Hallmark Financial Services, Inc.
and Kemper Reinsurance Company (incorporated by reference to
Exhibit 10(g) to the registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996).
10(aa) Form of Guaranty of Performance and Hold Harmless Agreement
effective July 1, 1996 between Hallmark Financial Services, Inc.
and Skandia America Reinsurance Corporation (incorporated by
reference to Exhibit 10(h) to the registrant's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1996).
10(ab) Form of Addendum No. 4 - Termination to Quota Share Retrocession
Agreement between American Hallmark Insurance Company of Texas
and Vesta Fire Insurance Company (incorporated by reference to
Exhibit 10(I) to the registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996).
10(ac) Form of Addendum No. 3 - Termination to 100% Quota Share
Reinsurance Agreement between American Hallmark Insurance Company
and State & County Mutual Fire Insurance Company (incorporated by
reference to Exhibit 10(j) to the registrant's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1996).
10(ad) Automobile Physical Damage Catastrophe Excess of Loss Reinsurance
Agreement effective July 1, 1996 between American Hallmark
Insurance Company of Texas and Kemper Reinsurance Company
(incorporated by reference to Exhibit 10(a) to the registrant's
Quarterly Report on Form 10-QSB for the quarter and ended
September 30, 1996).
10(ae) Form of 100% Quota Share Reinsurance Agreement, effective January
1, 1997, between State & County Mutual Fire Insurance Company,
Vaughn General Agency, Inc. and American Hallmark General Agency,
Inc. (incorporated by reference to Exhibit 10(am) to the
registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996).
10(af) Form of General Agency Agreement, effective January 1, 1997,
between Dorinco Reinsurance Company, State & County Mutual Fire
Insurance Company and Vaughn General Agency, Inc. (incorporated
by reference to Exhibit 10(an) to the registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996).
Exhibit
Number Description
------ -----------
10(ag) Form of Administrative Services Agreement between State & County
Mutual Fire Insurance Company, Vaughn General Agency, Inc. and
American Hallmark General Agency, Inc. (incorporated by reference
to Exhibit 10(ao) to the registrant's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1996).
10(ah) Form of Loan Agreement dated March 11, 1997, between Hallmark
Financial Services, Inc. and Dorinco Reinsurance Company,
(incorporated by reference to Exhibit 10(ap) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1996).
10(ai) Form of Promissory Note dated March 11, 1997, with Hallmark
Financial Services, Inc. as Maker and Dorinco Reinsurance Company
as Payee. (incorporated by reference to Exhibit 10(aq) to the
registrant's Annual Report on Form 10-KSB for the year ended
December 31, 1996).
10(aj) Stock Pledge and Security Agreement dated March 11, 1997, between
ACO Holdings, Inc. and Dorinco Reinsurance Company. (incorporated
by reference to Exhibit 10(ar) to the registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996).
10(ak) Form of Endorsement No. 1, effective July 1, 1996, to the 100%
Quota Share Reinsurance Agreement between State & County Mutual
Fire Insurance Company and American Hallmark Insurance Company of
Texas, effective July 1, 1996. (incorporated by reference to
Exhibit 10(a) to the registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1997).
10(al) Form of Endorsement No 1, effective July 1, 1997, to the Guaranty
of Performance and Hold Harmless Agreement between Hallmark
Financial Services, Inc. and Skandia America Reinsurance
Corporation, effective July 1, 1996. (incorporated by reference
to Exhibit 10(b) to the registrant's Quarterly Report on Form 10-
QSB for the quarter ended June 30, 1997).
10(am) Form of Endorsement No. 1, effective July 1, 1997, to the
Guaranty Agreement provided by Skandia America Reinsurance
Corporation in favor of State & County Mutual Fire Insurance
Company, effective July 1, 1996. (incorporated by reference to
Exhibit 10(c) to the registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1997).
10(an) Form of Endorsement No. 1, effective July 1, 1997, to the
Guaranty Agreement provided by Dorinco Reinsurance Corporation in
favor of State & County Mutual Fire Insurance Company, effective
July 1, 1996. (incorporated by reference to Exhibit 10(d) to the
registrant's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1997).
10(ao) Form of Endorsement No. 1 - Termination, effective January 1,
1997, to the Quota Share Retrocession Agreement between American
Hallmark Insurance Company of Texas and the Reinsurers (Dorinco
Reinsurance Company and Odyssey Reinsurance Corporation),
effective July 1, 1996. (incorporated by reference to Exhibit
10(e) to the registrant's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1997).
10(ar) Form of Endorsement No. 1, effective July 1, 1997, to the Quota
Share Retrocession Agreementt between American Hallmark Insurance
Company of Texas and the Reinsurer (Dorinco Reinsurancee Company)
effective July 1, 1996. (incorporated by reference to Exhibit
10(h) to the registrant's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1997).
10(as) Automobile Physical Damage Catastrophe Excess of Loss Reinsurance
Agreement effective July 1, 1997 between American Hallmark
Insurance Company and Kemper Reinsurance Company. (incorporated
by reference to Exhibit 10(bf) to the registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1997).
Exhibit
Number Description
------ -----------
10(at) Endorsement No. 1, effective July 1, 1997, to the Quota Share
Retrocession Agreement between American Hallmark Insurance
Company of Texas and Kemper Reinsurance Company, effective July
1, 1996. (incorporated by reference to Exhibit 10(bg) to the
registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997).
10(au) Endorsement No. 2, effective January 1, 1997, to the Quota Share
Retrocession Agreement between American Hallmark Insurance
Company of Texas and Dorinco Reinsurance Company, effective
January 1, 1997. (incorporated by reference to Exhibit 10(bh) to
the registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997).
10(av) Endorsement No. 1, effective January 1, 1997, to the 100% Quota
Share Reinsurance Agreement between State & County Mutual Fire
Insurance Company, Vaughn General Agency, Inc. and American
Hallmark General Agency, Inc. (incorporated by reference to
Exhibit 10(bi) to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997).
10(aw) Form of Endorsement No. 2, effective July 1, 1997, to the 100%
Quota Share Reinsurance Agreement between State & County Mutual
Fire Insurance Company, Vaughn General Agency, Inc., American
Hallmark General Agency, Inc. and the Reinsurers (Dorinco
Reinsurance Company and Kemper Reinsurance Company) effective
July 1, 1997. (incorporated by reference to Exhibit 10(bj) to the
registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997).
10(ax) Form of Amendment No. 1 to the Loan Agreement dated March 11,
1997, between Hallmark Financial Services, Inc. and Dorinco
Reinsurance Company. (Incorporated by reference to Exhibit
10(bg) to the registrant's annual Report on Form 10KSB for the
fiscal year ended December 31, 1998.)
10(ay) Form of Retrocession Agreement effective March 1, 1998, between
American Hallmark Insurance Company of Texas, Dorinco Reinsurance
Company and Associated General Agency, Inc. (Incorporated by
reference to Exhibit 10(bh) to the registrant's annual Report on
Form 10KSB for the fiscal year ended December 31, 1998.)
10(az) Form of Retrocession Agreement effective June 1, 1998, between
American Hallmark Insurance Company of Texas, Dorinco Reinsurance
Company and Harold Loving, d/b/a Texas Insurance Facilities.
(Incorporated by reference to Exhibit 10(bi) to the registrant's
annual Report on Form 10KSB for the fiscal year ended December
31, 1998.)
10(ba) Form of Quota Share Retrocession Agreement effective September 1,
1998, between American Hallmark Insurance Company of Texas,
Dorinco Reinsurance Company and Van Wagoner Companies, Inc.
(Incorporated by reference to Exhibit 10(bj) to the registrant's
annual Report on Form 10KSB for the fiscal year ended December
31, 1998.)
10(bb) Endorsement No. 5, effective January 1, 1999, to the Quota Share
Retrocession Agreement between American Hallmark Insurance
Company of Texas and the Reinsurer (Dorinco Reinsurance Company),
effective January 1, 1997. (incorporated by reference to Exhibit
10(a) to the registrant's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1999).
10(bc) Endorsement No. 4, effective January 1, 1999, to the Quota Share
Retrocession Agreement between American Hallmark Insurance
Company of Texas and the Reinsurer (GE Re Reinsurance Company),
effective January 1, 1996.(incorporated by reference to Exhibit
10(b) to the registrant's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1999).
10(bd) Addendum No. 1 to the Retrocession Contract effective June 1,
1998 between Dorinco Re and American Hallmark Insurance Company
of Texas and Harold Loving, d/b/a Texas Insurance Facilities.
(incorporated by reference to Exhibit 10(a) to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1999).
Exhibit
Number Description
------ -----------
10(be) Endorsement No. 1 to the Retrocession Contract effective March 1,
1998 between Dorinco Re and American Hallmark Insurance Company
of Texas and Associated General Agency, Inc. (incorporated by
reference to Exhibit 10(b) to the registrant's Quarterly Report
on Form 10-QSB for the quarter ended September 30, 1999).
10(bf) Automobile Physical Damage Catastrophe Excess of Loss Reinsurance
Contract effective January 1, 1999 between American Hallmark
Insurance Company of Texas and GE Reinsurance Corporation.
(incorporated by reference to Exhibit 10(c) to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1999).
10(bg) Form of Endorsement No. 2, effective July 1, 1997, to the 100%
Quota Share Reinsurance Agreement between State & County Mutual
Fire Insurance Company, Vaughn General Agency, Inc. and American
Hallmark General Agency, Inc. (incorporated by reference to
Exhibit 10(bg) to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999)
10(bh) Form of Amendment No. 3 to the Loan Agreement dated March 11,
1997, between Hallmark Financial Services, Inc. and Dorinco
Reinsurance Company. (incorporated by reference to Exhibit 10(bh)
to the registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1999)
10(bi) Form of Endorsement No. 6, effective January 1, 1999, to the
Quota Share Retrocession Agreement between American Hallmark
Insurance Company of Texas and Dorinco Reinsurance Company,
effective January 1, 1997. (incorporated by reference to Exhibit
10(bi) to the registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1999)
10(bj) Form of the Second Renewal Promissory Note dated November 19,
1999, with Hallmark Financial Services, Inc. as Maker and Dorinco
Reinsurance Company as Payee. (incorporated by reference to
Exhibit 10(bj) to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999)
10(bk) Form of Sale and Assignment Agreement dated November 18, 1999,
with Hallmark Finance Corporation as Seller and FPF, Inc.
(incorporated by reference to Exhibit 10(bk) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1999)
10(bl) Form of Premium Receivable Servicing Agreement dated November 18,
1999 between Hallmark Finance Corporation and FPF, Inc.
(incorporated by reference to Exhibit 10(bl) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1999)
10(bm) Automobile Physical damage catastrophe Excess of Loss Reinsurance
Contract effective July 1, 1999 between American Hallmark
Insurance Company of Texas and GE Reinsurance Corporation
(incorporated by reference to Exhibit 10(a) to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended March 31,
2000).
10(bn) Seventh Amendment to Office Lease for 14651 Dallas Parkway, Suite
900, dated January 1, 1995, between American Hallmark Insurance
Company of Texas and Fults Management Company, as agent for The
Prudential Insurance Company of America (incorporated by
reference to Exhibit 10(a) to the registrant's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 2000).
10(bo) Quota Share Retrocession Agreement, effective July 1, 2000,
between American Hallmark Insurance Company of Texas and Dorinco
Reinsurance Company (incorporated by reference to Exhibit 10(a)
to the registrant's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 2000).
10(bp) Addendum No. 2 to the Retrocession Contract, effective June 1,
1998, issued to Dorinco Reinsurance Company by American Hallmark
Insurance Company of Texas, effective October 1, 1999
(incorporated by reference to Exhibit 10(b) to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 2000).
10(bq) Commutation Agreement, effective April 30, 2000, between Vesta
Fire Insurance Corporation and American Hallmark Insurance
Company of Texas (incorporated by reference to Exhibit 10(c) to
the registrant's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2000).
10(br) Form of Eighth Amendment to Office Lease for 14651 Dallas *
Parkway, Suite 900, dated January 1, 1995, between American
Hallmark Insurance Company of Texas and Fults Management Company,
as agent for The Prudential Insurance Company of America.
10(bs) Form of Quota Share Retrocession Contract between Dorinco *
Reinsurance Company and American Hallmark Insurance Company of
Texas, effective September 1, 2000.
10(bt) Form of Endorsement No. 5, effective July 1, 2000, to the 100% *
Quota Share Reinsurance Agreement issued to State and County
Mutual Fire Insurance Company, effective January 1, 1997.
10(bu) Form of Endorsement No. 4, effective July 1, 2000, to the 100% *
Quota Share Reinsurance Agreement between State and County Mutual
Fire Insurance Company and American Hallmark Insurance Company of
Texas, effective July 1,1996.
10(bv) Form of Termination Addendum to the Quota Share Retrocession *
Agreement, effective May 28, 1999, issued to American Hallmark
Insurance Company of Texas by Kemper Reinsurance Company,
effective July 1, 1996.
10(bw) Form of Termination Addendum to the Quota Share Retrocession *
Agreement, effective June 30, 2000, issued to Dorinco Reinsurance
Company by American Hallmark Insurance Company of Texas,
effective January 1, 1997.
10(bx) Form of Termination Addendum to the Quota Share Retrocession *
Contract, effective September 1, 2000, issued to Dorinco
Reinsurance Company by American Hallmark Insurance Company of
Texas, effective September 1, 1998.
10(by) Form of Termination Addendum to the Interests and Liability *
Agreement, effective June 30, 2000, of GE Reinsurance Corporation
with respect to the 100% Quota Share Reinsurance Agreement,
effective January 1, 1997.
10(bz) Form of Third Amendment to Executive Compensation Agreement, *
effective November 26, 2000, between Ramon D. Phillips and
Hallmark Financial Services Inc., dated August 24, 1994.
10(ca) Form of Third Amendment to Executive Compensation Agreement, *
effective November 26, 2000, between Linda H. Sleeper and
Hallmark Financial Services Inc., dated August 24, 1994.
10(cb) Form of Termination Endorsement, effective July 1, 2000, to the *
Guaranty of Performance and Hold Harmless Agreement between
Hallmark Financial Services, Inc. and GE Reinsurance Corporation
(formerly Kemper Reinsurance Company), effective July 1, 1996.
10(cc) Form of Termination Endorsement, effective July 1, 2000, to the *
Guaranty Agreement provided by GE Reinsurance Corporation
(formerly Kemper Reinsurance Company) in favor of State and
County Mutual Fire Insurance Company, effective July 1, 1996.
22 List of subsidiaries of the registrant (incorporated by reference
to Exhibit 22 to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1991).
28 Schedule P of American Hallmark Insurance Company of Texas as *
filed with the Texas Department of Insurance for the year ended
December 31, 2000.
* Filed herewith
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description Page Number
----------- -----------
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity for the F-5
Years
December 31, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended F-6
December 31, 2000 and 1999
Notes to Consolidated Financial Statements F-7
Report of Independent Accountants
---------------------------------
To the Board of Directors
Hallmark Financial Services, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows,
present fairly, in all material respects, the financial position of Hallmark
Financial Services, Inc. and Subsidiaries (the "Company") at December 31,
2000 and 1999, and the results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Dallas, Texas
March 23, 2001
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
----------------------------
ASSETS 2000 1999
----------- -----------
Investments:
Debt securities, held-to-maturity, at
amortized cost $ 7,243,373 $ 3,831,657
Equity securities, available-for-sale, at
market value 145,302 142,901
Short-term investments, at cost which
approximates market value 6,188,764 6,373,491
----------- -----------
Total investments 13,577,439 10,348,049
Cash and cash equivalents 6,830,712 5,786,069
Restricted cash 4,276,397 3,422,297
Prepaid reinsurance premiums 10,943,902 7,673,196
Premiums receivable from lender (net of
allowance for doubtful accounts of
$168,648 in 2000 and $68,287 in 1999) 13,544,985 9,058,958
Premiums receivable 799,140 741,613
Reinsurance recoverable 19,212,172 15,673,241
Deferred policy acquisition costs 3,867,033 2,741,076
Excess of cost over net assets acquired (net
of accumulated amortization of $1,642,093
in 2000 and $1,485,080 in 1999) 4,588,121 4,745,134
Current federal income tax recoverable 95,232 -
Deferred federal income taxes 572,112 212,059
Accrued investment income 108,364 52,721
Other assets 642,205 547,820
----------- -----------
$ 79,057,814 $ 61,002,233
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 13,032,999 $ 9,288,366
Unpaid losses and loss adjustment expenses 22,297,816 17,804,254
Unearned premiums 16,710,581 11,761,723
Reinsurance balances payable 3,341,437 2,623,603
Deferred ceding commissions 3,505,421 2,142,097
Drafts outstanding 1,534,721 901,471
Current federal income taxes payable - 46,124
Accrued ceding commission refund 2,503,128 1,251,614
Accounts payable and other accrued expenses 3,258,475 2,516,222
Accrued litigation costs 1,385,840 950,000
----------- -----------
67,570,418 49,285,474
----------- -----------
Stockholders' equity:
Common stock, $.03 par value, authorized
issued 11,855,610 shares in 2000 and
11,854,610 in 1999 355,668 355,638
Capital in excess of par value 10,875,432 10,875,212
Retained earnings 1,309,934 1,543,304
Accumulated other comprehensive income (10,471) (14,228)
Treasury stock, 806,477 shares in 2000
and 1999, at cost (1,043,167) (1,043,167)
----------- -----------
Total stockholders' equity 11,487,396 11,716,759
----------- -----------
$ 79,057,814 $ 61,002,233
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2000 and 1999
----------------------------
2000 1999
------------ ------------
Gross premiums written $ 50,468,652 $ 37,956,953
Ceded premiums written (31,395,654) (22,512,285)
------------ ------------
Net premiums written $ 19,072,998 $ 15,444,668
============ ============
Revenues:
Gross premiums earned $ 45,519,795 $ 33,928,854
Ceded premiums earned (28,124,949) (19,949,293)
------------ ------------
Net premiums earned 17,394,846 13,979,561
Investment income, net of expenses 1,264,138 789,584
Finance charges 2,925,772 2,098,944
Processing and service fees 1,952,388 1,969,930
Other income 348,262 362,675
------------ ------------
Total revenues 23,885,406 19,200,694
------------ ------------
Benefits, losses and expenses:
Losses and loss adjustment expenses 43,184,638 26,777,314
Reinsurance recoveries (28,627,143) (17,658,138)
------------ ------------
Net losses and loss adjustment expenses 14,557,495 9,119,176
Acquisition costs, net 237,366 140,781
Other acquisition and underwriting expenses
(net of ceding commission of $9,413,890
in 2000 and $6,291,236 in 1999) 3,274,272 4,397,249
Operating expenses 4,347,345 3,473,515
Interest expense 1,137,787 625,770
Amortization of intangible assets 157,015 157,015
Litigation costs 435,840 -
------------ ------------
Total benefits, losses and expenses 24,147,120 17,913,506
------------ ------------
Income (loss) from operations before
federal income taxes (261,714) 1,287,188
Federal income tax expense (benefit) (28,344) 499,878
------------ ------------
Net income (loss) $ (233,370) $ 787,310
============ ============
Basic and diluted earnings per share
(11,049,133 shares outstanding):
Net income (loss) $ (.02) $ .07
============ ============
The accompanying notes are an integral part
of the consolidated financial statements
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 2000 and 1999
---------------------------------------
Capital Accumulated
Number in Other Total Comprehensive
of Par Excess of Retained Comprehensive Treasury Stockholders' Income
Shares Value Par Value Earnings Income Stock Equity (Loss)
---------- ------- ---------- -------- ------ --------- ---------- -------
Balance at December 31, 1998 11,854,610 $355,638 $10,875,212 $ 755,994 ($9,429) ($1,043,167) $10,934,248
Comprehensive income:
Net income 787,310 787,310 787,310
Other comprehensive income,
net of tax
Unrealized losses on
securities, net of
tax of ($2,473) (4,799) (4,799) (4,799)
-------
Comprehensive income $782,511
=======
---------- ------- ---------- --------- ------- ---------- ----------
Balance at December 31, 1999 11,854,610 $355,638 $10,875,212 $1,543,304 ($14,228) ($1,043,167) $11,716,759
Comprehensive loss:
Net loss (233,370) (233,370) (233,370)
Other comprehensive income,
net of tax
Unrealized gains on
securities, net of
tax of $1,936 3,757 3,757 3,757
-------
Comprehensive loss ($229,613)
========
Issuance of common stock 1,000 30 220 250
---------- ------- ---------- --------- ------- ---------- ----------
Balance at December 31, 2000 11,855,610 $355,668 $10,875,432 $1,309,934 ($10,471) ($1,043,167) $11,487,396
========== ======= ========== ========= ======= ========== ==========
The accompanying notes are an integral
part of the consolidated financial statements
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2000 and 1999
----------------------------
2000 1999
----------- ----------
Cash flows from operating activities:
Net income (loss) $ (233,370) $ 787,310
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities:
Depreciation and amortization expense 304,773 314,385
Change in deferred Federal income taxes (360,053) (168,423)
Change in prepaid reinsurance premiums (3,270,706) (2,562,992)
Change in premiums receivable (57,527) 307,076
Change in deferred policy acquisition (1,125,957) (652,174)
Change in deferred ceding commissions 1,363,324 792,955
Change in unpaid losses and loss 4,493,562 1,789,685
Change in unearned premiums 4,948,858 4,028,099
Change in reinsurance recoverable (3,538,931) (1,772,745)
Change in reinsurance balances payable 717,834 526,039
Change in current federal income tax (95,232) 150,031
Change in current federal income tax (46,124) 46,124
Change in accrued ceding commission 1,251,514 506,928
Change in litigation costs 435,840 -
Change in all other liabilities 1,375,503 718,955
Change in all other assets (60,713) 14,471
----------- ----------
Net cash provided by operating 6,102,595 4,825,724
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment (237,073) (80,610)
Premium finance notes originated (40,608,079) (26,416,178)
Premium finance notes repaid 36,122,051 22,645,165
Change in restricted cash (854,100) (1,653,370)
Purchases of debt securities (6,803,480) (1,810,839)
Maturities and redemptions of investment
securities 3,393,119 2,426,532
Purchase of short-term investments (22,604,042) (14,337,813)
Maturities of short-term investments 22,788,769 11,221,201
----------- ----------
Net cash used in investing activities (8,802,835) (8,005,912)
----------- ----------
Cash flows from financing activities:
Proceeds from note payable - 6,500,000
Net advances from lender 4,323,931 (238,263)
Repayment of borrowings (579,298) (4,071,754)
Issuance of common stock 250 -
----------- ----------
Cash provided by financing activities 3,744,883 2,189,983
----------- ----------
Increase (decrease) in cash and cash equivalents 1,044,643 (990,205)
Cash and cash equivalents at beginning of year 5,786,069 6,776,274
----------- ----------
Cash and cash equivalents at end of year $ 6,830,712 $ 5,786,069
=========== ==========
Supplemental cash flow information:
Interest paid $ 1,107,374 $ 653,424
=========== ==========
Income taxes paid $ 428,877 $ 675,000
=========== ==========
The accompanying notes are an integral part
of the consolidated financial statements
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. Accounting Policies:
General
Hallmark Financial Services, Inc. ("HFS") and its subsidiaries
(collectively, the "Company"), are engaged primarily in the marketing,
underwriting and premium financing of non-standard automobile
insurance, as well as claims adjusting and other insurance related
services. The Company pursues its business activities through an
integrated insurance group (collectively, the "Insurance Group"), the
members of which are an authorized Texas property and casualty
insurance company, American Hallmark Insurance Company of Texas
("Hallmark"); a managing general agency, American Hallmark General
Agency, Inc.("AHGA"); a network of affiliated insurance agencies known
as the American Hallmark Agencies ("Hallmark Agencies"); a premium
finance company, Hallmark Finance Corporation ("HFC"); and a claims
handling and adjusting firm, Hallmark Claims Service, Inc. ("HCS"). The
Company operates only in Texas.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
and operations of HFS and its subsidiaries. Intercompany accounts and
transactions have been eliminated.
Basis of Presentation
The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America which, as to Hallmark, differ from statutory
accounting practices prescribed or permitted for insurance companies by
insurance regulatory authorities.
Investments
Debt securities are reported at amortized cost. The Company has the
intent and ability to hold all investments in debt securities to
maturity. Provisions for possible losses are recorded only on other-
than-temporary declines in the value of an investment.
Equity securities available-for-sale are reported at market value.
Unrealized gains and losses are recorded as a component of
stockholder's equity.
Short-term investments are carried at cost which approximates market.
Short-term investments include U.S. Government securities maturing
within one year.
Realized investment gains and losses are recognized in operations on
the specific identification method.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Recognition of Premium Revenues
Insurance premiums and policy fees are earned pro rata over the terms
of the policies. Upon cancellation, any unearned premium and policy fee
is refunded to the insurer. Insurance premiums written include gross
policy fees of $5,744,493 and $4,718,289 and policy fees, net of
reinsurance, of $3,695,031 and $4,741,428 for the years ended December
31, 2000 and 1999, respectively.
Finance Charges
The majority of Hallmark's annual insurance premiums are financed
through the Company's premium finance program offered by its wholly-
owned subsidiary, HFC. Finance charges on the premium finance notes
are recorded as interest earned. This interest is earned on the Rule
of 78's method which approximates the interest method for such short-
term notes.
Property and Equipment
Property and equipment, aggregating $1,544,413 and $1,307,340, at
December 31, 2000 and 1999, respectively, which is included in other
assets, is recorded at cost and is depreciated using the straight-line
method over the estimated useful lives of the assets (five to ten
years). Depreciation expense for 2000 and 1999 was $147,278 and
$156,781, respectively. Accumulated depreciation was $1,191,762 and
$1,044,484 at December 31, 2000 and 1999, respectively.
Premiums Receivable from Lender
Premiums receivable from lender represents premiums due to HFC as a
result of a secured financing agreement with an unaffiliated third
party. (See Note 5.)
Premiums Receivable
The majority of the balance in premiums receivable is premiums due to
Hallmark on unaffiliated MGA business assumed from Dorinco. (See Note
4.)
Deferred Policy Acquisition Costs
Policy acquisition costs (mainly commissions, underwriting and
marketing expenses) that vary with and are primarily related to the
production of new and renewal business, are deferred and charged to
operations over periods in which the related premiums are earned. The
method followed in computing deferred acquisition costs limits the
amount of such deferred costs to their estimated realizable value. In
determining estimated realizable value, the computation gives effect to
the premium to be earned, related investment income, losses and loss
expenses and certain other costs expected to be incurred as the
premiums are earned. Ceding commissions from reinsurers, which include
expense allowances, are deferred and recognized over the period
premiums are earned for the underlying policies reinsured. The change
in deferred ceding commission income is netted against the change in
deferred policy acquisition costs.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses represent the estimated ultimate
net cost of all reported and unreported losses incurred through
December 31, 2000 and 1999. The liabilities for unpaid losses and loss
adjustment expenses are estimated using individual case-basis
valuations and statistical analyses.
These estimates are subject to the effects of trends in loss severity
and frequency. Although considerable variability is inherent in such
estimates, management believes that the liabilities for unpaid losses
and loss adjustment expenses are adequate. The estimates are
continually reviewed and adjusted as necessary as experience develops
or new information becomes known; such adjustments are included in
current operations. The liabilities for unpaid losses and loss
adjustment expenses at December 31, 2000 and 1999 are reported net of
recoverables for salvage and subrogation of approximately $300,000 and
$180,000, respectively.
Reinsurance
Hallmark is routinely involved in reinsurance transactions with other
companies. Reinsurance premiums, losses, and loss adjustment expenses
are accounted for on bases consistent with those used in accounting for
the original policies issued and the terms of the reinsurance
contracts. (See Note 4.)
Income Taxes
The Company files a consolidated federal income tax return. Deferred
federal income taxes reflect the future tax consequences of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each year end. Deferred taxes are recognized
using the liability method, whereby tax rates are applied to cumulative
temporary differences based on when and how they are expected to affect
the tax return. Deferred tax assets and liabilities are adjusted for
tax rate changes.
Net Income Per Share
The computation of net income per share is based upon the weighted
average number of common shares outstanding during the period, plus (in
periods in which they have a dilutive effect) the effect of common
shares potentially issuable, primarily from stock options and exercise
of warrants. (See Notes 6 and 8.)
Intangible Assets
When Hallmark, AHGA, HFC, and HCS were purchased by HFS, the excess
cost over the fair value of the net assets acquired was recorded as
goodwill and is being amortized on a straight-line basis over forty
years. Other intangible assets consist of a trade name, a managing
general agent's license, and non-compete arrangements all of which were
fully amortized at December 31, 2000.
The Company continually reevaluates the propriety of the carrying
amount of goodwill and other intangibles as well as the amortization
period to determine whether current events and circumstances warrant
adjustments to the carrying value and/or revised estimates of useful
lives. At this time, the Company believes that no significant
impairment of the goodwill has occurred and that no reduction of the
estimated useful life is warranted.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Cash and Short-term Investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Investment Securities: Fair values are obtained from an independent
pricing service. (See Note 2.)
Premiums Receivable from Lender: The carrying amount reported in the
balance sheet for this instrument approximates its fair value as the
term of the receivable is less than one year.
Notes Payable: The carrying amounts reported in the balance sheet for
these instruments approximate their fair values. (See Note 5.)
Stock-based Compensation
The Company recognizes its compensation expense for grants of stock,
stock options, and other equity instruments in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees ("APB 25"). (See Note 8.)
Codification of Statutory Accounting Principles
In 1998 the National Association of Insurance commissioners (the
"NAIC") adopted the Codification of Statutory Accounting Principles
(the "Codification") guidance, which will replace the NAIC's primary
guidance on statutory accounting. The Texas Department of Insurance
adopted the Codification guidance, effective January 1, 2001. The
Company has not estimated the potential effect of the Codification
guidance.
Reclassification
Certain previously reported 1999 amounts have been reclassified to
conform to current year presentation. Such reclassification had no
effect on net income or stockholders' equity.
2. Investments:
Major categories of net investment income are summarized as follows:
Years ended December 31,
---------------------------
2000 1999
----------- -----------
Debt securities $ 293,494 $ 199,629
Equity securities 8,961 8,170
Short-term investments 524,543 375,252
Cash equivalents 319,351 204,643
Other 125,149 2,730
----------- -----------
1,271,498 790,424
Investment expenses (7,360) (840)
----------- -----------
Net investment income $ 1,264,138 $ 789,584
=========== ===========
No investment in any entity or its affiliates exceeded 10% of stockholders'
equity at December 31, 2000 and 1999.
The amortization cost and estimated market value of investments in debt
and equity securities by category is as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Market
--------- ------ ------- ---------
At December 31, 2000
--------------------
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $6,420,988 $13,864 $ (10,452) $6,424,400
Mortgage backed securities 822,385 4,348 (5,832) 820,901
--------- ------ -------- ---------
Total debt securities 7,243,373 18,212 (16,284) 7,245,301
Equity securities 161,167 2,040 (17,905) 145,302
--------- ------ -------- ---------
Total debt and equity securities $7,404,540 $20,252 $ (34,189) $7,390,603
========= ====== ======== =========
At December 31, 1999
--------------------
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $2,944,133 $19,527 $ (9,599) $2,954,061
Mortgage backed securities 887,524 6,780 (38,303) 856,001
--------- ------ -------- ---------
Total debt securities 3,831,657 26,307 (47,902) 3,810,062
Equity securities 164,459 - (21,558) 142,901
--------- ------ -------- ---------
Total debt and equity securities $3,996,116 $26,307 $ (69,460) $3,952,963
========= ====== ======== =========
The amortized cost and estimated market value of debt securities at
December 31, 2000, by contractual maturity, are as follows. Expected
maturities may differ from contractual maturities because certain
borrowers may have the right to call or prepay obligations with or
without penalities.
Amortized Market
Maturity: Cost Value
-------- ----------- -----------
Due in one year or less $ 2,358,865 $ 2,353,386
Due after one year through five years 3,944,275 3,946,647
Due after five years through ten years 117,848 124,367
Mortgage backed securities 822,385 820,901
----------- -----------
$ 7,243,373 $ 7,245,301
=========== ===========
At December 31, 2000 and 1999, investments in debt securities, with a
approximate carrying value of $100,000 were on deposit with the Texas
Department of Insurance (the "TDI") as required by insurance regulations.
Proceeds from investment securities of $3,393,119 and $2,426,532 during
2000 and 1999, respectively, were primarily from maturities, bond call
and prepayments of mortgage-backed securities.
3. Liability for Unpaid Losses and Loss Adjustment Expenses:
Activity in the liability for unpaid losses and loss adjustment expense
(in thousands) is summarized as follows:
2000 1999
------- -------
Balance at January 1 $ 17,804 $ 16,015
Less reinsurance recoverables 12,395 11,435
------- -------
Net Balance at January 1 5,409 4,580
------- -------
Incurred related to:
Current year 14,460 9,330
Prior years 97 14
------- -------
Total incurred 14,557 9,344
------- -------
Paid related to:
Current year 9,286 5,724
Prior years 3,229 2,791
------- -------
Total paid 12,515 8,515
------- -------
Net Balance at December 31 7,451 5,409
Plus reinsurance recoverables 14,847 12,395
------- -------
Balance at December 31 $ 22,298 $ 17,804
======= =======
4. Reinsurance:
Hallmark is involved in the assumption and cession of reinsurance
from/to other companies. The Company remains obligated to its
policyholders in the event that the reinsurers do not meet their
obligations under the reinsurance agreements.
Effective March 1, 1992, Hallmark entered into a reinsurance
arrangement with State & County Mutual Fire Insurance Company ("State &
County"), an unaffiliated company, to assume 100% of the nonstandard
auto business produced by AHGA and underwritten by State & County. The
earned premiums assumed under this agreement in 2000 and 1999 were
$41,577,697 and $30,859,991, respectively. Funds generated from
business produced under this agreement are maintained in accounts for
the benefit of State & County. At December 31, 2000 and 1999, Hallmark
held for the benefit of State & County, cash and cash equivalents of
$4,283,299 and $4,280,910, respectively, and investment securities at
amortized cost of $8,441,189 and $7,831,540, respectively.
The arrangement is supplemented by a separate retrocession agreement
effective July 1, 2000 between Hallmark and Dorinco Reinsurance Company
("Dorinco"), under which Hallmark currently retains 30% and cedes 70%
of the risk to Dorinco. Prior to July 1, 2000, Hallmark retroceded 75%
to its reinsurers (GE Reinsurance and Dorinco) under a separate
retrocession agreement effective January 1,1999 through June 30, 2000.
Under the retrocession agreement with Dorinco effective July 1, 2000,
Hallmark receives a provisional ceding commission of 41%. This
provisional commission is adjusted annually on a sliding scale based on
annual loss ratios. Based upon its loss experience, Hallmark can earn
a maximum commission of 41% and is guaranteed a minimum commission of
31% regardless of loss experience on business reinsured by Dorinco.
During 1999 and the first half of 2000, the guaranteed minimum
commission rates were 29% and 26%, respectively. As of December 31,
2000 and 1999, the accrued ceding commission refund was $2,503,128 and
$1,251,614, respectively. This accrual represents the difference
between the ceding commission received and the ceding commission earned
based on current loss ratios.
Hallmark assumes business from Dorinco on various unaffiliated MGA
programs. Under these programs, HCS also provides claims processing,
and AHGA provides premium processing. At December 31, 2000 and 1999,
Dorinco held cash of $2,819,086 and $2,049,291, respectively, to secure
balances ceded to Hallmark. These amounts were included in restricted
cash in the accompanying Consolidated Balance Sheets.
During 2000, the Company commuted loss reserves under its previous
reinsurance arrangement (effective March 1, 1992 through June 30, 1996)
with Vesta Fire Insurance Corporation. The reserves were commuted at
100%. The Company commuted outstanding loss and LAE reserves of
$506,932 as of the date of commutation.
5. Notes Payable:
A summary of the Company's notes
December 31,
2000 1999
---------- ----------
Note payable to unaffiliated insurance $ 2,447,331 $ 2,993,330
Balance under Financing Arrangement 10,585,668 6,261,737
Note payable to individual - 33,299
---------- ----------
$13,032,999 $ 9,288,366
========== ==========
Scheduled annual principal payments on note payable to
unaffiliated insurance company are as follows at December 31,
2001 727,999
2002 727,999
2003 727,999
2004 263,334
----------
$ 2,447,331
==========
The balance under the Financing Arrangement will be repaid during the
coming year as associated premium finance notes are repaid (See below).
Effective March 11, 1997, the Company entered into a loan agreement
with Dorinco, whereby the Company borrowed $7,000,000 (the "Dorinco
Loan") to contribute to HFC. Proceeds from this loan were used by HFC
primarily to fund premium finance notes. The loan agreement provides
for a seven-year term at a fixed interest rate of 8.25%. During the
fourth quarter of 1999, the Company paid $4,006,670 on the principal,
reducing the note balance to $2,993,330. During 2000, the Company paid
$545,999 of principal reducing the note balance to $2,447,331.
As long as certain financial covenants defined as "triggering events"
are maintained, collateral for the Dorinco Loan is limited to the stock
of HFC and a covenant by the Company not to pledge the stock of
Hallmark or AHGA. To avoid a triggering event, Hallmark must (1)
maintain a combined ratio and loss ratio which do not exceed 107% and
83%, respectively, and (2) maintain statutory surplus of $4,200,000
and experience no decreases to surplus in any one year that exceeds 15%
of the prior year surplus. If a triggering event should occur, the
Company has ten days to pledge the stock of AHGA and Hallmark as
additional collateral for the Dorinco Loan. Changes in the Company's
reinsurance terms negatively impacted the Company's statutory loss
ratio which was 84.7% for 2000. Dorinco waived the maximum loss ratio
covenant for 2000. The loan agreement also contains covenants which
require the Company to satisfy certain financial ratios which are less
restrictive than the triggering event ratios and, among other things,
restrict capital expenditures, payment of dividends, and incurrence of
additional debt. For the years ended, December 31, 2000 and 1999, the
Company was in compliance with the covenants of the loan with the
exception of the loss ratio covenant as explained above.
Effective November 18, 1999, HFC entered into a secured financing
arrangement (the "Financing Arrangement") and a servicing agreement
with an unaffiliated third party in order to fund HFC's premium finance
activities. The Financing Arrangement provides that HFC sell to the
third party all eligible premium finance notes generated by HFC in
connection with the financing of insurance policies. Though structured
as a sale, the transaction is accounted for as a secured financing
transaction as it does not meet the requirements for application of
SFAS 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. Under the Financing Arrangement,
HFC may from time to time specify the amount to be advanced by the
third party and secured by the premium finance notes (up to maximum of
90% of the face amount of the premium finance notes). Collections on
the premium finance notes are remitted to HFC to the extent they exceed
the sum of (a) the aggregate amount of all prior advances, (b) interest
on the aggregate advance balance from time to time outstanding, and (c)
certain other fees and expenses payable to the third party. The
interest payable under the Financing Arrangement is at the prime rate
plus a spread ranging from one-half percent to one percent depending on
the unpaid balance of the advances. As of December 31, 2000 and 1999,
HFC had an outstanding balance on advances under the Financing
Arrangement of $10,585,668 and $6,261,737, respectively, and the
applicable interest rates were 10% and 9.5%, respectively. Under the
Financing Arrangement, the maximum advances available to HFC were $0.6
million and $1.5 million at December 31, 2000 and 1999, respectively.
6. Earnings per Share:
The Company has adopted the provisions of SFAS No. 128, Earnings Per
Share, requiring presentation of both basic and diluted earnings per
share. A reconciliation of the numerators and denominators of the
basic and diluted per-share computations as required by SFAS No. 128
is presented below:
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
For the year ended December 31, 2000:
Basic Earnings per Share
Income available to
common stockholders:
Net loss ($233,370) 11,049,133 $ (.02)
======== ======
Effect of Dilutive Securities:
Options and warrants - - -
Diluted Earnings per Share
Income available to
common stockholders
+ assumed conversions:
Net loss ($233,370) 11,049,133 $ (.02)
======== ======
For the year ended December 31, 1999:
Basic Earnings per Share
Income available to
common stockholders:
Net income $787,310 11,048,133 $ .07
======== ======
Effect of Dilutive Securities:
Options and warrants - - -
Diluted Earnings per Share
Income available to
common stockholders
+ assumed conversions:
Net income $787,310 11,048,133 $ .07
======== ======
7. Regulatory Capital Restrictions:
Hallmark's 2000 and 1999 net income and stockholders' equity (capital
and surplus), as determined in accordance with statutory accounting
practices, were $138,959 and $357,451, and $6,390,374 and $6,013,143,
respectively. The minimum statutory capital and surplus required for
Hallmark by the TDI is $2,000,000. Texas state law limits the payment
of dividends to stockholders by property and casualty insurance
companies. The maximum dividend that may be paid without prior
approval of the Commissioner of Insurance is limited to the greater of
10% of statutory surplus as regards policyholders as of the preceding
calendar year end or the statutory net income of the preceding calendar
year. No dividends were declared or paid by Hallmark in 2000 or 1999.
Effective December 31, 1994, the NAIC requested property/casualty
insurers to file a risk-based capital ("RBC") calculation according to
a specified formula. The purpose of the NAIC-designed formula is
twofold: (1) to assess the adequacy of an insurer's statutory capital
and surplus based upon a variety of factors such as potential risks
related to investment portfolio, ceded reinsurance and product mix; and
(2) to assist state regulators under the RBC for Insurers Model Act
(the "Model Act") by providing thresholds at which a state commissioner
is authorized and expected to take regulatory action. The TDI adopted
the Model Act during 1998. The Company's 2000 and 1999 adjusted
capital under the RBC calculation exceeded the minimum TDI requirement
by 79% and 67%, respectively.
8. Stock Option Plans:
The Company has two stock option plans for key employees, the 1991 Key
Employee Stock Option Plan and the 1994 Key Employee Long Term
Incentive Plan, and a non-qualified plan for non-employee directors.
The number of shares reserved for future issuance under the 1991
employee plan, the 1994 employee plan and the non-employee director
plan is 500,000, 1,500,000 and 1,350,000, respectively. The option
prices under the plans are not to be less than the closing price of the
common stock on the day preceding the grant date. Pursuant to the
stock option plans, the Company has granted incentive stock options
under Section 422 of the Internal Revenue Code of 1986. The stock
options granted to employees vest over a 3 year period on a graded
schedule, 40% in the first 6 months and 20% on each anniversary date of
the grant date. The stock options granted to the directors vest over a
6 year period on a graded schedule, 40% in the first 6 months and 10%
on each anniversary date of the grant date. In accordance with APB 25,
the Company has not recognized compensation expense for the stock
options granted in 2000.
Pursuant to SFAS No. 123, Accounting for Stock-based Compensation, a
company may elect to continue expense recognition under APB 25, or to
recognize compensation expense for grants of stock, stock options, and
other equity instruments to employees based on fair value methodology
outlined in SFAS No. 123. The Company has elected to continue expense
recognition pursuant to APB 25.
A summary of the status of the Company's stock options as of December
31, 2000 and December 31, 1999 and the changes during the years ended
on those dates is presented below:
2000 1999
----------------------- -----------------------
Number Number
of Shares of Weighted of Shares of Weighted
Underlying Average Underlying Average
Options and Exercise Options and Exercise
Warrants Prices Warrants Prices
--------- ------- --------- -------
Outstanding at beginning
of the year 1,275,000 $ .468 1,840,000 $ .525
Exercised (1,000) $ .250 - $ -
Granted 1,157,500 $ .429 - $ -
Forfeited - $ - (63,000) $ .988
Expired - $ - (502,000) $ .558
Outstanding at end of year 2,431,500 $ .468 1,275,000 $ .504
Exercisable at end of year 1,774,500 $ .467 1,132,100 $ .468
2000 1999
--------- --------
Weighted average fair value
of all options granted $ 0.22 $ -
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2000 1999
--------- --------
Expected Term 5.00 -
Expected Volatility 51.48% -
Expected Dividend Yield 0.00% -
Risk-Free Interest Rate 6.37% -
The following table summarizes information about stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Avg.
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 12/31/00 Contr. Actual Life Exercise Price at 12/31/99 Exercise Price
--------------- ----------- ------------------ -------------- ----------- --------------
$ .25 to $ .70 2,280,500 6.56 $ .43 1,653,500 $ .43
$ .71 to $ 1.00 151,000 5.03 $ 1.00 121,000 $ 1.00
$ .25 to $ 1.00 2,431,500 6.47 $ .47 1,774,500 $ .47
The pro forma effects on net income and earnings per share for 2000
and 1999 from compensation expense computed pursuant to SFAS No. 123
is as follows:
December 31, 2000 December 31, 1999
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
SFAS No. 123 charge $ - $ 187,557 $ - $ 14,044
Net income (loss) $ (233,370) $(357,158) $ 787,310 $ 778,041
Net income (loss) $ (.02) $ (.03) $ .07 $ .07
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to
awards prior to 1995, and the Company anticipates making awards in the
future under its stock-based compensation plan.
9. Income Taxes:
The composition of deferred tax assets and liabilities and the related
tax effects as of December 31, 2000 and 1999, are as follows:
2000 1999
----------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs ($ 1,314,791) ($ 931,966)
Other ( 41,972) ( 121,781)
----------- ---------
Total deferred tax liabilities ( 1,356,763) ( 1,053,747)
----------- ---------
Deferred tax assets:
Unearned premiums 392,133 278,020
Loss reserve discounting, net
of salvage and subrogation 216,310 175,934
Deferred ceding commissions 1,191,843 728,313
Unrealized gains (losses) on securities 3,560 4,857
----------- ---------
Net operating loss carry forward 33,171 33,171
Other 125,028 78,681
----------- ---------
Total deferred tax assets 1,962,045 1,298,976
----------- ---------
Net deferred tax asset 605,282 245,229
Valuation allowance 33,170 33,170
----------- ---------
Net deferred tax asset $ 572,112 $ 212,059
========== ==========
A valuation allowance is provided against the Company's deferred tax
asset to the extent that management does not believe it is more likely
than not that future taxable income will be adequate to realize these
future tax benefits. This allowance was $33,170 in 2000 and 1999.
A reconciliation of the income tax provisions based on the prevailing
corporate tax rate of 34 percent to the provision reflected in the
consolidated financial statements for the years ended December 31, 2000
and 1999, is as follows:
2000 1999
-------- --------
Computed expected income tax expense (benefit)
at statutory regulatory tax rate ($ 88,983) $ 437,644
Amortization of excess cost over
net assets acquired 53,597 53,385
Meals and entertainment 2,807 2,243
Adjustment to prior year's deferred taxes - (5,235)
Other 4,235 11,841
-------- --------
Income tax expense (benefit) ($ 28,344) $ 499,878
======== ========
The Company has available, for federal income tax purposes, unused net
operating losses of $97,562 at December 31, 2000, which may be used to
offset future taxable income. The net operating losses will expire,
if unused, as follows:
Year
----
2002 $ 1,325
2003 96,237
-------
$ 97,562
=======
10. Commitments and Contingencies:
The Company has several leases, primarily for office facilities and
computer equipment, which expire in various years through 2007. Certain
of these leases contain renewal options. Rental expense amounted to
$570,923 and to $595,572 for the years ended December 31, 2000 and 1999,
respectively.
Future minimum lease payments under noncancelable operating leases as
of December 31, 2000 are as follows:
Year
----
2001 $ 598,724
2002 573,154
2003 530,942
2004 600,895
2005 600,895
2006 and thereafter 1,151,715
------------
Total minimum lease payments $ 4,056,325
============
The Company has a 401(K) savings plan. Employees who have completed
three months of service are eligible to participate. Under this plan
employees may contribute a portion of their compensation, and the
Company may contribute a discretionary amount each year. The Company's
contribution for 2000 to be paid in 2001 was $80,000 and for 1999 was
$84,000.
In March 1997, a jury returned a verdict against the Company and in
favor of a former director and officer of Hallmark in the amount of
approximately $517,000 on the basis of contractual and statutory
indemnification claims. The court subsequently granted the plaintiff's
motion for attorneys' fees of approximately $271,000, court costs of
approximately $39,000 and pre-judgment and post-judgment interest, and
rendered final judgment on the verdict. The Company believed the
outcome in this case was both legally and factually incorrect and
appealed the judgment. During the fourth quarter of 1997, the Company
deposited $1,248,758 into the registry of the court in order to stay
execution on the judgment pending the result of appeals. The amount on
deposit with the court of $1,457,311 as of December 31, 2000 has been
included as restricted cash in the accompanying balance sheet. During
February 2001, the court ruled against the Company in its appeal. In
anticipation of the verdict, the Company accrued an additional amount
of $435,840 at December 31, 2000 which primarily represents additional
post-judgment interest and legal fees associated with the appeal. This
judgment will be paid out of the restricted funds (which includes
accrued interest) that have been on deposit with the court and earning
interest since 1997.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position or results
of operations.
From time to time, assessments are levied on the Company by the
guaranty association of the State of Texas. Such assessments are made
primarily to cover the losses of policyholders of insolvent or
rehabilitated insurers. These assessments can be partially recovered
through a reduction in future premium taxes. There were no assessments
for 2000 and 1999.
11. Concentrations of Credit Risk:
The Company maintains cash equivalents in accounts with two financial
institutions in excess of the amount insured by the Federal Deposit
Insurance Corporation. The Company monitors the financial stability of
the depository institutions regularly, and management does not believe
excessive risk of depository institution failure exists at December 31,
2000.
All of the Company's business activity is with customers and independent
agents located within the State of Texas.