sec document

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O/3gpoa9t7z+PdlSvi5r7LKzM0oI1f/GrmnToLKBXEjcK/861hZEf1JwDHk0wD5X 3w5MEnnQ1vxTIDNO2iN6DQ== 0000921895-06-000240.txt : 20060131 0000921895-06-000240.hdr.sgml : 20060131 20060131125210 ACCESSION NUMBER: 0000921895-06-000240 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20060131 DATE AS OF CHANGE: 20060131 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: HALLMARK FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000819913 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE CARRIERS, NEC [6399] IRS NUMBER: 870447375 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-39686 FILM NUMBER: 06564942 BUSINESS ADDRESS: STREET 1: 777 MAIN STREET, SUITE 1000 CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8173481600 MAIL ADDRESS: STREET 1: 777 MAIN STREET STREET 2: STE 1000 CITY: FORT WORTH STATE: TX ZIP: 76102 FORMER COMPANY: FORMER CONFORMED NAME: ACOI INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN CREDIT OPTICAL INC /DE/ DATE OF NAME CHANGE: 19910611 FORMER COMPANY: FORMER CONFORMED NAME: PYRAMID GROWTH INC DATE OF NAME CHANGE: 19890124 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: NEWCASTLE PARTNERS L P CENTRAL INDEX KEY: 0000932334 IRS NUMBER: 752574953 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 300 CRESCENT COURT STREET 2: STE 1110 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2146617474 MAIL ADDRESS: STREET 1: 300 CRESCENT COURT STREET 2: STE 1110 CITY: DALLAS STATE: TX ZIP: 75201 SC 13D/A 1 sc13da504670005_01272006.htm sec document


                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                 --------------

                                  SCHEDULE 13D
                                 (Rule 13d-101)

             INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
            TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
                                  RULE 13d-2(a)

                               (Amendment No. 5)1

                        Hallmark Financial Services, Inc.
                        ---------------------------------
                                (Name of Issuer)

                Shares of Common Stock, Par Value $0.03 Per Share
                -------------------------------------------------
                         (Title of Class of Securities)

                                    40624Q104
                                    ---------
                                 (CUSIP Number)

                              STEVEN WOLOSKY, ESQ.
                 OLSHAN GRUNDMAN FROME ROSENZWEIG & WOLOSKY LLP
                                Park Avenue Tower
                               65 East 55th Street
                            New York, New York 10022
                                 (212) 451-2300
                                 --------------
                  (Name, Address and Telephone Number of Person
                Authorized to Receive Notices and Communications)

                                January 27, 2006
                                -----------------
             (Date of Event Which Requires Filing of This Statement)

            If the filing  person has  previously  filed a statement on Schedule
13G to report the  acquisition  that is the subject of this Schedule 13D, and is
filing this schedule because of Rule 13d-1(e),  13d-1(f) or 13d-1(g),  check the
following box / /.

            Note.  Schedules  filed  in  paper  format  shall  include  a signed
original and five copies of the schedule, including all exhibits. See Rule 13d-7
for other parties to whom copies are to be sent.

                         (Continued on following pages)

                              (Page 1 of 14 Pages)

- ----------------------
1           The remainder of this cover page shall be filled out for a reporting
person's  initial  filing on this  form with  respect  to the  subject  class of
securities,  and for any subsequent amendment containing information which would
alter disclosures provided in a prior cover page.

            The  information  required on the remainder of this cover page shall
not be deemed to be "filed"  for the  purpose  of  Section 18 of the  Securities
Exchange Act of 1934 or otherwise  subject to the liabilities of that section of
the Act but shall be subject to all other  provisions of the Act  (however,  see
the Notes).




- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                    Page 2 of 14 Pages
- ------------------------------                           -----------------------


================================================================================
     1         NAME OF REPORTING PERSONS
               I.R.S. IDENTIFICATION NOS.OF ABOVE PERSONS (ENTITIES ONLY)

                    NEWCASTLE PARTNERS, L.P.
- --------------------------------------------------------------------------------
     2         CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*         (a) / /
                                                                         (b) / /
- --------------------------------------------------------------------------------
     3         SEC USE ONLY

- --------------------------------------------------------------------------------
     4         SOURCE OF FUNDS*
                    WC
- --------------------------------------------------------------------------------
     5         CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
               PURSUANT TO ITEM 2(d) OR 2(e)                                 / /
- --------------------------------------------------------------------------------
     6         CITIZENSHIP OR PLACE OF ORGANIZATION

                    TEXAS
- --------------------------------------------------------------------------------
 NUMBER OF         7      SOLE VOTING POWER
   SHARES
BENEFICIALLY                   67,520,362
  OWNED BY     -----------------------------------------------------------------
    EACH           8      SHARED VOTING POWER
 REPORTING
PERSON WITH                    - 0 -
               -----------------------------------------------------------------
                   9      SOLE DISPOSITIVE POWER

                               67,520,362
               -----------------------------------------------------------------
                  10      SHARED DISPOSITIVE POWER

                               - 0 -
- --------------------------------------------------------------------------------
     11        AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
               PERSON

                    67,520,362
- --------------------------------------------------------------------------------
     12        CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
               SHARES*                                                       / /
- --------------------------------------------------------------------------------
     13        PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

                    63.5%
- --------------------------------------------------------------------------------
     14        TYPE OF REPORTING PERSON*

                    PN
================================================================================

                      *SEE INSTRUCTIONS BEFORE FILLING OUT!




- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                    Page 3 of 14 Pages
- ------------------------------                           -----------------------


================================================================================
     1         NAME OF REPORTING PERSONS
               I.R.S. IDENTIFICATION NOS.OF ABOVE PERSONS (ENTITIES ONLY)

                    NEWCASTLE SPECIAL OPPORTUNITY FUND I, L.P.
- --------------------------------------------------------------------------------
     2         CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*         (a) / /
                                                                         (b) / /
- --------------------------------------------------------------------------------
     3         SEC USE ONLY

- --------------------------------------------------------------------------------
     4         SOURCE OF FUNDS*
                    WC
- --------------------------------------------------------------------------------
     5         CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
               PURSUANT TO ITEM 2(d) OR 2(e)                                 / /
- --------------------------------------------------------------------------------
     6         CITIZENSHIP OR PLACE OF ORGANIZATION

                    DELAWARE
- --------------------------------------------------------------------------------
 NUMBER OF         7      SOLE VOTING POWER
   SHARES
BENEFICIALLY                   9,804,687(1)
  OWNED BY     -----------------------------------------------------------------
    EACH           8      SHARED VOTING POWER
 REPORTING
PERSON WITH                    - 0 -
               -----------------------------------------------------------------
                   9      SOLE DISPOSITIVE POWER

                               9,804,687
               -----------------------------------------------------------------
                  10      SHARED DISPOSITIVE POWER

                               - 0 -
- --------------------------------------------------------------------------------
     11        AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
               PERSON

                    9,804,687
- --------------------------------------------------------------------------------
     12        CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
               SHARES*                                                       / /
- --------------------------------------------------------------------------------
     13        PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

                    9.2%
- --------------------------------------------------------------------------------
     14        TYPE OF REPORTING PERSON*

                    PN
================================================================================

                      *SEE INSTRUCTIONS BEFORE FILLING OUT!

1    Does not  include  shares  owned by  Newcastle  Partners,  L.P.,  which are
     subject  to  a  voting  agreement  between  Newcastle  Partners,  L.P.  and
     Newcastle  Special  Opportunity  Fund I, L.P.  described  in Item 6 of this
     Schedule 13D.




- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                    Page 4 of 14 Pages
- ------------------------------                           -----------------------


================================================================================
     1         NAME OF REPORTING PERSONS
               I.R.S. IDENTIFICATION NOS.OF ABOVE PERSONS (ENTITIES ONLY)

                    NEWCASTLE SPECIAL OPPORTUNITY FUND II, L.P.
- --------------------------------------------------------------------------------
     2         CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*         (a) / /
                                                                         (b) / /
- --------------------------------------------------------------------------------
     3         SEC USE ONLY

- --------------------------------------------------------------------------------
     4         SOURCE OF FUNDS*
                    WC
- --------------------------------------------------------------------------------
     5         CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
               PURSUANT TO ITEM 2(d) OR 2(e)                                 / /
- --------------------------------------------------------------------------------
     6         CITIZENSHIP OR PLACE OF ORGANIZATION

                    DELAWARE
- --------------------------------------------------------------------------------
 NUMBER OF         7      SOLE VOTING POWER
   SHARES
BENEFICIALLY                   9,726,562(1)
  OWNED BY     -----------------------------------------------------------------
    EACH           8      SHARED VOTING POWER
 REPORTING
PERSON WITH                    - 0 -
               -----------------------------------------------------------------
                   9      SOLE DISPOSITIVE POWER

                               9,726,562
               -----------------------------------------------------------------
                  10      SHARED DISPOSITIVE POWER

                               - 0 -
- --------------------------------------------------------------------------------
     11        AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
               PERSON

                    9,726,562
- --------------------------------------------------------------------------------
     12        CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
               SHARES*                                                       / /
- --------------------------------------------------------------------------------
     13        PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

                    9.1%
- --------------------------------------------------------------------------------
     14        TYPE OF REPORTING PERSON*

                    PN
================================================================================

                      *SEE INSTRUCTIONS BEFORE FILLING OUT!

1    Does not  include  shares  owned by  Newcastle  Partners,  L.P.,  which are
     subject  to  a  voting  agreement  between  Newcastle  Partners,  L.P.  and
     Newcastle  Special  Opportunity  Fund II, L.P.  described in Item 6 of this
     Schedule 13D.




- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                    Page 5 of 14 Pages
- ------------------------------                           -----------------------


================================================================================
     1         NAME OF REPORTING PERSONS
               I.R.S. IDENTIFICATION NOS.OF ABOVE PERSONS (ENTITIES ONLY)

                    NEWCASTLE CAPITAL MANAGEMENT, L.P.
- --------------------------------------------------------------------------------
     2         CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*         (a) / /
                                                                         (b) / /
- --------------------------------------------------------------------------------
     3         SEC USE ONLY

- --------------------------------------------------------------------------------
     4         SOURCE OF FUNDS*
                    OO
- --------------------------------------------------------------------------------
     5         CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
               PURSUANT TO ITEM 2(d) OR 2(e)                                 / /
- --------------------------------------------------------------------------------
     6         CITIZENSHIP OR PLACE OF ORGANIZATION

                    TEXAS
- --------------------------------------------------------------------------------
 NUMBER OF         7      SOLE VOTING POWER
   SHARES
BENEFICIALLY                   87,051,611
  OWNED BY     -----------------------------------------------------------------
    EACH           8      SHARED VOTING POWER
 REPORTING
PERSON WITH                    - 0 -
               -----------------------------------------------------------------
                   9      SOLE DISPOSITIVE POWER

                               87,051,611
               -----------------------------------------------------------------
                  10      SHARED DISPOSITIVE POWER

                               - 0 -
- --------------------------------------------------------------------------------
     11        AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
               PERSON

                    87,051,611
- --------------------------------------------------------------------------------
     12        CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
               SHARES*                                                       / /
- --------------------------------------------------------------------------------
     13        PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

                    81.8%
- --------------------------------------------------------------------------------
     14        TYPE OF REPORTING PERSON*

                    PN
================================================================================

                      *SEE INSTRUCTIONS BEFORE FILLING OUT!




- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                    Page 6 of 14 Pages
- ------------------------------                           -----------------------


================================================================================
     1         NAME OF REPORTING PERSONS
               I.R.S.  IDENTIFICATION  NOS. OF ABOVE PERSONS (ENTITIES ONLY)

                    NEWCASTLE CAPITAL GROUP, L.L.C.
- --------------------------------------------------------------------------------
     2         CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*         (a) / /
                                                                         (b) / /
- --------------------------------------------------------------------------------
     3         SEC USE ONLY

- --------------------------------------------------------------------------------
     4         SOURCE OF FUNDS*
                    OO
- --------------------------------------------------------------------------------
     5         CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
               PURSUANT TO ITEM 2(d) OR 2(e)                                 / /
- --------------------------------------------------------------------------------
     6         CITIZENSHIP OR PLACE OF ORGANIZATION

                    TEXAS
- --------------------------------------------------------------------------------
 NUMBER OF         7      SOLE VOTING POWER
   SHARES
BENEFICIALLY                   87,051,611
  OWNED BY     -----------------------------------------------------------------
    EACH           8      SHARED VOTING POWER
 REPORTING
PERSON WITH                    - 0 -
               -----------------------------------------------------------------
                   9      SOLE DISPOSITIVE POWER

                               87,051,611
               -----------------------------------------------------------------
                  10      SHARED DISPOSITIVE POWER

                               - 0 -
- --------------------------------------------------------------------------------
     11        AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
               PERSON

                    87,051,611
- --------------------------------------------------------------------------------
     12        CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
               SHARES*                                                       / /
- --------------------------------------------------------------------------------
     13        PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

                    81.8%
- --------------------------------------------------------------------------------
     14        TYPE OF REPORTING PERSON*

                    OO
================================================================================

                      *SEE INSTRUCTIONS BEFORE FILLING OUT!




- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                    Page 7 of 14 Pages
- ------------------------------                           -----------------------


================================================================================
     1         NAME OF REPORTING PERSONS
               I.R.S.  IDENTIFICATION  NOS. OF ABOVE PERSONS (ENTITIES ONLY)

                    MARK E. SCHWARZ
- --------------------------------------------------------------------------------
     2         CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*         (a) / /
                                                                         (b) / /
- --------------------------------------------------------------------------------
     3         SEC USE ONLY

- --------------------------------------------------------------------------------
     4         SOURCE OF FUNDS*
                    OO, PF
- --------------------------------------------------------------------------------
     5         CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
               PURSUANT TO ITEM 2(d) OR 2(e)                                 / /
- --------------------------------------------------------------------------------
     6         CITIZENSHIP OR PLACE OF ORGANIZATION

                    USA
- --------------------------------------------------------------------------------
 NUMBER OF         7      SOLE VOTING POWER
   SHARES
BENEFICIALLY                   87,344,536
  OWNED BY     -----------------------------------------------------------------
    EACH           8      SHARED VOTING POWER
 REPORTING
PERSON WITH                    - 0 -
               -----------------------------------------------------------------
                   9      SOLE DISPOSITIVE POWER

                               87,344,536
               -----------------------------------------------------------------
                  10      SHARED DISPOSITIVE POWER

                               - 0 -
- --------------------------------------------------------------------------------
     11        AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
               PERSON

                    87,344,536
- --------------------------------------------------------------------------------
     12        CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
               SHARES*                                                       / /
- --------------------------------------------------------------------------------
     13        PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

                    82.1%
- --------------------------------------------------------------------------------
     14        TYPE OF REPORTING PERSON*

                    IN
================================================================================

                      *SEE INSTRUCTIONS BEFORE FILLING OUT!




- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                    Page 8 of 14 Pages
- ------------------------------                           -----------------------


         The following  constitutes  Amendment No. 5 ("Amendment  No. 5") to the
Schedule 13D filed by the undersigned.  This Amendment No. 5 amends the Schedule
13D as specifically set forth herein.

         Item 2 is hereby amended and restated to read as follows:

         (a)-(c) This statement is jointly filed by Newcastle Partners,  L.P., a
Texas limited partnership ("NP"),  Newcastle Special Opportunity Fund I, L.P., a
Delaware limited  partnership ("NSOF I"), Newcastle Special Opportunity Fund II,
L.P., a Delaware limited partnership ("NSOF II"),  Newcastle Capital Management,
L.P., a Texas limited partnership  ("NCM"),  Newcastle Capital Group,  L.L.C., a
Texas limited liability company ("NCG"),  and Mark E. Schwarz (together with NP,
NSOF I, NSOF II, NCM and NCG, the "Reporting Persons").  Because Mark Schwarz is
the  managing  member of NCG,  which is the  general  partners of NCM (with Mark
Schwarz,  NCG and NCM  hereinafter  referred to as the  "Controlling  Persons"),
which in turn is the  general  partner  of each of NP,  NSOF I and NSOF II,  the
Controlling  Persons  may be deemed,  pursuant  to Rule 13d-3 of the  Securities
Exchange Act of 1934, as amended (the "Act"), to be the beneficial owners of all
shares of Common  Stock held by each of NP,  NSOF I and NSOF II.  The  Reporting
Persons are filing this joint  statement,  as they may be  considered  a "group"
under Section 13(d)(3) of the Act. However,  neither the fact of this filing nor
anything  contained herein shall be deemed an admission by the Reporting Persons
that such a group exists.

         As stated  above,  Mark  Schwarz  is the  managing  member of NCG.  The
principal business of NCG is acting as the general partner of NCM. The principal
business of NCM is acting as the general  partner of each of NP, NSOF I and NSOF
II. The  principal  business of each of NP, NSOF I and NSOF II is  investing  in
securities. The principal place of business and principal office for each of the
Reporting Persons is 300 Crescent Court, Suite 1110, Dallas, Texas 75201.

         (d) During the last five years,  none of the Reporting Persons has been
convicted in a criminal  proceeding  (excluding  traffic  violations  or similar
misdemeanors).

         (e) During the last five years,  none of the Reporting Persons has been
a party to a civil proceeding of a judicial or administrative  body of competent
jurisdiction,  and as a  result  of  such  proceeding,  was or is  subject  to a
judgment,  decree or final order enjoining future  violations of, or prohibiting
or mandating  activities subject to, federal or state securities laws or finding
any violation with respect to such laws.

         (f) Mark Schwarz is a United States citizen.

         Item 3 is hereby amended and restated to read as follows:

         As of January 27,  2006,  NP had  invested  $49,120,351  (inclusive  of
brokerage  commissions)  in shares of Common Stock of the Issuer.  The source of
these funds was the working capital of NP.



- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                    Page 9 of 14 Pages
- ------------------------------                           -----------------------


         As of January 27, 2006, NSOF I had invested $12,550,000 in a promissory
note that is convertible  into shares of Common Stock of the Issuer,  subject to
the  conditions  described  in Item 6 herein.  The source of these funds was the
working capital of NSOF I.

         As  of  January  27,  2006,  NSOF  II  had  invested  $12,450,000  in a
promissory  note that is convertible  into shares of Common Stock of the Issuer,
subject to the conditions  described in Item 6 herein. The source of these funds
was the working capital of NSOF II.

         As of January 27, 2006, Mark Schwarz had invested  $242,382  (inclusive
of brokerage commissions) in shares of Common Stock of the Issuer. The source of
these funds was the personal funds of Mr. Schwarz.

         Item 4 is hereby amended to add the following:

         On January 27, 2006,  each of NSOF I and NSOF II,  pursuant to separate
purchase  agreements entered into with the Issuer (each, a "Purchase  Agreement"
and, together,  the "Purchase  Agreements"),  purchased a promissory note in the
original principal amount of $12,550,000 and $12,450,000,  respectively (each, a
"Note" and, together, the "Notes"), that, subject to the conditions described in
Item 6 herein,  is  convertible  into  9,804,687  shares and  9,726,562  shares,
respectively,  of Common  Stock of the  Issuer,  based  upon  conversion  of the
original  principal amounts of each of the Notes at the initial conversion price
of $1.28 per share.

         Item 5(a)-(b) is hereby amended and restated to read as follows:

         (a) The aggregate  percentage of shares of Common Stock  reported to be
owned by the  Reporting  Persons is based upon  86,841,791  shares  outstanding,
which is the total number of shares of Common Stock  outstanding  as of November
14, 2005,  plus an aggregate of 19,531,249  shares of Common Stock issuable upon
conversion of the Notes, based upon conversion of the original principal amounts
of the Notes at the initial conversion price of $1.28 per share.

         As of  the  filing  date  of  this  statement,  NP  beneficially  owned
67,520,362  shares  of Common  Stock,  representing  approximately  63.5% of the
issued and outstanding Common Stock of the Issuer.

         Subject to the  conditions  described  in Item 6 herein,  NSOF I may be
deemed to  beneficially  own  9,804,687  shares of Common  Stock  issuable  upon
conversion of the original  principal amount of its Note, based upon the initial
conversion  price of $1.28 per  share,  representing  approximately  9.2% of the
issued and outstanding Common Stock of the Issuer.

         Subject to the  conditions  described in Item 6 herein,  NSOF II may be
deemed to  beneficially  own  9,726,562  shares of Common  Stock  issuable  upon
conversion of the original  principal amount of its Note, based upon the initial
conversion  price of $1.28 per  share,  representing  approximately  9.1% of the
issued and outstanding Common Stock of the Issuer.



- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                   Page 10 of 14 Pages
- ------------------------------                           -----------------------


         NCM, as the  general  partner of each of NP, NSOF I and NSOF II, may be
deemed to beneficially own the 67,520,362 shares, 9,804,687 shares and 9,726,562
shares  of  Common  Stock  beneficially  owned  by  NP,  NSOF  I  and  NSOF  II,
respectively,  representing  approximately  81.8% of the issued and  outstanding
Common Stock of the Issuer.

         NCG,  as the  general  partner  of NCM,  which  in turn is the  general
partner of each of NP,  NSOF I and NSOF II,  may also be deemed to  beneficially
own the 67,520,362 shares, 9,804,687 shares and 9,726,562 shares of Common Stock
beneficially  owned  by  NP,  NSOF I and  NSOF  II,  respectively,  representing
approximately 81.8% of the issued and outstanding Common Stock of the Issuer.

         Mark  Schwarz,  as the managing  member of NCG, the general  partner of
NCM, which in turn is the general partner of each of NP, NSOF I and NSOF II, may
also be deemed to beneficially own the 67,520,362  shares,  9,804,687 shares and
9,726,562 shares of Common Stock  beneficially  owned by NP, NSOF I and NSOF II,
respectively,  which,  together  with the  292,925  shares of  Common  Stock Mr.
Schwarz  owns  directly,  represents  approximately  82.1%  of  the  issued  and
outstanding Common Stock of the Issuer.

         NCM, NCG and Mr. Schwarz disclaim beneficial ownership of the shares of
Common Stock  beneficially owned by NP, NSOF I and NSOF II, except to the extent
of their pecuniary interest therein.

         (b) By virtue of his  position  with NP,  NSOF I, NSOF II, NCM and NCG,
Mr. Schwarz has the sole power to vote and dispose of the shares of Common Stock
reported in this statement.

         Item 5(c) is hereby amended to add the following:

         There were no  transactions  by the Reporting  Persons in the shares of
Common  Stock during the past 60 days other than the purchase by NSOF I and NSOF
II of the Notes described in Item 6 herein.

         Item 6 is hereby amended to add the following:

         On  January  27,  2006,  each of NSOF I and  NSOF II,  pursuant  to the
Purchase Agreements,  purchased from the Issuer a Note in the original principal
amount of $12,550,000 and $12,450,000,  respectively.  Subject to the conditions
described in the following  paragraph,  the principal of, and accrued but unpaid
interest  on, the Notes are  convertible  into Common Stock of the Issuer at any
time at the  option of NSOF I or NSOF II,  and any  unconverted  portion  of the
Notes will be converted into Common Stock on July 27, 2007, the maturity date of
the Notes. The initial conversion price of the Notes is $1.28 per share, subject
to  customary  anti-dilution  adjustments.  If the Issuer  consummates  a rights
offering  on or before  October  27,  2006 and the price to acquire one share of
Common Stock (or the equivalent  thereof)  pursuant to such rights offering (the
"Rights Offering  Price") is less than the conversion price then in effect,  the
conversion  price  will be reduced  to an amount  equal to the  Rights  Offering
Price.



- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                   Page 11 of 14 Pages
- ------------------------------                           -----------------------


         The Purchase  Agreements obligate the Issuer to hold its annual meeting
of  shareholders  no later than May 31,  2006 and to solicit  its  shareholders'
approval at the annual meeting of resolutions  providing for (1) the issuance of
all of the shares of Common Stock upon  conversion of the Notes,  as required by
the rules and regulations of the American Stock  Exchange,  and (2) the increase
in the  Issuer's  authorized  capital  by at least  20,000,000  shares of Common
Stock.  Approval of the former  proposal is a condition  to the  issuance of any
shares of Common Stock upon conversion of the Notes,  and approval of the latter
proposal is required to enable the full  conversion of the Notes.  Pursuant to a
voting  agreement  between  NP and each of NSOF I and NSOF II  (each,  a "Voting
Agreement" and, together,  the "Voting  Agreements"),  NP has agreed to vote all
shares of Common  Stock held  beneficially  or of record by it in favor of these
proposals.

         In connection  with NSOF I's and NSOF II's  purchase of the Notes,  the
Issuer,  pursuant to a registration  rights agreement  entered into with each of
NSOF I and NSOF II (each, a "Registration  Rights Agreement" and, together,  the
"Registration  Rights  Agreements"),  granted  NSOF I and NSOF II the  following
registration  rights with  respect to the shares of Common Stock  issuable  upon
conversion of the Notes (the "Registrable Securities"): (1) one right to request
that  the  Issuer  register  all or  part  of the  Registrable  Securities;  (2)
unlimited  "piggyback"  rights to  require  the  Issuer to  include  Registrable
Securities in registration  statements filed by the Issuer; and (3) the right to
cause the  Issuer to file a shelf  registration  statement  covering  all of the
Registrable Securities by January 27, 2009, subject to certain limitations.

         A form of each of the Purchase  Agreement,  the Note, the  Registration
Rights  Agreement and the Voting  Agreement is attached as an exhibit hereto and
is incorporated herein by reference.

         Other than as described herein,  there are no contracts,  arrangements,
understandings  or  relationships  among the Reporting  Persons,  or between the
Reporting  Persons and any other person,  with respect to the  securities of the
Issuer.

         Item 7 is hereby amended to add the following exhibits:

Exhibit 99.1      Joint Filing Agreement

Exhibit 99.2      Form of Purchase Agreement

Exhibit 99.3      Form of Note

Exhibit 99.4      Form of Registration Rights Agreement

Exhibit 99.5      Form of Voting Agreement




- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                   Page 12 of 14 Pages
- ------------------------------                           -----------------------


                                   SIGNATURES

         After  reasonable  inquiry and to the best of my knowledge  and belief,
the  undersigned  certify that the  information  set forth in this  statement is
true, complete and correct.


Dated: January 31, 2006                         NEWCASTLE PARTNERS, L.P.

                                         By: Newcastle Capital Management, L.P.,
                                             its general partner
                                         By: Newcastle Capital Group, L.L.C.,
                                             its general partner

                                         By: /s/ Mark Schwarz
                                             -----------------------------------
                                             Mark Schwarz, Managing Member


                                         NEWCASTLE SPECIAL OPPORTUNITY FUND I,
                                         L.P.

                                         By: Newcastle Capital Management, L.P.,
                                             its general partner
                                         By: Newcastle Capital Group, L.L.C.,
                                             its general partner

                                         By: /s/ Mark Schwarz
                                             -----------------------------------
                                             Mark Schwarz, Managing Member


                                         NEWCASTLE SPECIAL OPPORTUNITY FUND II,
                                         L.P.

                                         By: Newcastle Capital Management, L.P.,
                                             its general partner
                                         By: Newcastle Capital Group, L.L.C.,
                                             its general partner

                                         By: /s/ Mark Schwarz
                                             -----------------------------------
                                             Mark Schwarz, Managing Member


                                         NEWCASTLE CAPITAL MANAGEMENT, L.P.

                                         By: Newcastle Capital Group, L.L.C.,
                                             its general partner

                                         By: /s/ Mark Schwarz
                                             -----------------------------------
                                             Mark Schwarz, Managing Member




- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                   Page 13 of 14 Pages
- ------------------------------                           -----------------------


                                         NEWCASTLE CAPITAL GROUP, L.L.C.

                                         By: /s/ Mark Schwarz
                                             -----------------------------------
                                             Mark Schwarz, Managing Member


                                          /s/ Mark Schwarz
                                         ---------------------------------------
                                         MARK SCHWARZ




- ------------------------------                           -----------------------
CUSIP 40624Q104                        13D                   Page 14 of 14 Pages
- ------------------------------                           -----------------------


                                  EXHIBIT INDEX

Exhibit
- -------

99.1     Joint Filing Agreement
99.2     Form of Purchase Agreement
99.3     Form of Note
99.4     Form of Registration Rights Agreement
99.5     Form of Voting Agreement

EX-99.1 2 ex991sc13da504670005_012706.htm sec document


                                                                    Exhibit 99.1

                             JOINT FILING AGREEMENT
                             ----------------------

         _________In  accordance with Rule 13d-1(k)(1)(iii) under the Securities
Exchange  Act of 1934,  as amended,  the persons  named below agree to the joint
filing on behalf of each of them of a Statement  on Schedule  13D dated  January
31, 2006  (including  amendments  thereto)  with  respect to the Common Stock of
Hallmark Financial Services,  Inc. This Joint Filing Agreement shall be filed as
an Exhibit to such Statement.


Dated: January 31, 2006                  NEWCASTLE PARTNERS, L.P.

                                         By: Newcastle Capital Management, L.P.,
                                             its general partner
                                         By: Newcastle Capital Group, L.L.C.,
                                             its general partner

                                         By: /s/ Mark Schwarz
                                             -----------------------------------
                                             Mark Schwarz, Managing Member


                                         NEWCASTLE SPECIAL OPPORTUNITY FUND I,
                                         L.P.

                                         By: Newcastle Capital Management, L.P.,
                                             its general partner
                                         By: Newcastle Capital Group, L.L.C.,
                                             its general partner

                                         By: /s/ Mark Schwarz
                                             -----------------------------------
                                             Mark Schwarz, Managing Member


                                         NEWCASTLE SPECIAL OPPORTUNITY FUND II,
                                         L.P.

                                         By: Newcastle Capital Management, L.P.,
                                             its general partner
                                         By: Newcastle Capital Group, L.L.C.,
                                             its general partner

                                         By: /s/ Mark Schwarz
                                             -----------------------------------
                                             Mark Schwarz, Managing Member




                                         NEWCASTLE CAPITAL MANAGEMENT, L.P.

                                         By: Newcastle Capital Group, L.L.C.,
                                             its general partner

                                         By: /s/ Mark Schwarz
                                             -----------------------------------
                                             Mark Schwarz, Managing Member


                                         NEWCASTLE CAPITAL GROUP, L.L.C.

                                         By: /s/ Mark Schwarz
                                             -----------------------------------
                                             Mark Schwarz, Managing Member


                                         /s/ Mark Schwarz
                                         ---------------------------------------
                                         MARK SCHWARZ

EX-99.2 3 ex992sc13da504670005_012706.htm sec document


                                                                    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 :
                                -----------------

     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,  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


                                       -2-


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


                                      -3-


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


                                      -4-


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


                                      -5-


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.


                                      -6-


     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)


                                      -7-


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.


                                      -8-


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.


                                      -9-


     (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


                                      -10-


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


                                      -11-


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:

                                      -12-


            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


                                      -13-


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.


                                      -14-


     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
   -------------------------------               -------------------------------

Its                                           Its
    ------------------------------                ------------------------------


                                      -15-


                                    EXHIBIT A

                                  FORM OF NOTE






                                    EXHIBIT B

                      FORM OF REGISTRATION RIGHTS AGREEMENT

EX-99.3 4 ex993sc13da504670005_012706.htm sec document


                                                                    Exhibit 99.3

     THIS NOTE AND THE SECURITIES  UNDERLYING THIS NOTE HAVE NOT BEEN REGISTERED
UNDER THE  SECURITIES  ACT OF 1933, AS AMENDED (THE "ACT"),  OR QUALIFIED  UNDER
APPLICABLE  STATE  SECURITIES  LAWS. THE SECURITIES MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED  IN THE  ABSENCE OF SUCH  REGISTRATION  AND  QUALIFICATION  WITHOUT,
EXCEPT AS OTHERWISE AGREED BY HALLMARK FINANCIAL  SERVICES,  INC., AN OPINION OF
COUNSEL REASONABLY  SATISFACTORY TO HALLMARK FINANCIAL SERVICES,  INC. THAT SUCH
REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.

                           CONVERTIBLE PROMISSORY NOTE

$12,550,000                                                     January 27, 2006

     FOR VALUE RECEIVED, the undersigned,  HALLMARK FINANCIAL SERVICES,  INC., a
Nevada  corporation  (the  "Maker"),  hereby  promises  to pay to the  order  of
Newcastle Special Opportunity Fund I, L.P., a Delaware limited  partnership,  or
its assigns (the "Payee"),  at such place as the Payee may designate in writing,
the  principal  sum of  Twelve  Million  Five  Hundred  Fifty  Thousand  Dollars
($12,550,000),  or such lesser amount as shall equal the  outstanding  principal
amount hereof, under the terms set forth herein.  Capitalized terms used but not
defined  herein shall have the  respective  meanings  given to such terms in the
Purchase  Agreement,  dated as of the date  hereof (the  "Purchase  Agreement"),
between the Maker and the Payer.

     1.   INTEREST.  Except as otherwise  provided herein,  the unpaid principal
balance hereof from time to time  outstanding  shall bear interest from the date
hereof at the rate of four percent  (4%) per annum.  Interest on this Note shall
be computed on the basis of a 365-day year.

     2.   PAYMENT OF INTEREST AND PRINCIPAL. Except as otherwise provided herein
(including,  without  limitation,  Sections 5 and 6 hereof),  and subject to any
default hereunder, the principal and interest hereof is payable as follows:

          (a)  Interest is payable in cash  quarterly in arrears on December 31,
March 31, June 30 and September 30 of each year, beginning March 31, 2006.

          (b)  The entire outstanding principal amount of the Note together with
all  accrued  but  unpaid  interest  shall be due in cash on July 27,  2007 (the
"Maturity Date").

          (c)  The Maker will have no right of early prepayment on this Note.

     3.   CONVERSION AT THE OPTION OF PAYEE.

          (a)  At any time while any  portion of the  principal  or  interest of
this Note is  outstanding,  the Payee may give the Maker  written  notice of its
intention  to convert all or any  portion of the  outstanding  principal  and/or
accrued  but  unpaid  interest  on this Note  into such  number of shares of the
Maker's common stock, par value $0.03 per share (the "Common  Stock"),  equal to
the amount to be  converted  divided by the  Conversion  Price in effect at such
time.  Upon  receipt  of the  Payee's  written  notice,  the Maker  shall  cause
certificates  representing  those  shares to be  delivered to Payee within three




business days of Maker's receipt of such notice.  The person or persons entitled
to receive the shares of Common Stock  issuable  upon a conversion  of this Note
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock on the date the applicable conversion notice is given.

          (b)  The  "Conversion  Price"  initially  shall be $1.28  and shall be
subject to adjustment as set forth below. The Conversion Price shall be adjusted
proportionally  for any subsequent stock dividend or split, stock combination or
other  similar  recapitalization,   reclassification  or  reorganization  of  or
affecting Maker's Common Stock.

          (c)  In case of a Change of Control,  instead of  receiving  shares of
Maker's  Common Stock upon  conversion of this Note,  Payee shall have the right
thereafter  to  receive  the kind and  amount  of  shares  of  stock  and  other
securities,  cash and  property  which the Payee  would  have owned or have been
entitled  to  receive  immediately  after such  Change of  Control  had the same
portion of this Note been converted  immediately  prior to the effective date of
such  Change  of  Control  and,  in any such  case,  if  necessary,  appropriate
adjustment  shall be made in the application of the provisions set forth in this
Section with respect to the rights and interests thereafter of the Payee, to the
end  that  the   provisions   set  forth  in  this  Section   shall   thereafter
correspondingly be made applicable,  as nearly as may reasonably be, in relation
to any  shares of stock  and  other  securities,  cash and  property  thereafter
deliverable  in connection  with this Note.  The  provisions of this  subsection
shall similarly apply to successive Changes of Control.

     "Change of Control" means that the Maker shall, directly or indirectly,  in
one or more related transactions, (i) consolidate or merge with or into (whether
or not the  Maker is the  surviving  corporation)  another  person,  (ii)  sell,
assign, transfer, convey or otherwise dispose of all or substantially all of the
properties or assets of the Maker to another person,  (iii) allow another person
to make a purchase,  tender or exchange offer that is accepted by the holders of
more than 50% of the  outstanding  shares of Common  Stock  (not  including  any
shares of Common  Stock  held by the  person or  persons  making or party to, or
associated or  affiliated  with the persons  making or party to, such  purchase,
tender or exchange  offer),  or (iv)  consummate a stock  purchase  agreement or
other business  combination  (including,  without limitation,  a reorganization,
recapitalization  or  spin-off)  with another  person  whereby such other person
acquires more than 50% of the outstanding  shares of Common Stock (not including
any shares of Common Stock held by the other person or other  persons  making or
party to, or associated or affiliated with the other persons making or party to,
such stock purchase agreement or other business combination); provided, however,
that a transaction in which Newcastle Partners, L.P. or any of its affiliates is
the acquiring party shall not be deemed to constitute a Change of Control.

          (d)  In the event that the Maker  consummates an offering of rights to
purchase  Common Stock or  Convertible  Securities  on or before the  nine-month
anniversary  of the  Closing  Date and the price to acquire  one share of Common
Stock (or the equivalent  thereof) pursuant to such rights offering (the "Rights
Offering Price") is less than the Conversion Price in effect  immediately  prior
to the  consummation  of  such  rights  offering,  then  immediately  after  the
consummation of such rights offering,  the Conversion Price then in effect shall
be reduced to an amount equal to the Rights Offering Price.


                                      -2-


          (e)  No fractional shares of Maker's Common Stock shall be issued upon
conversion  of the Note. In lieu of any  fractional  shares to which Payee would
otherwise  be  entitled,  the Maker  shall pay cash equal to the product of such
fraction  multiplied by the average of the closing prices of the Common Stock on
the American Stock Exchange for the five  consecutive  trading days  immediately
preceding the date of the conversion.

          (f)  In the event of an adjustment to the Conversion  Price, the Maker
shall promptly deliver to the Payee a certificate, signed by its Chief Financial
Officer,  setting forth the new Conversion Price and a calculation in reasonable
detail of the adjustment to the Conversion Price.

          (g)  The Maker  shall pay any and all taxes that may be  payable  with
respect to the issuance and  delivery of Common  Stock upon  conversion  of this
Note;  provided  that the Maker shall not be required to pay any tax that may be
payable in respect of any  issuance of Common Stock to any person other than the
Payee or with  respect to any  income tax due by the Payee with  respect to such
Common Stock.

     4.   REDEMPTION  UPON CHANGE OF  CONTROL.  No sooner than 15 days nor later
than  10  days  prior  to  the  consummation  of a  Change  of  Control,  if the
Shareholder Approval has not then been obtained, the Maker shall deliver written
notice of such Change of Control to the Payee (a "Change of Control Notice"). At
any time during the period  beginning  after the Payee's  receipt of a Change of
Control  Notice and  ending on the date of the  consummation  of such  Change of
Control,  the Payee may  require  the Maker to redeem all or any portion of this
Note by  delivering  written  notice  thereof (a  "Change of Control  Redemption
Notice") to the Maker,  which Change of Control Redemption Notice shall indicate
the portion of the outstanding  principal  amount of this Note that the Payee is
electing to redeem.  The portion of this Note subject to redemption  pursuant to
this  Section 4 shall be  redeemed  by the Maker at a price equal to 110% of the
principal  amount  being  redeemed,  plus  accrued  but unpaid  interest on such
principal  amount  (the  "Change  of  Control  Redemption  Price").  Redemptions
required by this Section 4 shall be made on the date of the  consummation of the
Change of Control and shall have  priority to  payments to  shareholders  of the
Maker in connection with such Change of Control. Notwithstanding anything to the
contrary in this Section 4, until the Change of Control Redemption Price is paid
in full,  the principal  amount  submitted for  redemption  under this Section 4
(together  with any accrued but unpaid  interest  thereon) may be converted,  in
whole or in part, by the Payee into Common Stock pursuant to Section 3.

     5.   REQUIRED CONVERSION ON MATURITY DATE. On the Maturity Date, in lieu of
making the payment  required by Section 2(b), the Maker shall issue to the Payee
a certificate  representing such number of shares of Common Stock as is equal to
the quotient  obtained by dividing the entire principal amount of this Note then
outstanding,  plus all accrued but unpaid  interest  thereon,  by the Conversion
Price in effect at such time, in full  satisfaction  of this Note (the "Maturity
Date Conversion"). The applicable provisions of Section 3 shall apply with equal
force to the Maturity Date Conversion.

     6.   CONDITION  TO  ISSUANCE  OF SHARES  UPON  CONVERSION.  Notwithstanding
anything to the contrary  contained  in Section 3 or Section 5 of this Note,  it
shall be a condition  precedent  to Maker's  issuance of shares of Common  Stock


                                      -3-


upon  conversion of this Note,  whether on the Maturity Date or otherwise,  that
the Stockholder Approval shall have been obtained prior to such issuance.

     7.   DIVIDENDS.  If, at any time  while any  portion  of the  principal  or
interest on the Note is  outstanding,  Maker  declares a  distribution  in cash,
property  (including  securities)  or a combination  thereof,  whether by way of
dividend  or  otherwise,  with  respect to its  Common  Stock,  the Payee  shall
participate pro rata in such distribution on an as-converted  basis with holders
of Maker's Common Stock.

     8.   RANKING. The Note is subordinate and junior to all existing and future
secured  indebtedness of Maker. This Note will rank pari passu with all existing
and  future  unsecured  indebtedness  of  Maker,  unless  such  other  unsecured
indebtedness is, by its terms or by operation of law,  subordinate and junior to
the unsecured indebtedness represented by this Note, and will rank senior to the
indebtedness  and obligations  evidenced by the Indenture,  dated as of June 21,
2005 (the  "Indenture"),  between the Maker and  JPMorgan  Chase Bank,  National
Association,  as trustee (the "Trustee"),  the Guarantee Agreement,  dated as of
June 21, 2005,  between the Maker and the Trustee and the Trust  Securities  (as
defined in the Indenture) of Hallmark Statutory Trust I.

     9.   COVENANTS.  From the date  hereof  and until  payment  in full of this
Note, the Maker will, and will cause each of its Subsidiaries to:

          (a)  MAINTENANCE OF EXISTENCE. Do all things necessary to preserve and
keep in full force and effect its existence as a corporation.

          (b)  COMPLIANCE WITH APPLICABLE LAWS.  Comply in all material respects
with the requirements of all applicable statutes,  laws, rules,  regulations and
orders of any governmental  authority,  except where contested in good faith and
by proper proceedings.

          (c)  LICENSES.  Obtain and maintain all  material  licenses,  permits,
franchises or other  governmental  authorizations  necessary to the ownership of
its properties or to the conduct of its business.

     10.  DEFAULT.  The  occurrence of any one or more of the  following  events
shall  constitute  an event of default,  upon which Payee may declare the entire
principal amount of this Note, together with all accrued but unpaid interest, to
be immediately due and payable in cash:

          (a)  The Maker shall fail to make any payment of principal (whether in
cash or by conversion  pursuant to Section 5 hereof)  and/or  accrued but unpaid
interest (at the applicable rate) when due and payable, and such failure, in the
case of any  interest  payment,  shall  continue  for a period of at least  five
business days.

          (b)  The Maker shall be in material  default of any term or  provision
of this Note, the Purchase Agreement or the Registration  Rights Agreement,  and
such failure shall continue  through 15 days after Payee gives written notice of
such default to Maker.


                                      -4-


          (c)  Any  representation  or  warranty of the Maker  contained  in the
Purchase Agreement or the Registration Rights Agreement shall have been false in
any material respect on the Closing Date.

          (d)  The Maker or any of its  Subsidiaries,  pursuant to or within the
meaning of Title 11, U.S. Code, or any similar federal, foreign or state law for
the  relief  of  debtors  (collectively,  "Bankruptcy  Law"),  (i)  commences  a
voluntary  case, (ii) consents to the entry of an order for relief against it in
an involuntary  case, (iii) consents to the appointment of a receiver,  trustee,
assignee,  liquidator or similar official (a "Custodian"),  (iv) makes a general
assignment  for the benefit of its creditors or (v) admits in writing that it is
generally unable to pay its debts as they become due.

          (e)  A court of competent jurisdiction enters an order or decree under
any  Bankruptcy  Law  that (i) is for  relief  against  the  Maker or any of its
Subsidiaries  in an involuntary  case, (ii) appoints a Custodian of the Maker or
any of its  Subsidiaries  or (iii) orders the liquidation of the Maker or any of
its Subsidiaries.

     Without limiting the above, the Maker acknowledges that payments in cash or
by the issuance of stock on the various  scheduled  due dates are of essence and
that any failure to timely pay the  principal or interest  (within any permitted
grace period) permits Payee to declare this Note  immediately due in cash in its
entirety without any prior notice of any kind to Maker,  except for the specific
notices  provided  above.  Upon the occurrence and during the  continuance of an
event of default,  the interest  rate under this Note shall be increased to 10%.
In the event that such event of default is  subsequently  cured,  the adjustment
referred to in the preceding sentence shall cease to be effective as of the date
of such  cure;  provided  that the  interest  as  calculated  and unpaid at such
increased rate during the continuance of such event of default shall continue to
apply to the extent  relating to the days after the  occurrence of such event of
default through and including the date of cure of such event of default.

     11.  APPLICABLE LAW. THE VALIDITY,  CONSTRUCTION AND  ENFORCEABILITY OF THE
NOTE  SHALL BE  GOVERNED  BY THE  INTERNAL  LAWS OF THE STATE OF TEXAS,  WITHOUT
GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF.

     12.  WAIVERS.  The Maker hereby waives  presentment for payment,  notice of
dishonor, protest and notice of payment and all other demands and notices of any
kind in connection with the enforcement of this Note. Any provision of this Note
may be amended,  waived or modified upon the written consent of Maker and Payee.
No failure or delay on the part of the Payee in the exercise of any power, right
or privilege  hereunder shall operate as a waiver thereof,  nor shall any single
or partial  exercise of any such power,  right or  privilege  preclude  other or
further exercise thereof or of any other power, right or privilege.

     13.  NO SETOFFS.  The Maker shall pay principal and interest under the Note
without any deduction for any setoff or counterclaim.

     14.  COSTS OF  COLLECTION.  If this Note is not paid  when  due,  the Maker
shall  pay  Payee's  reasonable  costs  of  collection,   including   reasonable
attorneys' fees.


                                      -5-


     15.  NOTICES. Whenever notice is required to be given under this Note, such
notice shall be given in accordance with Section 7.7 of the Purchase Agreement.

                            [SIGNATURE PAGE FOLLOWS]


                                      -6-


     IN WITNESS WHEREOF, the undersigned has hereunto affixed its signature.

                                     HALLMARK FINANCIAL SERVICES, INC.


                                     By
                                        ----------------------------------------
                                     Its
                                         ---------------------------------------


                                      -7-

EX-99.4 5 ex994sc13da504670005_012706.htm sec document


                                                                    Exhibit 99.4

                          REGISTRATION RIGHTS AGREEMENT

     THIS REGISTRATION  RIGHTS AGREEMENT (the "AGREEMENT") is entered into as of
January 27, 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 "INVESTOR").

                                R E C I T A L S :

     WHEREAS,  the Company has entered  into that  certain  Purchase  Agreement,
dated  as of the date  hereof  (the  "PURCHASE  AGREEMENT"),  with the  Investor
pursuant  to which the  Company  has agreed to issue and sell to the  Investor a
convertible promissory note (the "NOTE");

     WHEREAS,  the Company has agreed to grant certain  registration rights with
respect to the shares of the Company's  Common Stock issuable upon conversion of
the Note;

     NOW,  THEREFORE,  in  consideration  of the  foregoing  and  of the  mutual
promises  and  covenants  contained  herein,  and for  other  good and  valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:

                                    ARTICLE 1
                                   DEFINITIONS

     Capitalized  terms used but not defined  herein  shall have the  respective
meanings given to them in the Purchase Agreement.

     As used herein,  the following  terms shall have the  following  respective
meanings:

     1.1  "COMMISSION" shall mean the U.S. Securities and Exchange Commission or
any other successor federal agency at the time administering the Securities Act.

     1.2  "COMMON STOCK" shall mean the Company's common stock,  $0.03 par value
per share.

     1.3  "EXCHANGE  ACT" shall mean the  Securities  Exchange  Act of 1934,  as
amended,  or any similar  federal  statute and the rules and  regulations of the
Commission thereunder, all as the same shall be in effect at the time.

     1.4  "HOLDERS"  shall mean and  include  the  Investor  and any  transferee
thereof who holds Registrable Securities of record.

     1.5  "REGISTER,"  "REGISTERED" and  "REGISTRATION"  refer to a registration
effected by preparing and filing with the Commission a registration statement in
compliance  with the  Securities  Act,  and the  declaration  or ordering by the
Commission of the effectiveness of such registration statement.




     1.6  "REGISTRABLE  SECURITIES" means any and all shares of Common Stock (i)
issued or issuable upon  conversion of the Note and (ii) issued or issuable with
respect  to the  Common  Stock  referred  to in clause  (i) above upon any stock
split,  stock dividend,  recapitalization,  reclassification,  exchange or other
similar event.  The term  "Registrable  Securities"  shall exclude in all cases,
however, such shares of Common Stock (i) following their sale by a Holder to the
public pursuant to a registered offering or pursuant to Rule 144 or (ii) sold in
a private  transaction  in which the  Holder's  registration  rights  under this
Agreement are not assigned.

     1.7  "REGISTRATION  EXPENSES"  shall  mean  all  reasonable  and  customary
expenses  incurred by the Company in complying  with Articles 2, 3 and 5 hereof,
including,  without limitation, all registration,  qualification and Commission,
National  Association  of Securities  Dealers,  Inc.,  stock  exchange and other
filing fees, printing expenses,  duplication  expenses relating to copies of any
registration statement or prospectus delivered to any Holders, escrow fees, fees
and  disbursements of legal counsel for the Company,  fees and  disbursements of
the Company's accountants and blue sky fees and expenses.

     1.8  "RULE 144" shall mean Rule 144 under the  Securities  Act or any other
similar rule or regulation then in effect.

     1.9  "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any similar  federal  statute and the rules and  regulations  of the  Commission
thereunder, all as the same shall be in effect at the time.

     1.10 "SELLING  EXPENSES" shall mean all  underwriting  fees,  discounts and
selling  commissions  applicable  to the  Registrable  Securities  registered on
behalf of the Holders and the fees and expenses of any special  counsel  engaged
by the Holders.

                                   ARTICLE 2
                              REQUIRED REGISTRATION

     2.1  REQUEST FOR REGISTRATION.

     (a)  At any time from and after the date  hereof,  the  Investor may make a
written  request  to the  Company  to file a  registration  statement  under the
Securities Act covering all or part of the  Registrable  Securities then held by
the  Investor.  No later than 30 days  following  its  receipt  of such  written
request (the "DEMAND  REGISTRATION  FILING DATE"),  the Company will prepare and
file with the  Commission a  registration  statement  under the  Securities  Act
covering all of the Registrable Securities requested to be included therein, and
the Company will use its reasonable best efforts to obtain the  effectiveness of
such  registration  as soon as  practicable  as would permit or  facilitate  the
original  issuance  or  subsequent  resale  and  distribution  of  all  of  such
Registrable Securities. If, however, the Company shall furnish to the Investor a
certificate  signed by the Chief  Operating  Officer of the Company prior to the
Demand  Registration Filing Date stating that, in the good faith judgment of the
Board of  Directors of the Company,  it would be  seriously  detrimental  to the
Company and its  shareholders  for such  registration  statement  to be filed by
reason of a material pending transaction,  then the Company shall have the right
to defer  such  filing  for a period of not more than 60 days  after the  Demand
Registration Filing Date. Such registration  statement shall contain (unless the


                                      -2-


Investor  otherwise directs)  substantially the "Plan of Distribution"  attached
hereto as ANNEX A.

     (b)  The  Company  shall be  obligated  to  effect  only  one  registration
pursuant to this Section 2.1. If any registration is commenced  pursuant to this
Section  2.1  and is not  consummated  for  any  reason  whatsoever  (a  "FAILED
REGISTRATION"),  such Failed  Registration  shall not be deemed to  constitute a
registration  under this  Section 2.1 and the  Investor  shall retain its rights
pursuant  to  this  Section  2.1.  Any  expenses  in  connection  with a  Failed
Registration shall be paid in accordance with Article 4 hereof.

     2.2  SHELF REGISTRATION.  Not later than the Shelf Registration Filing Date
(as defined  below),  the Company  will  prepare and file with the  Commission a
registration  statement under the Securities Act covering all of the Registrable
Securities  then  outstanding,  and the  Company  will use its  reasonable  best
efforts to obtain the  effectiveness of such registration as soon as practicable
as would permit or facilitate  the original  issuance or  subsequent  resale and
distribution of all of such Registrable  Securities by the Holders. If, however,
the  Company  shall  furnish to the  Holders a  certificate  signed by the Chief
Operating Officer of the Company within 30 days of the Shelf Registration Filing
Date stating that,  in the good faith  judgment of the Board of Directors of the
Company,  it would be seriously  detrimental to the Company and its shareholders
for such  registration  statement  to be filed by reason of a  material  pending
transaction,  then the  Company  shall have the right to defer such filing for a
period of not more than sixty 60 days after the Shelf Registration  Filing Date.
Such registration  statement shall contain (unless the Holders otherwise direct)
substantially  the "Plan of  Distribution"  attached  hereto as ANNEX A.  "SHELF
REGISTRATION  FILING DATE" shall mean the third  anniversary of the date hereof,
provided that the Company's market  capitalization  on such date is greater than
$300 million; provided,  however, that if the Company's market capitalization on
such date is less  than or equal to $300  million,  then the Shelf  Registration
Filing Date shall be 30 days  following the first date  thereafter  (the "MARKET
CAPITALIZATION THRESHOLD DATE") that the Company's market capitalization exceeds
$300 million,  and the Company shall give the Investor  prompt written notice of
the occurrence of the Market Capitalization Threshold Date.

     2.3  UNDERWRITING.

     (a)  The resale  distribution of the Registrable  Securities covered by the
registration  statements  referred  to in  Section  2.1 and 2.2  above  shall be
effected by means of the method of distribution  selected by the Holders holding
a majority in  interest of the  Registrable  Securities.  The Holders  holding a
majority in interest of the  Registrable  Securities  may also change the resale
distribution  method from time to time (subject to amendment of the registration
statement at the expense of the Holders as required to describe  such  changes).
If such  distribution is effected by means of an underwriting,  the right of any
Holder to registration pursuant to this Article 2 shall be conditioned upon such
Holder's  participation in such  underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein.

     (b)  If such  distribution  is  effected by means of an  underwriting,  the
Company  (together  with all Holders  proposing to distribute  their  securities
through  such  underwriting)  shall  enter  into an  underwriting  agreement  in
customary  form with a managing  underwriter of nationally  recognized  standing


                                      -3-


selected  for such  underwriting  by the Company  and  approved by a majority in
interest of the Holders,  which  approval  shall not be  unreasonably  withheld;
provided,  however,  that the  liability  of each Holder  shall be limited to an
amount equal to the net proceeds from the offering received by such Holder.

     (c)  Notwithstanding any other provision of this Article 2, if the managing
underwriter determines that marketing factors require a limitation of the number
of  shares to be  underwritten,  the  Company  shall so advise  all  Holders  of
Registrable Securities, and the number of shares of Registrable Securities to be
included in the underwriting shall be allocated among the Holders of Registrable
Securities  that have elected to participate in such  underwritten  offering pro
rata  according  to the number of  Registrable  Securities  held by each Holder.
Without the consent of a majority in  interest  of the  Holders,  no  securities
other than Registrable Securities shall be covered by such registration.

     (d)  If any  Holder  disapproves  of the  terms of the  underwriting,  such
Holder may elect to withdraw  therefrom by written  notice to the  Company,  the
managing  underwriter  and the other  Holders.  The  Registrable  Securities  so
withdrawn shall also be withdrawn from registration.

                                   ARTICLE 3
                              COMPANY REGISTRATION

     3.1  NOTICE OF  REGISTRATION  TO  INVESTOR.  If at any time or from time to
time from and after the date hereof, the Company shall determine to register any
of its  securities,  either  for its own  account  or the  account of a security
holder or holders,  other than (i) a  registration  relating  solely to employee
benefit plans on Form S-8 (or any successor  form),  (ii) a registration on Form
S-4 (or any  successor  form),  (iii) a  registration  on any form that does not
permit  secondary  sales  or (iv) a  registration  relating  solely  to a rights
offering, the Company will:

     (a)  promptly give to the Investor written notice thereof; and

     (b)  include in such registration (and any related qualification under blue
sky laws or other compliance),  and in any underwriting involved therein, all of
the Registrable  Securities specified in a written request,  made within 15 days
after  receipt of such  written  notice  from the Company  described  in Section
3.1(a),  by the Investor,  but only to the extent that the original  issuance or
resale distribution of such Registrable  Securities is not already covered by an
effective registration statement under Article 2 above.

     3.2  UNDERWRITING.

     (a)  If the  registration  of which  the  Company  gives  notice  is for an
offering involving an underwriting,  the Company shall so advise the Investor as
part of the written notice given pursuant to Section 3.1(a).  In such event, the
right of the  Investor  to  registration  pursuant  to this  Article  3 shall be
conditioned  upon the  Investor's  participation  in such  underwriting  and the
inclusion of the Investor's  Registrable  Securities in the  underwriting to the
extent  provided  herein.  The Investor shall  (together with the Company) enter
into an underwriting  agreement in customary form with the managing  underwriter
selected for such  underwriting  by the  Company;  provided,  however,  that the
liability  of the  Investor  shall  be  limited  to an  amount  equal to the net
proceeds from the offering received by the Investor.


                                      -4-


     (b)  Notwithstanding any other provision of this Article 3, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten,  the Company shall so advise the Investor, and the
number of shares of Common  Stock to be included in such  registration  shall be
allocated as follows:  (i) first, for the account of the Company,  all shares of
Common  Stock  proposed  to be sold by the  Company;  and (ii)  second,  for the
account of the Investor and any other shareholders of the Company  participating
in such  registration,  the  number of shares of Common  Stock  requested  to be
included in the  registration  by the  Investor and such other  shareholders  in
proportion,  as nearly as practicable,  to the respective  number of shares that
are proposed to be offered and sold by the Investor and such other  shareholders
at the time of filing the registration  statement.  No Registrable Securities or
other shares of Common Stock excluded from the underwriting in this Article 3 by
reason of the  underwriters'  marketing  limitation  shall be  included  in such
registration.

     (c)  The Company  shall so advise the Investor  and the other  shareholders
distributing  their securities  through such underwriting of any such limitation
and the  number of  shares  that may be  included  in the  registration.  If the
Investor  disapproves  of the terms of any such  underwriting,  the Investor may
elect to withdraw  therefrom  by written  notice to the Company and the managing
underwriter.  Any securities  excluded or withdrawn from such underwriting shall
be withdrawn from such registration.

     (d)  The  Company  shall  have  the  right to  terminate  or  withdraw  any
registration  initiated by it under this Article 3 prior to the effectiveness of
such  registration,   whether  or  not  the  Investor  has  elected  to  include
Registrable Securities in such registration.

                                   ARTICLE 4
                            EXPENSES OF REGISTRATION

     All  Registration  Expenses  incurred in connection with any  registration,
qualification  or  compliance  pursuant  to  Articles  2, 3 and 5 hereof and the
reasonable fees of one counsel for the Holders of Registrable  Securities in the
case of a  registration  pursuant  to Article 2 hereof  (up to $5,000)  shall be
borne by the Company.  All Selling Expenses  relating to Registrable  Securities
registered on behalf of a Holder shall be borne by such Holder.

                                   ARTICLE 5
                             REGISTRATION PROCEDURES

     (a)  In the case of each  registration  effected by the Company pursuant to
this  Agreement,  the Company will keep each Holder advised in writing as to the
initiation of each  registration and as to the completion  thereof.  The Company
agrees to use its reasonable  best efforts to effect or cause such  registration
to permit the sale of the Registrable  Securities covered thereby by the Holders
thereof in  accordance  with the  intended  method or  methods  of  distribution
thereof  described  in such  registration  statement.  In  connection  with  any
registration of any Registrable Securities, the Company shall:

               (i)     prepare  and file  with  the  Commission  a  registration
          statement  with  respect to such  Registrable  Securities  and use its
          reasonable best efforts to cause such registration  statement filed to
          become effective;


                                      -5-


               (ii)    prepare and file with the Commission  such amendments and
          supplements to such registration statement and the prospectus included
          therein as may be necessary  to effect and maintain the  effectiveness
          of such  registration  statement  pursuant to the applicable rules and
          regulations of the Commission and the  instructions  applicable to the
          form of such  registration  statement  (provided,  however,  that  the
          Company  shall not be obliged to maintain  the  effectiveness  of such
          registration  statement  longer  than  through  the earlier of (A) two
          years following the effective date of such registration  statement and
          (B) such time as all Registrable Securities registered thereunder have
          been sold pursuant to such registration statement), and furnish to the
          Holders of the  Registrable  Securities  covered thereby copies of any
          such  supplement or amendment  prior to its use and/or filing with the
          Commission;

               (iii)   permit one legal  counsel for the Holders of  Registrable
          Securities  to be included in a  registration  statement to review and
          comment  upon  a  registration  statement,   and  all  amendments  and
          supplements  thereto,  within a reasonable amount of time prior to its
          filing with the Commission,  and not file any registration  statement,
          or  amendment  or  supplement  thereto,  in a form to which such legal
          counsel  reasonably and timely  objects.  The Company shall furnish to
          such legal counsel,  without charge, copies of any correspondence from
          the Commission to the Company or its  representatives  relating to any
          registration statement;

               (iv)    promptly notify the Holders of Registrable  Securities to
          be  included  in a  registration  statement  hereunder,  the  sales or
          placement agent, if any, therefor and the managing  underwriter of the
          securities  being sold,  and confirm such advice in writing,  (A) when
          such registration  statement or the prospectus included therein or any
          prospectus  amendment or  supplement or  post-effective  amendment has
          been filed and,  with  respect to such  registration  statement or any
          post-effective  amendment,  when the same has become effective, (B) of
          the  issuance  by the  Commission  of any stop  order  suspending  the
          effectiveness of such registration  statement or the initiation of any
          proceedings for that purpose, (C) of the receipt by the Company of any
          notification  with respect to the suspension of the  qualification  of
          the  Registrable  Securities  for  sale  in  any  jurisdiction  or the
          initiation or threatening  of any proceeding for such purpose,  (D) of
          any request by the  Commission  for any  amendment or  supplement to a
          registration statement or related prospectus or related information or
          (E) if, at any time when a  prospectus  is  required  to be  delivered
          under the Securities Act, such  registration  statement or prospectus,
          or any document  incorporated  by  reference in any of the  foregoing,
          contains an untrue  statement of a material fact or omits to state any
          material fact  required to be stated  therein or necessary to make the
          statements  therein not misleading in light of the circumstances  then
          existing.  In the case of  clause  (E),  the  Company  shall  promptly
          prepare a supplement  or amendment to such  registration  statement to
          correct such untrue statement or omission;

               (v)     use its reasonable  best efforts to obtain the withdrawal
          of  any  order  suspending  the  effectiveness  of  such  registration
          statement  or any  post-effective  amendment  thereto  or of any order
          suspending  or  preventing  the  use  of  any  related  prospectus  or
          suspending the qualification of any Registrable Securities included in
          such  registration  statement  for  sale  in any  jurisdiction  at the
          earliest practicable date;


                                      -6-


               (vi)    furnish to each Holder of  Registrable  Securities  to be
          included in such registration  statement hereunder,  each placement or
          sales agent, if any, therefor and each  underwriter,  if any, thereof,
          without charge,  a conformed copy of such  registration  statement and
          any  amendment  and  supplement  thereto (in each case  including  all
          exhibits and documents  incorporated  by reference) and such number of
          copies  of the  prospectus  included  in such  registration  statement
          (including each preliminary prospectus, any summary prospectus and any
          free writing prospectus),  and any amendment or supplement thereto, as
          such Holder,  agent, if any, and  underwriter,  if any, may reasonably
          request in order to  facilitate  the  disposition  of the  Registrable
          Securities owned by such Holder, sold by such agent or underwritten by
          such  underwriter and to permit such Holder,  agent and underwriter to
          satisfy the prospectus delivery requirements of the Securities Act;

               (vii)   use  its  reasonable  best  efforts  to (A)  register  or
          qualify the Registrable Securities to be included in such registration
          statement  under such other  securities  laws or blue sky laws of such
          states of the United  States or the  District  of  Columbia  as may be
          reasonably  requested by the Holders of a majority of such Registrable
          Securities participating in such registration, each placement or sales
          agent, if any, therefor or the managing underwriter,  if any, thereof,
          (B) keep such  registrations  or  qualifications  in effect and comply
          with such laws at all times  during  the period  described  in Section
          5(a)(ii)  above,  and (C)  take  any and all  such  actions  as may be
          reasonably  necessary  to  enable  such  Holder,  agent,  if any,  and
          underwriter,   if  any,  to  consummate   the   disposition   in  such
          jurisdictions of such Registrable Securities;  provided, however, that
          in order to fulfill  the  foregoing  obligations  under  this  Section
          5(a)(vii),  the Company shall not (unless otherwise  required to do so
          in any  jurisdiction)  be  required  to (1)  qualify  generally  to do
          business  as a  foreign  company  or a  broker-dealer,  (2)  execute a
          general  consent  to  service  of  process  or (3)  subject  itself to
          taxation;

               (viii)  furnish,  at the  request of the Holders of a majority of
          such Registrable Securities participating in such registration, on the
          date  that  such   Registrable   Securities   are   delivered  to  the
          underwriters  for sale,  if such  securities  are being  sold  through
          underwriters,  or,  if such  securities  are not  being  sold  through
          underwriters, on the date that the registration statement with respect
          to such securities becomes effective, (i) an opinion, dated as of such
          date,  of counsel  representing  the Company for the  purposes of such
          registration,  in  form  and  substance  as is  customarily  given  to
          underwriters  in  an  underwritten   public  offering  and  reasonably
          satisfactory  to a majority in interest of the  Holders,  addressed to
          the underwriters, if any, and to such Holders and (ii) a letter, dated
          as of such date, from the independent  certified public accountants of
          the  Company,  in  form  and  substance  as is  customarily  given  by
          independent   certified  public  accountants  to  underwriters  in  an
          underwritten public offering and reasonably satisfactory to a majority
          in interest of the  Holders,  addressed to the  underwriters,  if any,
          and, if permitted by applicable accounting standards, to such Holders;
          and

               (ix)    otherwise use its reasonable  best efforts to comply with
          all applicable  rules and  regulations of the Commission in connection
          with any registration hereunder.

     (b)  The Company may require each Holder of  Registrable  Securities  as to
which any  registration  is being  effected to furnish in writing to the Company
such information  regarding such Holder and such Holder's method of distribution


                                      -7-


of such  Registrable  Securities as the Company may from time to time reasonably
request.  Each  such  Holder  agrees  to  notify  the  Company  as  promptly  as
practicable of any inaccuracy or change in information  previously  furnished by
such  Holder to the  Company  or of the  occurrence  of any event as a result of
which any prospectus relating to such registration  contains an untrue statement
of a material fact regarding such Holder or the distribution of such Registrable
Securities  or omits to state any  material  fact  regarding  such Holder or the
distribution  of such  Registrable  Securities  required to be stated therein or
necessary  to make  the  statements  therein  not  misleading  in  light  of the
circumstances  then  existing,  and  promptly  to  furnish  to the  Company  any
additional  information  required to correct and update any previously furnished
information or required so that such prospectus shall not contain,  with respect
to such Holder or the  distribution of such  Registrable  Securities,  an untrue
statement  or a material  fact or omit to state a material  fact  required to be
stated  therein or necessary to make the  statements  therein not  misleading in
light of the circumstances then existing.

     (c)  Each of the Holders will comply with the  provisions of the Securities
Act with respect to disposition of the Registrable  Securities to be included in
any registration statement filed by the Company.

                                   ARTICLE 6
                                 INDEMNIFICATION

     6.1  The  Company  will  indemnify  each  Holder,  each  of  its  officers,
directors and partners, such Holder's legal counsel and independent accountants,
if any, each person  controlling such Holder within the meaning of Section 15 of
the Securities Act, each  underwriter,  if any, and each person who controls any
underwriter  within the meaning of Section 15 of the  Securities Act against all
expenses,  claims,  losses,  damages  and  liabilities  (or  actions  in respect
thereof),  including  any  of  the  foregoing  incurred  in  settlement  of  any
litigation,  commenced  or  threatened,  arising  out of or based on any  untrue
statement (or alleged  untrue  statement)  of a material  fact  contained in any
registration statement or prospectus, or any amendment or supplement thereto, or
any omission (or alleged  omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, or
any  violation by the Company of any rule or  regulation  promulgated  under the
Securities  Act or any state  securities  laws  applicable  to the  Company  and
relating  to action or  inaction  by the  Company  in  connection  with any such
registration,  qualification or compliance, and will reimburse each such Holder,
each of its officers,  directors and partners,  such Holder's  legal counsel and
independent  accountants,   each  person  controlling  such  Holder,  each  such
underwriter and each person who controls any such  underwriter for any legal and
other expenses reasonably  incurred in connection with investigating,  preparing
or  defending  any such claim,  loss,  damage,  liability  or action;  provided,
however, that the Company will not be liable in any such case to the extent that
any such expense,  claim, loss, damage,  liability or action arises out of or is
based on any untrue  statement  or  omission  or  alleged  untrue  statement  or
omission  made in  reliance  upon and in  conformity  with  written  information
furnished to the Company by such Holder  expressly for use in such  registration
statement or prospectus, or any amendment or supplement thereto.

     6.2  Each Holder will, if  Registrable  Securities  held by such Holder are
included  in the  securities  as to which such  registration,  qualification  or
compliance  is being  effected,  severally  indemnify  the Company,  each of its


                                      -8-


directors and  officers,  its legal counsel and  independent  accountants,  each
underwriter,  if any, of the Company's securities covered by such a registration
statement,  each person who controls the Company or such underwriter  within the
meaning of Section 15 of the Securities Act, and each other such Holder, each of
its officers, directors, partners, legal counsel and independent accountants, if
any, and each person controlling such Holder within the meaning of Section 15 of
the  Securities  Act,  against  all  expenses,   claims,   losses,  damages  and
liabilities  (or actions in respect  thereof),  including  any of the  foregoing
incurred in settlement of any litigation,  commenced or threatened,  arising out
of or based on any untrue statement (or alleged untrue  statement) of a material
fact  contained  in  any  such  registration  statement  or  prospectus,  or any
amendment or supplement  thereto, or any omission (or alleged omission) to state
therein a material fact  required to be stated  therein or necessary to make the
statements therein not misleading, and will reimburse the Company, such Holders,
such directors,  officers,  partners,  legal counsel,  independent  accountants,
underwriters  and control  persons for any legal and other  expenses  reasonably
incurred in  connection  with  investigating,  preparing or  defending  any such
claim, loss,  damage,  liability or action, in each case to the extent, but only
to the extent,  that such untrue  statement  (or alleged  untrue  statement)  or
omission  (or  alleged  omission)  is  made in such  registration  statement  or
prospectus or amendment or  supplement  in reliance upon and in conformity  with
written information furnished to the Company by such Holder expressly for use in
such  registration  statement or  prospectus,  or any  amendment  or  supplement
thereto; provided,  however, that the obligations of each Holder hereunder shall
be limited to an amount equal to the net proceeds to such Holder of  Registrable
Securities sold pursuant to such registration statement.

     6.3  Each party  entitled  to  indemnification  under  this  Article 6 (the
"INDEMNIFIED  PARTY")  shall  give  notice  to the  party  required  to  provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the  Indemnifying  Party to assume  the  defense of any such claim or any
litigation  resulting  therefrom,  provided  that  counsel for the  Indemnifying
Party,  who shall  conduct  the  defense of such claim or  litigation,  shall be
approved by the  Indemnified  Party (whose  approval shall not  unreasonably  be
withheld). The Indemnified Party may participate in such defense at such party's
expense;  provided,  however, that the Indemnifying Party shall bear the expense
of such defense of the Indemnified  Party if  representation  of both parties by
the same counsel would be inappropriate due to actual or potential  conflicts of
interest. The failure of any Indemnified Party to give notice as provided herein
shall  not  relieve  the  Indemnifying  Party  of  its  obligations  under  this
Agreement,  unless such failure is materially  prejudicial to the ability of the
Indemnifying  Party to defend the action. No Indemnifying  Party, in the defense
of any  such  claim or  litigation,  shall,  except  with  the  consent  of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which  does not  include  as an  unconditional  term  thereof  the giving by the
claimant or plaintiff to such Indemnified  Party of a release from all liability
in respect of such claim or litigation.

     6.4  If  the  indemnification  provided  for  in  Section  6.1  or  6.2  is
unavailable or  insufficient  to hold harmless an Indemnified  Party,  then each
Indemnifying  Party  shall  contribute  to the  amount  paid or  payable by such
Indemnified  Party as a result  of the  expenses,  claims,  losses,  damages  or
liabilities  (or  actions or  proceedings  in respect  thereof)  referred  to in
Section 6.1 or 6.2, in such proportion as is appropriate to reflect the relative
fault of the Company on the one hand and the Holders of  Registrable  Securities


                                      -9-


on the other hand in connection  with  statements or omissions which resulted in
such expenses, claims, losses, damages or liabilities (or actions or proceedings
in respect thereof), as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things,  whether
the untrue or alleged  untrue  statement  of a material  fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the  Holders of  Registrable  Securities  and the  parties'  relative
intent,  knowledge,  access to information and opportunity to correct or prevent
such untrue  statement  or omission.  The Company and the Holders  agree that it
would not be just and  equitable if  contributions  pursuant to this Section 6.4
were to be determined by pro rata allocation (even if all Holders of Registrable
Securities  were treated as one entity for such  purpose) or by any other method
of  allocation  which  does not take  account  of the  equitable  considerations
referred to in the first  sentence of this  Section  6.4.  The amount paid by an
Indemnified  Party as a result  of the  expenses,  claims,  losses,  damages  or
liabilities  (or actions or proceedings in respect  thereof)  referred to in the
first sentence of this Section 6.4 shall be deemed to include any legal or other
expenses  reasonably  incurred  by such  Indemnified  Party in  connection  with
investigating or defending any claim,  action or proceeding which is the subject
of this Section 6.4. No person  guilty of fraudulent  misrepresentation  (within
the  meaning of  Section  11(f) of the  Securities  Act)  shall be  entitled  to
contribution   from  any  person   who  was  not   guilty  of  such   fraudulent
misrepresentation.  The  obligations  of Holders of  Registrable  Securities  to
contribute  pursuant to this Section 6.4 shall be several in  proportion  to the
respective  amount  of  Registrable  Securities  sold  by  them  pursuant  to  a
registration  statement,  and shall be  limited  to an  amount  equal to the net
proceeds to each such Holder of  Registrable  Securities  sold  pursuant to such
registration statement.

                                   ARTICLE 7
                               RULE 144 REPORTING

     With a  view  to  making  available  the  benefits  of  certain  rules  and
regulations of the Commission that may at any time permit the sale of securities
of the Company to the public without registration, the Company agrees to use its
reasonable best efforts to:

     7.1  Make and keep public information  regarding the Company available,  as
those terms are  understood and defined in Rule 144, at all times after the date
hereof; and

     7.2  File with the  Commission  in a timely  manner all  reports  and other
documents required of the Company under the Securities Act and the Exchange Act.

                                   ARTICLE 8
                         TRANSFER OF REGISTRATION RIGHTS

     The rights to cause the Company to register  Registrable  Securities  under
Section 2.2 of this Agreement, together with all related rights and obligations,
may be assigned by a Holder to any other person; provided, however, that (A) the
transferor  shall furnish to the Company  written notice of the name and address
of such  transferee  or assignee and the  securities  with respect to which such
registration  rights  are being  assigned  prior to such  transfer  and (B) such
transferee  shall agree in writing to be subject to all applicable  restrictions
set forth in this  Agreement.  In each case, such rights may only be transferred
together with the underlying  Registrable  Securities in a transfer permitted by


                                      -10-


the  Securities  Act and applicable  state  securities  laws. Any such permitted
transferee or assignee shall be deemed a Holder hereunder.

                                   ARTICLE 9
         LIMITATIONS ON REGISTRATION RIGHTS GRANTED TO OTHER SECURITIES

     From and after the date of this Agreement,  the Company shall not,  without
the prior  written  consent  of the  Holders of a  majority  of the  Registrable
Securities  then  outstanding,  enter  into any  agreement  with any  holder  or
prospective  holder of any securities of the Company  providing for the grant to
such holder of registration rights superior to those granted herein.

                                   ARTICLE 10
                                  MISCELLANEOUS

     10.1 GOVERNING  LAW.  The  laws of the  State  of Texas  shall  govern  the
interpretation,  validity  and  performance  of the  terms  of  this  Agreement,
regardless  of the law that might be applied  under  principles  of conflicts of
law.

     10.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein,
the  provisions  hereof shall inure to the benefit of, and be binding upon,  the
successors  and  assigns of each of the  parties  hereto and shall  inure to the
benefit of and be binding upon each Holder of any Registrable Securities.

     10.3 ENTIRE  AGREEMENT.  This  Agreement  constitutes  the full and  entire
understanding  and  agreement  between  the  parties  with regard to the subject
matter hereof.

     10.4 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


                                      -11-


          Attention:  Steven D. Davidson, Esq.

     (b)  if to the Investor, 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.

     (c)  if to a  Holder,  to  the  address  reflected  on the  records  of the
Company,  or such other  address or  addresses  as shall have been  furnished in
writing by such party to the Company and to the other parties to this Agreement.

     10.5 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.

     10.6 TITLES AND  SUBTITLES.  The titles of the sections and  subsections of
this  Agreement  are  for  convenience  of  reference  only  and  are  not to be
considered in construing this Agreement.

     10.7 COUNTERPARTS.  This  Agreement  may  be  executed  in  any  number  of
counterparts,  each of which  shall be an  original,  but all of which  together
constitute one instrument.

     10.8 AMENDMENT AND MODIFICATION. This Agreement may be amended, modified or
supplemented in any respect only by written agreement by the Company and Holders
representing at least a majority of the Registrable Securities,  voting together
as a single class; provided,  that no such amendment shall unfairly discriminate
against a particular  Holder relative to the other Holders.  Any action taken by
the Holders, as provided in this Section 10.8, shall bind all Holders.


                                      -12-


     IN WITNESS WHEREOF, the undersigned 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
   -------------------------------               -------------------------------

Its                                           Its
    ------------------------------                ------------------------------


                                      -13-


                                     ANNEX A
                              PLAN OF DISTRIBUTION

     We are  registering  the shares offered by this prospectus on behalf of the
selling shareholders.  The selling  shareholders,  which as used herein includes
donees, pledgees,  transferees or other successors-in-interest selling shares of
common stock or interests in shares of common stock  received  after the date of
this  prospectus  from a  selling  shareholder  as a gift,  pledge,  partnership
distribution  or other  transfer,  may,  from time to time,  sell,  transfer  or
otherwise  dispose of any or all of their shares of common stock or interests in
shares of common  stock on any stock  exchange,  market or trading  facility  on
which the shares are traded or in private  transactions.  These dispositions may
be at fixed prices,  at prevailing  market prices at the time of sale, at prices
related to the prevailing market price, at varying prices determined at the time
of sale or at negotiated prices.

     The selling  shareholders may use any one or more of the following  methods
when disposing of shares or interests therein:

          o    ordinary  brokerage  transactions  and  transactions in which the
               broker-dealer solicits purchasers;

          o    block trades in which the broker-dealer  will attempt to sell the
               shares as agent,  but may  position  and  resell a portion of the
               block as principal to facilitate the transaction;

          o    purchases  by a  broker-dealer  as  principal  and  resale by the
               broker-dealer for its account;

          o    an  exchange  distribution  in  accordance  with the rules of the
               applicable exchange;

          o    privately negotiated transactions;

          o    short sales;

          o    through the  writing or  settlement  of options or other  hedging
               transactions, whether through an options exchange or otherwise;

          o    broker-dealers may agree with the selling  shareholders to sell a
               specified number of such shares at a stipulated price per share;

          o    a combination of any such methods of sale; and

          o    any other method permitted pursuant to applicable law.

     The selling shareholders may, from time to time, pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock,  from time to time, under
this  prospectus,  or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
shareholders to include the pledgee,  transferee or other successors in interest
as selling shareholders under this prospectus. The selling shareholders also may
transfer  the shares of common stock in other  circumstances,  in which case the


                                      -14-


transferees,  pledgees  or other  successors  in  interest  will be the  selling
beneficial owners for purposes of this prospectus.

     In connection with the sale of our common stock or interests  therein,  the
selling  shareholders may enter into hedging transactions with broker-dealers or
other  financial  institutions,  which may in turn  engage in short sales of the
common stock in the course of hedging the  positions  they  assume.  The selling
shareholders  may also sell shares of our common  stock short and deliver  these
securities  to close out their  short  positions,  or loan or pledge  the common
stock to  broker-dealers  that in turn may sell these  securities.  The  selling
shareholders   may  also  enter   into   option  or  other   transactions   with
broker-dealers  or other  financial  institutions or the creation of one or more
derivative  securities which require the delivery to such broker-dealer or other
financial  institution of shares offered by this  prospectus,  which shares such
broker-dealer  or  other  financial  institution  may  resell  pursuant  to this
prospectus (as supplemented or amended to reflect such transaction).

     The  aggregate  proceeds to the selling  shareholders  from the sale of the
common stock offered by them will be the purchase price of the common stock less
discounts or commissions,  if any. Each of the selling shareholders reserves the
right to accept and, together with their agents from time to time, to reject, in
whole or in part,  any proposed  purchase of common stock to be made directly or
through agents. We will not receive any of the proceeds from this offering.

     The selling  shareholders also may resell all or a portion of the shares in
open market  transactions  in reliance upon Rule 144 under the Securities Act of
1933,  provided that they meet the criteria and conform to the  requirements  of
that rule.

     The selling shareholders and any broker-dealers that act in connection with
the sale of securities might be deemed to be  "underwriters"  within the meaning
of Section 2(11) of the  Securities  Act, and any  commissions  received by such
broker-dealers and any profit on the resale of the securities sold by them while
acting as principals might be deemed to be underwriting discounts or commissions
under the Securities Act.

     To the extent  required,  the shares of our  common  stock to be sold,  the
names of the selling  shareholders,  the respective  purchase  prices and public
offering  prices,  the  names  of any  agent,  dealer  or  underwriter,  and any
applicable  commissions or discounts with respect to a particular  offer will be
set  forth in an  accompanying  prospectus  supplement  or,  if  appropriate,  a
post-effective  amendment  to the  registration  statement  that  includes  this
prospectus.

     In order to comply with the securities laws of some states,  if applicable,
the common stock may be sold in these  jurisdictions  only through registered or
licensed  brokers or dealers.  In addition,  in some states the common stock may
not be sold unless it has been  registered or qualified for sale or an exemption
from  registration  or  qualification  requirements is available and is complied
with.


                                       -2-



     We have advised the selling shareholders that the  anti-manipulation  rules
of  Regulation  M under  the  Exchange  Act may  apply to sales of shares in the
market and to the activities of the selling  shareholders and their  affiliates.
In addition,  we will make copies of this  prospectus (as it may be supplemented
or amended  from time to time)  available  to the selling  shareholders  for the
purpose of satisfying the  prospectus  delivery  requirements  of the Securities
Act. The selling  shareholders may indemnify any broker-dealer that participates
in transactions  involving the sale of the shares against  certain  liabilities,
including liabilities arising under the Securities Act.

     We have agreed to indemnify the selling  shareholders  against liabilities,
including  liabilities  under  the  Securities  Act and state  securities  laws,
relating to the registration of the shares offered by this prospectus.

     We have  agreed  with the  selling  shareholders  to keep the  registration
statement that includes this  prospectus  effective until the earlier of (1) two
years  following the effective date of the  registration  statement and (2) such
time as all shares of common  stock  covered by this  prospectus  have been sold
pursuant to this prospectus.


                                      -3-

EX-99.5 6 ex995sc13da504670005_012706.htm sec document


                                                                    Exhibit 99.5

                            Newcastle Partners, L.P.
                         300 Crescent Court, Suite 1110
                                Dallas, TX 75201


January 27, 2006

Newcastle Special Opportunity Fund I, L.P.
300 Crescent Court, Suite 1110
Dallas, TX 75201

Gentlemen:

     As  an  inducement  to  Newcastle   Special   Opportunity  Fund  I,  L.P.'s
willingness  to  purchase a  $12,550,000  4%  convertible  promissory  note (the
"Note") issued by Hallmark Financial  Services,  Inc., a Nevada corporation (the
"Company"),  Newcastle Partners,  L.P.  ("Newcastle")  hereby agrees to vote all
shares of common stock, par value $0.03 per share (the "Common  Stock"),  of the
Company,  held  beneficially  or of record by it,  in favor of any  proposal  to
approve (i) an increase in the  authorized  share capital of the Company (or any
proposal having a similar effect, including, without limitation, a reverse stock
split) and (ii) the  issuance of shares of Common Stock upon  conversion  of the
Note, as required by the rules and  regulations of the American Stock  Exchange,
at any meeting of  shareholders  of the Company called for such purpose,  or any
adjournment or postponement  thereof,  or by written consent of the shareholders
of the Company.

     This  agreement  will be  binding on any  successor  of  Newcastle  and any
transferee of any shares of Common Stock held by Newcastle.

                                               Sincerely,

                                               Newcastle Partners, L.P.

                                               By: Newcastle Capital Management,
                                                   L.P., its general partner

                                               By:
                                                   -----------------------------
                                                   Name:
                                                   Title:

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