EXHIBIT 10.1
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (the "Agreement") is entered into as of the
27th day of January, 2006, by and between Hallmark Financial Services, Inc.,
a Nevada corporation (the "Company"), and Newcastle Special Opportunity Fund
[I] [II], L.P., a Delaware limited partnership (the "Purchaser").
R E C I T A L S :
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WHEREAS, in consideration of [$12,550,000] [$12,450,000], the Company
proposes to issue to the Purchaser, and the Purchaser desires to purchase, a
[$12,550,000] [$12,450,000] convertible promissory note in the form attached
as Exhibit A (the "Note").
NOW, THEREFORE, in consideration of the foregoing recital and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
SECTION 1. AGREEMENT TO SELL AND PURCHASE
1.1 Authorization of Transaction. On or prior to the closing of the
transactions contemplated in this Agreement (the "Closing"), the Company
shall have authorized the sale and issuance to the Purchaser of the Note
and, subject to obtaining Shareholder Approval (as defined below), the
shares of the Company's common stock, $0.03 par value per share (the
"Common Stock"), issuable upon conversion of the Note (collectively, the
"Shares").
1.2 Sale and Purchase. Subject to the terms and conditions hereof, at
the Closing, the Company hereby agrees to issue and sell to the Purchaser,
and the Purchaser agrees to purchase from the Company, the Note for an
aggregate purchase price of [$12,550,000] [$12,450,000] (the "Purchase
Price").
SECTION 2. CLOSING, DELIVERY AND PAYMENT
2.1 Closing. The Closing shall take place at 10:00 a.m. on the date
hereof at the offices of the Purchaser's legal counsel, Olshan Grundman
Frome Rosenzweig & Wolosky LLP, in New York, New York, or at such other
time or place as the Company and the Purchaser may mutually agree (the
"Closing Date"). At the Closing, subject to the terms and conditions
hereof, the Company will issue, sell and deliver to the Purchaser the
Note, against payment of the Purchase Price by certified check or wire
transfer of immediately available funds. At that time, the Company and
the Purchaser shall also execute the Registration Rights Agreement in the
form attached as Exhibit B (the "Registration Rights Agreement").
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser as of the
Closing Date, and agrees, as follows:
3.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Nevada. The Company's only active subsidiaries
are the subsidiaries listed on Schedule 3.1 (the "Subsidiaries"). Except
as indicated on Schedule 3.1, each Subsidiary is duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization. Each of the Company and the Subsidiaries has all requisite
corporate power and authority to own and operate its respective properties
and assets and to carry on its respective business as presently conducted
and as presently proposed to be conducted. The Company has all requisite
corporate power and authority to execute and deliver this Agreement, the
Note and the Registration Rights Agreement (together, the "Transaction
Documents"), to issue and sell the Shares upon conversion of the Note
(subject to obtaining Shareholder Approval) and to carry out the
provisions of the Transaction Documents. Each of the Company and the
Subsidiaries is duly qualified and is authorized to do business and is in
good standing in each jurisdiction in which the nature of its respective
activities and of its respective properties (both owned and leased) makes
such qualification necessary, except for those jurisdictions in which
failure to be so qualified would not have a material adverse effect on the
Company or its business, taken as a whole.
3.2 Capitalization. The Company is authorized to issue 100,000,000
shares of Common Stock, of which 86,841,791 shares are issued and
outstanding as of the date hereof, and no shares of preferred stock.
Except as set forth on Schedule 3.2 or in the Company's current,
quarterly, annual and other periodic filings (the "SEC Reports") with the
U.S. Securities and Exchange Commission (the "Commission"), there are no
outstanding options, warrants or other rights to acquire any of the
Company's capital stock, or securities convertible, exercisable or
exchangeable for the Company's capital stock or for securities themselves
convertible, exercisable or exchangeable for the Company's capital stock
(together, "Convertible Securities"). Except as set forth on Schedule 3.2
or in the SEC Reports, the Company has no agreement or commitment to sell
or issue any shares of capital stock or Convertible Securities. All
issued and outstanding shares of the Company's capital stock (i) have been
duly authorized and validly issued, (ii) are fully paid and nonassessable,
(iii) are free from any preemptive and cumulative voting rights and (iv)
were issued pursuant to an effective registration statement filed with the
Commission and applicable state securities authorities or pursuant to
valid exemptions under federal and state securities laws. Except as set
forth on Schedule 3.2 or in the SEC Reports, there are no outstanding
rights of first refusal or proxy or shareholder agreements of any kind
relating to any of the Company's securities to which the Company or any of
its executive officers and directors is a party or as to which the Company
otherwise has knowledge. When issued in compliance with the provisions of
the Note, the Shares will be validly issued, fully paid and nonassessable,
and will be free of any liens or encumbrances; provided, however, that the
Shares may be subject to restrictions on transfer under state and/or
federal securities laws as set forth herein or as otherwise required by
such laws at the time a transfer is proposed.
3.3 Authorization; Binding Obligations. All corporate action on the
part of the Company, its officers and directors (including a special
committee of independent directors) necessary for the authorization of the
Transaction Documents and the performance of all obligations of the
Company hereunder and thereunder at the Closing, including the
authorization, sale, issuance and delivery of the Shares upon conversion
of the Note, has been taken, and no further corporate action is required
to be taken except for the Shareholder Approval. The Transaction
Documents, when executed and delivered, will be valid and binding
obligations of the Company enforceable against the Company in accordance
with their terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights, (ii) according to
general principles of equity that restrict the availability of equitable
remedies and (iii) to the extent that the enforceability of the
indemnification provisions of the Registration Rights Agreement may be
limited by applicable laws. The issuance and sale of the Shares upon
conversion of the Note are not and will not be subject to any preemptive
rights or rights of first refusal.
3.4 Financial Statements. The audited consolidated balance sheets at
December 31, 2004 of the Company and the audited consolidated statements
of operations, cash flows and stockholders' equity of the Company for the
year ended December 31, 2004 and the unaudited consolidated balance sheet
at, and the unaudited consolidated statements of operations and cash flows
for the nine months ended, September 30, 2005 of the Company (all of the
foregoing together, the "Financial Statements," with September 30, 2005
being the "Latest Statement Date" and the consolidated financial
statements at and for the nine months ended September 30, 2005 being the
"Latest Financial Statements"), as contained in the SEC Reports, fairly
present the consolidated financial condition, results of operations and
cash flows of the Company and its Subsidiaries on a consolidated basis as
of the respective dates and for the respective periods covered thereby
(subject, in the case of unaudited financial statements, to normal year-
end audit adjustments) and have been prepared in accordance with generally
accepted accounting principles in the United States applied on a
consistent basis (except as may be indicated in the notes thereto) and the
rules and regulations of the Commission.
3.5 Liabilities. Except as reflected or expressly reserved in the
Latest Financial Statements or disclosed on Schedule 3.5, neither the
Company nor any Subsidiaries has any material liabilities or obligations
and there is no known basis for any material contingent liabilities,
except current liabilities incurred after the Latest Statement Date in the
ordinary course of business of the Company and the Subsidiaries.
3.6 Certain Agreements and Actions. Except as disclosed on Schedule
3.6 or in the SEC Reports, since the Latest Statement Date, neither the
Company nor any Subsidiary has (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or
series of its capital stock, (ii) incurred any indebtedness for money
borrowed or any other material liabilities out of the ordinary course of
business, (iii) made any loans or advances to any person, other than
ordinary advances for travel or entertainment expenses, or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights, other than
in the ordinary course of business. "Person" shall mean an individual, a
limited liability company, a partnership, a joint venture, a corporation,
a trust, an unincorporated organization or any other entity.
3.7 Obligations of or to Related Parties. Except as disclosed on
Schedule 3.7 or in the SEC Reports, there are no obligations of the
Company or any Subsidiary to executive officers, directors, 1% or greater
shareholders or key employees (listed in the Company's most recent proxy
materials) of the Company or any Subsidiary or to any members of their
immediate families or other affiliates, other than (i) for accrued
salaries, (ii) reimbursement for expenses reasonably incurred on behalf of
the Company or any Subsidiary and (iii) for other standard employee
benefits made generally available to all employees (including stock option
agreements outstanding under any stock option plan approved by the Board
of Directors of the Company). Except as disclosed on Schedule 3.7 or in
the SEC Reports, none of the executive officers, directors, 1% or greater
shareholders or key employees (listed in the Company's most recent proxy
materials) of the Company or any Subsidiary, or any members of their
immediate families or other affiliates, are indebted to the Company or any
Subsidiary or have any direct or indirect ownership interest in any firm,
corporation or other entity with which the Company or any Subsidiary is
affiliated or with which the Company or any Subsidiary has a business
relationship, or any firm, corporation or other entity that competes with
the Company or any Subsidiary. Except as disclosed in the SEC Reports, no
executive officer, director, 1% or greater shareholder or key employee
(listed in the Company's most recent proxy materials) of the Company or
any Subsidiary, or, to the Company's knowledge, any member of their
immediate families or other affiliates, is, directly or indirectly,
interested in or a party to any material contract with the Company or any
Subsidiary. Except as disclosed on Schedule 3.7 or in the SEC Reports,
neither the Company nor any Subsidiary is a guarantor or indemnitor of any
indebtedness or obligation of any other person, other than the Company or
its Subsidiaries. The representations contained in this Section 3.7 shall
not be deemed to apply to the Purchaser or any of its affiliates.
3.8 No Material Adverse Change. Since the Latest Statement Date, and
except as disclosed in the SEC Reports, there has not been any material
adverse change in the business, assets, liabilities, condition (financial
or otherwise), operations or prospects of the Company, and no event has
occurred or circumstance exists that may result in such a material adverse
change.
3.9 Title to Properties and Assets; Liens. Except as set forth on
Schedule 3.6 or Schedule 3.9 or in the SEC Reports, each of the Company
and its Subsidiaries has good and marketable title to its properties and
assets, including the properties and assets reflected in the Latest
Financial Statements, and good title to its leasehold estates, in each
case subject to no mortgage, pledge, lien, lease, encumbrance or charge,
other than (i) those resulting from taxes that have not yet become
delinquent, (ii) minor liens and encumbrances that do not materially
detract from the value of the property subject thereto or materially
impair the operations of the Company or any Subsidiary and (iii) those
that have otherwise arisen in the ordinary course of business. All
facilities, machinery, equipment, fixtures and other properties owned,
leased or used by the Company or any Subsidiary are in good operating
condition and repair and are reasonably fit and usable for the purposes
for which they are being used, reasonable wear and tear excepted.
3.10 Intellectual Property. Except as set forth on Schedule 3.10 or in
the SEC Reports, each of the Company and its Subsidiaries owns or licenses
all trademarks, service marks, trade names, copyrights, trade secrets,
information and other proprietary rights and processes necessary for its
business as now conducted and as proposed to be conducted, without any
known infringement of the rights of others.
3.11 Compliance with Other Instruments. Except as disclosed in
Schedule 3.11 or the SEC Reports, neither the Company nor any Subsidiary
is in violation or default of any term of its Articles of Incorporation or
Bylaws, or of any provision of any mortgage, indenture, contract,
agreement or instrument to which it is party or by which it is bound or of
any judgment, decree, order, writ, statute, rule or regulation applicable
to the Company or any Subsidiary that would materially and adversely
affect the business, assets, liabilities, condition (financial or
otherwise), operations or prospects of the Company. The execution and
delivery of, and the performance of and compliance with the transactions
contemplated by, the Transaction Documents, and the issuance and sale of
the Shares upon conversion of the Note, will not, with or without the
passage of time or giving of notice or both, result in any such material
violation, or be in conflict with or constitute a default under any such
term, or result in the creation of any mortgage, pledge, lien, encumbrance
or charge upon any of the properties or assets of the Company or any
Subsidiary or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to
the Company or any Subsidiary, the business or operations of the Company
or any Subsidiary or any of the assets or properties of the Company or any
Subsidiary.
3.12 Litigation. Except as disclosed in the SEC Reports, Schedule 3.5
or Schedule 3.12, there is no action, suit, proceeding or investigation
pending or, to the Company's knowledge, currently threatened against the
Company that questions the validity of this Agreement or the other
agreements contemplated hereby or the right of the Company to enter into
any of such agreements, or to consummate the transactions contemplated
hereby or thereby. Except as disclosed in the SEC Reports, Schedule 3.5
or Schedule 3.12, there is no action, suit, proceeding or investigation
pending or, to the Company's knowledge, currently threatened against the
Company or any Subsidiary that could result, either individually or in the
aggregate, in any material adverse change in the business, assets,
liabilities, condition (financial or otherwise), operations or prospects
of the Company, or in any change in the current equity ownership of the
Company, nor is the Company aware that there is any basis for the
foregoing. Except as disclosed in the SEC Reports, Schedule 3.5 or
Schedule 3.12, neither the Company nor any Subsidiary is a party or
subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality.
3.13 Tax Returns and Payments. Except as disclosed on Schedule 3.13,
each of the Company and its Subsidiaries has filed all tax returns
(federal, state and local) required to be filed by it. All taxes shown to
be due and payable on such returns, any assessments imposed, and, to the
Company's knowledge, all other taxes due and payable by the Company or any
Subsidiary on or before the Closing have been paid or will be paid prior
to the time they become delinquent. The Company has not been advised
(i) that any of the tax returns of the Company or any Subsidiary have been
or are being audited as of the date hereof or (ii) of any deficiency in
assessment or proposed judgment to federal, state or other taxes of the
Company or any Subsidiary. The Company has no knowledge of any liability
of any tax to be imposed upon the properties or assets of the Company or
any Subsidiary as of the date of this Agreement that is not adequately
provided for.
3.14 Employees. Neither the Company nor any Subsidiary has any
collective bargaining agreements with any of its employees. There is no
labor union organizing activity pending or, to the Company's knowledge,
threatened with respect to the Company or any Subsidiary. Except as set
forth on Schedule 3.14 or in the SEC Reports, no executive officer or key
employee (listed in the Company's most recent proxy materials) has any
agreement or contract, written or verbal, regarding his employment.
Except as disclosed on Schedule 3.14 or in the SEC Reports, neither the
Company nor any Subsidiary is a party to or bound by any currently
effective deferred compensation arrangement, bonus plan, incentive plan,
profit sharing plan, retirement agreement or other employee compensation
plan or agreement. To the Company's knowledge, no employee of the Company
or any Subsidiary, nor any consultant with whom the Company or any
Subsidiary has contracted, is in violation of any material term of any
employment or consulting agreement with the Company or any Subsidiary.
Except as disclosed on Schedule 3.14 or in the SEC Reports, no executive
officer or key employee (listed in the Company's most recent proxy
materials) of the Company or any Subsidiary has been granted the right to
continued employment by the Company or any Subsidiary or to any material
compensation following termination of employment with the Company or any
Subsidiary. The Company is not aware that any executive officer or key
employee (listed in the Company's most recent proxy materials), or that
any group of executive officers or key employees (listed in the Company's
most recent proxy materials), intends to terminate his or their employment
with the Company or any Subsidiary, nor does the Company or any Subsidiary
have a present intention to terminate the employment of any executive
officer, key employee (listed in the Company's most recent proxy
materials) or group of executive officers or key employees (listed in the
Company's most recent proxy materials).
3.15 Registration Rights. Except as disclosed on Schedule 3.15 or
required pursuant to the Registration Rights Agreement, the Company is
presently not under any obligation, and has not granted any rights, to
register (as defined in the Registration Rights Agreement) any of the
Company's presently outstanding securities or any of its securities that
may hereafter be issued.
3.16 Compliance with Laws; Permits. Except as disclosed in Schedule
3.16 or the SEC Reports, neither the Company nor any Subsidiary is in
violation of any applicable statute, rule, regulation, order or
restriction of any domestic or foreign government or any instrumentality
or agency thereof in respect of the conduct of its business or the
ownership of its properties that would materially and adversely affect
the business, assets, liabilities, condition (financial or otherwise),
operations or prospects of the Company. No governmental orders,
permissions, consents, approvals or authorizations are required to be
obtained and no registrations, filings, notices or declarations are
required to be filed in connection with the execution and delivery of, and
the performance of the transactions contemplated by, the Transaction
Documents or the issuance of the Shares upon conversion of the Note,
except such as have been duly and validly obtained or filed, or with
respect to any filings that must be made after the Closing, as will be
filed in a timely manner. Each of the Company and the Subsidiaries has
all franchises, permits, licenses and any similar authority necessary for
the conduct of its business as now being conducted by it, the lack of
which could materially and adversely affect the business, assets,
liabilities, condition (financial or otherwise), operations or prospects
of the Company, and the Company believes it can (and covenants to
Purchaser that it will) obtain any similar authority for the conduct of
its business as planned to be conducted.
3.17 Environmental and Safety Laws. Except as disclosed in Schedule
3.17 or the SEC Reports, to the Company's knowledge, neither the Company
nor any Subsidiary is in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety,
and, to the Company's knowledge, no material expenditures are or will be
required in order to comply with any such existing statute, law or
regulation.
3.18 Private Offering. Assuming the truth and accuracy of the
representations and warranties of the Purchaser contained in Section 4,
the offer, sale and issuance of the Note (and the Shares issuable upon
conversion of the Note) will be exempt from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"), and will
have been registered or qualified (or are exempt from registration
and qualification) under the registration, permit or qualification
requirements of the State of Texas.
3.19 Full Disclosure. None of the Transaction Documents nor the SEC
Reports contains any untrue statement of a material fact nor omits to
state a material fact necessary in order to make the statements contained
herein or therein not misleading in light of the circumstances in which
they were made. There are no facts that (individually or in the
aggregate) materially adversely affect the business, assets, liabilities,
condition (financial or otherwise), operations or prospects of the Company
that have not been set forth in the Transaction Documents, the SEC Reports
or in other documents delivered to the Purchaser or its attorneys or
agents in connection herewith.
3.20 Investment Company Act. The Company is not, and will not use the
proceeds from the Note in a manner so as to become, an "investment
company," within the meaning of the Investment Company Act of 1940, as
amended.
3.21 American Stock Exchange Compliance. The Company's Common Stock
is registered pursuant to Section 12(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and is listed on the American Stock
Exchange (the "Amex"). The Company has taken no action designed to, or
likely to have the effect of, and the transactions contemplated by this
Agreement will not have the effect of, terminating the registration of the
Common Stock under Section 12(b) of the Exchange Act or de-listing of the
Common Stock from the Amex. Except as disclosed in Schedule 3.21 or the
SEC Reports, the Company has not received any notification that the
Commission, the Amex or any other self-regulatory organizational body is
contemplating terminating such registration or listing.
3.22 Reporting Status. The Company has filed all documents that the
Company was required to file under the Exchange Act during the 12 months
preceding the date of this Agreement. The SEC Reports complied in all
material respects with the applicable requirements of the Securities Act
or the Exchange Act, as the case may be, and the applicable rules and
regulations promulgated thereunder as of their respective filing dates,
and the information contained therein as of the date thereof did not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Company has disclosed in Item 4 of the Company's Report
on Form 10-Q for the quarter ended September 30, 2005 the effectiveness of
its disclosure controls and procedures. The Company is not aware of any
material weaknesses (as defined in Section 404 of the Sarbanes-Oxley Act)
in its internal controls.
3.23 No Manipulation of Price. Neither the Company nor, to the
knowledge of the Company, any agent or other person acting on behalf of
the Company has taken or will, in violation of applicable law, take any
action designed to or that might reasonably be expected to cause or result
in, or which has constituted, stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the securities
issued or issuable in connection with the transactions contemplated
hereunder.
3.24 Foreign Corrupt Practices; Sarbanes-Oxley.
(a) Neither the Company nor, to the knowledge of the Company, any
agent or other person acting on behalf of the Company has (i) directly or
indirectly, used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any direct or indirect unlawful payment to
foreign or domestic government officials or employees or to any foreign or
domestic political parties or campaigns from corporate funds, (iii) failed
to disclose fully any contribution made by the Company (or made by any
person acting on its behalf of which the Company is aware) which is in
violation of law, or (iv) violated in any material respect any provision
of the Foreign Corrupt Practices Act of 1977, as amended.
(b) The Company, to its knowledge, is in compliance in all material
respects with the provisions of the Sarbanes-Oxley Act of 2002 (and
related rules of the Commission) that are applicable to it as of the
Closing Date.
3.25 No Material Transactions or Events. As of the Closing Date, the
Company is not aware of any pending or proposed merger, acquisition or
disposition of assets that support 20% or more of current revenues, or
revenue shortfall against publicly issued Company guidance, other than as
previously disclosed in the SEC Reports or in a publicly disseminated
press release.
3.26 Acknowledgment Regarding the Purchaser's Purchase of the Note.
The Company acknowledges that the Purchaser is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with
respect to the Transaction Documents and the transactions contemplated
hereby and thereby, and any advice given by the Purchaser or any of its
representatives or agents in connection with the Transaction Documents and
the transactions contemplated hereby and thereby is merely incidental to
the Purchaser's purchase of the Note. The Company further represents to
the Purchaser that the Company's decision to enter into the Transaction
Documents has been based solely on the independent evaluation by the
Company and its representatives.
3.27 No General Solicitation. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in
any form of general solicitation or general advertising (within the
meaning of Regulation D) in connection with the offer or sale of the Note
and the Shares.
3.28 No Integrated Offering. None of the Company, its Subsidiaries,
any of their affiliates, or any person acting on their behalf has,
directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would
require registration of any of the Note or the Shares under the Securities
Act or cause this offering to be integrated with prior offerings by the
Company for purposes of the Securities Act or any applicable shareholder
approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of
the securities of the Company are listed or designated.
3.29 Off-Balance Sheet Arrangements. There is no material transaction,
arrangement or other relationship between the Company and an
unconsolidated or other off-balance sheet entity that is required to be
disclosed by the Company in its Exchange Act filings and is not so
disclosed
3.30 Form S-3 Eligibility. The Company is currently eligible to
register the Shares for resale by the Purchaser using Form S-3 promulgated
under the Securities Act.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Company as of the
Closing Date, and agrees, as follows:
4.1 Investment Representations. The Purchaser understands that
neither the offer nor the sale of the Note or the Shares has been
registered under the Securities Act. The Purchaser also understands that
the Note is being offered and sold pursuant to an exemption from
registration contained in the Securities Act based in part upon the
Purchaser's representations contained in the Agreement. The Purchaser
hereby represents and warrants as follows:
(a) Purchaser Bears Economic Risk. The Purchaser has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. The Purchaser must bear the economic
risk of this investment indefinitely unless the Note (or the Shares) is
subsequently registered pursuant to the Securities Act, or an exemption from
registration is available. Except as contemplated by the Registration
Rights Agreement, the Purchaser has no present intention of selling or
otherwise transferring the Note or the Shares, or any interest therein. The
Purchaser also understands that there is no assurance that any exemption
from registration under the Securities Act will be available and that, even
if available, such exemption may not allow the Purchaser to transfer all or
any portion of the Note or the Shares under the circumstances, in the
amounts or at the times the Purchaser might propose.
(b) Acquisition for Own Account. Except as contemplated by the
Registration Rights Agreement, the Purchaser is acquiring the Note and the
Shares for the Purchaser's own account for investment only, and not with a
view towards their public distribution.
(c) Purchaser Can Protect Its Interest. By reason of its, or of its
management's business or financial experience, the Purchaser has the
capacity to protect its own interests in connection with the transactions
contemplated in this Agreement, the Note and the Registration Rights
Agreement. Further, the Purchaser is aware of no publication of any
advertisement or general solicitation in connection with the transactions
contemplated in the Agreement.
(d) Accredited Investor. The Purchaser is an accredited investor
within the meaning of Regulation D of the Securities Act.
(e) Residence. The Purchaser is organized under the laws of the State
of Delaware and its principal office is located in the State of Texas.
(f) Rule 144. The Purchaser acknowledges and agrees that the Note and,
if issued, the Shares must be held indefinitely unless they are subsequently
registered under the Securities Act or an exemption from such registration
is available. The Purchaser has been advised or is aware of the provisions
of Rule 144 promulgated under the Securities Act, which permits limited
resale of shares purchased in a private placement subject to the
satisfaction of specified conditions.
(g) Access To Information. The Purchaser has had an opportunity to
discuss the Company's business, management and financial affairs with the
Company's management and to review the Company's facilities. The Purchaser
acknowledges that the Company has given the Purchaser access to the
corporate records and accounts of the Company, has made its officers and
representatives available for interview by the Purchaser and has furnished
the Purchaser with all documents and other information requested by the
Purchaser to make an informed decision with respect to the purchase of the
Note.
4.2 Transfer Restrictions. The Purchaser acknowledges and agrees that
the Note and, if issued, the Shares are subject to restrictions on
transfer and will bear restrictive legends.
4.3 Organization; Authorization; Binding Obligations. The Purchaser
is a limited partnership duly organized, validly existing and in good
standing under the laws of the State of Delaware. The Purchaser has all
requisite limited partnership power and authority to execute and deliver
this Agreement and the Registration Rights Agreement and to carry out its
obligations under the provisions of such documents. This Agreement and
the Registration Rights Agreement, when executed and delivered, will be
valid and binding obligations of the Purchaser enforceable against the
Purchaser in accordance with their terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application affecting enforcement of creditors' rights,
(ii) according to general principles of equity that restrict the
availability of equitable remedies and (iii) to the extent that the
enforceability of the indemnification provisions of the Registration
Rights Agreement may be limited by applicable laws.
SECTION 5. CONDITIONS FOR CLOSING
5.1 Conditions for the Company to Satisfy. The obligation of the
Purchaser to purchase the Note as contemplated by this Agreement is
subject to satisfaction of the following contingencies at or prior to
Closing:
(a) The Company shall have obtained all consents and approvals from
third parties, governmental authorities and self-regulatory organizations
required in connection herewith.
(b) The Company shall have executed and delivered to the Purchaser at
Closing the Transaction Documents.
SECTION 6. COVENANTS
6.1 Use of Proceeds. The Company will use the proceeds from the sale
of the Note in connection with the acquisition of Texas General Agency,
Inc. and/or Aerospace Holdings, LLC.
6.2 Listing. The Company shall promptly secure the listing of all of
the Registrable Securities (as defined in the Registration Rights
Agreement) upon each national securities exchange and automated quotation
system, if any, upon which the Common Stock is then listed (subject to
official notice of issuance) and shall maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all Registrable
Securities from time to time issuable under the terms of the Transaction
Documents. The Company shall maintain the Common Stock's authorization for
listing on the Amex; provided, however, that the Company makes no covenant
regarding applicable listing standards based on the trading price of the
Common Stock. Neither the Company nor any of its Subsidiaries shall take
any action that would be reasonably expected to result in the delisting or
suspension of the Common Stock on the Amex.
6.3 No Integrated Offering. None of the Company, its Subsidiaries,
their affiliates or any person acting on their behalf will take any action
or steps referred to in Section 3.28 that would require registration of
any of the Note or the Shares under the Securities Act or cause the
offering of the Note or the Shares to be integrated with other offerings.
6.4 Reservation of Shares. The Company shall take all action,
including, without limitation, using reasonable best efforts to obtain
Shareholder Approval, necessary to have authorized, and reserved for the
purpose of issuance, the number of Shares issuable pursuant to the terms
of the Note.
6.5 Shareholder Approval. The Company shall provide each shareholder
entitled to vote at the annual meeting of shareholders of the Company (the
"Shareholder Meeting"), which shall be promptly called and held not later
than May 31, 2006 (the "Shareholder Meeting Deadline"), a proxy statement,
substantially in the form which will have been reviewed by the Purchaser
and its counsel, soliciting each such shareholder's affirmative vote at
the Shareholder Meeting for approval of resolutions providing for (i) the
Company's issuance of all of the Shares as described in the Transaction
Documents in accordance with applicable law and the rules and regulations
of the Amex and (ii) the increase in the Company's authorized capital by
at least 20,000,000 shares of Common Stock (such affirmative approval of
the matters set forth in (i) and (ii) of this Section 6.5 collectively
being referred to herein as the "Shareholder Approval"), and the Company
shall use its reasonable best efforts to solicit its shareholders'
approval of such resolutions and use its reasonable best efforts to cause
the Board of Directors of the Company (including a special committee of
independent directors) to recommend to the shareholders that they approve
such resolutions. The Company shall be obligated to seek to obtain the
Shareholder Approval by the Shareholder Meeting Deadline.
6.6 Further Assurances. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute
and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out
the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby, including, without
limitation, to enable the full conversion of the Note.
SECTION 7. MISCELLANEOUS
7.1 Governing Law. This Agreement shall be governed by the laws of
the State of Texas, without regard to conflicts of law principles.
7.2 Survival. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by the parties and the
closing of the transactions contemplated hereby until the earlier to
occur of the Maturity Date (as defined in the Note) of the Note and the
payment (or conversion) in full of the principal amount of the Note and
any accrued but unpaid interest thereon. All statements as to factual
matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto in connection with the
transactions contemplated hereby shall be deemed to be representations and
warranties by the Company hereunder solely as of the date of such
certificate or instrument.
7.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators
of the parties hereto and shall inure to the benefit of and be enforceable
by each person who shall be a holder of the Note or the Shares from time
to time. The Company shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the Purchaser.
The Purchaser may assign some or all of its rights hereunder without the
consent of the Company in connection with a transfer by the Purchaser of
any of the Notes or the Shares.
7.4 Entire Agreement. The Transaction Documents and the other
documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the
subjects hereof and thereof and no party shall be liable or bound to the
other in any manner by any representations, warranties, covenants and
agreements, except as specifically set forth herein and therein.
7.5 Severability. The invalidity, illegality or unenforceability of
one or more of the provisions of this Agreement in any jurisdiction shall
not affect the validity, legality or enforceability of the remainder of
this Agreement in such jurisdiction or the validity, legality or
enforceability of this Agreement, including any such provision, in any
other jurisdiction, it being intended that all rights and obligations of
the parties hereunder shall be enforceable to the fullest extent permitted
by law.
7.6 Amendment and Waiver. This Agreement may be amended or modified,
and any provision hereunder may be waived, only upon the written consent
of the Company and the Purchaser.
7.7 Notices. All notices, requests, consents and other communications
hereunder shall be made in writing and shall be deemed given (i) when made
if made by hand delivery, (ii) one business day after being deposited with
an overnight courier if made by courier guaranteeing overnight delivery,
(iii) on the date indicated on the notice of receipt if made by first-
class mail, return receipt requested or (iv) on the date of confirmation
of receipt of transmission by facsimile, addressed as follows:
(a) if to the Company, at
Hallmark Financial Services, Inc.
777 Main Street, Suite 1000
Fort Worth, TX 76102
Facsimile: (817) 348-1815
Attention: Chief Financial Officer
with a copy to:
McGuire, Craddock & Strother, P.C.
3550 Lincoln Plaza
500 N. Akard Street
Dallas, Texas 75201
Facsimile: (214) 954-6868
Attention: Steven D. Davidson, Esq.
(b) if to the Purchaser, in care of:
Newcastle Partners, L.P.
300 Crescent Court, Suite 1110
Dallas, TX 75201
Facsimile: (214) 661-7475
Attention: Steven J. Pully
with a copy to:
Olshan Grundman Frome Rosenzweig & Wolosky LLP
65 East 55th Street
New York, New York 10022
Facsimile: (212) 451-2222
Attention: Steven Wolosky, Esq.
7.8 Indemnification by the Company. The Company agrees to indemnify
and hold the Purchaser harmless against any loss, liability, damage or
expense (including reasonable legal fees and costs) that the Purchaser may
suffer, sustain or become subject to as a result of or in connection with
the breach by the Company of any representation, warranty, covenant or
agreement of the Company contained in any of the Transaction Documents;
provided, however, that no indemnification shall be required hereunder
for the negligence or willful misconduct of the Purchaser or breach by
the Purchaser of any of the representations and warranties set forth
in Section 4 hereof. In case any such action is brought against the
Purchaser, the Company will be entitled to participate in and assume the
defense thereof with counsel reasonably satisfactory to the Purchaser, and
after notice from the Company to the Purchaser of its election to assume
the defense thereof, the Company shall not be responsible for any legal or
other expenses subsequently incurred by the Purchaser in connection with
the defense thereof; provided, that if the Purchaser shall have
reasonably concluded that there may be one or more legal defenses
available to the Purchaser which conflict in any material respect with
those available to the Company, the Company shall not have the right to
assume the defense of such action on behalf of the Purchaser and the
Company shall reimburse the Purchaser for that portion of the fees and
expenses of one counsel retained by the Purchaser.
7.9 Expenses. At Closing, the Company shall pay the Purchaser's
counsel, Olshan Grundman Frome Rosenzweig & Wolosky LLP, $8,000 for its
legal fees and expenses in representing the Purchaser in connection with
the preparation, negotiation, execution, delivery and performance of this
Agreement, the Note and the Registration Rights Agreement and the
consummation of the transactions contemplated hereby and thereby. In
addition, the Company agrees to pay or reimburse the Purchaser for its
reasonable legal fees and expenses that it may incur after the date hereof
in connection with the granting of any waiver with respect to, the
modification of any of the terms or provisions of, or the enforcement of
any of the Transaction Documents.
7.10 Titles and Subtitles. The titles of the sections and subsections
of the Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.11 Counterparts. This Agreement may be delivered via facsimile or
other means of electronic communication, and may be executed in
counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have hereunto affixed their
signatures.
Newcastle Special Opportunity
Fund [I] [II], L.P.
Hallmark Financial Services, Inc. By: Newcastle Capital Management,
L.P., its general partner
By By
_____________________________ _____________________________
Its Its
_____________________________ _____________________________
Exhibit A
Form of Note
Exhibit B
Form of Registration Rights Agreement