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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
Commission file number 0-16090
Hallmark Financial Services, Inc.
---------------------------------
(Exact name of registrant as specified in its charter)
Nevada 87-0447375
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
777 Main Street, Suite 1000, Fort Worth, Texas 76102
---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 348-1600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 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 X No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No X
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common
Stock, par value $.03 per share - 36,447,291 shares outstanding as of
April 30, 2004.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
INDEX TO FINANCIAL STATEMENTS
Page Number
-----------
Consolidated Balance Sheets at March 31, 2004 3
(unaudited) and December 31, 2003
Consolidated Statements of Operations (unaudited) for 4
the three months ended March 31, 2004 and March 31, 2003
Consolidated Statements of Cash Flows (unaudited) for 5
the three months ended March 31, 2004 and March 31, 2003
Notes to Consolidated Financial Statements (unaudited) 6
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31 December 31
ASSETS 2004 2003
------ ---------- ----------
(unaudited) (audited)
Investments:
Debt securities, available-for-sale,
at market value $ 27,615 $ 25,947
Equity securities, available-for-sale,
at market value 3,695 3,573
Short-term investments, available-for-sale,
at market value 445 335
---------- ----------
Total investments 31,755 29,855
Cash and cash equivalents 8,452 10,520
Restricted cash and investments 5,275 5,366
Prepaid reinsurance premiums 10 291
Premiums receivable encumbered by premium financing
activity (net of allowance for doubtful accounts
of $2 in 2004 and of $3 in 2003) 111 43
Premiums receivable 4,168 4,033
Accounts receivable 3,486 3,395
Reinsurance recoverable 7,435 10,516
Deferred policy acquisition costs 7,655 7,146
Excess of cost over fair value
of net assets acquired 4,836 4,836
Intangible assets 506 513
Current federal income tax recoverable - 625
Deferred federal income taxes 3,784 3,961
Other assets 2,816 2,753
---------- ----------
$ 80,289 $ 83,853
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Notes payable $ 809 $ 991
Unpaid losses and loss adjustment expenses 23,762 28,456
Unearned premiums 6,094 5,862
Unearned revenue 10,878 10,190
Accrued agent profit sharing 365 1,511
Accrued ceding commission payable 1,165 1,164
Pension liability 1,237 1,237
Current federal income tax payable 39 -
Accounts payable and other accrued expenses 6,791 7,045
---------- ----------
51,140 56,456
Stockholders' equity:
Common stock, $.03 par value, authorized
100,000,000 shares Issued 36,856,610 shares
in 2004 and 2003 1,106 1,106
Capital in excess of par value 19,641 19,693
Retained earnings 8,666 7,254
Accumulated other comprehensive income 212 (93)
Treasury stock, 409,319 shares in 2004 and
484,319 in 2003, at cost (476) (563)
---------- ----------
Total stockholders' equity 29,149 27,397
---------- ----------
$ 80,289 $ 83,853
========== ==========
The accompanying notes are an integral part
of the consolidated financial statements
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amount)
Three Months Ended
March 31
------------------------
2004 2003
---------- ----------
Gross premiums written $ 8,753 $ 21,915
Ceded premiums written 24 (8,398)
---------- ----------
Net premiums written 8,777 13,517
Change in unearned premiums (513) (1,015)
---------- ----------
Net premiums earned 8,264 12,502
Investment income, net of expenses 279 194
Finance charges 547 1,089
Commission and fees 5,195 3,350
Processing and service fees 1,480 1,308
Other income 8 277
---------- ----------
Total revenues 15,773 18,720
Losses and loss adjustment expenses 5,227 8,890
Other operating costs and expenses 8,439 8,770
Interest expense 24 443
Amortization of intangible asset 7 7
---------- ----------
Total expenses 13,697 18,110
Income before income tax and extraordinary gain 2,076 610
Income tax expense 664 207
---------- ----------
Income before extraordinary gain $ 1,412 $ 403
Extraordinary gain - 8,152
---------- ----------
Net income $ 1,412 $ 8,555
========== ==========
Basic earnings per share:
Income before extraordinary gain $ 0.04 $ 0.04
Extraordinary gain - 0.73
---------- ----------
Net income $ 0.04 $ 0.77
========== ==========
Diluted earnings per share:
Income before extraordinary gain $ 0.04 $ 0.04
Extraordinary gain - 0.71
---------- ----------
Net income $ 0.04 $ 0.75
========== ==========
The accompanying notes are an integral part
of the consolidated financial statements
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31
------------------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net income $ 1,412 $ 8,555
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Extraordinary gain on acquisition of subsidiary - (8,152)
Depreciation and amortization expense 112 159
Change in prepaid reinsurance premiums 281 (175)
Change in premiums receivable (135) (8)
Change in accounts receivable (91) (740)
Change in deferred policy acquisition costs (509) (251)
Change in unpaid losses and loss
adjustment expenses (4,694) 1,132
Change in unearned premiums 232 690
Change in unearned revenue 688 843
Change in accrued agent profit sharing (1,146) (393)
Change in reinsurance recoverable 3,081 4,655
Change in reinsurance balances payable - 959
Change in excess of cost over
net assets acquired - 288
Change in current federal income tax
payable/recoverable 664 516
Change in accrued ceding commission refund 1 (124)
Change in all other liabilities (254) 642
Change in all other assets 31 331
---------- ----------
Net cash (used in) provided by
operating activities (327) 8,927
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (46) (203)
Acquisition of subsidiary - 6,944
Premium finance notes originated,
net of finance notes repaid (68) (971)
Change in restricted cash and investments (2,335) (16)
Maturities and redemptions of investment
securities 1,000 114
Net redemptions (purchases) of short-term
investments (110) 4,434
---------- ----------
Net cash (used in) provided by
investing activities (1,559) 10,302
---------- ----------
Cash flows from financing activities:
Net advances from lender - (670)
Repayment of borrowings (182) (238)
---------- ----------
Net cash used in financing activities (182) (908)
---------- ----------
Increase (decrease) in cash and cash equivalents (2,068) 18,321
Cash and cash equivalents at beginning of period 10,520 8,453
---------- ----------
Cash and cash equivalents at end of period $ 8,452 $ 26,774
========== ==========
In the first quarter of 2004, the Company transferred $2.4 million of
fixed maturity investments from restricted investments to debt securities,
available-for-sale.
The accompanying notes are an integral part
of the consolidated financial statements
Item 1. Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Summary of Accounting Policies
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the financial position of
Hallmark Financial Services, Inc. ("HFS") and subsidiaries (collectively,
the "Company") as of March 31, 2004 and the consolidated results of
operations and cash flows for the periods presented. The preparation of
financial statements requires the use of management's estimates. The
accompanying financial statements have been prepared by the Company without
audit.
Certain information and disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been condensed or
omitted. Reference is made to the Company's annual consolidated financial
statements for the year ended December 31, 2003 for a description of
accounting policies and certain other disclosures. Certain items in the
2003 financial statements have been reclassified to conform to the 2004
presentation.
The results of operations for the period ended March 31, 2004 are not
necessarily indicative of the operating results to be expected for the full
year.
Recently Adopted Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). The
Statement amends SFAS 123 to provide alternative methods of transition for
voluntary change to the fair value based method of accounting for stock-
based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS 148 is effective for financial statements for fiscal years ending
after December 15, 2002. Effective January 1, 2003, the Company adopted the
prospective method provisions of SFAS 148.
At March 31, 2004, the Company had a stock-based employee compensation
plan for key employees and a non-qualified plan for non-employee directors,
which are described more fully in Note 13 to the Company's Form 10-KSB for
December 31, 2003. Prior to 2003, the Company accounted for those plans
under the recognition and measurement provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations.
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under the prospective method of adoption
selected by the Company under the provisions of SFAS 148, compensation cost
is recognized for all employee awards granted, modified, or settled after
the beginning of the fiscal year in which the recognition provisions are
first applied. Results for prior years have not been restated.
The following table illustrates the effect on net income and earnings per
share if the fair value based method had been applied to all outstanding and
unvested awards in each period.
Three Months Ended
March 31
(in thousands) 2004 2003
------ ------
Net income as reported $ 1,412 $ 8,555
Add: Stock-based employee compensation
expenses included in reported net income,
net of related tax effects 5 -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (8) (9)
------ ------
Pro forma net income $ 1,409 $ 8,546
====== ======
Earnings per share:
Basic-as reported $ 0.04 $ 0.77
====== ======
Basic-pro forma $ 0.04 $ 0.77
====== ======
Diluted-as reported $ 0.04 $ 0.75
====== ======
Diluted-pro forma $ 0.04 $ 0.75
====== ======
Note 2 - Reinsurance
The Company is involved in the assumption and cession of reinsurance
from/to other companies. The Company remains obligated to its policyholders
in the event that the reinsurers do not meet their obligations under the
reinsurance agreements.
Under its reinsurance arrangements, the Company earns ceding
commissions based on loss ratio experience on the portion of policies it
cedes. The Company receives a provisional commission as policies are
produced as an advance against the later determination of the commission
actually earned. The provisional commission is adjusted periodically on a
sliding scale based on expected loss ratios.
The following table shows earned premiums ceded and reinsurance loss
recoveries by period (in thousands):
Three Months Ended
March 31,
2004 2003
------ ------
Ceded earned premiums $ 257 $ 8,015
Reinsurance recoveries $ (326) $ 5,170
Note 3 - Segment Information
The Company pursues its business activities through integrated
insurance groups managing non-standard personal automobile insurance (the
"Personal Lines Group") and commercial insurance (the "Commercial Lines
Group"). The members of the Personal Lines Group are American Hallmark
Insurance Company of Texas ("Hallmark"), an authorized Texas property and
casualty insurance company; Phoenix Indemnity Insurance Company ("Phoenix"),
an authorized Arizona property and casualty insurance company; American
Hallmark General Agency, Inc. ("AHGA"), a managing general agency; Hallmark
Finance Corporation ("HFC"), a premium finance company; and Hallmark Claims
Services, Inc. ("HCS"), a claims administrator. The members of the
Commercial Lines Group are Hallmark General Agency, Inc. ("HGA"), a managing
general agency; and Effective Claims Management, Inc. ("ECM"), a third party
claims administrator.
The following is additional business segment information for the three
months ended March 31, 2004 and 2003 (in thousands):
Three Months Ended
March 31,
2004 2003
------ ------
Revenues
--------
Personal Lines Group $10,259 $14,033
Commercial Lines Group 5,513 4,687
Corporate 1 -
------ ------
Consolidated $15,773 $18,720
====== ======
Pre-tax income
--------------
Personal Lines Group $ 1,636 $ 948
Commercial Lines Group 670 300
Corporate (230) (638)
------ ------
Consolidated $ 2,076 $ 610
====== ======
The following is additional business segment information as of the
following dates (in thousands):
Mar. 31, Dec. 31,
2004 2003
------ ------
Assets
------
Personal Lines Group $65,339 $ 68,247
Commercial Lines Group 14,238 13,365
Corporate 712 2,241
------ ------
Consolidated $80,289 $83,853
====== ======
Note 4 - Deferred Policy Acquisition Costs
Total deferred and amortized acquisition costs for the three months ending
March 31, 2004 and 2003 (in thousands) were as follows:
Three Months Ended
March 31,
2004 2003
------ ------
Deferred $(6,148) $(3,326)
Amortized 5,639 3,075
------ ------
Net Deferred $ (509) $ (251)
====== ======
Note 5 - Earnings per Share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 (" SFAS No. 128"), "Earnings Per Share," requiring
presentation of both basic and diluted earnings per share.
The following table sets forth basic and diluted weighted average shares
outstanding for the periods indicated (in thousands):
Three Months Ended
March 31,
2004 2003
------ ------
Weighted average shares - basic 36,443 11,167
Effect of dilutive securities 127 278
------ ------
Weighted average shares - assuming dilution 36,570 11,445
====== ======
Options to purchase an additional 771,000 shares of common stock at prices
ranging from $0.65 to $1.00 were outstanding at March 31, 2004 and 2003, but
were not included in the computation of diluted earnings per share because
the inclusion would result in an anti-dilutive effect in periods where the
option exercise price exceeded the average market price per share for the
period.
Note 6 - Comprehensive Income
The following table sets forth comprehensive income for the periods
indicated (in thousands):
Three Months Ended
March 31,
2004 2003
------ ------
Net Income $ 1,412 $ 8,555
Unrealized gain on available
for sale securities, net of tax 305 35
------ ------
Other comprehensive income 305 35
------ ------
Comprehensive income $ 1,717 $ 8,590
====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction. Hallmark Financial Services, Inc. ("HFS") and its wholly
owned subsidiaries (collectively, the "Company") engage in the sale of
property and casualty insurance products. The Company's business involves
marketing and underwriting of non-standard automobile insurance primarily in
Texas, Arizona, and New Mexico; marketing of commercial insurance in Texas,
New Mexico, Idaho, Oregon and Washington; and providing third party claims
administration and other insurance related services.
The Company pursues its business activities through integrated
insurance groups managing non-standard personal automobile insurance (the
"Personal Lines Group") and commercial insurance (the "Commercial Lines
Group"). The members of the Personal Lines Group are American Hallmark
Insurance Company of Texas ("Hallmark"), an authorized Texas property and
casualty insurance company; Phoenix Indemnity Insurance Company ("Phoenix"),
an authorized Arizona property and casualty insurance company; American
Hallmark General Agency, Inc. ("AHGA"), a managing general agency; Hallmark
Finance Corporation ("HFC"), a premium finance company; and Hallmark Claims
Services, Inc. ("HCS"), a claims administrator. The members of the
Commercial Lines Group are Hallmark General Agency, Inc. ("HGA"), a managing
general agency; and Effective Claims Management, Inc. ("ECM"), a third party
claims administrator
The Personal Lines Group provides non-standard automobile liability and
physical damage insurance through Hallmark and Phoenix for drivers who do
not qualify for or cannot obtain standard-rate insurance. Prior to April 1,
2003, Hallmark assumed the reinsurance of 100% of the Texas non-standard
automobile policies produced by AHGA and underwritten by State & County
Mutual Fire Insurance Company ("State & County") and retroceded 55% of
the business to Dorinco Reinsurance Company ("Dorinco"). Under this
arrangement, Hallmark remained obligated to policyholders in the event
Dorinco did not meet its obligations under the retrocession agreement.
Effective April 1, 2003, Hallmark assumes the reinsurance of 45% of the
Texas non-standard automobile policies produced by AHGA and underwritten
either by State & County (for policies written from April 1, 2003 through
September 30, 2003) or Old American County Mutual Fire Insurance Company
("OACM") (for policies written after September 30, 2003). The remaining 55%
of each policy is directly assumed by Dorinco. Under these new reinsurance
arrangements, Hallmark is obligated to policyholders only for the portion of
risk assumed by Hallmark. Phoenix underwrites non-standard auto insurance
produced by independent agents and retains 100% of the premium and losses
for the business it writes. Effective July 1, 2003, HFC discontinued its
premium finance program and the Company shifted focus to a six month direct
bill program. HCS provides claims adjustment, salvage, subrogation recovery
and litigation services to Hallmark.
The Commercial Lines Group, through HGA, markets commercial insurance
policies through independent agents. HGA produces policies on behalf of
Clarendon National Insurance Company ("CNIC") under a general agency
agreement where it receives a commission based on the premium written with
CNIC. ECM provides fee-based claims adjustment, salvage and subrogation
recovery, and litigation services on behalf of CNIC and another unaffiliated
third party.
Liquidity and Capital Resources
The Company's sources of funds are principally derived from insurance
related operations. Major sources of funds from operations include premiums
collected (net of policy cancellations and premiums ceded), ceding
commissions, and processing and service fees. Other sources of funds are
from financing and investment activities. On a consolidated basis, the
Company's cash and investments (excluding restricted cash and investments)
at March 31, 2004 were $40.2 million compared to $40.4 million at December
31, 2003.
Net cash used by the Company's operating activities was $0.3 million
for the first three months of 2004 compared to net cash provided by
operating activities of $8.9 million for the first three months of 2003.
The decrease in operating cash flow was due mostly to a reduction in
Personal Lines Group premium volume causing a $5.9 million reduction in
premiums collected. Also contributing to the decrease was a $2.3 million
Phoenix bad faith claim settlement paid in 2004 and a $0.8 million reduction
in collected finance charges due primarily to the discontinuation of the
Personal Lines Group premium finance program in July 2003.
Cash used by investing activities during the first three months of 2004
was $1.6 million as compared to cash provided by investing activities of
$10.3 million for the same period in 2003. The acquisition of Phoenix in
2003 produced a net cash increase of $6.9 million. The decrease was
additionally attributable to redemption of short-term investments in the
first quarter of 2003 of $4.4 million compared to purchases of short-term
investments in 2004 of $0.1 million.
Cash used in financing activities decreased by $0.7 million in the
first three months of 2004 as compared to the same period of 2003 due to the
discontinuation of the premium finance program in July 2003. As a result,
the Company did not receive any advances in 2004 from the premium finance
lender.
HFS is dependent on dividend payments and management fees from its
insurance subsidiaries and free cash flow of its non-insurance subsidiaries
to meet operating expenses and debt obligations. As of March 31, 2004, cash
and invested assets of HFS were $0.7 million. Cash and invested assets of
non-insurance subsidiaries were $5.0 million as of March 31, 2004. Property
and casualty insurance companies domiciled in the State of Texas are limited
in the payment of dividends to their shareholders in any twelve-month
period, without the prior written consent of the Commission of Insurance, to
the greater of statutory net income for the prior calendar year or 10% of
statutory policyholders' surplus as of the prior year end. Dividends may
only be paid from unassigned surplus funds. During 2004, Hallmark's
ordinary dividend capacity is $2.2 million. Phoenix, domiciled in Arizona,
is limited in the payment of dividends to the lesser of 10% of prior year
policyholder's surplus or prior year's net investment income, without prior
written approval from the Arizona Department of Insurance ("AZDOI"). During
2004, Phoenix's ordinary dividend capacity is $0.6 million. Neither
Hallmark nor Phoenix paid a dividend to HFS during the first quarter of
2004.
The Texas Department of Insurance ("TDI") regulates financial
transactions between Hallmark, HFS and affiliated companies. Applicable
regulations require TDI's approval of management and expense sharing
contracts and similar transactions. Although TDI has approved Hallmark's
payment of management fees to HFS and commissions to AHGA, since the second
half of 2000 management has elected not to pay all of the approved
commissions or management fees. AHGA paid HFS $0.2 million in management
fees in the first quarter of 2004 and HFC paid HFS $0.2 million in
management fees in the first quarter of 2003.
The AZDOI regulates financial transactions between Phoenix and
affiliated companies. Applicable regulations require AZDOI's approval of
management and expense sharing contracts and similar transactions. Although
AZDOI has approved payments of management fees to HFS, management has
elected to not pay a management fee to HFS in the first quarter of either
2003 or 2004 in order to strengthen Phoenix's statutory surplus.
Results of Operations
Three Months Ending March 30, 2004 as compared to Three Months Ending
March 30, 2003
Income before tax and extraordinary gain was $2.1 million for the
quarter ended March 31, 2004, compared to $0.6 million for the same period
in 2003. The improvement in operating earnings for the first quarter of
2004 compared to the first quarter of 2003 reflects the reversal of bad debt
allowances in the Personal Lines Group, additional commission revenue in the
Commercial Lines Group and overall reduced interest expenses.
The following is additional business segment information for the three
months ended March 31 (in thousands):
2004 2003
-------- --------
Revenues
--------
Personal Lines Group $ 10,259 $ 14,033
Commercial Lines Group 5,513 4,687
Corporate 1 -
-------- --------
Consolidated $ 15,773 $ 18,720
======== ========
Pre-tax Income
--------------
Personal Lines Group $ 1,636 $ 948
Commercial Lines Group 670 300
Corporate (230) (638)
-------- --------
Consolidated $ 2,076 $ 610
======== ========
Personal Lines Group
Net premiums written decreased $4.7 million during the first quarter of
2004 to $8.8 million compared to $13.5 million in the first quarter of 2003.
The decrease in net premiums written is impacted by the following actions
taken in 2003: (i) cancellation of unprofitable agents; (ii) a shift in
marketing focus from annual term premium financed policies to six month term
direct bill policies; and (iii) reduction in policy counts caused by
increased rates.
Revenue for the Personal Lines Group decreased 27% for the first
quarter of 2004 to $10.3 million from $14.0 million for the same period in
2003. The decrease is mainly caused by less net premium volume causing
earned premium for the quarter to be $4.2 million less than in the first
quarter of 2003. Also contributing to the decline is the discontinuation of
the premium finance program, which caused a $0.6 million reduction in
finance charge revenue. Partially offsetting these reductions is AHGA
commission revenue of $1.0 million from business ceded to Dorinco for
policies effective after March 31, 2003 due to the new reinsurance
structure. Prior to April 1, 2003, under the terms of the previous
reinsurance structure, this commission was classified as a ceding commission
and a reduction to commission expense.
Even though revenue for the Personal Lines Group declined, pre-tax
income increased $0.7 million, or 73%, for the first quarter of 2004
compared to the first quarter of 2003. Despite the decrease in premium
volume, underwriting results for the first quarter of 2004 were comparable
to the first quarter of 2003 due largely to improved loss experience as
shown by a loss ratio (defined as loss and loss adjustment expenses divided
by net premiums earned) of 63.6% for the first quarter of 2004 as compared
to 71.7% in the first quarter of 2003. Also contributing to the increased
pre-tax income for the quarter was bad debt expense which was $0.4 million
lower than the same period in 2003. This reduction reflects the reversal of
allowances deemed no longer necessary due to cash collections. Interest
expense was $0.2 million less for the first quarter of 2004 as compared to
the same period in 2003 due to the discontinuation of the premium finance
program in July 2003. Also, additional investment income contributed $0.1
million to the increased pre-tax income for the quarter.
Commercial Lines Group
Total revenue for the Commercial Lines Group of $5.5 million for the
first quarter of 2004 was $0.8 million more than the $4.7 million reported
in the first quarter of 2003. This was primarily due to additional
commission revenue of $0.8 million in the first quarter of 2004 as compared
to the same period in 2003. Increased commercial premium volume was the
primary cause of the increased commission revenue for the quarter.
Pre-tax income for the Commercial Lines Group of $0.7 million for the
first quarter of 2004 increased $0.4 million over the $0.3 million reported
for the first quarter of 2003. Increased revenue, as discussed above, is
the primary reason for the increase in pre-tax income, partially offset by
additional agent commissions of $0.5 million due to the increased premium
volume. Also contributing to the increased pre-tax income is rent savings
of $0.1 million from renegotiating the lease for the Commercial Lines Group
office space in Fort Worth, Texas.
Corporate
Corporate pre-tax loss was $0.2 million for the first quarter of 2004
as compared to $0.6 million for the same period in 2003. The Company saved
$0.3 million in interest expense for the first quarter of 2004 as compared
to the same period in 2003 due to the repayment of a related party note
payable in September 2003. Also contributing to the decrease in pre-tax
loss were additional management fees collected from the Commercial Lines
Group of $0.1 million in the first quarter of 2004. Corporate did not
collect any management fees from the Commercial Lines Group in the first
quarter of 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information required under Item 305 of Regulation S-K is not required
in this Form 10-Q.
Item 4. Controls and Procedures.
The Chief Executive Officer and Chief Financial Officer of the Company
have evaluated the Company's disclosure controls and procedures and have
concluded that such controls and procedures are effective as of the end of
the period covered by this report. During the most recent fiscal quarter,
there have been no changes in the Company's internal controls over financial
reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Risks Associated with Forward-Looking Statements Included in this Form 10-Q
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the
safe harbors created thereby. These statements include the plans and
objectives of management for future operations, including plans and
objectives relating to future growth of the Company's business activities
and availability of funds. The forward-looking statements included herein
are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions, regulatory framework, weather-related events and future business
decisions, all of which are difficult or impossible to predict accurately
and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as
a representation by the Company or any other person that the objectives and
plans of the Company will be achieved.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is engaged in legal proceedings in the ordinary
course of business, none of which, either individually or in
the aggregate, are believed likely to have a material
adverse effect on the consolidated financial position of the
Company or the results of operations, in the opinion
of management. The various legal proceedings to which the
Company is a party are routine in nature and incidental to
the Company's business.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits listed in the Exhibit Index appearing on page 17
are filed herewith.
(b) The Company filed the following reports on Form 8-K during
the first quarter of 2004.
Form 8-K filed March 8, 2004 containing a press release
announcing the appointment of Chief Financial Officer, Mark J.
Morrison.
Form 8-K filed March 31, 2004 containing a press release
announcing the financial results for the fourth quarter and
year-ended December 31, 2003.
Exhibit Index
-------------
Exhibit
Number Description
------ -----------
31(a) Certification of Chief Executive Officer required by
Rule 13a-14(a) or Rule 15d-14(a).
31(b) Certification of Chief Financial Officer required by
Rule 13a-14(a) or Rule 15d-14(a).
32(a) Certification of Chief Executive Officer Pursuant to 18
U.S.C. 1350 Enacted by Section 906 of the Sarbanes-Oxley
Act of 2002.
32(b) Certification of Chief Financial Officer Pursuant to 18
U.S.C. 1350 Enacted by Section 906 of the Sarbanes-Oxley
Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HALLMARK FINANCIAL SERVICES, INC.
(Registrant)
Date: May 14, 2004 /s/ Mark E. Schwarz
---------------------------------------------
Mark E. Schwarz, Chairman (Chief
Executive Officer)
Date: May 14, 2004 /s/ Mark J. Morrison
---------------------------------------------
Mark J. Morrison, Executive Vice President
(Chief Financial Officer)