LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is made and entered into on
this day of March, 1997, by and between Hallmark Financial
Services, Inc., a Nevada corporation (the "Borrower"), and DORINCO
REINSURANCE COMPANY (the Lender ), a Michigan corporation.
Borrower and Lender agree as follows:
1. Definitions. For purposes of this Agreement, the following
terms have the following meanings:
a. "ACO" means ACO Holdings, Inc., a Texas corporation which
is wholly owned by HFS.
b. "Affiliates" means the Subsidiaries, Hallmark
Underwriting, Inc., a Texas corporation, and American Hallmark Agencies,
Inc., a Texas corporation. "Affiliate" means any of the Affiliates.
c. "Agreement" means this Loan Agreement, as amended,
modified or supplemented from time to time in writing.
d. "AH" means American Hallmark Insurance Company of Texas,
a Texas domiciled insurance company which is wholly owned by HFS.
e. "XXXX" means American Hallmark General Agency, Inc., a
Texas corporation which is wholly owned by ACO.
f. "Borrower" means Hallmark Financial Services, Inc., a
Nevada corporation.
g. "Business Day" means a day other than a Saturday, Sunday
or other day on which Lender is not open for business.
h. "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
i. "Combined Ratio" means a combined ratio determined in
accordance with statutory accounting practices from time to time
prescribed or permitted by the Texas Department of Insurance or the
National Association of Insurance Commissioners for stock property and
casualty insurance companies in Texas.
j. "Commissioner" means the Commissioner of the Texas
Department of Insurance.
k. "Environment" means any water, including, but not limited
to, surface water, ground water and water vapor, any land, including
land surface or subsurface, stream sediments, air, fish, wildlife,
plants and all other natural resources or environmental media.
l. "Environmental Laws" means all federal, state and local
environmental, land use, zoning, health, chemical use, safety, and
sanitation laws, statutes, ordinances, regulations, codes and rules
relating to the protection of the Environment and/or governing the use,
storage, treatment, generation, transportation, processing, handling,
production or disposal of hazardous substances (as defined in 42 U.S.C.
Section 9601(14)) and the policies, guidelines, procedures,
interpretations, decisions, orders and directives of federal, state and
local governmental agencies and authorities with respect thereto.
m. "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended from time to time.
n. "Events of Default" means the occurrence of one or more
events set forth in Section 8 of this Agreement.
o. "Federal Bankruptcy Code" means Title 11 of the United
States Code, entitled "Bankruptcy," as amended, or any successor federal
bankruptcy law.
p. "Gross Premium Written" means gross premiums determined
in accordance with statutory accounting practices from time to time
prescribed or permitted by the Texas Department of Insurance or the
National Association of Insurance Commissioners for stock property and
casualty insurance companies in Texas.
q. "HCS" means Hallmark Claims Services, Inc., a Texas
corporation which is wholly owned by ACO.
r. " H FC" means Hallmark Finance Corporation, a Texas
corporation which is wholly owned by ACO.
s. "HFC Interest Coverage Ratio" means, for any period
specified below, the ratio of (i) the sum obtained by adding (A) HFC's
pre-tax net income determined in accordance with generally accepted
accounting principles (but before deduction of dividends, distributions,
management fees and marketing fees) for such period, plus (B) HFC
Interest Expense for such period, to (ii) HFC Interest Expense for such
period. The Interest Coverage Ratio shall be determined (x) as of the
last day of the fiscal quarters ending September 30, 1997, December 31,
1997, and March 31, 1998, for the period commencing on July 1, 1997, and
ending on the last day of each such fiscal quarter, and (y) as of the
last day of each fiscal quarter ending in the period beginning April 1,
1998 through and including the Expiration Date, for the twelve-month
period ending on the last day of such fiscal quarter.
t. "HFC Interest Expense" means for any period the sum of
(i) HFC's aggregate interest expense determined in accordance with
generally accepted accounting principles (including the portion of any
obligation allocable to interest expense under a capital lease) for such
period, plus (ii) HFC's bad debt expense determined in a manner
consistent with the Borrower's internally prepared financial statements
dated November 30, 1996.
u. "Indebtedness" means any obligation, indebtedness or
liability now or hereafter owed by Borrower to Lender pursuant to the
Transaction Documents.
v. "Lender" means Dorinco Reinsurance Company, a Michigan
corporation, and any successors or assigns.
w. " L o ss Ratio" means the loss ratio determined in
accordance with statutory accounting practices from time to time
prescribed or permitted by the Texas Department of Insurance or the
National Association of Insurance Commissioners for stock property and
casualty insurance companies in Texas.
x. "NationsBank Loan Documents" means the Loan Documents
described and defined in that certain Loan Agreement of even date
herewith between HFC and NationsBank of Texas, N.A.
y. "Net Premium Written" means net premiums determined in
accordance with statutory accounting practices from time to time
prescribed or permitted by the Texas Department of Insurance or the
National Association of Insurance Commissioners for stock property and
casualty insurance companies in Texas.
z. "Outstanding Debt" means any obligation, indebtedness or
liability now or hereafter owed by HFC pursuant to the NationsBank Loan
Documents.
aa. "Pledge Agreement" means the Stock Pledge and
Security Agreement described in Section 3 pursuant to which Borrower
pledges to Lender, as security for the Indebtedness, the Pledged Stock.
bb. "Pledged Stock" means all of the following, whether
now owned or hereafter acquired: (i) all of the issued and outstanding
capital stock of HFC, (ii) all certificates, options, rights, warrants
and other securities issued as an addition to, in substitution or
exchange for, or on account of such shares of capital stock, and (iii)
all proceeds of the foregoing.
cc. "Promissory Note" means the Promissory Note of even
date herewith in the original principal amount of $7,000,000.00 from
Borrower, as maker, payable to the order of Lender, in the form attached
hereto as Exhibit A, and all extensions, renewals, substitutions and
modifications thereof.
dd. "Restricted Stock" means all of the following,
whether now owned or hereafter acquired: (i) all of the issued and
outstanding capital stock of AH and XXXX, (ii) all certificates, options
rights, warrants and other securities issued as an addition to, in
substitution or exchange for, or on account of such shares of capital
stock, and (iii) all proceeds of the foregoing.
ee. "Solvent" means, with respect to any person or
entity, on a particular determination date, that on such date such
person or entity is able to realize upon its assets and pay its debts
and other liabilities, contingent obligations and other commitments as
they mature in the normal course of business.
ff. "Statutory Capital and Surplus" means capital and
surplus determined in accordance with statutory accounting practices
from time to time prescribed or permitted by the Texas Department of
Insurance or the National Association of Insurance Commissioners for
stock property and casualty insurance companies in Texas.
gg. "Subsidiaries" means ACO, AH, XXXX, HCS, and HFC.
"Subsidiary" means any of the Subsidiaries.
hh. "Transaction Documents" means this Agreement, the
Promissory Note, the Pledge Agreement, and all amendments, renewals,
substitutions and restatements of any of the preceding documents.
2. Promissory Note Commitment. Lender will loan to Borrower the
sum of $7,000,000.00 upon the terms and conditions set forth in this
Agreement and the Promissory Note for the purpose of enabling Borrower
to make a $7,000,000 capital contribution to HFC.
3. Collateral. In order to secure the Indebtedness, Borrower has
caused ACO to pledge to Lender the Pledged Stock pursuant to the terms
of the Pledge Agreement attached hereto as Exhibit B. Lender shall not
presently have or claim any security interest in the Restricted Stock.
Upon the occurrence of any "triggering event" specified below, Borrower
shall, and shall cause ACO to, within ten (10) days, execute and deliver
to Lender a Stock Pledge and Security Agreement in substantially the
same form as Exhibit B (without any material change thereto) covering
the Restricted Stock, together with certificates representing the
Restricted Stock, and thereafter such Restricted Stock shall be deemed
Pledged Stock for purposes of this Agreement. For purposes of this
Section 3, a "triggering event" means:
a. If as of the end of any fiscal quarter AH's Combined
Ratio for the four (4) immediately preceding fiscal quarters of AH's
operations exceeds 107%;
b. If as of the end of any fiscal quarter AH's Loss Ratio
for the four (4) immediately preceding fiscal quarters of AH's
operations exceeds 83%;
c. If as of the end of any fiscal quarter the HFC Interest
Coverage Ratio is less than 1.8 to 1.0;
d. As of the date of any reporting period required by law or
the Texas Department of Insurance, the stockholders' equity of HFC
(determined in accordance with generally accepted accounting principles)
shall be less than the amount set forth below for the calendar year
indicated:
1997 $7,890,000
1998 $8,200,000
1999 $8,650,000
2000 $9,200,000
2001 and thereafter $9,450,000; or
e. As of the date of any reporting period required by law or
the Texas Department of Insurance, the Statutory Capital and Surplus of
AH shall be less than $4,200,000 or shall have decreased by more than
15% from the comparable reporting period of the preceding calendar year.
4. Conditions to this Agreement. This Agreement is effective
only upon fulfillment of the following conditions to the satisfaction of
Lender on or prior to the date of execution of this Agreement:
a. C o rporate Action. Borrower shall have taken all
necessary and appropriate corporate action authorizing Borrower to enter
into and perform this Agreement and to execute and deliver to Lender
this Agreement, the Promissory Note, the Pledge Agreement and any other
documents reasonably requested by Lender. Further, Borrower shall have
delivered to Lender certified copies of such corporate resolutions and
such other corporate documents as Lender may reasonably request.
b. Corporate Documents. Borrower shall have furnished to
Lender:
(i) a certificate of Borrower's and a certificate of
AH's, HFC s and XXXX s good standing in the State of Texas, issued as of
a date satisfactory to Lender;
(ii) c e r tificate of incumbency specifying the
officers of Borrower; and
(iii) such other documents as Lender may reasonably
request.
c. Borrower's Opinion. Borrower shall have delivered to
Lender an opinion of Borrower's counsel in form and content satisfactory
to Lender and its counsel.
d. Transaction Documents. Borrower shall have delivered or
caused to have been delivered to Lender all Transaction Documents in
form and content satisfactory to Lender and its counsel.
e. Reinsurance Treaty. Borrower shall have caused AH to
offer, for the time period set forth in the table contained in this
paragraph, to reinsure a portion of its Personal Lines Auto Quota Share
Reinsurance with Lender, the form and content of such reinsurance treaty
to be substantially similar to Exhibit D attached to and made a part of
this Agreement, in amounts sufficient to allow for the following
schedule of ceded premiums:
Treaty Years Ceded
Premium
07/01/97 to 06/30/98 $ 20,000,000
07/01/98 to 06/30/99 $ 21,600,000
07/01/99 to 06/30/00 $ 23,328,000
07/01/00 to 06/30/01 $ 25,194,240
07/01/01 to 06/30/02 $ 27,209,779
07/01/02 to 06/30/03 $ 29,386,562
07/01/03 to 06/30/04 $ 31,737,486
f. Due Diligence. Lender shall have conducted a
due diligence investigation of Borrower and its Affiliates in
scope and content satisfactory to Lender.
g. Other Documents. Borrower shall provide copies
of all documentation as Lender reasonably requests.
h. Other Matters. All matters incidental to the
execution and delivery of the Transaction Documents and all
actions required by the Transaction Documents shall be
satisfactory to Lender.
5. Representations and Warranties. To induce Lender to
enter into this Agreement and to loan to Borrower the funds
described in this Agreement, Borrower represents and warrants.
a. C o r p orate Existence. Borrower and its
Affiliates are duly organized, validly existing and in good
standing under the laws of the State of their incorporation,
and each has the power to own its assets and carry on its
business as now being conducted.
b. Corporate Capacity. The execution, delivery
and performance of the Transaction Documents to which Borrower
is a party are within Borrower's corporate powers, have been
duly authorized by all necessary and appropriate corporate
action, and are not in contravention of any law or regulation
or the terms of Borrower's Articles of Incorporation, Bylaws
or amendments thereto, or of any agreement, undertaking or
other document to which Borrower is a party or by which
Borrower or any of Borrower's property is bound or affected.
T h e execution, delivery and performance of the Pledge
Agreement is within ACO's corporate powers, has been duly
authorized by all necessary and appropriate corporate action,
and is not in contravention of any law or regulation or the
terms of ACO's Articles of Incorporation, Bylaws or amendments
thereto, or of any agreement, undertaking or other document to
which Borrower or ACO is a party or by which Borrower or ACO
or any of their respective property is bound or affected.
c. Financial Condition.
(i) Borrower has furnished to Lender its and
AH's most current audited annual financial statements, which
s t atements fairly and accurately reflect the financial
condition and results of operations of Borrower and AH as of
the date and for the period referred to, and have been
prepared in accordance with generally accepted accounting
principles consistently applied during the interval involved
and from interval to interval. Since the date of such
financial statements, there have not been any materially
adverse changes in the financial condition or results of
operations reflected in such financial statements, nor has
AH's Statutory Capital and Surplus decreased by $250,000 or
more.
(ii) Borrower has furnished to Lender its and
AH's most current quarterly consolidated and consolidating
financial statements. Since the date of these financial
statements, there have not been any material adverse changes
in the financial condition or results of operations reflected
in such financial statements, except as disclosed to Lender.
d. Taxes. All federal and other tax returns
required to be filed by Borrower and by AH have been filed and
all taxes required by such returns have been paid, except to
the extent that the same are now being contested in good faith
and by appropriate proceedings. Neither Borrower nor AH has
received any notice from the Internal Revenue Service or any
other taxing authority proposing additional taxes.
e. Litigation. Except as disclosed to Lender,
there are no actions, suits, proceedings or investigations
pending or, to the knowledge of Borrower, threatened against
Borrower or AH or any basis therefor, which, if adversely
determined, could, in any case or in the aggregate, materially
adversely affect the property, assets, financial condition or
business of Borrower or AH, or impair the right or ability of
Borrower or AH to carry on its operations substantially as
conducted on the date of this Agreement. For purposes of this
paragraph, "material" means a $250,000 or more decrease in
AH's Statutory Capital and Surplus.
f. V a l idity of Transaction Documents. The
Transaction Documents to which Borrower is a party constitute
t h e legal, valid and binding obligations of Borrower,
enforceable in accordance with their respective terms, except
as enforceability may be limited by applicable bankruptcy and
insolvency laws and the laws affecting creditors' rights
generally. The Pledge Agreement constitutes the legal, valid
and binding obligation of ACO, enforceable in accordance with
its terms, except as enforceability may be limited by
applicable bankruptcy and insolvency laws and the laws
affecting creditors' rights generally.
g. Consents, Licenses, etc. No consent, license,
approval or authorization of, or registration, declaration or
filing with, any court, regulatory or governmental body,
authority or person or entity is required in connection with
t h e valid execution, delivery or performance of the
Transaction Documents.
h. No Violations. Borrower and AH are not in
violation of any term of their Articles of Incorporation,
Bylaws or, except as disclosed to Lender, any agreement or
instrument to which they or their property are a party or are
bound, and the execution and delivery of the Transaction
Documents shall not cause a default or result in the violation
of any such agreements.
i. Contingent Liabilities. Except as set forth in
the NationsBank Loan Documents, there are no suretyship
agreements, guaranties or other contingent liabilities of
Borrower and AH that have not been disclosed in writing to
Lender.
j. Compliance with Laws. Borrower and AH each are
in compliance with all applicable laws, rules, regulations and
other legal requirements with respect to its business, and the
use, maintenance and operation of the real and personal
property owned or leased by it in the conduct of its business,
except where the failure to so comply would not have a
material adverse effect on the financial condition, business
or operation of either Borrower or AH.
k. Affiliates' Capital Stock. Each Affiliate's
total authorized capital shares, the par value of such shares,
a n d the number of such shares authorized, issued and
outstanding, are as set forth on Exhibit C. All shares of
each Affiliate are of one class and all shares of each
Affiliate have been validly issued in full compliance with all
federal and state laws, and are fully paid and non-assessable.
No other shares of any class or type are authorized or
outstanding respecting each Affiliate. The record and
beneficial ownership of the issued and outstanding capital
stock of each Affiliate is as set forth in Exhibit C.
l. No Defaults. Except as disclosed to Lender, no
event or condition is existing which constitutes, or upon the
lapse of time or the giving of notice, or both, would
constitute an event of default under any agreement or evidence
of indebtedness relating to any obligation of Borrower or any
Affiliate, except where such default would not have a material
adverse effect on the financial condition, business or
operation of Borrower or any Affiliate.
m. R e s trictions on Pledged Stock. Neither
Borrower nor any Affiliate is a party to any buy-sell
agreement or similar agreement restricting the pledge or
t r ansfer of its capital stock other than restrictions
contained in the Transaction Documents and the NationsBank
Loan Documents.
n. No Options, Warrants, etc. Except as disclosed
to Lender, there is not outstanding any option, warrant or
other right requiring or permitting Borrower or others to
purchase or convert any obligation into shares of any
Affiliate's capital stock.
o. Title to Assets. As of the date of execution
of this Agreement, Borrower and its Subsidiaries each are the
legal and beneficial owner of all of their assets and
properties (including, without limitation, the Pledged Stock
and the Restricted Stock) as disclosed in Borrower's and its
Subsidiaries' consolidated and consolidating financial
statements. Borrower and its Subsidiaries own such assets and
properties free and clear of all security interests, liens and
other encumbrances other than the encumbrances created by
(i) ACO's pledge of the Pledged Stock,
(ii) the NationsBank Loan Documents,
(iii) existing encumbrances disclosed in
B o r rower's consolidated and consolidating financial
statements,
(iv) p u rchase money security interests in
equipment used in the normal course of Borrower's or an
Affiliate's business, and
(v) operating or capital equipment leases for
use in the ordinary course of business.
p. ERISA. Borrower and its Affiliates are in
compliance with all of the provisions of ERISA and no events
or circumstances have occurred or exist which could result in
Borrower or any Affiliate incurring a material liability or
contingent liability under the provisions of ERISA.
q. E n vironmental Matters. Borrower and its
Affiliates are not subject to any existing, pending or
threatened suit, claim, notice of violation or request for
information under any Environmental Laws. Borrower and its
Affiliates have not provided any notice or information to
regulatory authorities under any Environmental Laws. Borrower
and its Affiliates are in compliance with all Environmental
Laws.
r. Solvency. Borrower and its Affiliates are
S o l vent, both before and after giving effect to the
transactions contemplated by the Transaction Documents.
x. Xxxx on Pledged Stock. Upon execution and
delivery of the Pledge Agreement and delivery of the Pledged
Stock to Lender, the Pledge Agreement shall create a valid
lien upon and first priority perfected security interest in
the Pledged Stock and the proceeds of the Pledged Stock,
s u b ject to no prior security interest, lien, charge,
encumbrance or agreement purporting to grant to any third
party a security interest in the Pledged Stock.
The representations and warranties contained in this
Agreement survive closing of the transactions described in
this Agreement.
6. Affirmative Covenants. So long as any part of the
Indebtedness remains unpaid or this Agreement remains in
effect, Borrower shall comply with the affirmative covenants
listed below:
a. I n f o rmation to be Furnished to Lender.
Borrower shall and shall cause AH to furnish to Lender:
(i) as soon as available, a copy of each
annual or quarterly report of, including but not limited to
finances and results of the National Association of Insurance
Commissioners Insurance Regulatory Information System tests,
Borrower and AH filed with the Texas Department of Insurance
or any other insurance regulatory authority;
(ii) as soon as available, but no later than
one hundred twenty (120) days after the end of each fiscal
y e a r, audited consolidated and consolidating financial
statements of Borrower, AH and HFC, as of the end of such
year, which have been prepared in accordance with generally
a c c epted accounting principles and present fairly and
accurately the financial condition and results of operations
of Borrower, AH and HFC, for said period, which statements
shall consist of balance sheets and related statements of
income, retained earnings and cash flow, all in reasonable
d e t ail and certified by Borrower's independent public
accountants;
(iii) as soon as available, but no later
than forty-five (45) days after the end of each fiscal
quarter, unaudited consolidated and consolidating financial
statements of Borrower, AH and HFC, as of the end of such
fiscal quarter, which contain non-material variations from
generally accepted accounting principles and present fairly
a n d accurately the financial condition and results of
operations of Borrower, AH and HFC, for said period, which
statements shall consist of balance sheets and related
statements of income, retained earnings and cash flow, all in
reasonable detail and certified to be true and correct by
Borrower's chief financial officer or President;
(iv) as soon as available, copies of all of
Borrower's reports on Form 10-KSB, Form 10-QSB and Form 8-K
filed with the Securities and Exchange Commission;
(v) as soon as available all independent third
party audits, insurance regulatory agency audits and actuarial
reports of Borrower, AH, or HFC;
(vi) i m m ediate notice in writing of any
material event or circumstance which bears upon the accuracy
or reliability of the information previously furnished to
Lender;
(vii) prompt notice in writing, in such
detail as Lender may reasonably request, of all material
litigation and all material proceedings before any
governmental or regulatory agencies affecting Borrower, AH, or
HFC;
(viii) within ten (10) days after Borrower
obtains knowledge of the occurrence of any Event of Default
under this Agreement, or any Transaction Document which is
continuing or of any condition not remedied which, upon the
lapse of time or the giving of notice, or both, would
constitute an Event of Default under this Agreement, or any
Transaction Document notice of such occurrence together with a
detailed statement of the steps taken to cure the effect of
such event or condition; and
(ix) as soon as practicable, but in no event
later than thirty (30) days after Lender's request, such other
information respecting the financial condition and results of
operations of Borrower, AH, or HFC, as Lender may reasonably
request from time to time.
b. Examinations. Borrower shall and shall cause
AH and HFC to, at any time during normal working hours and
from time to time, permit Lender or its agents to inspect
Borrower's, AH s and/or HFC s books and records, which books
and records shall be kept in good order and reasonable detail.
c. Taxes. Borrower shall and shall cause its
A f f i liates to promptly pay and discharge all taxes,
assessments and other governmental charges prior to the date
on which penalties are attached thereto.
d. Good Standing; Business. Borrower shall and
shall cause its Affiliates to take all reasonable steps to
preserve their corporate existence and their right to conduct
business as presently conducted.
e. Compliance with Laws. Borrower shall and shall
cause its Affiliates to comply with any applicable federal,
state or local laws, rules, regulations and other legal
requirements with respect to their business, including but not
limited to compliance with all Environmental Laws and the
provisions of ERISA and the Code with respect to all pension
plans.
f. License, Permits, etc. Borrower shall and
s h a ll cause its Affiliates to maintain all of their
franchises, grants, authorizations, licenses, permits,
consents, certificates and orders, if any, in full force and
effect until their respective expiration dates, except where
the failure to maintain such items will not have a material
adverse effect on either Borrower or its Affiliates, their
financial condition, business or operation.
g. Maintenance of Ownership. Borrower shall cause
its Affiliates to at all times maintain the percentage
ownership of each class of their issued and outstanding
capital stock as set forth in Exhibit C.
h. Insurance. Borrower shall and shall cause its
Affiliates to maintain or cause to be maintained insurance
with responsible and reputable insurance companies acceptable
to Lender in such amounts and covering such risks as may be
reasonably required by Lender; provided, however, that Lender
acknowledges and agrees that the current insurance carriers,
amounts and risks covered are now satisfactory.
i. Books and Records. Borrower shall and shall
cause its Affiliates to maintain, at their own cost and
expense, accurate and complete books and records which comply
in all material respects with generally accepted accounting
principles and, with respect to AH, with statutory accounting
principles.
j. Defend Pledged and Restricted Stock.
(i) Borrower shall cause all stock
certificates representing shares of the issued and outstanding
capital stock of XXXX and AH to contain a reference to this
Agreement in the form attached hereto as Exhibit E.
(ii) Borrower shall, and shall cause ACO to,
defend at its own expense, the Pledged Stock and Restricted
Stock against the claims and demands of all third parties.
k. Use of Proceeds. Borrower shall use the
proceeds of the Promissory Note to purchase additional shares
of the capital stock or otherwise contribute to the equity
capital of HFC.
l. Management. Borrower may make changes in and
additions to its management group so long as either Xxxxx X.
Xxxxxxxx or Xxxxx X. Xxxxxxx remains primarily responsible for
t h e management of Borrower. In the event of death,
resignation, or incapacity of both Xxxxx X. Xxxxxxxx and
Xxxxx X. Xxxxxxx, Borrower shall obtain Lender's acceptance of
the named replacement, such acceptance not to be unreasonably
withheld.
m. Statutory Capital and Surplus.
(i) B o rrower shall cause AH to maintain
Statutory Capital and Surplus of at least $2,650,000 as of the
date of each reporting period required by law or required by
the Texas Department of Insurance.
(ii) Borrower shall cause HFC to maintain the
f o l l owing minimum stockholders' equity (determined in
accordance with generally accepted accounting principles) as
of the date of each reporting period required by law or
required by the Texas Department of Insurance:
1997 $ 7,780,000
1998 $ 8,000,000
1999 $ 8,300,000
2000 $ 8,800,000
2001 $ 9,300,000
n. Board Meetings. Borrower shall advise Lender
of and hereby grants to Lender the right to be present at all
Board meetings of Borrower. Borrower shall cause each
Affiliate to advise Lender and grant to Lender the right to be
present at all Board meetings of such Affiliate.
o. Reinsurance Treaty. Borrower shall cause AH to
continue to offer, for the time period set forth in the table
contained in this paragraph, to reinsure a portion of its
Personal Lines Auto Quota Share Reinsurance with Lender, the
f o r m and content of such reinsurance treaty to be
substantially similar to Exhibit D attached hereto, in amounts
sufficient to allow for the following schedule of ceded
premiums:
Treaty Years Ceded
Premium
07/01/97 to 06/30/98 $ 20,000,000
07/01/98 to 06/30/99 $ 21,600,000
07/01/99 to 06/30/00 $ 23,328,000
07/01/00 to 06/30/01 $ 25,194,240
07/01/01 to 06/30/02 $ 27,209,779
07/01/02 to 06/30/03 $ 29,386,562
07/01/03 to 06/30/04 $ 31,737,486
p. Affiliate Transactions. All transactions for
the duration of the Transaction Documents between or among
Borrower, each Affiliate, and any director, officer, employee
and/or agent of Borrower or any Affiliate shall be in good
faith and commercially reasonably.
7. Negative Covenants.
a. Ratios.
(i) Borrower shall not permit AH's ratio of
gross premium to surplus (calculated by dividing Gross Premium
Written by Statutory Capital and Surplus) to be above 10.0:1
as of the date of any report required by law or the Texas
Department of Insurance.
(ii) Borrower shall not permit AH's ratio of
net premium to surplus (calculated by dividing Net Premium
Written by Statutory Capital and Surplus) to be above 3.0:1 as
of the date of any report required by law or the Texas
Department of Insurance.
(iii) Borrower shall not permit the average
of AH's Combined Ratio as of the end of any four (4)
immediately preceding fiscal quarters of AH's operations to
exceed 115%.
(iv) Borrower shall not permit the average of
AH's Loss Ratio as of the end of any four (4) immediately
preceding fiscal quarters of AH's operations to exceed 87%.
(v) Borrower shall not permit the HFC Interest
Coverage Ratio as of the end of any fiscal quarter to be less
than 1.5 to 1.0.
b. Change in Ownership or Business.
(i) Borrower shall not, nor permit AH, HFC or
XXXX to, change the nature of their respective business except
as provided in this Agreement.
(ii) Borrower shall not permit AH to write
directly or indirectly the following lines of business, or its
e q u ivalent: mortgage guaranty, ocean marine, financial
guaranty, medical malpractice, earthquake (as a separate
coverage), group accident and health, credit accident and
health (group and individual), other accident and health,
workers compensation, products liability, aircraft (all
perils), fidelity, surety, boiler and machinery, credit, and
international.
c. Dividends. Borrower shall not pay or declare
any cash or other dividends or distributions on its corporate
stock. Borrower shall not permit AH to pay or declare any
cash or other dividends or distributions on its corporate
stock if such payment or declaration would result in an Event
of Default.
d. Intercompany Service Agreements. Borrower
shall not, nor permit AH to, amend or adjust the commission
structure of its intercompany service agreements in place at
the date of execution of this Agreement, to the extent that it
materially adversely affects AH financially.
e. Disposition of Assets, Security Interests and
other Encumbrances. Borrower shall not, nor permit AH, HFC or
XXXX to, sell, assign, transfer or otherwise dispose of any of
its assets or properties or any interest therein, or create,
incur or suffer to exist any mortgage, security interest,
lien, license or other encumbrance upon any of its properties
or assets, whether nor owned or hereafter acquired, except
(a) ACO's pledge of the Pledged Shares (and Borrower's and
ACO's pledge of the Restricted Shares, if effected) pursuant
to this Agreement, (b) security interests created or arising
pursuant to the NationsBank Loan Documents, (c) purchase money
security interests in equipment used in the normal course of
B o rrower's, AH's, HFC's or AHGA's respective business,
(d) operating or capital equipment leases for use in the
ordinary course of business, and (e) existing encumbrances
d i s closed in Borrower's consolidated and consolidating
financial statements.
f. Investments and Advances. Borrower shall not,
nor permit AH to, make any investment in or advance to any
person, firm or corporation, other than advances (i) to or
investments in Affiliates, and (ii) to employees in the
ordinary course of business, not to exceed $50,000.00 to any
employee.
g. Guaranties. Borrower shall not, nor permit AH
to, become a guarantor, surety or otherwise liable for the
debts or other obligations of any other person, firm or
corporation, except for (a) obligations arising under the
NationsBank Loan Documents, (b) obligations under reinsurance
agreements, and (c) obligations of Affiliates, provided the
aggregate liability of either Borrower or AH on obligations of
all other Affiliates shall not exceed $500,000, further
provided no single transaction shall exceed $200,000.
h. Disposition of Pledged Stock. Without limiting
the generality of any other provision of this Section 7,
Borrower shall not, nor permit ACO to,
(i) s e l l, convey, transfer or otherwise
dispose of any of the Pledged Stock or Restricted Stock or any
interest therein, or create, incur or permit to exist any
pledge, mortgage, lien, charge, encumbrance or any security
interest whatsoever in or with respect to any of the Pledged
Stock or the Restricted Stock or the proceeds thereof, other
than that created under the Transaction Documents;
(ii) consent to or approve or permit the
issuance of any additional shares of any class of capital
stock of HFC, AH or XXXX or any securities convertible
voluntarily by the holder thereof or automatically upon the
occurrence or non-occurrence of any event or condition into,
or exchangeable for, any such shares, or any warrants,
options, rights or other commitments entitling any person to
purchase or otherwise acquire any such shares;
(iii) consent to or approve or permit any
amendment, restatement or substitution of the Articles of
Incorporation and/or Bylaws of HFC, AH or XXXX without the
prior written consent of Lender, it being hereby acknowledged
b y B orrower that any such amendment, restatement or
substitution shall not be effective unless so consented to by
Lender and that Lender may give or withhold such consent in
each instance in Lender's sole and absolute discretion; or
(iv) consent to or approve or permit HFC, AH or
XXXX to sell, dispose of, encumber or xxxxx x xxxx on or
security interest in all or any material portion of its
property or assets.
i. Affiliates' Stock. Borrower shall not permit
any Affiliates to consent to or approve or permit the issuance
of any additional shares of any class of capital stock of any
Affiliate, or any securities convertible voluntarily by the
holder thereof or automatically upon the occurrence or non-
occurrence of any event or condition into, or exchangeable
for, any such shares, or any warrants, options, rights or
o t her commitments entitling any person to purchase or
otherwise acquire any such shares other than to the present
owner of the capital stock of such Affiliate as set forth in
Exhibit C.
j. Miscellaneous. So long as any part of the
Indebtedness remains unpaid or this Agreement remains in
effect, Borrower shall not, nor permit AH to, without the
express prior written consent of Lender:
(i) Create, incur or permit to exist or
otherwise become liable for, directly or indirectly, any
indebtedness for borrowed money or for the deferred purchase
price of real or personal property in excess of $500,000 in
the aggregate, provided, however, no individual transaction
shall exceed $200,000 except (i) trade indebtedness incurred
in the ordinary course of business, (ii) the Indebtedness, and
(iii) the Outstanding Debt.
(ii) M e rge or consolidate with any other
company or companies; enter into any joint venture or
partnership with any person, firm or corporation other than an
Affiliate; or convey, lease or sell all or any material
portion of its property or assets or business to any other
person, firm or corporation, other than the purchase or sale
of assets in the ordinary course of business.
(iii) Consent to or approve or permit any
m a terial amendment, restatement or substitution of the
Articles of Incorporation and/or Bylaws of AH, it being hereby
acknowledged by Borrower that any such amendment, restatement
or substitution shall not be effective unless so consented to
by Lender and that Lender may give or withhold such consent in
each instance in Lender's sole and absolute discretion. For
purposes of this Section 7, and without limiting the scope of
this Section 7, any change in capital structure or in the
relative rights, preferences or limitations relating to
capital stock shall be deemed a material change.
8. Events of Default.
a. D x x xxxxx. Each of the following shall
constitute an Event of Default for purposes of this Agreement:
(i) Borrower fails to pay within ten (10)
Business Days of the due date principal, interest, costs or
expenses due under the Transaction Documents;
(ii) Borrower makes a misstatement of material
fact in the Transaction Documents or any other document or
certificate relating to the Agreement;
(iii) Borrower fails to observe or perform
any covenant, term or agreement set forth in Section 3 hereof;
(iv) Borrower fails to observe or perform any
other covenant, term or agreement of the Transaction Documents
and such failure is not cured within thirty (30) days
following notice thereof from Lender;
(v) Filing by or against Borrower or AH of a
petition or request for liquidation, reorganization,
arrangement, adjudication as a bankrupt, relief as a debtor,
or other relief under the bankruptcy, insolvency or similar
laws of the United States or any state thereof now or
hereafter in effect;
(vi) If Borrower or AH seeks, consents to or is
subjected to the appointment or taking possession of a
receiver, liquidator, assignee, trustee, custodian or other
similar official for it or for any substantial portion of its
property, or if a court of competent jurisdiction shall enter
any decree effectuating such an appointment or ordering the
winding up or liquidation of Borrower or AH;
(vii) B o r rower or AH ceases business
operations, makes a general assignment for the benefit of
creditors or consents to or has filed against it any formal or
informal proceeding for the dissolution, liquidation or
winding-up of the affairs of Borrower or AH; provided however,
if such action is brought against Borrower or AH, Borrower
shall have 60 days to cause such action to be dismissed;
(viii) An admission in writing by Borrower
or AH that it is not Solvent;
(ix) If any judgment against Borrower or AH not
covered by insurance or any attachment or other levy against
any of its property for an amount in excess of $200,000.00
remains unpaid, unstayed on appeal, undischarged, unbonded or
undismissed for more than thirty (30) consecutive days;
(x) If any governmental agency, department,
commission or authority delivers to Borrower or AH a cease and
desist order, letter of unsafe practices or conditions, an
order of correction, or similar directive under applicable law
o r commences any action which could result in taking
possession, reorganization or liquidation of Borrower or AH,
and such letter, action or other directive is permitted to
remain uncured or undismissed for more than forty-five (45)
consecutive days;
(xi) All or a controlling interest in the
capital stock of Borrower is sold, assigned or otherwise
transferred or a security interest or other encumbrance is
granted or otherwise acquired therein or in respect thereto,
in a single transaction or series of related transactions;
(xii) Borrower or AH commences any action
or proceeding to contest the validity or enforceability of any
Transaction Document or any lien or security interest granted
or obligations evidenced by any Transaction Document; or
(xii) A writ or order of attachment or
garnishment in excess of $250,000 is issued or made against
any of the property, assets or income of Borrower.
b. Remedies upon Default. Upon the occurrence of
an Event of Default under this Agreement, Lender may declare
all of the Indebtedness due and owing, without notice to
Borrower, whereupon all such Indebtedness and other amounts
shall thereupon be and become immediately due and payable. In
addition, Lender may pursue or exercise any and all other
rights, remedies, privileges and powers given Lender by this
Agreement, the Promissory Note, or any other instrument or
document now or hereafter given as security for payment of the
Indebtedness or any other obligations under this Agreement or
any applicable law due to a default thereunder. No failure on
the part of Lender to exercise, and no delay in exercising,
any right hereunder, under the Promissory Note, or under any
documents securing the Indebtedness shall operate as a waiver
thereof, nor shall any singular or partial exercise by Lender
hereunder or under the Promissory Note or such other documents
preclude any other or further exercise thereof, or the
exercise of any other right.
Borrower agrees that upon the occurrence of an
Event of Default under this Agreement, the proceeds of any
property or collateral in the possession of Lender or in which
Lender has a security interest, whether or not such property
or collateral is held as security for the Indebtedness under
this Agreement, may be held and/or applied by Lender, at its
discretion, to the payment of the Promissory Note, the
Indebtedness and any other indebtedness owed to Lender by
Borrower, at such times and in such order as Lender may from
time to time deem appropriate.
9. Miscellaneous.
a. P e r formance of Borrower's Duties. Upon
Borrower's failure to perform any of its duties under the
T r a n saction Documents, Lender has the right, but no
obligation, to perform any or all such duties.
b. Notice of Sale. Without in any way requiring
notice to be given in the following manner, Borrower agrees
that any notice by Lender of sale, disposition or other
intended action under or in connection with this Agreement,
whether required by the Uniform Commercial Code of the State
of Michigan or otherwise, constitutes reasonable notice to
Borrower if such notice is given in the manner described in
Section 9.j. of this Agreement and at least fifteen (15) days
prior to such action.
c. Exercise of Lender's Rights. No course of
dealing between Lender and Borrower and no delay or omission
by Lender in exercising any right or remedy under the
Transaction Documents or with respect to the Indebtedness
shall operate as a waiver of any such right or remedy, or of
any other right or remedy, and no single or partial exercise
of any such right or remedy shall preclude any other right or
remedy, or exercise of, or further exercise of any other right
or remedy. All rights and remedies of Lender are cumulative.
d. Successors and Assigns. Lender and Borrower as
used in this Agreement include the successors and assigns of
those parties, except Borrower does not have the right to
assign its rights under or any interest in this Agreement.
e. Indemnification. Borrower agrees to pay,
indemnify and hold Lender harmless from and against all
liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind
or nature whatsoever (including reasonable attorneys' fees,
costs and expenses) which arise out of, relate to or are
connected in any manner with the negligent or willful acts or
omissions of Borrower, including, without limitation, any
costs or expenses incurred by Lender in connection with
enforcing its rights to indemnification pursuant to this
subparagraph. The provisions of this subparagraph survive
payment of the Indebtedness.
f. Severability. The provisions of this Agreement
are independent and separable from each other, and no such
p r o v i sion shall be affected or rendered invalid or
unenforceable by virtue of the fact that for any reason any
other provision may be invalid or unenforceable in whole or in
part. If any provision of this Agreement is prohibited or
u n e n forceable in any jurisdiction, such provision is
ineffective in such jurisdiction only to the extent of such
prohibition or unenforceability, and such prohibition or
unenforceability does not invalidate the balance of such
provision to the extent it is not prohibited or unenforceable
nor render prohibited or unenforceable such provision in any
other jurisdiction.
g. Modifications. No modification or waiver of
any provision of, nor consent to any departure by Borrower
from this Agreement is effective unless in writing signed by
an authorized representative of Lender and Borrower, and such
waiver or consent is effective only in the specific instance
and for the purpose for which given. No notice to or demand
on Borrower in any case entitles Borrower to any other or
further notice or demand in similar or other circumstances.
h. G o v erning Law. This Agreement and the
Transaction Documents delivered in connection with this
Agreement are governed by and construed in accordance with the
laws of the State of Michigan. Exercise of any right or
remedy in the event of default is likewise governed by the
laws of Michigan.
i. Further Assurances. Borrower agrees to take
such additional actions and execute such further documents as
Lender may reasonably request in order to give effect to the
transactions described in this Agreement.
j. N o t ices. Except as otherwise expressly
provided in this Agreement or any other Transaction Document,
each notice, request or demand pursuant to this Agreement or
any Transaction Document shall be in writing and mailed by
United States mail, postage prepaid, certified mail, return
receipt requested, addressed as follows:
If to Borrower:
Hallmark Financial Services, Inc.
00000 Xxxxxx Xxxxxxx, Xxxxx 000
Xxxxxx, XX 00000
Attention: Xxxxx X. Xxxxxxxx
(000) 000-0000
(000) 000 0000 (facsimile)
If to Lender:
Dorinco Reinsurance Company
0000 Xxxxx Xxxxxx
Xxxxxxx, XX 00000
Attention: Xxxxx X. Xxxxxxxxxxx
(000) 000-0000
(000) 000-0000 (facsimile)
N o tices shall be deemed given five (5) days
following the date deposited in the United States mail as
evidenced by the postmark of the United States Post Office in
which the notice was deposited.
k. Singular and Plural. Whenever used, the
singular number includes the plural, and the plural numbers
includes the singular, and the use of any gender applies to
all genders.
l. Counterparts. This Agreement may be executed
in any number of counterparts, and by Borrower and Lender on
separate counterparts, each of which when so executed and
delivered will be an original, but all of which together shall
constitute one in the same Agreement.
m. Section Headings. The captions and headings of
the sections and subsections of this Agreement are for
convenience of reference only and are not to be used to
interpret or define the provisions of this Agreement.
n. ORAL AGREEMENTS. ORAL AGREEMENTS OR
COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FOREBEAR FROM
ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR
RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU
( X X X X OWER) AND US (LENDER) FROM MISUNDERSTANDING OR
DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS
ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND
EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE
MAY LATER AGREE IN WRITING TO MODIFY IT.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the day and year first above written.
BORROWER:
HALLMARK FINANCIAL SERVICES, INC.
By:
Name: Xxxxx X. Xxxxxxx
Title: Executive Vice President
ATTEST:
[CORPORATE SEAL]
LENDER:
DORINCO REINSURANCE COMPANY
By:
Name: Xxxx X. Xxxxx
Title: President & CEO
EXHIBIT E
STOCK CERTIFICATE RESTRICTIONS
"Sale, transfer, pledge or other
disposition of the shares represented by
this certificate is restricted pursuant to
a Loan Agreement dated March , 1997,
between Hallmark Financial Services, Inc.
and Dorinco Reinsurance Company."
