Exhibit 99.2
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, 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, the Company proposes to issue to
the Purchaser, and the Purchaser desires to purchase, a $12,550,000 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 (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, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Frome
▇▇▇▇▇▇▇▇▇▇ & 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
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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
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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
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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
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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.
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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 ▇▇▇▇▇▇▇▇-▇▇▇▇▇ 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; ▇▇▇▇▇▇▇▇-▇▇▇▇▇.
(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)
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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 ▇▇▇▇▇▇▇▇-▇▇▇▇▇ 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.
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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.
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(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
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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
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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.
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: Chief Financial Officer
with a copy to:
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▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, P.C.
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇. ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Esq.
(b) if to the Purchaser, in care of:
Newcastle Partners, L.P.
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇
with a copy to:
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Frome ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇ LLP
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, 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,
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Frome ▇▇▇▇▇▇▇▇▇▇ & 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
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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.
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IN WITNESS WHEREOF, the parties hereto have hereunto affixed their
signatures.
NEWCASTLE SPECIAL OPPORTUNITY
FUND I, L.P.
HALLMARK FINANCIAL SERVICES, INC. BY: NEWCASTLE CAPITAL MANAGEMENT,
L.P., ITS GENERAL PARTNER
By By
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Its Its
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EXHIBIT A
FORM OF NOTE
EXHIBIT B
FORM OF REGISTRATION RIGHTS AGREEMENT