Edgar Filing: HALLMARK FINANCIAL SERVICES INC

sec document

As filed with the Securities and Exchange Commission on July 28, 2003
Registration No. 333-104274

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO.3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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HALLMARK FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)

Nevada 87-0447375
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

14651 Dallas Parkway
Suite 900
Dallas, Texas 75254
(972) 404-1637
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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Mark E. Schwarz
Chairman and CEO
Hallmark Financial Services, Inc.
14651 Dallas Parkway
Suite 900
Dallas, Texas 75254
(972) 404-1637
(Name, address, including zip code, and telephone number,
including area code, of agent for service of process)

Copies to:
Steven Wolosky, Esq.
Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, New York 10022
(212) 753-7200
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
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If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. |_|

If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. |X|

If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|

If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|

CALCULATION OF REGISTRATION FEE

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Proposed Maximum
Aggregate Offering Amount Of
Title of Shares to be Registered Price(1) Registration Fee
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Common Stock, par value $.03 per share,
issuable upon exercise of nontransferable
rights..................................... $10,000,000(2) $809.00(3)
=======================================================================================

(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) Represents the gross proceeds from the assumed exercise of all
nontransferable rights issued.
(3) Previously paid with the initial filing on April 2, 2003.

The Registrant hereby amends this registration statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
registration statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JULY 28, 2003

PROSPECTUS
Hallmark Financial Services, Inc.
[________] Shares of Common Stock

Our Board of Directors declared a dividend of rights to purchase our
common stock to holders of record as of June 27, 2003. Through this prospectus,
we are offering the shares of common stock that rights holders may purchase upon
exercising such subscription rights.

You received one right for each share of common stock you owned on
the record date of June 27, 2003. Each right will entitle you to purchase
_______ shares of our common stock at a subscription price of $______ per share.

The rights are currently exercisable and will expire if they are not
exercised by 5:00 p.m., New York City time, on ______________, 2003. We may
extend the period for exercising the rights in our sole discretion. If you want
to exercise your rights, you must submit your subscription documents to us
before the expiration date. Rights that are not exercised by the expiration date
will expire and will have no value.

The proceeds from the exercise of rights will be used to repay an
outstanding loan made to us by Newcastle Partners, L.P., our largest
stockholder. Any remaining proceeds will be used for working capital and general
corporate purposes. Mark E. Schwarz, our chairman and chief executive officer,
is an affiliate of Newcastle.

Shares of our common stock are traded on the American Stock Exchange
Emerging Company Marketplace under the symbol "HAF. EC." On July 7, 2003, the
last reported sales price for our common stock was $1.03 per share.

AN INVESTMENT IN OUR COMMON STOCK IS VERY RISKY. YOU SHOULD
CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 6 OF THIS PROSPECTUS
BEFORE EXERCISING YOUR SUBSCRIPTION RIGHTS.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

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The date of this prospectus is ____________, 2003.

TABLE OF CONTENTS

Page
----

Questions and Answers about this Offering......................................1
Risk Factors...................................................................6
Our Company...................................................................12
Use of Proceeds...............................................................12
Capitalization................................................................13
Price Range of Common Stock...................................................13
The Offering..................................................................14
Material United States Federal Income Tax Consequences........................21
Plan of Distribution..........................................................22
Legal Matters.................................................................23
Experts.......................................................................23
Material Changes..............................................................23
Where You Can Find More Information...........................................24
Forward-Looking Statements....................................................24

You should rely only on the information in this prospectus and the
additional information described under the heading "Where You Can Find More
Information." We have not authorized any other person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information in this prospectus and the additional
information described under the heading "Where You Can Find More Information"
were accurate on the date on the front cover of the prospectus only. Our
business, financial condition, results of operations and prospects may have
changed since that date.

QUESTIONS AND ANSWERS ABOUT THIS OFFERING

This section highlights information contained elsewhere or
incorporated by reference in this prospectus. This section does not contain all
of the important information that you should consider before exercising your
subscription rights and investing in our common stock. You should read this
entire prospectus carefully.

Q: WHAT ARE WE OFFERING IN THIS PROSPECTUS?

A: Our Board of Directors has declared a dividend of nontransferable
subscription rights to purchase shares of our common stock to each of our
stockholders of record on June 27, 2003. Through this prospectus, we are
offering the shares of common stock that holders of rights may purchase
upon exercise of their rights.

Q: WHO MAY PARTICIPATE IN THIS OFFERING?

A: Only holders of record of our common stock as of June 27, 2003 are
entitled to participate in this offering. Any attempt to participate in
this offering by anyone that was not a holder of record of our common
stock on such date will be null and void.

Q: WHAT IS A SUBSCRIPTION RIGHT?

A: Each subscription right is a right to purchase ____ shares of our common
stock and carries with it a basic subscription privilege and an
over-subscription privilege.

Q: WHAT IS THE BASIC SUBSCRIPTION PRIVILEGE?

A: The basic subscription privilege of each right entitles you to purchase
_____ shares of our common stock at a subscription price of $_____ per
share. You may exercise any number of your subscription rights, or you may
choose not to exercise any subscription rights. We will not distribute any
fractional shares or pay cash in place of fractional shares, but we will
round down the aggregate number of shares you are entitled to receive to
the nearest whole number.

Q: WHAT IS THE OVER-SUBSCRIPTION PRIVILEGE?

A: We do not expect that all of our stockholders will exercise all of their
basic subscription rights. By extending over-subscription privileges to
our stockholders, we are providing stockholders that exercise all of their
basic subscription privileges with the opportunity to purchase those
shares that are not purchased by other stockholders. The over-subscription
privilege of each right entitles you, if you fully exercise your basic
subscription privilege, to subscribe for additional shares of our common
stock unclaimed by other holders of rights in this offering, at the same
subscription price per share. If an insufficient number of shares is
available to fully satisfy all over-subscription privilege requests, the
available shares will be distributed proportionately among rights holders
who exercised their over-subscription privilege based on the number of
shares each rights holder subscribed for under the basic subscription
privilege. The subscription agent will return any excess payments by mail
without interest or deduction promptly after the expiration of the
subscription period.

Q: HOW LONG WILL THE SUBSCRIPTION PERIOD LAST?

A: You will be able to exercise your subscription rights only during a
limited period. If you do not exercise your subscription rights before
5:00 p.m., New York City time, on _____________, 2003, your subscription
rights will expire. We may, in our sole discretion, decide to extend this
offering until some later time. If we extend the expiration date, we will

give oral or written notice to the subscription agent on or before such
expiration date, followed by a press release no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
expiration date.

Q: AM I REQUIRED TO SUBSCRIBE IN THIS OFFERING?

A: No.

Q: WHAT HAPPENS IF I CHOOSE NOT TO EXERCISE MY SUBSCRIPTION RIGHTS?

A: You will retain your current number of shares of common stock even if you
do not exercise your subscription rights. If you choose not to exercise
your subscription rights, then the percentage of our common stock that you
own may decrease. The magnitude of the reduction of your percentage
ownership will depend upon the extent to which you and the other
stockholders exercise your rights.

Q: HOW DO I EXERCISE MY SUBSCRIPTION RIGHTS?

A: You may exercise your subscription rights by properly completing and
signing your subscription certificate, and delivering it and the rights
certificate, with full payment of the subscription price for the shares
you are subscribing (including any amounts in respect of the
over-subscription privilege), to the subscription agent on or prior to the
expiration date. If you use the mail, we recommend that you use insured,
registered mail, return receipt requested. If you cannot deliver your
rights certificate to the subscription agent on time, you may follow the
guaranteed delivery procedures described under "The Offering - Guaranteed
Delivery Procedures."

Q: WHAT SHOULD I DO IF I WANT TO EXERCISE MY SUBSCRIPTION RIGHTS BUT MY
SHARES ARE HELD IN THE NAME OF MY BROKER, CUSTODIAN BANK OR OTHER NOMINEE?

A: If you hold shares of our common stock through a broker, custodian bank or
other nominee, we will ask your broker, custodian bank or other nominee to
notify you of this offering. If you wish to exercise your subscription
rights, you will need to have your broker, custodian bank or other nominee
act for you. To indicate your decision, you should complete and return to
your broker, custodian bank or other nominee the form entitled "Beneficial
Owner Election Form." You should receive this form from your broker,
custodian bank or other nominee with the other offering materials. You
should contact your broker, custodian bank or other nominee if you believe
you are entitled to participate in this offering but you have not received
this form.

Q: WHAT SHOULD I DO IF I WANT TO EXERCISE MY SUBSCRIPTION RIGHTS AND I AM A
STOCKHOLDER IN A FOREIGN COUNTRY OR IN THE ARMED SERVICES?

A: The subscription agent will mail subscription certificates to you if you
are a rights holder whose address is outside the United States or if you
have an Army Post Office or a Fleet Post Office address. To exercise your
rights, you must notify the subscription agent on or prior to 5:00 p.m.,
New York City time, on ____________, 2003, and take all other steps which
are necessary to exercise your rights, on or prior to that time. If you do
not follow these procedures prior to the expiration date, your rights will
expire.

Q: WILL I BE CHARGED A SALES COMMISSION OR A FEE BY HALLMARK FINANCIAL
SERVICES IF I EXERCISE MY SUBSCRIPTION RIGHTS?

A: No. We will not charge a brokerage commission or a fee to rights holders
for exercising their subscription rights. However, if you exercise your
subscription rights through a broker or nominee, you will be responsible
for any fees charged by your broker or nominee.

Q: WHAT ARE THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF EXERCISING
MY SUBSCRIPTION RIGHTS AS A HOLDER OF COMMON STOCK?

A: A holder of common stock generally will not recognize income or loss for
federal income tax purposes in connection with the receipt or exercise of
subscription rights. We urge you to consult your own tax advisor with
respect to the particular tax consequences of this offering to you. See
"Material United States Federal Income Tax Consequences."

Q: HOW MANY SHARES MAY I PURCHASE?

A: You will receive one nontransferable subscription right for each share of
common stock that you owned at the close of business on June 27, 2003, the
record date. Each right contains the basic subscription privilege and the
over-subscription privilege. Each basic subscription privilege entitles
you to purchase _____ shares of our common stock for $___ per share.
Fractional shares will be eliminated by rounding down the aggregate number
of shares you are entitled to receive to the nearest whole number. See
"The Offering - Subscription Privileges - Basic Subscription Privilege."
The over-subscription privilege entitles you to subscribe for additional
shares of our common stock at the same subscription price per share on a
pro-rata basis to the number of shares you purchased under your basic
subscription privilege, provided you fully exercise your basic
subscription privilege. "Pro-rata" means in proportion to the number of
shares of our common stock that you and the other rights holders electing
to exercise their over-subscription privileges have purchased by
exercising the basic subscription privileges on their holdings of common
stock. See "The Offering - Subscription Privileges - Over-Subscription
Privilege."

Q: WHEN WILL I RECEIVE CERTIFICATES FOR THE SHARES PURCHASED IN THIS
OFFERING?

A: We will issue certificates representing shares purchased in this offering
to you or to the Depository Trust Company on your behalf, as the case may
be, as soon as practicable after the expiration of the subscription period
and after all pro rata allocations and adjustments have been completed. We
will not be able to calculate the number of shares to be issued to each
exercising holder until 5:00 p.m., New York City time, on the third
business day after the expiration date, which is the latest time by which
subscription rights certificates may be delivered to the subscription
agent under the guaranteed delivery procedures described under "The
Offering - Guaranteed Delivery Procedures."

Q: IF THIS OFFERING IS NOT COMPLETED, WILL MY SUBSCRIPTION PAYMENT BE
REFUNDED TO ME?

A: Yes. The subscription agent will hold all funds it receives in escrow
until completion of this offering. If this offering is not completed, the
subscription agent will return promptly, without interest, all
subscription payments.

Q: HOW WAS THE SUBSCRIPTION PRICE ESTABLISHED?

A: The subscription price was established by our board of directors based on
the recommendation of a special committee of directors, excluding those
directors affiliated with Newcastle who did not participate (in their
capacity as directors) in the discussion, consideration or voting with
respect to these matters. These factors included the historic and then
current market price of our common stock, our business prospects, our
recent and anticipated operating results, general conditions in the
securities markets, our need for capital, alternatives available to us for
raising capital, the amount of proceeds desired, the pricing of similar
transactions, the liquidity of our common stock, and the level of risk to
our investors.

Q: ARE THERE RISKS IN EXERCISING MY SUBSCRIPTION RIGHTS?

A: Yes. The exercise of your rights involves risks. Exercising your rights
means buying additional shares of our common stock and should be
considered as carefully as you would consider any other equity investment
in our company. Among other things, you should carefully consider the
risks described under the heading "Risk Factors," beginning on page 6.

Q: AFTER I EXERCISE MY SUBSCRIPTION RIGHTS, CAN I CHANGE MY MIND AND CANCEL
MY PURCHASE?

A: No. Once you send in your subscription certificate and payment you cannot
revoke the exercise of your subscription rights, even if you later learn
information about us that you consider to be unfavorable and even if the
market price of our common stock is below the subscription price. You
should not exercise your subscription rights unless you are certain that
you wish to purchase additional shares of our common stock at the
subscription price. See "The Offering - No Revocation."

Q: MAY I TRANSFER MY SUBSCRIPTION RIGHTS IF I DO NOT WANT TO PURCHASE ANY
SHARES?

A: No. Should you choose not to exercise your subscription rights, you may
not sell, give away or otherwise transfer your rights. However,
subscription rights will be transferable to affiliates of the recipient
and by operation of law (for example, upon death of the recipient).

Q: WHY IS HALLMARK FINANCIAL SERVICES ENGAGING IN THIS OFFERING?

A: We are making this offering in order to raise $10.0 million in new capital
to be used as follows:

o to repay an $8.6 million loan, and accrued interest, made by Newcastle
Partners, L.P. (referred to as Newcastle) to us during 2002, that is
evidenced by promissory notes with an annual interest rate of 11.75%
(referred to as the Newcastle Notes), and

o as additional working capital for our business and general corporate
purposes.

Our board of directors believes that this offering will ultimately
strengthen our financial condition through generating additional cash,
reducing our indebtedness and increasing our stockholders' equity. We want
to give you the opportunity to participate in this fund raising effort and
to purchase additional shares of our common stock.

For your information, Mark E. Schwarz, our Chairman and Chief Executive
Officer, is the managing member of the general partner of the general
partner of Newcastle.

Q: WHAT IS THE BOARD OF DIRECTORS' RECOMMENDATION REGARDING THIS OFFERING?

A: Our board of directors is not making any recommendation as to whether you
should exercise your subscription rights. You are urged to make your
decision based on your own assessment of this offering and our company.

Q: HOW MANY SHARES OF OUR COMMON STOCK WILL BE OUTSTANDING AFTER THIS
OFFERING?

A: As of July 7, 2003, we had 11,318,245 shares of common stock issued and
outstanding. We expect to issue up to ________ shares in this offering.
After this offering, we anticipate that we will have ________ shares of
common stock outstanding. Depending on the number of subscriptions we
receive from stockholders, this offering could result in a change in
control of Hallmark Financial Services because of the over subscription
privilege held by Newcastle. See "Risk Factors" beginning on page 6.

Q: WILL THE NEW SHARES BE INITIALLY LISTED ON THE AMERICAN STOCK EXCHANGE
EMERGING COMPANY MARKETPLACE AND TREATED LIKE OTHER SHARES?

A: Yes. Our common stock is traded on the American Stock Exchange Emerging
Company Marketplace under the symbol "HAF.EC." We expect that the shares
of common stock issued in this offering will also be listed on the AMEX
Emerging Company Marketplace under the same symbol.

Q: HOW WILL THIS OFFERING AFFECT NEWCASTLE'S OWNERSHIP OF OUR COMMON STOCK?

A: Newcastle beneficially owns 5,334,001 shares of our common stock
(including currently exercisable options to purchase 50,000 shares of
common stock), representing approximately 42.3% of our outstanding common
stock and of the voting power of our outstanding voting securities.

If no holders of subscription rights other than Newcastle exercise their
rights in this offering, Newcastle may, as a result of its
over-subscription privilege, own approximately _____ shares, representing
____% of our outstanding common stock and of the voting power of our
outstanding voting securities. If all rights holders exercise their basic
subscription privileges in full, then Newcastle will continue to
beneficially own approximately 42.3% of our common stock and of the voting
power of our outstanding voting securities.

Q: CAN THE BOARD OF DIRECTORS WITHDRAW THIS OFFERING?

A: Yes. Our board of directors may decide to withdraw this offering at any
time for any reason. If we withdraw this offering, any money received from
subscribing stockholders will be refunded promptly, without interest. See
"The Offering - Withdrawal and Amendment."

Q: WHAT SHOULD I DO IF I HAVE OTHER QUESTIONS OR NEED ASSISTANCE?

A: If you have questions or need assistance, please contact Timothy A.
Bienek, our President and Chief Operating Officer, or Securities Transfer
Corporation, the subscription agent for this offering, at the following
addresses and telephone numbers:

Timothy A. Bienek
Hallmark Financial Services, Inc.
777 Main Street, Suite 1000
Fort Worth, Texas 76102
(817) 348-1600

The Subscription Agent:
Securities Transfer Corporation
2591 Dallas Parkway, Suite 102
Frisco, Texas 75034
(469) 633-0101

For a more complete description of this offering, see "The Offering" beginning
on page 14.

RISK FACTORS

THE EXERCISE OF YOUR SUBSCRIPTION RIGHTS FOR SHARES OF OUR COMMON
STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS AND OTHER INFORMATION PRESENTED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. IF WE DO NOT
SUCCESSFULLY ADDRESS ANY ONE OR MORE OF THE RISKS DESCRIBED BELOW, THERE COULD
BE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION, OPERATING RESULTS AND
BUSINESS. WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY ADDRESS THESE RISKS.

RISKS RELATING TO OUR BUSINESS:

OUR RESULTS MAY FLUCTUATE AS A RESULT OF CYCLICAL CHANGES IN THE
PROPERTY-CASUALTY INSURANCE INDUSTRY.

All of our revenue is attributable to property-casualty insurance,
which as an industry is cyclical in nature and has historically been
characterized by soft markets followed by hard markets. A soft market is a
period of relatively high levels of price competition, less restrictive
underwriting standards and generally low premium rates. A hard market is a
period of capital shortages resulting in lack of insurance availability,
relatively low levels of competition, more selective underwriting of risks and
relatively high premium rates. The industry is currently experiencing a hard
market, with premium rates increasing and more selective underwriting of risks
occurring.

OUR INDUSTRY IS VERY COMPETITIVE, WHICH MAY UNFAVORABLY IMPACT OUR RESULTS OF
OPERATIONS.

The property-casualty insurance industry, our sole source of
revenue, is highly competitive and, except for regulatory considerations, there
are very few barriers to entry. As of July 11, 2002, A.M. Best Company, Inc.
reported that there were 2,874 property-casualty insurance companies and 1,829
property-casualty insurance groups operating in the United States. In the
personal lines markets we compete with large national insurance companies such
as Allstate, State Farm, and Progressive, as well as a large number of regional
insurance companies and managing general agents. In the commercial lines markets
we compete with large national carriers such as Hartford, Zurich and Safeco, as
well as a number of regional insurance companies and managing general agents.
Our competition includes entities which have, or are affiliated with, entities
that have greater financial and other resources than we have.

ESTIMATING RESERVES IS INHERENTLY UNCERTAIN AND IF OUR LOSS RESERVES ARE NOT
ADEQUATE, IT WILL HAVE AN UNFAVORABLE IMPACT ON OUR RESULTS.

We maintain loss reserves to cover estimated liability for unpaid
losses and loss adjustment expenses, including legal and other fees as well as a
portion of general expenses, for reported and unreported claims incurred as of
the end of each accounting period. Reserves represent management's estimates of
what the ultimate settlement and administration of claims will cost. These
estimates, which generally involve actuarial projections, are based on
management's assessment of facts and circumstances then known, as well as
estimates of future trends in claim severity, frequency, judicial theories of
liability, and other factors. These variables are affected by both internal and
external events, such as changes in claim handling procedures, inflation,
judicial trends and legislative changes. Many of these items are not directly
quantifiable in advance. Additionally, there may be a significant reporting lag
between the occurrence of an event and the time it is reported to us. The
inherent uncertainties of estimating reserves are greater for certain types of
liabilities, particularly those in which the various considerations affecting
the type of claim are subject to change and in which long periods of time may
elapse before a definitive determination of liability is made. Reserve estimates
are continually refined in a regular and ongoing process as experience develops
and further claims are reported and settled. Adjustments to reserves are
reflected in the results of the periods in which such estimates are changed.
Because settling reserves is inherently uncertain, there can be no assurance
that the current reserves will prove adequate.

During 2002 and 2001, loss and loss adjustment expense reserves were
increased $177,000 and $522,000 for prior accident years, respectively. The
increases represented, as compared to beginning of year loss and loss adjustment
expense reserves, a 2.2% increase in 2002 and 7.0% increase in 2001. We have
established our loss and loss adjustment expense reserves at a level slightly
above the mid-point of the range established by our actuaries.

OUR RESULTS MAY BE UNFAVORABLY IMPACTED IF WE ARE UNABLE TO OBTAIN ADEQUATE
REINSURANCE.

If we are unable to obtain adequate reinsurance protection for the
risks we have underwritten, we will either be exposed to greater losses from
these risks or we will reduce the level of business that we underwrite, which
will reduce our revenue. The amount, availability and cost of reinsurance are
subject to prevailing market conditions beyond our control, and may affect our
ability to write additional premiums as well as our profitability.

We currently reinsure 55% of our Texas non-standard auto business to
Dorinco Re, our sole reinsurer. Dorinco Re has been a reinsurer of ours since
July 1, 1996. The current contract with Dorinco renews annually and if the
contract is not renewed, we will be required to enter into a reinsurance
agreement with another reinsurance company or reduce the level of business that
we underwrite. We cannot be certain the we would be able to enter into a
contract with another reinsurance company, or that such contract would have the
same terms and conditions as the contract with Dorinco Re.

IF THE COMPANIES THAT PROVIDE OUR REINSURANCE DO NOT PAY ALL OF OUR CLAIMS, WE
COULD INCUR SEVERE LOSSES.

We purchase reinsurance by transferring, or ceding, part of the risk
we have assumed to a reinsurance company in exchange for part of the premium we
receive in connection with the risk. Although reinsurance makes the reinsurer
liable to us to the extent the risk is transferred or ceded to the reinsurer, it
does not relieve us, the reinsured, of our liability to our policyholders.
Accordingly, we bear credit risk with respect to our reinsurers. We cannot
assure that our reinsurers will pay all of our reinsurance claims, or that they
will pay our claims on a timely basis.

CATASTROPHIC LOSSES MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, LIQUIDITY
AND FINANCIAL CONDITION.

Property-casualty insurance companies are subject to claims arising
out of catastrophes that may have a significant affect on their results of
operations, liquidity and financial condition. Catastrophes can be caused by
various events, including hurricanes, windstorms, earthquakes, hail storms,
explosions, severe winter weather and fires and may include man-made events,
such as the September 11, 2001 terrorist attacks on the World Trade Center. The
incidence, frequency, and severity of catastrophes are inherently unpredictable.
The extent of losses from a catastrophe is a function of both the total amount
of insured exposure in the area affected by the event and the severity of the
event.

OUR RESULTS MAY BE UNFAVORABLY IMPACTED IF WE LOSE OUR GENERAL AGENCY
APPOINTMENT IN OUR COMMERCIAL LINES GROUP OPERATIONS.

In our Commercial Lines Group Operations we are appointed as a
general agent by Clarendon National Insurance Company, which is our sole general
agency appointment. The general agency agreement with Clarendon began in August
2000 and is continuous until cancelled. Under the terms of the agreement,
Clarendon is required to provide at least 180 days notice prior to canceling the
contract. If the agreement is canceled, we will be required to enter into a
general agency agreement with a different insurance company. We cannot be
certain that we would be able to enter into such an agreement or that the terms
of such agreement would be on the same terms and conditions as the agreement
with Clarendon.

WE ARE SUBJECT TO COMPREHENSIVE REGULATION, AND OUR RESULTS MAY BE UNFAVORABLY
IMPACTED BY THESE REGULATIONS.

We are subject to comprehensive governmental regulation and
supervision. Most insurance regulations are designed to protect the interests of
policyholders rather than of the of the stockholders and other investors of the
insurance companies. These regulations, generally administered by the department
of insurance in each state in which we do business, relate to, among other
things;

o Approval of policy forms and rates,

o Standards of solvency, including risk based capital
measurements (which are a measure developed by the National
Association of Insurance Commissioners and used by the state
insurance regulators to identify insurance companies that
potentially are inadequately capitalized),

o Licensing of insurers and their agents,

o Restrictions on the nature, quality and concentration of
investments,

o Restrictions on the ability of our insurance company
subsidiaries to pay dividends,

o Restrictions on transactions between the insurance company
subsidiaries and their affiliates,

o Requiring certain methods of accounting,

o Periodic examinations of operations and finances,

o Prescribing the form and content of records of financial
condition to be filed, and

o Requiring reserves for unearned premium, losses and other
purposes.

State insurance departments also conduct periodic examinations of
the affairs of insurance companies and require filing of annual and other
reports relating to the financial condition of insurance companies, holding
company issues and other matters. Our business depends on compliance with
applicable laws and regulations and our ability to maintain valid licenses and
approvals for our operations. Regulatory authorities may deny or revoke licenses
for various reasons, including violations of regulations. Changes in the level
of regulation of the insurance industry or changes in laws or regulations
themselves or interpretations by regulatory authorities, could have a material
adverse affect on our operations.

During 2002, and for the three months ended March 31, 2003,
approximately 56% and 54%, respectively, of our written premium was in the State
of Texas. During such periods, approximately 71% and 73%, respectively, of the
written premium in the State of Texas was in the non-standard personal
automobile line of business. On June 10, 2003, the Governor of Texas signed
legislation Senate Bill 14, which has been described as comprehensive insurance
reform effecting homeowners and personal automobile business. With respect to
personal automobile insurance, the most significant provisions provide for
additional rate regulation and limitations on the use of credit scoring. With
the new law, broadened rulemaking authority has been given to the Commissioner
of Insurance.

The Company currently writes all of its Texas personal automobile
business pursuant to a fronting arrangement with a Texas County Mutual Insurance
Company. Although the new reforms are significant, the primary rating regulation
provisions do not apply directly to the Company due to an exemption that applies
to certain County Mutual Insurance Companies. Additionally, the Company does not
currently use credit or insurance scoring models. Although we currently do not
believe the changes outlined in Senate Bill 14 have a material adverse affect on
our operations, the Commissioner has been given broad rulemaking authority and
we cannot determine the ultimate outcome and the impact it will have on our
business until certain rules are developed by the Commissioner. Any rule changes
that would affect our ability to charge adequate rates for the non-standard
automobile line of business in the State of Texas would have a material adverse
effect on our operations.

STATE STATUTES LIMIT THE AGGREGATE AMOUNT OF DIVIDENDS THAT OUR SUBSIDIARIES MAY
PAY US, THEREBY LIMITING OUR FUNDS TO PAY EXPENSES AND DIVIDENDS.

We are a holding company and a legal entity separate and distinct
from our insurance company subsidiaries and our non-insurance company
subsidiaries. As a holding company without significant operations of our own,
our principal sources of funds are dividends and other sources of funds from our
subsidiaries. State insurance laws limit the ability of our insurance company
subsidiaries to pay dividends and require the insurance companies to maintain
specified levels of statutory capital and surplus. These restrictions affect the
ability of the insurance company subsidiaries to pay dividends and use their
capital in other ways. Our rights to participate in any distribution of assets
of the insurance company subsidiaries are subject to prior claims of
policyholders and creditors (except to the extent that our rights, if any, as a
creditor are recognized). Consequently, our ability to pay debts, expenses and
cash dividends to our stockholders may be limited.

The maximum dividend that can be paid by American Hallmark Insurance
Company of Texas, without prior regulatory approval, is limited to the greater
of 10% of policyholders' surplus as of the preceding calendar year end or the
statutory net income of the preceding calendar year. The maximum dividend
payout, which may be made without prior regulatory approval, is $839,380 during
2003.

The maximum dividend that can be paid by Phoenix Indemnity Insurance
Company, without prior regulatory approval, is limited to the lesser of 10% of
policyholders' surplus as of the preceding calendar year end or net investment
income for the preceding calendar year. The maximum dividend payout, which may
be made without prior regulatory approval, is $601,688 during 2003.

As of March 31, 2003, there was $302,907 in cash at the holding
company level. The operating cash requirements of the holding company, including
all current debt obligations of the holding company (with the exception of the
Newcastle Notes) are anticipated to be adequately funded from dividends from the

insurance subsidiaries, management fees from the insurance subsidiaries and
payments under tax sharing agreements with subsidiaries.

In the event this offering did not raise sufficient cash to repay
the Newcastle Notes, there would be insufficient cash at the holding company to
repay the Newcastle Notes.

OUR INSURANCE COMPANY SUBSIDIARIES ARE SUBJECT TO MINIMUM CAPITAL AND SURPLUS
REQUIREMENTS. FAILURE TO MEET THESE REQUIREMENTS COULD SUBJECT US TO REGULATORY
ACTION.

Our insurance company subsidiaries are subject to minimum capital
and surplus requirements imposed under the laws of Texas and Arizona. Any
failure by one of the insurance company subsidiaries to meet minimum capital and
surplus requirements imposed by applicable state law will subject it to
corrective action, including requiring adoption of a comprehensive financial
plan, examination and the issuance of a corrective order by the applicable state
insurance department, revocation of its license to sell insurance products or
placing the subsidiary under state regulatory control. Any new minimum capital
and surplus requirements adopted in the future may require us to increase the
capital and surplus of our insurance company subsidiaries which we may not be
able to do.

As of March 31, 2003, American Hallmark Insurance Company of Texas
and Phoenix Indemnity Insurance Company had statutory capital and surplus that
exceeded the minimum policyholders' surplus required by state regulators by 322%
and 587%, respectively.

THE LOSS OF KEY EXECUTIVES COULD DISRUPT OUR BUSINESS.

Our success will depend in part upon the continued service of our
Chairman and Chief Executive Officer, Mark E. Schwarz and our President and
Chief Operating Officer, Timothy A. Bienek. Messrs. Schwarz and Bienek do not
have employment agreements with us. We do not have key person insurance on the
lives of Messrs. Schwarz and Bienek. Our success will also depend on our ability
to attract and retain additional executives and personnel. The loss of key
personnel could cause disruption in our business.

ADVERSE SECURITIES MARKET CONDITIONS CAN HAVE A SIGNIFICANT AND NEGATIVE IMPACT
ON OUR INVESTMENT PORTFOLIO.

Our results of operations depend in part on the performance of our
invested assets. As of March 31, 2003, 69% of our investment portfolio was
invested in fixed maturity securities. Certain risks are inherent in connection
with fixed maturity securities including loss upon default and price volatility
in reaction to changes in interest rates and general market factors. In general,
the fair market value of a portfolio of fixed income securities increases or
decreases inversely with changes in the market interest rates, while net
investment income realized from future investments in fixed income securities
increases or decreases along with interest rates. In addition, some of our fixed
income securities have call or prepayment options. This could subject us to
reinvestment risk should interest rates fall or issuers call their securities
and we reinvest proceeds at lower interest rates. We attempt to mitigate this
risk by investing in securities with varied maturity dates, so that only a
portion of the portfolio will mature at any point in time. Furthermore, actual
net investment income and/or cash flows from investments that carry prepayment
risk (such as mortgage-back and other asset-backed securities) may differ from
those anticipated at the time of investment as a result of interest rate
fluctuations. An investment has prepayment risk when there is a risk that the
timing of cash flows that result from the repayment of principal might occur
earlier than anticipated because of declining interest rates or later than
anticipated because of rising interest rates. The fair value of our fixed income
securities as of March 31, 2003 was $16.0 million. If market interest rates were
to change 1%, (e.g. from 5% to 6%), the fair value of our fixed income
securities would change approximately $0.6 million as of March 31, 2003. The
change in fair value was determined using duration modeling assuming no
prepayments.

Historically, the impact of market fluctuations has only slightly
affected our financial statements since we used an investment strategy
classified as "held to maturity." In 2003, we changed the classification of our
investment portfolio to "available for sale." A classification of "available for
sale" means that changes in the fair market value of our securities are
reflected in our other comprehensive income section of stockholders' equity.
Fluctuations in the fair market value of fixed income securities may greatly
reduce the value of our investment portfolio and, as a result, our financial
condition may suffer. In addition to the general risks described above, although
we maintain an investment grade portfolio (fixed income securities - 71% U. S.
government or U.S. government agencies, 16% municipals and 13% other), our fixed
income securities are also subject to credit risk. If any of the issuers of our
fixed income securities suffer financial set backs, the ratings on the fixed
income securities could fall (with a concurrent fall in market value) and, in a
worst case scenario, the issuer could default on its obligations. Because of the

change in classification of investments to available for sale, future changes in
the fair market value of our securities will be reflected in other comprehensive
income. Similar treatment is not available for liabilities. Therefore, interest
rate fluctuations could adversely affect our shareholders' equity, total
comprehensive income and/or our cash flows.

SINCE WE ARE RELIANT ON INDEPENDENT AGENTS TO MARKET OUR PRODUCTS, THEIR FAILURE
TO DO SO WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.

We principally market our insurance programs through independent
insurance agents. As a result, our business depends in part on the marketing
efforts of these agents and on our ability to offer insurance products and
services that meet the requirements of the agents and customers of these agents.
The agents, however, are not obligated to sell or promote our products and many
sell or promote competitors' insurance products in addition to our products. The
failure or inability of insurance agents to market our insurance products
successfully could have a material adverse impact on our business, financial
condition and results of operations.

During 2002, our top 10 agency groups produced approximately 15% of
our total written premium and no individual agent or group produced more than
3.5% of our total written premium.

MARK E. SCHWARZ, OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER, THROUGH HIS
AFFILIATION WITH NEWCASTLE PARTNERS, L.P., HAS THE ABILITY TO EXERT SIGNIFICANT
INFLUENCE OVER OUR OPERATIONS AND MAY HAVE INTERESTS THAT DIFFER FROM THOSE OF
OUR OTHER STOCKHOLDERS.

Newcastle Partners, L.P. beneficially owns approximately 42.3%
(including outstanding options) of our common stock prior to this offering. If
no stockholders other than Newcastle exercise their subscription rights,
Newcastle will purchase all of the shares in this offering, thereby increasing
its ownership to approximately __%. Mark E. Schwarz, has sole investment and
voting control over the shares beneficially owned by Newcastle and thus has the
ability to exert significant influence over our policies and affairs, including
the election of our board of directors and the approval of any action requiring
stockholder vote, such as amendments to our Articles of Incorporation or
Regulations and approving mergers or sales of substantially all of our assets.
The interests of Mark E. Schwarz and Newcastle may differ from the interests of
our other stockholders in some respects and Mark E. Schwarz and Newcastle may
take action adverse to our other stockholders.

RISKS RELATING TO THIS OFFERING:

THE SUBSCRIPTION PRICE PER SHARE IS NOT AN INDICATION OF OUR VALUE AND YOU MAY
NOT BE ABLE TO SELL SHARES PURCHASED UPON THE EXERCISE OF YOUR SUBSCRIPTION
RIGHTS AT A PRICE EQUAL TO OR GREATER THAN THE SUBSCRIPTION PRICE.

The subscription price per share does not necessarily bear any
relationship to the book value of our assets, operations, cash flows, earnings,
financial condition or any other established criteria for value. As a result,
you should not consider the subscription price as an indication of the current
value of our company or our common stock. We cannot assure you that you will be
able to sell shares purchased in this offering at a price equal to or greater
than the subscription price.

[IF PRICED AT A DISCOUNT] THIS OFFERING MAY CAUSE THE PRICE OF OUR COMMON STOCK
TO DECREASE IMMEDIATELY, AND THIS DECREASE MAY CONTINUE.

The subscription price per share equals ___% of the current market
price of our common stock determined by averaging the closing price of our
common stock on the AMEX for the ten preceding trading days ending on _______,
2003. This discount, along with the number of shares we propose to issue and
ultimately will issue if this offering is completed, may result in an immediate
decrease in the market value of our common stock. This decrease may continue
after the completion of this offering.

AS A HOLDER OF COMMON STOCK, YOU MAY SUFFER SIGNIFICANT DILUTION OF YOUR
PERCENTAGE OWNERSHIP OF OUR COMMON STOCK.

If you do not exercise your subscription rights and shares are
purchased by other stockholders in this offering, your proportionate voting and
ownership interest will be reduced and the percentage that your original shares
represent of our expanded equity after exercise of the subscription rights will
be diluted. For example, if you own 200,000 shares of our common stock before
this offering, or approximately 1.8% of our outstanding common stock, and you
exercise none of your subscription rights while all other subscription rights
are exercised by other stockholders, then your percentage ownership would be

reduced to approximately ___%. The magnitude of the reduction of your percentage
ownership will depend upon the extent to which you exercise your subscription
rights.

ONCE YOU EXERCISE YOUR SUBSCRIPTION RIGHTS, YOU MAY NOT REVOKE SUCH EXERCISE
EVEN IF THERE IS A DECLINE IN OUR COMMON STOCK PRICE.

The public trading market price of our common stock may decline
after you elect to exercise your subscription rights. If that occurs, you may
have committed to buy shares of common stock at a price above the prevailing
market price and you will have an immediate unrealized loss. Moreover, we cannot
assure you that following the exercise of subscription rights you will be able
to sell your shares of common stock at a price equal to or greater than the
subscription price.

YOU MAY NOT REVOKE THE EXERCISE OF YOUR RIGHTS EVEN IF WE DECIDE TO EXTEND THE
EXPIRATION DATE OF THE SUBSCRIPTION PERIOD.

We may, in our sole discretion, extend the expiration date of the
subscription period. During any potential extension of time, our common stock
price may decline below the subscription price and result in a loss on your
investment upon the exercise of rights to acquire shares of our common stock. If
the expiration date is extended after you send in your subscription forms and
payment, you still may not revoke or change your exercise of rights.

YOU WILL NOT RECEIVE INTEREST ON SUBSCRIPTION FUNDS RETURNED TO YOU.

If we cancel this offering, neither we nor the subscription agent
will have any obligation with respect to the subscription rights except to
return, without interest, any subscription payments to you.

THE SUBSCRIPTION RIGHTS ARE NOT TRANSFERABLE AND THERE IS NO MARKET FOR THE
SUBSCRIPTION RIGHTS.

You may not sell, give away or otherwise transfer your subscription
rights. The subscription rights are only transferable to your affiliates and by
operation of law. Because the subscription rights are non-transferable, there is
no market or other means for you to directly realize any value associated with
the subscription rights. You must exercise the subscription rights and acquire
additional shares of our common stock to realize any value.

BECAUSE WE MAY TERMINATE THIS OFFERING, YOUR PARTICIPATION IN THE OFFERING IS
NOT ASSURED.

Once you exercise your subscription rights, you may not revoke the
exercise for any reason unless we amend this offering. If we decide to terminate
the offering, we will not have any obligation with respect to the subscription
rights except to return any subscription payments, without interest.

YOU NEED TO ACT PROMPTLY AND FOLLOW SUBSCRIPTION INSTRUCTIONS, OTHERWISE YOUR
SUBSCRIPTION MAY BE REJECTED.

Stockholders who desire to purchase shares in this offering must act
promptly to ensure that all required forms and payments are actually received by
the subscription agent prior to 5:00 p.m., New York City time, on the expiration
date. If you fail to complete and sign the required subscription forms, send an
incorrect payment amount, or otherwise fail to follow the subscription
procedures that apply to your desired transaction, the subscription agent may,
depending on the circumstances, reject your subscription or accept it to the
extent of the payment received. Neither we nor our subscription agent undertakes
to contact you concerning, or attempt to correct, an incomplete or incorrect
subscription form or payment. We have the sole discretion to determine whether a
subscription exercise properly follows the subscription procedures.

MOST, IF NOT ALL, OF THE PROCEEDS OF THIS OFFERING WILL BE USED TO REPAY A LOAN
TO AN AFFILIATE AND THEREFOR WILL NOT BE AVAILABLE FOR WORKING CAPITAL OR OTHER
GENERAL CORPORATE PURPOSES.

The proceeds from this offering will be used to repay the $8.6
million bridge loan from Newcastle, our largest stockholder, plus accrued
interest on such loan. Therefore, most, if not all, of the proceeds of this
offering will not be available to us for working capital or other general
corporate purposes. Mark E. Schwarz, our Chairman and Chief Executive Officer,
is the managing member of the general partners of the general partner of
Newcastle.

RISKS RELATING TO OUR COMMON STOCK:

OUR COMMON STOCK IS VOLATILE AND THE VALUE OF ANY INVESTMENT IN OUR COMMON STOCK
MAY FLUCTUATE.

The market price for our common stock has been, and is likely to
continue to be, highly volatile. The market for our common stock is subject to
fluctuations as a result of a variety of factors, including factors beyond our
control. These include:

o current expectations of our future revenue and earnings growth
rates;

o changes in market valuations of similar companies;

o conditions or trends in the industry;

o general market and economic conditions; and

o other events or factors that are unforeseen.

Our common stock has traded on the American Stock Exchange's
Emerging Marketplace under the symbol "HAF.EC" since January 6, 1994. During the
past two years, the price per share of our common stock has ranged from a low of
$0.30 to a high of $1.05. See "Price Range of Common Stock."

SINCE WE DO NOT INTEND TO PAY DIVIDENDS ON SHARES OF OUR COMMON STOCK IN THE
FORESEEABLE FUTURE, AN INVESTOR WILL ONLY SEE A RETURN ON HIS INVESTMENT IF THE
VALUE OF THE SHARES APPRECIATES.

We currently expect to retain our future earnings, if any, to reduce
debt and for use in the operation of our business. We do not anticipate paying
any cash dividends on shares of our common stock in the foreseeable future.
Therefore, an investor will only see a return on his investment if the value of
the shares appreciates.

OUR COMPANY

We engage in the sale of property and casualty insurance products.
Our business involves (i) marketing, underwriting and premium financing of
non-standard personal automobile insurance primarily in Texas, Arizona and New
Mexico, (ii) commercial insurance in Texas, New Mexico, Idaho, Oregon and
Washington, (iii) third party claims administration and (iv) other insurance
related services. Our principal executive offices are located at 777 Main
Street, Suite 1000, Fort Worth, Texas 76102, and our telephone number is (817)
348-1600.

USE OF PROCEEDS

The gross proceeds from the exercise of the subscription rights in
this offering will be approximately $10.0 million. We will use the proceeds of
this offering to fully repay $8.6 million in loans, plus accrued interest on
such loans, made to us by Newcastle.

On November 1, 2002, Newcastle Partners, L.P. provided an interim
financing facility to us, whereby we could borrow up to $9 million. On November
1, 2002, we borrowed $6.5 million to purchase, at a discount, a $14.85 million
promissory note in default, payable by Millers American Group, Inc. ("Millers").
In addition, on December 3, 2002, we borrowed an additional $2.1 million from
Newcastle Partners to purchase the Commercial Lines Group from Millers Insurance
Company ("MIC"). The purchase of the note receivable was determined by
arm's-length negotiations between us and the seller of the note. The purchased
note is guaranteed by Trilogy Holdings, Inc. ("Trilogy"), a wholly-owned
intermediate holding company subsidiary of Millers, and is secured by all of the
issued and outstanding common stock of Millers Insurance Company ("MIC"), a
Texas based property and casualty insurance carrier, and Phoenix Indemnity
Insurance Company ("Phoenix"), an Arizona based property and casualty insurance
carrier, each of which is a wholly-owned subsidiary of Trilogy.

into additional states outside our traditional Texas base. The remaining $7.85
million principal balance of the note receivable exceeded our basis in such
note, and therefore could not be carried on our balance sheet. We also do not
have any unpaid or accrued interest on such note reflected on our balance sheet.
We do not expect to collect any additional amounts on the note receivable due to
the fact that Millers is a holding company, which no longer has any ongoing
operations. Millers' principal operating subsidiaries were Phoenix and MIC. MIC
was placed in receivership by the Texas Department of Insurance in February
2003. At this time, Millers has no known operations or material assets of any
kind.

The interim financing facility provides for fixed interest rate of
11.75%. The unpaid principal balance and accrued and unpaid interest is due and
payable at any time after September 30, 2003.

Mark E. Schwarz, our Chairman and Chief Executive Officer, is the
managing member of Newcastle Capital Group, L.L.C., which is the general partner
of Newcastle Capital Management, L.P., which in turn is the general partner of
Newcastle Partners, L.P.

We intend to use the remaining net proceeds, if any, as additional
working capital for our business and for other general corporate purposes.

CAPITALIZATION

The following table sets forth our summary capitalization as of
March 31, 2003 on an historical basis and should be read in conjunction with our
financial statements and notes thereto incorporated by reference into this
prospectus. The table also includes our capitalization on a pro forma basis
assuming the completion of this offering and the use of the net proceeds for the
repayment of the Newcastle Notes, but prior to the use of the remaining
proceeds. See "Use of Proceeds."

Actual Pro Forma
------ ---------
(in thousands) (in thousands)

Total debt (excluding advances for financed premiums)
Short-term debt ......................................................... 8,600 0
Long-term debt .......................................................... 1,565 1,565

Total debt ......................................................... $ 10,165 $ 1,565

Stockholders' equity:
Common stock, $.03 par value, authorized 100,000,000 shares, issued
11,855,610 ........................................................ $ 356 $_____
Capital in excess of par value .................................... 10,725 _____
Retained earnings ................................................. 7,067 7,067
Accumulated other comprehensive income
(loss) ............................................................ (127) (127)
Treasury stock, 806,477 shares, at cost ........................... (892) (892)

Total stockholders' equity .................................. 17,129 _____

Total capitalization .................................................... $ 27,294 $_____

PRICE RANGE OF COMMON STOCK

Our common stock has traded on the American Stock Exchange Emerging
Company Marketplace under the symbol "HAF.EC" since January 6, 1994. On July 7,
2003, the closing price of our common stock was $1.03 per share. The following
table shows the common stock's high and low sales prices on the AMEX for the
periods indicated.

Period High Sale Low Sale

2001:
-----
First Quarter $ 0.69 $ 0.50
Second Quarter 0.65 0.50
Third Quarter 0.61 0.43
Fourth Quarter 0.60 0.40

2002:
-----
First Quarter $ 0.60 $ 0.40
Second Quarter 0.60 0.40
Third Quarter 0.54 0.35
Fourth Quarter 0.70 0.30

2003:
-----
First Quarter $ 0.75 $ 0.50
Second Quarter 0.95 0.65
Third Quarter
(through July 7) 1.05 0.87

On July 7, 2003 there were approximately 160 record holders and
approximately 560 beneficial stockholders of our common stock.

We have never paid dividends on our common stock and we intend to
continue this policy for the foreseeable future in order to retain earnings for
development of our business.

THE OFFERING

Our Board of Directors has proposed that we attempt to raise equity
capital through this offering to all of our stockholders and to use the proceeds
from the subscription of such rights to repay the Newcastle Notes. Any remaining
proceeds would be used for working capital purposes. The Board declared a
dividend of rights to purchase our common stock to holders of record as of June
27, 2003. Through this prospectus, we are offering the shares of common stock
that rights holders may purchase upon exercising such subscription rights.

REASONS FOR THIS OFFERING

In approving this offering, our Board of Directors carefully
considered our need for additional capital and several alternative capital
raising methods, including a credit facility and a private placement of equity
securities. The Board also considered the potential change in control by
Newcastle and the potential dilution of the ownership percentage of our current
common stockholders caused by this offering. While the ownership percentage of
our current common stockholders may decrease, the Board considered that the
magnitude of this dilution would be subject to, and dependent upon, the decision
of each common stockholder whether to exercise their subscription rights for
additional shares of our common stock in this offering.

After weighing the factors discussed above and the effect of this
offering of generating $10.0 million (less expenses related to the offering) in
additional capital for us, the board of directors believes that this offering is
the best alternative for capital raising and is in the best interests of our
company and our stockholders. As described in "Use of Proceeds," the proceeds of
this offering are intended to be used to repay the Newcastle Notes and any
remaining amounts will be used for additional working capital for our business
and other general corporate purposes.

Our Board of Directors believes that this offering will ultimately
strengthen our financial condition through generating additional cash, reducing
our indebtedness, and increasing our stockholders' equity. See "Use of Proceeds"
and "Capitalization". However, our board of directors is not making any
recommendation as to whether you should exercise your subscription rights.

SUBSCRIPTION RIGHTS

BASIC SUBSCRIPTION PRIVILEGE. We distributed to the holders of
record of our common stock, at the close of business on June 27, 2003, at no
charge, one nontransferable subscription right for each share of our common
stock they own. The subscription rights will be evidenced by rights
certificates. Each subscription right will entitle the holder to purchase
_______ shares of our common stock. You are not required to exercise any or all
of your subscription rights.

If, pursuant to your exercise of your subscription rights, the
number of shares of common stock you are entitled to receive would result in
your receipt of fractional shares, the aggregate number of shares issued to you
will be rounded down to the nearest whole number. You will not receive cash in
lieu of fractional shares.

OVER-SUBSCRIPTION PRIVILEGE. Subject to the allocation described
below, each subscription right also grants each subscription rights holder an
over-subscription privilege to purchase additional shares of our common stock
that are not purchased by other rights holders pursuant to the other rights
holders' basic subscription privileges. You are entitled to exercise your
over-subscription privilege only if you exercise your basic subscription
privilege in full.

If you wish to exercise your over-subscription privilege, you should
indicate the number of additional shares that you would like to purchase in the
space provided on your subscription certificate. When you send in your
subscription certificate, you must also send the full purchase price for the
number of additional shares that you have requested to purchase (in addition to
the payment due for shares purchased through your basic subscription privilege).
If the number of shares remaining after the exercise of all basic subscription
privileges is not sufficient to satisfy all requests for shares pursuant to
over-subscription privileges, you will be allocated additional shares pro-rata
(subject to elimination of fractional shares), based on the number of shares you
purchased through the basic subscription privilege in proportion to the total
number of shares that you and other over-subscribing stockholders purchased
through the basic subscription privilege. However, if your pro-rata allocation
exceeds the number of shares you requested on your subscription certificate,
then you will receive only the number of shares that you requested, and the
remaining shares from your pro-rata allocation will be divided among other
rights holders exercising their over-subscription privileges.

As soon as practicable after the expiration date, Securities
Transfer Corporation, acting as our subscription agent, will determine the
number of shares of common stock that you may purchase pursuant to the
over-subscription privilege. You will receive certificates representing these
shares as soon as practicable after the expiration date and after all
pro-rations and adjustments have been effected. If you request and pay for more
shares than are allocated to you, we will refund that overpayment, without
interest. In connection with the exercise of the over-subscription privilege,
banks, brokers and other nominee holders of subscription rights who act on
behalf of beneficial owners will be required to certify to us and to the
subscription agent as to the aggregate number of subscription rights that have
been exercised, and the number of shares of common stock that are being
requested through the over-subscription privilege, by each beneficial owner on
whose behalf the nominee holder is acting.

SUBSCRIPTION PRICE

The subscription price for a subscription right is $_____ per share.
The per share price equals ___% of the current market price of our common stock
determined by averaging the closing price of our common stock on the AMEX for
the ten preceding trading days ending on ______, 2003. The subscription price
does not necessarily bear any relationship to our past or expected future
results of operations, cash flows, current financial condition, or any other
established criteria for value. No change will be made to the cash subscription
price by reason of changes in the trading price of our common stock prior to the
closing of this offering.

DETERMINATION OF SUBSCRIPTION PRICE

Our board of directors set all of the terms and conditions of this
offering, including the subscription price, which was based on the
recommendation of a special committee of directors, excluding those directors
affiliated with Newcastle who did not participate (in their capacity as
directors) in the discussion, consideration or voting with respect to these
matters. In establishing the subscription price, our board of directors
considered the following factors:

o strategic alternatives for capital raising,

o the market price of our common stock,

o the pricing of similar transactions,

o the amount of proceeds desired,

o our business prospects,

o our recent and anticipated operating results, and

o general conditions in the securities markets.

We determined the ___% [premium][discount] to our current market
price after taking into account the preceding factors. We did not seek or obtain
any opinion of financial advisors or investment bankers in establishing the
subscription price for the offering. You should not consider the subscription
price as an indication of the value of our company or our common stock. We
cannot assure you that you will be able to sell shares purchased during this
offering at a price equal to or greater than the subscription price. On July 7,
2003, the closing sale price of our common stock was $1.03 per share.

EXPIRATION DATE, EXTENSIONS AND TERMINATION

You may exercise your subscription right at any time before 5:00
p.m., New York City time, on ______, 2003, the expiration date for this
offering. However, we may extend the offering period for exercising your
subscription rights from time to time in our sole discretion. If you do not
exercise your subscription rights before the expiration date, your unexercised
subscription rights will be null and void. We will not be obligated to honor
your exercise of subscription rights if the subscription agent receives the
documents relating to your exercise after the expiration date, regardless of
when you transmitted the documents, unless you have timely transmitted the
documents under the guaranteed delivery procedures described below.

We have the sole discretion to extend the expiration date from time
to time by giving oral or written notice to the subscription agent on or before
the scheduled expiration date. If we elect to extend the expiration of this
offering, we will issue a press release announcing the extension no later than
9:00 a.m., New York City time, on the next business day after the most recently
announced expiration date.

WITHDRAWAL AND AMENDMENT

We reserve the right to withdraw or terminate this offering at any
time for any reason. In the event that this offering is withdrawn or terminated,
all funds received from subscriptions by stockholders will be returned. Interest
will not be payable on any returned funds.

We reserve the right to amend the terms of this offering. If we make
an amendment that we consider significant, we will:

o mail notice of the amendment to all stockholders of record as
of the record date;

o extend the expiration date by at least 10 days; and

o offer all subscribers no less than 10 days to revoke any
subscription already submitted.

The extension of the expiration date will not, in and of itself, be
treated as a significant amendment for these purposes.

METHOD OF SUBSCRIPTION - EXERCISE OF SUBSCRIPTION RIGHTS

You may exercise your subscription rights by delivering the
following to the subscription agent, at or prior to 5:00 p.m., New York City
time, on ______________, 2003, the date on which the rights expire:

o your properly completed and executed rights certificate with
any required signature guarantees or other supplemental
documentation; and

o your full subscription price payment for each share subscribed
for under your basic subscription privilege and your
over-subscription privilege.

You should read and follow the instructions accompanying the rights certificate
carefully.

SIGNATURE GUARANTEE MAY BE REQUIRED

Your signature on each rights certificate must be guaranteed by an
eligible institution such as a member firm of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc., or
from a commercial bank or trust company having an office or correspondent in the
United States, subject to standards and procedures adopted by the subscription
agent, unless:

o your rights certificate provides that shares are to be
delivered to you as record holder of those subscription rights;
or

o you are an eligible institution.

DELIVERY OF SUBSCRIPTION MATERIALS AND PAYMENT

You should deliver your rights certificate and payment of the
subscription price or, if applicable, notice of guaranteed delivery, to the
subscription agent by mail, by hand or by overnight courier to: Securities
Transfer Corporation, 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034. The
subscription agent's telephone number is (469) 633-0101.

You are responsible for the method of delivery of your rights
certificate(s) with your subscription price payment to the subscription agent.
If you send your rights certificate(s) and subscription price payment by mail,
we recommend that you send them by registered mail, properly insured, with
return receipt requested. You should allow a sufficient number of days to ensure
delivery to the subscription agent prior to the time this offering expires.

Do not send your rights certificate(s) and subscription price
payment to us. Your delivery to an address other than the address set forth
above will not constitute valid delivery.

METHOD OF PAYMENT

Your payment of the subscription price must be made in U.S. dollars
for the full number of shares of common stock you are subscribing (or
over-subscribing) for by either:

o check or bank draft (cashier's check) drawn upon a U.S. bank or
money order payable to the subscription agent; or

o wire transfer of immediately available funds, to the
subscription account maintained by the subscription agent at
Wells Fargo Bank Texas, N.A., ABA # 111900659, Account #
9278791711, Account Name: Securities Transfer Corporation Trust
Account for Hallmark Financial.

RECEIPT OF PAYMENT

Your payment will be considered received by the subscription agent
only upon:

o receipt and clearance of any uncertified check,

o receipt by the subscription agent of any certified check or
bank draft drawn upon a United States bank, any money order or
any funds transferred by wire transfers, or

o receipt of good funds in the subscription agent's account
designated above.

Please note that funds paid by uncertified personal check may take
at least five business days to clear. Accordingly, if you wish to pay by means
of an uncertified personal check, we urge you to make payment sufficiently in

advance of the expiration date to ensure that the subscription agent receives
cleared funds before that date. We also urge you to consider payment by means of
a certified or cashier's check or money order.

CALCULATION OF SUBSCRIPTION RIGHTS EXERCISED

If you do not indicate the number of subscription rights being
exercised, or do not forward full payment of the total subscription price for
the number of subscription rights that you indicate are being exercised, then
you will be deemed to have exercised your basic subscription privilege with
respect to the maximum number of rights that may be exercised with the aggregate
subscription price payment you delivered to the subscription agent.

YOUR FUNDS WILL BE HELD BY THE SUBSCRIPTION AGENT UNTIL SHARES OF COMMON STOCK
ARE ISSUED

The subscription agent will hold your payment of the subscription
price payment in a segregated account with other payments received from other
rights holders until we issue your shares to you. If this offering is not
completed, or we do not apply your full subscription price payment to your
purchase of shares of our common stock, the subscription agent will return
promptly, without interest, all excess subscription payments.

NO REVOCATION

Once you have exercised your subscription privileges, you may not
revoke your exercise. Subscription rights not exercised prior to the expiration
date of this offering will expire.

NON-TRANSFERABILITY OF THE SUBSCRIPTION RIGHTS

Except in the limited circumstances described below, only you may
exercise the basic subscription privilege and the over-subscription privilege.
You may not sell, give away or otherwise transfer the basic subscription
privilege or the over-subscription privilege.

Notwithstanding the foregoing, you may transfer your rights to any
affiliate of yours and your rights also may be transferred by operation of law;
for example a transfer of rights to the estate of the recipient upon the death
of the recipient would be permitted. As used in this paragraph, an affiliate of
yours shall mean any person (for this purpose, a person includes a partnership,
corporation or other legal entity such as a trust or estate) which controls, is
controlled by or is under common control with you. If the rights are transferred
as permitted, evidence satisfactory to us that the transfer was proper must be
received by us prior to the expiration date of this offering.

ISSUANCE OF STOCK CERTIFICATES

Stock certificates for shares purchased in this offering will be
issued as soon as practicable after the expiration date. Our subscription agent
will deliver subscription payments to us only after consummation of this
offering and the issuance of stock certificates to our stockholders that
exercised rights. Unless you instruct otherwise in your subscription certificate
form, shares purchased by the exercise of subscription rights will be registered
in the name of the person exercising the rights.

GUARANTEED DELIVERY PROCEDURES

If you wish to exercise your subscription rights, but you do not
have sufficient time to deliver the rights certificate evidencing your rights to
the subscription agent on or before the time your subscription rights expire,
you may exercise your subscription rights by the following guaranteed delivery
procedures:

o deliver your subscription price payment in full for each share
you subscribed for under your subscription privileges in the
manner set forth in "- Method of Payment" to the subscription
agent on or prior to the expiration date;

o deliver the form entitled "Notice of Guaranteed Delivery,"
substantially in the form provided with the "Instructions as to
Use of Rights Certificates" distributed with your rights
certificates, at or prior to the expiration date; and

o deliver the properly completed rights certificate evidencing
your rights being exercised and the related nominee holder
certification, if applicable, with any required signatures
guaranteed, to the subscription agent within three business
days following the date of your Notice of Guaranteed Delivery.

Your Notice of Guaranteed Delivery must be delivered in
substantially the same form provided with the Instructions as to Use of Rights
Certificates, which will be distributed to you with your rights certificate.

Your Notice of Guaranteed Delivery must come from an eligible institution, or
other eligible guarantee institutions which are members of, or participants in,
a signature guarantee program acceptable to the subscription agent.

In your Notice of Guaranteed Delivery, you must state:

o your name;

o the number of subscription rights represented by your rights
certificates and the number of shares of our common stock you
are subscribing (and over-subscribing) for; and

o your guarantee that you will deliver to the subscription agent
any rights certificates evidencing the subscription rights you
are exercising within three business days following the date
the subscription agent receives your Notice of Guaranteed
Delivery.

You may deliver your Notice of Guaranteed Delivery to the
subscription agent in the same manner as your rights certificates at the address
set forth above under " - Delivery of Subscription Materials and Payment."
Alternatively, you may transmit your Notice of Guaranteed Delivery to the
subscription agent by facsimile transmission (Facsimile No.: (469) 633-0088). To
confirm facsimile deliveries, you may call (469) 633-0101.

Please call Timothy A. Bienek , our President and Chief Operating
Officer, at (817) 348-1600, to request any additional copies of the form of
Notice of Guaranteed Delivery you may need.

DETERMINATIONS REGARDING THE EXERCISE OF YOUR SUBSCRIPTION RIGHTS

We will decide all questions concerning the timeliness, validity,
form and eligibility of your exercise of your subscription rights and our
determinations will be final and binding. We, in our sole discretion, may waive
any defect or irregularity, or permit a defect or irregularity to be corrected
within such time as we may determine. We may reject the exercise of any of your
subscription rights because of any defect or irregularity. We will not receive
or accept any subscription until all irregularities have been waived by us or
cured by you within such time as we decide, in our sole discretion.

Neither we nor the subscription agent will be under any duty to
notify you of any defect or irregularity in connection with your submission of
rights certificates and we will not be liable for failure to notify you of any
defect or irregularity. We reserve the right to reject your exercise of
subscription rights if your exercise is not in accordance with the terms of this
offering or in proper form. We will also not accept your exercise of rights if
our issuance of shares of our common stock to you could be deemed unlawful under
applicable law or is materially burdensome to us.

If you are given notice of a defect in your subscription, you will
have five business days after the giving of notice to correct it. You will not,
however, be allowed to cure any defect later than 5:00 p.m., New York City time,
on _______, 2003. We will not consider an exercise to be made until all defects
have been cured or waived.

NOTICE TO BANKERS, TRUSTEES OR OTHER DEPOSITARIES

If you are a broker, a trustee or a depositary for securities who
holds shares of our common stock for the account of others at the close of
business on the record date, you should notify the respective beneficial owners
of such shares of this offering as soon as possible to find out their intentions
with respect to exercising their subscription rights. You should obtain
instructions from the beneficial owners with respect to the subscription rights,
as set forth in the instructions we have provided to you for your distribution
to beneficial owners. If the beneficial owner so instructs, you should complete
the appropriate rights certificates and submit them to the subscription agent
with the proper payment. If you hold shares of our common stock for the accounts
of more than one beneficial owner, you may exercise the number of subscription
rights to which all such beneficial owners in the aggregate otherwise would have
been entitled had they been direct record holders of our common stock on the
record date, provided that you, as a nominee record holder, make a proper
showing to the subscription agent by submitting the form entitled "Nominee
Holder Certification" which we will provide to you with your offering materials.

NOTICE TO BENEFICIAL OWNERS

If you are a beneficial owner of shares of our common stock or will
receive your subscription rights through a broker, custodian bank or other
nominee, we will ask your broker, custodian bank or other nominee to notify you
of this offering. If you wish to exercise your subscription rights, you will
need to have your broker, custodian bank or other nominee act for you. If you
hold certificates of our common stock directly and would prefer to have your
broker, custodian bank or other nominee exercise your subscription rights, you
should contact your nominee and request it to effect the transaction for you. To
indicate your decision with respect to your subscription rights, you should
complete and return to your broker, custodian bank or other nominee the form
entitled "Beneficial Owner Election Form." You should receive this form from
your broker, custodian bank or other nominee with the other offering materials.
If you wish to obtain a separate rights certificate, you should contact the
nominee as soon as possible and request that a separate rights certificate be
issued to you.

SHARES OF COMMON STOCK OUTSTANDING AFTER THIS OFFERING

Upon the issuance of the shares of common stock offered in this
offering, _________ shares of common stock will be issued and outstanding. This
would represent an approximate ___% increase in the number of outstanding shares
of common stock.

EFFECTS OF OFFERING ON OUR STOCK OPTION PLANS AND OTHER PLANS

As of July 7, 2003, there were outstanding options to purchase
1,478,500 shares of our common stock issued or committed to be issued pursuant
to stock options granted by us. None of the outstanding options have
anti-dilution or other provisions for adjustment to exercise price or number of
shares which will be automatically triggered by this offering. Each outstanding
and unexercised option will remain unchanged and will be exercisable for the
same number of shares of common stock and at the same exercise price as before
this offering.

RELATIONSHIP WITH NEWCASTLE

Our primary purpose for acquiring the note receivable was to
exchange a portion of the note receivable for 100% of the outstanding common
stock of Phoenix. Effective January 1, 2003, we exchanged $7 million of the note
receivable for 100% of the outstanding common stock of Phoenix. As of December
31, 2002 the book value of Phoenix was approximately $15.6 million. The
acquisition allowed us to expand our current property and casualty operations
into additional states outside our traditional Texas base. The remaining $7.85
million principal balance of the note receivable exceeded our basis in such
note, and therefore could not be carried on our balance sheet. We also do not
have any unpaid or accrued interest on such note reflected on our balance sheet.
We do not expect to collect any additional amounts on the note receivable due to
the fact that Millers is a holding company, which no longer has any ongoing
operations. Millers' principal operating subsidiaries were Phoenix and MIC. MIC
was placed in receivership by the Texas Department of Insurance in February
2003. At this time, Millers has no known operations or material assets of any
kind.

The interim financing facility provides for fixed interest rate of
11.75%. The unpaid principal balance and accrued and unpaid interest is due and
payable at any time after September 30, 2003.

Newcastle Partners, L.P. also currently owns 5,334,001 shares of our
common stock (including currently exercisable options to purchase 50,000 shares
of common stock), which is equal to approximately 42.3% of our outstanding
shares of common stock. Mark E. Schwarz is deemed to beneficially own all of the
shares owned by Newcastle due to his affiliation therewith. Newcastle has been
offered its pro rata portion of the subscription rights (including
over-subscription privilege). If our other stockholders purchase all of the
shares offered to them for sale, Newcastle will purchase its pro rata amount and
would continue to beneficially own approximately 42.3% of our common stock
outstanding. If no stockholders other than Newcastle exercise their subscription
rights, Newcastle will purchase up to __________ shares in the offering. In that
case, Newcastle's ownership interest could be approximately __%, and the
aggregate ownership interest of the other outstanding stockholders could
decrease to approximately __%. Even if some stockholders other than Newcastle
exercise their rights, Newcastle could still obtain a majority ownership
interest pursuant to its subscription rights. As a result, Newcastle may have
the voting power to control the election of our board of directors and the
approval of other matters presented for consideration by the stockholders, which
could include mergers, acquisitions, amendments to our charter and various
corporate governance actions.

SUBSCRIPTION AGENT

We have appointed Securities Transfers Corporation as subscription
agent for this offering. We will pay the fees and certain expenses of the
subscription agent, which we estimate will total approximately $5,000. Under
certain circumstances, we may indemnify the subscription agent from certain
liabilities that may arise in connection with this offering.

FEES AND EXPENSES

Other than for fees charged by the information agent and the
subscription agent, you are responsible for paying any other commissions, fees,
taxes or other expenses incurred in connection with the exercise of the
subscription rights. Neither us, the information agent nor the subscription
agent will pay such expenses.

OTHER MATTERS

We are not making this offering in any state or other jurisdiction
in which it is unlawful to do so, nor are we selling or accepting any offers to
purchase any shares of our common stock from rights holders who are residents of
those states or other jurisdictions. We may delay the commencement of this
offering in those states or other jurisdictions, or change the terms of this
offering, in order to comply with the securities law requirements of those
states or other jurisdictions. We may decline to make modifications to the terms
of this offering requested by those states or other jurisdictions, in which
case, if you are a resident in those states or jurisdictions, you will not be
eligible to participate in this offering.

We will not be required to issue to you shares of common stock
pursuant to this offering if, in our opinion, you would be required to obtain
prior clearance or approval from any state or federal regulatory authority to
own or control such shares if, at the time the subscription rights expire, you
have not obtained such clearance or approval.

NO BOARD RECOMMENDATION

An investment in shares of our common stock must be made according
to each investor's evaluation of its own best interests. Accordingly, our board
of directors makes no recommendation to rights holders regarding whether they
should exercise their subscription rights.

IF YOU HAVE QUESTIONS ABOUT EXERCISING RIGHTS

If you have questions or need assistance concerning the procedure
for exercising subscription rights, or if you would like additional copies of
this prospectus, the Instructions as to Use of Rights Certificates or the Notice
of Guaranteed Delivery, you should contact Timothy A. Bienek, our President and
Chief Operating Officer, or the subscription agent at the following addresses
and telephone numbers:

Timothy A. Bienek
Hallmark Financial Services, Inc.
777 Main Street, Suite 1000
Fort Worth, Texas 76201
Telephone: (817) 348-1600

The Subscription Agent:
Securities Transfer Corporation
2591 Dallas Parkway, Suite 102
Frisco, Texas 75034
Telephone: (469) 633-0101

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following discussion is a summary of the material U.S. federal
income tax consequences of (i) the dividend by us of subscription rights to
holders of common stock that hold such stock as a capital asset for federal
income tax purposes, and (ii) the exercise of such rights. This discussion is
based on laws, regulations, rulings and decisions in effect on the date of this
prospectus, all of which are subject to change (possibly with retroactive
effect) and to differing interpretations. This discussion applies only to
holders that are U.S. persons, which is defined as a citizen or resident of the
United States, a domestic partnership, a domestic corporation, any estate (other
than a foreign estate), and any trust so long as a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more U.S. persons have the authority to control all substantial
decisions of the trust. Generally, for federal income tax purposes an estate is
classified as a "foreign estate" based on the location of the estate assets, the
country of the estate's domiciliary administration, and the nationality and
residency of the domiciliary's personal representative.

This discussion does not address all aspects of federal income
taxation that may be relevant to holders in light of their particular
circumstances or to holders who may be subject to special tax treatment under
the Internal Revenue Code of 1986, as amended, including holders of options or
warrants, holders who are dealers in securities or foreign currency, foreign
persons (defined as all persons other than U.S. persons), insurance companies,
tax-exempt organizations, banks, financial institutions, broker-dealers, holders
who hold common stock as part of a hedge, straddle, conversion or other risk
reduction transaction, or who acquired common stock pursuant to the exercise of
compensatory stock options or warrants or otherwise as compensation.

We have not sought, and will not seek, an opinion of counsel or a
ruling from the Internal Revenue Service regarding the federal income tax
consequences of the distribution of the rights or the related share issuance.
The following summary does not address the tax consequences of the distribution
of the rights or the related share issuance under foreign, state, or local tax
laws. ACCORDINGLY, EACH HOLDER OF COMMON STOCK SHOULD CONSULT ITS OWN TAX
ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION OF
THE RIGHTS OR THE RELATED SHARE ISSUANCE TO SUCH HOLDER.

The federal income tax consequences for a holder of common stock on
the receipt of subscription rights and the exercise of such rights are as
follows:

o A holder will not recognize taxable income for federal income
tax purposes in connection with the receipt of subscription
rights.

o Except as provided in the following sentence, the tax basis of
the subscription rights received by a holder will be zero. If
either (i) the fair market value of the subscription rights on
the date such subscription rights are distributed is equal to
at least 15% of the fair market value on such date of the
common stock with respect to which the subscription rights are
received or (ii) the holder irrevocably elects, by attaching a
statement to its federal income tax return for the taxable year
in which the subscription rights are received, to allocate part
of the tax basis of such common stock to the subscription

rights, then upon exercise of the subscription rights, the
holder's tax basis in the common stock will be allocated
between the common stock and the subscription rights in
proportion to their respective fair market values on the date
the subscription rights are distributed. A holder's holding
period for the subscription rights received will include the
holder's holding period for the common stock with respect to
which the subscription rights were received. We believe that
the fair market value of the subscription rights will not
exceed 15% of the fair market value of the common stock to
which the subscription rights relate.

o A holder that allows the subscription rights received to expire
will not recognize any gain or loss, and the tax basis of the
common stock owned by such holder with respect to which such
subscription rights were distributed will be equal to the tax
basis of such common stock immediately before the receipt of
the subscription rights.

o A holder will not recognize any gain or loss upon the exercise
of the subscription rights.

o The tax basis of the common stock acquired through exercise of
the subscription rights will equal the sum of the subscription
price for the common stock and the holder's tax basis, if any,
in the subscription rights as described above.

o The holding period for the common stock acquired through
exercise of the subscription rights will begin on the date the
subscription rights are exercised.

PLAN OF DISTRIBUTION

We are offering the shares of our common stock underlying the rights
directly to you. We have not employed any brokers, dealers or underwriters in
connection with the solicitation or exercise of subscription rights in this
offering and no commissions, fees or discounts will be paid in connection with
this offering. Securities Transfer Corporation is acting as our subscription
agent to effect the exercise of the rights and the issuance of the underlying
shares of common stock. Therefore, we anticipate that our officers' and
employees' role will be limited to:

o Responding to inquiries of potential purchasers, provided the
response is limited to information contained in the
registration statement of which this prospectus is a part; and

o Ministerial and clerical work involved in effecting
transactions pertaining to the sale of the common stock
underlying the rights.

We intend to distribute and deliver this prospectus by hand or by
mail only, and not by electronic delivery. Also, we intend to use printed
prospectuses only, and not any other forms of prospectus.

We have distributed to the holders of record of our common stock, at
the close of business on June 27, 2003, at no charge, one nontransferable
subscription right for each share of our common stock they own. Each
subscription right is a right to purchase ____ shares of our common stock and
carries with it a basic subscription privilege and an over-subscription
privilege. The basic subscription privilege of each right entitles you to
purchase _____ shares of our common stock at a subscription price of $_____ per
share. You may exercise any number of your subscription rights, or you may
choose not to exercise any subscription rights. We will not distribute any
fractional shares or pay cash in lieu of fractional shares, but will round down
the aggregate number of shares you are entitled to receive to the nearest whole
number.

We do not expect that all of our stockholders will exercise all of
their basic subscription privileges. By extending over-subscription privileges
to our stockholders, we are providing stockholders that exercise all of their
basic subscription privileges with the opportunity to purchase those shares that
are not purchased by other stockholders.

(subject to elimination of fractional shares), based on the number of shares you
purchased through the basic subscription privilege in proportion to the total
number of shares that you and other over-subscribing stockholders purchased
through the basic subscription privilege. However, if your pro-rata allocation
exceeds the number of shares you requested on your subscription certificate,
then you will receive only the number of shares that you requested, and the
remaining shares from your pro-rata allocation will be divided among other
rights holders exercising their over-subscription privileges.

As soon as practicable after the expiration date, Securities
Transfer Corporation, acting as our subscription agent, and we will determine
the number of shares of common stock that you may purchase pursuant to the
over-subscription privilege. You will receive certificates representing these
shares as soon as practicable after the expiration date. If you request and pay
for more shares than are allocated to you, we will refund that overpayment,
without interest. In connection with the exercise of the over-subscription
privilege, banks, brokers and other nominee holders of subscription rights who
act on behalf of beneficial owners will be required to certify to us and to the
subscription agent as to the aggregate number of subscription rights that have
been exercised, and the number of shares of common stock that are being
requested through the over-subscription privilege, by each beneficial owner on
whose behalf the nominee holder is acting.

We will pay Securities Transfer Corporation, the subscription agent,
a fee of approximately $5,000 plus expenses, for its services in connection with
this offering. We also have agreed to indemnify under certain circumstances the
subscription agent from any liability it may incur in connection with this
offering.

We expect that shares of our common stock issued upon the exercise
of subscription rights will be traded on the American Stock Exchange Emerging
Company Marketplace under the symbol "HAF.EC," the same symbol our currently
outstanding shares of common stock now trade.

LEGAL MATTERS

The validity of the shares of common stock offered hereby, and the
description in this prospectus of the U.S. federal income tax consequences of
this offering, will be passed upon for us by Olshan Grundman Frome Rosenzweig &
Wolosky LLP, New York, New York.

EXPERTS

The consolidated financial statements of Hallmark Financial
Services, Inc. at December 31, 2002 and 2001, and for the years then ended,
appearing in our annual report on Form 10-KSB for the year ended December 31,
2002 have been audited by PricewaterhouseCoopers LLP, independent accountants,
as set forth in their report thereon included therein. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.

MATERIAL CHANGES

On May 30, 2003, Phoenix Indemnity Insurance Company (PIIC), a
wholly owned subsidiary of ours, was served with a suit from the Superior Court
of the State of Arizona in and for the County of Pima, alleging breach of
contract and bad faith in connection with PIIC's denial of coverage in an
automobile accident. The plaintiffs have filed an offer of judgment in the
amount of $15 million. PIIC believes the suit is without merit and has filed an
answer denying each and every allegation in the case. The suit is still in
pre-trial discovery stage. Unless a favorable settlement can be reached, we
intend to vigorously defend PIIC against all claims asserted by the plaintiffs
in the case.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Securities
Exchange Act of 1934. Accordingly, we file reports, proxy statements and other
information with the SEC. You may read and copy any materials that we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549 upon payment of the prescribed fees. You may obtain

information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,
proxy and information statements and other materials that are filed through the
SEC's Electronic Data Gathering, Analysis, and Retrieval, or EDGAR, system. You
can access this web site at http://www.sec.gov. Our common stock is listed on
the American Stock Exchange Emerging Capital Markets. These reports, proxy
statements and other information can also be read and copied at the offices of
the American Stock Exchange at 86 Trinity Place, New York, New York 10006.

The SEC allows us to "incorporate by reference" the information we
file with the SEC. This permits us to disclose important information to you by
referencing these filed documents. Any information referenced this way is
considered part of this prospectus, and any information filed with the SEC after
the date on the cover of this prospectus will automatically be deemed to update
and supercede this information. We incorporate by reference the documents listed
below and any future filings made by us with the SEC file number 0-16090 under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act of 1934, as amended,
until all of the securities described in this prospectus are sold:

o our annual report on Form 10-KSB for the year ended December
31, 2002,

o our quarterly report on Form 10-QSB for the period ended March
31, 2003,

o our current report on Form 8-K, filed on January 29, 2003,

o our current report on Form 8-K/A, filed on February 14, 2003,

o our current report on Form 8-K/A, filed on April 14, 2003,

o our current report on Form 8-K/A, filed on May 13, 2003,

o our current report of Form 8-K, filed on June 17, 2003, and

o the description of our common stock contained in our
resignation statement on Form 8-A filed with the SEC on July 8,
1992, including all amendments and reports filed for purposes
of updating such description.

This prospectus is part of a registration statement filed with the
SEC. This prospectus does not contain all the information contained in the
registration statement. The full registration statement can be obtained from the
SEC. This prospectus contains a general description of our company and the
securities being offered for sale. You should read this prospectus together with
the additional information incorporated by reference.

You can request a copy of any document incorporated by reference in
this prospectus, at no cost, by writing or telephoning us at the following:

Hallmark Financial Services, Inc.
777 Main Street, Suite 1000
Fort Worth, Texas 76201
Attention: Timothy A. Bienek, President and COO
Telephone: (817) 348-1600

FORWARD-LOOKING STATEMENTS

We believe that certain statements contained or incorporated by
reference in this prospectus are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and are considered
prospective. The following statements are or may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995:

o statements before, after or including the words "may," "will,"
"could," "should," "believe," "expect," "future," "potential,"
"anticipate," "intend," "plan," "estimate" or "continue" or the
negative or other variations of these words, and

o other statements about matters that are not historical facts.

We may be unable to achieve the future results covered by the
forward-looking statements. The statements are subject to risks, uncertainties
and other factors that could cause actual results to differ materially from the

future results that the statements express or imply. See "Risk Factors" on page
6. Please do not put undue reliance on these forward-looking statements, which
speak only as of the date of this prospectus.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by us in connection with the issuance
and distribution of the securities being offered. All items below are estimates
other than the Securities and Exchange Commission registration fee and the AMEX
listing fee. Hallmark Financial Services, Inc. will pay all of such expenses.

Securities and Exchange Commission registration fee $ 809.00
AMEX listing fee......................................... 22,500.00
Printing and engraving expenses.......................... 1,000.00
Accounting fees and expenses............................. 10,000.00
Legal fees and expenses.................................. 60,000.00
Subscription Agent fees and expenses..................... 5,000.00
Miscellaneous............................................ 691.00
------------
Total........................................$100,000.00
============

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Nevada General Corporation Law ("NGCL") provides that a director
or officer of a corporation will not be personally liable for monetary damages
for breach of that individual's fiduciary duties as a director or officer except
for liability for (1) any act or omission constituting a breach of fiduciary
duties as a director or officer and when (2) breach of those duties involved
intentional misconduct, fraud or a knowing violation of law. Under the NGCL, a
corporation may indemnify directors and officers, as well as other employees and
individuals, to any threatened, pending or completed action, suit or proceeding,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, or that, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.

The NGCL further provides that indemnification may not be made for
any claim as to which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to the
corporation or for amounts paid in settlement to the corporation, unless and
only to the extent that the court in which the action or suit was brought or
other court of competent jurisdiction determines upon application that in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper. To the extent
that a director, officer, employee or agent of a corporation has been successful

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on the merits or otherwise in defense of any action, suit or proceeding or in
defense of any claim, issue or matter therein, the corporation shall indemnify
him against expenses, including attorneys' fees, actually and reasonably
incurred by him in connection with the defense. The NGCL provides that this is
not exclusive of other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.

The Registrant's articles of incorporation provide that the
directors and officers will not be personally liable to the Registrant or its
stockholders for monetary damages for breach of their fiduciary duty as a
director or officer, except for liability of a director or officer for acts or
omissions involving intentional misconduct, fraud or a knowing violation of law,
or the payment of dividends in violation of the NGCL. The Registrant's bylaws
provide that the Registrant is required to indemnify its directors and officers
to the fullest extent permitted by law. The Registrant's bylaws also require the
Registrant to advance expenses incurred by a director or officer in connection
with the defense of any proceeding upon receipt of an undertaking by or on
behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he or she is not entitled
to be indemnified by the Registrant. The Registrant's bylaws also permit the
Registrant to purchase and maintain errors and omissions insurance on behalf of
any director or officer for any liability arising out of his or her actions in a
representative capacity.

ITEM 16. EXHIBITS.

Exhibit # Description
--------- -----------

3.1 Articles of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3(a) to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1993).

3.2 By-Laws of the Registrant, as amended (incorporated by reference
to Exhibit 3(b) to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1993).

4.1 Specimen certificate for Common Stock, $.03 par value, of the
Registrant (incorporated by reference to Exhibit 4 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1991).

4.2* Form of Subscription Rights Certificate.

5.1** Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP.

23.1** Consent of PricewaterhouseCoopers LLP.

23.2** Consent of Deloitte & Touche LLP.

23.3** Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP
(included in opinion filed as Exhibit 5.1).

24.1* Power of Attorney (included on signature page hereto).

99.1* Form of Instructions as to Use of Rights Certificates.

99.2* Form of Notice of Guaranteed Delivery for Rights Certificates.

99.3* Form of Letter to Security Holders Who Are Record Holders.

99.4* Form of Letter to Securities Dealers, Commercial Banks, Trust
Companies and Other Nominees.

99.5* Form of Letter to Clients of Security Holders Who Are Beneficial
Holders.

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99.6* Form of Nominee Holder Certification Form.

99.7* Beneficial Owner Election Form.

99.8* Substitute Form W-9 (including Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9).

99.9** Form of Subscription Agency Agreement between Hallmark Financial
Services, Inc. and Securities Transfer Corporation.

------------------------

* Previously filed
** Filed herewith

ITEM 17. UNDERTAKINGS.

(a) The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration
Statement to include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;

(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof; and

(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.

(b) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of an action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 3 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 28th day of July, 2003.

HALLMARK FINANCIAL SERVICES, INC.

By: /s/ Mark E. Schwarz
-------------------------------------
Mark E. Schwarz
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:

Signature Title Date
--------- ----- ----

/s/ Mark E. Schwarz Chairman, Chief Executive July 28, 2003
-------------------- Officer and Director
Mark E. Schwarz (principal executive officer)

* President, Chief Operating July 28, 2003
-------------------- Officer and Director
Timothy A. Bienek

* Vice President (principal July 28, 2003
-------------------- financial and accounting
Scott K. Billings officer)

* Director July 28, 2003
-------------------
James H. Graves

* Director July 28, 2003
-------------------
George R. Manser

* Director July 28, 2003
-------------------
Scott T. Berlin

Director July __, 2003
-------------------
James C. Epstein

* Executed by Mark E. Schwarz, as attorney-in-fact

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