UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): December 31, 2005
HALLMARK FINANCIAL SERVICES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Nevada
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(State or Other Jurisdiction of Incorporation)
0-16090 87-0447375
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(Commission File Number) (IRS Employer Identification No.)
777 Main Street, Suite 1000, Fort Worth, Texas 76102
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(Address of Principal Executive Offices) (Zip Code)
817-348-1600
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of
the following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities
Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange
Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under
the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under
the Exchange Act (17 CFR 240.13e-4(c))
Item 1.01 Entry into a Material Definitive Agreement
The information provided in Item 2.03 is incorporated herein by this
reference.
Item 2.01 Completion of Acquisition or Disposition of Assets
On January 3, 2006, Hallmark Financial Services, Inc. (the "Company")
completed the acquisition of all of the issued and outstanding membership
interests in Aerospace Holdings, LLC ("Aerospace Holdings"), a Texas limited
liability company, from Donnell Children Revocable Trust and Curtis R.
Donnell (collectively, the "Seller"). Aerospace Holdings, through various
wholly-owned subsidiaries, markets and services general aviation property
and casualty insurance products, with a particular emphasis on private and
small commercial aircraft. Other than the current transaction, there is no
material relationship between the Seller and the Company or any of its
affiliates. The effective date of the transaction was January 1, 2006.
The Company acquired Aerospace Holdings for initial consideration
of $12,500,000 paid in cash at closing. Such initial consideration was
allocated $11,875,000 to the purchase price and $625,000 to the Seller's
compliance with certain restrictive covenants, including a covenant not to
compete for a period of five years after closing. The Company may also be
required to pay additional contingent consideration of up to $2,500,000
conditioned on the Seller complying with its restrictive covenants and
Aerospace Holdings achieving certain operational objectives related to
premium production and loss ratios. The contingent consideration, if any,
will be payable in cash on or before March 30, 2009, unless the Seller
elects to defer a portion of the payment in order to permit further
development of the loss ratios.
The Company funded the acquisition of Aerospace Holdings through a
$12,500,000 interim financing facility from Newcastle Partners, L.P.
("Newcastle"), an affiliate of the Company's Chairman and Chief Executive
Officer, Mark E. Schwarz. The Company presently intends to retire the
bridge loan with the proceeds from a rights offering to its shareholders
during 2006. However, there can be no assurance that the contemplated
rights offering will be completed in a timely manner or will provide
sufficient net proceeds to fully repay the loan from Newcastle.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under
an Off-Balance Sheet Arrangement of a Registrant
On January 3, 2006, the Company executed a promissory note payable to
Newcastle in the amount of $12,500,000 in order to obtain funding to
complete the acquisition of Aerospace Holdings. The promissory note bears
interest at the rate of ten percent per annum prior to maturity and at the
maximum rate allowed under applicable law upon default. Accrued and unpaid
interest on the promissory note is due and payable on the first business day
of each month. The unpaid principal balance of the promissory note,
together with all accrued and unpaid interest, is due and payable on demand
at any time after June 30, 2006.
The description of the Company's direct financial obligation to
Newcastle set forth above is qualified in its entirety by reference to the
Promissory Note filed as an exhibit to this Current Report on Form 8-K and
incorporated herein by this reference.
Item 5.02 Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers
Mr. James C. Epstein resigned from the Board of Directors of the
Company effective as of December 31, 2005. Mr. Epstein has orally advised
the Board that his resignation was not the result of any disagreement with
the Company on any matter relating to its operations, policies or practices.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
Exhibit 4.1 Promissory Note dated January 3, 2006, in the amount of
$12,500,000 payable to Newcastle Partners, L.P.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
HALLMARK FINANCIAL SERVICES, INC.
Date: January 5, 2006 By: /s/ Mark J. Morrison
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Mark J. Morrison, Chief Operating Officer