ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE.
Directors and Executive Officers
The following table sets forth
information regarding the current members of the Board of Directors (the “Board”) and the current executive officers of the
Company. Directors are elected to serve until the next annual meeting of stockholders and until their respective successors
have been duly elected and qualified. Executive officers are appointed by the Board and serve until their successors have been
duly appointed and qualified. There are no family relationships among any of our directors or executive officers.
| Name |
Age |
|
Positions with the Company |
| Mark E. Schwarz |
61 |
|
Director, Executive Chairman and Chief Executive Officer |
| Scott T. Berlin |
52 |
|
Director |
| James H. Graves |
73 |
|
Director |
| Mark E. Pape |
71 |
|
Director |
| Christopher J. Kenney |
59 |
|
President, Chief Financial Officer and Secretary |
Mark
E. Schwarz was elected Executive Chairman of the Company in August 2006 and became President and Chief Executive Officer
on February 12, 2021. He previously served as Chief Executive Officer of the Company from January, 2003 until August, 2006, and as
President from November 2003 through March 2006. Since 1993, Mr. Schwarz has indirectly controlled Newcastle Partners,
L.P., a private investment firm. Mr. Schwarz presently serves as Chairman of the boards of directors of Rave Restaurant Group, Inc.,
an operator and franchisor of pizza restaurants; and Wilhelmina International, Inc., a model management and talent representation
company. He also serves as a director of various privately held companies. The Board believes that Mr. Schwarz should serve as a
director of the Company due to his extensive business and investment expertise, broad director experience and significant direct and indirect
shareholdings in the Company. (See, Principal Shareholders and Stock Ownership of Management.)
Scott
T. Berlin has since June 2017 served as the President of Mason Structural Steel, LLC, a fabricator of structural steel
and distributor of building products. From 2016 to 2017, he was the Director of Business Development of Ullman Oil Company, LLC, a supplier
of heating oil, commercial fuels, industrial lubricants, greases and coolants. During portions of 2015, Mr. Berlin served in a financial
restructuring role as President of JC Fodale Energy Services, LLC, an oilfield services company. Subsequently, in February 2016,
JC Fodale Energy Services, LLC filed a voluntary petition for liquidation under Chapter 7 of the United States Bankruptcy Code. From 1997
to 2015, he was a Managing Director and principal of Brown, Gibbons, Lang & Company, an investment banking firm serving middle
market companies, where he focused on the corporate finance and mergers/acquisitions practice. Prior to joining Brown, Gibbons, Lang &
Company, Mr. Berlin was a lending officer in the Middle Market Group at The Northern Company. The Board believes that Mr. Berlin
should serve as a director of the Company due to his general background in investment banking and his particular experience in advising
public and private companies and their boards in merger, acquisition and financing transactions.
James
H. Graves has been a Partner of Erwin, Graves & Associates, LP, a management consulting firm, since 2002. He
has also served as Chairman and a director of Medaxion, Inc., a healthcare technology company providing real-time anesthesia intelligence
solutions, since 2010; and as a director and partner of BankCap Partners, a private equity firm focused on the U.S. financial services
sector, since 2006. From 2002 until 2006, Mr. Graves was a director, Vice Chairman and Chief Operating Officer of Detwiler,
Mitchell & Co., a securities research firm. Prior to 2002, he served as a senior executive in Dean Witter Reynolds Investment
Banking Division and as the Chief Operating Officer of J.C. Bradford & Company. Mr. Graves also presently serves as
a director of FirstCash, Inc., a leading operator of retail-based pawn stores; and Atlantic Capital Bancshares, Inc., a bank
holding company. Within the past five years, Mr. Graves has served as a director of Cash America International, Inc., a company
operating pawn shops and jewelry stores which merged with FirstCash during 2016. The Board believes Mr. Graves should serve as a
director due to his executive leadership and management experience in several businesses, including large corporations and businesses
within the financial services industry, his over 30 years of experience analyzing financial statements, and his experience as a director
of both private and public companies, including his service as chairman of the audit committee of another public company.
Mark
E. Pape has served, since September 2021, as the Chief Financial Officer of Factory Intelligent Solutions, LLP, the parent
company of LossExpress, LLP, a provider of total claims loss software solutions for auto insurers. Previously, he had served as the Chairman
of the boards of directors of H2Options, Inc., a water conservation design/installation firm, since 2009, and U.S. Rain Group, Inc.,
a private equity company investing in water conservation opportunities, since 2013. He is also currently a director and chairman
of the audit committee of Wilhelmina International, Inc., a model management and talent representation company. He served as the
Chief Financial Officer of Oryon Technologies, Inc., a lighting technology company, from 2010 to 2014, and as a director from 2012
to January 2014. Oryon Technologies, Inc. filed a petition under Chapter 11 of the federal Bankruptcy Code in May 2014.
Mr. Pape served as a partner at Tatum LLC, an executive services firm, from 2008 to 2009. From 2005 to 2007, he served
as Executive Vice President and Chief Financial Officer at Affirmative Insurance Holdings, Inc., a property/casualty insurance company
specializing in non-standard automobile insurance, and served on its board of directors and audit committee from 2004 to 2005. Mr. Pape
served as the Chief Financial Officer of HomeVestors of America, Inc., a franchisor of home acquisition services, during 2005; as
President and Chief Executive Officer of R.E. Technologies, Inc., a provider of software tools to the housing industry, from 2002
to 2005; as Senior Vice President and Chief Financial Officer of LoanCity.com, a start-up e-commerce mortgage bank, from 1999 to 2001;
as Vice President-Planning for Torchmark Corporation, a life/health insurance holding company, from 1998 to 1999; as Senior Vice President
and Chief Financial Officer of United Dental Care, Inc., a dental benefits insurance company, from 1995 to 1997; and as Executive
Vice President and Chief Financial Officer of American Income Holding, Inc., a life insurance company, from 1991 to 1994. Previously,
Mr. Pape was engaged in investment banking from 1979 to 1991 with First City National Bank of Houston, Merrill Lynch Capital Markets
Group, the First Boston Corporation and then Bear, Stearns & Co. He began his career in 1974 as an auditor with KPMG LLP. He
is a certified public accountant licensed in Texas. The Board believes that Mr. Pape should serve as a director due to his leadership
and operational skills developed as a business executive, his background in finance and financial services, and his experience as a director
of both private and public companies.
Christopher
J. Kenney was promoted to the office of President on January 9, 2022, and has served as Chief Financial Officer of the
Company since May 2021. Previously, Mr. Kenney had served as Chief Accounting Officer of the Company since 2020 and Senior Vice
President of Accounting of the Company since 2004. From 2003 to 2004, he served as Senior Vice President of Accounting for Affirmative
Insurance Holdings, Inc. From 2000 to 2003, Mr. Kenney served as Controller of Associates Insurance Group, a subsidiary of The
Travelers Companies, Inc. From 1994 to 2000, he served in various accounting roles with Associates Insurance Group, the insurance
division of Associates First Capital Corporation, rising to the position of Controller. Mr. Kenney is a Certified Public Accountant
licensed in Texas.
Code of Ethics
The
Board has adopted a Code of Ethics applicable to all of the Company’s employees, officers and directors. The Code of Ethics covers
compliance with law; fair and honest dealings with the Company, its competitors and others; full, fair and accurate disclosure to the
public; and procedures for compliance with the Code of Ethics. This Code of Ethics is posted on the Company’s website at www.hallmarkgrp.com.
Nominating Procedures
No changes to the procedures by which security
holders may recommend nominees to the Board have been implemented since the Company’s disclosures in its Proxy Statement for the
2021 Annual Meeting of Shareholders.
Audit Committee
The Board has a separately-designated
Audit Committee comprised of James H. Graves (Chairman), Scott T. Berlin, and Mark E. Pape. The Board has determined that each
member of the Audit Committee is “independent” as defined by Nasdaq listing standards and Rule 10A-3(b)(1) under
the Exchange Act. The Board has determined that at least one member of the Audit Committee, Mr. Graves, is an “audit committee
financial expert,” as defined by SEC rules and regulations. This designation does not impose upon Mr. Graves any duty,
obligation or liability that is greater than is generally imposed on him as a member of the Audit Committee and the Board, and his designation
as an audit committee financial expert does not affect the duty, obligation or liability of any other member of the Audit Committee or
the Board. For an overview of Mr. Graves’ relevant experience, see “Directors and Executive Officers” above.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth
information for the fiscal years ended December 31, 2021 and 2020 concerning the compensation of every person who served as an executive
officer of the Company at any time during 2021 (the “Named Executive Officers”).
Name
and Principal
Position | |
Year | | |
Salary
($) | | |
Bonus ($) | | |
Stock Awards
($)1 | | |
All
Other Compensation
($)2 | | |
Total ($) | |
Mark E. Schwarz
Executive Chairman;
Director | |
2021 2020 | | |
| 195,000 195,000 | | |
| --- --- | | |
| 536,245
--- | | |
| 4,388 13,739 | | |
| 735,633 208,739 | |
Naveen
Anand3
President;
Chief Executive Officer | |
2021 2020 | | |
| ---
525,000 | | |
| --- --- | | |
| --- --- | | |
| ---
623 | | |
| ---
525,623 | |
Christopher
J. Kenney4
President;
Chief Financial Officer | |
2021 2020 | | |
| 268,750 227,146 | | |
| 75,000 25,000 | | |
| 192,498
--- | | |
| 12,408 14,004 | | |
| 548,656 266,150 | |
| 1 | Reflects the fair value of restricted stock unit awards estimated on the date of grant based on the probable
outcome of certain performance conditions. Assumptions used in calculating the grant date fair value are included in Note 13 to the Company’s
audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2021. Assuming that
the highest level of performance conditions will be achieved, the grant date fair value of the 2021 awards would be $804,367 for Mr. Schwarz
and $288,747 for Mr. Kenney. |
| 2 | Represents the employee portion of life, disability and health insurance premiums paid by the Company
and the Company’s matching contributions to employee 401(k) accounts. |
| 3 | Mr. Anand’s employment with the Company ended on February 12, 2021. |
| 4 | Mr. Kenney was promoted to Chief Financial Officer of the Company effective May 27, 2021. |
Employment Agreements
In connection with the grant
of restricted stock units during 2015, the Company entered into a Confidentiality and Non-Solicitation Agreement with Mr. Kenney
pursuant to which severance is payable in an amount equal to at least six months of base salary in the event that he has been terminated
from employment without cause. The Company does not otherwise have employment agreements with any of its current executive officers.
Outstanding Equity Awards at 2021 Fiscal Year-End
The following table sets forth
information concerning all equity awards to the Named Executive Officers which were outstanding as of December 31, 2021, consisting
of unexercised stock options and unvested restricted stock units granted under the 2005 LTIP and the 2015 LTIP.
| | |
Option Awards | | |
Stock Awards | |
| | |
Number of Securities Underlying
Unexercised
Options | | |
| | |
| | |
| | |
Number of
Unearned
Shares | | |
Market Value
of Unearned
Shares | |
| Name | |
Exercisable
(#) | | |
Unexercisable
(#) | | |
Option Exercise Price
($) | | |
Option Expiration Date | | |
Award Date1 | | |
Underlying
Restricted
Stock Units
That Have
Not
Vested
(#)2 | | |
Underlying
Restricted
Stock Units
That Have Not
Vested ($)2 | |
| Mark E. Schwarz | |
| --- | | |
| --- | | |
| --- | | |
| --- | | |
12/21/2021 | | |
| 127,374 | | |
| 554,077 | |
| Naveen Anand3 | |
| --- | | |
| --- | | |
| --- | | |
| --- | | |
--- | | |
| --- | | |
| --- | |
| Christopher J. Kenney | |
| --- | | |
| --- | | |
| --- | | |
| --- | | |
09/16/2019 12/21/2021 | | |
| 1,409 45,724 | | |
| 6,129 198,899 | |
| 1 | Restricted stock units awarded in 2019 vest March 31, 2022, and restricted stock units awarded in
2021 vest up to 50% on March 31, 2024, up to a cumulative 80% on March 31, 2025, and up to a cumulative 100% on March 31,
2026. |
| 2 | Based on achieving the threshold performance criteria and the closing market price of the Company’s
common stock of $4.35 on December 31, 2021. |
| 3 | All of Mr. Anand’s outstanding equity awards expired when his employment with the Company ended
on February 12, 2021. |
Director Compensation
The Company’s standard
compensation arrangement for each non-employee director is currently a $30,000 annual retainer plus a fee of $1,500 for each Board meeting
attended in person or telephonically and a fee of $750 for each committee meeting attended in person or telephonically. The chairman of
the Audit Committee also receives an additional $7,500 annual retainer. No other cash compensation was paid to any non-employee director
during 2021. The Compensation Committee also periodically grants stock options to the directors of the Company. However, no stock options
were granted to any of the non-employee directors of the Company during 2021.
The following table sets forth
information concerning the compensation of the non-employee directors of the Company for the fiscal year ended December 31, 2021.
| Name | |
Fees
Earned or Paid
in Cash ($) | | |
Option Awards
($) | | |
All
Other Compensation
($) | | |
Total ($) | |
| Scott T. Berlin | |
| 44,250 | | |
| --- | | |
| --- | | |
| 44,250 | |
| James H. Graves | |
| 51,750 | | |
| --- | | |
| --- | | |
| 51,750 | |
| Mark E. Pape | |
| 44,250 | | |
| --- | | |
| --- | | |
| 44,250 | |
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
Director Independence
The Board is presently composed
of Mark E. Schwarz, Scott T. Berlin, James H. Graves and Mark E. Pape. None of these directors was selected on the basis of any special
arrangement or understanding with any other person. None of these directors bears any family relationship to any other director or to
any other executive officer of the Company. The Board has determined that all of these directors other than Mr. Schwarz meet the
current Nasdaq independence requirements.
The following table provides
information concerning the present composition of each of the standing committees of the Board. Messrs. Berlin, Graves and Pape serve
on the standing committees set forth below. Mr. Schwarz does not presently serve on any of these standing committees.
| | |
Audit Committee | |
Nomination and Governance Committee | |
Compensation Committee |
| Scott T. Berlin | |
X | |
X | |
X |
| James H. Graves | |
X | |
X | |
X |
| Mark E. Pape | |
X | |
| |
X |
Certain Relationships and Related Transactions
The Executive Chairman of
the Company, Mark E. Schwarz, is the sole trustee of the Schwarz 2012 Family Trust (“Schwarz Trust”), which entity is the
sole shareholder of NCM Services, Inc. (“NCMS”), which entity is the sole member of Newcastle Capital Group, L.L.C. (“NCG”),
which entity is the sole general partner of Newcastle Capital Management, L.P. (“NCM”), which entity is the sole general partner
of Newcastle Partners, L.P. (“Newcastle Fund”). As a result of these relationships, Mr. Schwarz has sole investment and
voting control over the shares of Common Stock beneficially owned by NCMS, NCM and the Newcastle Fund, which collectively are the largest
holders of the Common Stock of the Company. (See, Principal Shareholders and Stock Ownership of Management.)
Also as a result of these
relationships, the Company, Mr. Schwarz, NCG, NCM and the Newcastle Fund may be deemed a “group” for purposes of Section 13(d)(3) of
the Securities Exchange Act of 1934 with respect to their respective investments in Rave Restaurant Group, Inc. (“Rave”),
an operator and franchisor of pizza restaurants in which Mr. Schwarz serves as Chairman of the board of directors. The Company presently
owns an aggregate of 2,246,086 shares of the common stock of Rave, which it acquired at an average price of $1.52 per share in the open
market, in shareholder rights offerings and upon conversion of 4% Convertible Senior Notes due 2022. As a result, the Company currently
beneficially owns approximately 12.5% of the total outstanding common stock of Rave. The Company previously owned $346,200 principal amount
of 4% Convertible Senior Notes due 2022 issued by Rave at par value in connection with a shareholder rights offering, which notes were
fully repaid by Rave at maturity on February 15, 2022. The Company has no other financial transactions, arrangements or relationships
with Rave.