Exhibit 99.2
Hallmark Financial Services, Inc.
Unaudited Pro Forma Combined Balance Sheet as of December 31, 2005
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 2005
Unaudited pro forma combined financial information
The unaudited pro forma combined balance sheet of the registrant as of
December 31, 2005, and the unaudited pro forma combined statement of
operations of the registrant for the year ended December 31, 2005, are
presented below.
INTRODUCTION AND OVERVIEW
Hallmark Financial Services, Inc. (the "Company") consummated the
acquisition of all of the issued and outstanding capital stock of Texas
General Agency, Inc. ("TGA"), Pan American Acceptance Corporation ("PAAC")
and TGA Special Risk, Inc. ("TGASRI") on January 30, 2006. TGA has a
wholly-owned insurance subsidiary, Gulf States Insurance Company ("GSIC").
The effective date of the transactions was January 1, 2006.
The transaction has been accounted for as a business combination in
accordance with Financial Accounting Standards Board Statement of Financial
Accounting Standard No. 141 "Business Combinations", using fair value
estimates of the acquired assets, liabilities and commitments of TGA and
subsidiary, TGASRI and PAAC as of January 1, 2006. The following table
summarizes the preliminary estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition.
At January 1, 2006
($000s)
Investments $ 19,597
Cash and equivalents 2,199
Premium receivable 17,556
Premium finance notes receivable 6,146
Reinsurance recoverable 640
Tradename 1,834
Customer relationships 20,237
Non-compete agreements 2,000
Employment agreements 267
Goodwill 16,375
Other assets 7,178
--------
Total assets acquired 94,029
Total liabilities assumed 55,861
--------
Net assets acquired $ 38,168
========
Net assets acquired equals the $39,625 purchase price discounted
at 4.40% (which is the rate of 2 year US Treasuries - the investment
restriction on the trust account guaranteeing the future payments to
the sellers)
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma combined financial statements combine the
historical consolidated financial statements of the Company and the
historical combined financial statements of TGA, GSIC, TGASRI and PAAC
(collectively, the "TGA Group"), after giving effect to the acquisition and
the assumptions and adjustments described in the accompanying notes to the
unaudited pro forma combined financial statements.
The unaudited pro forma combined statement of operations of the Company
for the year ended December 31, 2005 present results for the Company as if
the acquisition of the TGA Group had occurred as of January 1, 2005. The
accompanying unaudited pro forma balance sheet of the Company as of December
31, 2005, presents the Company's financial position as if the acquisition of
the TGA Group had occurred on December 31, 2005. We have made pro forma
adjustments to the combined statement of operations to give effect to events
that are (1) directly attributable to the acquisition, (2) factually
supportable, and (3) expected to have a continuing impact on the combined
results.
The unaudited pro forma combined financial statements have been
prepared for informational purposes only. The unaudited pro forma combined
financial statements are not intended to represent or be indicative of the
combined results of operations or financial position of the Company that
would have been reported had the acquisition been completed as of the dates
presented, and should not be taken as representative of the future combined
results of operations or financial position of the Company. The unaudited
pro forma combined statements of operations do not give consideration to the
impact of possible revenue changes, expense or operating efficiencies,
reinsurance program changes, synergies or other changes in the business
resulting from the transaction.
The preliminary allocation of the purchase price used in the unaudited
pro forma combined financial statements is based upon preliminary valuations
and estimates of assets and liabilities. The estimated fair values of
certain assets and liabilities have been determined with the assistance of a
third party based on their preliminary work. The Company's estimates
and assumptions are subject to change upon finalization of individual
valuations.
The unaudited pro forma combined financial statements should be read in
conjunction with the historical financial statements and accompanying notes
of the Company included in its 2005 annual report on Form 10-K and with the
combined TGA Group financial statements included herein as Exhibit 99.1.
Hallmark Financial Services, Inc.
Unaudited Combined Pro Forma Balance Sheet
(Dollars in thousands)
Hallmark
Financial Combined
Services, Inc. TGA Group Pro forma Pro forma
December 31, December 31, Adjustments December 31,
2005 2005 2005
---------------------------- ----------- ------------
ASSETS
------
Investments:
Debt securities, available-for-sale,
at fair value $ 79,360 $ 18,259 $ 375 (a) $ 97,994
Equity securities, available-for-sale,
at fair value 3,403 1,338 - 4,741
Short-term investments, available-for-sale,
at fair value 12,281 - - 12,281
----------------------- -------- ----------
Total investments 95,044 19,597 375 115,016
Cash and cash equivalents 44,528 2,199 - 46,727
Restricted cash and investments 13,802 - 25,000 (b) 38,802
Premiums receivable 26,530 17,556 - 44,086
Premium finance notes receivable - 6,146 - 6,146
Accounts receivable 2,083 - - 2,083
Prepaid reinsurance premium 767 - - 767
Losses receivable from insurance companies - 6,172 - 6,172
Reinsurance recoverable 444 640 - 1,084
Deferred policy acquisition costs 9,164 1,425 (1,425) (c) 9,164
Excess of cost over fair value of net
assets acquired 4,836 - 16,375 (d) 21,211
Intangible assets 459 - 24,338 (e) 24,797
Deferred federal income taxes 3,992 1,789 (9,128) (f) (3,347)
Other assets 7,257 1,006 - 8,263
----------------------- -------- ----------
$ 208,906 $ 56,530 $ 55,535 $ 320,971
======================= ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Notes payable $ 30,928 $ 4,785 $ 15,000 (g) $ 50,713
Convertible debt - - 25,000 (b) 25,000
Unpaid losses and loss adjustment expenses 26,321 9,304 - 35,625
Unearned premiums 36,027 5,091 (1,425) (c) 39,693
Unearned revenue 4,055 6,090 (37) (h) 10,108
Structured settlements - - 23,543 (i) 23,543
Liability for outstanding claims - 4,376 - 4,376
Premiums payable to insurance companies - 17,975 - 17,975
Reinsurance balances payable 116 649 - 765
Accrued agent profit sharing 2,173 - - 2,173
Accrued ceding commission payable 11,430 - - 11,430
Pension liability 2,932 - - 2,932
Current federal income tax payable 300 863 - 1,163
Accounts payable and other accrued expenses 9,436 851 - 10,287
----------------------- -------- ----------
123,718 49,984 62,081 235,783
Stockholders' Equity:
Total stockholders' equity 85,188 6,546 (6,546) (j) 85,188
----------------------- -------- ----------
$ 208,906 $ 56,530 $ 55,535 $ 320,971
======================= ======== ==========
Hallmark Financial Services, Inc.
Unaudited Combined Pro Forma Income Statement
(Dollars in thousands, except per share data)
Hallmark
Financial Combined
Services, Inc. TGA Group Pro forma Pro forma
Fiscal 2005 Fiscal 2005 Adjustments Fiscal 2005
---------------------------- ----------- ------------
Gross premiums written $ 89,467 $ 11,784 $ - $ 101,251
Ceded premiums written (1,215) (1,143) - (2,358)
----------------------- -------- ----------
Net premiums written 88,252 10,641 - 98,893
Change in unearned premiums (29,068) (682) - (29,750)
----------------------- -------- ----------
Net premiums earned 59,184 9,959 - 69,143
Investment income, net of expenses 3,836 547 - 4,383
Realized gain (loss) 58 - - 58
Finance charges 2,044 1,303 - 3,347
Commission and fees 16,703 39,828 (1,962) (k) 54,569
Processing and service fees 5,183 - - 5,183
Other income 27 368 - 395
----------------------- -------- ----------
Total revenues 87,035 52,005 (1,962) 137,078
Losses and loss adjustment expenses 33,784 5,653 - 39,437
Other operating costs and expenses 38,492 41,358 (3,249) (l) 76,601
Interest expense 1,264 218 3,083 (m) 4,565
Amortization of intangible asset 27 - 1,960 (n) 1,987
----------------------- -------- ----------
Total expenses 73,567 47,229 1,794 122,590
Income before tax 13,468 4,776 (3,756) 14,488
Income tax expense 4,282 1,492 (1,389) (o) 4,385
----------------------- -------- ----------
Net income (loss) $ 9,186 $ 3,284 $ (2,367) $ 10,103
======================= ======== ==========
Basic earnings per share $ 0.13 $ 0.14
---------- ----------
Diluted earnings per share $ 0.13 $ 0.12
---------- ----------
Basic weighted average shares outstanding 72,051 72,051
Diluted weighted average shares outstanding 72,626 19,531 (p) 92,157
Hallmark Financial Services, Inc.
Adjustments to unaudited pro forma combined balance sheet and income statement
(Dollars in thousands)
(a) Cash from borrowing of Hallmark Financial Services, Inc. on its
revolving credit facility in January, 2006, less $14.6 million
paid at closing for the acquisition.
(b) Recognition of trust account securing future guaranteed
payments to sellers funded by the issuance of 4% convertible
debt in January, 2006.
(c) Fair value adjustment reclassification to eliminate deferred policy
acquisition costs and reduce unearned premium.
(d) Recognition of goodwill from the Hallmark Financial Services, Inc.
acquisition of TGA Group.
(e) Recognition of intangible assets (tradename $1,834; customer
relationships $20,237; non-compete agreement $2,000; employment
agreements $267) from the Hallmark Financial Services, Inc. acquisition
of TGA Group. All of the purchased identifiable intangible assets have
useful lives of 15 years, except for the non-compete agreement which
has a useful life of 5 years and employment agreements which have a
useful life of 3 years.
(f) Recognition of the following purchase accounting adjustments:
Adjustment Tax Effect
---------- ----------
Identifed purchase intangible assets $ 24,338 $ (8,998)
Deferred policy acquisition cost
reclassified to unearned premium 1,425 422
Discount on future guaranteed payments 1,457 (538)
Discount on unearned commissions 37 (14)
----------
$ (9,128)
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(g) Recognition of $15,000 of three month eurodollar + 2.0% debt incurred
in January, 2006, to complete the transaction.
(h) Recognition of discount on unearned commissions.
(i) Recognition of future discounted guaranteed payments of $25,000.
(j) Equity elimination of purchased entities.
(k) Adjustment for contingent commission received by TGA in fiscal 2005.
As part of the purchase agreement, this commission is retained by
the sellers.
(l) Adjustment for TGA Group profits that were paid as bonuses to employees.
The Company intends to retain these profits after the acquisition.
(m) Includes twelve months of interest expense on borrowing under Hallmark
Financial Services, Inc.'s revolving credit facility at 6.92%, twelve
months of interest expense on the convertible debt at 4.00% and 12
months amortization of discount on the future guaranteed purchase
price at 4.40%.
(n) Includes twelve months amortization expense of $1,349 for customer
relationships; $122 for tradename; $400 for non-compete agreement
and $89 for employment agreements.
(o) Tax effect of pro forma adjustments.
(p) Includes the issuance of 19.5 million common shares for the assumed
conversion of the $25,000 convertible debt per SFAS 128.