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, 1995
Commission file number 0-16090
HALLMARK FINANCIAL SERVICES, INC.
(Name of Small Business Issuer in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization)
Nevada
(I.R.S. Employer I.D. No.) 87-0447375
14651 Dallas Parkway, Suite 900, Dallas, Texas 75240
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (214) 404-1637
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which
Registered
Common Stock, 3 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 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [XX]
State issuer's revenues for its most recent fiscal year -
$13,795,903
State the aggregate market value of the voting stock held by non-
affiliates - $10,210,285 as of March 22, 1996.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Common Stock, 3 par value - 10,662,277 shares outstanding as of
March 22, 1996.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference
from the Registrant's definitive proxy statement to be filed with
the Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
Hallmark Financial Services, Inc. ("HFS"), a Nevada corporation
formed in 1987, and its wholly owned subsidiaries (HFS and its
wholly owned subsidiaries are collectively referred to herein as
the "Company") engage in the sale of consumer products and
services on credit terms, primarily to lower and middle income
customers. The Company's target market encompasses the
substantial number of Americans who either are denied credit from
banks, credit card companies and other conventional credit
sources, or have never established a bank account or credit
history. Currently, the Company's business primarily involves
premium financing, marketing and underwriting of non-standard
automobile insurance. Secondarily, the Company provides fee-
based claims adjusting and related services for affiliates and
third parties.
OVERVIEW
The Company pursues its business activities through an
integrated insurance group, the dominant members of which are an
authorized Texas property and casualty insurance company,
American Hallmark Insurance Company of Texas ("Hallmark"); a
managing general agent, American Hallmark General Agency, Inc.
("AHGA"); a network of affiliated insurance agencies known as the
American Hallmark Agencies ("Hallmark Agencies"); a commercial
excess and surplus lines affiliated managing general agency,
Hallmark Underwriters, Inc. ("HUI"); a premium finance company,
Hallmark Finance Corporation ("HFC"); and a claims handling and
adjusting firm, Hallmark Claims Service, Inc. ("HCS"), herein
referred to as the "Insurance Group". The Company operates only
in Texas.
Hallmark writes non-standard automobile liability and physical
damage coverages. Currently, 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.
HFC, through a financing and servicing arrangement with an
unaffiliated premium finance company (see note 8 to Consolidated
Financial Statements), offers premium financing to policyholders.
This arrangement, effective January 1, 1995, is referred to
herein as HFC's premium finance program. To a lesser degree,
Hallmark provides premium financing through a direct bill
program, which is being phased out.
AHGA, a managing general agency, holds an appointment from
State & County to manage the sale and servicing of State & County
<PAGE>
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 Company's
network of thirteen retail insurance agencies, the Hallmark
Agencies, and through a group of some 475 independent agents
operating under their own names.
HUI, formed to market and produce commercial excess and surplus
lines ("E&S") insurance on behalf of unaffiliated E&S insurers,
is expected to begin operations in April 1996. HUI is expected
to generate commission income by producing E&S insurance business
through the network of the Company's thirteen retail agencies,
certain agents from the Company's current independent agent
group, and other selected independent agents not currently
representing the Company.
SUMMARY OF BUSINESS DEVELOPMENT
Formed in 1987, HFS commenced its current operations in 1990
when it acquired, through several acquisitions, most of the
companies now referred to as the Insurance Group. Previously,
HFS owned and operated a small chain of retail outlets
specializing in the sale and financing of optical products and
services. These operations were discontinued as of December 31,
1990.
During 1990, HFS identified Acadine Capital Corporation ("ACC")
as an acquisition candidate. ACC operated various Texas retail
insurance agencies that sold and financed non-standard auto
insurance on behalf of unaffiliated insurers. To comply with
Texas Department of Insurance ("TDI") regulatory requirements,
HFS acquired the capital stock of the then inactive managing
general agency, Brokers General, Inc., now known as AHGA, on
August 3, 1990. The purpose of the AHGA acquisition was to
serve, initially, as a vehicle through which to acquire the
retail agency operations of ACC. On August 30, 1990, HFS,
through AHGA, acquired all of ACC's assets, including the retail
agency operations. HFS also acquired ACC's premium finance
operations through a newly-created subsidiary, Acadine Finance
Corporation, now known as HFC. Immediately thereafter, HFS
purchased the capital stock of Hallmark, as of September 1, 1990.
During 1991, HFS expanded the Insurance Group through two
additional acquisitions, neither of which constituted a material
transaction for accounting purposes. It acquired the capital
stock of Citizen's Adjustment and Reporting Services, Inc., now
known as HCS, as of January 1, 1991. HCS provides claims
adjustment, salvage and subrogation recovery, and litigation
services to Hallmark and two unaffiliated entities. Also, in May
1991, AHGA acquired the business and assets of another agency
operation. AHGA currently owns thirteen retail agencies which
operate under the American Hallmark Agencies name in various
Texas cities.
INSURANCE GROUP OPERATIONS
HFS manages Hallmark, AHGA, the Hallmark Agencies, HUI, HFC and
HCS as an integrated Insurance Group that shares common
management, computer facilities and corporate offices. AHGA
<PAGE>
manages the sale of State & County policies by the Hallmark
Agencies and by independent agents. HFC offers a premium finance
program through HFC and HCS provides claims services. HUI
underwrites E&S policies issued by unaffiliated insurance
companies and manages the sale of these policies by the Hallmark
Agencies and by independent agents, and offers premium financing
by HFC.
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 and monthly
policies, respectively.
During 1995, purchasers of Hallmark policies were individuals.
No single customer or group of related customers accounted for
more than 1% of its net premiums written during the last three
years.
Currently, the Company writes both annual and monthly policies.
During 1995 and 1994, monthly policies accounted for
approximately 39% of Hallmark's net premium volume. The
Company's typical customer is unable or unwilling to pay a full
year's premium in advance and thus, either a monthly policy or an
annual policy on credit, suits his/her budgetary needs. For the
annual-policy customer, the Company provides premium financing
primarily through a premium finance program offered by HFC.
Prior to January 1, 1995, and since early-1992, all premium
financing offered by the Company was provided under a direct-bill
program administered by Hallmark.
During 1995, approximately 89% percent of Hallmark's annual
policyholders financed their premiums through HFC's premium
finance program or Hallmark's direct-bill program. During 1994
and 1993, approximately 98% and 95%, respectively, of Hallmark
annual policyholders financed their premiums through Hallmark's
direct-bill program.
Effective January 1, 1995, the Company began financing premiums
produced by the Hallmark Agencies through HFC's premium finance
program. During May 1995, the Company expanded HFC's operations
to include the offer of financing premiums produced by the
Company's independent agents. The finance charges a premium
finance company may impose under a premium finance note are
subject to state regulation, but the permissible rates are
substantially higher than those an insurance company may now
charge under a direct-bill program.
HCS provides claims adjustment and related litigation services
to both the Company and third parties. Fees are charged either
on a per-file basis, as a percentage of earned premiums, or in
certain instances, a combination of both methods. When the
Company receives notice of a loss, HCS personnel establish a
claim file and an estimated loss reserve. HCS's adjusters
review, investigate and initiate claim payments, with the Company
utilizing a third-party claims service only in unusual
circumstances. The Company has an in-house legal staff and thus,
<PAGE>
handles much of its claims-related litigation in-house.
Management believes that the Company is achieving optimal
efficiency and cost effectiveness by utilizing its own trained
employee-adjusters and in-house litigation staff in most
instances.
UNDERWRITING AND OTHER RATIOS
An insurance company's underwriting experience is traditionally
measured by the 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 "loss
ratio"), and (2) the ratio of underwriting and operating expenses
to net premiums written (referred to as the "expense ratio").
The approximate SAP underwriting profit or loss is reflected by
the extent to which the combined ratio is less or more than 100%.
During 1995, 1994 and 1993, Hallmark experienced statutory loss
ratios of 81.8%, 74.6% and 75.3%, respectively. During the same
periods, it experienced expense ratios of 11.2%, 21.1% and
33.3%, respectively, and combined ratios of 93.0%, 95.7% and
108.6%, 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 generally accepted accounting principles ("GAAP").
Although losses related to earned premiums from TDI
allocations of risk to Hallmark under the Texas Automobile
Insurance Plan Association ("TAIPA") adversely impacted
Hallmark's loss ratios in prior years, the 1995 loss ratio was
not significantly affected due to recent reductions in TAIPA
premium allocations. Drivers who purchase insurance through
TAIPA typically present high risks and past claims have been
high. The number of drivers who purchased TAIPA coverage
increased substantially in 1992 and 1993 as the flexible rating
plan described in Reinsurance Arrangements resulted in reduced
availability of alternative coverage. Participation in the TAIPA
program, state-wide, remained high due to lower-than-market
premium rates until a rate increase in June 1995. The percentage
of TAIPA premiums allocated to Hallmark by the state peaked in
1992 and dropped dramatically in 1994. During 1995, 1994, 1993
and 1992, the Company was assigned TAIPA premiums of
approximately $49,000, $285,000, $850,000, and $1,350,000,
respectively. Due to a marked decrease in both 1994 and 1995
allocations, TAIPA earned premiums for 1995 decreased to
approximately $200,000 and thus, has had considerably less impact
on Hallmark's underwriting performance than in prior years. The
Company anticipates that TAIPA premiums should have little to no
impact on Hallmark's future performance absent a regulatory
change governing the TAIPA allocation methodology.
Hallmark's 1993 and 1994 loss ratios, and to a lesser extent,
the 1995 loss ratio, were also negatively impacted by adverse
loss experience associated with assumed business produced by an
unaffiliated agency pursuant to an April 1, 1993 reinsurance
agreement. Although this agreement was canceled effective
December 31, 1994, the runoff of business pursuant to this
contract continues to negatively impact Hallmark's loss ratio.
Hallmark's 1995 loss ratio was also adversely affected by
<PAGE>
unusually high catastrophe losses due to hail, as well as an
increase in non-catastrophic losses.
Hallmark's 1995 expense ratio of 11.2% has improved in relation
to 21.1% and 33.3% in 1994 and 1993, respectively, principally
due to continued improved operating efficiencies, including a
decrease in agent commission expense, and an increase in ceding
commission income. The higher 1993 ratio was partially
attributable to significant expenses incurred by Hallmark during
1993 (as well as 1992) to convert internal systems and
documentation, as well as the assumption of additional
administrative functions to accommodate the new relationship with
State & County, which was necessary due to legislative changes.
Under TDI guidelines, 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 1995, 1994, and 1993, Hallmark's premium-to-
surplus ratios were 2.58 to 1, 2.53 to 1 and 2.95 to 1,
respectively. The improvement in the 1995 and 1994 ratios in
relation to 1993 is primarily attributable to improved operating
efficiencies, including a reduction in agent commission expense,
started in 1993, but in effect for all of 1995 and 1994.
REINSURANCE ARRANGEMENTS
Hallmark shares its claims risk with non-affiliated insurance
companies. Effective March 1, 1992, Hallmark and AHGA entered
into a reinsurance arrangement with an unaffiliated company,
State & County. This arrangement is supplemented by a separate
risk-sharing agreement between Hallmark and an unaffiliated
company, Vesta Fire Insurance Corporation ("Vesta"), formerly
Liberty National Fire Insurance Company, which is rated A+ by the
A.M. Best Insurance Guide. Between January 1, 1991 and February
29, 1992, Hallmark ceded 60% of its risk on a quota-share basis
to a group of eight reinsurers.
Prior to March 1, 1992, Hallmark was a direct writer of non-
standard auto insurance on a consent-to-rate basis. On this
basis, Hallmark set its premiums by reference to standard rates
adopted by TDI, but added an excess premium in each prescribed
rating category. In January 1992, TDI adopted certain 1991
legislative amendments to the Texas Insurance Code which went
into effect March 1, 1992. Among other things, the amended
regulations replaced existing premium rate-setting procedures
with a flexible rating plan. This change virtually eliminated
the possibility of Hallmark continuing to write insurance on a
consent-to-rate basis.
Primarily in response to this regulatory change, the Company
entered into a relationship with a Texas county mutual insurance
company, State & County. Texas county mutual companies are
governed by special statutory standards, and their premium rates
are not subject to the rate-setting formulas or TDI approvals
required under the March 1, 1992 flexible rating plan.
<PAGE>
Under the Company's arrangement with State & County, AHGA is a
managing general agent appointed by State & County which allows
AHGA to issue State & County policies, as well as appoint
producing agents to sell these policies. AHGA issues State &
County policies in accordance with Hallmark's underwriting
standards and pursuant to proposed rates Hallmark submits to
State & County. Hallmark's proposed rates are effective
immediately upon approval by State & County and filing with TDI.
Although State & County is required to file periodic rate
adjustments with the state, TDI approval is not required.
Pursuant to the March 1, 1992 reinsurance agreement, Hallmark
reinsures 100% of the State & County business produced by AHGA.
Under a related quota-share reinsurance agreement, Vesta assumes
a pro-rata portion of the State & County business, including
claims risk, from Hallmark. In addition, Vesta unconditionally
guarantees Hallmark's and AHGA's obligations to State & County.
Since August 1, 1993, Hallmark has retained 25% and Vesta has
assumed 75% of the State & County business. From March 1, 1992
through July 31, 1993, Hallmark retained 40% and Vesta assumed
the balance.
As compensation for acting as managing general agent, AHGA
receives commissions equal to a percentage of premiums written.
It uses a portion of these commissions to compensate its
producing agents for selling State & County policies.
State & County receives commissions from Hallmark on the State
& County policies AHGA produces equal to a percentage of
Hallmark's assumed premiums written. The commission rate
decreases as the annual volume of premiums written exceeds
specified levels. As permitted by law, AHGA charges policy
origination fees in addition to premiums.
Under the reinsurance agreement between Hallmark and Vesta,
Hallmark receives a 30% commission on the portion of the business
ceded to Vesta. In addition, Hallmark is entitled to a
contingent commission equal to Vesta's share of earned premiums,
after deducting (i) Vesta's share of losses and loss adjustment
expenses ("LAE") on the ceded risk, (ii) Vesta's share of fees
payable to State & County, AHGA and Hallmark, (iii) and expense
factors payable to Vesta, which includes compensation for its
guaranty of Hallmark's obligations to State & County. If these
deductions reduce Vesta's expense-factor margins below the agreed
amount, the deficiency is carried over to the following year.
MARKETING
Customers for non-standard auto insurance typically fall into
two groups. The first is drivers who have had standard auto
insurance, but no longer qualify due to reasons such as driving
record, claims history, or residency status. The second group is
drivers who either live in areas of Texas in which standard-rate
insurers do not write insurance or who are declined coverage
because of the standard-rate insurers' limits on the amount of
coverage they write for new customers. Although these drivers
may qualify for the lower standard rates, they cannot obtain
standard coverage.
<PAGE>
As managing general agent, AHGA manages the marketing of the
Company's non-standard auto insurance program through a retail
network of affiliated and independent agencies. At December 31,
1995, there were 13 affiliated offices, operating under the
American Hallmark Agencies name, and some 475 independent agents
with offices located throughout the State of Texas. The thirteen
affiliated-agency offices are located in Amarillo, Austin, Corpus
Christi, Houston, Lubbock and the Dallas/Fort Worth metroplex
area.
Marketing efforts are twofold: one, direct advertising to the
insured for the benefit of the Company's affiliated agencies; and
two, marketing and ongoing service to the Company's independent
agents. Regarding the Hallmark Agencies, business is developed
primarily through advertising in regional and local publications,
direct-mail, telephone solicitation and referrals from standard
agents and existing customers. Regarding independent agents,
field marketing representatives promote the Company's insurance
program to prospective agents and service existing agents. The
Hallmark Agencies principally sell Hallmark policies, while
independent agents may represent several standard and non-
standard insurers. 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.
During 1992, substantially all of the Company's core State &
County business consisted of annual policies produced by the
Hallmark Agencies. During 1993, the Company began bolstering
premium volume principally through independent agent production
of monthly policies. Thus, during 1993, annual policies were
sold primarily by the affiliated agencies, while the majority of
monthly policies were sold by independent agents. In 1994, the
Company expanded its annual program whereby independent agents
could sell annual policies, but receive commissions on an earned,
or monthly, basis. The Company's previous annual program,
offered only to selected independent agents, was substantially
discontinued in late-1993. Annual premium production by
independent agents during 1995 and 1994 accounted for
approximately 57% and 47%, respectively, of total independent
agent production.
COMPETITION
Information available from industry sources indicates that the
private passenger automobile insurance market in Texas is
approximately $7.5 billion in premium volume. Annual premium
volume of the non-standard auto policies written in Texas
exceeded $1.8 billion, according to 1994 data. The Company's
1995 core State & County premium volume was almost 3% of the
total non-standard market with gross premiums of approximately
$49 million, a progressive increase from gross premiums written
of approximately $27 million in 1994 and gross premiums written
of $22 million in 1993. Although competition in the Texas non-
standard auto market is intense with some 40 companies competing
for a share of the non-standard auto market, management believes
that the Company has effective tools for increasing its market
share. The Company relies on its ability to promptly set rates
that are directed toward the lower-risk segment of the non-
<PAGE>
standard auto market and to compete on the basis of underwriting
criteria and 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 the 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 TDI regulation.
However, as discussed under REINSURANCE ARRANGEMENTS, premium
rates and underwriting guidelines must be approved by State &
County, and State & County, in turn, must file the rates with
TDI. Both AHGA and the producing agents who staff the Hallmark
Agencies offices are subject to TDI's licensing requirements.
HCS is also subject to licensing, financial reporting and certain
financial requirements. In addition, interest rates, note forms
and disclosures, among other things used by HFC, 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
1995, and thus Hallmark made no payments to the fund during the
current year. For years 1994 and 1993, Hallmark paid $33,619 and
$48,959, respectively, to the state insolvency fund.
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 the Company are restricted.
The staff of TDI recently completed the fieldwork of its
regular, triennial examination of Hallmark's books and records as
of September 30, 1995. Although a final report has not yet been
issued, TDI staff has informally reported to management that no
<PAGE>
significant items or discrepancies were noted during the
examination.
Effective December 31, 1994, the National Association of
Insurance Commissioners ("NAIC") requests 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: To assess the adequacy of a
company's statutory capital and surplus based upon a variety of
factors such as potential risks related to the company's
investment portfolio, ceded reinsurance and product mix; and to
assist state regulators under the RBC for Insurers Model Act by
providing thresholds at which a state commissioner is authorized
and expected to take regulatory action. Texas has not adopted
the RBC for Insurers Model Act formulated by the NAIC, and
currently, there are no TDI filing or compliance requirements
related to RBC.
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 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 the
Loss and Loss Adjustment Expenses section of Note 1 of Notes to
Consolidated Financial Statements.
The Company continually attempts to 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. For example, in 1992 regulatory changes governing
timing of certain claim payments and reserves affected loss
development patterns. In addition, legal trends changing the
potential liability of insureds affect claims handling procedures
and claims-related litigation. Such trends can significantly
affect the ability of insurers to estimate reserves for unpaid
losses and related expenses. Thus, future changes in estimates
of claims costs may adversely affect future period operating
results; however, such effects cannot be reasonably estimated.
<PAGE>
Reconciliation of Reserve for Unpaid Losses and LAE. The
following table provides a 1995, 1994 and 1993 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.
<TABLE>
<CAPTION>
1995 1994 1993
(Thousands of dollars)
<S> <C> <C> <C>
Reserve for unpaid losses and
LAE, net of reinsurance
recoverables, at beginning
of year $ 4,297 $ 4,321 $ 4,374
Provision for losses and LAE
for claims occurring in the
current period 8,458 6,803 7,594
Increase (decrease) in reserve
for unpaid losses and LAE
for claims occurring in prior
periods 502 (33) (1,161)
Payments for losses and LAE,
net of reinsurance:
Current period (4,020) (3,765) (4,377)
Prior periods (3,313) (3,029) (2,109)
(7,333) (6,794) (6,486)
Reserve for unpaid
losses and LAE, net of
reinsurance recoverables,
at end of year $ 5,924 $ 4,297 $ 4,321
Reinsurance recoverables on
unpaid losses and LAE, at
end of year (following the
adoption of FASB
Statement 113 in 1993) 16,399 8,371 5,905
Reserve for unpaid losses and
LAE, gross of reinsurance
recoverables on unpaid
losses, at end of year $ 22,323 $12,668 $10,226
</TABLE>
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 1995 and 1994 are summarized below:
<PAGE>
<TABLE>
<CAPTION>
1995 1994
(Thousands of Dollars)
<S> <C> <C>
Reserve for unpaid losses and LAE on a
SAP basis (net of reinsurance
recoverables on unpaid losses) $6,300 $4,636
Deduct estimated salvage and subrogation
recoveries reported on a cash basis
for SAP purposes and on an accrual basis
for GAAP purposes (376) (339)
Reserve for unpaid losses and LAE on
GAAP basis (net of reinsurance
recoverables on unpaid losses) $5,924 $4,297
</TABLE>
ANALYSIS OF LOSS AND LAE RESERVE DEVELOPMENT
The following table shows the development of Hallmark's balance
sheet liabilities, net of reinsurance, for 1985 through 1995.
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 three years of changes in estimates of the
liabilities for losses and LAE are shown in the table under
reconciliation of SAP/GAAP reserves for unpaid losses and LAE.
<PAGE>
<TABLE>
<CAPTION>
ANALYSIS OF LOSS AND LAE DEVELOPMENT
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95
A. Reserve for Unpaid
Losses & LAE, Net
of Reinsurance
Recoverables 1191 1130 1380 2365 3039 2968 3353 4374 4321 4297 5924
B. Net Reserve
Re-estimated as of:
One year later 1267 1299 2257 4264 3186 3126 2815 3423 4626 5175
Two years later 1390 1566 4231 4486 3353 3001 2885 3285 4499
Three years later 1541 3597 4321 4556 3374 3090 2813 3147
Four years later 2666 3645 4388 4606 3408 3052 2700
Five years later 2668 3629 4374 4595 3384 2988
Six years later 2667 3632 4372 4593 3363
Seven years later 2668 3632 4373 4585
Eight years later 2668 3631 4370
Nine years later 2667 3626
Ten years later 2662
C. Net Cumulative
Redundancy
(Deficiency) (1471)(2496)(2990)(2220)(324) (20) 653 1227 (178)(878)
D. Cumulative Amount
of Claims Paid, Net
of Reserve Recoveries,
Through:
One year later 808 935 1522 3490 1991 2100 1958 2109 3028 3313
Two years later 1187 1325 4029 4155 2994 2760 2472 2768 3883
Three years later 1413 3583 4211 4457 3285 2956 2654 2956
Four years later 2661 3615 4334 4569 3363 2990 2668
Five years later 2666 3627 4369 4587 3369 2983
Six years later 2667 3632 4372 4590 3361
Seven years later 2668 3632 4370 4583
Eight years later 2668 3631 4368
Nine years later 2667 3626
Ten years later 2662
</TABLE>
<TABLE>
'94 '95
<S> <C> <C>
Net Reserve - December 31 4,297 5,924
Reinsurance Recoverables 8,371 16,399
Gross Reserve - December 31 2,668 22,323
Net Re-estimated Reserve 5175
Re-estimated Reinsurance Recoverable 9264
Gross Re-estimated Reserve 14,439
Gross Cumulative Deficiency (1,771)
</TABLE>
<PAGE>
INVESTMENT POLICY
Hallmark's investment objective is to maximize current yield while
maintaining safety of capital together with sufficient liquidity for
ongoing insurance operations. Accordingly, the investment portfolio is
composed of fixed income securities: U.S. government and U.S. Government
agency debentures and agency mortgage-backed securities, municipal
securities and U.S. government bond mutual funds. The average maturity of
the portfolio (after taking into account current assumptions regarding
anticipated principal prepayments on mortgage-backed securities and the
call dates of certain securities held), and 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. The securities liquidated during 1995 were as a result of
maturities, bond calls and prepayments of mortgage-backed securities
totalling $934,102. During 1995, the Company's investment income totalled
$585,055, compared to $236,916 for 1994.
EMPLOYEES
On December 31, 1995, the Company employed 162 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 good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters are located at 14651 Dallas Parkway,
Suite 900, Dallas, Texas. This suite also houses Hallmark's operations,
AHGA's administrative staff, HFC and HCS's operations, and the Company's
computer center. The suite is located in a high-rise office building and
contains approximately 21,587 square feet of space. Effective January 1,
1995, the Company renegotiated its lease for a period of seventy-one months
to expire November 30, 2000, and expanded its square footage under the
previous lease by approximately 1,554 square feet. The Company further
expanded its square footage under this lease by an aggregate of 3,692
square feet pursuant to amendments effective May 25, 1995 and January 16,
1996. The rent is currently $22,037 per month, and will increase 3% to 4%
annually to a maximum of $25,285. The Hallmark Agencies' offices are
located in 11 Texas cities, including Dallas, Fort Worth, Austin and
Houston. 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. HUI currently
shares space in one of the slightly larger Dallas metroplex offices. 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 materially significant to
its insurance marketing operations.
HCS formerly occupied approximately 3,810 square feet of space in a
second location in Houston, Texas through mid-January, 1995. These
operations were moved and consolidated with the Dallas location. The
Houston lease expired September 1995.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Except for routine litigation incidental to the business of the Company,
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 1995, 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, when it changed its name. Under its prior name, ACOI, Inc., the
Company traded from August 4, 1992, to January 5, 1994, under the symbol
"CCS.EC." Prior to that time, the Common Stock traded in the over-the-
counter market and was quoted in the NASDAQ System under the symbol "ACOI".
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,
1994.
<TABLE>
<CAPTION>
Period High Sale Low Sale
<S> <C> <C>
1994
First Quarter $ .44 $ .19
Second Quarter .81 .25
Third Quarter .56 .38
Fourth Quarter .50 .25
1995
First Quarter $ .56 $ .25
Second Quarter .75 .56
Third Quarter 1.44 .56
Fourth Quarter 1.50 .81
1996
First Quarter $ 1.38 $ 1.00
(through March 22)
</TABLE>
On March 22, 1996 there were 192 record holders 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 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 financial
statements and related notes included in this Report.
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
The Company's sources of funds are principally derived from insurance
related operations. Major sources of funds are from premiums collected (net
of policy cancellations and premiums ceded), external funding of premium
notes,ceding commissions, processing fees premium finance service charges
and investment activities. Net cash flow provided from the Company's
consolidated operations for the years ended December 31, 1995 and 1994 were
$8,264,673 and $ 2,193,136, respectively.
On a consolidated basis, the Company's liquidity improved during 1995,
with bonds, equities, short-term investments and cash totalling $14,454,353
at December 31, 1995. This represents an increase of $7,829,780, or
almost 118%, over the December 31, 1994 balance of $6,624,573. The
Company's improved liquidity is primarily due to an approximate 62%
increase in Hallmark's 1995 gross premiums written of $49,158,955 versus
$30,278,277 written during 1994, an approximate 79% increase in ceding
commission income to $11,049,694 during 1995 versus $6,171,062 in 1994, and
more timely funding of annual policy premiums under HFC's premium finance
program than under Hallmark's direct-bill program. Under HFC's premium
finance program, premiums for annual policies due Hallmark are funded-in-
full in approximately 30 days. Any unfunded premium balances are recorded
as Premiums Receivable and the December 31, 1995 balance is $4,497,117
versus -0- at December 31, 1994. Under Hallmark's direct-bill program,
which is being phased out, the Company generally received a 10% to 20% down
payment and the remaining annual premium in ten monthly installments. As
expected, net installment premiums receivable, which represent remaining
premium payments due under the direct-bill program, decreased to a balance
of $299,182 at December 31,1995 as compared to a December 31, 1994 balance
of $8,284,633. During 1995 the Company received external funds, net of
cancellations, of $15,844,050 to fund premiums generated by the Company.
At December 31, 1995, the Company had $639,162 in notes payable, $428,463
of which is due in 1996. The Company expects to repay the amounts due on
these notes with cash from operations. However, the amount to be paid in
1996 may be less than the $428,463 reflected in the 1995 notes payable
balance. Included in this amount is a disputed principal obligation of
$380,000 in connection with a financing transaction which occurred prior to
HFS's acquisition of the Insurance Group. Further, if any portion of the
approximately $380,000 is ultimately deemed owing, the Company believes
that it has the right of offset against a related receivable in the sum of
$240,000. See Note 5 to Notes to Consolidated Financial Statements.
A substantial portion of the Company's 1995 liquid assets are held by
Hallmark and are not available for general corporate purposes. Of the
Company's consolidated liquid assets of $14,454,353 at December 31, 1995,
$2,131,582 (as compared to $665,503 in 1994) represents non-restricted
cash. Since state insurance regulations restrict financial transactions
between an insurance company and its affiliates, the Company is limited in
its ability to use Hallmark funds for its own working capital purposes.
Furthermore, dividends and loans by Hallmark to the Company are also
restricted and subject to TDI approval. However, TDI has sanctioned the
payment of management fees, commissions and claims handling fees by
Hallmark to the Company and other affiliates. During the latter part of
1993, the Company initiated measures to strengthen Hallmark's surplus in
order to insure its compliance with regulatory guidelines and to provide
the surplus balances necessary to accommodate premium growth. Some of the
measures taken were a temporary abatement or reduction of the management
fee and a reduction of commissions payable by Hallmark to the Company and
<PAGE>
AHGA, respectively. These measures continued into subsequent years, with
only $250,000 in management fees paid or accrued in 1994, and $600,000 of
management fees paid or accrued in 1995. While the 1995 fees increased
over 1994, they remained less than the amounts authorized by TDI.
Management anticipates that Hallmark will continue to pay management fees
periodically during 1996, and this should be a moderate source of
unrestricted liquidity. However, management intends to continue to restrict
payment of management fees, as necessary, to insure the surplus strength of
Hallmark.
Commissions from an annual policy program for independent agents
initiated during the first quarter of 1994 have been an additional source
of unrestricted liquidity during 1995. Under this program, AHGA offers
independent agents the ability to write annual policies, but commissions to
independent agents are paid monthly on an "earned" basis. However,
consistent with customary industry practice, Hallmark is paying total
commissions up-front to AHGA based on the entire annual premiums written.
Independent agent production of annual policies was approximately $24
million in 1995 compared to $8 million in 1994. During 1995, AHGA received
$4,361,742 in commissions related to this annual policy program from
Hallmark, of which $1,510,231 will be paid to independent agents during
1996 as earned. In 1995 and 1994 these amounts were $1,487,660 and
$626,486, respectively.
Ceding commission income represents a significant source of funds to the
Company. In 1995 and 1994, ceding commission income exceeded agent
commission and other direct expenses associated with the cost of producing
new business (i.e., policy acquisition costs). Ceding commission income
for 1995 increased $4,878,632 to $11,049,694 representing a 79% increase as
compared to 1994. 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 also increased significantly to $3,518,227 at
December 31, 1995, from $2,191,344 at December 31, 1994. This increase is
principally due to an increase in the Company's premium volume which
includes annual policies. In light of the growth in premium volume,
deferred policy acquisition costs as of December 31, 1995, also increased
in relation to the prior year. However, deferred policy acquisition costs
of $2,999,541 were $518,686 less than deferred ceding commission income of
$3,518,227 at December 31, 1995.
Prepaid reinsurance premiums and reinsurance recoverable generally
increased as expected in relation to increased premium writings. See Note
4 to Notes to Consolidated Financial Statements.
At December 31, 1995, Hallmark reported statutory capital and surplus of
$4,774,444, which reflects an increase of $941,460 over the $3,832,984
reported at December 31, 1994. At December 31, 1995, Hallmark showed a
premium-to-surplus ratio of 2.58 to 1, as compared to 2.53 to 1 for the
year ended December 31, 1994. Management believes that, despite a higher
statutory loss ratio of 81.8% in 1995 compared to 74.6% in 1994, Hallmark
is positioned to maintain and strengthen statutory surplus through
continued earnings from insurance operations. Hallmark implemented rate
increases for new business written in certain territories effective
September 15, 1995 and January 1, 1996, respectively, which is intended to
return loss ratios to desirable levels in 1996. However, increased 1995
loss ratios may have a negative impact on Hallmark's reinsurance treaties
for 1996. Management continues to believe that development of enhanced
statistical data during the last two years to further refine rate-setting
<PAGE>
procedures and to promptly identify high-loss ratio books of business
produced by independent agents, as well as a continued emphasis on direct
appointments of independent agents, should continue to positively affect
earnings and liquidity during 1996.
Effective January 1, 1995, the Company began financing premiums of
affiliated agents through a premium finance program offered by its formerly
dormant premium finance subsidiary, HFC, and independent agents began
financing through HFC's premium finance program in May of 1995. The
financing of the premium notes is provided by an unaffiliated premium
finance company on a secured basis (see "Insurance Group Operations"). The
transfer of financing from Hallmark's direct billing program to HFC's
premium financing program has had a positive impact on liquidity during
1995 and management expects this trend to continue. See Note 8 to
Consolidated Financial Statements.
During 1996, management expects that Company liquidity will continue to
be favorably impacted by a continued focus on strengthening the performance
of the Company's core State & County business with particular emphasis on
enhancement of HCS's procedures. The Company has increased its claims
staff and hired additional, experienced claims adjusters and supervisory
personnel which, in turn, should lower loss and LAE payments and favorably
impact the Company's profitability. This focus has included and will
continue to encompass an ongoing emphasis on systems and effective rate-
setting procedures, a close monitoring of agent performance (followed by
corrective action, as necessary), and expansion of the premium finance
subsidiary operations to include, at a minimum, financing of E&S premiums
produced by HUI. Management also anticipates that an integrated cash
management system implemented in late-1995 will positively impact
liquidity.
The Company continues to pursue third party claims handling and
administrative contracts. During 1995, HCS entered into a small claims-
handling and consulting contract with an unaffiliated independent agent.
However, fees from this contract were not material during 1995 and are not
expected to have a significant impact on 1996. Effective December 31,
1994, the contract between the Company, Vesta and an unaffiliated agency
governing claims adjusting and certain administrative services was
canceled. However, the Company continues to earn fees for handling claims-
related litigation. Although the Company is actively pursuing additional
third party claims handling business, it does not have any other definitive
agreements at this time.
The Company expects to begin producing E&S insurance by HUI through the
Company's marketing arm, AHGA beginning April 1996. This business will be
produced by the Hallmark Agencies and a select group of independent agents,
and some portion of the premiums will be financed by HFC. No entity within
the Company will bear any underwriting risk. The E&S policies will be
written on behalf of A-rated (A.M. Best rating) unaffiliated insurance
companies. Management anticipates that the growth of this business will be
gradual, and does not expect a significant liquidity contribution in 1996.
HFC will offer premium financing for E&S business produced by HUI.
Management is currently in discussions with a bank regarding a secured line
of credit to fund HFC's E&S premium notes. The Company intends to provide
the funding until such time that bank financing is in place, and
anticipates that internal funding could be used to sustain the E&S program
during its first year.
<PAGE>
Management intends to continue to investigate opportunities for future
growth and expansion. However, the Company currently has no growth plans
which would require significant external funding during 1996.
RESULTS OF OPERATIONS
Gross premiums written (prior to reinsurance) of $49,158,955 for the year
ended December 31, 1995 were $18,880,728 higher than gross premiums written
of $30,278,227 in 1994, representing an increase of approximately 62% The
increase in gross premiums written was principally due to an increase in
both monthly and annual policies produced by independent agents during
1995. This increase was offset by the absence in 1995 of assumed premiums
produced by an unaffiliated agency pursuant to a reinsurance agreement
effective April 1, 1993 and canceled December 31, 1995, and to a decrease
in 1995 TAIPA premium allocations by TDI. Net premiums (after reinsurance)
increased disproportionately in relation to gross premiums written (after
reinsurance). This 20% increase in net premiums was primarily the result
of the Company retaining 100% of the assumed premiums related to the now-
canceled reinsurance contract and the TAIPA premiums during 1994, while
ceding 75% of the State & County business in both years.
Premiums earned (prior to reinsurance) of $43,410,319 increased
approximately 54% during 1995 in relation to premiums earned (prior to
reinsurance) of $28,171,375 in 1994, and premiums earned (after
reinsurance) increased approximately 19%. The increases in premiums earned
prior to and after reinsurance generally followed the increases in premiums
written prior to reinsurance as compared to the increase of 62% in gross
premiums written prior and after reinsurance since the policy mix was
constant in both years. The 1995 policy mix is approximately 61% annual
and 39% monthly as compared to 60% and 40%, respectively, in the prior
year. The disproportionate increase of approximately 19% in net premiums
earned of $ 11,000,691 in 1995 versus $9,251,314 for 1994 were also in line
with the disproportionate increase in gross and net written premiums as
discussed above.
Gross incurred loss ratios (computed on both premiums earned prior to and
after premiums ceded), on a GAAP basis, for the year ended December 31,
1995, were approximately 77% as compared to 69% prior to reinsurance and
71% after reinsurance for 1994. The 8 percentage-point increase in the
1995 gross loss ratio was primarily attributable to (1) less favorable loss
experience on the Company's core State & County business due to sizeable
1995 hail losses particularly during the second quarter, (2) higher than
normal non-catastrophic losses primarily during the first half of the year,
(3) adverse runoff of the now-canceled 10% assumed treaty with Vesta, and
(4) lower salvage and subrogation recoveries. The smaller increase of 6%
in the net incurred loss ratios (computed on net premiums earned after
reinsurance) was primarily because the 1994 gross incurred loss ratio was
more significantly affected than the net ratio by high losses associated
with TAIPA and the assumed business under the April 1, 1993 reinsurance
agreement which was 100% retained by the Company. As previously discussed,
TAIPA premiums were considerably lower in 1995 and should be even further
reduced in future years assuming state regulations governing premium
assignments remain the same, and the April 1, 1993 reinsurance agreement
was canceled effective December 31, 1994.
<PAGE>
Investment income of $585,055 for the twelve months ended December 31,
1995 was $348,139 higher than the $236,916 reported in 1994. This 147%
increase is primarily due to an increase in the Company's funds available
for investment, an increase in the percentage of funds invested, and higher
market rates during 1995 than in 1994.
Processing fees of $1,414,283, reported for the first time, represent
fees earned by HFC pursuant to the commencement of its premium finance
program January 1, 1995. Service fees of $79,779 decreased by
approximately 95% due to the December 31, 1994 cancellation of the claims
adjustment and cash control services contract pursuant to the April 1, 1993
reinsurance agreement with Vesta.
Other acquisition, underwriting and operating expenses of $3,217,452
decreased approximately 23% as compared to the prior year. As discussed in
the Financial Condition and Liquidity section, ceding commission income of
$11,049,694 for the year increased approximately 79% over ceding commission
income of $6,171,062 for 1994. The increase in ceding commission income
during 1995 was partially offset by increases in volume-sensitive expenses
such as agent commissions, allowances for doubtful accounts, postage and
salaries.
Amortization of acquisition costs of $441,101 increased approximately
117% during 1995 in relation to 1994 due primarily to the increase in 1995
premium volume.
NEW ACCOUNTING PRONOUNCEMENTS
During 1995, the Company adopted Statement of Financial Accounting
Standard No. 121, Accounting For the Impairment of Long Lived Assets (SFAS
121). This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. The Company has
considered the effects of this pronouncement in relation to the Company's
carrying value of its intangible assets. This statement has had no impact
on the Company's consolidated financial statements.
In October 1995, The Financial Accounting Standard Board (FASB) issued
statement of Accounting Standards No. 123, Accounting for Stock-based
Compensation (SFAS 123). Pursuant to SFAS 123, a company may elect to
continue expense recognition under Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (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
123. SFAS 123 further specifies that companies electing to continue
expense recognition under APB 25 are required to disclose pro forma net
income and pro forma earnings per share as if the fair value based
accounting prescribed by SFAS 123 has been applied. The Company has
elected to continue expense recognition pursuant to APB 25. SFAS 123 is
effective for fiscal years beginning after December 15, 1995.
ITEM 7. FINANCIAL STATEMENTS.
The following consolidated financial statements of the Company and its
subsidiaries are filed as part of this Report.
Report of Independent Accountants
<PAGE>
Consolidated Balance Sheets at December 31, 1995 and 1994
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995 and 1994
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995 and 1994
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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 20 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
Report during or with respect to the fiscal year ended December 31, 1995.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HALLMARK FINANCIAL SERVICES, INC.
(Registrant)
Date: March 28, 1996 /s/ Ramon D. Phillips
Ramon D. Phillips, President (Chief Executive
Officer)
Date: March 28, 1996 /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 28, 1996 /s/ Ramon D. Phillips
Ramon D. Phillips, Director
Date: March 28, 1996 /s/ Raymond A. Kilgore
Raymond A. Kilgore, Director
Date: March 28, 1996 /s/ Jack R. Daugherty
Jack R. Daugherty, Director
Date: March 28, 1996 /s/ Kenneth H. Jones, Jr.
Kenneth H. Jones, Jr., Director
Date: March 28, 1996 /s/ Samuel W. Rizzo
Samuel W. Rizzo, Director
Date: March 28, 1996 /s/ A. R. Dike
A. R. Dike, Director
Date: March 28, 1996 /s/ James H. Graves
James H. Graves, Director
Date: March 28, 1996 /s/ C. Jeffrey Rogers
C. Jeffrey Rogers, Director
Date: March 28, 1996 /s/ George R. Manser
George R. Manser, Director
<PAGE>
EXHIBIT INDEX
The following exhibits are either filed with this report or incorporated
by reference.
EXHIBIT NUMBER DESCRIPTION NOTES
3(a) Articles of Incorporation of the registrant, (see below)
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, 3 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)
<PAGE>
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) Reverse Split-Dollar Agreement, dated April
12, 1991, between the registrant and Ramon D.
Phillips (incorporated by reference to
Exhibit 10(i) to the registrant's Annual
Report on Form 10-KSB for the fiscal year
ended December 31, 1991)
10(i) Form of Common Stock Purchase Warrant
representing warrants issued to officers and
directors of the registrant on October 2,
1992 (incorporated by reference to Exhibit
10(l) to the registrant's Annual Report on
Form 10-KSB for the fiscal year ended
December 31, 1992)
10(j) Form of Amendment to Common Stock Purchase
Warrant dated March 29, 1994, representing
warrants issued to officers and directors of
the registrant on October 2, 1992
(incorporated by reference to Exhibit 10(l)
to the registrant's Annual Report on Form 10-
KSB for the fiscal year ended December 31,
1994)
10(k) 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(l) 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)
<PAGE>
10(m) 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(n) 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(o) 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(p) Processing Agreement, effective January 1,
1995, between Peregrine Premium Finance L.C.
and Hallmark Finance Corporation
(incorporated by reference to Exhibit 10(r)
to the registrant's Annual Report on Form 10-
KSB for the fiscal year ended December 31,
1994)
10(q) Amendment to Processing Agreement, effective
January 1, 1995, between Peregrine Premium
Finance L.C. and Hallmark Finance Corporation
(incorporated by reference to Exhibit 10(s)
to the registrant's Annual Report on Form 10-
KSB for the fiscal year ended December 31,
1994)
10(r) Guaranty of Processing Agreement, dated
December 30, 1994, between Hallmark Financial
Services, Inc., Peregrine Premium Finance
L.C. and Bank One, Texas, N.A. (incorporated
by reference to Exhibit 10(t) to the
registrant's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994)
<PAGE>
10(s) Consent and Agreement, dated December 30,
1994, between Hallmark Finance Corporation
and Bank One, Texas, N.A. (incorporated by
reference to Exhibit 10(u) to the
registrant's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994)
10.T1-4 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.
10.U Form of Shareholders Agreement dated January *
1, 1996, between American Hallmark General
Agency, Inc., Robert D. Campbell, Margaret
Jones and American Hallmark Agencies, Inc.
10.V 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.
10.W 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.
10.X Form of Shareholders Agreement dated January *
3, 1996, between American Hallmark General
Agency, Inc., Robert D. Campbell, Richard
Mason, Sr. and Hallmark Underwriters, Inc.
10.Y 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.
10.Z 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.
10.AA Form of Second Amendment to Processing *
Agreement, effective November 30, 1995,
between Peregrine Premium Finance L.C. and
Hallmark Finance Corporation.
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 (Filed under Form SE, March 28, 1996) P
<PAGE>
EXHIBIT NOTES:
* = FILED HERE WITH
P = PAPER COPY FILED
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors Hallmark Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of Hallmark
Financial Services, Inc. and Subsidiaries as of December 31, 1995, and
1994, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hallmark
Financial Services, Inc. and Subsidiaries at December 31, 1995, and 1994,
and the consolidated results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 22, 1996
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Investments:
Debt securities, held-to-maturity $ 6,409,544 $ 4,329,103
Equity securities, available-for-sale 171,727 174,709
Short-term investments, at cost which
approximates market value 3,615,327 320,000
Total investments 10,196,598 4,823,812
Cash and cash equivalents 4,257,755 1,800,761
Prepaid reinsurance premiums 11,726,968 7,304,284
Premiums Receivable 4,898,628 -
Installment premiums receivable
(net of allowance for doubtful accounts
of $20,275 in 1995 and $52,275 in 1994) 299,182 8,284,633
Reinsurance recoverable 19,335,746 10,382,311
Deferred policy acquisition costs 2,999,541 2,113,759
Excess of cost over net assets acquired,
net of accumulated amortization
of $856,231 in 1995 and $700,278 in 1994 5,373,983 5,529,936
Other intangible assets, net of accumulated
amortization of $495,467 in 1995
and $465,467 in 1994 10,000 40,000
Deferred Federal income taxes 567,969 -
Accrued investment income 55,765 41,609
Other assets 788,216 363,811
$ 60,510,351 $ 40,684,916
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 639,162 $ 882,862
Unpaid losses and loss adjustment expenses 22,323,090 12,668,306
Unearned premiums 15,659,897 10,229,911
Reinsurance balances payable 3,489,357 2,719,039
Deferred ceding commissions 3,518,227 2,191,344
Drafts outstanding 684,430 777,585
Accounts payable and other accrued expenses 3,824,591 2,099,029
Total liabilities 50,138,754 31,568,076
Commitments and contingencies (Notes 4, 5, 6 and 8)
Stockholders' equity:
Common stock, $.03 par value, authorized
100,000,000 shares; issued 10,962,277
shares in 1995 and 1994 328,868 328,868
Capital in excess of par value 10,349,665 10,349,665
Retained earnings (deficit) 293,064 (961,693)
Treasury stock, 300,000 shares, at cost (600,000) (600,000)
Total stockholders' equity 10,371,597 9,116,840
$ 60,510,351 $ 40,684,916
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1995 and 1994
__________
<TABLE>
1995 1994
<S> <C> <C>
Gross premiums written $ 49,158,955 $ 30,278,227
Ceded premiums written (36,832,312) (20,570,207)
Net premiums written $ 12,326,643 $ 9,708,020
Revenues:
Premiums earned $ 43,410,319 $ 28,171,375
Premiums ceded (32,409,627) (18,920,061)
Net premiums earned 11,000,692 9,251,314
Investment income, net of expenses 585,055 236,916
Finance service charges 628,747 705,027
Processing fees 1,414,283 -
Service fees 79,779 1,656,505
Other income 87,347 67,683
Total revenues 13,795,903 11,917,445
Benefits, losses and expenses:
Losses and loss adjustment expenses 33,350,740 19,299,563
Reinsurance recoveries (24,885,262) (12,706,536)
Net losses and
loss adjustment expenses 8,465,478 6,593,027
Acquisition costs, net 441,101 202,911
Other underwriting and operating expenses 3,217,452 4,193,479
Interest expense 40,361 63,320
Amortization of intangible assets 185,953 187,014
Total benefits, losses and expenses 12,350,345 11,239,751
Income from operations before
federal income taxes 1,445,558 677,694
Provision for federal income taxes 190,801 87,941
Net income $ 1,254,757 $ 589,753
Net income per share of common stock -
primary and fully diluted $ .11 $ .06
Weighted average shares outstanding 11,510,611 10,662,277
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1995 and 1994
__________
<TABLE>
<CAPTION>
Common Stock Capital
Number in Retained Total
of Par Excess of Earnings Treasury Stockholders'
Shares Value Par Value (Deficit) Stock Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1993 10,917,277 $327,518 $10,351,015 ($1,551,446) ($600,000) $8,527,087
1994 transactions:
Issuance of
common stock 45,000 1,350 (1,350) - -
Net income - - - 589,753 - 589,753
Balance at
December 31,
1994 10,962,277 $328,868 $10,349,665 ($961,693) ($600,000) $9,116,840
1995 transactions:
Issuance of
common stock - - -
Net income - - - 1,254,757 - 1,254,757
Balance at
December 31,
1995 10,962,277 $328,868 $10,349,665 $293,064 ($600,000) $10,371,597
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995 and 1994
__________
<TABLE>
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,254,757 $ 589,753
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization expense 305,491 305,086
Change in deferred Federal income taxes (567,969) -
Change in prepaid reinsurance premiums (4,422,684) (1,650,145)
Change in premiums receivable (4,898,628) -
Change in installment premiums receivable 7,985,451 (1,552,435)
Change in deferred policy acquisition costs (885,782) (579,443)
Change in deferred ceding commissins 1,326,883 782,354
Change in unpaid losses and
loss adjustment expenses 9,654,784 2,442,578
Change in unearned premiums 5,429,986 2,106,852
Change in reinsurance recoverable (8,953,435) (2,810,636)
Change in reinsurance balances payable 770,318 1,165,988
Change in all other liabilities 1,654,639 1,134,312
Change in all other assets (389,138) 258,872
Net cash provided by operating activities 8,264,673 2,193,136
Cash flows from investing activities:
Purchases of property and equipment (184,540) (59,787)
Purchases of debt securities (3,018,214) (4,916,260)
Maturities, redemptions and capital
distributions of investment securities 934,102 3,810,836
Purchase of short-term investments (3,515,327) (200,000)
Maturities of short-term investments 220,000 100,500
Net cash used in investing activities (5,563,979) (1,264,711)
Cash flows from financing activities:
Repayment of notes payable (243,700) (239,556)
Cash used in financing activities (243,700) (239,556)
Increase in cash and cash equivalents 2,456,994 688,869
Cash and cash equivalents at beginning of year 1,800,761 1,111,892
Cash and cash equivalents at end of year $ 4,257,755 $ 1,800,761
Supplemental cash flow information:
Cash paid during the year for interest $ 40,360 $ 63,319
Income taxes paid $ 825,000 $ -
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES:
GENERAL
Hallmark Financial Services, Inc. (the "Company"), is engaged in (1)
the marketing, underwriting and premium financing of non-standard
automobile insurance, and (2) providing fee-based claims adjusting and
administrative services to third parties. The Company conducts these
activities through its wholly-owned subsidiaries: American Hallmark
Insurance Company of Texas ("Hallmark"), American Hallmark General
Agency, Inc. (AHGA), Hallmark Claims Service, Inc. ("HCS"), formerly
Citizens Adjustment and Reporting Services, Inc., and Hallmark Finance
Corporation ("HFC"). Hallmark is a licensed insurer in Texas and is
regulated by the Texas Department of Insurance. AHGA is a managing
general agency currently selling policies written by an unaffiliated
insurer which are reinsured by Hallmark; HFC offers premium financing
through an unaffiliated premium finance company for annual policies
sold by AHGA, and HCS provides claims adjusting services for Hallmark
and third parties.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts and operations of the Company and its wholly-owned
subsidiaries. Intercompany accounts and transactions have been
eliminated.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles 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
positive 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.
Short-term investments are carried at cost which approximates market.
Short-term investments include certificates of deposit maturing within
one year, U.S. Government securities maturing within one year, money
market funds, and other interest-bearing deposits.
Realized investment gains and losses are recognized in operations on
the specific identification method.
RECOGNITION OF PREMIUM REVENUES
Insurance premiums are earned pro rata over the terms of the policies.
<PAGE>
FINANCE SERVICE CHARGES
For the year ended December 31, 1994, the majority of Hallmark's
insurance business was financed on a "direct-bill" basis. Finance
charges are assessed on "direct-bill" policies in the form of monthly
service fees and are recognized when collected.
PROCESSING FEES
For the year ended December 31, 1995, the majority of Hallmark's
annual insurance premiums were financed through the Company's premium
finance program offered by its wholly owned subsidiary, HFC. Under a
servicing and financing arrangement with an unaffiliated company, HFC,
receives a processing fee which is paid and recognized on an earned
basis.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment, aggregating $757,302 and $572,761, at December
31, 1995 and 1994, respectively, included in other assets, is recorded
at cost and is depreciated using the straight-line method over the
estimated useful lives of the assets (five to ten years).
Depreciation expense for 1995 and 1994 was $112,886 and $108,692,
respectively. Accumulated depreciation was $500,480 and $387,594 at
December 31, 1995 and 1994, respectively.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, mainly commissions, underwriting and
marketing expenses that vary with, and are primarily related to, the
production of new and renewal business, are deferred and charged to
operations over periods in which the related premiums are earned. The
method followed in computing deferred acquisition costs limits the
amount of such deferred costs to their estimated realizable value. In
determining estimated realizable value, the computation gives effect
to the premium to be earned, related investment income, losses and
loss expenses and certain other costs expected to be incurred as the
premiums are earned. Ceding commissions from reinsurers, which
include expense allowances, are deferred and recognized over the
period premiums are earned for the underlying policies reinsured.
The change in deferred ceding commission income is netted against
the change in deferred acquisition costs.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Losses and loss adjustment expenses represent the estimated ultimate
net cost of all reported and unreported losses incurred through
December 31, 1995 and 1994. 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
<PAGE>
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, 1995 and 1994, are reported net of
recoverables for salvage and subrogation of approximately $377,000 and
$339,000, 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 for further discussion.)
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.
INTANGIBLE ASSETS
When Hallmark, AHGA, HFC, and HCS were purchased by the Company, 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 and
a managing general agent's license that were fully amortized at
December 31, 1994 and 1995 and three non-compete agreements that are
being amortized over the terms of the respective agreements.
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 and other intangibles has occurred and that
no reduction of the estimated useful lives is warranted.
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 contingently issuable, primarily from stock options and
exercise of warrants.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles 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
<PAGE>
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 estimated using values
obtained from an independent pricing service.
Installment Premiums Receivable: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values as
the terms of the receivables are less than one year.
Notes Payable: Based on immateriality, it was not practicable to
estimate the fair value.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, The Financial Accounting Standard Board (FASB) issued
statement of Accounting Standards No. 123, Accounting for Stock-based
Compensation (SFAS 123). Pursuant to SFAS 123, a company may elect to
continue expense recognition under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (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 123. SFAS 123 further specifies that companies
electing to continue expense recognition under APB 25 are required to
disclose pro forma net income and pro forma earnings per share as if
the fair value based accounting prescribed by SFAS 123 has been
applied. The Company has elected to continue expense recognition
pursuant to APB 25. SFAS 123 is effective for fiscal years beginning
after December 15, 1995.
RECLASSIFICATION
Certain previously reported 1994 amounts have been reclassified to
conform to current year presentation. Such reclassifications had no
effect on net income or stockholders' equity.
<PAGE>
2. INVESTMENTS:
Major categories of net investment income are summarized as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994
<S> <C> <C>
Debt securities $330,280 $169,988
Equity securities 11,689 12,072
Short-term investments 121,328 13,320
Cash equivalents 119,512 38,481
Other 3,107 3,649
585,916 237,510
Investment expenses (861) (594)
Net investment income $585,055 $236,916
</TABLE>
No investment in any entity or its affiliates exceeded 10% of
stockholders' equity at December 31, 1995 and 1994, respectively.
The amortized cost and estimated market value of investments in
debt securities by category are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
At December 31, 1995
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $5,981,341 $91,797 ($56,720) $6,016,418
Obligations of state and
local governments 428,203 15,458 - 443,661
Total bonds 6,409,544 107,255 ( 56,720) 6,460,079
At December 31, 1994
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies 4,036,158 - (182,553) 3,853,605
Obligations of state and
local governments 292,945 9,799 - 302,744
Total bonds $4,329,103$ 9,799 ($182,553) $4,156,349
</TABLE>
The amortized cost and estimated market value of bonds at December 31,
1995, 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
penalties.
<PAGE>
<TABLE>
<CAPTION>
Amortized Market
Maturity Cost Value
<S> <C> <C>
1996 $ 1,502,042 $ 1,524,690
1997 - 2000 1,438,197 1,436,636
2001 - 2005 500,487 522,110
After 2005 454,959 483,371
Mortgage backed securities 2,513,859 2,493,272
$ 6,409,544 $ 6,460,079
</TABLE>
At December 31, 1995 and 1994, investments in debt securities,
with an approximate carrying value of $98,000, were on deposit
with the Texas Department of Insurance as required by statutory
regulations.
Proceeds from investment securities of $934,102 and $3,810,836
during 1995 and 1994, respectively, were primarily from
maturities and bond calls.
3. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment
expenses (in thousands) is summarized as follows:
<TABLE>
1995 1994
<S> <C> <C>
Balance at January 1 $ 12,668 $ 10,226
Less reinsurance recoverables 8,371 5,905
Net Balance at January 1 4,297 4,321
Incurred related to:
Current year 8,458 6,803
Prior years 502 (33)
Total incurred 8,960 6,770
Paid related to:
Current year 4,020 3,765
Prior years 3,313 3,029
Total paid 7,333 6,794
Net Balance at December 31 5,924 4,297
Plus reinsurance recoverables 16,399 8,371
Balance at December 31 $ 22,323 $ 12,668
</TABLE>
Incurred losses of $8,960,000 and $6,770,000 for 1995 and 1994,
respectively, include an increase of $502,000 for 1995 and a
$33,000 decrease for 1994 due to respective changes made in
reserve estimates for losses and LAE incurred in prior years.
4. REINSURANCE:
Hallmark is involved in the cession of reinsurance to other
companies. The Company remains obligated to its policyholders in
<PAGE>
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 and County Mutual Fire Insurance Company
("State & County"), an unaffiliated company, to assume 100% of
the nonstandard auto business produced by AHGA and written on
State & County policies. The earned premiums assumed under this
agreement in 1995 and 1994 were $43,212,837 and $25,226,748,
respectively. Funds generated from business produced under this
agreement are maintained in accounts for the benefit of State &
County. At December 31, 1995 and 1994, Hallmark held for the
benefit of State & County, cash and cash equivalents of
$1,439,760 and $877,288, respectively, and investment securities
at amortized cost of $7,243,756 and $1,466,415, respectively.
The arrangement is supplemented by a separate retrocession
agreement between Hallmark and Vesta Fire Insurance Corporation
("Vesta"). Hallmark and Vesta share the risk on the State &
County policies that Hallmark reinsures.
Effective May 1, 1994 and 1995, respectively, Hallmark entered
into respective Excess of Loss Reinsurance Agreements with Vesta
whereby Vesta reinsured Hallmark for physical damage catastrophic
losses in excess of 95% of $200,000 not to exceed $800,000 per
loss occurrence and not to exceed 95% of $1,600,000 over the term
of the respective agreements. There were two 1995 catastrophic
occurrences as defined and covered under each of the respective
agreements due to severe hailstorms in March and May.
Accordingly, total gross and net recoveries under the respective
agreements were $517,000 and $129,000, respectively. There were
no catastrophic losses in 1994 that exceeded Hallmark's retention
level of $200,000.
5. NOTES PAYABLE:
A summary of the Company's notes payable is as follows:
<TABLE>
December 31,
1995 1994
<S> <C> <C>
Notes payable to former parent of Hallmark $ - $ 200,001
Note payable to individual 258,975 302,674
Note payable to unaffiliated finance company 380,187 380,187
Total $ 639,162 $ 882,862
</TABLE>
Scheduled annual principal repayments on all the foregoing borrowings
are as follows:
<TABLE>
<S> <C>
Year
1996 $ 428,463
1997 53,330
1998 58,915
1999 65,084
2000 33,370
Total $ 639,162
</TABLE>
<PAGE>
The notes payable to Hallmark's former parent were unsecured and
were due in 60 equal monthly installments of approximately
$16,000 through December 31, 1995, with interest at 10%.
The note payable to an individual is collateralized by most
assets of AHGA and requires monthly principal and interest
payments of $6,000 through May 1, 2000, with interest at 10%.
The entire note payable to unaffiliated finance company with
interest at prime plus one percent was due March 1, 1993. The
Company has not made payments on the note since November 1992,
and is in technical default. The note provides for an interest
rate after maturity of the maximum statutory interest rate. The
Company believes it has the right to offset $240,000 which is on
deposit with a subsidiary of the finance company. The total
principal and interest in arrears aggregates $672,000 at December
31, 1995. Both the lender and its subsidiary are currently in
bankruptcy proceedings. Upon final settlement, management
believes the cost, if any, to the Company will not exceed amounts
accrued in these financial statements.
6. STOCKHOLDERS' EQUITY:
On November 20, 1992, the Company sold 300,000 shares of its
common stock in a private placement for cash proceeds of
$150,000. The investors also received stock purchase warrants
entitling them to acquire 300,000 shares of the Company's common
stock at $.50 per share. The Company was obligated to file a
registration statement to register the shares sold with the
Securities and Exchange Commission on or before
November 20, 1993. If the filing was not completed and the
investors did not exercise the warrants, the Company was
obligated to issue an additional 45,000 shares of the Company's
stock for no additional consideration.
The Company did not file a registration statement to register the
shares with the Securities and Exchange Commission, and on
January 12, 1994, the additional 45,000 shares of the Company's
stock were issued in accordance with the above agreement.
The Company has two (2) incentive stock option plans for key
executives and a non-qualified plan for non-employee directors.
Under each of the key executive plans, 500,000 shares of common
stock were reserved for future issuance and, under the non-
employee director plan, 700,000 shares were reserved for future
issuance. The option prices under the plans are not to be less
than the closing price of the common stock on the date preceding
the grant date.
At December 31, 1995 there were outstanding and exercisable
options for the purchase of 885,000 shares under the key employee
plans at $0.375 per share. Under the non-employee director plan
there were 400,000 outstanding and exercisable options at a price
of $.375 per share and 225,000 outstanding and exercisable at
$.6875 per share.
As part of the purchase of Thomas, Burns & McCurdy Insurance
Agency, the Company issued five-year options, effective May 8,
1991, to the two former shareholders of the purchased agencies.
<PAGE>
The offer included an option for each to purchase 50,000 shares
of the Company's common stock at an exercise price of $2 per
share.
Stock options granted are summarized as follows:
<TABLE>
<CAPTION>
Number of OPTION PRICES
Shares Per Share Aggregate
<S> <C> <C> <C>
Outstanding and exercisable,
December 31, 1993 935,000 $.375 - $2.00 1,200,000
Granted during 1994 1,200,000 $.375 450,000
Expired during 1994 115,000 $.375 - $2.00 184,375
Surrendered during 1994 485,000 $1.50 727,500
Outstanding and exercisable,
December 31, 1994 1,535,000 738,125
Granted during 1995 230,000 $.25 - $.6875 155,938
Expired during 1995 150,000 $.375 56,250
Outstanding & exercisable,
December 31, 1995 1,615,000 837,813
</TABLE>
In October 1992, the Company issued warrants to purchase 981,333
shares of its Common Stock ("Guaranty Warrants") to executive
officers and directors in consideration for the recipients'
agreement to pledge outstanding shares of the Company's common
stock they owned as security for a working capital line of credit
the Company proposed to obtain from a commercial bank. The
Company subsequently abandoned its efforts to obtain the working
capital line of credit. Each Guaranty Warrant covered the same
number of shares the recipient agreed to pledge. No value has
been assigned to these warrants. The Guaranty Warrants were
fully exercisable between October 2, 1992 and October 1, 1994, at
which time they would have expired to the extent not exercised.
In March 1994, the Board of Directors extended the exercisability
of the Guaranty Warrants through October 1, 1996. The exercise
price is $.50 per share, an amount equal to the last reported
sale price of the Common Stock on the American Stock Exchange's
Emerging Company Marketplace prior to October 2, 1992. The
Guaranty Warrants are not transferrable, but may be exercised
only by their recipients (or by a recipient's estate in the event
of his/her death).
Hallmark's 1995 and 1994 net income and stockholders' equity
(capital and surplus), as determined in accordance with statutory
accounting practices, were $836,605 and $4,774,444, and $918,846
and $3,832,984, respectively.
The minimum statutory capital and surplus required for Hallmark
by the Texas Department of Insurance 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 investment income of the
<PAGE>
preceding calendar year. No dividends were declared or paid by
Hallmark in 1994 or 1995.
7. INCOME TAXES:
The composition of deferred tax assets and liabilities and the
related tax effects as of December 31, 1995, and 1994, is as
follows:
<TABLE>
1995 1994
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs,
deductible for tax ($1,019,844) ($718,678)
Other (2,373) (6,123)
Total deferred tax liabilities (1,022,217) (724,801)
Deferred tax assets:
Unearned premiums 267,439 198,943
Loss reserve discounting 140,211 122,142
Deferred ceding commissions,
non-deductible for tax 1,196,197 745,057
Accrued Expenses 30,444 -
Net operating loss carryforward 33,171 78,073
AMT credit 23,062
Other 20,287 18,998
Total deferred tax assets 1,687,749 1,186,275
Net deferred tax asset 665,532 461,474
Valuation allowance 97,562 461,474
Net deferred tax asset $ 567,970 $ 0
</TABLE>
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.
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, 1995, and 1994, is as follows:
<PAGE>
<TABLE>
1995 1994
<S> <C> <C>
Computed expected income tax
expense at statutory regulatory
tax rate $ 491,490 $ 230,416
Amortization of excess cost 53,024 53,382
Tax-exempt interest (9,251) (5,358)
Key-man life insurance 5,909 9,848
Change in valuation allowance (364,084) (270,183)
Other 13,713 69,833
Income tax expense $ 190,801 $ 87,941
</TABLE>
The change in the valuation allowance primarily results from the
utilization, based upon its recent operating history, of net
operating loss carryforwards for which a full valuation allowance
had previously been recorded.
The Company has available, for federal income tax purposes,
unused net operating losses of $97,562 at December 31, 1995,
operating losses will expire, if unused, as follows:
<TABLE>
<S> <C>
Year
2002 $ 1,325
2003 96,237
$ 97,562
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
The Company has several leases, primarily for office facilities
and computer equipment, which expire in various years through
2000. Certain of these leases contain renewal options. Rental
expense amounted to $566,296 and $532,378 for the years ended
December 31, 1995 and 1994, respectively.
Future minimum lease payments under noncancelable operating
leases as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
Year
1996 $ 539,165
1997 485,604
1998 402,380
1999 372,523
2000 314,369
Total minimum lease payments $ 2,114,041
</TABLE>
Effective January 1, 1995, HFC entered into a financing and
servicing arrangement with an unaffiliated premium finance
company, Peregrine Premium Finance L.C. ("Peregrine"). Under the
agreement, Peregrine has agreed to provide a credit facility of
$13,500,000 as of December 31, 1995, to fund premium finance
notes (the "Notes") generated by financing State & County
policies produced by AHGA. HFC, in turn, processes and services
the Notes on behalf of Peregrine for a processing fee
approximating Peregrine's operating profit from the Notes, net of
imputed borrowing costs on the credit facility and after
deducting certain expenses, including default cost. As of
<PAGE>
December 31, 1995, Peregrine had issued notes totalling
$11,831,771 under the credit facility. The imputed interest costs
on the funds borrowed by HFC range from prime plus one percent (1%)
on approximately eighty percent (80%) of the funded amount to
twenty-five percent (25%) on approximately twenty percent (20%)
of the funded amount. Although Peregrine's commitment to HFC is
not contingent upon Peregrine having a bank credit facility to
fund some portion of the Notes, the agreement provides for the
possible existence of such a facility and further provides that
HFC will reimburse Peregrine for any fees charged by the bank.
Under the agreement, a bank has committed to provide
approximately 80% of the funding of the Notes up to $8,570,373 at
December 31, 1995. Under this facility, HFC reimbursed Peregrine
$32,254 in bank commitment fees representing one-half of one
percent on the unused portion of the bank commitment credit
facility. HFS guarantees HFC's performance and obligations under
this agreement. Neither the notes issued by Peregrine nor the
credit facility amounts outstanding is recorded in the
accompanying financial statements.
At December 31, 1995, a standby letter of credit of $400,000 has
been issued by a financial institution under an agreement,
expiring December 29, 1996, which is being maintained as
collateral for performance and advances received on a reinsurance
contract. At December 31, 1995, no amounts were outstanding under
the letter of credit. The letter of credit requires an annual
commitment fee of $4,500 and is collateralized by a U.S.
Government Security with a total par value of $500,000 held in
Hallmark's name.
Effective August 1, 1994, the Company adopted 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. No Company
contributions were made for 1994. The Company's contribution for
1995 was $56,856.
The Company is involved in various 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.
A lawsuit filed in March 1995, by former directors, officers or
agents of Hallmark relates to a claim forindemnification.
Damages claimed include alleged actual damages in excess of
$400,000 plus unspecified punitive damages and attorneys' fees.
The Company has denied all allegations and asserted various
affirmative defenses and counterclaims. The Company has been
granted a partial summary judgment with respect to certain of
the claims and intends to vigorously defend against the remaining
allegations. However, the Company is presently unable to determine
the likelihood of an unfavorable outcome or estimate any amount
or range of potential loss.
From time to time, assessments are levied on the Company by the
guaranty association of the state of Texas in which the Company
is licensed to write business. Such assessments are made
<PAGE>
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.
Assessments have not been material to the Company's financial
position through 1995. However, the economy and other factors
have recently caused the number of insurance company failures to
increase. Based on information currently available, management
believes that it is probable that these failures will result in
future assessments; however, the amounts of such assessments are
not presently determinable and, accordingly, no provisions have
been reflected in the accompanying financial statements for such
assessments.
9. 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.
Most of the Company's business activity is with customers and
independent agents located within the State of Texas.
Reinsurance recoverables and prepaid reinsurance premiums were
primarily associated with one reinsurer.
SECOND AMENDMENT TO LEASE AGREEMENT
THIS SECOND AMENDMENT TO LEASE AGREEMENT (this "Amendment")
is entered into as of the 25th day of May, 1995, by and between
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey
corporation ("Landlord") and AMERICAN HALLMARK INSURANCE COMPANY
OF TEXAS, a Texas corporation ("Tenant").
WHEREAS, pursuant to that certain Office Lease Agreement
dated September 12, 1994, by and between Landlord and Tenant, as
amended by that certain First Amendment to Lease Agreement dated
as of October 10, 1994 (such Office Lease Agreement, as amended,
herein called the "Lease"), Landlord leased to Tenant certain
space (the "Premises") in the building known as The Princeton
(the "Building") more particularly described therein;
WHEREAS, the Premises currently consist of 16,526 square
feet of rentable area on the ninth (9th) floor of the Building;
WHEREAS, Tenant desires (i) to delete from the Premises the
2,054 square feet of rentable area described on Exhibit A-1
attached hereto (the "Reduction Space"), (ii) to increase the
Premises by adding 5,746 square feet of rentable area located on
the second (2nd) floor of the Building described on Exhibit A-2
attached hereto (the "Additional Premises"), (iii) to temporarily
lease from Landlord 426 square feet of rentable area on the third
(3rd) floor of the Building described on Exhibit C attached
hereto (the "Temporary Space"), (iv) to acquire a right of first
refusal to lease from Landlord (a) certain space in the Building
located on the second (2nd) floor and (b) the Reduction Space
(collectively, the "Additional Right of First Refusal Space");
and
WHEREAS, Landlord and Tenant desire to amend the Lease to
reflect their agreements as to the terms and conditions governing
Tenant's deletion of the Reduction Space, Tenant's lease of the
Additional Premises and the Temporary Space, Tenant's rights with
respect to the Additional Right of First Refusal Space and all
other matters relating to the foregoing.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants between the parties herein contained, Landlord
and Tenant hereby agree as follows:
1. Premises. Effective on the earlier of (i) July 1, 1995 (the
"Target Date") or (ii) the date Tenant occupies the Additional
Premises for any purpose (such date, the "Additional Premises
Commencement Date"), Item 2 of the Basic Lease Provisions shall
be amended to read as follows:
Premises:
a. Suite #: 900 and 205; Floors: ninth and second.
b. Agreed Rentable Area: 20,218.
<PAGE>
2. Basic Rent. Effective thirty (30) days after the Additional
Premises Commencement Date (the Adjusted Commencement Date"),
Item 3 of the Basic Lease Provisions shall be amended to read as
follows:
<TABLE>
Basic Rent (See Article 2, Supplemental Lease Provisions):
<CAPTION>
Rate Per Square Basic Basic
Rental Foot of Agreed Annual Monthly
Period Rentable Area Rent Rent
Adjusted
Commencement
<S> <C> <C> <C>
Date to 12-31-95 $11.75 $237,561.50 $19,796.79
1-1-96 to 12-31-96 $12.25 $247,670.50 $20,639.21
1-1-97 to 12-31-97 $12.50 $252,725.00 $21,060.42
1-1-98 to 12-31-98 $12.75 $257,779.50 $21,481.63
1-1-99 to 12-31-99 $13.25 $267,888.50 $22,324.04
1-1-00 to 11-30-00 $13.50 $272,943.00 $22,745.25
</TABLE>
3. Tenant's Pro Rata Percentage. Effective as of the Adjusted
Commencement Date, Item 4 of the Basis Lease Provisions shall be
amended to read as follows:
Tenant's Pro Rata Share Percentage: 5.44624% (the Agreed
Rentable Area of the Premises divided by the Agreed Rentable
Area of the Building, expressed in a percentage).
4. Substitution of Exhibit A. Effective as of the Additional
Premises Commencement Date, Exhibit A attached to the Lease shall
be deleted in its entirety and Exhibit A attached hereto shall be
substituted therefor.
5. Delivery of Additional Premises. Subject to Landlord's
completion of its obligations under the Work Letter attached
hereto as Exhibit B (the "Additional Work Letter"), the
Additional Premises shall be delivered to Tenant on the
Additional Premises Commencement Date in "AS IS" condition.
6. Tenant's Improvements. Landlord shall construct Tenant's
Improvements in accordance with the terms and conditions of the
Additional Work Letter.
7. Acceptance of Additional Premises. Upon Substantial
Completion of Tenant's Improvements in the Additional Premises,
Landlord and Tenant shall execute the Acceptance of Premises
Memorandum in the form of the Acceptance of Premises Memorandum
executed in connection with the Lease. If Tenant occupies the
Additional Premises without executing an Acceptance of Premises
Memorandum, Tenant shall be deemed to have accepted the
Additional Premises for all purposes and Substantial Completion
shall be deemed to have occurred on the earlier to occur of (i)
actual occupancy or (ii) the Target Date.
<PAGE>
8. Segregation of the Premises from the Reduction Premises.
Landlord shall construct, or cause to be constructed, at Tenant's
sole cost and expense, a demising wall to separate the ninth
(9th) floor Premises from the Reduction Premises. Tenant shall
reimburse Landlord for all costs and expenses relating to the
design and/or construction of such demising wall within thirty
(30) days of Tenant's receipt of an invoice from Landlord. In
the event that, at the time of payment of such invoice, Tenant
has not expended all of the Additional Finish Allowance (as
defined in the Additional Work Letter) or the Finish Allowance
provided for under the Lease, to the extent such amounts remain
available to Tenant under the terms of the Additional Work Letter
or the Lease, Tenant may apply such amounts to the costs of the
demising wall.
9. Right of First Refusal. Effective as of the Additional
Premises Commencement Date, Rider 3 to the Lease shall be amended
as follows:
a. The words "and Schedule A-1" are hereby added after the
words "Schedule A" in the first line of Paragraph A of Rider
3.
b. The following shall be added as Paragraph D to Rider 3:
D. Notwithstanding anything to the contrary contained in
this Rider, in the event Tenant exercises its right of
first refusal with respect to any of the Right of First
Refusal Space described on Schedule A-1 attached to
this Rider within one hundred eighty (180) days after
the Additional Premises Commencement Date, Landlord
shall lease such space to Tenant on the same terms and
conditions as contained in this Lease; provided that
Landlord shall provide Tenant with a finish allowance
equal to the product of $6.82 times (i) the number of
square feet of the applicable Right of First Refusal
Space times (ii) a fraction, the numerator of which is
the number of full calendar months which remain in the
initial Lease Term from and after the date Basic Annual
Rent commences with respect to the applicable Right of
First Refusal Space and the denominator of which is the
number of full calendar months in the initial Lease
Term. Notwithstanding anything to the contrary
contained in this Rider, in the event that Tenant
exercises its right of first refusal with respect to
any of the Right of First Refusal Space described on
Schedule A-1 attached to this Rider after the
expiration of such one hundred eighty (180) day period
but before the expiration of one (1) year after the
Additional Premises Commencement Date, Landlord shall
lease such space to Tenant on the same terms and
conditions as contained in this Lease; provided,
however, that Basic Annual Rent for the remaining term
of the Lease shall be calculated at $13.75 per square
foot of Agreed Rentable Area of the applicable Right of
First Refusal Space and Landlord shall provide Tenant
with a finish allowance equal to the product of $6.82
times (i) the number of square feet of the applicable
<PAGE>
Right of First Refusal Space times (ii) a fraction, the
numerator of which is the number of full calendar
months which remain in the initial Lease Term from and
after the date Basic Annual Rent commences with respect
to the applicable Right of First Refusal Space and the
denominator of which is the number of full calendar
months in the initial Lease Term. In the event Tenant
exercises its right of first refusal with respect to
any of the Right of First Refusal Space described on
Schedule A-1 attached to this Rider after the
expiration of one (1) year after the Additional
Premises Commencement Date, Landlord shall lease such
space to Tenant on the same terms and conditions as
contained in the Statement.
c. The following shall be added as Paragraph E to Rider 3:
In the event Tenant notifies Landlord within one
hundred eighty (180) days after the Additional Premises
Commencement Date of Tenant's desire to lease any of
the Right of First Refusal Space described on Schedule
A-1 attached hereto and provided that such space is
available for lease by Landlord, and further provided
that an amendment to this Lease is executed by Tenant
prior to the expiration of such one hundred eighty
(180) day period, which amendment provides that the
rent commencement date for such Right of First Refusal
Space shall occur no later than two (2) months after
the date of such amendment, Tenant shall be entitled to
lease such Right of First Refusal Space on the same
terms and conditions as contained in this Lease;
provided that Landlord shall provide Tenant with a
finish allowance equal to the product of $6.82 times
(i) the number of square feet of the applicable Right
of First Refusal Space times (ii) a fraction, the
numerator of which is the number of full calendar
months which remain in the initial Lease Term from and
after the date Basic Annual Rent commences with respect
to the applicable Right of First Refusal Space and the
denominator of which is the number of full calendar
months in the initial Lease Term. In the event Tenant
notifies Landlord after the expiration of such one
hundred eighty (180) day period described above but
before the expiration of one (1) year after the
Additional Premises Commencement Date of Tenant's
desire to lease any of the Right of First Refusal Space
described on Schedule A-1 attached hereto and provided
that such space is available for lease by Landlord, and
further provided that an amendment to this Lease is
executed by Tenant prior to the expiration of one (1)
year after the Additional Premises Commencement Date,
which amendment provides that the rent commencement
date for such Right of First Refusal Space shall occur
no later than two (2) months after the date of such
amendment Tenant shall be entitled to lease such Right
of First Refusal Space on the same terms and conditions
as contained in this Lease; provided, however, that
Basic Annual Rent for the remaining term of the Lease
shall be calculated at $13.75 per square foot of Agreed
<PAGE>
Rentable Area of the applicable Right of First Refusal
Space and Landlord shall provide Tenant with a finish
allowance equal to the product of $6.82 times (i) the
number of square feet of the applicable Right of First
Refusal Space times (ii) a fraction, the numerator of
which is the number of full calendar months which
remain in the initial Lease Term from and after the
date Basic Annual Rent commences with respect to the
applicable Right of First Refusal Space and the
denominator of which is the number of full calendar
months in the initial Lease Term. After the expiration
of one (1) year from the Additional Premises
Commencement Date, Landlord shall have no obligation
under this Paragraph E.
d. Schedule A-1 attached hereto is hereby added as
Schedule A-1 to Rider 3 of the Lease.
10. Temporary Space. Landlord hereby leases (the "Short Term
Lease") to Tenant and Tenant hereby leases from Landlord that
certain space designated as the "Temporary Space" (herein so
called) shown on Exhibit C attached hereto, which space is
situated on the third (3rd) floor of the Building. The Agreed
Rentable Area of the Temporary Space is 426 square feet. The
Short Term Lease shall be on the same terms and conditions
contained in the Lease, with the following exceptions: (i) the
Short Term Lease shall be a month-to-month lease, commencing on
the date of this Amendment and terminating on the date which is
seven (7) days after the Additional Premises Commencement Date;
(ii) the Basic Annual Rent for the Temporary Space shall be at
the rate of $0.00 per square foot of Agreed Rentable Area of the
Temporary Space, (iii) Tenant shall not be required to pay
Additional Rent with respect to the Temporary Space, (iv) the
Temporary Space shall be delivered "AS IS" and Tenant shall not
be entitled to any Finish Allowance or other concessions in
connection with the Temporary Space, (v) Tenant shall not be
entitled to any renewal option in connection with the Temporary
Space, (vi) Tenant shall not be entitled to any additional
parking spaces in connection with the Temporary Space, and (vi)
Landlord shall not provide any janitorial services to the
Temporary Space. Except with respect to the provisions
specifically addressed the foregoing provisions of this Paragraph
10, the term "Premises" as used in the Lease shall include the
Temporary Space (for example and without limitation, all
insurance and indemnity provisions in the Lease applicable to the
Premises shall also be applicable to the Temporary Space).
11. Parking. Effective as of the Additional Premises
Commencement Date, Paragraph 1 of Exhibit F to the Lease shall be
amended to read as follows:
Parking Spaces. So long as the Lease remains in effect,
Tenant or persons designated by Tenant shall have the right
(but not the obligation) to rent in the Garage on (i) a
reserved basis up to five (5) parking spaces in the Garage
during the term of this Lease and (ii) an unreserved and
non-exclusive basis up to fifty-six (56) parking spaces in
the Garage during the term of this Lease. Each capitalized
term not defined herein shall have the meaning assigned to
it in the Supplemental Lease Provisions.
<PAGE>
12. No Brokers. Tenant warrants that it has had no dealings
with any real estate broker or agent in connection with the
negotiation of this Amendment and that it knows of no real estate
brokers or agents who are or might be entitled to a commission in
connection with this Amendment or otherwise in connection with
the Lease. Tenant agrees to indemnify and hold harmless Landlord
from and against any liability or claim arising in respect to
brokers or agents.
13. Authority. Tenant and each person signing this Amendment on
behalf of Tenant represents to Landlord as follows: (i) Tenant is
a duly incorporated and validly existing under the laws of the
State of Texas, (ii) Tenant has and is qualified to do business
in Texas, (iii) Tenant has the full right and authority to enter
into this Amendment, and (iv) each person signing on behalf of
Tenant was and continues to be authorized to do so.
14. Defined Terms. All terms not otherwise defined herein shall
have the same meaning as assigned to them in the Lease. Except
as amended hereby, the Lease shall remain in full force and
effect in accordance with its terms and is hereby ratified. In
the event of a conflict between the Lease and this Amendment,
this Amendment shall control.
15. Exhibits. Each Exhibit and Schedule attached hereto is made
a part hereof for all purposes.
16. No Representations. Landlord and Landlord's agents have
made no representations or promises, express or implied, in
connection with the Additional Premises or this Amendment except
as expressly set forth herein.
17. Entire Agreement. This Amendment, together with the Lease,
contains all of the agreements of the parties hereto with respect
to any matter covered or mentioned in this Amendment or the
Lease, and no prior agreement, understanding or representation
pertaining to any such matter shall be effective for any purpose.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first above written.
LANDLORD
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, a New Jersey corporation
By: Fults Realty Corporation, its
duly authorized agent
By:
Name:
Title:
<PAGE>
TENANT
AMERICAN HALLMARK INSURANCE
COMPANY OF TEXAS, a Texas
corporation
By:
Name:
Title:
EXHIBIT B
WORK LETTER
PLANS TO BE AGREED UPON/FINISH ALLOWANCE
This Exhibit is attached to and a part of that certain
Second Amendment to Lease Agreement (the "Amendment") dated as of
May 25, 1995, executed by and between THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA, a New Jersey corporation ("Landlord"), and
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS, a Texas corporation
("Tenant"). Any capitalized term used but not defined herein
shall have the meaning assigned to it in the Lease (as defined in
the Amendment). Landlord and Tenant mutually agree as follows:
1. Plans.
1.1 Space Plan. Landlord's designated space planner, at
Tenant's expense, has prepared and delivered to Tenant a space
plan for the Additional Premises showing the location of all
partitions and doors and the lay-out of the Additional Premises.
Tenant will at all times cooperate with Landlord's space planner,
furnishing all reasonable information and material concerning
Tenant's organization, staffing, growth expectations, physical
facility needs (including, without limitation, needs arising by
reason of the Disability Acts), equipment, inventory, etc.,
necessary for the space planner to efficiently and expeditiously
arrive at an acceptable lay-out of the Premises. Landlord and
Tenant have approved in writing the space plan (such space plan,
as approved by Landlord and Tenant, is herein referred to as the
"Space Plan").
1.2 Compliance With Disability Acts. Tenant shall promptly
provide Landlord and Landlord's space planner and/or architect as
applicable, with all information needed to cause the construction
of Tenant's Improvements to be completed such that Tenant, the
Additional Premises and Tenant's Improvements (as constructed)
will be in compliance with the Disability Acts. TENANT SHALL BE
RESPONSIBLE FOR AND SHALL INDEMNIFY AND HOLD HARMLESS LANDLORD
FROM AND AGAINST ANY AND ALL CLAIMS, LIABILITIES AND EXPENSES
(INCLUDING, WITHOUT LIMITATION REASONABLE ATTORNEYS' FEES AND
EXPENSES) INCURRED BY OR ASSERTED AGAINST LANDLORD BY REASON OF
OR IN CONNECTION WITH ANY VIOLATION OF THE DISABILITY ACTS
ARISING FROM OR OUT OF (x) information or design and space plans
furnished to Landlord by Tenant (or the lack of complete and
accurate information so furnished) concerning Tenant's
<PAGE>
Improvements, (y) Tenant's employer-employee obligations, or (z)
after the Additional Premises Commencement Date, violations by
Tenant and/or Tenant's Improvements or the Additional Premises
not being in compliance with the Disability Acts as the result of
changes in regulations or law or interpretations thereof not in
effect on the Additional Premises Commencement Date. The
foregoing indemnity shall not include any claims, liabilities or
expenses (including reasonable attorneys' fees and expenses)
arising out of the negligence or gross negligence of Landlord or
Landlord's employees, agents or contractors. Without limiting
the foregoing, if Landlord constructs Tenant's Improvements based
on any special requirements or improvements required by Tenant,
or upon information furnished by Tenant that later proves to be
inaccurate or incomplete resulting in any violation of the
Disability Acts, Tenant shall be solely liable to correct such
violations and to bring the improvements into compliance with the
Disability Acts as promptly as is practicable.
1.3 Construction Plans. On or before May 26, 1995, Landlord's
space planner and engineer, at Tenant's expense, will prepare
construction plans (such construction plans, when approved, and
all changes and amendments thereto agreed to by Landlord and
Tenant in writing, are herein called the "Construction Plans")
for all of Tenant's improvements requested pursuant to the Space
Plan (all improvements required by the Construction Plans are
herein called "Tenant's Improvements"), including complete detail
and finish drawings for partitions, doors, reflected ceiling,
telephone outlets, electrical switches and outlets and Building
standard heating, ventilation and air conditioning equipment and
controls. Within three (3) business days after construction
plans are delivered to Tenant, Tenant shall approve (which
approval shall not be unreasonably withheld) or disapprove same
in writing and if disapproved, Tenant shall provide Landlord and
Landlord's space planner and engineer specific reasons for
disapproval. Within five (5) business days after receipt of such
specific reasons for disapproval, Landlord's space planner and
engineer shall deliver revised Construction Plans to Tenant. The
foregoing process shall continue until the construction plans are
approved by Tenant; provided that if Tenant fails to respond in
any three (3) business day period, Tenant shall be deemed to have
approved the last submitted construction plans. If the
construction plans are not approved in writing by both Tenant and
Landlord on or before June 8, 1995, for any reason whatsoever,
then each day after June 8, 1995 that the construction plans are
not approved by Tenant shall constitute one (1) day of Tenant
Delay.
1.4 Changes to Approved Plans. If any re-drawing or re-drafting
of either the Space Plan or the Construction Plans is
necessitated by Tenant's requested changes (all of which shall be
subject to approval by Landlord and, if applicable, the Texas
Department of Licensing & Regulation and any other governmental
agency or authority to which the plans and specifications are
required to be submitted), the expense of any such re-drawing or
re-drafting required in connection therewith and the expense of
any work and improvements necessitated by such re-drawing or
re-drafting will be charged to Tenant.
<PAGE>
1.5 Coordination of Planners and Designers. If Tenant shall
arrange for interior design services, whether with Landlord's
space planner or any other planner or designer, it shall be
Tenant's responsibility to cause necessary coordination of its
agents' efforts with Landlord's agents to ensure that no delays
are caused to either the planning or construction of the Tenant's
Improvements.
2. Construction and Costs of Tenant's Improvements.
2.1 Construction Obligation and Additional Finish Allowance.
Landlord agrees to construct Tenant's Improvements, at Tenant's
cost and expense; provided, however, Landlord shall provide
Tenant with an allowance up to $30,355.07 (the "Additional Finish
Allowance"), which allowance shall be disbursed by Landlord, from
time to time, for payment of (in the following priority) (i) the
contract sum required to be paid to the general contractor
engaged to construct Tenant's Improvements (the "Contract Sum"),
(ii) the fees of the preparer of the Space Plan and the
Construction Plans and (iii) payment of the Construction
Management Fee (hereinafter defined). Provided that the Contract
Sum equals or exceeds $50,000.00, upon completion of Tenant's
Improvements and in consideration of Landlord administering the
construction of Tenant's Improvements, Tenant agrees to pay
Landlord a fee equal to five percent (5%) of the Contract Sum to
construct Tenant's Improvements in the Additional Premises (the
"Construction Management Fee") (the foregoing costs are
collectively referred to as the "Permitted Costs").
2.2. Unexpended Finish Allowance. In addition to the Additional
Finish Allowance, Tenant may apply all or any portion of the
unexpended Finish Allowance (the "Unexpended Finish Allowance")
provided for under the Work Letter attached to the Lease for
payment of the Permitted Costs; provided that the terms of
Section 7 of the Work Letter attached to the Lease for
disbursement of such Unexpended Finish Allowance are complied
with. As of the date hereof, the Unexpended Finish Allowance is
$25,566.79. In the event any portion of the Additional Finish
Allowance remains unexpended after payment of the Permitted
Costs, such unexpended portion of the Additional Finish Allowance
up to $20,218 shall be applied against Tenant's next accruing
obligation for Basic Monthly Rent.
2.3 Excess Costs. If the sum of the Permitted Costs exceeds the
Additional Finish Allowance and Unexpended Finish Allowance, then
Tenant shall pay all such excess costs ("Excess Costs"),
provided, however, Landlord will, prior to the commencement of
construction of Tenant's Improvements, advise Tenant of the
Excess Costs, if any, and the Contract Sum. Tenant shall have
two (2) business days from and after the receipt of such advice
within which to approve or disapprove the Contract Sum and Excess
Costs. If Tenant fails to approve same by the expiration of the
second such business day, then Tenant shall be deemed to have
approved the proposed Contract Sum and Excess Costs. If Tenant
disapproves the Contract Sum and Excess Costs within such two (2)
business day period, then Tenant shall either reduce the scope of
Tenant's Improvements such that there shall be no Excess Costs
or, at Tenant's option, Landlord shall obtain two (2) additional
<PAGE>
bids, provided that each day beyond such two (2) business day
period and until the rebid is accepted by Tenant shall constitute
a Tenant Delay hereunder. Subject to the last sentence of this
subsection, the foregoing process shall continue until a Contract
Sum and resulting Excess Costs, if any, are accepted or deemed
accepted by Tenant. Landlord and Tenant must approve (or be
deemed to have approved) the Contract Sum for the construction of
Tenant's Improvements in writing prior to the commencement of
construction. If Tenant fails to accept a Contract Sum by June
12, 1995, then each day after June 12, 1995 that such Contract
Sum is not accepted by Tenant shall constitute one (1) day of
Tenant Delay.
2.4 Liens Arising from Excess Costs. Tenant agrees to keep the
Premises free from any liens arising out of nonpayment of Excess
Costs. In the event that any such lien is filed and Tenant,
within ten (10) days following such filing fails to cause same to
be released of record by payment or posting of a proper bond,
Landlord shall have, in addition to all other remedies provided
herein and by law, the right, but not the obligation, to cause
the same to be released by such means as it in its sole
discretion deems proper, including payment of or defense against
the claim giving rise to such lien. All sums paid by Landlord in
connection therewith shall constitute Rent under the Lease and a
demand obligation of Tenant to Landlord and such obligation shall
bear interest at the rate provided for in Section 15.10 of the
Supplemental Lease Provisions from the date of payment by
Landlord until the date paid by Tenant.
2.5 Construction Deposit. Tenant shall remit to Landlord an
amount (the "Prepayment") equal to the projected Excess Costs, if
any, within five (5) working days after commencement of
construction by Landlord. On or prior to the Additional Premises
Commencement Date, Tenant shall deliver to Landlord the actual
Excess Costs, minus the Prepayment previously paid. Failure by
Tenant to timely tender to Landlord the full Prepayment shall
permit Landlord to stop all work until the Prepayment is
received. All sums due Landlord under this Section 2.5 shall be
considered Rent under the terms of the Lease and nonpayment shall
constitute a default under the Lease and entitle Landlord to any
and all remedies specified in the Lease.
3. Delays. Delays in the completion of construction of
Tenant's Improvements in the Additional Premises or in obtaining
a certificate of occupancy for the Additional Premises, if
required by the applicable governmental authority, caused by
Tenant, Tenant's Contractors (hereinafter defined) or any person,
firm or corporation employed by Tenant or Tenant's Contractors
shall constitute "Tenant Delays". In the event that Tenant's
Improvements in the Additional Premises are not Substantially
Complete by the Target Date (as defined in the Amendment), then
the Target Date shall be amended to be the Adjusted Target Date
(hereinafter defined). The Adjusted Target Date shall be the
date Tenant's Improvements in the Additional Premises are
Substantially Complete, adjusted backward, however, by one day
for each day of Tenant Delays, if any. The foregoing adjustment
in the Target Date shall be Tenant's sole and exclusive remedy in
the event Tenant's Improvements are not Substantially Complete by
the Target Date set forth in the Amendment.
<PAGE>
4. Substantial Completion and Punch List. The terms
"Substantial Completion" and "Substantially Complete," as
applicable, shall mean when Tenant's Improvements are
sufficiently completed in accordance with the Construction Plans
so that Tenant can reasonably use the Additional Premises for the
Permitted Use (as described in Item 12 of the Basic Lease
Provisions). When Landlord considers Tenant's Improvements to be
Substantially Complete, Landlord will notify Tenant and within
two (2) business days thereafter, Landlord's representative and
Tenant's representative shall conduct a walk-through of the
Additional Premises and identify any necessary touch-up work,
repairs and minor completion items as are necessary for final
completion of Tenant's Improvements. Neither Landlord's
representative nor Tenant's representative shall unreasonably
withhold his agreement on punch list items. Landlord will use
reasonable efforts to cause the contractor to complete all punch
list items within thirty (30) days after agreement thereon.
5. Tenant's Contractors. If Tenant should desire to enter the
Additional Premises or authorize its agent to do so prior to the
Additional Premises Commencement Date, to perform approved work
not requested of the Landlord, Landlord shall permit such entry
if:
(a) Tenant shall use only such contractors which Landlord
shall approve in its reasonable discretion and Landlord
shall have approved the plans to be utilized by Tenant,
which approval will not be unreasonably withheld; and
(b) Tenant, its contractors, workmen, mechanics, engineers,
space planners or such others as may enter the
Additional Premises (collectively, "Tenant's
Contractors"), work in harmony with and do not in any
way disturb or interfere with Landlord's space
planners, architects, engineers, contractors, workmen,
mechanics or other agents or independent contractors in
the performance of their work (collectively,
"Landlord's Contractors"), it being understood and
agreed that if entry of Tenant or Tenant's Contractors
would cause, has caused or is causing a material
disturbance to Landlord or Landlord's Contractors, then
Landlord may, with notice, refuse admittance to Tenant
or Tenant's Contractors causing such disturbance; and
(c) Tenant (notwithstanding the first sentence of
subsection 7.201 of the Supplemental Lease Provisions),
Tenant's Contractors and other agents shall provide
Landlord sufficient evidence that each is covered under
such Worker's Compensation, public liability and
property damage insurance as Landlord may reasonably
request for its protection.
Landlord shall not be liable for any injury, loss or damage to
any of Tenant's installations or decorations made prior to the
Additional Premises Commencement Date and not installed by
Landlord. Tenant shall indemnify and hold harmless Landlord and
Landlord's Contractors from and against any and all costs,
expenses, claims, liabilities and causes of action arising out of
<PAGE>
or in connection with work performed in the Additional Premises
by or on behalf of Tenant (but excluding work performed by
Landlord or Landlord's Contractors). Landlord is not responsible
for the function and maintenance of Tenant's Improvements which
are different than Landlord's standard improvements at the
Property or improvements, equipment, cabinets or fixtures not
installed by Landlord. Such entry by Tenant and Tenant's
Contractors pursuant to this Section 5 shall be deemed to be
under all of the terms, covenants, provisions and conditions of
the Lease except the covenant to pay Rent.
6. Construction Representatives. Landlord's and Tenant's
representatives for coordination of construction and approval of
change orders will be as follows, provided that either party may
change its representative upon written notice to the other:
LANDLORD'S REPRESENTATIVE:
NAME Mitch Owen
ADDRESS 200 Crescent Court, 12th Floor
Dallas, Texas 75201
PHONE (214) 871-6677
TENANT'S REPRESENTATIVE:
NAME Raymond Kilgore
ADDRESS 14651 Dallas Parkway, Suite 900
Dallas, Texas 75240
PHONE (214) 934-2400
THIRD AMENDMENT TO LEASE AGREEMENT
This Third Amendment to Lease Agreement (this "Third
Amendment") is entered into as of the 12th day of June, 1995,
by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New
Jersey corporation ("Landlord") and American Hallmark Insurance
Company of Texas, a Texas corporation ("Tenant").
WHEREAS, Landlord and Tenant have executed that certain
Lease Agreement dated September 12, 1994, whereby Tenant leased
16,526 square feet of rentable area on the ninth (9th) floor of
the building known as The Princeton, Dallas, Texas (each
capitzlized term used but not defined herein shall have the
meaning assigned to such term in the Lease);
WHEREAS, the Lease Agreement was modified by that certain
First Amendment of Lease (the "First Amendment") dated October
10, 1994, and the Second Amendment to Office Lease Agreement
(the "Second Amendment") dated May 25, 1995 (such Office Lease
Agreement, as amended, herein called the "Lease");
NOW, THEREFORE, in consideration of the premises and the
mutual covenants between parties, Landlord and Tenant hereby
agree as follows:
1. Effective June 15, 1995, Tenant shall occupy Suite 328B,
containing approximately 756 rentable square feet, as
described on Exhibit "A-3" (the "Storage Premises") located
on the third floor in Suite 328 under the following
conditions.
A) Tenant shall pay Landlord $8.00 per rentable square
foot or $504.00 per month rental for Storage Premises
in addition to its base monthly rental for its office
lease space.
B) The occupancy term for the Storage Premises only shall
be on a month-to-month basis. Both Landlord and Tenant
each have the right to give thirty (30) days prior
written notice to the other party to cancel the leasing
of the aforementioned Storage Premises.
C) The Storage Premises will be used as a storage facility
only and is accepted in an "as is" condition.
2. Landlord and Landlord's agents have made no representations
or promises, express or implied, in connection with the
Storage Premises or the Third Amendment except as expressly
set forth herein.
3. This Third Amendment, together with the Second Amendment,
the First Amendment and the Lease, contain all of the
agreements of the parties hereto with respect to any matter
covered or mentioned in the Third Amendment or the Lease,
and no prior agreement, understanding or representation
pertaining to any such matter shall be effective for any
purpose.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as
of the date first above written.
LANDLORD: TENANT:
The Prudential Insurance Company American Hallmark Insurance
Of America, a New Jersey corporation Company of Texas
BY: Fults Realty Corporation, its
duly authorized agent
By: By:
Name: Name:
Title: Title:
FOURTH AMENDMENT TO LEASE AGREEMENT
This Fourth Amendment to Lease Agreement (this "Fourth
Amendment") is entered into as of the 11th day of August, 1995,
by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New
Jersey corporation ("Landlord") and American Hallmark Insurance
Company of Texas, a Texas corporation ("Tenant").
WHEREAS, Landlord and Tenant have executed that certain
Lease Agreement dated September 12, 1994, whereby Tenant leased
20,218 square feet of rentable area on the ninth (9th) floor of
the building known as The Princeton, Dallas, Texas (each
capitalized term used but not defined herein shall have the
meaning assigned to such term in the Lease);
WHEREAS, the Lease Agreement was modified by that certain
First Amendment of Lease (the "First Amendment") dated October
10, 1994, and the Second Amendment to Office Lease Agreement
(the "Second Amendment") dated May 25, 1995, and Third Amendment
to Lease Agreement (the "Third Amendment") dated June 12, 1995,
(such Office Lease Agreement, as amended, herein called the
"Lease");
NOW, THEREFORE, in consideration of the premises and the
mutual covenants between parties, Landlord and Tenant hereby
agree as follows:
1. Effective August 16, 1995, Tenant shall occupy Suite 215,
deemed to be 1,369 square feet of rentable area on the
second (2nd) floor of the Building, as described on Exhibit
"A-4" (the "Expanded Premises") under the following
conditions.
A) The Lease Term for the Expanded Premises shall be from
August 16, 1995 to January 15, 1996 for a total term of
five (5) months.
B) The Basic Annual Rent and Basic Monthly for the
Expanded Premises shall be as follows:
Basic Basic
Monthly Annual
Period Rent Rent
8/16/95 to 1/15/96 $1,597.17 $19,166.04*
*Prorated to a five (5) month term for a total of
$7,985.85
C) Tenant shall lease the Expanded Premises in its current
"as is" condition with no improvement to be provided by
the Landlord.
D) Tenant's Operating Expense Stop for the Expanded
Premises shall be a 1995 Base Year Expense Stop.
<PAGE>
2. Landlord and Landlord's agents have made no representations
or promises, express or implied, in connection with the
Expanded Premises or the Fourth Amendment except as
expressly set forth herein.
3. This Fourth Amendment, together with the First, Second and
Third Amendment, and the Lease, contain all of the
agreements of the parties hereto with respect to any matter
covered or mentioned in the Fourth Amendment or the Lease,
and no prior agreement, understanding or representation
pertaining to any such matter shall be effective for any
purpose.
IN WITNESS WHEREOF, the parties have executed this Amendment as
of the date first above written.
LANDLORD: TENANT:
The Prudential Insurance Company American Hallmark
Of America, a New Jersey corporation Insurance Company of
Texas
BY: Fults Realty Corporation, its
duly authorized agent
By: By:
Name: Name:
Title: Title:
Exhibit "A-4"
Expanded Premises
Suite 215, consisting of approximately 1,369 rentable square
feet, as outlined in red below.
FIFTH AMENDMENT TO LEASE AGREEMENT
THIS FIFTH AMENDMENT TO LEASE AGREEMENT (this "Amendment")
is entered into as of the 16th day of January, 1996, by and
between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey
corporation ("Landlord") and AMERICAN HALLMARK INSURANCE COMPANY
OF TEXAS, a Texas corporation ("Tenant").
WHEREAS, pursuant to that certain Office Lease Agreement
dated September 12, 1994, by and between Landlord and Tenant, as
amended by that certain First Amendment to Lease Agreement dated
as of October 10, 1994, that certain Second Amendment to Lease
dated as of May 25, 1995, that certain Third Amendment of Lease
(the "Third Amendment") dated as of June 12, 1995 and that
certain Fourth Amendment to Office Lease (the "Fourth Amendment")
dated as of August 11, 1995 (such Office Lease Agreement, as
amended, herein called the "Lease"), Landlord leased to Tenant
certain space (the "Premises") in the building known as The
Princeton (the "Building") more particularly described therein;
WHEREAS, after termination of the lease term for the
Expanded Premises (as defined in the Fourth Amendment), the
Premises (excluding the Storage Premises [as defined in the Third
Amendment]) currently consist of 20,218 square feet of rentable
area on the ninth (9th) and second (2nd) floors of the Building;
WHEREAS, pursuant to Paragraph E of Rider 3 to the Lease,
Tenant has the right to lease certain space in the Building
described on Schedule A-1 to Rider 3 (the "Right of First Refusal
Space");
WHEREAS, Tenant has notified Landlord that it desires to
lease a portion of the Right of First Refusal Space known as
Suite 215, which suite contains 1,369 square feet of Agreed
Rentable Area and is shown on Exhibit A attached hereto (the
"Expansion Space"); and
WHEREAS, Landlord and Tenant desire to amend the Lease to
reflect their agreements as to the terms and conditions governing
Tenant's lease of the Expansion Space.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants between the parties herein contained, Landlord
and Tenant hereby agree as follows:
1. Premises. Item 2 of the Basic Lease Provisions is hereby
amended to read as follows:
Premises:
a. Suite #: 900, 205 and 215; Floors: ninth and second.
b. Agreed Rentable Area: 21,587.
2. Basic Rent. Item 3 of the Basic Lease Provisions is hereby
amended to read as follows:
<PAGE>
<TABLE>
Basic Rent (See Article 2, Supplemental Lease Provisions):
With respect to Suites 900 and 205 the Basic Rent shall be
as follows:
<CAPTION>
Rate Per Square Basic Basic
Rental Foot of Agreed Annual Monthly
Period Rentable Area Rent Rent
<S> <C> <C> <C>
7-22-95 to 12-31-95 $11.75 $237,561.50 $19,796.79
1-1-96 to 12-31-96 $12.25 $247,670.50 $20,639.21
1-1-97 to 12-31-97 $12.50 $252,725.00 $21,060.42
1-1-98 to 12-31-98 $12.75 $257,779.50 $21,481.63
1-1-99 to 12-31-99 $13.25 $267,888.50 $22,324.04
1-1-00 to 11-30-00 $13.50 $272,943.00 $22,745.25
</TABLE>
<TABLE>
With respect to Suite 215, the Basic Rent shall be as
follows:
<CAPTION>
Rate Per Square Basic Basic
Rental Foot of Agreed Annual Monthly
Period Rentable Area Rent Rent
<S> <C> <C> <C>
1-16-96 to 12-31-96 $12.25 $16,770.25 $1,397.52
1-1-97 to 12-31-97 $12.50 $17,112.50 $1,426.04
1-1-98 to 12-31-98 $12.75 $17,454.75 $1,454.56
1-1-99 to 12-31-99 $13.25 $18,139.25 $1,511.60
1-1-00 to 11-30-00 $13.50 $18,481.50 $1,540.13
</TABLE>
With respect to Suite 328B (the Storage Premises), the
monthly rent shall be $504.00.
3. Tenant's Pro Rata Percentage. Item 4 of the Basis Lease
Provisions is hereby amended to read as follows:
Tenant's Pro Rata Share Percentage: 5.81502% (the Agreed
Rentable Area of the Premises divided by the Agreed Rentable
Area of the Building, expressed in a percentage).
4. Amendment of Exhibit A. Exhibit A attached hereto shall be
added to and made a part of Exhibit A attached to the Lease.
5. Delivery of Expansion Space. Landlord delivers the
Expansion Space to Tenant on the date hereof in "AS IS"
condition.
6. Tenant's Improvements. Landlord shall construct
improvements in the Expansion Space subject to and in accordance
with the terms and conditions of the Work Letter attached hereto
as Exhibit B.
7. Acceptance of Expansion Space. Tenant hereby accepts the
Expansion Space for all purposes. Upon Substantial Completion of
the improvements in the Expansion Space, Landlord and Tenant
shall execute the Acceptance of Premises Memorandum substantially
in the form of the Acceptance of Premises Memorandum executed in
connection with the Lease.
<PAGE>
8. Parking. Paragraph 1 of Exhibit F to the Lease is hereby
amended to read as follows:
Parking Spaces. So long as the Lease remains in effect,
Tenant or persons designated by Tenant shall have the right
(but not the obligation) to rent in the Garage on (i) a
reserved basis up to five (5) parking spaces in the Garage
during the term of this Lease and (ii) an unreserved and
non-exclusive basis up to sixty (60) parking spaces in the
Garage during the term of this Lease. Each capitalized term
not defined herein shall have the meaning assigned to it in
the Supplemental Lease Provisions.
9. No Brokers. Tenant warrants that it has had no dealings
with any real estate broker or agent in connection with the
negotiation of this Amendment and that it knows of no real estate
brokers or agents who are or might be entitled to a commission in
connection with this Amendment or otherwise in connection with
the Lease. Tenant agrees to indemnify and hold harmless Landlord
from and against any liability or claim arising in respect to
brokers or agents.
10. Authority. Tenant and each person signing this Amendment on
behalf of Tenant represents to Landlord as follows: (i) Tenant is
a duly incorporated and validly existing under the laws of the
State of Texas, (ii) Tenant has and is qualified to do business
in Texas, (iii) Tenant has the full right and authority to enter
into this Amendment, and (iv) each person signing on behalf of
Tenant was and continues to be authorized to do so.
11. Defined Terms. All terms not otherwise defined herein shall
have the same meaning as assigned to them in the Lease. Except
as amended hereby, the Lease shall remain in full force and
effect in accordance with its terms and is hereby ratified. In
the event of a conflict between the Lease and this Amendment,
this Amendment shall control.
12. Exhibits. Each Exhibit attached hereto is made a part
hereof for all purposes.
13. No Representations. Landlord and Landlord's agents have
made no representations or promises, express or implied, in
connection with the Expansion Space or this Amendment except as
expressly set forth herein.
14. Entire Agreement. This Amendment, together with the Lease,
contains all of the agreements of the parties hereto with respect
to any matter covered or mentioned in this Amendment or the
Lease, and no prior agreement, understanding or representation
pertaining to any such matter shall be effective for any purpose.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first above written.
LANDLORD
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, a New Jersey corporation
<PAGE>
By: Fults Realty Corporation, its duly
authorized agent
By:
Name: Bernard Deaton
Title: President
TENANT
AMERICAN HALLMARK INSURANCE
COMPANY OF TEXAS, a Texas corporation
By:
Name: Raymond Kilgore
Title: Secretary/Director
EXHIBIT B
WORK LETTER
PLANS TO BE AGREED UPON/FINISH ALLOWANCE
This Exhibit is attached to and a part of that certain Fifth
Amendment to Lease Agreement (the "Amendment") dated as of
January 16, 1996, executed by and between THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA, a New Jersey corporation
("Landlord"), and AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS, a
Texas corporation ("Tenant"). Any capitalized term used but not
defined herein shall have the meaning assigned to it in the Lease
(as defined in the Amendment). Landlord and Tenant mutually
agree as follows:
1. Plans.
1.1 Space Plan. Upon Landlord's receipt of written notice (the
"Refurbishment Notice") from Tenant stating that Tenant desires
to refurbish the Expansion Space, which Refurbishment Notice must
be received by Landlord on or before 5:00 p.m. November 1, 1996,
Landlord's designated space planner, at Tenant's expense, will
prepare and deliver to Tenant a space plan for the Expansion
Space showing the location of all partitions and doors and the
lay-out of the Expansion Premises. Tenant will at all times
cooperate with Landlord's space planner, furnishing all
reasonable information and material concerning Tenant's
organization, staffing, growth expectations, physical facility
needs (including, without limitation, needs arising by reason of
the Disability Acts), equipment, inventory, etc., necessary for
the space planner to efficiently and expeditiously arrive at an
acceptable lay-out of the Expansion Space. Tenant will approve
or disapprove in writing the space plan within three (3) business
days after receipt from Landlord and if disapproved, Tenant shall
provide Landlord and Landlord's space planner with specific
reasons for disapproval. If Tenant fails to approve or
disapprove the space plan on or before the end of such three (3)
business day period, Tenant shall be deemed to have approved the
last submitted space plan. The foregoing process shall be
<PAGE>
repeated until Tenant has approved (which shall include deemed
approval) the space plan (such space plan, when approved by
Landlord and Tenant, is herein referred to as the "Space Plan").
In the event Tenant fails to deliver the Refurbishment Notice to
Landlord on or before 5:00 p.m. November 1, 1996, Landlord shall
have no obligation under this Work Letter. Without limiting the
foregoing, in the event Landlord does not receive the
Refurbishment Notice on or before 5:00 p.m. November 1, 1996,
Landlord shall have no obligation to construct improvements in
the Expansion Space and shall have no obligation to pay the
Expansion Space Finish Allowance.
1.2 Compliance With Disability Acts. Tenant shall promptly
provide Landlord and Landlord's space planner and/or architect as
applicable, with all information needed to cause the construction
of Tenant's Improvements to be completed such that Tenant, the
Expansion Space and Tenant's Improvements (as constructed) will
be in compliance with the Disability Acts. TENANT SHALL BE
RESPONSIBLE FOR AND SHALL INDEMNIFY AND HOLD HARMLESS LANDLORD
FROM AND AGAINST ANY AND ALL CLAIMS, LIABILITIES AND EXPENSES
(INCLUDING, WITHOUT LIMITATION REASONABLE ATTORNEYS' FEES AND
EXPENSES) INCURRED BY OR ASSERTED AGAINST LANDLORD BY REASON OF
OR IN CONNECTION WITH ANY VIOLATION OF THE DISABILITY ACTS
ARISING FROM OR OUT OF (x) information or design and space plans
furnished to Landlord by Tenant (or the lack of complete and
accurate information so furnished) concerning Tenant's
Improvements, (y) Tenant's employer-employee obligations, or (z)
violations by Tenant and/or Tenant's Improvements or the
Expansion Space not being in compliance with the Disability Acts
(i.e., Tenant shall be solely responsible for and indemnify
Landlord in the event the Expansion Space is not in compliance
with the Disability Acts during Tenant's occupancy of the
Expansion Space prior to Landlord's construction of the Tenant's
Improvements). The foregoing indemnity shall not include any
claims, liabilities or expenses (including reasonable attorneys'
fees and expenses) arising out of the negligence or gross
negligence of Landlord or Landlord's employees, agents or
contractors. Without limiting the foregoing, if Landlord
constructs Tenant's Improvements based on any special
requirements or improvements required by Tenant, or upon
information furnished by Tenant that later proves to be
inaccurate or incomplete resulting in any violation of the
Disability Acts, Tenant shall be solely liable to correct such
violations and to bring the improvements into compliance with the
Disability Acts as promptly as is practicable.
1.3 Construction Plans. Landlord's space planner and engineer,
at Tenant's expense, will prepare construction plans (such
construction plans, when approved, and all changes and amendments
thereto agreed to by Landlord and Tenant in writing, are herein
called the "Construction Plans") for all of Tenant's improvements
in the Expansion Space requested pursuant to the Space Plan (all
improvements required by the Construction Plans are herein called
"Tenant's Improvements"), including complete detail and finish
drawings for partitions, doors, reflected ceiling, telephone
outlets, electrical switches and outlets and Building standard
heating, ventilation and air conditioning equipment and controls.
Within three (3) business days after construction plans are
delivered to Tenant, Tenant shall approve (which approval shall
<PAGE>
not be unreasonably withheld) or disapprove same in writing and
if disapproved, Tenant shall provide Landlord and Landlord's
space planner and engineer specific reasons for disapproval.
Within five (5) business days after receipt of such specific
reasons for disapproval, Landlord's space planner and engineer
shall deliver revised Construction Plans to Tenant. The
foregoing process shall continue until the construction plans are
approved by Tenant; provided that if Tenant fails to respond in
any three (3) business day period, Tenant shall be deemed to have
approved the last submitted construction plans. If the
construction plans are not approved in writing by both Landlord
and Tenant on or before fifteen (15) business days after Landlord
delivers the initial construction plans to Tenant, Landlord shall
be entitled to terminate Landlord's obligations under this Work
Letter by delivering written notice of such termination to
Tenant.
1.4 Changes to Approved Plans. If any re-drawing or re-drafting
of either the Space Plan or the Construction Plans is
necessitated by Tenant's requested changes (all of which shall be
subject to approval by Landlord and, if applicable, the Texas
Department of Licensing & Regulation and any other governmental
agency or authority to which the plans and specifications are
required to be submitted), the expense of any such re-drawing or
re-drafting required in connection therewith and the expense of
any work and improvements necessitated by such re-drawing or
re-drafting will be charged to Tenant.
1.5 Coordination of Planners and Designers. If Tenant shall
arrange for interior design services, whether with Landlord's
space planner or any other planner or designer, it shall be
Tenant's responsibility to cause necessary coordination of its
agents' efforts with Landlord's agents to ensure that no delays
are caused to either the planning or construction of the Tenant's
Improvements.
2. Construction and Costs of Tenant's Improvements.
2.1 Construction Obligation and Expansion Space Finish
Allowance. Landlord agrees to construct Tenant's Improvements,
at Tenant's cost and expense; provided, however, Landlord shall
provide Tenant with an allowance up to $7,627.06 (the "Expansion
Space Finish Allowance"), which allowance shall be disbursed by
Landlord, from time to time, for payment of (in the following
priority) (i) the contract sum required to be paid to the general
contractor engaged to construct Tenant's Improvements (in the
Expansion Space) (the "Contract Sum"), (ii) the fees of the
preparer of the Space Plan and the Construction Plans, (iii)
payment of the Construction Management Fee (hereinafter defined),
and (iv) fees for asbestos testing in the Expansion Space (the
foregoing costs are collectively referred to as the "Permitted
Costs"). In consideration of Landlord administering the
construction of Tenant's Improvements, Tenant agrees to pay
Landlord a fee equal to five percent (5%) of the Contract Sum to
construct Tenant's Improvements in the Expansion Space (the
"Construction Management Fee"). In the event any portion of the
Expansion Space Finish Allowance remains unexpended after payment
of the Permitted Costs, such unexpended portion of the Expansion
Space Finish Allowance shall be the property of Landlord.
<PAGE>
2.2 Excess Costs. If the sum of the Permitted Costs exceeds the
Expansion Space Finish Allowance, then Tenant shall pay all such
excess costs ("Excess Costs"), provided, however, Landlord will,
prior to the commencement of construction of Tenant's
Improvements, advise Tenant of the Excess Costs, if any, and the
Contract Sum. Tenant shall have two (2) business days from and
after the receipt of such advice within which to approve or
disapprove the Contract Sum and Excess Costs. If Tenant fails to
approve same by the expiration of the second such business day,
then Tenant shall be deemed to have approved the proposed
Contract Sum and Excess Costs. If Tenant disapproves the
Contract Sum and Excess Costs within such two (2) business day
period, then Tenant shall reduce the scope of Tenant's
Improvements such that there shall be no Excess Costs. Landlord
and Tenant must approve (or be deemed to have approved) the
Contract Sum for the construction of Tenant's Improvements in
writing prior to the commencement of construction. If Tenant
fails to accept a Contract Sum within ten (10) business days
after Landlord advises Tenant of the Excess Costs, if any, then
Landlord shall be entitled to terminate Landlord's obligations
under this Work Letter by delivering written notice of such
termination to Tenant.
2.4 Liens Arising from Excess Costs. Tenant agrees to keep the
Premises (including the Expansion Space) free from any liens
arising out of nonpayment of Excess Costs. In the event that any
such lien is filed and Tenant, within ten (10) days following
such filing fails to cause same to be released of record by
payment or posting of a proper bond, Landlord shall have, in
addition to all other remedies provided herein and by law, the
right, but not the obligation, to cause the same to be released
by such means as it in its sole discretion deems proper,
including payment of or defense against the claim giving rise to
such lien. All sums paid by Landlord in connection therewith
shall constitute Rent under the Lease and a demand obligation of
Tenant to Landlord and such obligation shall bear interest at the
rate provided for in Section 15.10 of the Supplemental Lease
Provisions from the date of payment by Landlord until the date
paid by Tenant.
2.5 Construction Deposit. Tenant shall remit to Landlord an
amount (the "Prepayment") equal to the projected Excess Costs, if
any, within five (5) working days after commencement of
construction by Landlord. On or prior to the Substantial
Completion of Tenant's Improvements in the Expansion Space,
Tenant shall deliver to Landlord the actual Excess Costs, minus
the Prepayment previously paid. Failure by Tenant to timely
tender to Landlord the full Prepayment shall permit Landlord to
stop all work until the Prepayment is received. All sums due
Landlord under this Section 2.5 shall be considered Rent under
the terms of the Lease and nonpayment shall constitute a default
under the Lease and entitle Landlord to any and all remedies
specified in the Lease.
<PAGE>
3. Substantial Completion and Punch List. The terms
"Substantial Completion" and "Substantially Complete," as
applicable, shall mean when Tenant's Improvements are
sufficiently completed in accordance with the Construction Plans
so that Tenant can reasonably use the Expansion Space for the
Permitted Use (as described in Item 12 of the Basic Lease
Provisions). When Landlord considers Tenant's Improvements to be
Substantially Complete, Landlord will notify Tenant and within
two (2) business days thereafter, Landlord's representative and
Tenant's representative shall conduct a walk-through of the
Expansion Space and identify any necessary touch-up work, repairs
and minor completion items as are necessary for final completion
of Tenant's Improvements. Neither Landlord's representative nor
Tenant's representative shall unreasonably withhold his agreement
on punch list items. Landlord will use reasonable efforts to
cause the contractor to complete all punch list items within
thirty (30) days after agreement thereon.
4. Construction Representatives. Landlord's and Tenant's
representatives for coordination of construction and approval of
change orders will be as follows, provided that either party may
change its representative upon written notice to the other:
LANDLORD'S REPRESENTATIVE:
NAME Mitch Owen
ADDRESS 200 Crescent Court, 12th Floor
Dallas, Texas 75201
PHONE (214) 871-6677
TENANT'S REPRESENTATIVE:
NAME Raymond Kilgore
ADDRESS 14651 Dallas Parkway, Suite 900
Dallas, Texas 75240
PHONE (214) 934-2400
SHAREHOLDERS AGREEMENT
This agreement (the "Agreement") is made between AMERICAN
HALLMARK GENERAL AGENCY, INC., a Texas corporation,
("Corporation"), ROBERT D. CAMPBELL and MARGARET W. JONES,
("Shareholder" or "Shareholders", as appropriate) and AMERICAN
HALLMARK AGENCIES, INC., a Texas corporation, ("Agency").
WHEREAS, the Shareholders jointly (with right of
survivorship) own all of the issued and outstanding common shares
of the Agency (the "Stock"); and
WHEREAS, the Corporation has paid Shareholders One Hundred
Dollars and No/100 ($100.00), receipt of which is acknowledged;
and
WHEREAS, the Corporation performs certain services and
provides certain facilities to Agency from time to time which
facilities and services are valuable to the Agency; and
WHEREAS, the parties believe it to be in the best interest
of all to restrict the transfer of the Stock in such a manner so
that the Stock will not find its way into the hands of persons
who are unlicensed pursuant to the laws of this State, or persons
who may be inimical to the best interests of the Agency or the
Corporation and to provide a fair market value for the Stock in
the event a triggering event occurs;
NOW, THEREFORE, for and in consideration of the mutual
promises and covenants herein contained and other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties have agreed and do agree as
follows:
Present Ownership. The Agency was formed pursuant to the
Texas Business Corporation Act with its principal place of
business in Dallas, Dallas County, Texas, and is or intends
to be duly licensed in Texas as a local recording insurance
agency. The Shareholders are currently the owners, jointly,
of all of the Stock. The parties agree that any shares of
stock, of any nature or class, which the Agency may
authorize or issue after the date of this Agreement, and any
shareholder of such shares, shall be subject to all of the
restrictions and obligations contained in this Agreement as
if such shares were presently issued and outstanding (and
shall thereafter be part of the "Stock") and such
shareholder were a signatory to this Agreement (who shall
thereafter be referred to as a "Shareholder" hereunder).
Survivorship. The Shareholders of the Agency shall all hold
joint interest in all Stock with a right of survivorship.
In the event of the death of any Shareholder, the interest
of such deceased Shareholder shall automatically be
transferred to the other Shareholder, or Shareholders, to be
then held jointly by the Shareholders, and the estate or
personal representative of the deceased Shareholder shall
have no interest in the Stock whatsoever.
<PAGE>
Term. This Agreement shall be effective as of the effective
date specified herein and shall continue in effect until
terminated as provided in Paragraph 12.
Legend on Certificates. Each certificate for Stock of the
Agency now issued and presently owned by the Shareholders
(as well as any certificate for Stock in the future with the
appropriate Shareholder) shall be conspicuously endorsed, in
accordance with Article 2.22 of the Texas Business
Corporation Act, as follows:
"THIS CERTIFICATE IS TRANSFERABLE ONLY UPON COMPLIANCE
WITH THE PROVISIONS OF THE SHAREHOLDERS AGREEMENT DATED
____________________ BY AND AMONG AMERICAN HALLMARK
GENERAL AGENCY, INC., AMERICAN HALLMARK AGENCIES, INC.
AND SHAREHOLDERS, ROBERT D. CAMPBELL AND MARGARET W.
JONES, A COPY OF WHICH IS ON FILE IN THE OFFICE OF THE
SECRETARY OF THE COMPANY, AND MAY BE OBTAINED WITHOUT
CHARGE BY REQUESTING SAME AT THE COMPANY'S PRINCIPAL
PLACE OF BUSINESS. IN ADDITION, THE TRANSFER OF THESE
SECURITIES IS SUBJECT TO THE RESTRICTIONS IMPOSED BY
ARTICLE 21.14 OF THE INSURANCE CODE OF TEXAS OF 1951,
AS AMENDED."
Stock Restrictions and Obligations. The Corporation, or its
designee, shall have the first right to purchase all of the
Stock owned by Shareholders upon the occurrence of any of
the following "triggering" events:
(a) Death of the Surviving Shareholder. Within ninety (90)
days after the death of the sole surviving Shareholder,
the Corporation, or its designee, shall have the first
right to buy all of the Stock of such Shareholder by
giving written notice thereof to the legal
representative of the deceased Shareholder's estate, or
if none to any heir of Shareholder, within such ninety
(90) day period.
Upon giving such notice, the Corporation, or its
designee, shall pay to the deceased Shareholder's legal
representative, or his or her heirs, as the case may
be, in consideration for such Stock, the sum of money
determined under Paragraph 6 hereof and pursuant to the
terms for sale prescribed in Paragraph 7 hereof, in
exchange for all of the Stock which the Shareholder
owned at the time of his death, and the estate of the
deceased Shareholder or the Shareholder's heirs, as the
case may be, shall be obligated to sell such Stock to
the Corporation, or its designee, upon such terms.
(b) Notice By Corporation. At any time whatsoever,
Corporation, or its designee, may notify Shareholders
that it wishes to purchase all of the Shareholders'
interest in the Stock and, upon receipt of such notice,
Shareholders shall sell such Stock to Corporation, or
to its designee. Upon giving such notice, the
Corporation, or its designee, shall pay to each such
Shareholder, in consideration for such Stock, the sum
of money determined under Paragraph 6 hereof and
<PAGE>
pursuant to the terms of sales prescribed in Paragraph
7 hereof, and each Shareholder shall be required to
sell such Stock upon such terms.
(c) Voluntary Transfer. If at any time any Shareholder
wishes to sell, transfer, mortgage, pledge, give or in
any other manner devise, distribute or dispose of all
or any of his or her interest in the Stock, Shareholder
shall first give the Corporation written notice of such
intention, which notice shall constitute an offer to
sell and the Corporation, or its designee, shall have
the right to accept such offer and purchase all of such
Shareholder's Stock at any time within ninety (90) days
from the date of such notice at a price per share of
Stock determined in accordance with Paragraph 6 hereof.
Upon making such election, the Corporation, or its
designee, shall pay to the selling Shareholder, in
consideration for such Stock, the sum of money
determined pursuant to Paragraph 6 hereof and upon the
terms of sale set forth in Paragraph 7 hereof, and
Shareholder shall be required to sell such interest in
Stock upon such terms.
(d) Involuntary Transfer. If for any reason any person or
entity obtains or claims an interest in the Stock as a
result of any involuntary transfer by a Shareholder,
such Stock owned or claimed by any such person or
entity shall be subject to all limitations and
obligations contained herein and Corporation may
enforce all terms of this Agreement against any such
person or entity owning or claiming an interest in the
Stock.
(e) Other Transfers. The Shareholder shall not transfer,
assign or in any way alienate any interest in the
Stock, except as provided for in this Agreement, or as
may be agreed to in writing by Corporation. If, and
only if, the Corporation, or its designee, elects not
to purchase the shares of Shareholder when such option
is provided above, then any Shareholder may sell or
assign all or any part of Shareholder's interest in the
Stock upon such terms as the Shareholder may desire,
provided that such Stock shall continue to be subject
hereto, as provided in paragraph 1.
Valuation of Stock. The Stock of the Agency shall be valued
and the sales price determined for purposes of this
Agreement at $1.00 per share for the joint interests of
Shareholders in each such share. The interest of a single
Shareholder shall be equal to his or her fractional amount
(with the numerator of one and the denominator being the
total number of such Shareholders) of the sales price.
Terms of Sale. The Corporation shall pay the consideration
for the purchased Stock in cash, or by reducing
Shareholder's debt, if any, owed to Corporation by the
amount of the sales price.
<PAGE>
Right To Assign or Transfer. It is understood by all
parties that Corporation has no intent to own the Agency
(while the Agency holds a Texas local recording agent's
license) but it is recognized that Corporation does have a
pecuniary interest in the Agency and has an interest in
placing certain restrictions on the Stock. Corporation
acknowledges that, because of licensing restrictions, it is
not entitled to own shares of a Texas corporate local
recording agency and therefore agrees that prior to
purchasing any Stock of Agency hereunder, if Agency then
holds such a license, it will assign its rights to purchase
hereunder to a designed individual or individuals permitted
to own such Stock, in which event such Stock shall be sold
to such designee upon the same terms and conditions and for
the same consideration as if Corporation had purchased them.
Any such Stock purchased by an designee and any designee so
purchasing shall be subject to all of the terms and
conditions hereof as if the Stock were owned by the original
Shareholder and the designee were the original Shareholder.
Stock Power. To protect Corporation's rights hereunder,
Shareholders have this day delivered to Corporation all of
the certificates of Stock of Agency owned by Shareholder,
together with blank stock powers, undated but executed,
which irrevocably authorizes and appoints Corporation, as
its attorney in fact, to complete such stock powers and to
transfer the Stock if and when an event occurs hereunder
which authorizes such transfer.
Assignment of Agency's Rights. The parties acknowledge that
it is in the best interest of the Agency to restrict the
transfer of Stock as provided herein and that to accomplish
same it may be necessary for Agency to contract with
Shareholder and to assign its contractual rights to
Corporation. Accordingly, to the extent necessary, this
Agreement shall be construed as an agreement between the
Agency and the Shareholders for the repurchase of
Shareholders' shares of Stock. Any repurchase rights of the
Agency are hereby assigned to the Corporation or its
designee.
Spouses. The spouse ("Spouse") of any Shareholder of
Agency, if the Shareholder is married, agrees, as evidenced
by Spouse's signature hereto, that to the extent Spouse
could claim an ownership interest in the Stock, which is
subject this Agreement, Spouse will be bound by this
Agreement and will transfer any such interest in conformity
with this Agreement.
Termination. This Agreement may be terminated (i) upon the
voluntary agreement of all the parties, or (ii) by any of
the parties following six (6) months prior written notice
from the terminating party to the remaining parties, subject
however to the prior rights of first refusal in Corporation
and its designee to purchase Shareholders' Stock hereunder,
the election of which shall terminate the running of the
notice of termination.
<PAGE>
Construction of Agreement; Severability. The captions used
in this Agreement are for convenience only and shall not be
construed in interpreting this Agreement. Whenever the
context requires, the masculine shall include the feminine
and neuter and the singular shall include the plural, and
conversely. If any portion of this Agreement shall be held
invalid or inoperative, then insofar as is reasonable or
possible (a) the remainder of this Agreement shall be
considered valid and operative, and (b) effect shall be
given to the intent manifested by the part held invalid or
inoperative.
Notice. Any notice to any party to this Agreement required
or permitted by this Agreement shall be in writing and shall
be effective upon receipt if hand delivered or upon the
placing of such notice in the United States mails, Postage
Prepaid, Certified Mail, Return Receipt Requested, addressed
to the receiving party at its last known address.
Place of Performance. All obligations pursuant to the terms
of this Agreement shall be payable and shall be made and
completed in Dallas, Dallas County, Texas.
Binding. This Agreement shall be binding upon and shall
inure to the benefit of the parties, their legal
representatives, successors, and assigns; this Agreement may
not be assigned, however, by any Shareholder.
Applicable Law. This Agreement shall be construed under and
in accordance with the laws of the State of Texas.
Specific Performance. The parties declare that it is
impossible to measure in money the damages that would accrue
to a party to this Agreement in the event of a breach.
Therefore, if any party institutes an action or proceeding
to enforce the provisions of this Agreement, the Agreement
may be specifically enforced.
New Shareholders. Any person or entity who becomes a
Shareholder of Agency after the effective date of this
Agreement shall be required to execute an addendum to this
Agreement binding said Shareholder to the same extent as if
an original Shareholder. Any new Shareholder must also have
his or her spouse sign the addendum binding his or her
interest. The addendum shall also be signed by the
Corporation and the Agency. Notwithstanding the foregoing,
the new Shareholder and his or her spouse, if any, will be
bound by the terms of this Agreement whether or not an
addendum is signed.
Supersedes Prior Agreements. This Agreement supersedes any
prior agreements between the parties relating to the Stock.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the ________ day of _______________, 199_, to be
effective ____________________, 199_.
<PAGE>
CORPORATION:
AMERICAN HALLMARK GENERAL AGENCY, INC.
By:
President
JOINT SHAREHOLDERS:
Robert D. Campbell
Margaret W. Jones
AGENCY:
AMERICAN HALLMARK AGENCIES, INC.
By:
President
________________________ and __________________________________,
the spouses of Robert D. Campbell and Margaret W. Jones,
Shareholders, agree that to the extent each may claim an interest
in the Stock, which is subject to this Agreement, each will be
bound by this Agreement and will transfer any such interest in
conformity with this Agreement.
Executed as of the ________ day of ___________________,
1995.
SPOUSES:
DATED:
DATED:
FACILITIES AND SERVICES AGREEMENT
STATE OF TEXAS
COUNTY OF DALLAS
This Agreement made by and between American Hallmark General
Agency, Inc., a Texas corporation, with its principal place of
business in Dallas, Texas (hereinafter called "General Agency")
and American Hallmark Agencies, Inc., a Texas corporation, with
its principal place of business in Dallas, Texas (hereinafter
called "Hallmark Agencies"), joined by Robert D. Campbell and
Margaret W. Jones, who are the sole officers, directors and
shareholders of Hallmark Agencies (hereinafter called "Campbell
and/or Jones");
W I T N E S S E T H:
WHEREAS, Hallmark Agencies is a corporation engaged in the
solicitation of property and casualty insurance in Texas and is
licensed as a Texas local recording insurance agent pursuant to
Article 21.14, TEX. INS. CODE; and
WHEREAS, General Agency is a Texas corporation licensed as a
managing general insurance agent pursuant to Article 21.07-3,
TEX. INS. CODE; and
WHEREAS, Hallmark Agencies desires that General Agency
furnish facilities and services in support of Hallmark Agencies
and General Agency is willing to provide these services under the
terms set forth herein; and
WHEREAS, as a necessary consideration hereto, Hallmark
Agencies and its officers, directors and shareholders, Campbell
and Jones, agree that all policyholder files, customer lists,
expirations, and renewals; the name "American Hallmark Agencies,
Inc." or any variation thereof, and any books, records, materials
and documents relating to the insurance business to be written by
Hallmark Agencies, belong to General Agency;
NOW, THEREFORE, in consideration of the mutual covenants of
the parties herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto have agreed and do hereby agree
as follows:
1. Responsibilities of Hallmark Agencies. Hallmark
Agencies agrees to conduct its insurance business in a lawful
manner and to
obtain and maintain all necessary licenses in accordance with all
relevant statutes and regulations. Notwithstanding any provision
to the contrary, the following shall apply:
(a) All solicitations for insurance and all contracts
with the public in the making or consummating of
any contract of insurance, and any other action
which requires that a local recording agent's
license or a solicitor's license first be
<PAGE>
obtained, shall be made and performed only by
appointees of Hallmark Agencies who are licensed
by the State of Texas as local recording agents or
as solicitors, as those terms are defined by the
Code.
(b) Hallmark Agencies shall countersign all policies
of insurance, certificates and endorsements;
(c) Hallmark Agencies shall provide General Agency
copies of all binders, policies, certificates,
endorsements and cancellations, oral or written,
issued by Hallmark Agencies promptly upon issuance
or acceptance by Hallmark Agencies.
(d) Hallmark Agencies shall provide assistance to all
Group II agents designated by General Agency in
connection with production of certain automobile
insurance through General Agency, State and County
Mutual Insurance Company or any other insurance
company designated by General Agent.
2. Services and Facilities Provided by General Agency.
General Agency will generally manage and supervise Hallmark
Agencies, and perform all necessary services in connection
therewith. In addition, General Agency shall provide the
following facilities and services to Hallmark Agencies during the
term of this Agreement:
(a) Office space, furniture, equipment, postage and
supplies,
(b) Telephone and all necessary utility services,
(c) Office personnel and management expertise,
(d) Bookkeeping, advertising, record keeping
(including maintenance of expiration lists and
renewals), data processing and periodic auditing,
(e) Handling of cash receipts and disbursements and
check writing, including collection of all
receipts and payment of all insurance company
accounts current, as well as any other debts of
Hallmark Agencies (reasonably incurred in the
conduct of business supervised by General Agency),
(f) Clerical assistance,
(g) Technical advice and information as Hallmark
Agencies may reasonably require,
(h) Underwriting services,
(i) Salaries and other compensation of agents,
solicitors, and
(j) Such other facilities and services as may be
agreed to by the parties.
<PAGE>
3. Consideration to General Agency. Hallmark Agencies and
General Agency shall from time to time (but in any event at least
once every six months) set the consideration to be paid to
General Agency for its services hereunder, it being intended by
the parties that General Agency receive reimbursement for its
costs and expenses in furnishing its services together with a
reasonable profit for its services and facilities and a
reasonable payment for its involvement. In the event the parties
cannot agree or fail to agree to the amount to be paid to General
Agency, then General Agency's consideration shall be equal to
100% of the income received by Hallmark Agency, net of any
expenses paid by Hallmark Agencies in connection with the
business subject hereto which are required to be paid or
reimbursed by General Agency hereunder. The amount of such
consideration shall be accounted for and remitted to General
Agency immediately. It is agreed that General Agency and
Hallmark Agencies are separate entities and nothing contained
herein shall be construed to hold General Agency liable for any
contractual obligation, acts or omissions of Hallmark Agencies,
except as may be expressly agreed by the parties. General Agency
shall not be responsible for any other charges or expenses
incurred by Hallmark Agencies, unless authorized by an officer of
General Agency.
4. Ownership and Confidentiality of Records. In
consideration of General Agency's services hereunder, it is
agreed between Hallmark Agencies and General Agency that all
policyholder files, customer files, expirations, and renewals and
any books, records, materials and documents relating to insurance
business written by Hallmark Agencies prior to or during the term
of this Agreement, as well as the name "American Hallmark
Agencies, Inc.", or any variation thereof, (hereinafter called
"Property") are the exclusive property of General Agency, and
Hallmark Agencies agrees that it has no right, title or interest
in such Property. Furthermore, Hallmark Agencies agrees that it
will not at any time sell, assign, transfer, pledge, hypothecate
or encumber any of the Property or any part thereof. Hallmark
Agencies agrees that the Property includes confidential
information, and, accordingly, agrees that such Property shall be
held in the strictest confidence and that none of the Property
shall be reproduced or copied, in whole or in part, by Hallmark
Agencies, its agents or employees, or at Hallmark Agencies'
direction, at any time whatsoever (even after termination of this
Agreement), save and except in the normal course of operation of
Hallmark Agencies' business in behalf of General Agency. General
Agency shall, in the event of termination hereof, be entitled to
recover all such Property in the possession of Hallmark Agencies.
All equipment and supplies furnished to Hallmark Agencies by
General Agency shall remain the property of General Agency and
shall be returned to General Agency promptly upon request.
Hallmark Agencies shall, upon General Agency's request, cease to
use the name "American Hallmark Agencies, Inc.", "Hallmark
Agencies", or any variation thereof. The provisions of this
paragraph shall survive the termination of this Agreement
indefinitely.
<PAGE>
5. Nonpiracy Covenant. In the event this Agreement is
terminated for any reason, Hallmark Agencies agrees that, for a
period of two (2) year after such termination, it will not in any
capacity whatsoever, directly or indirectly, for itself, or for
any other, as agent, consultant, owner, partner, stockholder,
broker, or otherwise, divert or attempt to divert, through
solicitation or otherwise, any insurance business from customers
of Hallmark Agencies. For these purposes, customers of Hallmark
Agencies shall be those for whom there is insurance coverage in
force (sold, secured or placed by or through Hallmark Agencies)
as of the date of the termination of the Agreement, including any
member of the immediate family of a customer, any business owned
by a customer for which the customer has a partnership or
shareholder interest of at least fifty percent (50%), or any
person or entity for whom a file is established within the one
year period prior to termination. Hallmark Agencies agrees that
it would be difficult to measure the damage to General Agency for
any such breach of this covenant, that such damage would be
incalculable and irreparable and that monetary damages, while
still recoverable, would therefore be inadequate to fully
compensate General Agency for any such breach. Therefore,
Hallmark Agencies agrees that upon any breach of the foregoing
covenant, General Agency shall be entitled, in addition to all
other remedies and damages available, to a restraining order and
to temporary and permanent injunctions against Hallmark Agencies,
or any person or entity acting for or in connection with Hallmark
Agencies, without showing or proving any actual damage sustained
by General Agency. The aforementioned covenant is in addition to
and not in substitution of any obligation which Hallmark Agencies
would otherwise owe to General Agency pursuant to this Agreement
or common law. The provisions of this Paragraph shall survive
the termination of this Agreement for the two (2) year period
provided herein.
6. Termination. This Agreement shall commence on the
effective date of this Agreement, and shall continue until
terminated as hereinafter set forth, provided that the
responsibility of either party hereof for the payment of any
monetary obligations hereunder, shall not be affected by the
termination hereof and, provided further, that paragraphs 4 and 5
shall survive the termination hereof for the periods indicated
therein. Subject to the foregoing, this Agreement will terminate
upon either party giving not less than 30 days' written notice to
the other. Notice shall be effective upon the terminating
party's placing such notice in the United States mail, postage
prepaid, certified mail, return receipt requested, addressed to
the receiving party at its last known address, or upon receipt,
if delivered personally or by electronic facsimile.
7. Assignment. This Agreement shall not be assignable by
Hallmark Agencies without the prior written consent of General
Agency, but shall be assignable by General Agency. This
Agreement shall be binding upon all successors and assigns.
8. Law Governing. This Agreement is subject in all
respects to the laws of the State of Texas, including but not
limited to, the Insurance Code of Texas of 1951, as now or
hereafter constituted, and all valid rules, regulations and
orders of the Commissioner of Insurance of Texas.
<PAGE>
9. Severability. Whenever possible, each provision of
this Agreement will be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of
this Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating
the remainder of this Agreement.
10. Supersedes Prior Agreements. This Agreement supersedes
all prior agreements between the parties relating to the
management, supervision, and provision of facilities and
services, including that Agency Supervision Agreement dated
February 1, 1993, which shall be of no further force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on this __________ day of ___________________, 1995, to
be effective ____________________________, 19_.
AMERICAN HALLMARK GENERAL AGENCY, INC.
By:
Linda Sleeper
Executive Vice President
AMERICAN HALLMARK AGENCIES, INC.
By:
Robert D. Campbell
President
Margaret W. Jones
Individually
Robert D. Campbell
Individually
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "Agreement") is made
between and among Hallmark Financial Services, Inc., a Nevada
corporation, and American Hallmark General Agency, Inc., a Texas
corporation ("American Hallmark"), acting jointly and severally
(singly and collectively herein termed "Indemnitor" or
"Indemnitors"), and Robert D. Campbell and Margaret W. Jones
("Indemnitee" or "Indemnitees", as appropriate).
WHEREAS, Indemnitees are shareholders, directors and
officers of American Hallmark Agencies, Inc. ("Company") a Texas
corporate local recording agency; and
WHEREAS, Company provides a facility to market certain
insurance products under the supervision of Indemnitors pursuant
to the terms of a facilities and services agreement between
Indemnitors and Company; and
WHEREAS, since such facility provided by Company benefits
both Indemnitors, Indemnitors are willing to provide the
indemnification herein; and
NOW, THEREFORE, in consideration of the foregoing and other
good and valuable considerations, Indemnitors agree as follows:
1. Acknowledgment of Consideration. Indemnitors acknowledge
that the facility for solicitation of insurance business
provided by the Company will directly benefit Indemnitors
and that the indemnification provided herein is a condition
precedent for the Company to enter into the such agreement
with Indemnitors.
2. Indemnification. Indemnitors shall indemnify, defend, and
hold Indemnitees harmless for any loss, liabilities, or
damages due to or arising from their positions as
shareholders, directors, or officers of the Company, or any
other loss, liability, or damage arising from the agreement
between Indemnitors and the Company, provided that any such
loss, liability, or damage does not arise from, or is not
due substantially to the wrongful act of the Indemnitee
seeking indemnification separately for loss, liability, or
damages arising from his or her separate and individual
positions as shareholder, director, or officer of the
Company. It is understood that the act of one Indemnitee
does not affect the right of the other Indemnitee for
purposes of seeking indemnification hereunder.
3. Primary Obligation. Indemnitees may, at their option,
proceed directly against Indemnitors for any right of
indemnification provided herein without being required to
proceed first against another Indemnitor or another party
primarily liable. It is understood that Indemnitors shall
have rights of subrogation for any indemnification provided
hereunder and may proceed to recover any such loss,
liability, or damage indemnified hereunder in the name of
either Indemnitee, as appropriate, and such Indemnitee shall
provide full cooperation to Indemnitor.
<PAGE>
4. Attorney's Fees. The prevailing party in any legal
proceeding necessary to enforce or interpret the terms of
this Agreement shall be entitled to reasonable attorney's
fees and court costs, in addition to any other recoveries
allowed by law, from the opposing party.
5. Governing Law. The laws of the state of Texas shall govern
this Agreement, and venue shall lie in Dallas County, Texas.
Jurisdiction and venue for actions brought hereunder shall
be in Dallas County, Texas.
Executed as of the date set forth below effective the
__________ day of ________________, 199_.
INDEMNITORS
DATED: AMERICAN HALLMARK GENERAL AGENCY, INC.
By
Its
DATED: HALLMARK FINANCIAL SERVICES, INC.
By
Its
INDEMNITEES
DATED: ROBERT D. CAMPBELL
DATED: MARGARET W. JONES
SHAREHOLDERS AGREEMENT
This agreement (the "Agreement") is made between AMERICAN
HALLMARK GENERAL AGENCY, INC., a Texas corporation,
("Corporation"), ROBERT D. CAMPBELL and RICHARD MASON, SR.,
("Shareholder" or "Shareholders", as appropriate) and HALLMARK
UNDERWRITERS, INC., a Texas corporation, ("Underwriters").
WHEREAS, the Shareholders jointly (with right of
survivorship) own all of the issued and outstanding common shares
of Underwriters (the "Stock"); and
WHEREAS, the Corporation has paid Shareholders One Hundred
and No/100 Dollars ($100.00), receipt of which is acknowledged;
and
WHEREAS, the Corporation performs certain services and
provides certain facilities to Underwriters from time to time
which facilities and services are valuable to the Underwriters;
and
WHEREAS, the parties believe it to be in the best interest
of all to restrict the transfer of the Stock in such a manner so
that the Stock will not find its way into the hands of persons
who are unlicensed pursuant to the laws of this State, or persons
who may be inimical to the best interests of Underwriters or the
Corporation and to provide a fair market value for the Stock in
the event a triggering event occurs;
NOW, THEREFORE, for and in consideration of the mutual
promises and covenants herein contained and other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties have agreed and do agree as
follows:
Present Ownership. Underwriters was formed pursuant to the
Texas Business Corporation Act with its principal place of
business in Dallas, Dallas County, Texas, and is or intends
to be duly licensed in Texas as a managing general insurance
agency. The Shareholders are currently the owners, jointly,
of all of the Stock. The parties agree that any shares of
stock, of any nature or class, which Underwriters may
authorize or issue after the date of this Agreement, and any
shareholder of such shares, shall be subject to all of the
restrictions and obligations contained in this Agreement as
if such shares were presently issued and outstanding (and
shall thereafter be part of the "Stock") and such
shareholder were a signatory to this Agreement (who shall
thereafter be referred to as a "Shareholder" hereunder).
Survivorship. The Shareholders of Underwriters shall all
hold joint interest in all Stock with a right of
survivorship. In the event of the death of any Shareholder,
the interest of such deceased Shareholder shall
automatically be transferred to the other Shareholder, or
Shareholders, to be then held jointly by the Shareholders,
and the estate or personal representative of the deceased
Shareholder shall have no interest in the Stock whatsoever.
<PAGE>
1. Term. This Agreement shall be effective as of the effective
date specified herein and shall continue in effect until
terminated as provided in Paragraph 12.
Legend on Certificates. Each certificate for Stock of the
Agency now issued and presently owned by the Shareholders
(as well as any certificate for Stock in the future with the
appropriate Shareholder) shall be conspicuously endorsed, in
accordance with Article 2.22 of the Texas Business
Corporation Act, as follows:
"THIS CERTIFICATE IS TRANSFERABLE ONLY UPON COMPLIANCE
WITH THE PROVISIONS OF THE SHAREHOLDERS AGREEMENT DATED
____________________ BY AND AMONG AMERICAN HALLMARK
GENERAL AGENCY, INC., HALLMARK UNDERWRITERS, INC. AND
SHAREHOLDERS, ROBERT D. CAMPBELL AND RICHARD MASON,
SR., A COPY OF WHICH IS ON FILE IN THE OFFICE OF THE
SECRETARY OF THE COMPANY, AND MAY BE OBTAINED WITHOUT
CHARGE BY REQUESTING SAME AT THE COMPANY'S PRINCIPAL
PLACE OF BUSINESS. IN ADDITION, THE TRANSFER OF THESE
SECURITIES IS SUBJECT TO THE RESTRICTIONS IMPOSED BY
ARTICLE 21.07-3 OF THE INSURANCE CODE OF TEXAS OF 1951,
AS AMENDED."
Stock Restrictions and Obligations. The Corporation, or its
designee, shall have the first right to purchase all of the
Stock owned by Shareholders upon the occurrence of any of
the following "triggering" events:
(a) Death of the Surviving Shareholder. Within ninety (90)
days after the death of the sole surviving Shareholder,
the Corporation, or its designee, shall have the first
right to buy all of the Stock of such Shareholder by
giving written notice thereof to the legal
representative of the deceased Shareholder's estate, or
if none to any heir of Shareholder, within such ninety
(90) day period.
Upon giving such notice, the Corporation, or its
designee, shall pay to the deceased Shareholder's legal
representative, or his or her heirs, as the case may
be, in consideration for such Stock, the sum of money
determined under Paragraph 6 hereof and pursuant to the
terms for sale prescribed in Paragraph 7 hereof, in
exchange for all of the Stock which the Shareholder
owned at the time of his death, and the estate of the
deceased Shareholder or the Shareholder's heirs, as the
case may be, shall be obligated to sell such Stock to
the Corporation, or its designee, upon such terms.
(b) Notice By Corporation. At any time whatsoever,
Corporation, or its designee, may notify Shareholders
that it wishes to purchase all of the Shareholders'
interest in the Stock and, upon receipt of such notice,
Shareholders shall sell such Stock to Corporation, or
to its designee. Upon giving such notice, the
Corporation, or its designee, shall pay to each such
Shareholder, in consideration for such Stock, the sum
of money determined under Paragraph 6 hereof and
<PAGE>
pursuant to the terms of sales prescribed in Paragraph
7 hereof, and each Shareholder shall be required to
sell such Stock upon such terms.
(c) Voluntary Transfer. If at any time any Shareholder
wishes to sell, transfer, mortgage, pledge, give or in
any other manner devise, distribute or dispose of all
or any of his or her interest in the Stock, Shareholder
shall first give the Corporation written notice of such
intention, which notice shall constitute an offer to
sell and the Corporation, or its designee, shall have
the right to accept such offer and purchase all of such
Shareholder's Stock at any time within ninety (90) days
from the date of such notice at a price per share of
Stock determined in accordance with Paragraph 6 hereof.
Upon making such election, the Corporation, or its
designee, shall pay to the selling Shareholder, in
consideration for such Stock, the sum of money
determined pursuant to Paragraph 6 hereof and upon the
terms of sale set forth in Paragraph 7 hereof, and
Shareholder shall be required to sell such interest in
Stock upon such terms.
(d) Involuntary Transfer. If for any reason any person or
entity obtains or claims an interest in the Stock as a
result of any involuntary transfer by a Shareholder,
such Stock owned or claimed by any such person or
entity shall be subject to all limitations and
obligations contained herein and Corporation may
enforce all terms of this Agreement against any such
person or entity owning or claiming an interest in the
Stock.
(e) Other Transfers. The Shareholder shall not transfer,
assign or in any way alienate any interest in the
Stock, except as provided for in this Agreement, or as
may be agreed to in writing by Corporation. If, and
only if, the Corporation, or its designee, elects not
to purchase the shares of Shareholder when such option
is provided above, then any Shareholder may sell or
assign all or any part of Shareholder's interest in the
Stock upon such terms as the Shareholder may desire,
provided that such Stock shall continue to be subject
hereto, as provided in paragraph 1.
Valuation of Stock. The Stock of the Agency shall be valued
and the sales price determined for purposes of this
Agreement at $1.00 per share for the joint interests of
Shareholders in each such share. The interest of a single
Shareholder shall be equal to his or her fractional amount
(with the numerator of one and the denominator being the
total number of such Shareholders) of the sales price.
Terms of Sale. The Corporation shall pay the consideration
for the purchased Stock in cash, or by reducing
Shareholder's debt, if any, owed to Corporation by the
amount of the sales price.
<PAGE>
Right To Assign or Transfer. It is understood by all
parties that Corporation has no intent to own Underwriters
(while Underwriters holds a Texas managing general agent's
license) but it is recognized that Corporation does have a
pecuniary interest in Underwriters and has an interest in
placing certain restrictions on the Stock. Corporation
acknowledges that, because of licensing restrictions, it is
not entitled to own shares of a Texas corporate managing
general agency and therefore agrees that prior to purchasing
any Stock of Underwriters hereunder, if Underwriters then
holds such a license, it will assign its rights to purchase
hereunder to a designed individual or individuals permitted
to own such Stock, in which event such Stock shall be sold
to such designee upon the same terms and conditions and for
the same consideration as if Corporation had purchased them.
Any such Stock purchased by an designee and any designee so
purchasing shall be subject to all of the terms and
conditions hereof as if the Stock were owned by the original
Shareholder and the designee were the original Shareholder.
Stock Power. To protect Corporation's rights hereunder,
Shareholders have this day delivered to Corporation all of
the certificates of Stock of Agency owned by Shareholder,
together with blank stock powers, undated but executed,
which irrevocably authorizes and appoints Corporation, as
its attorney in fact, to complete such stock powers and to
transfer the Stock if and when an event occurs hereunder
which authorizes such transfer.
Assignment of Agency's Rights. The parties acknowledge that
it is in the best interest of Underwriters to restrict the
transfer of Stock as provided herein and that to accomplish
same it may be necessary for Underwriters to contract with
Shareholder and to assign its contractual rights to
Corporation. Accordingly, to the extent necessary, this
Agreement shall be construed as an agreement between
Underwriters and the Shareholders for the repurchase of
Shareholders' shares of Stock. Any repurchase rights of the
Agency are hereby assigned to the Corporation or its
designee.
Spouses. The spouse ("Spouse") of any Shareholder of
Agency, if the Shareholder is married, agrees, as evidenced
by Spouse's signature hereto, that to the extent Spouse
could claim an ownership interest in the Stock, which is
subject this Agreement, Spouse will be bound by this
Agreement and will transfer any such interest in conformity
with this Agreement.
Termination. This Agreement may be terminated (i) upon the
voluntary agreement of all the parties, or (ii) by any of
the parties following six (6) months prior written notice
from the terminating party to the remaining parties, subject
however to the prior rights of first refusal in Corporation
and its designee to purchase Shareholders' Stock hereunder,
the election of which shall terminate the running of the
notice of termination.
<PAGE>
Construction of Agreement; Severability. The captions used
in this Agreement are for convenience only and shall not be
construed in interpreting this Agreement. Whenever the
context requires, the masculine shall include the feminine
and neuter and the singular shall include the plural, and
conversely. If any portion of this Agreement shall be held
invalid or inoperative, then insofar as is reasonable or
possible (a) the remainder of this Agreement shall be
considered valid and operative, and (b) effect shall be
given to the intent manifested by the part held invalid or
inoperative.
Notice. Any notice to any party to this Agreement required
or permitted by this Agreement shall be in writing and shall
be effective upon receipt if hand delivered or upon the
placing of such notice in the United States mails, Postage
Prepaid, Certified Mail, Return Receipt Requested, addressed
to the receiving party at its last known address.
Place of Performance. All obligations pursuant to the terms
of this Agreement shall be payable and shall be made and
completed in Dallas, Dallas County, Texas.
Binding. This Agreement shall be binding upon and shall
inure to the benefit of the parties, their legal
representatives, successors, and assigns; this Agreement may
not be assigned, however, by any Shareholder.
Applicable Law. This Agreement shall be construed under and
in accordance with the laws of the State of Texas.
Specific Performance. The parties declare that it is
impossible to measure in money the damages that would accrue
to a party to this Agreement in the event of a breach.
Therefore, if any party institutes an action or proceeding
to enforce the provisions of this Agreement, the Agreement
may be specifically enforced.
New Shareholders. Any person or entity who becomes a
Shareholder of Underwriters after the effective date of this
Agreement shall be required to execute an addendum to this
Agreement binding said Shareholder to the same extent as if
an original Shareholder. Any new Shareholder must also have
his or her spouse sign the addendum binding his or her
interest. The addendum shall also be signed by the
Corporation and the Agency. Notwithstanding the foregoing,
the new Shareholder and his or her spouse, if any, will be
bound by the terms of this Agreement whether or not an
addendum is signed.
Supersedes Prior Agreements. This Agreement supersedes any
prior agreements between the parties relating to the Stock.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the _________ day of________________, 199_, to be effective
______________________, 199_.
<PAGE>
CORPORATION:
AMERICAN HALLMARK GENERAL AGENCY, INC.
By:
President
JOINT SHAREHOLDERS:
Robert D. Campbell
Richard Mason, Sr.
UNDERWRITERS:
HALLMARK UNDERWRITERS, INC.
By:
President
_________________________ and __________________________, the
spouses of Robert D. Campbell and Richard Mason, Sr.,
Shareholders, agree that to the extent each may claim an interest
in the Stock, which is subject to this Agreement, each will be
bound by this Agreement and will transfer any such interest in
conformity with this Agreement.
Executed as of the ________ day of ___________________,
1995.
SPOUSES:
DATED:
DATED:
FACILITIES AND SERVICES AGREEMENT
STATE OF TEXAS
COUNTY OF DALLAS
This Agreement made by and between American Hallmark General
Agency, Inc., a Texas corporation, with its principal place of
business in Dallas, Texas (hereinafter called "General Agency")
and Hallmark Underwriters, Inc., a Texas corporation, with its
principal place of business in Dallas, Texas (hereinafter called
"Hallmark Underwriters"), joined by Robert D. Campbell and
Richard Mason, Sr., who are the sole officers, directors and
shareholders of Hallmark Agencies (hereinafter called "Campbell
and/or Mason");
W I T N E S S E T H:
WHEREAS, Hallmark Underwriters is a corporation engaged in
property and casualty insurance in Texas and is licensed as a
Texas managing general agent pursuant to Article 21.07-3, TEX.
INS. CODE; and
WHEREAS, General Agency is a Texas corporation licensed as a
managing general insurance agent pursuant to Article 21.07-3,
TEX. INS. CODE; and
WHEREAS, Hallmark Underwriters desires that General Agency
furnish facilities and services in support of Hallmark
Underwriters and General Agency is willing to provide these
services under the terms set forth herein; and
WHEREAS, as a necessary consideration hereto, Hallmark
Underwriters and its officers, directors and shareholders,
Campbell and Mason, agree that all policyholder files, customer
lists, expirations, and renewals; the name "Hallmark
Underwriters, Inc." or any variation thereof, and any books,
records, materials and documents relating to the insurance
business of Hallmark Underwriters, belong to General Agency;
NOW, THEREFORE, in consideration of the mutual covenants of
the parties herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto have agreed and do hereby agree
as follows:
1. Responsibilities of Hallmark Underwriters. Hallmark
Underwriters agrees to conduct its insurance business in a lawful
manner and to obtain and maintain all necessary licenses in
accordance with all relevant statutes and regulations.
Notwithstanding any provision to the contrary, the following
shall apply:
(a) All solicitations for insurance and all contacts
with the public in the making or consummating of
any contract of insurance, and any other action
which requires an agent shall be made and
performed only by agents who are licensed
appropriately by the Texas Department of
Insurance.
<PAGE>
(b) Hallmark Underwriters shall stamp and affix the
information required under Sec. 7, Art. 1.14-2, or
any amendment, Insurance Code of Texas to every
new or renewal surplus lines insurance contract,
certificate, cover note or other confirmation of
coverage on which such information is required.
(c) Hallmark Underwriters shall provide General Agency
copies of all binders, policies, certificates,
endorsements and cancellations, oral or written,
issued by Hallmark Underwriters promptly upon
issuance or acceptance by Hallmark Underwriters.
(d) Hallmark Underwriters shall provide assistance to
all agents designated by General Agency in
connection with production of certain automobile
insurance through General Agency or any insurance
company designated by General Agent.
(e) Underwriters shall report to and file a copy of
each surplus lines insurance contract and/or other
documents pursuant to Sec. 6 (c), or any
amendment, of the Insurance Code of Texas with the
Surplus Lines Stamping Office of Texas and shall
comply with rules and regulations involving said
Stamping Office.
(f) Hallmark Underwriters shall maintain a separate
Trust Account for the deposit of surplus lines
premium taxes pursuant to Sec. 12, Art. 1.14-2, or
any amendment, Insurance Code of Texas and an
additional separate Trust Account for the deposit
of stamping fees.
2. Services and Facilities Provided by General Agency.
General Agency will generally perform all necessary services in
connection with Hallmark Underwriters insurance business. In
addition, General Agency shall provide the following facilities
and services to Hallmark Underwriters during the term of this
Agreement:
(a) Office space, furniture, equipment, postage and
supplies,
(b) Telephone and all necessary utility services,
(c) Office personnel and management expertise,
(d) Bookkeeping, advertising, record keeping
(including maintenance of expiration lists and
renewals), data processing and periodic auditing,
(e) Handling of cash receipts and disbursements and
check writing, including collection of all
receipts and payment of all insurance company
accounts current, as well as any other debts of
Hallmark Underwriters (reasonably incurred in the
conduct of its business),
<PAGE>
(f) Clerical assistance,
(g) Technical advice and information as Hallmark
Underwriters may reasonably require,
(h) Underwriting services,
(i) Salaries and other compensation of agents,
solicitors, and
(j) Such other facilities and services as may be
agreed to by the parties.
3. Consideration to General Agency. Hallmark Underwriters
and General Agency shall from time to time (but in any event at
least once every six months) set the consideration to be paid to
General Agency for its services hereunder, it being intended by
the parties that General Agency receive reimbursement for its
costs and expenses in furnishing its services together with a
reasonable profit for its services and facilities and a
reasonable payment for its involvement. In the event the parties
cannot agree or fail to agree to the amount to be paid to General
Agency, then General Agency's consideration shall be equal to
100% of the income received by Hallmark Underwriters, net of any
expenses paid by Hallmark Underwriters in connection with the
business subject hereto which are required to be paid or
reimbursed by General Agency hereunder. The amount of such
consideration shall be accounted for and remitted to General
Agency immediately. It is agreed that General Agency and
Hallmark Underwriters are separate entities and nothing contained
herein shall be construed to hold General Agency liable for any
contractual obligation, acts or omissions of Hallmark
Underwriters, except as may be expressly agreed by the parties.
General Agency shall not be responsible for any other charges or
expenses incurred by Hallmark Underwriters, unless authorized by
an officer of General Agency.
4. Ownership and Confidentiality of Records. In
consideration of General Agency's services hereunder, it is
agreed between Hallmark Underwriters and General Agency that all
policyholder files, customer files, expirations, and renewals and
any books, records, materials and documents relating to insurance
business written by Hallmark Underwriters prior to or during the
term of this Agreement, as well as the name "Hallmark
Underwriters, Inc.", or any variation thereof, (hereinafter
called "Property") are the exclusive property of General Agency,
and Hallmark Underwriters agrees that it has no right, title or
interest in such Property. Furthermore, Hallmark Underwriters
agrees that it will not at any time sell, assign, transfer,
pledge, hypothecate or encumber any of the Property or any part
thereof. Hallmark Underwriters agrees that the Property includes
confidential information, and, accordingly, agrees that such
Property shall be held in the strictest confidence and that none
of the Property shall be reproduced or copied, in whole or in
part, by Hallmark Underwriters, its agents or employees, or at
Hallmark Underwriters' direction, at any time whatsoever (even
after termination of this Agreement), save and except in the
<PAGE>
normal course of operation of Hallmark Underwriters' business in
behalf of General Agency. General Agency shall, in the event of
termination hereof, be entitled to recover all such Property in
the possession of Hallmark Underwriters. All equipment and
supplies furnished to Hallmark Underwriters by General Agency
shall remain the property of General Agency and shall be returned
to General Agency promptly upon request. Hallmark Underwriters
shall, upon General Agency's request, cease to use the name
"Hallmark Underwriters, Inc.", "Hallmark Underwriters", or any
variation thereof. The provisions of this paragraph shall
survive the termination of this Agreement indefinitely.
5. Nonpiracy Covenant. In the event this Agreement is
terminated for any reason, Hallmark Underwriters agrees that, for
a period of two (2) year after such termination, it will not in
any capacity whatsoever, directly or indirectly, for itself, or
for any other, as agent, consultant, owner, partner, stockholder,
broker, or otherwise, divert or attempt to divert, through
solicitation or otherwise, any insurance business from customers
of Hallmark Underwriters. For these purposes, customers of
Hallmark Underwriters shall be those for whom there is insurance
coverage in force (sold, secured or placed by or through Hallmark
Underwriters) as of the date of the termination of the Agreement,
including any member of the immediate family of a customer, any
business owned by a customer for which the customer has a
partnership or shareholder interest of at least fifty percent
(50%), or any person or entity for whom a file is established
within the one year period prior to termination. Hallmark
Underwriters agrees that it would be difficult to measure the
damage to General Agency for any such breach of this covenant,
that such damage would be incalculable and irreparable and that
monetary damages, while still recoverable, would therefore be
inadequate to fully compensate General Agency for any such
breach. Therefore, Hallmark Underwriters agrees that upon any
breach of the foregoing covenant, General Agency shall be
entitled, in addition to all other remedies and damages
available, to a restraining order and to temporary and permanent
injunctions against Hallmark Underwriters, or any person or
entity acting for or in connection with Hallmark Underwriters,
without showing or proving any actual damage sustained by General
Agency. The aforementioned covenant is in addition to and not in
substitution of any obligation which Hallmark Underwriters would
otherwise owe to General Agency pursuant to this Agreement or
common law. The provisions of this Paragraph shall survive the
termination of this Agreement for the two (2) year period
provided herein.
6. Termination. This Agreement shall commence on the
effective date of this Agreement, and shall continue until
terminated as hereinafter set forth, provided that the
responsibility of either party hereof for the payment of any
monetary obligations hereunder, shall not be affected by the
termination hereof and, provided further, that paragraphs 4 and 5
shall survive the termination hereof for the periods indicated
therein. Subject to the foregoing, this Agreement will terminate
upon either party giving not less than 30 days' written notice to
the other. Notice shall be effective upon the terminating
party's placing such notice in the United States mail, postage
prepaid, certified mail, return receipt requested, addressed to
<PAGE>
the receiving party at its last known address, or upon receipt,
if delivered personally or by electronic facsimile.
7. Assignment. This Agreement shall not be assignable by
Hallmark Underwriters without the prior written consent of
General Agency, but shall be assignable by General Agency. This
Agreement shall be binding upon all successors and assigns.
8. Law Governing. This Agreement is subject in all
respects to the laws of the State of Texas, including but not
limited to, the Insurance Code of Texas of 1951, as now or
hereafter constituted, and all valid rules, regulations and
orders of the Commissioner of Insurance of Texas.
9. Severability. Whenever possible, each provision of
this Agreement will be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of
this Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating
the remainder of this Agreement.
10. Supersedes Prior Agreements. This Agreement supersedes
all prior agreements between the parties relating to the
management, supervision, and provision of facilities and
services, which shall be of no further force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on this __________ day of _________________, 199_, to
be effective ______________________, 19_.
AMERICAN HALLMARK GENERAL AGENCY, INC.
By:
Linda Sleeper
Executive Vice President
HALLMARK UNDERWRITERS, INC.
By:
Robert D. Campbell
President
Richard Mason, Sr.
Individually
Robert D. Campbell
Individually
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "Agreement") is made
between and among Hallmark Financial Services, Inc., a Nevada
corporation, and American Hallmark General Agency, Inc., a Texas
corporation ("American Hallmark"), acting jointly and severally
(singly and collectively herein termed "Indemnitor" or
"Indemnitors"), and Robert D. Campbell and Richard Mason, Sr.
("Indemnitee" or "Indemnitees", as appropriate).
WHEREAS, Indemnitees are shareholders, directors and
officers of Hallmark Underwriters, Inc. ("Company") a Texas
corporate managing general agency; and
WHEREAS, Company provides a facility for certain insurance
products under the terms of a facilities and services agreement
between Indemnitors and Company; and
WHEREAS, since such facility provided by Company directly or
indirectly benefits both Indemnitors, Indemnitors are willing to
provide the indemnification herein; and
NOW, THEREFORE, in consideration of the foregoing and other
good and valuable considerations, Indemnitors agree as follows:
1. Acknowledgment of Consideration. Indemnitors acknowledge
that the facility for the insurance business provided by the
Company will directly or indirectly benefit Indemnitors and
that the indemnification provided herein is a condition
precedent for the Company to enter into such agreement with
Indemnitors.
2. Indemnification. Indemnitors shall indemnify, defend, and
hold Indemnitees harmless for any loss, liabilities, or
damages due to or arising from their positions as
shareholders, directors, or officers of the Company, or any
other loss, liability, or damage arising from the agreement
between Indemnitors and the Company, provided that any such
loss, liability, or damage does not arise from, or is not
due substantially to the wrongful act of the Indemnitee
seeking indemnification separately for loss, liability, or
damages arising from his or her separate and individual
positions as shareholder, director, or officer of the
Company. It is understood that the act of one Indemnitee
does not affect the right of the other Indemnitee for
purposes of seeking indemnification hereunder.
3. Primary Obligation. Indemnitees may, at their option,
proceed directly against Indemnitors for any right of
indemnification provided herein without being required to
proceed first against another Indemnitor or another party
primarily liable. It is understood that Indemnitors shall
have rights of subrogation for any indemnification provided
hereunder and may proceed to recover any such loss,
liability, or damage indemnified hereunder in the name of
either Indemnitee, as appropriate, and such Indemnitee shall
provide full cooperation to Indemnitor.
<PAGE>
4. Attorney's Fees. The prevailing party in any legal
proceeding necessary to enforce or interpret the terms of
this Agreement shall be entitled to reasonable attorney's
fees and court costs, in addition to any other recoveries
allowed by law, from the opposing party.
5. Governing Law. The laws of the state of Texas shall govern
this Agreement, and venue shall lie in Dallas County, Texas.
Jurisdiction and venue for actions brought hereunder shall
be in Dallas County, Texas.
Executed as of the date set forth below effective the
day of ______________________, 199_.
INDEMNITORS
DATED: AMERICAN HALLMARK GENERAL AGENCY, INC.
By
Its
DATED: HALLMARK FINANCIAL SERVICES, INC.
By
Its
INDEMNITEES
DATED: ROBERT D. CAMPBELL
DATED: RICHARD MASON, SR.
SECOND AMENDMENT TO PROCESSING AGREEMENT
THIS AMENDMENT TO PROCESSING AGREEMENT (this "Amendment") is
made and entered into effective as of the 30th day of November,
1995, by and between PEREGRINE PREMIUM FINANCE L.C., a Texas
limited liability company (hereinafter referred to as
"Peregrine"), and HALLMARK FINANCE CORPORATION, a Texas
corporation (hereinafter referred to as "Hallmark"), and joined
herein by AMERICAN HALLMARK GENERAL AGENCY, INC.
WHEREAS, the parties hereto have entered into that certain
Processing Agreement dated as of January 1, 1995, as amended by
that certain Amendment to Processing Agreement dated as of
January 1, 1995 (the "Processing Agreement"); and
WHEREAS, as a result of financing obtained by Peregrine from
Bank One, Texas, N.A., the parties desire to increase Peregrine's
capital commitment under the Processing Agreement from
$10,500,000 to $13,500,000; and
WHEREAS, the parties hereto desire to enter into this
Amendment to reflect the aforesaid increased capital commitment
on the part of Peregrine;
NOW, THEREFORE, in consideration of the premises, and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as
follows:
1. Paragraph 4(b) of the Processing Agreement is hereby
amended to read in its entirety as follows:
"Peregrine will have available for use in funding Notes its
own money, whether such money represents member's equity or
debt of Peregrine to its Lender or one or more of its
members or otherwise (herein called 'Capital'), in an amount
not less than $13,500,000. If, at any time and from time to
time during the existence of this Agreement, Hallmark
desires to obtain funding for Notes in a total amount that
would require Peregrine's Capital commitment to exceed
$13,500,000, then Hallmark will give to Peregrine written
notice (the "Notice") of such fact, of the amount of Notes
Hallmark desires to have funded hereunder and of the extra
Capital required of Peregrine to fund such Notes, at least
30 days prior to the date (the 'Funding Date') Hallmark
desires to obtain such excess funding. Peregrine will,
within 15 days of receipt of the Notice, give to Hallmark
written notice of whether it will provide all or any part,
or none, of the additional Capital funding over and above
$13,500,000 requested by Hallmark. If Peregrine elects to
provide all or any part of the additional Capital, it shall
provide such Capital on or before the Funding Date. If
Peregrine gives notice that it does not elect to provide all
of such additional Capital or if Peregrine gives Hallmark no
notice whatsoever, then Hallmark shall be entitled to sell,
itself finance, obtain third-party financing for, or
otherwise deal with such premium finance notes for policies
of insurance produced by Brokers through State and County;
<PAGE>
provided that any such third-party financing or financing
provided by Hallmark itself shall not be in an amount
greater than the amount of premium finance notes with
respect to which funding was requested in the Notice. If in
such event Hallmark does sell, itself finance, obtain third-
party financing for, or otherwise deal with such premium
finance notes, Peregrine agrees to transfer Unfunded Notes
(as hereinafter defined) as provided in paragraph 4(e) below
and to use its best efforts to obtain a release by
Peregrine's Lender of any lien or security interest claimed
by it in premium finance notes not funded in whole or in
part by Peregrine's Lender. The parties acknowledge that
Peregrine may obtain financing from a Lender in order to
fulfill Peregrine's Capital commitment hereunder. In the
event that Peregrine obtains such financing, Hallmark will
abide by any requirements imposed upon Peregrine by its
Lender in connection with such financing, including, without
limitation, any requirements regarding the delivery of
possession to Lender of Notes in which it has a security
interest."
2. Except as amended hereby, the Processing Agreement is
ratified, approved and confirmed in all respects.
3. Capitalized terms used herein and not otherwise defined
shall have the respective meanings ascribed to such terms in the
Processing Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first above written.
PEREGRINE PREMIUM FINANCE L.C.
Date:________________ By:___________________________
Its:__________________________
HALLMARK FINANCE CORPORATION
Date:________________ By:___________________________
Its:__________________________
AMERICAN HALLMARK GENERAL AGENCY, INC.
Date:________________ By:___________________________
Its:__________________________
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Due to format constraints of this Financial Data Schedule (FDS) certain
Balance Sheet items were omitted: i.e. Prepaid reinsurance premiums,
Premium notes receivable, Installment premiums receivable, Excess of cost
over net assets acquired & Other assets. Refer to actual 10-KSB submission.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 10,024,871
<DEBT-MARKET-VALUE> 10,077,133
<EQUITIES> 171,727
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 10,196,598
<CASH> 4,257,755
<RECOVER-REINSURE> 19,335,746
<DEFERRED-ACQUISITION> (518,686)
<TOTAL-ASSETS> 60,510,351
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 15,659,897
<POLICY-OTHER> 3,489,357
<POLICY-HOLDER-FUNDS> 4,509,021
<NOTES-PAYABLE> 639,162
0
0
<COMMON> 328,868
<OTHER-SE> 9,749,665
<TOTAL-LIABILITY-AND-EQUITY> 60,510,351
11,000,692
<INVESTMENT-INCOME> 582,955
<INVESTMENT-GAINS> 2,100
<OTHER-INCOME> 2,210,156
<BENEFITS> 8,465,478
<UNDERWRITING-AMORTIZATION> 441,101
<UNDERWRITING-OTHER> 3,443,766
<INCOME-PRETAX> 1,445,558
<INCOME-TAX> 190,801
<INCOME-CONTINUING> 1,254,757
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,254,757
<EPS-PRIMARY> 11.8
<EPS-DILUTED> 11.0
<RESERVE-OPEN> 12,668,000
<PROVISION-CURRENT> 31,911,637
<PROVISION-PRIOR> 1,038,965
<PAYMENTS-CURRENT> 14,424,658
<PAYMENTS-PRIOR> 8,870,854
<RESERVE-CLOSE> 22,323,090
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
