8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT PURSUANT

TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): August 29, 2008

HALLMARK FINANCIAL SERVICES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada

(State or Other Jurisdictionof Incorporation)

001-11252	87-0447375
(Commission File Number)	(IRS Employer Identification No.)

777 Main Street, Suite 1000, Fort Worth, Texas	76102
(Address of Principal Executive Offices)	(Zip Code)

817-348-1600

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01Entry into a Material Definitive Agreement

On August 29, 2008, Hallmark Financial Services, Inc. (the “Company”) executed a Purchase Agreement with Jeffrey L. Heath (the “Seller”) pursuant to which the Company simultaneously acquired 80% of the issued and outstanding membership interests in Heath XS, LLC and Hardscrabble Data Solutions, LLC, each a New Jersey limited liability company (collectively, the “Heath Group”). The Heath Group is an underwriting organization that produces lower hazard, middle market, excess commercial automobile and commercial umbrella insurance policies on both an admitted and non-admitted basis through a network of independent wholesale agencies throughout the United States. Prior to the execution and closing of the Purchase Agreement, there was no material relationship between the Seller and the Company or any of its affiliates. Pursuant to the Purchase Agreement, the Company acquired 80% of the membership interests in the Heath Group for consideration of $15.0 million. The consideration was paid in cash at closing out of the Company’s existing working capital. The purchase price is subject to post-closing reduction in an amount equal to (a) all accrued unpaid operational liabilities of the Heath Group as of August 29, 2008, plus (b) any amount by which cash on hand as of August 29, 2008, was less than $200,000. Pursuant to the Purchase Agreement, the Seller has agreed not to disclose any of the Heath Group’s confidential information and not to compete with the Heath Group or solicit any of the Heath Group’s employees, agents, suppliers or customers on behalf of a business competitive with the Heath Group for a period through the later of August 29, 2014, or two years following closing of the Put/Call Option (as defined below).

In connection with the acquisition of its membership interests in the Heath Group, the Company executed an Amended and Restated Operating Agreement for each of Heath XS, LLC and Hardscrabble Data Solutions, LLC (collectively, the “Operating Agreements”). The Operating Agreements provide for management of the Heath Group by three managers, two of whom are appointed by the Company and one of whom is appointed by an affiliate of the Seller. Although most matters may be approved by a majority of the managers, the Operating Agreements specify certain matters requiring unanimous approval of the managers. The Operating Agreements also grant certain preemptive rights, provide for allocation of profits and losses and distributions of available cash, restrict transfers of membership interests and specify certain co-sale and “drag-along” rights. In addition, the Operating Agreements grant to the Company the right to purchase the remaining 20% membership interests in the Heath Group and grants to an affiliate of the Seller the right to require the Company to purchase such remaining membership interests (the “Put/Call Option”). The Put/Call Option becomes exercisable by either the Company or the affiliate of the Seller upon the earlier of August 29, 2012, the termination of the employment of the Seller by the Heath Group or a change of control of the Company. If the Put/Call Option is exercised, the Company would have the right or obligation to purchase the remaining 20% membership interests in the Heath Group for an amount equal to nine times the average Pre-Tax Income (as defined in the Operating Agreements) for the previous 12 fiscal quarters.

In connection with the acquisition of its membership interests in the Heath Group, the Company also caused Heath XS, LLC to enter into an Employment Agreement with the Seller effective as of August 29, 2008. The employment agreement provides the Seller a base salary of at least $300,000 per year and is terminable at the will of either party. Pursuant to his Employment Agreement, the Seller has agreed not to disclose any of the employer’s confidential information and not to compete with the employer or solicit any of the employer’s employees, agents, suppliers or customers on behalf of a business competitive with the employer for a period of two years following termination of his employment for any reason.

The descriptions of the Purchase Agreement, the Operating Agreements and the Employment Agreement set forth above are qualified in their entirety by reference to the definitive agreements filed as exhibits to this Current Report on Form 8-K and incorporated herein by this reference.

Item 9.01Financial Statements and Exhibits

(c) Exhibits.

10.1 Purchase Agreement dated August 29, 2008, between Hallmark Financial Services, Inc. and Jeffrey L. Heath.

10.2 Heath XS, LLC Amended and Restated Operating Agreement dated August 29, 2008, between Hallmark Financial Services, Inc. and Heath Holdings, LLC.

10.3 Hardscrabble Data Solutions, LLC Amended and Restated Operating Agreement dated August 29, 2008, between Hallmark Financial Services, Inc. and Heath Holdings, LLC.

10.4 Employment Agreement dated August 29, 2008, between Heath XS, LLC and Jeffrey L. Heath.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.

		HALLMARK FINANCIAL SERVICES, INC.
Date: September 4, 2008	By:	/s/ Jeffrey R. Passmore
		Jeffrey R. Passmore, Chief Accounting Officer

EX-10.1

PURCHASE AGREEMENT

by and between

HALLMARK FINANCIAL SERVICES, INC.,

and

JEFFREY L. HEATH

DATED AS OF AUGUST 29, 2008

TABLE OF CONTENTS

			Page
ARTICLE I	TERMS OF THE PURCHASE AND SALE		1
Section 1.1		Sale of Interests	1
Section 1.2		Purchase Price	1
Section 1.3		Payment of the Purchase Price	2
ARTICLE II		CLOSING	2
Section 2.1		Closing	2
Section 2.2		Deliveries by the Seller	2
Section 2.3		Deliveries by Purchaser	3
Section 2.4		Simultaneous Deliveries	3
Section 2.5		Adjustment Amount	3
ARTICLE III	REPRESENTATIONS AND WARRANTIES OF SELLER		4
Section 3.1		Title to Interest	4
Section 3.2		Power and Authority	4
Section 3.3		Execution and Validity	4
Section 3.4		No Conflict; Consents	4
Section 3.5		Company Organization; Good Standing; Delivery of Charter Documents	5
Section 3.6		Corporate Power and Authority	5
Section 3.7		Capitalization	5
Section 3.8		No Undisclosed Claims	5
Section 3.9		Sufficiency and Condition of and Title to the Company Assets	5
Section 3.10		Real and Personal Property	6
Section 3.11		Compliance with Laws	6
Section 3.12		Insurance	7
Section 3.13		Contracts	7
Section 3.14		Litigation; Orders	7
Section 3.15		Licenses	8
Section 3.16		Intangible Assets	8
Section 3.17		Employees	8
Section 3.18		Employee Benefits	9
Section 3.19		Taxes	11
Section 3.20		Bank Accounts; Powers of Attorney	11
Section 3.21		Affiliated Transactions	11
Section 3.22		Books and Records	12
Section 3.23		Full Disclosure	12
Section 3.24		Brokers	12
Section 3.25		Absence of Sensitive Payments	12
Section 3.26		Financial Information	12
ARTICLE IV	REPRESENTATIONS AND WARRANTIES OF PURCHASER		13
Section 4.1		Organization; Good Standing; Delivery of Charter Documents	13
Section 4.2		Power and Authority	13

Section 4.3		Authorization; Execution and Validity	13
Section 4.4		No Conflict; Purchaser Consents	13
Section 4.5		Full Disclosure	13
Section 4.6		Brokers	13
Section 4.7		Investment Representations	14
ARTICLE V	COVENANTS OF SELLER		14
Section 5.1		Cooperation of the Seller	14
Section 5.2		Pre-Closing Access to Information	14
Section 5.3		Conduct of Business	14
Section 5.4		No Business Changes	15
Section 5.5		Supplements to Schedules	15
Section 5.6		Standstill	15
Section 5.7		Discharge of Encumbrances	16
Section 5.8		Non-Disclosure; Non-Competition; Non-Solicitation	16
ARTICLE VI	COVENANTS OF PURCHASER		18
Section 6.1		Cooperation by Purchaser	18
ARTICLE VII	MUTUAL COVENANTS		19
Section 7.1		Fees and Expenses	19
Section 7.2		Governmental Consents	19
Section 7.3		Consents to Assign Leases and Contracts	19
Section 7.4		Licenses	19
Section 7.5		Further Assurances	19
Section 7.6		Supplemental Agreements	20
Section 7.7		Tax Matters	20
Section 7.8		Employee Benefit Plans; Employment	24
Section 7.9		Pre-Closing Restructuring	24
ARTICLE VIII	CONDITIONS PRECEDENT TO CLOSING		25
Section 8.1		Conditions Precedent to Purchaser’s Obligations	25
Section 8.2		Conditions Precedent to the Seller’s Obligations	26
ARTICLE IX	TERMINATION PRIOR TO CLOSING		27
Section 9.1		Termination of Agreement	27
Section 9.2		Procedure Upon Termination	27
ARTICLE X	INDEMNIFICATION AND OFFSET		27
Section 10.1		Indemnification by Seller	27
Section 10.2		Indemnification by Purchaser	28
Section 10.3		Claims for Indemnification	28
Section 10.4		Defense by Indemnifying Party	29
Section 10.5		Offset	29
Section 10.6		Tax Benefit	30
Section 10.7		Characterization of Indemnity Payments	30
Section 10.8		Limits on Indemnification; Other Provisions	30
ARTICLE XI	MISCELLANEOUS		30
Section 11.1		Amendment	30

Section 11.2	Counterparts	31
Section 11.3	Entire Agreement	31
Section 11.4	Expenses	31
Section 11.5	GOVERNING LAW	31
Section 11.6	Forum	31
Section 11.7	No Assignment	31
Section 11.8	No Third Party Beneficiaries	31
Section 11.9	Notices	32
Section 11.10	Public Announcements	32
Section 11.11	Representation by Legal Counsel	32
Section 11.12	Schedules	33
Section 11.13	Severability	33
Section 11.14	Successors	33
Section 11.15	Time of the Essence	33
Section 11.16	Waiver	33

SCHEDULES

Schedule 3.7	Subsidiaries
Schedule 3.8	Undisclosed Liabilities
Schedule 3.10(b)	Leased Real Property
Schedule 3.10(c)	Owned Personal Property
Schedule 3.10(d)	Leased Personal Property
Schedule 3.10(e)	Personal Property Owned by Others
Schedule 3.12	Insurance
Schedule 3.13	Contracts
Schedule 3.14	Litigation
Schedule 3.15	Licenses
Schedule 3.16(a)	Owned Intangible Assets
Schedule 3.16(b)	Licensed Intangible Assets
Schedule 3.17(a)	Employees
Schedule 3.17(b)	Employee Contracts
Schedule 3.18(a)	Identification of Company Plans and Exceptions
Schedule 3.20	Bank Accounts; Powers of Attorney
Schedule 3.21	Affiliated Transactions
Schedule 3.26	Financial Statements
Schedule 7.3(b)	Pre-Closing; Required Consents
Schedule 7.8(a)	Assumed Plans
Schedule 8.1(i)	Assets and Liabilities

PURCHASE AGREEMENT

THIS PURCHASE AGREEMENT (this “Agreement”), dated as of August 29, 2008 (the “Signing Date”), is made by and between Hallmark Financial Services, Inc., a Nevada corporation (“Purchaser”) and Jeffrey L. Heath (“Seller”).

PRELIMINARY STATEMENTS

A.The Seller owns 100% of the outstanding membership interests in each of (a) Heath XS, LLC, a New Jersey limited liability company (“HXS”) and (b) Hardscrabble Data Solutions, LLC, a New Jersey limited liability company (“Hardscrabble”, and together with HXS, the “Companies”). Membership interests in HXS are herein referred to as “HXS Interests” and membership interests in Hardscrabble are herein referred to as “Hardscrabble Interests”. The Companies, together with Jeffrey L. Heath Inc., a New Jersey corporation (“JLH”), are herein referred to herein as the “Heath Group Entities”.

B.Purchaser and Seller are collectively referred to herein as the “Parties” or individually as a “Party.”

C.The Seller desires to sell, and the Purchaser desires to purchase, (a) 80% of the outstanding HXS Interests and (b) 80% of the outstanding Hardscrabble Interests, on the terms and subject to the conditions set forth in this Agreement.

E.Capitalized terms used in this Agreement and rules of construction are defined or indexed in Appendix A for the convenience of the reader and in order to eliminate the need for cross-references. Appendix A is incorporated herein by this reference.

STATEMENT OF AGREEMENT

NOW, THEREFORE, in consideration of the premises and the mutual agreements, covenants, representations and warranties set forth in this Agreement and for other good, valid and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:

ARTICLE I

TERMS OF THE PURCHASE AND SALE

Section 1.1Sale of Interests. Subject to the terms and conditions and in reliance upon the representations and warranties set forth in this Agreement, at the Closing Seller shall sell and assign to Purchaser, and Purchaser shall purchase and acquire from Seller, the HXS Interests and Hardscrabble Interests described on Schedule 1.1 (the “Purchased Heath Interests”), in each case free and clear of all Encumbrances, for the Purchase Price set forth in Section 1.2 hereof. The Purchased Heath Interests purchased and acquired by Purchaser shall represent 80% of the issued and outstanding equity interests in each of the Companies.

Section 1.2Purchase Price. The total consideration for the purchase of the Purchased Heath Interests shall be an amount equal to Fifteen Million Dollars ($15,000,000)(the “Base Price”), less the Final Adjustment Amount, in cash (the “Purchase Price”). The amount paid by Purchaser at Closing shall be the Base Price less the Estimated Adjustment Amount (the “Closing Consideration”). Schedule 1.2 shall reflect the amount that is allocated to the equity of each Company, which shall be mutually agreed upon by the Parties.

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Section 1.3Payment of the Purchase Price. The Purchase Price shall be payable to the Seller in the allocated amounts indicated on Schedule 1.1 at Closing by wire transfer of immediately available funds to the bank account set forth on a notice given to the Purchaser by the Seller at least three (3) business days prior to the Closing Date.

ARTICLE II

CLOSING

Section 2.1Closing. The consummation of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of the Purchaser on the first business day following the date on which all of the conditions set forth in Article VIII, to the extent not waived, are satisfied. The Closing may be postponed to such other date as the Parties may mutually agree. The date on which the Closing actually occurs is hereinafter referred to as the “Closing Date.”

Section 2.2Deliveries by the Seller. At the Closing, the Seller shall deliver to the Purchaser the following:

(a)the closing and secretary’s certificates referred to in Section 8.1(e) and Section 8.1(f);

(b)a duly executed assignment of the Purchased Heath Interests in form and substance reasonably satisfactory to the Purchaser and its counsel;

(c)a certificate dated within ten (10) business days prior to the Closing Date from the Secretary of State of the applicable state of organization certifying as to each of the Companies’ valid existence and good standing in such jurisdiction;

(d)certified Charter Documents of each of the Companies, recently certified by the Secretary of State of the applicable state of organization;

(e)executed counterparts of all Required Consents;

(f)a receipt for the payment of the Closing Consideration;

(g)each of the agreements referred to in Section 7.6 executed by the Seller;

(h)a written opinion of counsel to the Seller addressed to the Purchaser confirming that the representations and warranties contained in Section 3.1 through Section 3.7 hereof are true; and

(i)all other previously undelivered documents, instruments and writings required to be delivered by the Seller to the Purchaser at or prior to the Closing pursuant to this Agreement and such other documents, instruments and certificates as the Purchaser may reasonably request in connection with the transactions contemplated by this Agreement.

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Section 2.3Deliveries by Purchaser. At the Closing, the Purchaser shall deliver, or cause to be delivered, to the Seller the following:

(a)the Closing Consideration;

(b)the closing and secretary’s certificates referred to in Sections 8.2(c) and 8.2(d);

(c)each of the agreements referred to in Section 7.6 to which the Purchaser is a party, each executed on behalf of the Purchaser;

(d)all other previously undelivered documents, instruments and writings required to be delivered by the Purchaser to the Seller at or prior to the Closing pursuant to this Agreement and such other documents, instruments and certificates as the Seller may reasonably request in connection with the transactions contemplated by this Agreement.

Section 2.4Simultaneous Deliveries. The delivery of the documents required to be delivered at the Closing pursuant to this Agreement shall be deemed to occur simultaneously. No delivery shall be effective until each Party has received, or waived receipt of, all the documents that this Agreement entitles such Party to receive.

Section 2.5Adjustment Amount.

(a)No less than two business days prior to the Closing, Seller shall deliver to Purchaser a good faith estimate (the “Estimated Adjustment Amount”) as of the Closing Date of the sum of (x) the Pre-Closing Operational Liabilities plus (y) the Operating Cash Shortfall. Seller shall also provide Purchaser with its best estimate of the Termination Obligation, including a schedule of any additional contributions to be made pursuant to Section 7.8(a) and distributions in connection therewith. For purposes of this Agreement, (A) the “Pre-Closing Operational Liabilities” shall mean the operational liabilities of the Heath Group Companies arising on or prior to the Closing Date, including, but not be limited to, (i) accrued payroll, (ii) accounts payable, (iii) accrued expenses and (iv) other normal recurring expenses, including all general and administrative expenses and in each case not satisfied as of the Closing Date and (B) “Operating Cash Shortfall” means $200,000 minus cash held in accounts of the Companies as of the Closing (all of which cash shall remain with the Companies following the Closing Date); provided that the Operating Cash Shortfall shall be $0 if the cash held in the accounts of the Companies exceeds $200,000. Purchaser shall be entitled to reasonably dispute the deliveries provided pursuant to this Section 2.5(a) (including the Estimated Adjustment Amount), in which case the parties shall use reasonable efforts to resolve any such dispute prior to proceeding with the Closing. Any amended estimate of the Estimated Adjustment Amount based on such resolution shall be deemed the Estimated Adjustment Amount for purposes of determining the Closing Consideration.

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(b) Within ninety days following the Closing, Purchaser shall deliver to Seller its good faith determination of the sum of (x) the Pre-Closing Operational Liabilities plus (y) the Operating Cash Shortfall, based on the books and records of the Heath Group Entities (Purchaser’s determination, the “Final Adjustment Amount”). Following Closing, Seller shall provide Purchaser and its representatives with access to all applicable books and records of JLH for purposes of making such determination. In the event that the Final Adjustment Amount exceeds the Estimated Adjustment Amount, then Seller shall promptly (and in no event later than ten business days following delivery to Seller of Final Adjustment Amount) pay to Purchaser such difference in cash (by wire transfer or check). In the event that Estimated Adjustment Amount exceeds the Final Adjustment Amount, then Purchaser shall promptly (and in no event later than ten business days following delivery to Seller of Final Adjustment Amount) pay to Seller such difference in cash (by wire transfer or check). In the event that Seller fails to make any required payment to Purchaser pursuant to the foregoing, then Purchaser shall be entitled to set off all or portion of any defaulted amount against future distributions of profits to Seller under any operating agreement of the Companies, in addition to any other remedies available to Purchaser.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SELLER

The Seller hereby represents and warrants to the Purchaser that the statements made in this Article III are true, correct and complete as of the date hereof.

Section 3.1Title to Interest. The Seller is the record and beneficial owner of (a) all outstanding HXS Interests and (b) all outstanding Hardscrabble Interests, in each case free and clear of all Encumbrances. At the Closing, the Seller will transfer to the Purchaser its entire right, title and interest in and to all of the Purchased Heath Interests free and clear of all Encumbrances.

Section 3.2Power and Authority. The Seller has the requisite power and authority to execute and deliver this Agreement, to perform their obligations hereunder and to consummate the transactions contemplated hereby, including the execution, delivery and performance of all of the Transaction Documents to which the Seller is a party.

Section 3.3Execution and Validity. Each of the Transaction Documents, when executed by the Seller and delivered to the Purchaser, will constitute a valid, legal and binding obligation of the Seller, enforceable against the Seller in accordance with the terms of such Transaction Document, subject to any Law Affecting Creditors’ Rights.

Section 3.4No Conflict; Consents. The execution, delivery and performance by the Seller of each Transaction Document will not (a) violate any Law, (b) violate any of the Charter Documents of the Heath Group Entities, (c) violate any Order to which Seller or any Heath Group Entity is a party or by which Seller, any Heath Group Entity or any of their respective assets are bound, (d) result in the creation of any Encumbrance on the Purchased Heath Interests or any material assets of the Heath Group Entities, (e) constitute a default under, or give rise to any right of termination, cancellation or acceleration of any material right or obligation of the Heath Group Entities or to a loss of any material benefit to which any Heath Group Entities is entitled under any provision of any agreement or other instrument binding upon the Heath Group Entities or (f) require any Consent from any Person that will not be obtained and delivered on or before the Closing.

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Section 3.5Company Organization; Good Standing; Delivery of Charter Documents. Each of the Heath Group Entities is duly organized, validly existing and in good standing under the laws of its state of organization. Each of the Heath Group Entities is duly qualified or licensed as a foreign limited liability company in each jurisdiction in which the nature of such Heath Group Entity’s business makes qualification or licensing necessary. Prior to the Signing Date, Seller has delivered, or caused to be delivered, to Purchaser true and complete copies of the Charter Documents of the Heath Group Entities as in effect on the Signing Date.

Section 3.6Corporate Power and Authority. The Heath Group Entities have all the requisite power and authority necessary to own, operate and lease their assets and to carry on their business as and where conducted.

Section 3.7Capitalization. The HXS Interests and Hardscrabble Interests constitute the only issued and outstanding membership interests or other equity securities of any kind of the Companies. All outstanding HXS Interests and Hardscrabble Interests have been duly authorized and validly issued and are fully paid and nonassessable There is no authorized or outstanding option, subscription, warrant, call, preemptive right, commitment or other right or agreement (each, a “Subscription Right”) obligating any Company or the Seller to issue or sell any equity securities or any securities convertible into or exercisable for any equity securities of any Company. The Purchased Heath Interests have not been issued or transferred, and will not be transferred pursuant to this Agreement, in violation of any preemptive or preferential rights or rights of first refusal of any Person. Except as set forth in Schedule 3.7, the Companies do not have any subsidiaries or own any shares of capital stock, membership interests, partnership interests or other beneficial ownership interests in any other Person.

Section 3.8No Undisclosed Claims. Except as set forth in Schedule 3.8, the Heath Group Entities are not subject to any Claim of any nature, absolute or contingent, and no events have occurred or circumstances exist that could give rise to any future Claim, that could have a Material Adverse Effect on the assets or business of the Heath Group Entities.

Section 3.9Sufficiency and Condition of and Title to the Company Assets.

(a)Sufficiency of the Company Assets. The assets reflected on the Books and Records of the Heath Group Entities (collectively, the “Heath Group Assets”) constitute all the assets, properties, licenses and other arrangements which are presently being used or are reasonably related to the business of the Heath Group Entities, and are sufficient to operate such business in a manner consistent with past practice and historic capacity. Except as set forth on Schedule 3.9(a), the assets reflected on Schedule 8.1(i) constitute all of the assets, properties, licenses and other arrangements owned or held for use by JLH which are presently being used or are reasonably related to the business of the Heath Group Companies.

(b)Condition of the Company Assets. Each of the Heath Group Assets complies with Law and is in good and normal operating condition and repair, structurally sound with no known defects (ordinary wear and tear excepted), and suitable for its intended use.

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(c)Title to the Company Assets. At the Closing, the Companies will hold good, valid and indefeasible title to, or a valid leasehold interest in, each of the Heath Group Assets (except for the assets set forth on Schedule 3.9(a)), free and clear of all Encumbrances, other than Permitted Encumbrances.

(d)No Transfers. During the six month period preceding the Signing Date, no Heath Group Entity has made any distribution of cash to Seller or any affiliate of Seller, except for salaries and expense reimbursement in the ordinary course of business.

Section 3.10Real and Personal Property.

(a)Owned Real Property. Except as set forth on Schedule 3.10(a), the Heath Group Entities do not own any interest in real property.

(b)Leased Real Property. Schedule 3.10(b) lists, as of the Signing Date, all leases of real property (collectively, the “Real Property Leases”) to which the Heath Group Entities are a party. As of the Signing Date, all of the Real Property Leases are valid, binding and in full force and effect. None of the Heath Group Entities nor, to Seller’s Knowledge, any other Person is in default under any of the Real Property Leases, nor is there any event or circumstance which with notice or lapse of time, or both, would constitute a default thereunder by any Company or any other Person.

(c)Owned Personal Property. Schedule 3.10(c) lists, as of the Signing Date, all of the depreciable personal property (including all machinery, equipment, vehicles, structures, fixtures and furniture) owned by the Heath Group Entities and used in the business of the Heath Group Entities or located on its premises.

(d)Leased Personal Property. Schedule 3.10(d) lists, as of the Signing Date, all leases of personal property (collectively, the “Personal Property Leases”) to which the Heath Group Entities are a party. As of the Signing Date, all of the Personal Property Leases are valid, binding and in full force and effect. None of the Heath Group Entities nor, to Seller’s Knowledge, any other Person is in default under any of the Personal Property Leases, nor is there any event or circumstance which with notice or lapse of time, or both, would constitute a default thereunder by any Heath Group Entity or any other Person.

(e)Personal Property Owned by Others. Schedule 3.10(e) lists, as of the Signing Date, all artwork, memorabilia and other personal property routinely located on the premises of the Heath Group Entities which is not owned by the Heath Group Entities, and is not being sold to the Purchaser pursuant to this Agreement, together with the name(s) of the owner(s) of such personal property.

Section 3.11Compliance with Laws. The Heath Group Entities have complied with all Laws in the conduct of their business. None of the Heath Group Entities has received any notice from any Governmental Authority or other Person asserting that any Heath Group Entity has violated any Law. No events have occurred or, to Seller’s Knowledge, circumstances exist that could cause any Heath Group Entity to violate any Law in the future.

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Section 3.12Insurance. Schedule 3.12 lists, as of the Signing Date, all insurance policies which insure the business of the Heath Group Entities or any of the assets of the Heath Group Entities against loss (collectively, the “Insurance Policies”), including each insurer’s name, coverage deductible and limit, expiration date and current premium. Each Insurance Policy is in full force and effect, all premiums with respect thereto have been paid to the extent due, and no notice of cancellation or termination has been received with respect to any such policy, other than any policy that will be replaced or is intended to be replaced prior to the expiration thereof by policies providing substantially the same coverage from an insurer that is financially sound and reputable. The Insurance Policies provide the Companies with adequate insurance coverage against the risks involved in the conduct of the business of the Companies and ownership of the assets of the Companies. All Insurance Policies provide coverage of the Companies, and the coverage provided by the Insurance Policies of the Companies will not in any way be affected by, or terminate or lapse by reason of, the consummation of the transactions contemplated by this Agreement, including the effectuation of the Pre-Closing Restructuring. True and complete copies of all Insurance Policies have been provided to the Purchaser.

Section 3.13Contracts. Schedule 3.13 lists, as of the Signing Date, all contracts relating to the business and assets of the Heath Group Entities or by which any of the assets of the Heath Group Entities is bound, pursuant to which the obligations of any party thereto are, or are contemplated to be, with respect to any such contract (a) in excess of $10,000 during any twelve month period, (b) not terminable prior to 90 days after the Signing Date, or (c) otherwise material to the business of the Heath Group Entities. All of the contracts listed on Schedule 3.13 and any contracts entered into after the Signing Date in accordance with Section 5.3 (collectively, the “Material Contracts”) are or will be valid and binding and in full force and effect, subject to Laws Affecting Creditors’ Rights. None of the Heath Group Entities nor, to Seller’s Knowledge, any other Person is in default under any Material Contract, nor, to Seller’s Knowledge, is there any event or circumstance which with notice or lapse of time, or both, would constitute a default thereunder by any Company or any other Person. No Heath Group Entity is a party to any contract which requires the Consent of any Person in order to consummate the transactions contemplated by this Agreement (including the effectuation of the Pre-Closing Restructuring), except as otherwise stated on Schedule 3.13. True and complete copies of all the Material Contracts have been provided to Purchaser. No Heath Group Entity has received notice (written or oral) of the termination or proposed termination of any Material Contract, other than the termination notice dated July 28, 2008 related to the Agency Agreement for the Truckers Umbrella and Excess Program between ACE American Insurance Company, Westchester Surplus Lines Insurance Company, Illinois Union Insurance Company and Jeffrey L. Heath, Inc. t/a Heath XS effective August 1, 2001, which notice has been provided to the Purchaser prior to the Closing Date.

Section 3.14Litigation; Orders. Except as set forth in Schedule 3.14, there are no Actions pending, or to Seller’s Knowledge, threatened against or affecting any Heath Group Entity, its business or any of its assets as of the Signing Date. No Heath Group Entity is subject to any Order.

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Section 3.15Licenses. Schedule 3.15 lists all of the Licenses related to the assets of the Heath Group Entities or operation of the business of the Heath Group Entities, and indicates those Licenses for which the Consent of any Person is required to assign such License (including in order to effectuate the Pre-Closing Restructuring). The Heath Group Entities (and Seller) have obtained, maintain in effect, and comply with the terms and conditions of all Licenses required by Law. There is no Action pending or, to Seller’s Knowledge, threatened in writing to revoke or limit any License listed on Schedule 3.15. The Heath Group Entities (and Seller) have all Licenses necessary for their business as presently conducted. At the Closing Date, to Seller’s Knowledge, the Companies (together with Seller) have all Licenses materially necessary under applicable Law to conduct the business conducted by the Heath Group Entities prior to the execution of this Agreement. Following the Closing Date, to Seller’s Knowledge, for a period of six (6) months, the Companies (together with Seller) will have all Licenses materially necessary under applicable Law to conduct the business conducted by the Heath Group Entities prior to the execution of this Agreement. Licenses held by Seller individually with respect to the business of the Heath Group Entities are in full force and effect and shall remain in full force and effect following consummation of the transactions under this Agreement.

Section 3.16Intangible Assets.

Owned Intangible Assets. Schedule 3.16(a) lists all of the Intangible Assets owned by the Heath Group Entities as of the Signing Date. With respect to the Intangible Assets listed on Schedule 3.16(a) and all of the Intangible Assets obtained or developed prior to the Closing, (i) the Heath Group Entities own all right, title and interest in and to such Intangible Assets free and clear of all Encumbrances, (ii) the Heath Group Entities have not sold, transferred, licensed, sublicensed or conveyed any interest in any of such Intangible Assets, and (iii) to Seller’s Knowledge, no Person has infringed upon or misappropriated any of such Intangible Assets. All Intangible Assets listed on Schedule 3.16(a) and all of the Intangible Assets obtained, held or used by the Heath Group Entities in respect of their business will be owned by the Companies as of the Closing Date, including without limitation all rights to the “Jeffrey L. Heath” name and trademark for use in connection with the business of the Heath Group Entities. As of the Closing Date, the Companies will have been irrevocably assigned by Seller all other rights of Seller in the “Jeffrey L. Heath” name for use in the business of Purchaser (including the Companies following the Closing).

(a)Licensed Intangible Assets. Schedule 3.16(b) lists all licenses and contracts related to any Intangible Asset used by the Heath Group Entities as of the Signing Date. Each license or contract listed on Schedule 3.16(b) and each license or contract related to an Intangible Asset which is entered into after the Signing Date in accordance with Section 5.3 is valid, binding and in full force and effect. The Heath Group Entities have not infringed upon or misappropriated any Intangible Asset owned by another Person. As of the Closing Date, the Companies will hold all licenses and contracts related to any Intangible Asset used by the Heath Group Entities as of the Signing Date pursuant to any third party license.

Section 3.17Employees.

(a)Employees. Schedule 3.17(a) lists the name, job title, date of employment and current annual compensation (salary, bonus and participation in any non-qualified deferred or incentive compensation arrangement) and Heath Group Entity employer for each employee of the Heath Group Entities employed as of the Signing Date (collectively, the “Employees”). All Employees are either United States citizens or otherwise authorized to engage in employment in the United States in accordance with all Laws. All sums due for Employee compensation and benefits and all vacation time owing to any Employee (including all persons whose employment by any Company is terminated prior to the Signing Date) have been duly and adequately accrued on the accounting Books and Records of the Heath Group Entities.

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(b)Contracts. Except as set forth in Schedule 3.17(b), no Heath Group Entity is a party to (i) any contract for employment between any Heath Group Entity and an Employee of such Heath Group Entity that cannot be terminated at will without cost, or (ii) any collective bargaining agreement or other contract to or with any labor union, Employee representative or group of Employees. Except as set forth in Schedule 3.17(b), the employment of all Employees is terminable at will without any penalty or severance obligation of any kind on the part of any Heath Group Entity.

(c)Compliance with Labor Laws. The Heath Group Entities have complied and are presently complying with all Laws respecting employment and employment practices, terms and conditions of employment, and wages and hours, and are not engaged in any unfair labor practice or unlawful employment practice.

Section 3.18Employee Benefits.

(a)Identification of Company Plans. Schedule 3.18(a) sets forth a list of all Employee Benefit Plans which provide compensation or benefits to employees, officers, directors or consultants of any Heath Group Entity (collectively, the “Company Plans”). Seller has delivered to Purchaser true and complete copies of: (i) each of the Company Plans and any related funding agreements thereto (including insurance contracts) including all amendments, all of which are legally valid and binding and in full force and effect, and there are no defaults thereunder, (ii) the currently effective Summary Plan Description pertaining to each of the Company Plans, (iii) the three most recent annual reports for each of the Company Plans, (iv) the most recent IRS determination letter for each Company Plan which is intended to constitute a qualified plan under Section 401 of the Code, and (v) financial statements for each funded Company Plan. Notwithstanding any statement or indication in this Agreement to the contrary, except as disclosed on Schedule 3.18(a), there are no Company Plans which the Companies (through the applicable Company) will not be able to terminate (or in which the Companies (through the applicable Company) will not be able to terminate the participation of its employees) immediately after the Closing in accordance with their terms and ERISA, and without incurring any expenses (including, but not limited to, loads or termination charges imposed with respect to insurance policies or mutual funds used to fund such Company Plans), other than administrative expenses in connection with such termination and benefits accrued as of the date of termination.

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(b)Compliance with Applicable Laws. All Company Plans comply with and are and have been operated in material compliance with each applicable provision of ERISA, the Code, other federal statutes, state Law (including, state insurance Law) and the regulations and rules promulgated pursuant thereto or in connection therewith. No Heath Group Entity nor any member of the same controlled group of businesses as the Heath Group Entities within the meaning of Section 4001(a)(14) of ERISA (an “ERISA Affiliate”) has failed to make any material contributions or to pay any material amounts due and owing as required by the terms of any Company Plan. Other than routine claims for benefits under the Company Plans, there are no pending or, to Seller’s Knowledge, threatened investigations, proceedings, claims, lawsuits, disputes, actions, audits or controversies involving the Company Plans or the fiduciaries, administrators, or trustees of any of the Company Plans or any ERISA Affiliate as the employer or sponsor under any Company Plan, with any of the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation, any participant in or beneficiary of any Company Plan or any other Person whomsoever. To Seller’s Knowledge, there is no reasonable basis for any such claim, lawsuit, dispute, action or controversy.

(c)Pension Benefit Plans. None of the Heath Group Entities nor any ERISA Affiliate is or ever has been a sponsor or obligated to contribute to any plan covered by Title IV of ERISA or Section 412 of the Code, or any “multiemployer plan,” within the meaning of Section 3(37) of ERISA. Each of the Company Plans which is intended to be a qualified plan under Section 401(a) of the Code has received a favorable determination letter from the IRS, and has been operated substantially in accordance with its terms and with the provisions of the Code.

(d)Welfare Benefit Plans. Each Company Plan which is required to comply with the provisions of Part 6 of Title I of ERISA, Section 601 et seq., and Code Section 4980B and the provisions of Part 7 of Title I of ERISA, Section 701 et seq., and Code Section 4980D has complied in all material respects. Except as required by such Sections of the Code, no Company Plan which is a Welfare Benefit Plan provides for any post-employment benefits.

(e)Effect of Consummation. Neither the execution of this Agreement nor the consummation of the transactions contemplated by this Agreement will (i) entitle any current or former employee of any Heath Group Entity or any other individual to a bonus, severance pay, unemployment compensation or similar payment by the Heath Group Entity (or otherwise trigger any right of termination or separation entitling any current or former employee to any such bonus, severance pay, unemployment compensation or similar payment) (ii) otherwise accelerate the time of payment or vesting, or increase the amount of any compensation due to any current or former employee of any Heath Group Entity, (iii) result in any prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code for which an exemption is not available, or (iv) in any way result in any liability of any Heath Group Entity with respect to any Employee Benefit Plan of any Person. No Heath Group Entity is a party or subject to any agreement, contract or other obligation which would require the making of any payment, other than payments contemplated by this Agreement, to any employee of such Heath Group Entity, Seller or any other Person as a result of the consummation of the transactions contemplated herein.

(f)Termination. As of the Closing, the Company Plan set forth on Schedule 10.1(c) with respect to the Companies shall have been terminated in accordance with the terms thereof and applicable Law without any further liability of the Companies or any sponsor or fiduciary thereof. Seller shall have made such additional contributions and other payments to such Company Plan as necessary to satisfy the Termination Obligation in connection with the foregoing.

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Section 3.19Taxes.

(a)Taxes and Tax Returns. All Taxes that are due and payable by any Heath Group Entity or by Seller (or affiliates of Seller) on behalf of or with respect to any Heath Group Entity (whether or not shown on a Return) have been paid. There are no liens on the property or assets of any Heath Group Entity for Taxes other than Permitted Encumbrances. All current Taxes not yet due and payable by the Company or by Seller (or affiliates of Seller) on behalf of or with respect to any Heath Group Entity have been properly accrued on the consolidated balance sheet of the Heath Group Entities. All Tax returns (including amended returns and claims for refund), reports, and declarations of estimated Tax (collectively, “Returns”) which were required to be filed by any Heath Group Entity or by Seller (or affiliates of Seller) on behalf of or with respect to any Heath Group Entity with any Governmental Authority have been timely filed. All Returns are true and correct in all material respects and accurately reflect the Tax liabilities of the applicable Heath Group Entity or by Seller (or affiliates of Seller) on behalf of or with respect to any Heath Group Entity .

(b)Statute of Limitations and Tax Actions. No Heath Group Entity or Seller (or affiliates of Seller) on behalf of or with respect to any Heath Group Entity has executed any presently effective waiver or extension of any statute of limitations against assessments and collection of Taxes. There are no pending or, to Seller’s Knowledge, threatened Claims, assessments, notices, proposals to assess, deficiencies or audits with respect to Taxes.

(c)Other Tax Representations. Proper and accurate amounts have been withheld and remitted by the applicable Heath Group Entity from and with respect to all Persons from whom it is required by applicable law to withhold for all periods in compliance with the tax withholding provisions of all Laws. There is no contract, plan or arrangement covering any Person that, individually or collectively, would give rise to the payment of any amount that would not be deductible by any Company by reason of Section 162(m) or Section 280G of the Code. No Heath Group Entity is a “foreign person” within the meaning of Section 1445(f)(3) of the Code. No Heath Group Entity has ever been a member of any group that filed a consolidated federal income tax return.

Section 3.20Bank Accounts; Powers of Attorney. Schedule 3.20 lists the names of (a) each bank, trust company and stock or other broker with which any Heath Group Entity has an account, credit line or safe deposit box or vault, or otherwise maintains relations (the “Bank Accounts”), (b) all Persons authorized to draw on, or to have access to, each of the Bank Accounts, and (c) all Persons authorized by proxies, powers of attorney or other like instruments to act on behalf of any Heath Group Entity in any matter concerning the business of such Heath Group Entity. Each of the Bank Accounts has a positive cash balance. No proxies, powers of attorney or other like instruments are irrevocable. Except as set forth on Schedule 3.20, the Companies will have access to, and be authorized to draw on, the Bank Accounts.

Section 3.21Affiliated Transactions. Except as set forth on Schedule 3.21, there are no outstanding loans or other transactions between any Heath Group Entity and Seller, officer, director, shareholder, consultant or affiliate of any Heath Group Entity or any spouse or child of any such person. Neither Seller, nor any officer, director, shareholder, consultant or affiliate of any Heath Group Entity nor any spouse or child of any such person owns or has any interest in, directly or indirectly, any real or personal property owned by or leased to any Heath Group Entity.

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Section 3.22Books and Records. The Books and Records of the Heath Group Entities, all of which have been made available to Purchaser prior to the Signing Date, are true, correct and complete and have been maintained in accordance with sound business practices, including the maintenance of an adequate system of internal controls.

Section 3.23Full Disclosure. No representation or warranty of the Seller made in this Agreement, nor any written statement furnished to Purchaser pursuant hereto or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact which affects the business or financial condition of the Heath Group Entities, or omits or will omit to state a material fact necessary to make the statements or facts contained herein or therein not misleading.

Section 3.24Brokers. No person is or will become entitled to receive any brokerage or finder’s fee, advisory fee or other similar payment for the transactions contemplated by this Agreement by virtue of having been engaged by or acted on behalf of Seller or any Heath Group Entity, except, as to the Seller, Philo Smith Capital Corp., whose fees and expenses are to be paid by the Seller. Seller agrees to indemnify and defend the Purchaser and to hold Purchaser harmless from any claim by any individual or entity asserting a broker or agency relationship relative to this Transaction.

Section 3.25Absence of Sensitive Payments. No Heath Group Entity has made or maintained (i) any contributions, payments or gifts of its funds or property to any governmental official, employee or agent where either the payment or the purpose of such contribution, payment or gift was or is illegal under the laws of the United States or any state thereof, or any other jurisdiction (foreign or domestic); or (ii) any contribution, or reimbursement of any political gift or contribution made by any other person, to candidates for public office, whether federal, state, local or foreign, where such contributions were or would be a violation of applicable law.

Section 3.26Financial Information. The Seller has delivered to the Purchaser all relevant financial information of the Heath Group Entities necessary to create consolidated financial statements as of June 30, 2008 based on generally accepted accounting principles (other than an actuarial report with respect to the unfunded pension liability of the Heath Group Entities as of June 30, 2008 (the “Pension Liability Report”)), along with financial information with respect to the financial condition and results of operations for the Heath Group Entities for calendar year 2007 and the six month period ended June 30, 2008. The financial information of the Heath Group Entities set forth on Schedule 3.26 (collectively, the “Scheduled Financial Information”) (i) were prepared in accordance with the books of account and other financial records of each of the Heath Group Entities, (ii) present fairly the financial condition and results of operations of each of the Heath Group Entities as of the dates thereof or for the periods covered thereby and (iii) include all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the financial condition of each of the Heath Group Entities and the results of the operations of each of the Heath Group Entities as of the dates thereof or for the periods covered thereby (subject, in the case of interim information, to normal, recurring adjustments, consistently applied, none of which, individually or in the aggregate, is material); provided that, as of the date of execution of this Agreement, the Scheduled Financial Information excludes the amount of the unfunded pension liability of Heath Group Entities as of June 30, 2008. Except as set forth in Schedule 3.26, the Heath Group Entities do not have any material liability or obligation of any kind or nature (fixed or contingent) which is not reflected, reserved against or disclosed in the Scheduled Financial Information.

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PURCHASER

The Purchaser hereby represents and warrants to the Seller that the statements set forth in this Article IV are correct and complete as of the date hereof.

Section 4.1Organization; Good Standing; Delivery of Charter Documents. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. Purchaser is duly qualified as a foreign corporation in the State of Texas.

Section 4.2Power and Authority. The Purchaser has all requisite corporate power and authority necessary to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby, including the execution, delivery and performance of all of the Transaction Documents to which the Purchaser is a party.

Section 4.3Authorization; Execution and Validity. Each of the Transaction Documents, when executed and delivered by the Purchaser, will be duly authorized, executed and delivered, and will constitute a valid, legal and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with the terms of such Transaction Document, subject to any Law Affecting Creditors’ Rights.

Section 4.4No Conflict; Purchaser Consents. The execution, delivery and performance by the Purchaser of each Transaction Document to which it is a party will not (a) violate any Law, (b) violate any Charter Document of the Purchaser, (c) violate any Order to which the Purchaser is a party or by which the Purchaser or its assets is bound, or (d) require any Consent from any Person.

Section 4.5Full Disclosure. No representation or warranty of the Purchaser made in this Agreement, nor any written statement furnished to the Seller pursuant hereto or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact which affects the business or financial condition of the Purchaser, or omits or will omit to state a material fact necessary to make the statements or facts contained herein or therein not misleading.

Section 4.6Brokers. No Person is or will become entitled to receive any brokerage or finder’s fee, advisory fee or other similar payment for the transactions contemplated by this Agreement by virtue of having been engaged by or acted on behalf of the Purchaser. The Purchaser agrees to indemnify and defend Seller and to hold Seller harmless from any claim by any individual or entity asserting a broker or agency relationship with Purchaser relating to this Transaction.

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Section 4.7 Investment Representations.

(a)Purchaser is acquiring the Purchased Heath Interests for investment for its own account and not as an agent or nominee for any other Person, solely for purposes of investment and not with a view to, or for offer or sale or grant of any participation in connection with, any distribution thereof in violation of any Law, subject to Purchaser’s compliance with the applicable provisions of the Transaction Documents to which it is specified therein to be a party on or after the date hereof.

(b)Purchaser (1) is an “accredited investor,” within the meaning of Rule 501 of Regulation D, as promulgated by the SEC and presently in effect, and (2) has such knowledge, skill and experience in business, financial and investment matters so that it is capable of evaluating the merits, risks and consequences of its purchase of the Purchased Heath Interests at the Closing and is able to bear the economic risk of loss of its investment in such shares indefinitely (including a complete loss of such investment). To the extent deemed necessary by Purchaser, Purchaser has retained professionals of Purchaser’s choice at its own expense, to provide appropriate professional advice regarding the investments, tax and legal merits and consequences of acquiring and owning such shares.

ARTICLE V

COVENANTS OF SELLER

Section 5.1Cooperation of the Seller. From the Signing Date through the Closing Date, the Seller shall use all reasonable efforts (a) to take all actions and to do all things necessary or advisable to consummate the transactions contemplated by this Agreement, (b) to cooperate with Purchaser in connection with the foregoing, including using reasonable efforts to obtain all Required Consents, and (c) subject to the other terms and conditions of this Agreement, to cause all the conditions set forth in Section 8.1, the satisfaction of which is in the reasonable control of the Seller, to be satisfied on or prior to Closing.

Section 5.2Pre-Closing Access to Information. From the Signing Date through the Closing Date, the Seller shall afford to the Purchaser and its Representatives access to the properties, management, employees and Books and Records of the Heath Group Entities at such times as reasonably requested by Purchaser.

Section 5.3Conduct of Business. From the Signing Date through the Closing Date, the Seller shall, and shall cause each of the Heath Group Entities to, use all reasonable efforts to (i) preserve substantially the relationships with their Representatives, suppliers and customers, (ii) perform its obligations under all contracts, leases and Licenses in all material respects, (iii) comply with all Laws, (iv) confer with the Purchaser regarding operational matters of a material nature, (v) report periodically to the Purchaser regarding the status of its business and the results of its operations, and (vi) conduct its business in the ordinary course and consistent with past practices.

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Section 5.4No Business Changes. From the Signing Date through the Closing Date, the Seller shall not, and shall cause the Heath Group Entities not to, without the express written consent of the Purchaser: (i) enter into any material agreement relating to the assets, properties or business of the Heath Group Entities, other than in the ordinary course of business; (ii) incur or discharge any material obligation or liability, except in the ordinary course of business; (iii) commit to make or make any capital expenditures or purchase any material assets; (iv) cancel or fail to renew any License; (v) impose any lien, pledge or encumbrance upon the Interest or any of the assets of any Heath Group Entity; (vi) make any change or authorize to be made any change to the Charter Documents of any Company; (vii) declare, set aside, or pay any dividend or make any distribution with respect to HXS Interests or Hardscrabble Interests (whether in cash or in kind) or redeem, purchase, or otherwise acquire any HXS Interests or Hardscrabble Interests other than (i) distributions by each Company to the Seller to pay Taxes on their respective allocable share of the income of such Company and (ii) to the extent that cash in the Companies exceeds $200,000, distributions such that any remaining cash is less than $200,000; (viii) issue, deliver or sell any equity securities or interests of any kind of the Company or split, combine or reclassify HXS Interests or Hardscrabble Interests with, into or as any other type of equity security or interest of any kind; (ix) incur any indebtedness for borrowed money; (x) forgive or cancel any indebtedness owing to any Heath Group Entity or waive any claims or rights of value belonging to any Heath Group Entity, (xi) sell, lease, license or otherwise dispose of any of the assets or properties of any Heath Group Entity, other than in the ordinary course of business; (xii) pay or increase the rate or terms of compensation or benefits payable to or to become payable to any of the directors, officers, employees, consultants or agents of any Heath Group Entity above the amounts reflected in Schedule 3.17(a); (xiii) except pursuant to the termination under Section 7.8(a), amend or otherwise make any changes to any of the Company Plans or increase the rate or terms of any benefits payable under the Company Plans; (xiv) make any other change in the terms of employment of any Employee; (xv) make or rescind any express or deemed material election relating to any Tax; or (xvi) commit pursuant to a legally binding agreement to do any of the foregoing.

Section 5.5Supplements to Schedules. If, between the Signing Date and the Closing Date, Seller becomes aware that any of its representations and warranties in this Agreement or the schedules to this Agreement was inaccurate when made or if during such period any event occurs or condition changes that causes any of such representations and warranties to be inaccurate, then the Seller shall notify the Purchaser thereof in writing and supplement the schedules hereto to account for any such inaccuracy, event or change. Any such supplement to the schedules shall not be deemed to have been disclosed as of the Signing Date, or to have cured any breach of a representation and warranty made in this Agreement, unless so agreed in writing by the Purchaser.

Section 5.6Standstill. Until the earlier to occur of the Closing or the termination of this Agreement pursuant to Article IX, the Seller shall not, nor shall the Seller permit the Heath Group Entities or any of Seller’s or their respective Representatives to, (a) directly or indirectly encourage, solicit, initiate or participate in discussions or negotiations with, or provide any information or assistance to, any Person (other than Purchaser and its Representatives) concerning any merger, sale of securities, sale of substantial assets, investment proposals or similar transaction involving any Heath Group Entity, (b) entertain or discuss any acquisition or investment proposals whatsoever with respect to any Heath Group Entity or (c) except as required by law after not less than five days notice to Purchaser, disclose to any third party any non-published information concerning any Heath Group Entity, the business of any Heath Group Entity or any Heath Group Entity’s financial condition. The Seller shall, and shall cause the Heath Group Entities to, promptly notify the Purchaser if Seller or any Heath Group Entity receives any such proposal or offer or any inquiry or contact with respect thereto and provide the Purchaser a copy of any written communication with respect thereto.

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Section 5.7Discharge of Encumbrances. Seller shall, and shall cause the Heath Group Entities to, take all actions and do all things necessary to cause all Encumbrances, other than Permitted Encumbrances, on any of the Purchased Heath Interests or the assets of the Heath Group Entities to be terminated or otherwise discharged at or prior to the Closing.

Section 5.8Non-Disclosure; Non-Competition; Non-Solicitation.

(a)Non-Disclosure Agreement. From the Signing Date through the Closing Date, Seller agrees that Seller will not (i) disclose to any person, either directly or indirectly, any Confidential Information, unless and solely to the extent that such Confidential Information is required to be disclosed by law or pursuant to a final judicial order or decree, (ii) use for his own account or cause, facilitate or allow any third party to use Confidential Information in any way. The Seller further agrees that, on or prior to the Closing Date, the Seller shall deliver to Companies all memoranda, notes, plans, records, reports and other documents (and copies thereof) relating to the Heath Group Entities or the conduct of the business of the Heath Group Entities that the Seller may possess or have under their control. Notwithstanding the foregoing, Seller shall be permitted to use Confidential Information for the purpose of winding up the affairs of JLH following the Closing.

(b)Work Product. All records and documents embodying any Confidential Information or pertaining to the existing or contemplated scope of the Heath Group Entities’ business which have been conceived, prepared or developed by Seller in connection with his ownership interests in the Heath Group Entities, his employment by the Heath Group Entities or otherwise, either alone or with others (herein called “Work Product”), shall be the sole property of the Companies following the Closing Date. At or prior to the Closing Date, the Seller shall deliver all Work Product to the Companies.

(c)Non-Competition Agreement. From the date hereof through the later of (i) the sixth (6^th) anniversary of the Closing or (ii) the second anniversary of the Option Closing with respect to Seller, Seller will not, directly or indirectly (including through any affiliate or related person), without the express written consent of the Purchaser, (A) own, engage in, manage, operate, join, control, or participate in the ownership, management, operation, or control of, or be connected as a stockholder, director, officer, employee, agent, partner, joint venturer, member, beneficiary, or otherwise with, any “Competing Business” (defined below) anywhere in the “Restricted Territory” (defined below), provided, however that nothing in this Agreement shall prohibit the Seller from being a passive owner of less than five percent (5%) of the outstanding ownership interests of any Person which is publicly traded on a national exchange, so long as the Seller has no active participation in the business or affairs of such Person (whether through employment, management, board position, consulting or otherwise); (B) induce any customer of any Heath Group Entity to patronize any Competing Business; (C) solicit or accept any Competing Business from any customer of any Heath Group Entity; (D) request or advise any customer, supplier or partnerof any Heath Group Entity to withdraw, curtail or cancel its business with the Heath Group Entity ; or (E) disclose to any Person engaged in any Competing Business the names or addresses of any of the customers of any Heath Group Entity or (F) subject to the license agreement provided for in Section 7.6(d), use the “Heath” name (including but not limited to “Jeffrey L. Heath”) in any Competing Business or any insurance business or any kind. For purposes of this Agreement, the term “Competing Business” is defined to mean any activity or business (other than on behalf of any Company) that is or would be competitive with the business conducted by any Heath Group Entity or by Purchaser or any of its Subsidiaries at any time on or following the date hereof and prior to the later of (i) the fourth (4^th) anniversary of the Closing or (ii) the Option Closing with respect to Seller. The term “Restricted Territory” is defined to mean any location in the United States or Canada. The Parties understand and agree that, for purposes of this Section 5.8(c) or Section 5.8(d), references to the Option Closing shall be deemed to be the “Option Expiration Date” following such time as the Heath Put-Call Option (as defined in the Amended and Restated Operating Agreements ceases to be exercisable. Notwithstanding the termination of the foregoing provision, the restriction set forth in clause (F) of this Section 5.8(c) above shall continue to apply indefinitely.

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(d)Non-Solicitation Agreement. From the date hereof through the later of (i) the sixth (6^th) anniversary of the Closing or (ii) the second anniversary of the Option Closing with respect to Seller, Seller shall not, either on its own behalf or on behalf of any business competing with the Purchaser, directly or indirectly (A) solicit or induce, or in any manner attempt to solicit or induce any person employed by, or an agent of, any Heath Group Entity or the Purchaser to terminate such person’s employment or agency, as the case may be, with such entity, or (B) attempt to induce any supplier or customer to cease being (or any prospective supplier or customer not to become) a supplier or customer of any Heath Group Entity or the Purchaser.

(e)Modification of Restrictions. Seller agrees that if an arbitrator or a court of competent jurisdiction determines that the length of time or any other restriction, or portion thereof, set forth in this Section 5.8 is overly restrictive and unenforceable, the arbitrator or court shall reduce or modify such restrictions to those which it deems reasonable and enforceable under the circumstances, and as so reduced or modified, the Parties agree that the restrictions of this Section 5.8 shall remain in full force and effect. Seller further agrees that if an arbitrator or court of competent jurisdiction determines that any provision of this Section 5.8 is invalid or against public policy, the remaining provisions of this Section 5.8 and the remainder of this Agreement shall not be affected thereby, and shall remain in full force and effect.

(f)Injunctive Relief. In the event of any pending, threatened or actual breach of any of the covenants or provisions of this Section 5.8, as determined by an arbitrator or a court of competent jurisdiction, it is understood and agreed by Seller that the remedy at law for a breach of any of the covenants or provisions of this Section 5.8 may be inadequate and, therefore, the Purchaser and the Companies shall be entitled to a restraining order or injunctive relief in addition to any other remedies at law and in equity, as determined by an arbitrator or a court of competent jurisdiction. Seller waives any bond, surety, or other security that might be required of the Purchaser or the Companies as a condition of any such restraining order or injunctive relief.

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(g)Acknowledgments of Seller. Seller acknowledges that (i) any public disclosure of the Confidential Information will have an adverse effect on the Companies, the Purchaser and the respective businesses, (ii) Seller possesses unique skills and experience, (iii) the Companies and the Purchaser would suffer irreparable injury if Seller breached any of the terms of this Section 5.8, (iv) the Companies and the Purchaser will be at a substantial competitive disadvantage if such entity fails to acquire and maintain exclusive ownership of the Confidential Information or Seller fails to abide by the restrictions provided in this Section 5.8, (v) the scope of the restrictions provided in this Section 5.8 are reasonable when taking into account (A) the negotiations between the Parties and (B) that Seller is the direct beneficiary of the Purchase Price paid pursuant to this Agreement, (vi) the consideration being paid to Seller (and the Seller collectively) pursuant to this Agreement is sufficient inducement for the Seller to agree to the terms hereof, (vii) the provisions of this Section 5.8 are reasonable and necessary to protect the business and interests of the Companies and Purchaser, to prevent the improper use or disclosure of the Confidential Information and to provide the Companies and the Purchaser with exclusive ownership of all such Confidential Information, and (viii) the terms of this Section 5.8 preclude Seller from engaging in the conduct of the business of the Company only for a reasonable period.

(h)Release. Seller, in his capacity as a member, manager, officer and/or employee of the Company, hereby releases and forever discharges the Companies from any and all Claims whatsoever, whether known or unknown suspected or unsuspected, both at law and in equity, which the Seller or any of its affiliates now has, have ever had or may hereafter have against the Companies related to any matter arising prior to the Closing Date. As of the Closing Date, the Seller has no knowledge of any Claims by it against the Companies. Seller also releases the Companies from any claims or rights to indemnification Seller may have under the Governing Documents of the Companies.

(i)Affiliates. Any reference to the Company or Companies in this Section 5.8 shall be deemed to include the Company, Purchaser, its subsidiaries and any other entity controlled by or under common control with Purchaser or its subsidiaries, unless the context clearly indicates otherwise.

(j)Acknowledgement. For the avoidance of doubt, the provisions set forth in this Section 5.8 are in addition to (and not in lieu of) provisions with respect to non-disclosure, non-competition and non-solicitation set forth in an employment agreement with Seller to be executed at Closing, which provisions may be in effect concurrently with this Agreement. In the event of any conflict between the provisions of this Agreement and such employment agreement, Seller shall be subject to the most restrictive provision then in effect.

ARTICLE VI

COVENANTS OF PURCHASER

Section 6.1Cooperation by Purchaser. From the Signing Date through the Closing Date, the Purchaser shall use all reasonable efforts (a) to take all actions and to do all things necessary or advisable to consummate the transactions contemplated by this Agreement, (b) to cooperate with the Companies and the Seller in connection with the foregoing, including using reasonable efforts to obtain all of the Required Consents, and (c) subject to the other terms and conditions of this Agreement, to cause all the conditions set forth in Section 8.2, the satisfaction of which is in the reasonable control of the Purchaser, to be satisfied on or prior to Closing.

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ARTICLE VII

MUTUAL COVENANTS

Section 7.1Fees and Expenses. Each Party hereto will be responsible for and bear all its own costs and expenses incurred at any time in connection with pursuing, negotiating or consummating this Agreement and all other agreements contemplated by the Transaction Documents. Such costs and expenses incurred by the Seller will be paid by the Seller with funds other than those of the Companies.

Section 7.2Governmental Consents. Promptly after the Signing Date, each Party shall take all actions and do all things necessary to obtain all Consents required by any Governmental Authority to consummate the transactions contemplated hereby.

Section 7.3Consents to Assign Leases and Contracts.

(a)Cooperation and Reasonable Efforts. Each Party hereby agrees to use reasonable efforts, to take reasonable actions (including the Purchaser’s delivery to third parties of its audited financial statements) and to cooperate with each other as may be necessary to obtain Consents under Encumbered Instruments. Except as expressly provided herein (including as provided in Section 7.9), no Party shall be required to pay any sum, to incur any obligation or to agree to any amendment of any Encumbered Instrument in order to obtain any such Consent to transfer and assign the Encumbered Instrument.

(b)Pre-Closing; Required Consents. Schedule 7.3(b) lists the Encumbered Instruments under which a Consent must be obtained from the appropriate third party prior to Closing as a condition to Closing (collectively, the “Required Consents”).

(c)Notwithstanding anything to the contrary set forth in this Section 7.3, Seller’s obligations with respect to Consents in connection with effectuating the Pre-Closing Restructuring are set forth in Section 7.9.

Section 7.4Licenses. Each Party hereby agrees to use reasonable efforts, to take reasonable actions and to cooperate with each other as may be necessary to transfer to Purchaser, or assist Purchaser in obtaining, all Licenses required for the Companies to conduct the business of the Heath Group Entities. On or as soon as practicable after the Signing Date, each Party shall file, separately or jointly with any other Party, as the case may be, all applications necessary to transfer or obtain the Licenses. Each Party shall use reasonable efforts to resolve such objections, if any, as may be asserted by any Governmental Authority with respect to the applications contemplated hereby. Except as expressly provided herein (including as provided in Section 7.9)., the Seller on the one hand and the Purchaser on the other hand shall each pay one-half of the fees and expenses incurred in connection with transferring or obtaining all Licenses. Notwithstanding anything to the contrary set forth in this Section 7.4, Seller’s obligations with respect to transferring Licenses in connection with the Pre-Closing Restructuring are set forth in Section 7.9.

Section 7.5Further Assurances. Subject to the other terms and conditions of this Agreement, at any time and from time to time, whether before or after Closing, each Party shall execute and deliver all instruments and documents and take all other action that the other Party may reasonably request to consummate or to evidence the consummation of the transactions contemplated by this Agreement.

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Section 7.6Supplemental Agreements. At or prior to the Closing, (a) the individuals set forth on Schedule 7.6 shall execute employment agreements in substantially the forms attached hereto as Exhibit A; (b) Purchaser and Seller shall execute an amended and restated operating agreement for each of HXS and Hardscrabble (collectively, the “Amended and Restated Operating Agreements”) in substantially the forms attached hereto on Exhibit B and Exhibit C, (c) Seller shall have irrevocably assigned to the Companies, pursuant to an assignment of rights in a form reasonably satisfactory to Purchaser, all rights of Seller in the “Jeffrey L. Heath” name (including derivative forms thereof) for use in Purchaser’s business (including the business of the Heath Group Entities) and (d) Purchaser and Seller shall execute a license agreement providing JLH with the right to use the “Jeffrey L. Heath” trademark for the sole purpose of winding up the operations of JLH.

Section 7.7Tax Matters. Preparation of Returns.

(i)Tax Periods Ending On or Before the Closing Date.

(A)Non-Income Returns. Purchaser shall prepare or cause to be prepared and file or cause to be filed all Returns for the Companies for all periods ending on or prior to the Closing Date (“Pre-Closing Tax Period”) which are filed after the Closing Date, other than income Returns for such periods. Such Returns shall be prepared consistently with the past practice of the Companies, unless otherwise required by applicable Law. Purchaser shall permit the Seller to review and comment on each such Return described in the preceding sentence prior to filing. Seller shall reimburse Purchaser for Taxes of the Companies with respect to such periods within five (15) days of payment by Purchaser or the Companies of such Taxes.

(B)Income Returns. Seller shall prepare or cause to be prepared all income Returns for the Companies for all Pre-Closing Tax Periods, including specifically, the final partnership income Return of each of HXS and Hardscrabble that will result from the termination of each such partnership (as treated for Tax purposes) pursuant to Section 708 of the Code. Such income Returns shall be prepared consistently with past practice of the Companies. Seller shall permit Purchaser to review and comment on each such Return described in the preceding sentence prior to filing. The Purchaser or the Companies shall file such Returns at the direction of the Seller. The cost of preparing such Returns shall be borne by the Seller, and not the Companies.

(ii)Tax Periods Beginning Before and Ending After the Closing Date. Purchaser shall prepare or cause to be prepared and file or cause to be filed Returns of the Companies (if any) for Tax periods which begin before the Closing and end after the Closing (a “Straddle Tax Period”). Such Returns shall be prepared consistently with the past practice of the Companies unless otherwise required by applicable Law. Purchaser shall permit the Seller to review and comment on each such Return described in the preceding sentence prior to filing. Seller shall reimburse Purchaser within five (5) days of the date on which Taxes are paid with respect to such periods an amount equal to the portion of such Taxes which relates to the portion of such taxable period ending on Closing.

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(iii)Allocation. For purposes of this Section 7.7, in the case of any Taxes that are imposed on a periodic basis and are payable for a taxable period that includes (but does not end on) the Closing, the portion of such Tax which relates to the portion of such taxable period ending on the Closing shall (x) in the case of any Taxes other than the Taxes based upon or related to income or receipts, be deemed to be the amount of such Tax for the entire taxable period multiplied by a fraction the numerator of which is the number of days in the taxable period ending on the Closing and the denominator of which is the number of days in the entire taxable period, and (y) in the case of any Tax based upon or related to income or receipts be deemed equal to the amount which would be payable if the relevant taxable period ended on the Closing. For purposes of this Section 7.7, in the case of any Tax credit relating to a taxable period that begins before and ends after the Closing, the portion of such Tax credit which relates to the portion of such taxable period ending on the Closing shall be the amount which bears the same relationship to the total amount of such Tax credit as the amount of Taxes described in (y) above bears to the total amount of Taxes for such taxable period.

(b)Cooperation on Tax Matters.

(i)Purchaser and Seller (and Purchaser shall cause the Companies to) cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Returns and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information reasonably relevant to any such audit, litigation, or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Seller and Purchaser agree to (A) retain all books and records with respect to Tax matters pertinent to the Companies relating to any taxable period beginning before the Closing Date until expiration of the statute of limitations (and any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (B) give all parties reasonable written notice prior to transferring, destroying or discarding any such books and records and, if any other party so requests, shall allow such other party to take possession of such books and records.

(ii)The Purchaser and the Seller further agree, upon request, to use their reasonable best efforts to obtain any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed.

(c)Amended Returns.

(i)Any amended Return of the Companies or claim for Tax refund on behalf of the Companies for any period ending on or prior to the Closing Date shall be filed, or caused to be filed, only by the Seller. The Seller shall not, without the prior written consent of the Purchaser (which consent shall not be unreasonably withheld or delayed), make or cause to be made, any such filing, to the extent such filing, if accepted, reasonably might change the Tax liability of the Purchaser or the Companies for any period ending after the Closing Date.

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(ii)Any amended Return of the Companies or claim for Tax refund on behalf of the Companies for any period ending after the Closing Date shall be filed, or caused to be filed, only by the Purchaser. The Purchaser shall not, without the prior written consent of the Seller (which consent shall not be unreasonably withheld or delayed), make or cause to be made, any such filing, to the extent such filing, if accepted, reasonably might change the Tax liability of the Seller for any period ending on or prior to the Closing Date.

(d)Audits.

(i)Purchaser shall provide Seller with notice of any written inquiries, audits, examinations or proposed adjustments by the Internal Revenue Service (“IRS”) or any other Taxing Authority, which relate to any Pre Closing Tax Periods. Seller shall have the sole right to represent the interests of the Companies in any Tax audit or other proceeding relating to any Pre Closing Tax Periods, to employ counsel of their choice at their own expense, and to settle any issues and to take any other actions in connection with such proceedings relating to such taxable periods; provided, however, that Seller shall inform Purchaser of the status of any such proceedings, shall provide Purchaser (at Purchaser’s cost and expense) with copies of any pleadings, correspondence, and other documents as Purchaser may reasonably request and shall consult with Purchaser prior to the settlement of any such proceedings and shall obtain the prior written consent of Purchaser prior to the settlement of any such proceedings that could reasonably be expected to adversely affect Purchaser in any taxable period ending after the Closing Date, which consent shall not be unreasonably withheld or delayed; provided further, however, that Purchaser and counsel of its own choosing shall have the right to participate in, but not direct, the prosecution or defense of such proceedings at Purchaser’s sole expense.

(ii)Purchaser and Seller shall promptly provide each other with notice of any written inquiries, audits, examinations or proposed adjustments by the IRS or any other Taxing Authority that relate to any Straddle Tax Period. Purchaser and Seller shall jointly control the conduct of any Tax audits or other proceedings relating to Taxes for a Straddle Tax Period, and neither party shall settle any such Tax audit or other proceeding without the written consent of the other party, which consent shall not be unreasonably withheld or delayed.

(iii)Purchaser shall have the right to control all other Tax audits or proceedings of the Companies. Purchaser shall obtain the prior written consent of Seller prior to the settlement of any such proceedings that could reasonably be expected to increase the Seller’s Tax liabilities for a Pre-Closing Tax Period, which consent shall not be unreasonably withheld or delayed.

(iv)Purchaser and the Companies shall execute and deliver to Seller such powers of attorney and other documents as may be necessary or appropriate to give effect to the foregoing.

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(e)Certain Taxes. All transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement shall be paid by the Purchaser when due, and the Purchaser or the Companies will, at its own expense, file all necessary Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and other taxes and fees, and, if required by applicable Law, Seller will join in the execution of any such Returns and other documentation, provided that Seller is held harmless from any liability solely by reason of such joinder.

(f)Tax Covenants.

(i)Purchaser covenants that without obtaining the prior written consent of Seller it will not, and will not cause or permit the Companies or any affiliate of Purchaser, to (i) take any action on the Closing Date other than in the ordinary course of business that could give rise to any Tax liability of Seller or (ii) make or change any material Tax election, amend any Return, take any Tax position on any Return, or compromise or settle any Tax liability, in each case if such action could have the effect of increasing the Tax liability of Seller or reducing any Tax asset of the Companies with respect to any Pre Closing Tax Period or portion of a Straddle-Tax Period ending on the Closing Date.

(ii)After the Closing Date, Purchaser and/or the Companies will not, without obtaining the written consent of Seller, agree to the waiver or any extension of the statute of limitations relating to any Taxes of the Companies for any Pre Closing Tax Period or any Straddle Tax Period.

(iii)Seller shall have the right to any Tax refunds received by the Companies for any Pre-Closing Tax Period or portion of any Straddle Tax Period that ends on the Closing Date. Purchaser shall pay such amounts to Seller no later than ten days after the receipt by the Companies of such Tax refunds.

(g)Allocation of Purchase Price. Within ninety (90) days after the Closing, Seller shall provide to Purchaser a statement (the “Allocation Notice”) of the amount of the Purchase Price allocated to each of HXS and Hardscrabble it proposes to allocate to the respective assets of HXS and Hardscrabble described in Section 751(a)(1) or (2) of the Code (the “Allocation”) for the review of the Purchaser. The Allocation shall be based on applicable Law. Seller shall consider and implement any reasonable adjustments to such Allocation as may be proposed by the Purchaser. To the extent the Purchaser fails to notify Seller of any disagreements within twenty (20) days of receipt of the Allocation Notice, then the Allocation, as proposed in the Allocation Notice, shall be final, binding and conclusive on the parties hereto. If (x) the Purchaser is in disagreement with the Allocation proposed in the Allocation Notice, and the Purchaser notifies the Seller within such twenty (20) day period in accordance with this Agreement, or (y) Seller do not agree with the Purchaser’s proposed adjustments to the Allocation, then such disagreement shall be submitted to the national office of a firm of independent accountants of nationally recognized standing reasonably satisfactory to the Seller and the Purchaser.

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Section 7.8Employee Benefit Plans; Employment.

(a)Employee Benefit Plans. As of the Closing Date (immediately prior to the Closing), the Seller shall, and shall cause the Companies to, terminate the Company Plan set forth on Schedule 10.1(c) with respect to the Companies in accordance with the terms thereof and applicable Law without any further liability of the Companies or any sponsor or fiduciary thereof, including making applicable distributions to participants therein. In connection with such termination, (i) Seller shall make, or cause to be made, such contributions and other payments as necessary to satisfy the Termination Obligation and (ii) Seller and Seller’s participating family members shall execute an indemnification of such Company Plan and its fiduciaries and sponsors, including a disclaimer of any rights or benefits under such Company Plan following the Closing Date (other than as provided in connection with the termination).

(b)No Representations. Without the written consent of the Purchaser (or except as expressly contemplated by this Agreement), neither the Seller nor any Company will make any promise or commitment to any employee of any Company with regard to his or her employment status with the Purchaser or such Company, or the terms or conditions upon which such employment might occur or be continued.

Section 7.9Pre-Closing Restructuring

(a)Following the date hereof, Seller shall take all actions necessary to cause the transfer by JLH to the Companies of the assets (including Intangible Assets) set forth on Schedule 8.1, free and clear of Encumbrances (the “Pre-Closing Restructuring”). Prior to execution thereof, Seller shall provide Purchaser and its representatives with copies for its review of any bills of sale, assignment of trademarks or related transfer documents in connection with the foregoing.

(b)Seller shall take all actions (including making out-of-pocket expenditures) necessary to obtain Consents under Encumbered Instruments required in connection with effectuating the Pre-Closing Restructuring; provided that Seller shall not, without the express consent of Purchaser, in connection with the Pre-Closing Restructuring (1) commit or agree to any amendment or modification of any Contract of the Heath Group Entities or to any other obligation binding on the Companies or (2) cause any Company to incur any liability.

(c)Seller shall take all actions (including making out of pocket expenditures borne by Seller) necessary to transfer to the Companies any Licenses held by JLH and required by the Companies to alone conduct the business of the Heath Group Entities as conducted prior to the date of this Agreement. In the event that any Licenses held by JLH cannot be legally transferred to the Companies (or such transfer would result in a material delay in the transaction), then Seller shall promptly cause the Companies (at the cost and expense of the Companies) to apply for new Licenses required for the Companies alone to conduct the business of the Heath Group Entities as conducted prior to the date of this Agreement. If the Closing occurs, Seller shall make available to the Companies all Licenses held by JLH (and not then held by the Companies) and/or Seller for the purpose of the conducting the business of the Heath Group Entities following the Closing until such time as all required Licenses have been issued to the Companies.

(d) Seller and JLH (and not the Companies nor Purchaser) shall bear all costs and expenses associated with effectuating the Pre-Closing Restructuring, including with respect to transferring or applying for Licenses in connection therewith.

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(e)Seller shall keep Purchaser informed on a current basis with respect to the progress of the Pre-Closing Restructuring, including with respect to completing any transfer, obtaining any Consent or License or other step which in each case presents a risk of delaying the Closing hereunder. Seller shall keep Purchaser informed of any material communication with the counterparty and its affiliates with respect the transfer of Material Contract set forth in Schedule 7.9(e).

ARTICLE VIII

CONDITIONS PRECEDENT TO CLOSING

Section 8.1Conditions Precedent to Purchaser’s Obligations. The obligation of the Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction of the following conditions, any of which may be waived in writing by the Purchaser.

(a)Accuracy of Representations and Warranties. The representations and warranties made by the Seller in this Agreement shall have been true and complete as of the Signing Date and as of the Closing Date as though made as of the Closing Date, except to the extent such representations or warranties made as of a specific date shall have been correct and complete as of the specified date.

(b)Performance of Covenants. The Companies and the Seller shall have performed and complied in all material respects with all agreements, covenants and obligations required by this Agreement to be performed by such party prior to or at the Closing.

(c)No Material Adverse Change. None of the Heath Group Entities has undergone any Material Adverse Change since the Signing Date.

(d)Consents. The Companies and the Seller, as the case may be, shall have received and delivered to Purchaser all of the Required Consents, each in form and substance satisfactory to Purchaser, and shall have given all notices required to be given to any Persons prior to the consummation of the transactions contemplated by this Agreement.

(e)Closing Certificate. The Seller and an executive officer of each of the Companies shall have delivered to the Purchaser a certificate confirming (i) the satisfaction of the conditions set forth in Sections 8.1(a), 8.1(b), 8.1(c) and 8.1(d) and (ii) the continuing force and effect of the Required Consents.

(f)Secretary’s Certificate. Seller shall have delivered to the Purchaser a certificate executed by the secretary or an assistant secretary of each of the Companies certifying as to (i) the applicable Company’s Charter Documents, (ii) the applicable Company’s good standing, (iii) the resolutions in which the applicable Company’s board of directors, or members and managers (if any), as the case may be, approved the Transaction Documents to which the Company is a party and the transactions contemplated thereby, and (iv) the incumbency of the applicable Company’s officers who execute any documents on behalf of such Company in connection with this Agreement.

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(g)Deliveries. The Seller shall have delivered the documents required by Section 2.2 and such other documents as Purchaser may reasonably require.

(h)No Order or Action. No Order shall be in effect forbidding or enjoining the consummation of the transactions contemplated hereby. No Action shall be pending or threatened before any court or other Governmental Authority seeking to enjoin the Closing or seeking damages against the Purchaser or any of its Representatives as a result of any of the transactions contemplated by this Agreement, provided that neither the Purchaser nor any of its affiliates instituted such Action.

(i)Transfer of Assets. The Seller shall have caused the transfer of the assets set forth on Schedule 8.1(i) from Jeffrey L. Heath, Inc. to HXS, free and clear of all Encumbrances, and all Consents with respect to such transfers shall have been received

(j)Licenses. All Licenses required for the Companies alone following the Closing to operate the business conducted by the Heath Group Entities as of the date of this Agreement, as determined in the reasonable discretion of the Purchaser, shall have been transferred to, or been received by, the Companies, and such Licenses shall remain in full force and effect.

(k)Pension Termination. The Company Plan set forth on Schedule 10.1(c) shall have been terminated with respect to the Companies in accordance with the terms of such Company Plan and applicable Law, and the Termination Obligation shall have been satisfied.

Section 8.2Conditions Precedent to the Seller’s Obligations. The obligation of the Seller to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction of the following conditions, any of which may be waived in writing by the Seller.

(a)Accuracy of Representations and Warranties. The representations and warranties made by the Purchaser in this Agreement shall have been true and complete as of the Signing Date and as of the Closing Date as though made as of the Closing Date, except to the extent such representations or warranties made as of a specific date shall have been correct and complete as of the specified date.

(b)Performance of Covenants. The Purchaser shall have performed and complied in all material respects with all agreements, covenants and obligations required by this Agreement to be performed by the Purchaser prior to or at the Closing.

(c)Closing Certificate. An executive officer of Purchaser shall have delivered to the Seller a certificate confirming the satisfaction of the conditions set forth in Sections 8.2(a) and 8.2(b).

(d)Deliveries. The Purchaser shall have delivered the documents required by Section 2.3 and such other documents as the Seller may reasonably require.

(e) No Order or Action. No Order shall be in effect forbidding or enjoining the consummation of the transactions contemplated hereby. No Action shall be pending or threatened before any court or other Governmental Authority seeking to enjoin the Closing or seeking damages against the Companies or the Seller or any of their Representatives as a result of any of the transactions contemplated by this Agreement, provided that neither the Companies nor the Seller nor any of their affiliates instituted such Action.

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ARTICLE IX

TERMINATION PRIOR TO CLOSING

Section 9.1Termination of Agreement. This Agreement may be terminated at any time prior to the Closing:

(a)by mutual agreement of the Purchaser and the Seller;

(b)by the Purchaser at any time after the occurrence of a Material Adverse Change in any of the Heath Group Entities;

(c)by the Purchaser or the Seller at any time on or after December 31, 2008 (the “Drop Dead Date”), if any of the conditions provided for in Section 8.1 or 8.2, respectively, shall not have been met or waived in writing prior to such date; provided that a Party shall not have the right to terminate under this Section 9.1(c) if such Party’s actions were the cause of the conditions not being satisfied on or prior to the Drop Dead Date;

(d)by Purchaser, if any of the conditions set forth in Section 8.1 shall become impossible to be satisfied; or

(e)by Seller, if any of the conditions set forth in Section 8.2 shall become impossible to be satisfied.

Section 9.2Procedure Upon Termination. In the event of termination pursuant to Section 9.1, written notice thereof shall be immediately given to the other Party and the transactions contemplated by this Agreement shall be terminated, without any further action by any Party. If the transactions contemplated by this Agreement are terminated as provided herein:

(a)each Party shall return all documents, work papers and other materials of the other Party, whether obtained before or after the execution hereof, to the Party furnishing the same; and

(b)such termination shall not in any way limit, restrict or relieve any Party of liability for any breach of this Agreement.

ARTICLE X

INDEMNIFICATION AND OFFSET

Section 10.1Indemnification by Seller. The Seller shall indemnify and hold harmless the Purchaser, the Companies, and their respective directors, officers, employees, agents, attorneys and shareholders (excluding the Seller and his affiliates) (collectively, the “Purchaser Group”) in respect of any and all Claims incurred by the Purchaser Group, in connection with each and all of the following:

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(a)Any breach of any representation or warranty made by the Seller in this Agreement as of the date of this Agreement or as of the Closing Date; and

(b)The breach of any covenant, agreement or obligation of the Seller contained in this Agreement or any other instrument delivered at the Closing, including, the agreement and covenants of the Seller set forth in Section 5.8 of this Agreement.

(c)Any liability (including any Tax liability) incurred in connection with the failure to administer any Company Plans in accordance with applicable Law prior to or on the Closing Date, and any liability arising in connection with the Company Plan described on Schedule 10.1(c) (including, but not limited to, any liability or Claim arising in connection with the termination thereof pursuant to Section 7.9(f) or otherwise, including the Termination Obligation).

(d)Any liability arising in connection with the Pre-Closing Restructuring (including but not limited to any liability arising from a failure to obtain any required Consent and any Tax liability).

(e)Any liability arising from the failure of the Companies to hold or obtain following Closing any License required under applicable Law for the Companies to conduct following the Closing the business conducted by the Heath Group Entities prior to Closing; provided that, without limiting any other rights under this Section 10.1, this specific indemnity under 10.1(e) shall no longer apply in respect of an individual License following the first issuance of such License following Closing.

(f)Any Pre-Closing Operational Liability.

(g)Any Operating Cash Shortfall.

(h)Any liabilities of JLH.

Section 10.2Indemnification by Purchaser. The Purchaser shall indemnify and hold harmless the Seller in respect of any and all Claims reasonably incurred by the Seller in connection with each and all of the following:

(a)Any breach of any representation or warranty made by the Purchaser in this Agreement; and

(b)The breach of any covenant, agreement or obligation of the Purchaser contained in this Agreement or any other instrument delivered at the Closing.

Section 10.3Claims for Indemnification.Whenever any Claim shall arise for indemnification hereunder, the party entitled to indemnification (the “Indemnified Party”) shall promptly notify the other party (the “Indemnifying Party”) of the Claim and, when known, the facts constituting the basis for such Claim. In the event of any Claim for indemnification hereunder resulting from or in connection with any Claim or legal proceedings by a third party, the notice to the Indemnifying Party shall specify, if known, the amount or an estimate of the amount of the liability potentially arising therefrom. The Indemnified Party shall not settle or compromise any Claim by a third party for which it is entitled to indemnification hereunder without the prior written consent of the Indemnifying Party, consent not be unreasonably withheld or delayed.

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Section 10.4Defense by Indemnifying Party.In connection with any Claim giving rise to indemnity hereunder resulting from or arising out of any Claim or legal proceeding by a Person who is not a party to this Agreement, the Indemnifying Party at its sole cost and expense may, upon written notice to the Indemnified Party given within twenty (20) days after delivery of the written notice referred to in Section 10.3 hereof assume the defense of any such Claim or legal proceeding if it acknowledges to the Indemnified Party in writing its obligations to indemnify the Indemnified Party with respect to all elements of such Claim. Without the prior written consent of the Indemnified Party, the Indemnifying Party will not enter into any settlement of any third-party claim which would lead to liability or create any financial or other obligation on the part of the Indemnified Party for which the Indemnified Party is not entitled to indemnification hereunder, or which provides for injunctive or other non-monetary relief applicable to the Indemnified Party, or does not include an unconditional release of all Indemnified Parties. The Indemnified Party shall be entitled to participate in (but not control) the defense of any such action, with its own counsel and at its own expense. If the Indemnifying Party does not assume the defense of any such Claim or litigation resulting therefrom with counsel reasonably satisfactory to the Indemnified Party, (a) the Indemnified Party may defend against such Claim or litigation, in such manner as it may deem appropriate, including, but not limited to, settling such Claim or litigation, after giving notice of the same to the Indemnifying Party, on such terms as the Indemnified Party may deem appropriate, and (b) the Indemnifying Party shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. If the Indemnifying Party thereafter seeks to question the manner in which the Indemnified Party defended such third party Claim or the amount or nature of any such settlement, the Indemnifying Party shall have the burden to prove by a preponderance of the evidence that the Indemnified Party did not defend or settle such third party Claim in a reasonably prudent manner as a prudent businessman would if his own funds were subject to such suit.

Section 10.5Offset.The Indemnified Party shall have the right to offset any amounts for which it is entitled to indemnification under this Article X against any amounts otherwise payable by the Indemnified Party to the Indemnifying Party under this Agreement. In addition, the parties acknowledge and agree that Purchaser shall be entitled to cause the Companies to (i) offset any amounts for which the Purchaser Group is entitled to indemnification under this Article X against amounts otherwise payable to the Seller or his affiliates under the Amended and Restated Operating Agreements (including distributions thereunder) and/or (ii) direct to Purchaser amounts otherwise payable to the Seller or his affiliates under the Amended and Restated Operating Agreements (including distributions thereunder) in respect of any amounts for which the Purchaser Group is entitled to indemnification under this Article X.

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Section 10.6Tax Benefit.Any payment or indemnity required to be made pursuant to Section 10.1 or Section 10.2 shall be adjusted to take into account any reduction in Taxes actually realized by the Indemnified Party (which term shall, for purposes of this Section 10.6, include the ultimate payer(s) of Taxes in the case of an Indemnified Party that is a branch or a disregarded entity or other pass-through entity for any Tax purpose) as a result of the Claims giving rise to the payment or indemnity; provided that, in calculating whether a net Tax benefit was actually realized, Purchaser shall assume that all items of deduction other than the applicable loss for which an indemnity payment is to be made hereunder shall first be used to determine the Tax liability of the Purchaser for the Tax year in which the relevant loss arises and, if the item of deduction (or portion thereof) with respect to such loss is not allowed in such Tax year applying the limitations of the foregoing provision, then such item of deduction (or any portion thereof) shall be deemed used in the first succeeding Tax year following such year that such item is allowed applying the foregoing ordering rules for such other Tax years.

Section 10.7Characterization of Indemnity Payments.The parties hereto agree to treat any indemnification payments made pursuant to this Agreement as an adjustment to the Purchase Price, unless a “Final Determination” with respect to the Indemnified Party or any of its affiliates causes any such payment not to be treated as an adjustment to such price for federal income Tax purposes. For purposes of this agreement “Final Determination” means (i) with respect to federal income Taxes, a “determination” as defined in Section 1313(a) of the Code or execution of an Internal Revenue Service Form 870 AD and, (ii) with respect to Taxes other than federal income Taxes, any final determination of liability in respect of a Tax that, under applicable law, is not subject to further appeal, review or modification through proceedings or otherwise (including the expiration of a statute of limitations or a period for the filing of claims for refunds, amended returns or appeals from adverse determinations).

Section 10.8Limits on Indemnification; Other Provisions.

(a)The maximum amount of indemnifiable Claims which may be recovered by an Indemnified Party arising out of or resulting from the causes set forth in Section 10.1(a) or 10.2 (a), as the case may be, shall be an amount equal to 66 2/3% of the Purchase Price.

(b)Purchaser’s rights to indemnification hereunder shall not be affected by any investigation (including any investigation or assessment with respect to the financial condition of the Companies based on information provided to Purchaser) conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with any such representation, warranty, covenant or obligation.

(c)Purchaser may elect that indemnification payments by Seller in respect of 100% of any indemnifiable Claim suffered or incurred directly by the Companies be paid directly to (i) the applicable Company or Companies or (ii) Purchaser, in each case in settlement thereof.

ARTICLE XI

MISCELLANEOUS

Section 11.1Amendment. No amendment of this Agreement shall be effective unless in a writing signed by Purchaser, on the one hand, and the Seller, on the other hand.

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Section 11.2Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original agreement, but all of which shall constitute one and the same agreement. Any Party may execute and deliver this Agreement by an executed signature page transmitted by a facsimile machine. If a Party transmits its signature page by a facsimile machine, such Party shall promptly thereafter deliver an originally executed signature page to the other Party, provided that any failure to deliver such an originally executed signature page shall not affect the validity, legality, or enforceability of this Agreement.

Section 11.3Entire Agreement. This Agreement constitutes the entire agreement and understanding between the Parties and supersedes all prior agreements and understandings, both written and oral, with respect to the subject matter of this Agreement.

Section 11.4Expenses. Each Party shall bear its own expenses with respect to the negotiation and preparation of this Agreement and the Closing, including any fees and expenses of its Representatives, provided that if a Party terminates this Agreement because of another Party’s breach of this Agreement, the non-breaching Party shall be entitled to seek reimbursement of its expenses as part of its damages with respect to such breach. The Seller shall bear any Tax imposed in connection with the transfer of the Interests to the Purchaser pursuant to this Agreement.

Section 11.5GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER THE CONFLICTS OF LAWS PRINCIPLES OF SUCH STATE.

Section 11.6Forum. The Parties agree that any action relating to this Agreement shall be instituted in a federal or state court sitting in Fort Worth, Texas, which courts and their respective appellate courts shall be the exclusive venue for any such claim. Each Party waives any objection that it may have to the laying of such venue, and irrevocably submits to the jurisdiction of any such court with respect to any such claim. Any service of process and other notice in any such case shall be effective against a Party when transmitted in accordance with Section 11.9, provided that a Party also may serve process in any manner permitted by Law.

Section 11.7No Assignment. No Party may assign its benefits or delegate its duties under this Agreement without the prior written consent of the other Party. Any attempted assignment or delegation without such prior consent shall be void. Notwithstanding this prohibition against assignment and delegation, the Purchaser may assign its rights and delegate its duties under this Agreement to a wholly-owned subsidiary of the Purchaser without the Seller’s consent; provided that Purchaser shall not be released from its obligations under this Agreement.

Section 11.8No Third Party Beneficiaries. This Agreement is solely for the benefit of the Parties and no other Person shall have any right, interest, or claim under this Agreement.

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Section 11.9Notices. All claims, consents, designations, notices, waivers, and other communications in connection with this Agreement shall be in writing. Such claims, consents, designations, notices, waivers, and other communications shall be considered received (i) on the day of actual transmittal when transmitted by facsimile with written confirmation of such transmittal, (ii) on the next business day following actual transmittal when transmitted by a nationally recognized overnight courier, or (iii) on the third business day following actual transmittal when transmitted by certified mail, postage prepaid, return receipt requested; in each case when transmitted to a Party at its address set forth below (or to such other address to which such Party has notified the other Party in accordance with this Section to send such claims, consents, designations, notices, waivers, and other communications):

Purchaser:	Hallmark Financial Services, Inc.
	777 Main Street, Suite 1000
	Fort Worth, Texas 76102
	Phone: (817) 348-1800
	Fax: (817) 348-1815
	Attn.: Mr. Mark Morrison
with a copy to:
Seller:	Jeffrey L. Heath
	59 South Finley Ave.
	Basking Ridge, NJ 07920
	E-mail: jheath@heathxs.com
	Facsimile: (908) 766-4419
with a copy to:
	Blank Rome, LLP
	One Logan Square
	Philadelphia, PA 19103
	E-mail: becker@blankrome.com
	Facsimile: (215) 832-5527
	Attention: Samuel H. Becker, Esquire

Section 11.10Public Announcements. The Parties shall agree on the terms of any press releases or other public announcements related to this Agreement, and shall consult with each other before issuing any press releases or other public announcements related to this Agreement; provided, however, that any Party may make a public disclosure if in the opinion of such Party’s counsel it is required by Law or the rules of the Securities Exchange Commission, any stock exchange or other regulatory agency to make such disclosure. The Parties agree, to the extent practicable, to consult with each other regarding any such public announcement in advance thereof.

Section 11.11 Representation by Legal Counsel. Each Party is a sophisticated Person that was advised by experienced legal counsel and other advisors in the negotiation and preparation of this Agreement.

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Section 11.12Schedules. All references in this Agreement to schedules shall mean the schedules identified in this Agreement, which are incorporated into this Agreement and shall be deemed a part of this Agreement for all purposes. Each Section of this Agreement that refers to a schedule shall have a separate schedule. In addition, any disclosure under a particular Section’s schedule shall be made under the heading of any relevant subsection of such Section. A disclosure of an item in a schedule for a particular Section or under a heading in a schedule corresponding to a particular subsection shall not be a disclosure under any other Section’s schedule or any other subsection, unless so noted specifically on such schedule. The Seller has delivered to the Purchaser a correct and complete copy of each document described on each schedule to this Agreement and a correct and complete written description of each unwritten arrangement or other item described on each such schedule.

Section 11.13Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall not invalidate the remaining provisions of this Agreement or affect the validity or enforceability of such provision in any other jurisdiction. In addition, any such prohibited or unenforceable provision shall be given effect to the extent possible in the jurisdiction where such provision is prohibited or unenforceable.

Section 11.14Successors. This Agreement shall be binding upon and shall inure to the benefit of each Party and its heirs, legal representatives, permitted assigns, and successors, provided that this Section shall not permit the assignment or other transfer of this Agreement, whether by operation of law or otherwise, if such assignment of other transfer is not otherwise permitted under this Agreement.

Section 11.15Time of the Essence. Time is of the essence in the performance of this Agreement and all dates and periods specified in this Agreement.

Section 11.16Waiver. No provision of this Agreement shall be considered waived unless such waiver is in writing and signed by the Party that benefits from the enforcement of such provision. No waiver of any provision in this Agreement, however, shall be deemed a waiver of a subsequent breach of such provision or a waiver of a similar provision. In addition, a waiver of any breach or a failure to enforce any term or condition of this Agreement shall not in any way affect, limit, or waive a Party’s rights under this Agreement at any time to enforce strict compliance thereafter with every term and condition of this Agreement.

[Signatures on next page]

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IN WITNESS WHEREOF, each Party has executed, or caused a duly authorized officer to execute, this Agreement as of the Signing Date.

PURCHASER:	HALLMARK FINANCIAL SERVICES, INC.
	By:
	Name:
	Title:

SELLER:
	Jeffrey L. Heath

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APPENDIX A

DEFINITIONS AND RULES OF INTERPRETATION

Definitions. Unless the context otherwise requires, the terms defined in this Appendix shall have the meanings specified below for all purposes of this Agreement:

“Action” means any action, arbitration proceeding, cause of action, charge, counterclaim, cross claim, inquiry, investigation, legal action, litigation, Order, proceeding, or suit.

“Agreement” shall have the meaning set forth in the Preamble.

“Assumed Plans” shall have the meaning set forth in Section 7.8(a).

“Bank Accounts” shall have the meaning set forth in Section 3.20.

“Books and Records” shall mean all the books and records maintained by or for any Person, including all accounting records, minute books, stock records, computerized records and storage media and the software used in connection therewith.

“Charter Documents” shall mean (i) in the case of a corporation, its articles or certificate of incorporation and its bylaws, (ii) in the case of a partnership, its partnership certificate and its partnership agreement, and (iii) in the case of any other Person, its organic and governing documents; in each case as such document has been amended or supplemented from time to time prior to the Signing Date.

“Claim” shall mean any arbitration award, assessment, charge, citation, claim, damage, demand, directive, expense, fine, interest, joint or several liability, lawsuit, loss, notice, obligation, payment, penalty, or summons of any kind or nature whatsoever, including any damages incurred because of the claimant’s negligence or gross negligence or any strict liability imposed upon the claimant, any consequential or punitive damages, and any reasonable attorneys’ fees and expenses. A Claim shall be considered to exist even though it may be conditional, contingent, indirect, potential, secondary, unaccrued, unasserted, unknown, unliquidated, or unmatured.

“Closing” shall have the meaning set forth in Section 2.1.

“Closing Date” shall have the meaning set forth in Section 2.1.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Companies” shall have the meaning set forth in Recital A.

“Company Plans” shall have the meaning set forth in Section 3.18(a).

“Competing Business” shall have the meaning set forth in Section 5.8(c).

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“Confidential Information” means any proprietary information, and any information which Purchaser reasonably considers to be proprietary, pertaining to the Company’s and Purchaser’s past, present or prospective business secrets, methods or policies, earnings, finances, security holders, lenders, key employees, nature of services performed by such entity’s sales personnel, procedures, standards and methods, information relating to arrangements with suppliers, the identity and requirements of arrangements with customers, all policyholder information of policyholders, the type, volume or profitability of services or products for customers, drawings, records, reports, documents, manuals, techniques, ratings, information, data, statistics, trade secrets and all other information of any kind or character relating to each of the Parties, whether or not reduced to writing.

“Consent” shall mean a consent, approval, order, authorization or waiver from, notice to or declaration, registration or filing with any Person.

“Effective Date” shall mean shall have the meaning set forth in Section 1.4.

“Employee Benefit Plan” shall mean any (i) Pension Benefit Plan, (ii) Welfare Benefit Plan, (iii) accident, dental, disability, health, life, medical, or vision plan or insurance policy, (iv) bonus, executive, incentive or deferred compensation plan, (v) change in control plan, (vi) fringe benefits and perquisites, (vii) holiday, sick pay, leave, vacation, moving or tuition reimbursement or other similar policy, (viii) stock option, stock purchase, phantom stock, restricted stock or stock appreciation plan, (ix) severance plan, or (x) other employee arrangement, commitment, custom, policy or practice.

“Employees” shall have the meaning set forth in Section 3.17(a).

“Encumbered Instrument” shall mean any contract or lease that by its terms requires Consent from a third party by reason of the transactions contemplated by the Transaction Documents, including the effectuation of the Pre-Closing Restructuring.

“Encumbrance” shall mean any title defect or objection, mortgage, lien, deed of trust, judgment, claim, restrictive covenant, use restriction, charge, pledge, security interest or other encumbrance of any nature whatsoever, including all leases, chattel mortgages, conditional sales contracts, collateral security arrangements and other title or interest retention arrangements.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” shall have the meaning set forth in Section 3.18(b).

“Financial Statements” shall have the meaning set forth in Section 3.26.

“GAAP” shall mean generally accepted accounting principles in effect in the United States of America as of the Signing Date.

“Governmental Authority” shall mean any federal, state, local, tribal, foreign or other governmental agency, department, branch, commission, board, bureau, court, instrumentality or body.

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“HardscrabbleInterest” shall have the meaning set forth in Recital A.

“Heath Group Assets” shall have the meaning set forth in Section 3.9(a).

“Heath Put-Call Option” shall have the meaning set forth in Section 5.8(c).

“Indemnified Party” shall have the meaning set forth in Section 10.3.

“Indemnifying Party” shall have the meaning set forth in Section 10.3.

“Insurance Policies” shall have the meaning set forth in Section 3.12.

“Intangible Asset” shall mean any patent, trademark, trademark license, servicemark, servicemark license, computer software, trade name, masthead, brand name, slogan, copyright, reprint right, franchise, license, process, authorization, invention, know-how, formula, trade secret and other intangible asset, together with any pending application, continuation-in-part or extension therefore.

“Law” shall mean any applicable code, statute, law, common law, rule, regulation, order, ordinance, judgment, decree, order, writ or injunction of any Governmental Authority.

“Law Affecting Creditors’ Rights” shall mean any bankruptcy, fraudulent conveyance or transfer, insolvency, moratorium, reorganization, or other law affecting the enforcement of creditors’ rights generally, and any general principles of equity.

“License” shall mean any license, approval, certificate, franchise, registration, qualification, permit or authorization issuable by any Governmental Authority or industry self-regulating organization.

“Material Adverse Change” shall mean, with respect to a Person, that such Person has (i) breached a Material Contract, (ii) incurred a Claim or become a party to an Action that could have a significant and detrimental effect upon it, (iii) suffered a Material Adverse Effect, or (iv) violated any Law or Order to which it or any of its assets is subject or bound.

“Material Adverse Effect” shall mean, with respect to a Person, the occurrence of an event or the existence of a circumstance that has a material adverse effect on such Person’s assets, business, cash flows, financial condition, liabilities, operations, prospects, or relationships, including the occurrence of any event or the existence of any circumstance that could cause such an effect in the future in an amount of $250,000.00 or more.

“Material Contracts” shall have the meaning set forth in Section 3.13.

“Option Closing” shall have the meaning set forth in the Amended and Restated Operating Agreements.

“Option Expiration Date” shall have the meaning set forth in Section 5.8(c).

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“Order” shall mean any consent decree, decree, determination, injunction, judgment, order, or writ of any arbitrator or Governmental Authority.

“Parties” and “Party” shall have the meaning set forth in Recital B.

“Pension Benefit Plan” shall mean (i) an “employee pension benefit plan” as defined in Section 3(2) of ERISA, and (ii) a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA.

“Permitted Encumbrance” shall mean any Encumbrance directly related to (i) workers’, repairmen’s and similar Encumbrances imposed by Law that have been incurred in the ordinary course of business, (ii) retention of title agreements with suppliers entered into in the ordinary course of business, (iii) the rights of others to customer deposits and (iv) liens for Taxes that are not yet due and payable or are being contested in good faith by the applicable Company and for which appropriate reserves have been established on the Financial Statements.

“Person” shall mean any association, bank, business trust, corporation, estate, general partnership, Governmental Authority, individual, joint stock company, joint venture, labor union, limited liability company, limited partnership, non-profit corporation, professional association, professional corporation, trust, or any other organization or entity.

“Personal Property Leases” shall have the meaning set forth in Section 3.10(d). .

“Purchase Price” shall have the meaning set forth in Section 1.2.

“Purchased Heath Interests” shall have the meaning set forth in Section 1.1.

“Purchased Heath Interests” shall have the meaning set forth in Section 1.1.

“Purchaser” shall have the meaning set forth in the Preamble.

“Purchaser Group” shall have the meaning set forth in Section 10.1.

“Real Property Leases” shall have the meaning set forth in Section 3.10(b).

“Representatives” shall mean, with respect to a Person, such Person’s directors, employees, officers, agents, accountants, affiliates, consultants, investment bankers, attorneys, lenders, representatives and shareholders.

“Required Consents” shall have the meaning set forth in Section 7.3(b).

“Restricted Territory” shall have the meaning set forth in Section 5.8(c).

“Returns” shall have the meaning set forth in Section 3.19(a).

“Seller” and “Seller” shall have the meaning set forth in the Preamble.

“Seller’s Knowledge” shall mean the actual knowledge as of the date that a specific representation or warranty is made or deemed made, after reasonable inquiry, of Seller.

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“Signing Date” shall have the meaning set forth in the Preamble.

“Subscription Right” shall have the meaning set forth in Section 3.7.

“Tax” shall mean any Federal, state, local or foreign assessment, charge, duty, fee, impost, levy, tariff, or tax of any nature whatsoever imposed by any Governmental Authority or payable pursuant to any tax sharing agreement, including any income, payroll, withholding, excise, gift, alternative minimum, capital gain, added value, social security, sales, use, real and personal property, use and occupancy, business and occupation, mercantile, real estate, capital stock, and franchise tax or charge, together with any related interest, penalties or additions thereon.

“Taxing Authority” shall mean the Internal Revenue Service and any other domestic or foreign Governmental Authority responsible for the administration of any Tax.

“Termination Obligation” shall mean the all contributions and other amounts (together with assets of the Company Plan as of the date of Closing) necessary to discharge in full all obligations and liabilities of the Companies with respect to the Company Plan set forth on Schedule 10.1(c) and to terminate such Company Plan with respect to the Companies in accordance with the terms thereof and applicable Law without any further liability of the Companies or any sponsor or fiduciary thereof.

“Transaction Documents” shall mean this Agreement and all other documents and instruments executed and delivered pursuant to or in furtherance of this Agreement.

“Welfare Benefit Plan” shall mean an “employee welfare benefit plan” as defined in Section 3(1) of ERISA, including an employee welfare benefit plan which is a “multiemployer welfare plan” as defined in Section 3(37) of ERISA and a “multiple employer welfare arrangement” as defined in Section 3(40) of ERISA.

“Work Product” shall have the meaning set forth in Section 5.8(b).

“XSInterest” shall have the meaning set forth in Recital A.

Accounting Terms. Except as otherwise provided in this Agreement, all accounting terms defined in this Agreement, whether defined in this Article or otherwise, shall be construed in accordance with GAAP on a consolidated basis.

Articles, Sections, Exhibits and Schedules. Except as specifically stated otherwise, references to Articles, Sections, Exhibits and Schedules refer to the Articles, Sections, Exhibits and Schedules of this Agreement.

Attorneys’ Fees. Whenever this Agreement refers to a Person’s “attorneys’ fees and expenses,” such reference also shall include any fees and expenses of accountants, experts, investigators, and other professional advisors whose services such Person’s attorney considered advisable in connection with the prosecution or defense of the particular matter.

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Breach. The term “breach” with respect to any contract or instrument means any breach or violation of, or default under, such contract or instrument, any conflict with another contract or instrument or any emergence of a right of another party to such contract or instrument to accelerate, cancel, modify or terminate such contract or instrument, including any such breach, violation, default, conflict, or right that will arise after notice or lapse of time.

Drafting. Neither this Agreement nor any provision set forth in this Agreement shall be interpreted in favor of or against any Party because such Party or its legal counsel drafted this Agreement or such provision. No prior draft of this Agreement or any provision set forth in this Agreement shall be used when interpreting this Agreement or its provisions.

Headings. Article and Section headings are used in this Agreement only as a matter of convenience and shall not have any effect upon the construction or interpretation of this Agreement.

Include. Whenever the words “include”, “includes” or “including” are used in this Agreement, they are deemed to be followed by the words “without limitation”.

Or. The term “or” shall not be interpreted as excluding any of the items described.

Plural and Singular Words. Whenever the plural form of a word is used in this Agreement, that word shall include the singular form of that word. Whenever the singular form of a word is used in this Agreement, that word shall include the plural form of that word.

Predecessors. Any of the Seller’s representations and warranties concerning any Claim against the Company, any liability or obligation of the Company, or any violation of Law by the Company shall include any Claims with respect to each predecessor of the Company, including all direct and indirect predecessors of any such predecessor.

Pronouns. Whenever a pronoun of a particular gender is used in this Agreement, if appropriate that pronoun also shall refer to the other gender and the neuter. Whenever a neuter pronoun is used in this Agreement, if appropriate that pronoun also shall refer to the masculine and feminine gender.

Representations and Warranties. The Seller’s representations and warranties under this Agreement shall mean the representations and warranties set forth in Article III and the reaffirmation of the Seller’s representations and warranties in certificates delivered pursuant to Article II. Purchaser’s representations and warranties under this Agreement shall mean the representations and warranties set forth in Article IV and the reaffirmation of those representations and warranties in the certificates delivered pursuant to Article II.

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EX-10.2

HEATH XS, LLC

AMENDED AND RESTATED

OPERATING AGREEMENT

DATED AUGUST 29, 2008

TABLE OF CONTENTS

		PAGE
ARTICLE I	Defined Terms; Operation of Company	1
Section 1.01	Definitions	1
Section 1.02	Other Definitions	5
Section 1.03	Formation; Name	6
Section 1.04	Registered Agent and Office; Principal Office	6
Section 1.05	Purpose	6
Section 1.06	Term	6
Section 1.07	Title to Property	6
Section 1.08	Waiver of Partition	6
Section 1.09	Partnership Status	6
ARTICLE II	Capital Contributions; Units; Capital Accounts	7
Section 2.01	Class of Units; Capital Contributions	7
Section 2.02	Additional Capital Contributions	8
Section 2.03	Ownership Percentage Interests	8
Section 2.04	Capital Accounts	8
Section 2.05	Compliance with Regulations	9
Section 2.06	No Interest	9
Section 2.07	No Deficit Make-Up	9
ARTICLE III	Distributions	9
Section 3.01	Distributions of Net Distributable Proceeds	9
Section 3.02	Amounts Withheld	10
Section 3.03	Tax Distributions	10
ARTICLE IV	Profits and Losses	10
Section 4.01	General Allocation of Profits and Losses	10
Section 4.02	Special Allocations	11
Section 4.03	Allocation During Year	12
Section 4.04	Tax Allocations	12
Section 4.05	754 Election	12
ARTICLE V	Management of Company	13
Section 5.01	General Provisions Concerning Management	13
Section 5.02	Appointment, Term and Actions of Managers	13
Section 5.03	Resignation and Removal of Managers	13
Section 5.04	Actions Requiring Consent of Managers and Members	13
Section 5.05	Meetings of Managers and Members; Written Consents	15
Section 5.06	Fiduciary Duties	16
Section 5.07	Actions of Members	16
Section 5.08	Contracts with Affiliates	16
Section 5.09	Company Expenses	16
ARTICLE VI	Books and Records; Tax and Financial Matters	16

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Section 6.01	Bank Accounts	16
Section 6.02	Books and Records	16
Section 6.03	Fiscal Year	17
Section 6.04	Reports	17
Section 6.05	Tax Matters	18
ARTICLE VII	Transfers, Admissions, and Withdrawals	19
Section 7.01	Transfers	19
Section 7.02	Admissions	19
Section 7.03	No Withdrawal	19
Section 7.04	Permitted Transfers	19
Section 7.05	Put/Call Option	20
Section 7.06	Right of Co-Sale	21
Section 7.07	Drag-Along Rights	22
Section 7.08	Miscellaneous Transfer Restrictions	24
ARTICLE VIII	Termination and Dissolution	25
Section 8.01	Dissolution Events	25
Section 8.02	Liquidation	25
Section 8.03	Distribution In-Kind	25
Section 8.04	Certificate of Cancellation	25
Section 8.05	Effect of Filing of Certificate of Cancellation	26
Section 8.06	Return of Contribution Nonrecourse to Other Members	26
ARTICLE IX	Exculpation And Indemnification	26
Section 9.01	Liability of Members	26
Section 9.02	Indemnification of Covered Persons	26
Section 9.03	Indemnification Procedure	27
ARTICLE X	Representations	27
Section 10.01	General	27
Section 10.02	Investment Representations	28
ARTICLE XI	Miscellaneous	29
Section 11.01	Notices	29
Section 11.02	Parties Bound; No Third Party Beneficiaries	29
Section 11.03	Applicable Law	29
Section 11.04	Amendment	30
Section 11.05	Entire Agreement	30
Section 11.06	Severability	30
Section 11.07	Counterparts	30
Section 11.08	Construction	30
Section 11.09	Headings and Captions	31
Section 11.10	No Waiver	31
Section 11.11	Other Business and Investment Ventures	31
Section 11.12	Additional Instruments	31
Section 11.13	Publicity	31
Section 11.14	Specific Performance	31

ii

HEATH XS, LLC

Amended and Restated Operating Agreement

This Amended and Restated Operating Agreement of Heath XS, LLC, a New Jersey limited liability company (the “Company”), is entered into effective as of the 29^th day of August, 2008, by and among the parties whose names are set forth as Members on Exhibit “A” attached hereto (each, a “Party” and collectively, the “Parties”).

BACKGROUND:

WHEREAS, the initial Member, Jeffrey L. Heath, caused the Company to be formed by the filing of a certificate of formation with the New Jersey Department of Treasury on December 13, 2001.

WHEREAS, on August 29, 2008, Hallmark Financial Services, Inc. acquired 80% of the ownership interests and voting rights in the Company.

WHEREAS, the Members have decided to reclassify the ownership interest in the Company as Units.

WHEREAS, the Parties hereto desire to enter into this limited liability company agreement to effect the reclassification of the ownership interests in the Company and to set forth their respective rights, duties and obligations with respect thereto.

NOW, THEREFORE, in consideration of the mutual promises of the Parties hereto and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Parties hereto agree as follows:

ARTICLE I

Defined Terms; Operation of Company

Section 1.01Definitions. Within the context of this Agreement, the following terms shall have the following meanings:

“Act” means the New Jersey Limited Liability Company Act.

“Adjusted Capital Account” means a Member’s Capital Account, adjusted as follows: (a) any deficit balance in a Member’s Capital Account shall be reduced by any amount that the Member is obligated to restore to the Company, or any amount the Member is treated as obligated to restore to the Company under Regulation § 1.704-1(b)(2)(ii)(c), Regulation §1.704-2(g) and Regulation §1.704-2(i)(5); and (b) a Member’s Capital Account shall be adjusted for items specified in subsections (4), (5), and (6) of Regulation §1.704-1(b)(2)(ii)(d).

“Affiliate” means any Person that Controls, is Controlled by or under common Control with another Person.

“Agreement” means this limited liability company agreement, as the same may be amended from time to time.

“Board of Managers” means the board of managers of the Company. The Board of Managers may be referred to as the “Board of Directors”.

“Book Value” means the adjusted basis of the Company’s property for federal income tax purposes, with the adjustments provided in accordance with Section 2.04(d) of this Agreement.

“Business” means the business of providing professional underwriting management services, policy issuance and other insurance carrier functions related to excess automobile and umbrella liability insurance.

“Capital Account” means the account established and maintained for each Member in accordance with Section 2.04 of this Agreement.

“Capital Contribution” means the amount of money and the fair market value of any property contributed to the Company by a Member (net of any liabilities to which such property is subject or that are assumed by the Company in connection with such contribution).

“Certificate” means the certificate of formation for the Company, and any amendments thereto.

“Class” means Class A, Class B or any other Class of Member that may be established with respect to the Company, as the context requires.

“Class A Manager” means any Manager appointed by the Class A Members in accordance with Section 5.02 of this Agreement.

“Class A Member” means each Person designated as a Class A Member on Exhibit “A” attached hereto, and any Person who has been approved as a substitute Member of a Class A Member in accordance with this Agreement. Hallmark Financial Services, Inc. will be the initial Class A Member.

“Class A Units” means Units initially issued to a Class A Member in such Person’s capacity as a Class A Member.

“Class B Manager” means any Manager appointed by the Class B Members in accordance with Section 5.02 of this Agreement.

“Class B Member” means each Person designated as a Class B Member on Exhibit “A” attached hereto, and any Person who has been approved as a substitute Member of a Class B Member in accordance with this Agreement. Heath Holdings, LLC shall be the initial Class B Member.

“Class B Units” means Units initially issued to a Class B Member in such Person’s capacity as a Class B Member.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company” means the limited liability company formed and operated pursuant to the terms of this Agreement.

“Company Minimum Gain” has the same meaning as “partnership minimum gain” set forth in Regulation §1.704-2(b)(2) and 1.704-2(d).

“Control”means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise and “controlling” and “controlled” shall have the meanings correlative hereto.

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“Covered Person”means a Member, a Manager, any Affiliate of a Member or Manager, any officers, directors, shareholders, partners or members of a Member or Manager or their respective Affiliates.

“Depreciation” means the amount determined for each Year or other period as an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to any Company property for such Year or other period, except that, if the Book Value of any property differs from its adjusted tax basis for federal income tax purposes at the beginning of such Year or other period, Depreciation shall be an amount that bears the same ratio to such beginning Book Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Year or other period bears to such beginning adjusted tax basis; provided, however, that if the adjusted tax basis of a property at the beginning of a Year is zero, Depreciation shall be determined for such property with reference to Book Value using any reasonable method selected by the Managers.

“Electronic Transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

“Family Member” means, with respect to any natural person, such person’s spouse, lineal descendants, ancestors, siblings, nephews and nieces, parents and grandparents, and stepchildren and stepparents, including any such persons by adoptive relationships.

“Majority-In-Interest” of the Members means those Members holding more than fifty percent (50%) of the applicable Class of Units in the Company.

“Managers” means the Persons designated as members of the Board of Managers of the Company in accordance with Section 5.02 of this Agreement. Except as specifically provided herein, all actions and decisions of the Managers shall require the approval of more than fifty percent (50%) of the votes of the Managers.

“Members” means the Persons designated as members on Exhibit “A” attached to this Agreement, and any Person subsequently admitted as a member in accordance with the terms of this Agreement.

“Member Nonrecourse Debt” has the same meaning as “partner nonrecourse debt” as set forth in Regulation §1.704-2(b)(4).

“Member Nonrecourse Debt Minimum Gain” has the same meaning as “partner nonrecourse debt minimum gain” as set forth in Regulation §1.704-2(i)(3).

“Member Nonrecourse Deductions” has the same meaning as “partner nonrecourse deductions” as set forth in Regulation §1.704-2(i)(2).

“Net Distributable Proceeds” means gross cash or property received by the Company from all sources, increased by reductions in Reserves that reduced Net Distributable Proceeds for prior periods, and reduced by the portion used (i) to pay Company expenses, including principal and interest payments under any of the Company’s debt obligations, (ii) to make investments and capital expenditures, (iii) to fund Reserves and (iv) to fund the Company’s normal working capital requirements.

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“Nonrecourse Deductions” has the meaning set forth in Regulation §1.704-2(b)(1).

“Ownership Percentage Interest” means the percentage determined in accordance with Section 2.03 of this Agreement.

“Person” means any individual or any partnership, corporation, estate, trust, limited liability company or other legal entity.

“Profits” and “Losses” mean, for each Year or other period, an amount equal to the Company’s taxable income or loss for such Year or period, determined in accordance with §703(a) of the Code (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to §703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments:

(a)Any income that is exempt from federal income tax and not otherwise taken into account in computing Profits and Losses shall be added to such taxable income or loss.

(b)Any expenditures described in §705(a)(2)(B) of the Code or treated as §705(a)(2)(B) expenditures pursuant to Regulation §1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits and Losses shall be subtracted from such taxable income or loss.

(c)If the Book Value property is adjusted pursuant to Section 2.04(d)(ii) of this Agreement, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such property for purposes of computing Profits or Losses.

(d)Gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Book Value of the asset disposed of, notwithstanding that the adjusted tax basis of such asset differs from its Book Value.

(e)In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Year or other period as determined in accordance with this Agreement.

(f)To the extent adjustment to the adjusted tax basis of any Company asset pursuant to §734(b) or §743(b) of the Code is required, pursuant to Regulations §1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such section of the Regulations.

(g)Items of income, gain, loss or deduction allocated pursuant to Section 4.02 shall be excluded from Profits and Losses.

“Regulations” or “Treasury Regulations” means the income tax regulations promulgated under the Code, as such regulations may be amended from time to time.

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“Reserves” means amounts set aside (a) to pay future costs or expenses that are anticipated to exceed cash available to pay such costs or expenses when due or (b) for such other reasonable and legitimate business purposes, in each case as determined in the sole discretion of the Managers.

“Sale of the Company” means the sale of the Company to an un-Affiliated Person or group of un-Affiliated Persons pursuant to which such party or parties acquire (i) all of the issued and outstanding Units (whether by merger, consolidation or Transfer of Units) or (ii) all or substantially all of the Company’s assets determined on a consolidated basis.

“Securities Act” means the Securities Act of 1933, as amended, or any similar Federal statute then in effect, and any reference to a particular section thereof shall include a reference to the comparable section, if any, of any such similar Federal statute, and the rules and regulations promulgated thereunder.

“Subsidiary” of the Company means any other Person whose (a) securities having ordinary voting power to elect a majority of the board of directors, managers or general partners (or other persons having similar functions) or (b) other ownership interests (including partnership and limited liability company interests) ordinarily constituting a majority interest in the capital, profits, distributions or cash flow of such Person, are at the time, directly or indirectly, owned or controlled by the Company, or by one or more other Subsidiaries of the Company, or by the Company and one or more of its Subsidiaries.

“Transfer” means to sell, convey, transfer, syndicate, assign, mortgage, pledge, hypothecate or otherwise encumber or dispose of in any way, including pursuant to equitable or other distribution after divorce or separation or by operation of law or otherwise, any Unit.

“Unit” means an ownership interest in the Company, including all of the rights and obligations in connection therewith under this Agreement and the Act.

“Year” means the fiscal year of the Company as set forth in Section 6.03 of the Agreement.

Section 1.02Other Definitions. Each of the following defined terms has the meaning given such term in the Section set forth opposite such defined term:

Defined Term	Section
Annual Budget		5.04	(f)
Claim		9.03	(a)
Communications		11.01
Damages		9.02
Drag-Along Members		7.07	(a)
Drag-Along Notice		7.07	(a)
Indemnified Party		9.03	(a)
New Units		2.01	(c)(i)
Notice		9.03	(a)
Offered New Units		2.01	(b)(i)
Participating Member		7.07
Preemptive Members		2.01	(b)(i)
Preemptive Notice of Acceptance		2.01	(b)(ii)
Preemptive Offer		2.01	(b)(i)
Proportionate Percentage		2.01	(b)(i)
Preemptive Offer Closing Date		2.01	(b)(i)
Tax Distribution		3.04
Tax Matters Partner		6.05	(a)
Transferring Member		7.06	(a)

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Section 1.03Formation; Name. The Company was formed by the filing of the Certificate by an authorized Person. The Members hereby agree to operate the Company as a limited liability company under the terms of this Agreement and the Act. Whenever the terms of this Agreement conflict with the Act, the terms of this Agreement shall control, except with respect to any matters contained in the Act that cannot be modified or waived by a limited liability company agreement. The Company shall be operated under the name “Heath XS, LLC.” The Managers or an authorized Person shall file such other certificates and documents as are necessary to qualify the Company to conduct business in any jurisdiction in which the Company conducts business. A copy of the Certificate shall be provided to any Member on request.

Section 1.04Registered Agent and Office; Principal Office. The registered agent and office of the Company required under the Act shall be as designated in the Certificate, and may be changed by the Managers in accordance with the Act. The principal business office of the Company shall be located at 59 South Finley Ave., Basking Ridge, NJ 07920, or such other address as shall be designated by the Managers.

Section 1.05Purpose. The purpose and business of the Company is to engage in the Business. The Company is authorized to engage in any business or activity that may be engaged in by a limited liability company under the Act, and do any and all acts and things necessary, appropriate, incidental to, or convenient for the furtherance and accomplishment of its purposes.

Section 1.06Term. The term of the Company commenced on the date of filing of the Certificate, and the Company shall continue until the Company is terminated in accordance with Article VIII.

Section 1.07Title to Property. All real and personal property owned by the Company shall be owned by the Company as an entity and no Member shall have any ownership interest in such property in the Member’s individual name or right, and each Member’s Units shall be personal property for all purposes. The Company shall hold all of its real and personal property in the name of the Company and not in the name of any Member.

Section 1.08Waiver of Partition. No Member shall either directly or indirectly take any action to require partition or appraisement of the Company or of any of its assets or properties or cause the sale of any Company property, and notwithstanding any provisions of applicable law to the contrary, each Member hereby irrevocably waives any and all right to maintain any action for partition or to compel any sale with respect to such Member’s Units, or with respect to any assets or properties of the Company, except as expressly provided in this Agreement.

Section 1.09Partnership Status. The Members intend that the Company shall be treated as a partnership for United States federal, state and local tax purposes to the extent such treatment is available, and agree to file all tax returns and take all tax positions in a manner consistent with such treatment. The Members agree to take such actions as may be necessary to receive and maintain such treatment and refrain from taking any actions inconsistent with such treatment.

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ARTICLE II

Capital Contributions; Units; Capital Accounts

Section 2.01Class of Units; Capital Contributions. The Company shall initially issue Class A Units and Class B Units.

(a)Class A Units and Class B Units shall be issued in exchange for Capital Contributions, the amount of which shall be as set forth in the books and records of the Company.

(b)Preemptive Rights.

(i)In the event that the Company shall propose after the date hereof to issue and sell any Units or any rights to subscribe for or purchase pursuant to any option or otherwise any Units (collectively “New Units”) or enter into any contracts relating to the issuance or sale of any New Units, each of the Class A Members and Class B Members (“Preemptive Members”) shall have the right to purchase, at the price and on the terms that the Company proposes to issue and sell the New Units, a number of the additional New Units based on each such Preemptive Member’s Ownership Percentage Interest (“Proportionate Percentage”). The Company shall offer to sell to each Preemptive Member its Proportionate Percentage of such New Units (“Offered New Units”) at the price and on the terms described above, which shall be specified by the Company in a written notice delivered to each Preemptive Member (“Preemptive Offer”). The Preemptive Offer shall by its terms remain open for a period of at least fifteen (15) calendar days from the date of delivery thereof and shall specify the date (“Preemptive Offer Closing Date”) on which the Offered New Units will be sold to accepting Preemptive Members (which shall be at least thirty (30) calendar days but not more than ninety (90) calendar days from the date written notice of the Preemptive Offer is delivered). In the event that the Offered New Units consist of more than one Class of Units being offered, each Preemptive Member exercising such Preemptive Member’s preemptive rights hereunder shall be required to purchase an equal percentage of each such Class of such Offered New Units.

(ii) Each Preemptive Member shall have the right, during the period prior to the Preemptive Offer Closing Date to purchase any or all of its Proportionate Percentage of the Offered New Units at the purchase price and on the terms stated in the Preemptive Offer. Notice by any Preemptive Member of its acceptance, in whole or in part, of a Preemptive Offer shall be in writing (a “Preemptive Notice of Acceptance”) signed by such Preemptive Member and delivered to the Company prior to the Preemptive Offer Closing Date, setting forth the number of Offered New Units such Preemptive Member elects to purchase.

(iii) Each Preemptive Member shall have the additional right to offer in its Preemptive Notice of Acceptance to purchase any of the Offered New Units not accepted for purchase by any other Preemptive Members, in which event such Offered New Units not accepted by such other Preemptive Members shall be deemed to have been offered to and accepted by the Preemptive Members exercising such additional right under this paragraph Section 2.01(b)(iii), pro rata in accordance with their respective Proportionate Percentages (determined without regard to those Preemptive Members not electing to purchase their full respective Proportionate Percentages under the foregoing Section 2.01(b)(ii)) on the same terms and conditions as those specified in the Preemptive Offer, but in no event shall any such electing Preemptive Member be allocated a number of New Units in the Company in excess of the maximum number of Offered New Units such Preemptive Member has elected to purchase in its Preemptive Notice of Acceptance.

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(iv) In the case of any Preemptive Offer, if Preemptive Notices of Acceptance given by the Preemptive Members do not cover in the aggregate all of the Offered New Units, the Company may during the ninety (90) calendar day period following the Preemptive Offer Closing Date sell to any other Person or Persons all or any part of the New Units not covered by the Preemptive Notices of Acceptance, but only on the terms and conditions that are no more favorable to such Person or Persons than those set forth in the Preemptive Offer and subject to and conditioned upon such Person(s) compliance with Section 7.02 with respect to admission as a new Member.

(v) The preemptive rights established by this Section 2.01(b) shall have no application to the issuance and sale by the Company of any Units or other equity securities of the Company: (a) in connection with any distribution or recapitalization of the Company; (b) to banks, equipment lessors or other financial institutions pursuant to a debt financing or equipment leasing transaction approved by the Managers (in their sole discretion); (c) to employees, officers, consultants or other Persons performing services for the Company (if issued solely because of any such Person’s status as an employee, officer, consultant or other Person performing services for the Company and not as part of any offering of Units or equity securities) whether or not pursuant to or any equity incentive plan approved by the Managers (in their sole discretion) and (d) in connection with a merger, consolidation, acquisition or similar business combination approved by the Managers (in their sole discretion).

(vi) Notwithstanding anything to the contrary in this Agreement, the Company shall neither issue nor sell any Class B Units other than the Class B Units issued to the Class B Member on the date of this Agreement.

Section 2.02Additional Capital Contributions. No Member shall be obligated to make any additional Capital Contributions to the Company.

Section 2.03Ownership Percentage Interests. Each Member shall have the Ownership Percentage Interest in the Company determined by dividing the number of Units owned by such Member by the total number of Units issued and outstanding. The Ownership Percentage Interest of each Member shall be set forth next to such Member’s name on Exhibit “A” attached hereto.

Section 2.04Capital Accounts. A Capital Account shall be maintained and adjusted for each Member in accordance with the following provisions:

(a)Additions to Capital Accounts. To each Member’s Capital Account there shall be added the Member’s Capital Contributions and the Member’s distributive share of Profits and any items of income or gain which are allocated separately from Profits under Section 4.02.

(b)Subtractions from Capital Accounts. From each Member’s Capital Account there shall be subtracted the amount of money and the Book Value of any Company property distributed to the Member (net of any liabilities to which the property is subject or that are assumed by the Member in connection with the distribution), and the Member’s distributive share of Losses and any items of expenses or losses which are allocated separately from Losses under Section 4.02.

(c)Transfers. If any Unit is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Unit.

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(d)Book Values. For purposes of determining a Member’s Capital Contributions and Capital Account, property held by the Company shall be taken into account in accordance with the following provisions:

(i)The Book Value of any property contributed by a Member to the Company initially shall be the gross fair market value of the property.

(ii)The Book Value of all Company property shall be adjusted to equal the respective gross fair market values of the property as of the following times, unless the Managers determine that such adjustment is not necessary to reflect the economic arrangement among the Members: (A) the acquisition of an additional Unit by any new or existing Member in exchange for services or more than a deminimis Capital Contribution; (B) the distribution by the Company to a Member of more than a deminimis amount of cash or property as consideration for a Unit; or (C) the liquidation of the Company within the meaning of Regulation §1.704-1(b)(2)(ii)(g). If any property is distributed to a Member, the Book Value of such property shall be adjusted to equal the gross fair market value of such property immediately before such distribution.

(iii)The Book Values of Company property shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such property pursuant to §734(b) or §743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulation §1.704-1(b)(2)(iv)(m).

(iv)The Book Value of Company property shall be adjusted by the Depreciation taken into account with respect to such property.

Section 2.05Compliance with Regulations. The foregoing provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with §704(b) of the Code and the Regulations issued thereunder, and shall be interpreted and applied in a manner consistent with such Regulations. If the Managers determine that it is appropriate to modify the manner in which the Capital Accounts are computed or any items are allocated under Article 4 in order to comply with such Regulations, the Managers may make such modification, provided that such modification shall not have a material effect on the amounts distributable to any Member.

Section 2.06No Interest. No interest shall be paid on any Capital Contributions or Capital Account balance of any Member.

Section 2.07No Deficit Make-Up. No Member shall be obligated to the Company or to any other Member solely because of a deficit balance in such Member’s Capital Account.

ARTICLE III

Distributions

Section 3.01Distributions of Net Distributable Proceeds. Net Distributable Proceeds shall be distributed to the Members at such times, but in no event less than at least annually (which annual distributions can be deferred at the option of the Board of Managers until a date no later than 20 business days following finalization of the annual audit of the consolidated financial statements of the Class A Member), and in such amounts as shall be determined by the Managers. Notwithstanding the preceding sentence, Net Distributable Proceeds shall be distributed to the Class B Member upon the occurrence of the Option Closing as set forth in Section 7.05 of this Agreement. Net Distributable Proceeds shall be distributed among the Members in proportion to their Ownership Percentage Interests. The foregoing shall be subject to the provisions of Section 3.04.

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Section 3.02Amounts Withheld. The Company is authorized to withhold from distributions or with respect to allocations and pay over to any federal, state, local or foreign government any amounts required to be withheld with respect to any Member pursuant to any provisions of federal, state, local or foreign law. All amounts so withheld shall be treated as amounts distributed to the Members pursuant to Section 3.01 of this Agreement, depending upon the source of the income that gives rise to the withholding obligation. To the extent any amount withheld with respect to a Member pursuant to this Section 3.02 for any Year exceeds the amount distributable to such Member pursuant to Section 3.01 for such Year, such Member shall repay such excess to the Company within ten (10) days after such Member receives written notice from the Company of the amount of such excess.

Section 3.03Tax Distributions.The Managers shall cause the Company to distribute to each Member for each Year to the extent cash is available for distribution an amount of cash which equals (A)(i) the amount of net taxable income allocable to the Member in respect of such Year multiplied by (ii) the combined effective maximum individual federal, state and local income tax rate attributable to such taxable income (determined as if all Members were residents of New Jersey and taking into account the deductibility of state and local income taxes for federal income tax purposes), reduced by (B) any amounts withheld by the Company for federal, state and local income taxes with respect to the Member for such year (the “Tax Distribution”). Tax Distributions shall be made no later than ninety (90) days after the end of the Year, and shall be made quarterly during the Year based upon the Managers’ estimates of the net taxable income for the Year. Tax Distributions shall be treated as an advance against and correspondingly reduce amounts otherwise distributable to the Member (other than amounts to be distributed as a return of capital) and not as additional distributions.

Section 3.04Indemnification Set Off. Notwithstanding anything to the contrary, if Jeffrey L. Heath fails to make all or a portion of an applicable indemnification payment to the Class A Member (or the election of the Class A Member, the Company) under the Purchase Agreement, the Managers shall be required, at the election of the Class A Member, to pay any Net Distributable Proceeds otherwise distributable to the Class B Member under Section 3.01 directly to the Class A Member (or to retain such amounts in the Company) in the amount of the defaulted amount until such time as such defaulted amount is fully satisfied.

ARTICLE IV

Profits and Losses

Section 4.01General Allocation of Profits and Losses. After taking into account any special allocations pursuant to Section 4.02 and subject to any limitations contained therein, Profits, Losses and, to the extent necessary, individual items of income, gain, loss or deduction, of the Company shall be allocated among the Members in a manner such that the Capital Account of each Member, immediately after making such allocation, is, as nearly as possible, equal (proportionately) to the distributions that would be made to such Member if the Company were dissolved, its affairs wound up and its assets sold for cash equal to their Book Value, all Company liabilities were satisfied (limited with respect to each nonrecourse liability to the Book Value of the assets securing such liability), and the net assets of the Company were distributed in accordance with Article III to the Members immediately after making such allocation.

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Section 4.02Special Allocations.

(a)Limitation on Allocation of Items of Loss or Deduction. No items of loss or deduction may be allocated to any Member to the extent such allocation would result in an Adjusted Capital Account deficit balance for such Member. Any items of loss or deduction that are prohibited to be allocated to a Member under the preceding sentence shall be reallocated among the other Members to whom such limitation does not apply in accordance with their relative Ownership Percentage Interests. If, at the end of a Year, any Member has an Adjusted Capital Account deficit balance, such Member shall be allocated items of gross income and gain to the extent necessary to eliminate such deficit balance.

(b)Nonrecourse Deductions and Company Minimum Gain Chargeback. Nonrecourse Deductions shall be allocated among the Members in accordance with their Ownership Percentage Interests. If there is a net decrease in Company Minimum Gain for any Year, each Member shall be allocated the next available items of income and gain for such Year (and for subsequent Years if necessary) equal to such Member’s share of the net decrease in Company Minimum Gain as determined in accordance with Regulation §1.704-2(g) and the “minimum gain chargeback” requirement of Regulation §1.704-2(f).

(c)Member Nonrecourse Deductions and Chargeback. Member Nonrecourse Deductions for any Year shall be allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable as determined under Regulation §1.704-2(i). If there is a net decrease in Member Nonrecourse Debt Minimum Gain in any Year, each Member shall be allocated items of income and gain for such Year (and for subsequent Years if necessary) equal to such Member’s share of the net decrease in Member Nonrecourse Debt Minimum Gain in accordance with Regulation §1.704-2(i)(4).

(d)Qualified Income Offset. Any Member who unexpectedly receives, with respect to the Company, an adjustment, allocation, or distribution of any item described in subsections (4), (5), or (6) of Regulation §1.704-1(b)(2)(ii)(d) shall be allocated items of income and gain in an amount sufficient to eliminate such Member’s Adjusted Capital Account deficit balance arising thereby as quickly as possible, in accordance with the “qualified income offset” rule of Regulation §1.704-1(b)(2)(ii)(d)(3).

(e)Gross Income Allocation. In the event any Member has a deficit Capital Account at the end of any Year which is in excess of the sum of (i) the amount such Member is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations, each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 4.02(e) shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Article IV have been made as if Section 4.02(d) hereof and this Section 4.02(e) were not in the Agreement.

(f)Curative Allocations. The special allocations set forth in this Section 4.02 are intended to comply with the requirements of the Regulations under §704(b) of the Code. It is the intent of the Members that all such special allocations shall be offset with other special allocations. Accordingly, to the extent consistent with the Regulations, to the extent that any such special allocations are made to a Member, subsequent offsetting special allocations shall be made to such Member such that the net amount of all items of income, gain, loss and deduction allocated to each Member is the same that would have been allocated to each Member if no special allocations had been made to any Member, taking into account future special allocations that, although not yet made, are likely to offset previous special allocations.

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Section 4.03Allocation During Year. For purposes of determining Profits, Losses, or any other items allocable to any period ending on a date other than the last day of the Company’s Year, Profits, Losses, and any such other items shall be allocated among such periods using such method permitted by §706 of the Code and the Regulations thereunder as shall be chosen by the Managers.

Section 4.04Tax Allocations.

(a)General Allocation. Except as otherwise provided in this Section 4.04, items of income, gain, loss and deduction as determined for federal income tax purposes shall be allocated in the same manner as the related items of Profits, Losses, or specially allocated items. Tax credits shall be allocated in accordance with Regulation §1.704-1(b)(4)(ii).

(b)Contributed Property. In accordance with §704(c) of the Code and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its Book Value.

(c)Revaluations. If the Book Value of any property is adjusted pursuant to Section 2.04(d)(ii) of this Agreement, income, gain, loss and deduction with respect to such property shall be allocated among the Members so as to take account of any variation between the adjusted basis of such property for federal income tax purposes and its Book Value in the same manner as under §704(c) of the Code and the Regulations thereunder.

(d)No Effect on Capital Accounts. Allocations pursuant to this Section 4.04 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Member’s Capital Account or share of Profits, Losses, or other items or distributions pursuant to any provision of this Agreement.

(e)Allocation Method. The method for making allocations pursuant to Section 4.04(b) and Section 4.04(c) shall be such method permitted by Regulation Section 1.704-3 as shall be selected by the Managers. The provisions of this Section 4.04(e) (and other related provision in this Agreement) pertaining to the allocation of items of Company income, gain, loss, deductions, and credits shall be interpreted consistently with the Treasury Regulations, and to the extent unintentionally inconsistent with such Treasury Regulations, shall be deemed to be modified to the extent necessary to make such provisions consistent with the Treasury Regulations.

Section 4.05754 Election.The Managers (based on the vote of more than fifty percent (50%) of the Managers) shall have the sole discretion to determine whether the Company should make an election under Section 754 of the Code.

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ARTICLE V

Management of Company

Section 5.01General Provisions Concerning Management. The powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, the Managers. No Member (other than in such Person’s capacity as a Manager) has the authority or power to act for or on behalf of the Company, to do any act that would be binding on the Company or to incur any expenditures on behalf of the Company.

Section 5.02Appointment, Term and Actions of Managers. The Company shall have a Board of Managers consisting of three (3) Managers, two (2) of whom will be appointed by the affirmative vote of a Majority-in-Interest of the Class A Members (the “Class A Managers”) and one (1) of whom will be appointed by the affirmative vote of a Majority-in-Interest of the Class B Members (the “Class B Managers”). The initial Class A Managers shall be Mark J. Morrison and Jeffrey R. Passmore. The initial Class B Manager shall be Jeffrey L. Heath. The Board of Managers will have three (3) votes. Each Manager shall have one (1) vote. The Class A Member may expand the Board of Managers to a size not to exceed five (5) Managers, and all such additional seats shall be designated solely by the Class A Member.

Section 5.03Resignation and Removal of Managers. Each Manager shall serve until death, resignation, or removal in accordance with this Agreement. A Manager may resign at any time upon giving written notice of resignation to the Members and all other Managers. A Class A Manager may be removed at any time (with or without cause) by the affirmative vote of a Majority-in-Interest of the Class A Members. A Class B Manager may be removed at any time (with or without cause) by the affirmative vote of a Majority-in-Interest of the Class B Members. If a Manager ceases to serve as a Manager at any time for any reason, the resulting vacancy shall be filled by a Manager appointed in accordance with Section 5.02 (i.e., the Class A Members shall designate the individual(s) to fill any vacancy resulting from the removal or other cessation of service of a Manager originally appointed by the Class A Members).

Section 5.04Actions Requiring Consent of Managers and Members. All actions of the Managers, including but not limited to the matters set forth in this Section 5.04 shall require the consent of more than fifty percent (50%) of the votes of the Managers; provided, however that the actions set forth in Section 5.04(b) shall require the unanimous consent of the Members. Except as required by applicable law, or as otherwise set forth herein, the Managers may delegate the day-to-day operations of the Company to the President (or other officers of the Company, as properly designated by the Managers and/or the President at the direction of the Managers), who will be appointed by the Managers. To the extent any such agreement is in effect, the President’s duties and terms of employment will be as set forth in such employment agreement between the Company and/or its Subsidiaries and the President..

(a)The actions requiring the approval of the Managers are:

(i)any act other than in the ordinary course of business of the Company or any of its Subsidiaries material to the financial condition or operation of the Company or any of its Subsidiaries taken as a whole;

(ii)borrowing money in the name of the Company or any Subsidiary or guaranteeing obligations of any Person or utilizing assets of the Company or any Subsidiary as security for any loans or other obligations whether such loans or obligations are those of the Company or of any other Person;

(iii)the review and approval of an annual business plan to be submitted by the President within forty-five (45) days prior to the end of each Year (and any updates to that plan during the year as required), which shall include, but not be limited to, an approval of an operations budget, capital expenditures, debt financing requirements and capital lease arrangements (the “Annual Budget”);

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(iv)the approval of any action that may result in a material deviation from the Annual Budget;

(v)the purchase, lease or other acquisition, use or benefit of: assets, properties, rights or privileges, whether any of the foregoing be real or personal, tangible or intangible, of any kind or description, whether income-producing or not if such purchase, lease or other acquisition involves a transaction or series of transactions valued in excess of $50,000, and except for transactions accounted for in the Annual Budget;

(vi)declaration or payment of any distribution to any Member, except as otherwise required by the terms of this Agreement;

(vii)entering into contracts or other agreements by the Company or any of its Subsidiaries with any Manager, Member or any Person related to or Affiliated with any Manager or Member;

(viii)commencement of any litigation or filing of any counterclaim in respect of then existing litigation, other than for the collection of accounts receivable;

(ix)approval of the creation of any Subsidiaries and the adoption of governance agreements or arrangements in respect thereof, or any other investment in, or the acquisition of stocks or bonds of, other Persons or any equity interest in any other Person;

(x)loaning money to any Person;

(xi)assuming on behalf of the Company or any of its Subsidiaries any binding obligations with respect to a collective bargaining agreement;

(xii)adoption, approval or termination of any employee benefit plan (as defined in the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder) or material welfare plans for any employees of the Company or any of its Subsidiaries, including retirement plans (including any plans relating to post retirement medical benefits other than as required by law), severance plans, deferred compensation plans and health plans;

(xiii)Actions (whether or not permitted to be taken without the consent of the Managers pursuant to any exception above) determined by the Chief Executive Officer of the Class A Member, or by the Managers of the Company, to require the consent of the Managers.

(b)The actions requiring unanimous consent of the Members are:

(i)the authorization or approval of any voluntary declaration of bankruptcy of the Company or any of its Subsidiaries;

(ii)the divestiture on behalf of the Company or any of its Subsidiaries of any business, operation or entity (whether by asset purchase, stock purchase, merger or otherwise) material to the Company and its Subsidiaries collectively; including without limitation the sale to any third party of certain equity securities in the Company’s Subsidiaries, which for the avoidance of doubt shall not be subject to the provisions of Section 2.01(c) of the Agreement;

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(iii)the sale, pledge, mortgage, lease, exchange, or grant options for the purchase, lease or exchange, of any of the Company or any of its Subsidiaries’ assets material to the business or operations of the Company and its Subsidiaries, other than in the ordinary course of business; provided that for purposes of clause (ii) and (iii), “material” shall mean assets, business or operations representing more than 50% of the Pre-Tax Income of the Company, Hardscrabble, LLC and their Subsidiaries;

(iv)causing the Company to purchase any Member’s Units, other than in respect of any purchase pursuant to Article VII;

(v)approval of any Additional Capital Contributions;

(vi)unless such change does not materially adversely affect the Class B Member, approval of any tax elections of the Company or any of its Subsidiaries, including any election that would result in the Company being taxed as other than a “partnership” for federal income tax purposes, including electing to be taxed as other than a “partnership” by filing Internal Revenue Service Form 8832, “Entity Classification Election”;

(vii)approving or adopting any revocation of the Certificate of Formation or, unless such change does not adversely affect the rights of the Class B Member or conflict with any provision herein, approving or adopting any amendment or restatement of the Certificate of Formation of the Company;

(viii)the authorization or approval of any plan of dissolution of the Company or any of its Subsidiaries, any liquidating distribution of the Company or any of its Subsidiaries’ assets or other action relating to the dissolution or liquidation of the Company or any of its Subsidiaries;

(ix)changing the location of the Company’s principal business office, unless such change does not require the Class B Manager’s principal place of business to relocate more than ten miles from Basking Ridge, New Jersey;

(x)in the event the Class A Member or any Affiliate of the Class A Member becomes the carrier with respect to any business, decreasing the commission on gross written premium, less cancellations and returned premiums according to the Company's books and records below the greater of (A) twenty-three percent (23%) written on a non-admitted basis and twenty-two and one-half percent (22.5%) written on an admitted basis and (B) the commission rate in effect with any carrier at the time the Class A Member or any Affiliate of the Class A Member becomes the carrier.

Section 5.05Meetings of Managers and Members; Written Consents. Meetings of the Managers may be called by any Manager upon 24 hours advance notice by phone or email or other reasonable means. Meetings of the Members may be called by any Manager or at the request of Members holding at least fifty percent (50%) of the Class A Units or Class B Units upon 24 hours advance notice by phone or email or other reasonable means. Any Manager or Member may participate in a meeting by means of conference telephone or similar communications equipment by means of which all Persons participating in the meeting can hear and speak to each other at the same time or in sequence, and participation in a meeting pursuant to this provision shall constitute presence at the meeting. Any action required or permitted to be taken at a meeting may be taken without a meeting if a consent, in writing, setting forth the action so taken shall be signed by the Managers or Members required to approve such action. A quorum of the Board of Managers shall be 2 Managers. Both Members shall be present at a meeting of the Members. Approval of matters at any meeting of the Members shall requires the consent of more than fifty percent (50%) of the outstanding Units, subject to any matters that require unanimous consent of the Members pursuant to Section 5.04(b).

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Section 5.06Fiduciary Duties. Except as expressly provided in this Agreement, notwithstanding any other provision of law or equity, each Member and Manager shall, to the maximum extent permitted by the Act, owe no duties (including no fiduciary duties) to the Company or any other Person bound by this Agreement. The provisions of this Agreement, to the extent that they restrict or eliminate the duties and liabilities of a Covered Person to the Company or its Members otherwise existing at law or in equity, are agreed by the Parties hereto to replace such other duties and liabilities of such Covered Person.

Section 5.07Actions of Members. The Members hereby agree and acknowledge that any actions which the Members are permitted to take pursuant to the terms of the Act shall be superseded by the terms of this Agreement to the extent that the Agreement provides the Managers the right to take all such actions without the Members’ approval.

Section 5.08Contracts with Affiliates. The Company may enter into contracts and agreements for property or services in the ordinary course of business with any Manager, Member or any Person related to or Affiliated with any Manager or Member, provided such contracts and agreements are on terms and conditions which are on arms length terms or otherwise approved by a majority of the disinterested Managers. If the Board of Managers determines that the Company requires additional funding, the Class A Member may make loans to the Company on prevailing market terms as determined by the Board of Managers.

Section 5.09Company Expenses. Each Manager or Member shall be reimbursed for all expenses incurred by the Manager or Member for or on behalf of the Company consistent with the corporate policies of the Class A Member, including reasonable travel expenses of any Member or Manager to attend meetings at the Company’s principal business office or other locations as determined by the Managers.

ARTICLE VI

Books and Records; Tax and Financial Matters

Section 6.01Bank Accounts. All funds of the Company shall be deposited in a bank account or accounts opened in the Company’s name. The Managers shall determine the institution or institutions at which the accounts will be opened and maintained, the types of accounts, and the Persons who will have authority with respect to the accounts and the funds therein.

Section 6.02Books and Records. During the term of existence of the Company, the Managers shall keep or cause to be kept complete and accurate books and records of the Company and supporting documentation of the transactions with respect to the conduct of the Company’sbusiness. The books and records shall be maintained in accordance with GAAP and shall be available at the Company’s principal office for examination by any Member or the Member’s duly authorized representative for any purpose reasonably related to such Member’s Units in the Company at any and all reasonable times during normal business hours. The Company will maintain the following records, among others, at its principal office:

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(a)A current list of the full name and last known business address of each Member;

(b)A copy of the Certificate of Formation and all amendments thereto together with executed copies of any powers of attorney pursuant to which such Certificate of Formation has been executed;

(c)Copies of the Company’s federal, foreign, state and local income tax returns and reports, if any, for the three most recent Years;

(d)Copies of this Agreement including all amendments thereto;

(e)Any financial statements of the Company for the seven most recent fiscal Years of the Company or such longer period as the Managers may determine;

(f)A writing or other data compilation from which information can be obtained through retrieval devices into reasonable usable form setting forth the following:

(i)the amount of cash and a description and statement of the agreed value of the other property or services contributed by each Member and which each Member has agreed to contribute;

(ii)the times at which or events on the happening of which any Additional Capital Contributions agreed to be made by any Member are to be made; and

(iii)A record of the Capital Account of each Member.

Section 6.03Fiscal Year. The fiscal year of the Company shall be the twelve months ending December 31. A fiscal quarter shall be a period of three months ending on the last day of the fiscal year and on the last day of March, June and September, respectively.

Section 6.04Reports. The Managers shall be responsible for the preparation of financial reports of the Company and the coordination of financial matters of the Company with the Company’s accountants. The Managers shall have the right to select the Company’s independent certified public accountants (which may be the same as the independent certified public accountants of the Class A Member with respect to its annual audit) .

(a)The Company shall make available to the Class A Members and Class B Members within thirty (30) days of the end of each quarter (other than the last month of the Company’s fiscal year) the following financial statements:

(i)a balance sheet of the Company as of the last day of the month;

(ii)a statement of income or loss of the Company for such month and for the entire fiscal year through the end of the month; and

(iii)a statement of the Company’s cash flow for such month and for the entire fiscal year through the end of the month.

(b)The quarterly financial statements provided for above need not be reviewed or audited by Company’s independent certified public accountants, but shall be prepared in accordance with GAAP, applied on a consistent basis.

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(c)As soon as practicable after the close of each fiscal Year of the Company, the Company shall cause to be prepared a financial report of the Company for such fiscal Year, including a balance sheet as of the last day of such fiscal Year, a statement of income and loss of the Company for the fiscal Year and a statement of the Company’s cash flow for the fiscal Year, and a schedule of distributions to the Members and allocations of Profit or Loss during the fiscal Year. Such balance sheet, statement of income and loss and statement of cash flow shall be prepared in accordance with GAAP applied on a consistent basis and shall be audited in accordance with generally accepted auditing standards by the Company’s firm of independent public accountants and the cost thereof shall be borne by the Company. Such annual financial reports of the Company shall be promptly (but in no event later than one hundred twenty (120) days after the end of the Year) transmitted to each Class A Member and Class B Member.

Section 6.05Tax Matters.

(a)The Member holding a majority of Class A Unitts shall serve as the tax matters partner (the “Tax Matters Partner”) within the meaning of Section 6231 of the Code. The Tax Matters Partner shall represent the Company on behalf of the Members in connection with all administrative and judicial proceedings with respect to Company affairs involving or resulting from examinations by any and all federal, state or other tax authorities (including, but not limited to, examinations by the Internal Revenue Service), and may expend Company funds for reasonable professional services and costs in connection therewith as it deems advisable and necessary; provided, however,that, except as otherwise provided in this Agreement or by law, the Tax Matters Partner does not assume any obligations or responsibilities with respect to the foregoing. Any Member other than the Tax Matters Partner who wishes to participate in the administrative proceedings at the partnership level may do so, and any legal, accounting or other expenses incurred by such Member in connection therewith shall be borne by the Company. The Tax Matters Partner shall promptly take such action as may be necessary to cause each Member to become a “notice partner” within the meaning of Section 6231(a)(8) of the Code. The Tax Matters Partner shall furnish to each Member a copy of all notices or other written communications received by the Tax Matters Partner from the Internal Revenue Service (except such notices or communications as are sent directly to the Member by the Internal Revenue Service). The Tax Matters Partner shall give to Members prompt written notice upon receipt of advice that the Internal Revenue Service or any other taxing authority intends to examine any Company tax return or the books andrecords of the Company. The Company and the Members hereby severally agree to indemnify and hold harmless the Tax Matters Partner from and against any claim, loss, expense, liability, action or damage resulting from its acting or failing to take any action in its capacity as the Tax Matters Partner, provided that any such action or failure to act was not fraudulent, in bad faith, a result of wanton or willful misconduct or gross negligence by such Member.

(b)Each of the Members, on the one hand, and the Company, on the other hand, agree to furnish or cause to be furnished to each other, as promptly as practicable such information and assistance as is reasonably necessary for the preparation and filing of any return, claim for refund or other required or optional filings relating to tax matters, for the preparation for and proof of facts during any tax audit, for the preparation for any tax protest, for the prosecution or defense of any suit or other proceeding relating to tax matters and for the answer to any governmental or regulatory inquiry relating to tax matters.

(c)Each tax return and any other statement to be filed by the Company with the Internal Revenue Service or any other taxing authority shall be prepared by the accountants (including outside accountants) for the Company, whose expenses shall be borne by the Company. Draft copies of each such tax return and statement shall be distributed to the Members not later than thirty (30) days before the date on which the same is required to be filed, including any extensions of such filing date.

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(d)The provisions of this Section 6.05 shall be subject to the covenants set forth in Section 7.7 of the Purchase Agreement

ARTICLE VII

Transfers, Admissions, and Withdrawals

Section 7.01Transfers. Except as provided in Section 7.04 or Section 7.05 hereof, no Member shall, directly or indirectly, Transfer all or any portion of his Units including any rights to receive distributions or other similar or dissimilar rights or interest, without the consent of the Managers and other than in accordance with the terms and conditions of this Article VII. A Transfer or issuance of Equity Securities of a Member, or an Indirect Owner of a Member, that is an entity shall be deemed to be an indirect Transfer of Units; provided that, notwithstanding anything to the contrary, the Transfer or issuance of Equity Securities of the Class A Member or of any owner or shareholder of the Class A Member shall not constitute a Transfer of Units. Any such attempted prohibited Transfer not permitted hereunder shall be null and void ab initio and the Company shall not register or effect such Transfer and the Member making the purported Transfer shall indemnify and hold the Company and the other Members harmless from any against any federal, state or local income taxes, or transfer taxes arising as a result of, or caused directly or indirectly by, such purported Transfer.In the event that any prohibited involuntary transfer of title or beneficial ownership of any Units shall occur by court order, Law or otherwise than a voluntary decision of a Member (an “Involuntary Transfer”) that purports to override the provisions of this Section 7.01, the person or entity to whom any such Units have been Involuntarily Transferred shall be subject to the obligations set forth in this Article VII.

Section 7.02Admissions.

(a)Subject to Section 7.02(b), no transferee of a Unit shall be admitted as a Member of the Company without the written consent of the Managers.

(b)A transferee will only be admitted as a Member if the transferee agrees to be legally bound by this Agreement as a Member and executes and delivers to the Company such documents and instruments as are necessary or appropriate in connection with the transferee becoming a Member.

(c)Any transferee of a Unit who is not admitted as a Member shall have the rights of an assignee with respect to distributions and Profits, Losses, and other allocations attributable to the transferred Unit, but shall have no rights as a Member under this Agreement or the Act. Notwithstanding the foregoing, the Units of the assignee shall be subject to the restrictions contained in this Agreement applicable to Units held by a Member.

Section 7.03No Withdrawal. No Member shall have the right to withdraw from the Company prior to the dissolution and winding up of the Company.

Section 7.04Permitted Transfers. Notwithstanding any other provision of this Agreement, any Member may transfer all or part of such Member’s Units to (i) such Member’s Family Members or trusts for the benefit of such Member’s Family Members or (ii) any limited liability company, partnership or corporation Controlled by the Member, without the consent of the Managers; provided that, until such time as the Heath Put-Call Option expires, the foregoing provisions of this Section 7.04 shall not apply. Any transferee of Units that is a permitted transferee under this Section 7.04 may, subject to Section 7.02, become a substituted Member. Further, the Parties hereto understand and agree that the permitted transfer provisions of this Section 7.04 shall not be effective or valid to accomplish an indirect transfer of legal or beneficial ownership intended to be subject to the restrictions of this Article VII.

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Section 7.05Put/Call Option.

(a)At any time on or following the earlier of (i) the fourth anniversary of the date here of, (ii) the termination by the Company of the employment of Jeffrey L. Heath with the Company or (ii) a Hallmark Change of Control, and until the tenth anniversary of the Closing (the “Option Expiration Date”), (a) the Class A Member shall have the right (the “Call Right”) to purchase from the Class B Member all, but not less than all, equity interests in the Company held by the Class B Member (the “Remaining Heath Group Securities”) and (b) the Class B Member shall have the right (the “Put Right”) to sell to the Class A Member all, but not less than all, of the Remaining Heath Group Securities, in each case ((a) and (b)) for a price equal to the Adjusted Option Price (the foregoing, the “Heath Put-Call Option”). If the Class A Member elects to exercise the Call Right, the Class B Member shall sell to the Class A Member all of the Remaining Heath Group Securities at the Adjusted Option Price. If the Class B Member elects to exercise the Put Right, the Class A Member shall purchase from the Class B Member all of the Remaining Heath Group Securities at the Adjusted Option Price. Notwithstanding the foregoing, the Put Right shall not apply if the employment of Jeffrey L. Heath with the Company is terminated by the Company with cause (as defined in the employment agreement then in effect between Jeffrey L. Heath and the Company). Further notwithstanding the foregoing, the Call Right shall not apply if the employment of Jeffrey L. Heath with the Company is terminated by the Company without cause.

A Party shall make its respective election hereunder to purchase or sell, as the case may be, Remaining Heath Group Securities hereunder by written notice (the “Option Notice”) to other Party referencing this Section 7.05. The closing of the purchase and sale of Remaining Heath Group Securities hereunder (an “Option Closing”) shall take place at the Class A Member’s offices not later than 30 calendar days following delivery to the Class B Member of the Option Notice, or at such other place and such other time as the Parties may mutually agree; provided that, the Option Closing shall be delayed to a later date in the Class A Member’s discretion if the Class A Member’s counsel reasonably determines that any third party or regulatory consents are required or advisable in connection with the Option Closing. At an Option Closing, the applicable Parties shall execute and deliver such instruments as shall be appropriate to transfer Remaining Heath Group Securities to the Class A Member (it being understood that the Class B Member shall make customary representations and warranties with respect to such transfer documents and shall make customary ownership and title representations with respect to the Remaining Heath Group Securities), and the Class A Member shall deliver to the Class B Member by wire transfer of immediately available funds to the bank account set forth on a notice given to the Class A Member by the Class B Member at least three (3) business days prior to the Option Closing. The parties agree to cooperate to obtain, and shall bear expenses pro rata for their relative ownership (on a pre Option Closing basis) of the Companies with respect to obtaining, any consents deemed required or advisable to obtain in connection with an Option Closing. Prior to or upon the occurrence of the Option Closing, the Managers shall cause the Company to distribute any and all accrued but unpaid Net Distributable Proceeds due to the Class B Member. The Heath Put-Call Option pursuant to this Agreement shall be exercised only in conjunction with the Hardscrabble Put-Call Option pursuant to the Hardscrabble Data Solutions, LLC Operating Agreement dated of even date herewith.

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(b)For purposes of Section 7.05(a):

“Adjusted Option Price” shall mean the product of (x) nine (9) times (y) the average of Pre-Tax Income for the most recent trailing twelve (12) quarters ending prior to the date of the Option Closing times (z) the Class B Member’s Ownership Percentage Interest of the Company. In the event Jeffrey L. Heath’s employment with the Company is terminated after the first month of any quarter, such quarter shall be included in the twelve quarters preceding the date of the Option Closing for the purpose of calculating the Adjusted Option Price. In the event Jeffrey L. Heath’s employment is terminated prior to the date which is twelve (12) quarters from the Closing Date, the period of time set forth in (y) above shall be the most recent trailing twelve (12) months ending prior to the date of the Option Closing.

“Pre-Tax Income” shall mean: (i) the total amount of gross written premium written on an admitted basis multiplied by 22.5% (less cancellations and returned premiums), plus (ii) the total amount of gross written premium written on a non-admitted basis multiplied by 23.0% (less cancellations and returned premiums), plus (iii) investment income, plus (iv) fee income, less (v) operating expenses (including acquisition costs and other reasonable, mutually agreed allocations of business and corporate expenses, including corporate audit expenses).

“Hallmark Change in Control”shall mean the consummation of a transaction following which an entity or person (other than Newcastle Partners, L.P., Newcastle Capital Management, L.P., Mark Schwarz or any affiliate of any of the foregoing (the “Newcastle Parties”)) shall alone, or together with its affiliates (other than any Newcastle Parties), beneficially own more than fifty percent (50%) of the outstanding common stock of the Class A Member.

Section 7.06Right of Co-Sale.

(a)Subject to the provisions of this Article VII, if during the term of this Agreement a Member desires to transfer, directly or indirectly any such Member’s Units (the “Transferring Member”) to a third-party purchaser in a transaction or series of related transactions involving the Transfer of Units representing in the aggregate at least twenty-five percent (25%) of the outstanding Units at such time, the Transferring Member(s) shall first give not less than twenty (20) calendar days prior written notice to each of the other Members (the “Co-Sale Members”). Such notice (the “Co-Sale Notice”) shall set forth the terms and conditions of such proposed Transfer, including the name of the proposed transferee, the number of Co-Sale Units, the purchase price per Unit proposed to be paid therefor and the payment terms and type of transfer to be effectuated. Nothing set forth herein shall be construed to override the restrictions on Transfer set forth in Section 7.01 and 7.04.

(b)Within ten (10) calendar days of delivery of the Co-Sale Notice by the Transferring Member(s), each Co-Sale Member shall, by written notice to the Transferring Member(s), have the opportunity and right to sell to the proposed transferee in such proposed Transfer (upon the same terms and conditions as the Transferring Member(s), subject to Section 7.06(c)) up to that number of Units owned by such Co-Sale Member as shall equal the product of (x) a fraction, the numerator of which is the number of Co-Sale Units and the denominator of which is the aggregate number of Units owned of record by the Transferring Members as of the date of the Co-Sale Notice, multiplied by (y) the number of Units owned of record by such Co-Sale Member as of the date of the Co-Sale Notice. Such written notice shall state the aggregate number of Units that such Co-Sale Member proposes to include in such Transfer.

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(c)If any Co-Sale Member exercises its rights pursuant to this Section 7.06, then the Transferring Member(s) will attempt to obtain the same agreements and commitments from the proposed transferee for the benefit of any such Co-Sale Member as such Transferring Member(s) obtained from the proposed transferee in respect of its Transfer. To the extent the Transferring Member(s) cannot obtain such agreements and commitments from such proposed transferee, the Transferring Member(s) and the Co-Sale Members shall reduce the number of Units being sold by such Transferring Member(s) and Co-Sale Members such that each Transferring Member and Co-Sale Member sells a number of Units as is determined by multiplying (x) a fraction, the numerator of which is equal to the number of Units such Transferring Member or Co-Sale Member, as the case may be, would have sold if the Transferring Member(s) had obtained such agreements and commitments from such proposed transferee, and the denominator of which is equal to the total number of Units that would have been sold by all of the Transferring Members and Co-Sale Members if the Transferring Member(s) had obtained such agreements and commitments from such proposed transferee, times (y) the total number of Units that such proposed transferee is in fact acquiring from all Transferring Members and Co-Sale Members.

(d)The closing of the Transfer of the Units with respect to which rights have been exercised by a Co-Sale Member pursuant to this Section 7.06 is subject to, and will take place concurrently with, the closing of the Transfer of the Co-Sale Units to the proposed transferee. At such closing, each Co-Sale Member electing to Transfer Units shall deliver to the proposed transferee, free and clear of all liens, the Units to be sold and shall receive in exchange therefor, the consideration to be paid by the proposed transferee in respect of such Units as described in the Co-Sale Notice.

(e)The right of co-sale granted pursuant to this Section 7.06 shall be deemed to be extended to all Permitted Transferees. The right of co-sale granted pursuant to this Section 7.06 shall not apply with respect to Transfers to Permitted Transferees or pursuant to the exercise of Drag-Along Rights pursuant to Section 7.07.

Section 7.07Drag-Along Rights.

(a)Subject to the provisions of Section 7.01 hereof, if at any time Members holding more than fifty percent (50%) of the Class A Units (“Drag-Along Members”) shall receive an offer constituting a Sale of the Company and the Drag Along Members propose to accept such offer to consummate a Sale of the Company, then each Member (“Obligated Member”) shall, if requested by the Drag Along Members, sell all (but not less than all) of the Units owned by such Obligated Member in such transaction on the same terms and for the same type and form of consideration as to be paid and given to the Drag-Along Members.

(b)The Drag-Along Members shall give each Obligated Member written notice (the “Drag-Along Notice”) of any Sale of the Company transaction at least twenty (20) calendar days prior to the date on which such transaction shall be consummated, including the terms and conditions thereof, and each Obligated Member shall have the obligation to sell its Units on such same terms and conditions in accordance with the instructions set forth in such notice. If the Transfer referred to in the Drag-Along Notice is not consummated within ninety (90) calendar days from the date of the Drag-Along Notice, the Drag-Along Members must deliver another Drag-Along Notice in order to exercise its rights pursuant to this with respect to such Transfer or any other Transfer.

(c)The following terms and conditions shall also apply to the exercise of rights under this Section 7.07:

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(i)if such transaction requires Member approval, with respect to all Units that each Obligated Member owns or over which each Obligated Member otherwise exercises voting power, each Obligated Member shall vote (in person, by proxy or by action by written consent, as applicable) all Units in favor of, and adopt, such Sale of the Company transaction and vote in opposition to any and all other proposals that could reasonably be expected to delay or impair the ability of the Company to consummate such Sale of the Company transaction;

(ii) each Obligated Member shall execute and deliver all related documentation and take such other action in support of the Sale of the Company transaction as shall reasonably be requested by the Company and/or the Drag-Along Members in order to carry out the terms and provision of this Section 7.07, including executing and delivering instruments of conveyance and transfer, and any purchase agreement, merger agreement, indemnity agreement, escrow agreement, consent, waiver, governmental filing, share certificates duly endorsed for transfer (free and clear of impermissible liens, claims and encumbrances) and any similar or related documents;

(iii) each Obligated Member shall not deposit, and shall cause its Affiliates not to deposit, except as provided in this Agreement, any Units owned by such party or Affiliate in a voting trust or subject any Units to any arrangement or agreement with respect to the voting of such Units, unless specifically requested to do so by the acquiring party in connection with the Sale of the Company transaction;

(iv) each Obligated Member shall refrain from exercising any dissenters’ rights or rights of appraisal under applicable law at any time with respect to such Sale of the Company;

(v) if the consideration to be paid in exchange for the Units pursuant to this Section 7.07 includes any securities and due receipt thereof by any Obligated Member would require under applicable law (x) the registration or qualification of such securities or of any person as a broker or dealer or agent with respect to such securities or (y) the provision to any Member of any information other than such information as a prudent issuer would generally furnish in an offering made solely to Accredited Investors as defined by the Securities Act, the Company may cause to be paid to any such Obligated Member in lieu thereof, against surrender of the Units which would have otherwise been sold by such Obligated Member, an amount in cash equal to the fair value (as determined in good faith by the Company) of the securities which such Obligated Member would otherwise receive as of the date of the issuance of such securities in exchange for the Units; and

(vi) each Member will bear its pro rata share (based on the net proceeds received) of the costs incurred by the Company in connection with such Sale of the Company to the extent that such costs are incurred for the benefit of all Members and are not otherwise paid by the Company or the acquiring party.

(d)Each Obligated Member hereby constitutes and appoints the Drag-Along Members, with full power of substitution, as its proxy with respect to votes regarding any Sale of the Company transaction pursuant to this Section 7.07, and hereby authorizes the Drag-Along Members to represent and to vote, if and only if such Member (i) fails to vote or (ii) attempts to vote (whether by proxy, in person or by written consent) in a manner which is inconsistent with the terms of this Agreement, all of such Obligated Member’s Units in favor of the approval of any Sale of the Company transaction pursuant to and in accordance with the terms and provisions of this Section 7.07. The proxy granted pursuant to the immediately preceding sentence is given in consideration of the agreements and covenants of the Company and the parties in connection with the transactions contemplated by this Agreement and, as such, is coupled with an interest and shall be irrevocable unless and until this Agreement terminates. Each party hereto hereby revokes any and all previous proxies with respect to the Units and shall not hereafter, unless and until this Agreement terminates, purport to grant any other proxy or power of attorney with respect to any of the Units, deposit any of the Units into a voting trust or enter into any agreement (other than this Agreement), arrangement or understanding with any Person, directly or indirectly, to vote, grant any proxy or give instructions with respect to the voting of any of the Units, in each case, with respect to any of the matters set forth herein.

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(e)The Obligated Members shall deliver when available all documents reasonably required to be executed by the Drag-Along Members in order to consummate the Sale of the Company transaction contemplated by this Section 7.07. Each Obligated Member shall execute and deliver to the Company at least five (5) calendar days prior to the proposed sale, all documents previously furnished to the Obligated Member for execution in connection with the proposed sale. If any Obligated Member fails to execute and deliver such documents to the Company, and such Transfer is subsequently consummated (a “Defaulting Obligated Member”), (i) the Company may receive the consideration that would otherwise be paid to the Defaulting Obligated Member and the Defaulting Obligated Member shall be deemed to have appointed the Managers as such Member’s agent to Transfer all of its Units to the purchaser and to receive the consideration in trust for such Defaulting Obligated Member; (ii) the receipt by the Company of the consideration for the Units owned by such Defaulting Obligated Member shall be a good discharge to the purchaser and the validity of the proceedings shall not be questioned by any Person; and (iii) the Defaulting Obligated Member shall be entitled to receive the consideration for its Units without interest at such time as the Defaulting Obligated Member executes all of the applicable documents requested by the Company, the Drag-Along Members or the purchaser.

Section 7.08Miscellaneous Transfer Restrictions.Notwithstanding any other provisions of this Agreement, no Transfer of any Units (including pursuant to a Permitted Transfer) may be made unless:

(a)such Transfer would not result in a violation of applicable law, including the Securities Act and any state securities or “Blue Sky” laws applicable to the Company or the Units to be transferred;

(b)such Transfer would not cause the Company to lose its exemption from the registration requirements of the Investment Company Act of 1940, as amended;

(c)such Transfer would not cause the Company to lose its status as a partnership for federal income tax purposes and, without limiting the generality of the foregoing, such transfer will not be effected on or through an “established securities market” or a “secondary market or the substantial equivalent thereof,” as such terms are used in Section 1.7704-1 of the Treasury Regulations promulgated under the Code, and the transferring Member and the transferee shall each have provided a certificate to that effect;

(d)such Transfer would not result in the Company being required to register under Section 12(g) of the Securities Exchange Act of 1934, as amended;

(e)the Transferring Member and the transferee shall have agreed in writing to provide the Company with any information requested by the Managers relating to the Company’s obligation to make basis adjustments under Section 743 of the Code (including the Company’s obligations under Section 6031 of the Code); and

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(f)if requested by the Managers, the transferring Member shall have provided an opinion of counsel (at the transferring Member’s sole cost and expense) satisfactory to the Company as to the matters set forth in clauses (a)-(e) of this Section 7.08.

ARTICLE VIII

Termination and Dissolution

Section 8.01Dissolution Events. The Company shall be terminated and dissolved only upon the unanimous election of the Managers, or the entry of a final decree of judicial dissolution under the Act. The happening of any event that terminates the continued membership of a Member shall not cause a dissolution of the Company.

Section 8.02Liquidation.

(a)Winding Up. Upon the dissolution of the Company, the Company’s business shall be liquidated in an orderly manner. The Managers shall determine which Company property shall be distributed in-kind and which Company property shall be liquidated. The liquidation of Company property shall be carried out as promptly as is consistent with obtaining the fair value thereof.

(b)Payments and Distributions. Company property or the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed in the following order of priority, with no distribution being made in any category set forth below until each preceding category has been satisfied in full:

(i)To the payment and discharge of all of the Company’s debts and liabilities, including any debts and liabilities owed to any Member, and to the expenses of liquidation;

(ii)To the establishment of Reserves (which Reserves, to the extent no longer needed by the Company, shall be distributed in accordance with the order of priority set forth in subsection (iii) below);

(iii)To and among the Members in accordance with Article III of this Agreement.

Section 8.03Distribution In-Kind. If the Managers determine that a portion of the Company’s property should be distributed in-kind to the Members, the Managers shall obtain an independent third-party appraisal of the fair market value of each such property as of a date reasonably close to the date of liquidation. Any unrealized appreciation or depreciation with respect to any property to be distributed in-kind shall be allocated pro rata among the Members (assuming that such property was sold for the appraised value) and taken into consideration in determining the balance in the Members’ Capital Accounts as of the date of final liquidation.

Section 8.04Certificate of Cancellation. When all debts, liabilities and obligations of the Company have been paid and discharged or adequate provisions have been made therefor and all of the remaining property and assets of the Company have been distributed, a certificate of cancellation as required by the Act shall be executed and filed by the Managers with the Secretary of the State of New Jersey.

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Section 8.05Effect of Filing of Certificate of Cancellation. Upon the filing of a certificate of cancellation with the Secretary of the State of Delaware, the existence of the Company shall cease, except for the purpose of suits, other proceedings and appropriate action as provided in the Act. The Managers shall have the authority to distribute any Company property discovered after dissolution, to convey real estate and to take such other action as may be necessary on behalf of and in the name of the Company.

Section 8.06Return of Contribution Nonrecourse to Other Members. Except as provided by law or as expressly provided in this Agreement, upon dissolution, each Member shall look solely to the assets of the Company for the return of his Capital Contributions. If the Company property remaining after the payment or discharge of the debts and liabilities of the Company is insufficient to return the Capital Contributions of one or more Members, such Member or Members shall have no recourse against any other Member.

ARTICLE IX

Exculpation And Indemnification

Section 9.01Liability of Members. Except as otherwise provided by the Act or this Agreement, the Members and the Managers shall not be liable, responsible or otherwise accountable for damages to the Company or to any Member or Manager for any action taken or failure to act on behalf of the Company, unless such acts or omissions were fraudulent, in bad faith, a result of wanton or willful misconduct or gross negligence by such Member or Manager.

Section 9.02Indemnification of Covered Persons. To the fullest extent permitted by law, the Company shall indemnify, defend and hold harmless each Covered Person from and against any and all debts, losses, claims, damages, costs, demands, fines, judgments, contracts (implied and expressed, written and unwritten), penalties, obligations, payments, liabilities of every type and nature (whether known or unknown, fixed or contingent), including those arising out of any lawsuit, action or proceeding (whether brought by a party to this Agreement or by any third party), together with any reasonable costs and expenses (including reasonable attorneys’ fees, out-of-pocket expenses and other reasonable costs and expenses incurred in investigating, preparing or defending any pending or threatened lawsuit, action or proceeding) incurred in connection with the foregoing (collectively “Damages”) suffered or sustained by him/her/it by reason of any act, omission or alleged act or omission by him/her/it arising out of his/her/its activities taken primarily on behalf of the Company, or at the request or with the approval of the Company, or primarily in furtherance of the interests of the Company; provided, however,that the acts, omissions or alleged acts or omissions upon which such actual or threatened actions proceedings or claims are based were performed or omitted in good faith and were not fraudulent, in bad faith, a result of wanton and willful misconduct or gross negligence, by such Covered Person. Expenses (including, reasonable attorneys’ fees, out-of-pocket expenses and other reasonable costs and expenses incurred in investigating, preparing or defending any pending or threatened lawsuit, action or proceeding) incurred by a Covered Person in defending any lawsuit, action or proceeding shall be paid by the Company in advance of the final disposition of such lawsuit, action or proceeding upon receipt of an undertaking, by or on behalf of such Covered Person, to repay such amount if it shall ultimately be determined that such Covered Person is not entitled to be indemnified by the Company as authorized by this Section 9.02.

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Section 9.03Indemnification Procedure.

(a)A party seeking indemnification from the Company pursuant to this Article IX (an “Indemnified Party”) shall give prompt notice to the Company of the assertion of any claim, including any claim brought by a third party, in respect of which indemnity may be sought hereunder (a “Claim”) and shall give the Company such information with respect thereto as the Company may reasonably request, but no failure to give such notice shall relieve the Company of any liability hereunder (except to the extent the Company has suffered actual prejudice thereby). The Company shall have the right, exercisable by written notice (the “Notice”) to the Indemnified Party (which notice shall state that the Company expressly agrees that as between the Company and the Indemnified Party, the Company shall be solely obligated to satisfy and discharge the Claim) within thirty (30) days of receipt of notice from the Indemnified Party of the commencement of or assertion of any Claim, to assume the defense of such Claim, using counsel selected by the Company; provided that the Company shall not have the right to assume the defense of a Claim (A) seeking an injunction, restraining order, declaratory relief or other nonmonetary relief against the Indemnified Party (whether or not the Company is also named as a party) or (B) if the named parties to any such action (including any impleaded parties) includes both the Indemnified Party and the Company and the Indemnified Party shall have been advised by counsel that there are one or more legal or equitable defenses available to the Indemnified Party, which are different from those available to the Company; in which case such Indemnified Party shall have the right to participate in the defense of a Claim of the type set forth in clause (A) and/or (B) above and all Damages in connection therewith shall be reimbursed by the Company. In addition, if the Company fails to give the Indemnified Party the Notice complying with the provisions stated above within the stated time period, the Indemnified Party shall have the right to assume control of the defense of the Claim and all Damages in connection therewith shall be reimbursed by the Company upon demand of the Indemnified Party. In any event, no party assuming the defense of any Claim shall have the right to compromise or settle any claim for non-monetary relief against the other party or any claim for monetary relief against another party without such party’s consent (which consent shall not be unreasonably withheld or denied) unless such monetary relief is paid in full by the settling party (without any expectation of reimbursement therefor from the consenting party).

(b)If at any time after the Company assumes the defense of a Claim any of the conditions set forth above are no longer satisfied, the Indemnified Party shall have the same rights as if clause (A) or (B) above had been satisfied and the Company never assumed the defense of such Claim.

(c)The Company or the Indemnified Party, as the case may be, shall in any event have the right to participate, at its own expense, in the defense of any Claim which the other is defending.

(d)Whether or not the Indemnifying Party chooses to defend or prosecute any Claim involving a third party, all the Parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested in connection therewith.

ARTICLE X

Representations

Section 10.01General. As of the date hereof, each of the Members makes each of the representations and warranties applicable to such Member as set forth in this Section 10.01, and such representations and warranties shall survive the execution of this Agreement.

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(a)Due Incorporation or Formation; Authorization of Agreement. If such Member is a corporation, partnership, trust, limited liability company, or other legal entity, it is duly organized or formed, validly existing, and in good standing under the laws of the jurisdiction of its incorporation or formation and has the power and authority to own property and carry on its business as owned and carried on at the date hereof and as contemplated hereby. Such Member is duly licensed or qualified to do business and in good standing in each of the jurisdictions in which the failure to be so licensed or qualified would have a material adverse effect on its ability to perform its obligations hereunder, and the execution, delivery, and performance of this Agreement has been duly authorized by all necessary corporate or partnership or company action. This Agreement constitutes the legal, valid, and binding obligation of such Member.

(b)No Conflict or Default. The execution, delivery, and performance of this Agreement and the consummation by such Member of the transactions contemplated hereby (i) will not conflict with, violate, or result in a breach of any of the terms, conditions, or provisions of any law, regulation, order, writ, injunction, decree, determination, or award of any court, any governmental department, board, agency, or instrumentality, or any arbitrator, applicable to such Member, and (ii) will not conflict with, violate, result in a breach of, or constitute a default under any of the terms, conditions, or provisions of the articles of incorporation, bylaws, partnership agreement, operating agreement, or other organizational documents of such Member, or of any material agreement or instrument to which such Member is a party or by which such Member is or may be bound or to which any of its material properties or assets are or may be subject.

(c)Governmental Authorizations. Any registration, declaration or filing with or consent, approval, license, permit or other authorization or order by, any governmental or regulatory authority that is required in connection with the valid execution, delivery, acceptance, and performance by such Member under this Agreement or the consummation by such Member of any transaction contemplated hereby has been completed, made, or obtained on or before the effective date of this Agreement.

(d)Litigation. There are no actions, suits, proceedings, or investigations pending or, to the knowledge of such Member, threatened against or affecting such Member or any of such Member’s properties, assets, or businesses in any court or before or by any governmental department, board, agency, instrumentality, or arbitrator which, if adversely determined, could (or in the case of an investigation could lead to any action, suit, or proceeding which, if adversely determined, could) reasonably be expected to materially impair such Member’s ability to perform its obligations under this Agreement.

Section 10.02Investment Representations.

(a)Each Member represents and warrants that it has acquired its Units for its own account as part of a transaction exempt from registration under the Securities Act, and applicable state law for investment purposes and not with a view to the resale or distribution thereof, and that it has had access to any and all information necessary to arrive at its decision to acquire its Units. In addition to the restrictions on transfer of Units otherwise set forth in this Agreement, no Unit may be sold, transferred, assigned or otherwise disposed of by any Member in the absence of registration under the Securities Act and applicable state law, or an opinion of counsel experienced in securities matters and satisfactory to the Members that such assignment or other disposition will not be in violation of the Securities Act or state laws. No Member shall have any right to require registration of its Units under said Securities Act or applicable state law and, in view of the nature of the Company and its business, such registration is neither contemplated nor likely. Each Member further acknowledges that it understands that the effect of the foregoing representation and warranty and restriction on assignment or other disposition is generally to require that such Units be held indefinitely unless they are registered or an exemption from registration is available.

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(b)The Units being acquired by each Member in the Company are being acquired for its own account solely for investment and not with a present view to resale or distribution thereof.

(c)Each Member (either alone or together with any advisors retained by such Member in connection with evaluating the merits and risks of prospective investments) has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of purchasing Units, and is able to bear the economic risk of its investment in the Company for an indefinite period of time, including a complete loss of capital.

(d)Each Member has been given the opportunity (i) to ask questions of, and receive answers from, the Company concerning the terms and conditions of the offering of Units and other matters pertaining to an investment in the Company, and (ii) to obtain any additional information which the Company can acquire without unreasonable effort or expense that is necessary to evaluate the merits and risks of an investment in the Company.

(e)The foregoing representations, warranties and agreements shall survive the date of each Member’s admission to the Company.

ARTICLE XI

Miscellaneous

Section 11.01Notices. All notices, approvals, consents, requests, instructions, and other communications (collectively “Communications”) required to be given in writing pursuant to this Agreement shall be validly given, made or served only when delivered personally or by registered or certified mail, return receipt requested, postage prepaid, or by a reputable overnight or same day courier, addressed to the Company or the Member at the address that is on record at the principal office of the Company, or by facsimile to the number that is on record at the principal office of the Company. Any such Communication shall be treated as given under this Agreement when the Communication is delivered to such address or received at such facsimile number. The designation of the Person to receive such Communication on behalf of a Member or the address of any such Person for the purposes of such Communication may be changed from time to time by written notice given to the Company pursuant to this Section.

Section 11.02Parties Bound; No Third Party Beneficiaries. This Agreement shall inure to the benefit of and shall be binding upon all of the Parties and their respective heirs, successors and assigns. Except for the Covered Persons, no provision of this Agreement is intended to or shall be construed to grant or confer any right to enforce this Agreement or any remedy for breach of this Agreement to or upon any Person other than the Parties hereto.

Section 11.03Applicable Law. This Agreement, including the validity hereof and the rights and obligations of the Parties hereto, and all matters arising out of or relating to this Agreement and/or any and all related documents shall be governed by, and construed and enforced in accordance with the substantive laws of the State of New Jersey, without regard to its otherwise applicable principles of conflicts of laws. The Parties hereto irrevocably consent to the exclusive jurisdiction of the state and federal courts located in the State of New Jersey in any and all actions, proceedings and disputes whether arising hereunder or under any other related agreement, instrument or document. The Parties hereto hereby irrevocably and unconditionally waive any rights they may have to a jury trial in any and all disputes whether arising hereunder or under any other agreements, notes, papers, instruments or documents heretofore or hereafter executed whether similar or dissimilar.

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Section 11.04Amendment. No change or modification to this Agreement shall be valid unless the same is in writing and signed by the holders of majority of the Ownership Percentage Interests of the Members. Notwithstanding the foregoing, no amendment to this Agreement shall either (w) amend or modify Article III, Article V, Section 7.05 or this Section 11.04 (other than nonmaterial modifications thereto), (x) reduce material rights or economic interests of a Member in the Company, (y) adversely impact in a disproportionate manner, any rights or economic interests of a Member in the Company or (z) subject a Member to personal liability for any obligations of the Company, in each case without the consent of the affected Member.

Section 11.05Entire Agreement. This Agreement together with the Purchase Agreement and Heath Employment Agreement contains the entire understanding among the Parties and supersedes any prior understandings and agreements between them respecting the subject matter hereof. There are no representations, agreements, arrangements, or understandings, oral or written, between or among the Parties hereto relating to the subject matter of this Agreement which are not fully expressed herein.

Section 11.06Severability. If any provision of this Agreement or the application thereof to any Person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected thereby but rather shall be enforced to the greatest extent permitted by law.

Section 11.07Counterparts. This Agreement may be executed in one or more counterparts with the same effect as if all of the Members had signed the same document. All counterparts shall be construed together and shall constitute one and the same instrument. The exchange of copies of this Agreement and of signature pages by facsimile or Electronic Transmission shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of the original Agreement for all purposes. Signatures of the parties transmitted by facsimile or Electronic Transmission shall be deemed to be their original signatures for all purposes.

Section 11.08Construction. Words in the singular include the plural and in the plural include the singular. The words “including,” “includes,” “included” and “include,” when used, are deemed to be followed by the words “without limitation”. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All accounting terms not defined in this Agreement shall have the meanings determined by GAAP. Unless otherwise expressly provided herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes, and all attachments thereto and instruments incorporated therein.

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Section 11.09Headings and Captions. The headings and captions contained in this Agreement are inserted only as a matter of convenience and in no way define, limit or extend the scope or intent of this Agreement or any provisions hereof.

Section 11.10No Waiver. The failure of any Member to insist upon strict performance of a covenant hereunder or of any obligation hereunder or to exercise any right or remedy hereunder, regardless of how long such failure shall continue, shall not be a waiver of such Member’s right to demand strict compliance therewith in the future unless such waiver is in writing and signed by the Member giving the same.

Section 11.11Other Business and Investment Ventures. Except as otherwise provided in this Agreement or any other agreement to which a Member is a party (which other agreement shall control), each Member may engage in other business or investment ventures, including business or investment ventures in competition with the Company, and neither the Company nor the other Members shall have any rights in such business or investment ventures.

Section 11.12Additional Instruments. Each Member agrees to execute and deliver such additional agreements, certificates, and other documents as may be necessary or appropriate to carry out the intent and purposes of this Agreement.

Section 11.13Publicity. No Member shall make any publicity, media communications, press releases or other public announcements regarding the transactions contemplated hereby or with respect to this Agreement unless such publicity, media communications, press releases or other public announcements first shall be approved, in writing, by the Managers.

Section 11.14Specific Performance. Each Member acknowledges and agrees that his respective remedies at law for a breach or threatened breach of any of the provisions of this Agreement would be inadequate and, in recognition of that fact, agrees that, in the event of a breach or threatened breach by a Member of the provisions of this Agreement, in addition to any remedies at law, the Company or any other Member shall, without posting any bond, be entitled to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy which may then be available.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written.

Class A Member::
HALLMARK FINANCIAL SERVICES, INC.
By:
	Name:
	Title:
Class B Member:
HEATH HOLDINGS, LLC
By:
	Name: Jeffrey L. Heath
	Title: Manager
Company
Heath XS, LLC
By:
	Name: Jeffrey L. Heath
	Title: Chief Executive Officer

Heath XS, LLC.

Operating Agreement

Exhibit “A”

Capital Contributions, Units and Ownership Percentage Interests

Class	Units		Ownership Percentage Interest
Class A Members
Hallmark Financial Services, Inc.		800		80	%
Class B Members
Heath Holdings, LLC		200		20	%
Total		1,000		100	%

A-1

EX-10.3

HARDSCRABBLE DATA SOLUTIONS, LLC

AMENDED AND RESTATED

OPERATING AGREEMENT

DATED AUGUST 29, 2008

TABLE OF CONTENTS

		PAGE
ARTICLE I	Defined Terms; Operation of Company	1
Section 1.01	Definitions	1
Section 1.02	Other Definitions	5
Section 1.03	Formation; Name	6
Section 1.04	Registered Agent and Office; Principal Office	6
Section 1.05	Purpose	6
Section 1.06	Term	6
Section 1.07	Title to Property	6
Section 1.08	Waiver of Partition	6
Section 1.09	Partnership Status	6
ARTICLE II	Capital Contributions; Units; Capital Accounts	7
Section 2.01	Class of Units; Capital Contributions	7
Section 2.02	Additional Capital Contributions	8
Section 2.03	Ownership Percentage Interests	8
Section 2.04	Capital Accounts	8
Section 2.05	Compliance with Regulations	9
Section 2.06	No Interest	9
Section 2.07	No Deficit Make-Up	9
ARTICLE III	Distributions	9
Section 3.01	Distributions of Net Distributable Proceeds	9
Section 3.02	Amounts Withheld	10
Section 3.03	Tax Distributions	10
ARTICLE IV	Profits and Losses	10
Section 4.01	General Allocation of Profits and Losses	10
Section 4.02	Special Allocations	11
Section 4.03	Allocation During Year	12
Section 4.04	Tax Allocations	12
Section 4.05	754 Election	12
ARTICLE V	Management of Company	13
Section 5.01	General Provisions Concerning Management	13
Section 5.02	Appointment, Term and Actions of Managers	13
Section 5.03	Resignation and Removal of Managers	13
Section 5.04	Actions Requiring Consent of Managers and Members	13
Section 5.05	Meetings of Managers and Members; Written Consents	15
Section 5.06	Fiduciary Duties	16
Section 5.07	Actions of Members	16
Section 5.08	Contracts with Affiliates	16
Section 5.09	Company Expenses	16
ARTICLE VI	Books and Records; Tax and Financial Matters	16

i

Section 6.01	Bank Accounts	16
Section 6.02	Books and Records	16
Section 6.03	Fiscal Year	17
Section 6.04	Reports	17
Section 6.05	Tax Matters	18
ARTICLE VII	Transfers, Admissions, and Withdrawals	19
Section 7.01	Transfers	19
Section 7.02	Admissions	19
Section 7.03	No Withdrawal	19
Section 7.04	Permitted Transfers	19
Section 7.05	Put/Call Option	20
Section 7.06	Right of Co-Sale	21
Section 7.07	Drag-Along Rights	22
Section 7.08	Miscellaneous Transfer Restrictions	24
ARTICLE VIII	Termination and Dissolution	25
Section 8.01	Dissolution Events	25
Section 8.02	Liquidation	25
Section 8.03	Distribution In-Kind	25
Section 8.04	Certificate of Cancellation	25
Section 8.05	Effect of Filing of Certificate of Cancellation	26
Section 8.06	Return of Contribution Nonrecourse to Other Members	26
ARTICLE IX	Exculpation And Indemnification	26
Section 9.01	Liability of Members	26
Section 9.02	Indemnification of Covered Persons	26
Section 9.03	Indemnification Procedure	27
ARTICLE X	Representations	27
Section 10.01	General	27
Section 10.02	Investment Representations	28
ARTICLE XI	Miscellaneous	29
Section 11.01	Notices	29
Section 11.02	Parties Bound; No Third Party Beneficiaries	29
Section 11.03	Applicable Law	29
Section 11.04	Amendment	30
Section 11.05	Entire Agreement	30
Section 11.06	Severability	30
Section 11.07	Counterparts	30
Section 11.08	Construction	30
Section 11.09	Headings and Captions	31
Section 11.10	No Waiver	31
Section 11.11	Other Business and Investment Ventures	31
Section 11.12	Additional Instruments	31
Section 11.13	Publicity	31
Section 11.14	Specific Performance	31

ii

Hardscrabble Data Solutions, LLC

Amended and Restated Operating Agreement

This Amended and Restated Operating Agreement of Hardscrabble Data Solutions, LLC, a New Jersey limited liability company (the “Company”), is entered into effective as of the 29^th day of August, 2008, by and among the parties whose names are set forth as Members on Exhibit “A” attached hereto (each, a “Party” and collectively, the “Parties”).

BACKGROUND:

WHEREAS, the initial Member, Jeffrey L. Heath, caused the Company to be formed by the filing of a certificate of formation with the New Jersey Department of Treasury on November 25, 2002.

WHEREAS, on August 29, 2008, Hallmark Financial Services, Inc. acquired 80% of the ownership interests and voting rights in the Company.

WHEREAS, the Members have decided to reclassify the ownership interest in the Company as Units.

WHEREAS, the Parties hereto desire to enter into this limited liability company agreement to effect the reclassification of the ownership interests in the Company and to set forth their respective rights, duties and obligations with respect thereto.

NOW, THEREFORE, in consideration of the mutual promises of the Parties hereto and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Parties hereto agree as follows:

ARTICLE I

Defined Terms; Operation of Company

Section 1.01Definitions. Within the context of this Agreement, the following terms shall have the following meanings:

“Act” means the New Jersey Limited Liability Company Act.

“Adjusted Capital Account” means a Member’s Capital Account, adjusted as follows: (a) any deficit balance in a Member’s Capital Account shall be reduced by any amount that the Member is obligated to restore to the Company, or any amount the Member is treated as obligated to restore to the Company under Regulation § 1.704-1(b)(2)(ii)(c), Regulation §1.704-2(g) and Regulation §1.704-2(i)(5); and (b) a Member’s Capital Account shall be adjusted for items specified in subsections (4), (5), and (6) of Regulation §1.704-1(b)(2)(ii)(d).

“Affiliate” means any Person that Controls, is Controlled by or under common Control with another Person.

“Agreement” means this limited liability company agreement, as the same may be amended from time to time.

“Board of Managers” means the board of managers of the Company. The Board of Managers may be referred to as the “Board of Directors”.

“Book Value” means the adjusted basis of the Company’s property for federal income tax purposes, with the adjustments provided in accordance with Section 2.04(d) of this Agreement.

“Business” means the business of providing professional underwriting management services, policy issuance and other insurance carrier functions related to excess automobile and umbrella liability insurance.

“Capital Account” means the account established and maintained for each Member in accordance with Section 2.04 of this Agreement.

“Capital Contribution” means the amount of money and the fair market value of any property contributed to the Company by a Member (net of any liabilities to which such property is subject or that are assumed by the Company in connection with such contribution).

“Certificate” means the certificate of formation for the Company, and any amendments thereto.

“Class” means Class A, Class B or any other Class of Member that may be established with respect to the Company, as the context requires.

“Class A Manager” means any Manager appointed by the Class A Members in accordance with Section 5.02 of this Agreement.

“Class A Member” means each Person designated as a Class A Member on Exhibit “A” attached hereto, and any Person who has been approved as a substitute Member of a Class A Member in accordance with this Agreement. Hallmark Financial Services, Inc. will be the initial Class A Member.

“Class A Units” means Units initially issued to a Class A Member in such Person’s capacity as a Class A Member.

“Class B Manager” means any Manager appointed by the Class B Members in accordance with Section 5.02 of this Agreement.

“Class B Member” means each Person designated as a Class B Member on Exhibit “A” attached hereto, and any Person who has been approved as a substitute Member of a Class B Member in accordance with this Agreement. Heath Holdings, LLC shall be the initial Class B Member.

“Class B Units” means Units initially issued to a Class B Member in such Person’s capacity as a Class B Member.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company” means the limited liability company formed and operated pursuant to the terms of this Agreement.

“Company Minimum Gain” has the same meaning as “partnership minimum gain” set forth in Regulation §1.704-2(b)(2) and 1.704-2(d).

“Control”means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise and “controlling” and “controlled” shall have the meanings correlative hereto.

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“Covered Person”means a Member, a Manager, any Affiliate of a Member or Manager, any officers, directors, shareholders, partners or members of a Member or Manager or their respective Affiliates.

“Depreciation” means the amount determined for each Year or other period as an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to any Company property for such Year or other period, except that, if the Book Value of any property differs from its adjusted tax basis for federal income tax purposes at the beginning of such Year or other period, Depreciation shall be an amount that bears the same ratio to such beginning Book Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Year or other period bears to such beginning adjusted tax basis; provided, however, that if the adjusted tax basis of a property at the beginning of a Year is zero, Depreciation shall be determined for such property with reference to Book Value using any reasonable method selected by the Managers.

“Electronic Transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

“Family Member” means, with respect to any natural person, such person’s spouse, lineal descendants, ancestors, siblings, nephews and nieces, parents and grandparents, and stepchildren and stepparents, including any such persons by adoptive relationships.

“Majority-In-Interest” of the Members means those Members holding more than fifty percent (50%) of the applicable Class of Units in the Company.

“Managers” means the Persons designated as members of the Board of Managers of the Company in accordance with Section 5.02 of this Agreement. Except as specifically provided herein, all actions and decisions of the Managers shall require the approval of more than fifty percent (50%) of the votes of the Managers.

“Members” means the Persons designated as members on Exhibit “A” attached to this Agreement, and any Person subsequently admitted as a member in accordance with the terms of this Agreement.

“Member Nonrecourse Debt” has the same meaning as “partner nonrecourse debt” as set forth in Regulation §1.704-2(b)(4).

“Member Nonrecourse Debt Minimum Gain” has the same meaning as “partner nonrecourse debt minimum gain” as set forth in Regulation §1.704-2(i)(3).

“Member Nonrecourse Deductions” has the same meaning as “partner nonrecourse deductions” as set forth in Regulation §1.704-2(i)(2).

“Net Distributable Proceeds” means gross cash or property received by the Company from all sources, increased by reductions in Reserves that reduced Net Distributable Proceeds for prior periods, and reduced by the portion used (i) to pay Company expenses, including principal and interest payments under any of the Company’s debt obligations, (ii) to make investments and capital expenditures, (iii) to fund Reserves and (iv) to fund the Company’s normal working capital requirements.

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“Nonrecourse Deductions” has the meaning set forth in Regulation §1.704-2(b)(1).

“Ownership Percentage Interest” means the percentage determined in accordance with Section 2.03 of this Agreement.

“Person” means any individual or any partnership, corporation, estate, trust, limited liability company or other legal entity.

“Profits” and “Losses” mean, for each Year or other period, an amount equal to the Company’s taxable income or loss for such Year or period, determined in accordance with §703(a) of the Code (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to §703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments:

(a)Any income that is exempt from federal income tax and not otherwise taken into account in computing Profits and Losses shall be added to such taxable income or loss.

(b)Any expenditures described in §705(a)(2)(B) of the Code or treated as §705(a)(2)(B) expenditures pursuant to Regulation §1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits and Losses shall be subtracted from such taxable income or loss.

(c)If the Book Value property is adjusted pursuant to Section 2.04(d)(ii) of this Agreement, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such property for purposes of computing Profits or Losses.

(d)Gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Book Value of the asset disposed of, notwithstanding that the adjusted tax basis of such asset differs from its Book Value.

(e)In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Year or other period as determined in accordance with this Agreement.

(f)To the extent adjustment to the adjusted tax basis of any Company asset pursuant to §734(b) or §743(b) of the Code is required, pursuant to Regulations §1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such section of the Regulations.

(g)Items of income, gain, loss or deduction allocated pursuant to Section 4.02 shall be excluded from Profits and Losses.

“Regulations” or “Treasury Regulations” means the income tax regulations promulgated under the Code, as such regulations may be amended from time to time.

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“Reserves” means amounts set aside (a) to pay future costs or expenses that are anticipated to exceed cash available to pay such costs or expenses when due or (b) for such other reasonable and legitimate business purposes, in each case as determined in the sole discretion of the Managers.

“Sale of the Company” means the sale of the Company to an un-Affiliated Person or group of un-Affiliated Persons pursuant to which such party or parties acquire (i) all of the issued and outstanding Units (whether by merger, consolidation or Transfer of Units) or (ii) all or substantially all of the Company’s assets determined on a consolidated basis.

“Securities Act” means the Securities Act of 1933, as amended, or any similar Federal statute then in effect, and any reference to a particular section thereof shall include a reference to the comparable section, if any, of any such similar Federal statute, and the rules and regulations promulgated thereunder.

“Subsidiary” of the Company means any other Person whose (a) securities having ordinary voting power to elect a majority of the board of directors, managers or general partners (or other persons having similar functions) or (b) other ownership interests (including partnership and limited liability company interests) ordinarily constituting a majority interest in the capital, profits, distributions or cash flow of such Person, are at the time, directly or indirectly, owned or controlled by the Company, or by one or more other Subsidiaries of the Company, or by the Company and one or more of its Subsidiaries.

“Transfer” means to sell, convey, transfer, syndicate, assign, mortgage, pledge, hypothecate or otherwise encumber or dispose of in any way, including pursuant to equitable or other distribution after divorce or separation or by operation of law or otherwise, any Unit.

“Unit” means an ownership interest in the Company, including all of the rights and obligations in connection therewith under this Agreement and the Act.

“Year” means the fiscal year of the Company as set forth in Section 6.03 of the Agreement.

Section 1.02Other Definitions. Each of the following defined terms has the meaning given such term in the Section set forth opposite such defined term:

Defined Term	Section
Annual Budget		5.04	(f)
Claim		9.03	(a)
Communications		11.01
Damages		9.02
Drag-Along Members		7.07	(a)
Drag-Along Notice		7.07	(a)
Indemnified Party		9.03	(a)
New Units		2.01	(c)(i)
Notice		9.03	(a)
Offered New Units		2.01	(b)(i)
Participating Member		7.07
Preemptive Members		2.01	(b)(i)
Preemptive Notice of Acceptance		2.01	(b)(ii)
Preemptive Offer		2.01	(b)(i)
Proportionate Percentage		2.01	(b)(i)
Preemptive Offer Closing Date		2.01	(b)(i)
Tax Distribution		3.04
Tax Matters Partner		6.05	(a)
Transferring Member		7.06	(a)

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Section 1.03Formation; Name. The Company was formed by the filing of the Certificate by an authorized Person. The Members hereby agree to operate the Company as a limited liability company under the terms of this Agreement and the Act. Whenever the terms of this Agreement conflict with the Act, the terms of this Agreement shall control, except with respect to any matters contained in the Act that cannot be modified or waived by a limited liability company agreement. The Company shall be operated under the name “Hardscrabble Data Solutions, LLC.” The Managers or an authorized Person shall file such other certificates and documents as are necessary to qualify the Company to conduct business in any jurisdiction in which the Company conducts business. A copy of the Certificate shall be provided to any Member on request.

Section 1.04Registered Agent and Office; Principal Office. The registered agent and office of the Company required under the Act shall be as designated in the Certificate, and may be changed by the Managers in accordance with the Act. The principal business office of the Company shall be located at 59 South Finley Ave., Basking Ridge, NJ 07920, or such other address as shall be designated by the Managers.

Section 1.05Purpose. The purpose and business of the Company is to engage in the Business. The Company is authorized to engage in any business or activity that may be engaged in by a limited liability company under the Act, and do any and all acts and things necessary, appropriate, incidental to, or convenient for the furtherance and accomplishment of its purposes.

Section 1.06Term. The term of the Company commenced on the date of filing of the Certificate, and the Company shall continue until the Company is terminated in accordance with Article VIII.

Section 1.07Title to Property. All real and personal property owned by the Company shall be owned by the Company as an entity and no Member shall have any ownership interest in such property in the Member’s individual name or right, and each Member’s Units shall be personal property for all purposes. The Company shall hold all of its real and personal property in the name of the Company and not in the name of any Member.

Section 1.08Waiver of Partition. No Member shall either directly or indirectly take any action to require partition or appraisement of the Company or of any of its assets or properties or cause the sale of any Company property, and notwithstanding any provisions of applicable law to the contrary, each Member hereby irrevocably waives any and all right to maintain any action for partition or to compel any sale with respect to such Member’s Units, or with respect to any assets or properties of the Company, except as expressly provided in this Agreement.

Section 1.09Partnership Status. The Members intend that the Company shall be treated as a partnership for United States federal, state and local tax purposes to the extent such treatment is available, and agree to file all tax returns and take all tax positions in a manner consistent with such treatment. The Members agree to take such actions as may be necessary to receive and maintain such treatment and refrain from taking any actions inconsistent with such treatment.

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ARTICLE II

Capital Contributions; Units; Capital Accounts

Section 2.01Class of Units; Capital Contributions. The Company shall initially issue Class A Units and Class B Units.

(a)Class A Units and Class B Units shall be issued in exchange for Capital Contributions, the amount of which shall be as set forth in the books and records of the Company.

(b)Preemptive Rights.

(i)In the event that the Company shall propose after the date hereof to issue and sell any Units or any rights to subscribe for or purchase pursuant to any option or otherwise any Units (collectively “New Units”) or enter into any contracts relating to the issuance or sale of any New Units, each of the Class A Members and Class B Members (“Preemptive Members”) shall have the right to purchase, at the price and on the terms that the Company proposes to issue and sell the New Units, a number of the additional New Units based on each such Preemptive Member’s Ownership Percentage Interest (“Proportionate Percentage”). The Company shall offer to sell to each Preemptive Member its Proportionate Percentage of such New Units (“Offered New Units”) at the price and on the terms described above, which shall be specified by the Company in a written notice delivered to each Preemptive Member (“Preemptive Offer”). The Preemptive Offer shall by its terms remain open for a period of at least fifteen (15) calendar days from the date of delivery thereof and shall specify the date (“Preemptive Offer Closing Date”) on which the Offered New Units will be sold to accepting Preemptive Members (which shall be at least thirty (30) calendar days but not more than ninety (90) calendar days from the date written notice of the Preemptive Offer is delivered). In the event that the Offered New Units consist of more than one Class of Units being offered, each Preemptive Member exercising such Preemptive Member’s preemptive rights hereunder shall be required to purchase an equal percentage of each such Class of such Offered New Units.

(ii) Each Preemptive Member shall have the right, during the period prior to the Preemptive Offer Closing Date to purchase any or all of its Proportionate Percentage of the Offered New Units at the purchase price and on the terms stated in the Preemptive Offer. Notice by any Preemptive Member of its acceptance, in whole or in part, of a Preemptive Offer shall be in writing (a “Preemptive Notice of Acceptance”) signed by such Preemptive Member and delivered to the Company prior to the Preemptive Offer Closing Date, setting forth the number of Offered New Units such Preemptive Member elects to purchase.

(iii) Each Preemptive Member shall have the additional right to offer in its Preemptive Notice of Acceptance to purchase any of the Offered New Units not accepted for purchase by any other Preemptive Members, in which event such Offered New Units not accepted by such other Preemptive Members shall be deemed to have been offered to and accepted by the Preemptive Members exercising such additional right under this paragraph Section 2.01(b)(iii), pro rata in accordance with their respective Proportionate Percentages (determined without regard to those Preemptive Members not electing to purchase their full respective Proportionate Percentages under the foregoing Section 2.01(b)(ii)) on the same terms and conditions as those specified in the Preemptive Offer, but in no event shall any such electing Preemptive Member be allocated a number of New Units in the Company in excess of the maximum number of Offered New Units such Preemptive Member has elected to purchase in its Preemptive Notice of Acceptance.

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(iv) In the case of any Preemptive Offer, if Preemptive Notices of Acceptance given by the Preemptive Members do not cover in the aggregate all of the Offered New Units, the Company may during the ninety (90) calendar day period following the Preemptive Offer Closing Date sell to any other Person or Persons all or any part of the New Units not covered by the Preemptive Notices of Acceptance, but only on the terms and conditions that are no more favorable to such Person or Persons than those set forth in the Preemptive Offer and subject to and conditioned upon such Person(s) compliance with Section 7.02 with respect to admission as a new Member.

(v) The preemptive rights established by this Section 2.01(b) shall have no application to the issuance and sale by the Company of any Units or other equity securities of the Company: (a) in connection with any distribution or recapitalization of the Company; (b) to banks, equipment lessors or other financial institutions pursuant to a debt financing or equipment leasing transaction approved by the Managers (in their sole discretion); (c) to employees, officers, consultants or other Persons performing services for the Company (if issued solely because of any such Person’s status as an employee, officer, consultant or other Person performing services for the Company and not as part of any offering of Units or equity securities) whether or not pursuant to or any equity incentive plan approved by the Managers (in their sole discretion) and (d) in connection with a merger, consolidation, acquisition or similar business combination approved by the Managers (in their sole discretion).

(vi) Notwithstanding anything to the contrary in this Agreement, the Company shall neither issue nor sell any Class B Units other than the Class B Units issued to the Class B Member on the date of this Agreement.

Section 2.02Additional Capital Contributions. No Member shall be obligated to make any additional Capital Contributions to the Company.

Section 2.03Ownership Percentage Interests. Each Member shall have the Ownership Percentage Interest in the Company determined by dividing the number of Units owned by such Member by the total number of Units issued and outstanding. The Ownership Percentage Interest of each Member shall be set forth next to such Member’s name on Exhibit “A” attached hereto.

Section 2.04Capital Accounts. A Capital Account shall be maintained and adjusted for each Member in accordance with the following provisions:

(a)Additions to Capital Accounts. To each Member’s Capital Account there shall be added the Member’s Capital Contributions and the Member’s distributive share of Profits and any items of income or gain which are allocated separately from Profits under Section 4.02.

(b)Subtractions from Capital Accounts. From each Member’s Capital Account there shall be subtracted the amount of money and the Book Value of any Company property distributed to the Member (net of any liabilities to which the property is subject or that are assumed by the Member in connection with the distribution), and the Member’s distributive share of Losses and any items of expenses or losses which are allocated separately from Losses under Section 4.02.

(c)Transfers. If any Unit is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Unit.

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(d)Book Values. For purposes of determining a Member’s Capital Contributions and Capital Account, property held by the Company shall be taken into account in accordance with the following provisions:

(i)The Book Value of any property contributed by a Member to the Company initially shall be the gross fair market value of the property.

(ii)The Book Value of all Company property shall be adjusted to equal the respective gross fair market values of the property as of the following times, unless the Managers determine that such adjustment is not necessary to reflect the economic arrangement among the Members: (A) the acquisition of an additional Unit by any new or existing Member in exchange for services or more than a deminimis Capital Contribution; (B) the distribution by the Company to a Member of more than a deminimis amount of cash or property as consideration for a Unit; or (C) the liquidation of the Company within the meaning of Regulation §1.704-1(b)(2)(ii)(g). If any property is distributed to a Member, the Book Value of such property shall be adjusted to equal the gross fair market value of such property immediately before such distribution.

(iii)The Book Values of Company property shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such property pursuant to §734(b) or §743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulation §1.704-1(b)(2)(iv)(m).

(iv)The Book Value of Company property shall be adjusted by the Depreciation taken into account with respect to such property.

Section 2.05Compliance with Regulations. The foregoing provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with §704(b) of the Code and the Regulations issued thereunder, and shall be interpreted and applied in a manner consistent with such Regulations. If the Managers determine that it is appropriate to modify the manner in which the Capital Accounts are computed or any items are allocated under Article 4 in order to comply with such Regulations, the Managers may make such modification, provided that such modification shall not have a material effect on the amounts distributable to any Member.

Section 2.06No Interest. No interest shall be paid on any Capital Contributions or Capital Account balance of any Member.

Section 2.07No Deficit Make-Up. No Member shall be obligated to the Company or to any other Member solely because of a deficit balance in such Member’s Capital Account.

ARTICLE III

Distributions

Section 3.01Distributions of Net Distributable Proceeds. Net Distributable Proceeds shall be distributed to the Members at such times, but in no event less than at least annually (which annual distributions can be deferred at the option of the Board of Managers until a date no later than 20 business days following finalization of the annual audit of the consolidated financial statements of the Class A Member), and in such amounts as shall be determined by the Managers. Notwithstanding the preceding sentence, Net Distributable Proceeds shall be distributed to the Class B Member upon the occurrence of the Option Closing as set forth in Section 7.05 of this Agreement. Net Distributable Proceeds shall be distributed among the Members in proportion to their Ownership Percentage Interests. The foregoing shall be subject to the provisions of Section 3.04.

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Section 3.02Amounts Withheld. The Company is authorized to withhold from distributions or with respect to allocations and pay over to any federal, state, local or foreign government any amounts required to be withheld with respect to any Member pursuant to any provisions of federal, state, local or foreign law. All amounts so withheld shall be treated as amounts distributed to the Members pursuant to Section 3.01 of this Agreement, depending upon the source of the income that gives rise to the withholding obligation. To the extent any amount withheld with respect to a Member pursuant to this Section 3.02 for any Year exceeds the amount distributable to such Member pursuant to Section 3.01 for such Year, such Member shall repay such excess to the Company within ten (10) days after such Member receives written notice from the Company of the amount of such excess.

Section 3.03Tax Distributions.The Managers shall cause the Company to distribute to each Member for each Year to the extent cash is available for distribution an amount of cash which equals (A)(i) the amount of net taxable income allocable to the Member in respect of such Year multiplied by (ii) the combined effective maximum individual federal, state and local income tax rate attributable to such taxable income (determined as if all Members were residents of New Jersey and taking into account the deductibility of state and local income taxes for federal income tax purposes), reduced by (B) any amounts withheld by the Company for federal, state and local income taxes with respect to the Member for such year (the “Tax Distribution”). Tax Distributions shall be made no later than ninety (90) days after the end of the Year, and shall be made quarterly during the Year based upon the Managers’ estimates of the net taxable income for the Year. Tax Distributions shall be treated as an advance against and correspondingly reduce amounts otherwise distributable to the Member (other than amounts to be distributed as a return of capital) and not as additional distributions.

Section 3.04Indemnification Set Off. Notwithstanding anything to the contrary, if Jeffrey L. Heath fails to make all or a portion of an applicable indemnification payment to the Class A Member (or the election of the Class A Member, the Company) under the Purchase Agreement, the Managers shall be required, at the election of the Class A Member, to pay any Net Distributable Proceeds otherwise distributable to the Class B Member under Section 3.01 directly to the Class A Member (or to retain such amounts in the Company) in the amount of the defaulted amount until such time as such defaulted amount is fully satisfied.

ARTICLE IV

Profits and Losses

Section 4.01General Allocation of Profits and Losses. After taking into account any special allocations pursuant to Section 4.02 and subject to any limitations contained therein, Profits, Losses and, to the extent necessary, individual items of income, gain, loss or deduction, of the Company shall be allocated among the Members in a manner such that the Capital Account of each Member, immediately after making such allocation, is, as nearly as possible, equal (proportionately) to the distributions that would be made to such Member if the Company were dissolved, its affairs wound up and its assets sold for cash equal to their Book Value, all Company liabilities were satisfied (limited with respect to each nonrecourse liability to the Book Value of the assets securing such liability), and the net assets of the Company were distributed in accordance with Article III to the Members immediately after making such allocation.

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Section 4.02Special Allocations.

(a)Limitation on Allocation of Items of Loss or Deduction. No items of loss or deduction may be allocated to any Member to the extent such allocation would result in an Adjusted Capital Account deficit balance for such Member. Any items of loss or deduction that are prohibited to be allocated to a Member under the preceding sentence shall be reallocated among the other Members to whom such limitation does not apply in accordance with their relative Ownership Percentage Interests. If, at the end of a Year, any Member has an Adjusted Capital Account deficit balance, such Member shall be allocated items of gross income and gain to the extent necessary to eliminate such deficit balance.

(b)Nonrecourse Deductions and Company Minimum Gain Chargeback. Nonrecourse Deductions shall be allocated among the Members in accordance with their Ownership Percentage Interests. If there is a net decrease in Company Minimum Gain for any Year, each Member shall be allocated the next available items of income and gain for such Year (and for subsequent Years if necessary) equal to such Member’s share of the net decrease in Company Minimum Gain as determined in accordance with Regulation §1.704-2(g) and the “minimum gain chargeback” requirement of Regulation §1.704-2(f).

(c)Member Nonrecourse Deductions and Chargeback. Member Nonrecourse Deductions for any Year shall be allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable as determined under Regulation §1.704-2(i). If there is a net decrease in Member Nonrecourse Debt Minimum Gain in any Year, each Member shall be allocated items of income and gain for such Year (and for subsequent Years if necessary) equal to such Member’s share of the net decrease in Member Nonrecourse Debt Minimum Gain in accordance with Regulation §1.704-2(i)(4).

(d)Qualified Income Offset. Any Member who unexpectedly receives, with respect to the Company, an adjustment, allocation, or distribution of any item described in subsections (4), (5), or (6) of Regulation §1.704-1(b)(2)(ii)(d) shall be allocated items of income and gain in an amount sufficient to eliminate such Member’s Adjusted Capital Account deficit balance arising thereby as quickly as possible, in accordance with the “qualified income offset” rule of Regulation §1.704-1(b)(2)(ii)(d)(3).

(e)Gross Income Allocation. In the event any Member has a deficit Capital Account at the end of any Year which is in excess of the sum of (i) the amount such Member is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations, each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 4.02(e) shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Article IV have been made as if Section 4.02(d) hereof and this Section 4.02(e) were not in the Agreement.

(f)Curative Allocations. The special allocations set forth in this Section 4.02 are intended to comply with the requirements of the Regulations under §704(b) of the Code. It is the intent of the Members that all such special allocations shall be offset with other special allocations. Accordingly, to the extent consistent with the Regulations, to the extent that any such special allocations are made to a Member, subsequent offsetting special allocations shall be made to such Member such that the net amount of all items of income, gain, loss and deduction allocated to each Member is the same that would have been allocated to each Member if no special allocations had been made to any Member, taking into account future special allocations that, although not yet made, are likely to offset previous special allocations.

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Section 4.03Allocation During Year. For purposes of determining Profits, Losses, or any other items allocable to any period ending on a date other than the last day of the Company’s Year, Profits, Losses, and any such other items shall be allocated among such periods using such method permitted by §706 of the Code and the Regulations thereunder as shall be chosen by the Managers.

Section 4.04Tax Allocations.

(a)General Allocation. Except as otherwise provided in this Section 4.04, items of income, gain, loss and deduction as determined for federal income tax purposes shall be allocated in the same manner as the related items of Profits, Losses, or specially allocated items. Tax credits shall be allocated in accordance with Regulation §1.704-1(b)(4)(ii).

(b)Contributed Property. In accordance with §704(c) of the Code and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its Book Value.

(c)Revaluations. If the Book Value of any property is adjusted pursuant to Section 2.04(d)(ii) of this Agreement, income, gain, loss and deduction with respect to such property shall be allocated among the Members so as to take account of any variation between the adjusted basis of such property for federal income tax purposes and its Book Value in the same manner as under §704(c) of the Code and the Regulations thereunder.

(d)No Effect on Capital Accounts. Allocations pursuant to this Section 4.04 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Member’s Capital Account or share of Profits, Losses, or other items or distributions pursuant to any provision of this Agreement.

(e)Allocation Method. The method for making allocations pursuant to Section 4.04(b) and Section 4.04(c) shall be such method permitted by Regulation Section 1.704-3 as shall be selected by the Managers. The provisions of this Section 4.04(e) (and other related provision in this Agreement) pertaining to the allocation of items of Company income, gain, loss, deductions, and credits shall be interpreted consistently with the Treasury Regulations, and to the extent unintentionally inconsistent with such Treasury Regulations, shall be deemed to be modified to the extent necessary to make such provisions consistent with the Treasury Regulations.

Section 4.05754 Election.The Managers (based on the vote of more than fifty percent (50%) of the Managers) shall have the sole discretion to determine whether the Company should make an election under Section 754 of the Code.

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ARTICLE V

Management of Company

Section 5.01General Provisions Concerning Management. The powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, the Managers. No Member (other than in such Person’s capacity as a Manager) has the authority or power to act for or on behalf of the Company, to do any act that would be binding on the Company or to incur any expenditures on behalf of the Company.

Section 5.02Appointment, Term and Actions of Managers. The Company shall have a Board of Managers consisting of three (3) Managers, two (2) of whom will be appointed by the affirmative vote of a Majority-in-Interest of the Class A Members (the “Class A Managers”) and one (1) of whom will be appointed by the affirmative vote of a Majority-in-Interest of the Class B Members (the “Class B Managers”). The initial Class A Managers shall be Mark J. Morrison and Jeffrey R. Passmore. The initial Class B Manager shall be Jeffrey L. Heath. The Board of Managers will have three (3) votes. Each Manager shall have one (1) vote. The Class A Member may expand the Board of Managers to a size not to exceed five (5) Managers, and all such additional seats shall be designated solely by the Class A Member.

Section 5.03Resignation and Removal of Managers. Each Manager shall serve until death, resignation, or removal in accordance with this Agreement. A Manager may resign at any time upon giving written notice of resignation to the Members and all other Managers. A Class A Manager may be removed at any time (with or without cause) by the affirmative vote of a Majority-in-Interest of the Class A Members. A Class B Manager may be removed at any time (with or without cause) by the affirmative vote of a Majority-in-Interest of the Class B Members. If a Manager ceases to serve as a Manager at any time for any reason, the resulting vacancy shall be filled by a Manager appointed in accordance with Section 5.02 (i.e., the Class A Members shall designate the individual(s) to fill any vacancy resulting from the removal or other cessation of service of a Manager originally appointed by the Class A Members).

Section 5.04Actions Requiring Consent of Managers and Members. All actions of the Managers, including but not limited to the matters set forth in this Section 5.04 shall require the consent of more than fifty percent (50%) of the votes of the Managers; provided, however that the actions set forth in Section 5.04(b) shall require the unanimous consent of the Members. Except as required by applicable law, or as otherwise set forth herein, the Managers may delegate the day-to-day operations of the Company to the President (or other officers of the Company, as properly designated by the Managers and/or the President at the direction of the Managers), who will be appointed by the Managers. To the extent any such agreement is in effect, the President’s duties and terms of employment will be as set forth in such employment agreement between the Company and/or its Subsidiaries and the President..

(a)The actions requiring the approval of the Managers are:

(i)any act other than in the ordinary course of business of the Company or any of its Subsidiaries material to the financial condition or operation of the Company or any of its Subsidiaries taken as a whole;

(ii)borrowing money in the name of the Company or any Subsidiary or guaranteeing obligations of any Person or utilizing assets of the Company or any Subsidiary as security for any loans or other obligations whether such loans or obligations are those of the Company or of any other Person;

(iii)the review and approval of an annual business plan to be submitted by the President within forty-five (45) days prior to the end of each Year (and any updates to that plan during the year as required), which shall include, but not be limited to, an approval of an operations budget, capital expenditures, debt financing requirements and capital lease arrangements (the “Annual Budget”);

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(iv)the approval of any action that may result in a material deviation from the Annual Budget;

(v)the purchase, lease or other acquisition, use or benefit of: assets, properties, rights or privileges, whether any of the foregoing be real or personal, tangible or intangible, of any kind or description, whether income-producing or not if such purchase, lease or other acquisition involves a transaction or series of transactions valued in excess of $50,000, and except for transactions accounted for in the Annual Budget;

(vi)declaration or payment of any distribution to any Member, except as otherwise required by the terms of this Agreement;

(vii)entering into contracts or other agreements by the Company or any of its Subsidiaries with any Manager, Member or any Person related to or Affiliated with any Manager or Member;

(viii)commencement of any litigation or filing of any counterclaim in respect of then existing litigation, other than for the collection of accounts receivable;

(ix)approval of the creation of any Subsidiaries and the adoption of governance agreements or arrangements in respect thereof, or any other investment in, or the acquisition of stocks or bonds of, other Persons or any equity interest in any other Person;

(x)loaning money to any Person;

(xi)assuming on behalf of the Company or any of its Subsidiaries any binding obligations with respect to a collective bargaining agreement;

(xii)adoption, approval or termination of any employee benefit plan (as defined in the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder) or material welfare plans for any employees of the Company or any of its Subsidiaries, including retirement plans (including any plans relating to post retirement medical benefits other than as required by law), severance plans, deferred compensation plans and health plans;

(xiii)Actions (whether or not permitted to be taken without the consent of the Managers pursuant to any exception above) determined by the Chief Executive Officer of the Class A Member, or by the Managers of the Company, to require the consent of the Managers.

(b)The actions requiring unanimous consent of the Members are:

(i)the authorization or approval of any voluntary declaration of bankruptcy of the Company or any of its Subsidiaries;

(ii)the divestiture on behalf of the Company or any of its Subsidiaries of any business, operation or entity (whether by asset purchase, stock purchase, merger or otherwise) material to the Company and its Subsidiaries collectively; including without limitation the sale to any third party of certain equity securities in the Company’s Subsidiaries, which for the avoidance of doubt shall not be subject to the provisions of Section 2.01(c) of the Agreement;

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(iii)the sale, pledge, mortgage, lease, exchange, or grant options for the purchase, lease or exchange, of any of the Company or any of its Subsidiaries’ assets material to the business or operations of the Company and its Subsidiaries, other than in the ordinary course of business; provided that for purposes of clause (ii) and (iii), “material” shall mean assets, business or operations representing more than 50% of the Pre-Tax Income of the Company, Heath XS, LLC and their Subsidiaries;

(iv)causing the Company to purchase any Member’s Units, other than in respect of any purchase pursuant to Article VII;

(v)approval of any Additional Capital Contributions;

(vi)unless such change does not materially adversely affect the Class B Member, approval of any tax elections of the Company or any of its Subsidiaries, including any election that would result in the Company being taxed as other than a “partnership” for federal income tax purposes, including electing to be taxed as other than a “partnership” by filing Internal Revenue Service Form 8832, “Entity Classification Election”;

(vii)approving or adopting any revocation of the Certificate of Formation or, unless such change does not adversely affect the rights of the Class B Member or conflict with any provision herein, approving or adopting any amendment or restatement of the Certificate of Formation of the Company;

(viii)the authorization or approval of any plan of dissolution of the Company or any of its Subsidiaries, any liquidating distribution of the Company or any of its Subsidiaries’ assets or other action relating to the dissolution or liquidation of the Company or any of its Subsidiaries;

(ix)changing the location of the Company’s principal business office, unless such change does not require the Class B Manager’s principal place of business to relocate more than ten miles from Basking Ridge, New Jersey;

(x)in the event the Class A Member or any Affiliate of the Class A Member becomes the carrier with respect to any business, decreasing the commission on gross written premium, less cancellations and returned premiums according to the Company's books and records below the greater of (A) twenty-three percent (23%) written on a non-admitted basis and twenty-two and one-half percent (22.5%) written on an admitted basis and (B) the commission rate in effect with any carrier at the time the Class A Member or any Affiliate of the Class A Member becomes the carrier.

Section 5.05Meetings of Managers and Members; Written Consents. Meetings of the Managers may be called by any Manager upon 24 hours advance notice by phone or email or other reasonable means. Meetings of the Members may be called by any Manager or at the request of Members holding at least fifty percent (50%) of the Class A Units or Class B Units upon 24 hours advance notice by phone or email or other reasonable means. Any Manager or Member may participate in a meeting by means of conference telephone or similar communications equipment by means of which all Persons participating in the meeting can hear and speak to each other at the same time or in sequence, and participation in a meeting pursuant to this provision shall constitute presence at the meeting. Any action required or permitted to be taken at a meeting may be taken without a meeting if a consent, in writing, setting forth the action so taken shall be signed by the Managers or Members required to approve such action. A quorum of the Board of Managers shall be 2 Managers. Both Members shall be present at a meeting of the Members. Approval of matters at any meeting of the Members shall requires the consent of more than fifty percent (50%) of the outstanding Units, subject to any matters that require unanimous consent of the Members pursuant to Section 5.04(b).

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Section 5.06Fiduciary Duties. Except as expressly provided in this Agreement, notwithstanding any other provision of law or equity, each Member and Manager shall, to the maximum extent permitted by the Act, owe no duties (including no fiduciary duties) to the Company or any other Person bound by this Agreement. The provisions of this Agreement, to the extent that they restrict or eliminate the duties and liabilities of a Covered Person to the Company or its Members otherwise existing at law or in equity, are agreed by the Parties hereto to replace such other duties and liabilities of such Covered Person.

Section 5.07Actions of Members. The Members hereby agree and acknowledge that any actions which the Members are permitted to take pursuant to the terms of the Act shall be superseded by the terms of this Agreement to the extent that the Agreement provides the Managers the right to take all such actions without the Members’ approval.

Section 5.08Contracts with Affiliates. The Company may enter into contracts and agreements for property or services in the ordinary course of business with any Manager, Member or any Person related to or Affiliated with any Manager or Member, provided such contracts and agreements are on terms and conditions which are on arms length terms or otherwise approved by a majority of the disinterested Managers. If the Board of Managers determines that the Company requires additional funding, the Class A Member may make loans to the Company on prevailing market terms as determined by the Board of Managers.

Section 5.09Company Expenses. Each Manager or Member shall be reimbursed for all expenses incurred by the Manager or Member for or on behalf of the Company consistent with the corporate policies of the Class A Member, including reasonable travel expenses of any Member or Manager to attend meetings at the Company’s principal business office or other locations as determined by the Managers.

ARTICLE VI

Books and Records; Tax and Financial Matters

Section 6.01Bank Accounts. All funds of the Company shall be deposited in a bank account or accounts opened in the Company’s name. The Managers shall determine the institution or institutions at which the accounts will be opened and maintained, the types of accounts, and the Persons who will have authority with respect to the accounts and the funds therein.

Section 6.02Books and Records. During the term of existence of the Company, the Managers shall keep or cause to be kept complete and accurate books and records of the Company and supporting documentation of the transactions with respect to the conduct of the Company’sbusiness. The books and records shall be maintained in accordance with GAAP and shall be available at the Company’s principal office for examination by any Member or the Member’s duly authorized representative for any purpose reasonably related to such Member’s Units in the Company at any and all reasonable times during normal business hours. The Company will maintain the following records, among others, at its principal office:

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(a)A current list of the full name and last known business address of each Member;

(b)A copy of the Certificate of Formation and all amendments thereto together with executed copies of any powers of attorney pursuant to which such Certificate of Formation has been executed;

(c)Copies of the Company’s federal, foreign, state and local income tax returns and reports, if any, for the three most recent Years;

(d)Copies of this Agreement including all amendments thereto;

(e)Any financial statements of the Company for the seven most recent fiscal Years of the Company or such longer period as the Managers may determine;

(f)A writing or other data compilation from which information can be obtained through retrieval devices into reasonable usable form setting forth the following:

(i)the amount of cash and a description and statement of the agreed value of the other property or services contributed by each Member and which each Member has agreed to contribute;

(ii)the times at which or events on the happening of which any Additional Capital Contributions agreed to be made by any Member are to be made; and

(iii)A record of the Capital Account of each Member.

Section 6.03Fiscal Year. The fiscal year of the Company shall be the twelve months ending December 31. A fiscal quarter shall be a period of three months ending on the last day of the fiscal year and on the last day of March, June and September, respectively.

Section 6.04Reports. The Managers shall be responsible for the preparation of financial reports of the Company and the coordination of financial matters of the Company with the Company’s accountants. The Managers shall have the right to select the Company’s independent certified public accountants (which may be the same as the independent certified public accountants of the Class A Member with respect to its annual audit) .

(a)The Company shall make available to the Class A Members and Class B Members within thirty (30) days of the end of each quarter (other than the last month of the Company’s fiscal year) the following financial statements:

(i)a balance sheet of the Company as of the last day of the month;

(ii)a statement of income or loss of the Company for such month and for the entire fiscal year through the end of the month; and

(iii)a statement of the Company’s cash flow for such month and for the entire fiscal year through the end of the month.

(b)The quarterly financial statements provided for above need not be reviewed or audited by Company’s independent certified public accountants, but shall be prepared in accordance with GAAP, applied on a consistent basis.

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(c)As soon as practicable after the close of each fiscal Year of the Company, the Company shall cause to be prepared a financial report of the Company for such fiscal Year, including a balance sheet as of the last day of such fiscal Year, a statement of income and loss of the Company for the fiscal Year and a statement of the Company’s cash flow for the fiscal Year, and a schedule of distributions to the Members and allocations of Profit or Loss during the fiscal Year. Such balance sheet, statement of income and loss and statement of cash flow shall be prepared in accordance with GAAP applied on a consistent basis and shall be audited in accordance with generally accepted auditing standards by the Company’s firm of independent public accountants and the cost thereof shall be borne by the Company. Such annual financial reports of the Company shall be promptly (but in no event later than one hundred twenty (120) days after the end of the Year) transmitted to each Class A Member and Class B Member.

Section 6.05Tax Matters.

(a)The Member holding a majority of Class A Unitts shall serve as the tax matters partner (the “Tax Matters Partner”) within the meaning of Section 6231 of the Code. The Tax Matters Partner shall represent the Company on behalf of the Members in connection with all administrative and judicial proceedings with respect to Company affairs involving or resulting from examinations by any and all federal, state or other tax authorities (including, but not limited to, examinations by the Internal Revenue Service), and may expend Company funds for reasonable professional services and costs in connection therewith as it deems advisable and necessary; provided, however,that, except as otherwise provided in this Agreement or by law, the Tax Matters Partner does not assume any obligations or responsibilities with respect to the foregoing. Any Member other than the Tax Matters Partner who wishes to participate in the administrative proceedings at the partnership level may do so, and any legal, accounting or other expenses incurred by such Member in connection therewith shall be borne by the Company. The Tax Matters Partner shall promptly take such action as may be necessary to cause each Member to become a “notice partner” within the meaning of Section 6231(a)(8) of the Code. The Tax Matters Partner shall furnish to each Member a copy of all notices or other written communications received by the Tax Matters Partner from the Internal Revenue Service (except such notices or communications as are sent directly to the Member by the Internal Revenue Service). The Tax Matters Partner shall give to Members prompt written notice upon receipt of advice that the Internal Revenue Service or any other taxing authority intends to examine any Company tax return or the books andrecords of the Company. The Company and the Members hereby severally agree to indemnify and hold harmless the Tax Matters Partner from and against any claim, loss, expense, liability, action or damage resulting from its acting or failing to take any action in its capacity as the Tax Matters Partner, provided that any such action or failure to act was not fraudulent, in bad faith, a result of wanton or willful misconduct or gross negligence by such Member.

(b)Each of the Members, on the one hand, and the Company, on the other hand, agree to furnish or cause to be furnished to each other, as promptly as practicable such information and assistance as is reasonably necessary for the preparation and filing of any return, claim for refund or other required or optional filings relating to tax matters, for the preparation for and proof of facts during any tax audit, for the preparation for any tax protest, for the prosecution or defense of any suit or other proceeding relating to tax matters and for the answer to any governmental or regulatory inquiry relating to tax matters.

(c)Each tax return and any other statement to be filed by the Company with the Internal Revenue Service or any other taxing authority shall be prepared by the accountants (including outside accountants) for the Company, whose expenses shall be borne by the Company. Draft copies of each such tax return and statement shall be distributed to the Members not later than thirty (30) days before the date on which the same is required to be filed, including any extensions of such filing date.

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(d)The provisions of this Section 6.05 shall be subject to the covenants set forth in Section 7.7 of the Purchase Agreement

ARTICLE VII

Transfers, Admissions, and Withdrawals

Section 7.01Transfers. Except as provided in Section 7.04 or Section 7.05 hereof, no Member shall, directly or indirectly, Transfer all or any portion of his Units including any rights to receive distributions or other similar or dissimilar rights or interest, without the consent of the Managers and other than in accordance with the terms and conditions of this Article VII. A Transfer or issuance of Equity Securities of a Member, or an Indirect Owner of a Member, that is an entity shall be deemed to be an indirect Transfer of Units; provided that, notwithstanding anything to the contrary, the Transfer or issuance of Equity Securities of the Class A Member or of any owner or shareholder of the Class A Member shall not constitute a Transfer of Units. Any such attempted prohibited Transfer not permitted hereunder shall be null and void ab initio and the Company shall not register or effect such Transfer and the Member making the purported Transfer shall indemnify and hold the Company and the other Members harmless from any against any federal, state or local income taxes, or transfer taxes arising as a result of, or caused directly or indirectly by, such purported Transfer.In the event that any prohibited involuntary transfer of title or beneficial ownership of any Units shall occur by court order, Law or otherwise than a voluntary decision of a Member (an “Involuntary Transfer”) that purports to override the provisions of this Section 7.01, the person or entity to whom any such Units have been Involuntarily Transferred shall be subject to the obligations set forth in this Article VII.

Section 7.02Admissions.

(a)Subject to Section 7.02(b), no transferee of a Unit shall be admitted as a Member of the Company without the written consent of the Managers.

(b)A transferee will only be admitted as a Member if the transferee agrees to be legally bound by this Agreement as a Member and executes and delivers to the Company such documents and instruments as are necessary or appropriate in connection with the transferee becoming a Member.

(c)Any transferee of a Unit who is not admitted as a Member shall have the rights of an assignee with respect to distributions and Profits, Losses, and other allocations attributable to the transferred Unit, but shall have no rights as a Member under this Agreement or the Act. Notwithstanding the foregoing, the Units of the assignee shall be subject to the restrictions contained in this Agreement applicable to Units held by a Member.

Section 7.03No Withdrawal. No Member shall have the right to withdraw from the Company prior to the dissolution and winding up of the Company.

Section 7.04Permitted Transfers. Notwithstanding any other provision of this Agreement, any Member may transfer all or part of such Member’s Units to (i) such Member’s Family Members or trusts for the benefit of such Member’s Family Members or (ii) any limited liability company, partnership or corporation Controlled by the Member, without the consent of the Managers; provided that, until such time as the Hardscrabble Put-Call Option expires, the foregoing provisions of this Section 7.04 shall not apply. Any transferee of Units that is a permitted transferee under this Section 7.04 may, subject to Section 7.02, become a substituted Member. Further, the Parties hereto understand and agree that the permitted transfer provisions of this Section 7.04 shall not be effective or valid to accomplish an indirect transfer of legal or beneficial ownership intended to be subject to the restrictions of this Article VII.

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Section 7.05Put/Call Option.

(a)At any time on or following the earlier of (i) the fourth anniversary of the date here of, (ii) the termination by the Heath XS, LLC of the employment of Jeffrey L. Heath with Heath XS, LLC or (ii) a Hallmark Change of Control, and until the tenth anniversary of the Closing (the “Option Expiration Date”), (a) the Class A Member shall have the right (the “Call Right”) to purchase from the Class B Member all, but not less than all, equity interests in the Company held by the Class B Member (the “Remaining Heath Group Securities”) and (b) the Class B Member shall have the right (the “Put Right”) to sell to the Class A Member all, but not less than all, of the Remaining Heath Group Securities, in each case ((a) and (b)) for a price equal to the Adjusted Option Price (the foregoing, the “Hardscrabble Put-Call Option”). If the Class A Member elects to exercise the Call Right, the Class B Member shall sell to the Class A Member all of the Remaining Heath Group Securities at the Adjusted Option Price. If the Class B Member elects to exercise the Put Right, the Class A Member shall purchase from the Class B Member all of the Remaining Heath Group Securities at the Adjusted Option Price. Notwithstanding the foregoing, the Put Right shall not apply if the employment of Jeffrey L. Heath with Heath XS, LLC is terminated by the Company with cause. Further notwithstanding the foregoing, the Call Right shall not apply if the employment of Jeffrey L. Heath with Heath XS, LLC is terminated by the Company without cause.

A Party shall make its respective election hereunder to purchase or sell, as the case may be, Remaining Heath Group Securities hereunder by written notice (the “Option Notice”) to other Party referencing this Section 7.05. The closing of the purchase and sale of Remaining Heath Group Securities hereunder (an “Option Closing”) shall take place at the Class A Member’s offices not later than 30 calendar days following delivery to the Class B Member of the Option Notice, or at such other place and such other time as the Parties may mutually agree; provided that, the Option Closing shall be delayed to a later date in the Class A Member’s discretion if the Class A Member’s counsel reasonably determines that any third party or regulatory consents are required or advisable in connection with the Option Closing. At an Option Closing, the applicable Parties shall execute and deliver such instruments as shall be appropriate to transfer Remaining Heath Group Securities to the Class A Member (it being understood that the Class B Member shall make customary representations and warranties with respect to such transfer documents and shall make customary ownership and title representations with respect to the Remaining Heath Group Securities), and the Class A Member shall deliver to the Class B Member by wire transfer of immediately available funds to the bank account set forth on a notice given to the Class A Member by the Class B Member at least three (3) business days prior to the Option Closing. The parties agree to cooperate to obtain, and shall bear expenses pro rata for their relative ownership (on a pre Option Closing basis) of the Companies with respect to obtaining, any consents deemed required or advisable to obtain in connection with an Option Closing. Prior to or upon the occurrence of the Option Closing, the Managers shall cause the Company to distribute any and all accrued but unpaid Net Distributable Proceeds due to the Class B Member. The Hardscrabble Put-Call Option pursuant to this Agreement shall be exercised only in conjunction with the Heath Put-Call Option pursuant to the Heath XS, LLC Operating Agreement dated of even date herewith.

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(b)For purposes of Section 7.05(a):

“Adjusted Option Price” shall mean the product of (x) nine (9) times (y) the average of Pre-Tax Income for the most recent trailing twelve (12) quarters ending prior to the date of the Option Closing times (z) the Class B Member’s Ownership Percentage Interest of the Company. In the event Jeffrey L. Heath’s employment with the Company is terminated after the first month of any quarter, such quarter shall be included in the twelve quarters preceding the date of the Option Closing for the purpose of calculating the Adjusted Option Price. In the event Jeffrey L. Heath’s employment is terminated prior to the date which is twelve (12) quarters from the Closing Date, the period of time set forth in (y) above shall be the most recent trailing twelve (12) months ending prior to the date of the Option Closing.

“Pre-Tax Income” shall mean: (i) the total amount of gross written premium written on an admitted basis multiplied by 22.5% (less cancellations and returned premiums), plus (ii) the total amount of gross written premium written on a non-admitted basis multiplied by 23.0% (less cancellations and returned premiums), plus (iii) investment income, plus (iv) fee income, less (v) operating expenses (including acquisition costs and other reasonable, mutually agreed allocations of business and corporate expenses, including corporate audit expenses).

“Hallmark Change in Control”shall mean the consummation of a transaction following which an entity or person (other than Newcastle Partners, L.P., Newcastle Capital Management, L.P., Mark Schwarz or any affiliate of any of the foregoing (the “Newcastle Parties”)) shall alone, or together with its affiliates (other than any Newcastle Parties), beneficially own more than fifty percent (50%) of the outstanding common stock of the Class A Member.

Section 7.06Right of Co-Sale.

(a)Subject to the provisions of this Article VII, if during the term of this Agreement a Member desires to transfer, directly or indirectly any such Member’s Units (the “Transferring Member”) to a third-party purchaser in a transaction or series of related transactions involving the Transfer of Units representing in the aggregate at least twenty-five percent (25%) of the outstanding Units at such time, the Transferring Member(s) shall first give not less than twenty (20) calendar days prior written notice to each of the other Members (the “Co-Sale Members”). Such notice (the “Co-Sale Notice”) shall set forth the terms and conditions of such proposed Transfer, including the name of the proposed transferee, the number of Co-Sale Units, the purchase price per Unit proposed to be paid therefor and the payment terms and type of transfer to be effectuated. Nothing set forth herein shall be construed to override the restrictions on Transfer set forth in Section 7.01 and 7.04.

(b)Within ten (10) calendar days of delivery of the Co-Sale Notice by the Transferring Member(s), each Co-Sale Member shall, by written notice to the Transferring Member(s), have the opportunity and right to sell to the proposed transferee in such proposed Transfer (upon the same terms and conditions as the Transferring Member(s), subject to Section 7.06(c)) up to that number of Units owned by such Co-Sale Member as shall equal the product of (x) a fraction, the numerator of which is the number of Co-Sale Units and the denominator of which is the aggregate number of Units owned of record by the Transferring Members as of the date of the Co-Sale Notice, multiplied by (y) the number of Units owned of record by such Co-Sale Member as of the date of the Co-Sale Notice. Such written notice shall state the aggregate number of Units that such Co-Sale Member proposes to include in such Transfer.

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(c)If any Co-Sale Member exercises its rights pursuant to this Section 7.06, then the Transferring Member(s) will attempt to obtain the same agreements and commitments from the proposed transferee for the benefit of any such Co-Sale Member as such Transferring Member(s) obtained from the proposed transferee in respect of its Transfer. To the extent the Transferring Member(s) cannot obtain such agreements and commitments from such proposed transferee, the Transferring Member(s) and the Co-Sale Members shall reduce the number of Units being sold by such Transferring Member(s) and Co-Sale Members such that each Transferring Member and Co-Sale Member sells a number of Units as is determined by multiplying (x) a fraction, the numerator of which is equal to the number of Units such Transferring Member or Co-Sale Member, as the case may be, would have sold if the Transferring Member(s) had obtained such agreements and commitments from such proposed transferee, and the denominator of which is equal to the total number of Units that would have been sold by all of the Transferring Members and Co-Sale Members if the Transferring Member(s) had obtained such agreements and commitments from such proposed transferee, times (y) the total number of Units that such proposed transferee is in fact acquiring from all Transferring Members and Co-Sale Members.

(d)The closing of the Transfer of the Units with respect to which rights have been exercised by a Co-Sale Member pursuant to this Section 7.06 is subject to, and will take place concurrently with, the closing of the Transfer of the Co-Sale Units to the proposed transferee. At such closing, each Co-Sale Member electing to Transfer Units shall deliver to the proposed transferee, free and clear of all liens, the Units to be sold and shall receive in exchange therefor, the consideration to be paid by the proposed transferee in respect of such Units as described in the Co-Sale Notice.

(e)The right of co-sale granted pursuant to this Section 7.06 shall be deemed to be extended to all Permitted Transferees. The right of co-sale granted pursuant to this Section 7.06 shall not apply with respect to Transfers to Permitted Transferees or pursuant to the exercise of Drag-Along Rights pursuant to Section 7.07.

Section 7.07Drag-Along Rights.

(a)Subject to the provisions of Section 7.01 hereof, if at any time Members holding more than fifty percent (50%) of the Class A Units (“Drag-Along Members”) shall receive an offer constituting a Sale of the Company and the Drag Along Members propose to accept such offer to consummate a Sale of the Company, then each Member (“Obligated Member”) shall, if requested by the Drag Along Members, sell all (but not less than all) of the Units owned by such Obligated Member in such transaction on the same terms and for the same type and form of consideration as to be paid and given to the Drag-Along Members.

(b)The Drag-Along Members shall give each Obligated Member written notice (the “Drag-Along Notice”) of any Sale of the Company transaction at least twenty (20) calendar days prior to the date on which such transaction shall be consummated, including the terms and conditions thereof, and each Obligated Member shall have the obligation to sell its Units on such same terms and conditions in accordance with the instructions set forth in such notice. If the Transfer referred to in the Drag-Along Notice is not consummated within ninety (90) calendar days from the date of the Drag-Along Notice, the Drag-Along Members must deliver another Drag-Along Notice in order to exercise its rights pursuant to this with respect to such Transfer or any other Transfer.

(c)The following terms and conditions shall also apply to the exercise of rights under this Section 7.07:

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(i)if such transaction requires Member approval, with respect to all Units that each Obligated Member owns or over which each Obligated Member otherwise exercises voting power, each Obligated Member shall vote (in person, by proxy or by action by written consent, as applicable) all Units in favor of, and adopt, such Sale of the Company transaction and vote in opposition to any and all other proposals that could reasonably be expected to delay or impair the ability of the Company to consummate such Sale of the Company transaction;

(ii) each Obligated Member shall execute and deliver all related documentation and take such other action in support of the Sale of the Company transaction as shall reasonably be requested by the Company and/or the Drag-Along Members in order to carry out the terms and provision of this Section 7.07, including executing and delivering instruments of conveyance and transfer, and any purchase agreement, merger agreement, indemnity agreement, escrow agreement, consent, waiver, governmental filing, share certificates duly endorsed for transfer (free and clear of impermissible liens, claims and encumbrances) and any similar or related documents;

(iii) each Obligated Member shall not deposit, and shall cause its Affiliates not to deposit, except as provided in this Agreement, any Units owned by such party or Affiliate in a voting trust or subject any Units to any arrangement or agreement with respect to the voting of such Units, unless specifically requested to do so by the acquiring party in connection with the Sale of the Company transaction;

(iv) each Obligated Member shall refrain from exercising any dissenters’ rights or rights of appraisal under applicable law at any time with respect to such Sale of the Company;

(v) if the consideration to be paid in exchange for the Units pursuant to this Section 7.07 includes any securities and due receipt thereof by any Obligated Member would require under applicable law (x) the registration or qualification of such securities or of any person as a broker or dealer or agent with respect to such securities or (y) the provision to any Member of any information other than such information as a prudent issuer would generally furnish in an offering made solely to Accredited Investors as defined by the Securities Act, the Company may cause to be paid to any such Obligated Member in lieu thereof, against surrender of the Units which would have otherwise been sold by such Obligated Member, an amount in cash equal to the fair value (as determined in good faith by the Company) of the securities which such Obligated Member would otherwise receive as of the date of the issuance of such securities in exchange for the Units; and

(vi) each Member will bear its pro rata share (based on the net proceeds received) of the costs incurred by the Company in connection with such Sale of the Company to the extent that such costs are incurred for the benefit of all Members and are not otherwise paid by the Company or the acquiring party.

(d)Each Obligated Member hereby constitutes and appoints the Drag-Along Members, with full power of substitution, as its proxy with respect to votes regarding any Sale of the Company transaction pursuant to this Section 7.07, and hereby authorizes the Drag-Along Members to represent and to vote, if and only if such Member (i) fails to vote or (ii) attempts to vote (whether by proxy, in person or by written consent) in a manner which is inconsistent with the terms of this Agreement, all of such Obligated Member’s Units in favor of the approval of any Sale of the Company transaction pursuant to and in accordance with the terms and provisions of this Section 7.07. The proxy granted pursuant to the immediately preceding sentence is given in consideration of the agreements and covenants of the Company and the parties in connection with the transactions contemplated by this Agreement and, as such, is coupled with an interest and shall be irrevocable unless and until this Agreement terminates. Each party hereto hereby revokes any and all previous proxies with respect to the Units and shall not hereafter, unless and until this Agreement terminates, purport to grant any other proxy or power of attorney with respect to any of the Units, deposit any of the Units into a voting trust or enter into any agreement (other than this Agreement), arrangement or understanding with any Person, directly or indirectly, to vote, grant any proxy or give instructions with respect to the voting of any of the Units, in each case, with respect to any of the matters set forth herein.

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(e)The Obligated Members shall deliver when available all documents reasonably required to be executed by the Drag-Along Members in order to consummate the Sale of the Company transaction contemplated by this Section 7.07. Each Obligated Member shall execute and deliver to the Company at least five (5) calendar days prior to the proposed sale, all documents previously furnished to the Obligated Member for execution in connection with the proposed sale. If any Obligated Member fails to execute and deliver such documents to the Company, and such Transfer is subsequently consummated (a “Defaulting Obligated Member”), (i) the Company may receive the consideration that would otherwise be paid to the Defaulting Obligated Member and the Defaulting Obligated Member shall be deemed to have appointed the Managers as such Member’s agent to Transfer all of its Units to the purchaser and to receive the consideration in trust for such Defaulting Obligated Member; (ii) the receipt by the Company of the consideration for the Units owned by such Defaulting Obligated Member shall be a good discharge to the purchaser and the validity of the proceedings shall not be questioned by any Person; and (iii) the Defaulting Obligated Member shall be entitled to receive the consideration for its Units without interest at such time as the Defaulting Obligated Member executes all of the applicable documents requested by the Company, the Drag-Along Members or the purchaser.

Section 7.08Miscellaneous Transfer Restrictions.Notwithstanding any other provisions of this Agreement, no Transfer of any Units (including pursuant to a Permitted Transfer) may be made unless:

(a)such Transfer would not result in a violation of applicable law, including the Securities Act and any state securities or “Blue Sky” laws applicable to the Company or the Units to be transferred;

(b)such Transfer would not cause the Company to lose its exemption from the registration requirements of the Investment Company Act of 1940, as amended;

(c)such Transfer would not cause the Company to lose its status as a partnership for federal income tax purposes and, without limiting the generality of the foregoing, such transfer will not be effected on or through an “established securities market” or a “secondary market or the substantial equivalent thereof,” as such terms are used in Section 1.7704-1 of the Treasury Regulations promulgated under the Code, and the transferring Member and the transferee shall each have provided a certificate to that effect;

(d)such Transfer would not result in the Company being required to register under Section 12(g) of the Securities Exchange Act of 1934, as amended;

(e)the Transferring Member and the transferee shall have agreed in writing to provide the Company with any information requested by the Managers relating to the Company’s obligation to make basis adjustments under Section 743 of the Code (including the Company’s obligations under Section 6031 of the Code); and

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(f)if requested by the Managers, the transferring Member shall have provided an opinion of counsel (at the transferring Member’s sole cost and expense) satisfactory to the Company as to the matters set forth in clauses (a)-(e) of this Section 7.08.

ARTICLE VIII

Termination and Dissolution

Section 8.01Dissolution Events. The Company shall be terminated and dissolved only upon the unanimous election of the Managers, or the entry of a final decree of judicial dissolution under the Act. The happening of any event that terminates the continued membership of a Member shall not cause a dissolution of the Company.

Section 8.02Liquidation.

(a)Winding Up. Upon the dissolution of the Company, the Company’s business shall be liquidated in an orderly manner. The Managers shall determine which Company property shall be distributed in-kind and which Company property shall be liquidated. The liquidation of Company property shall be carried out as promptly as is consistent with obtaining the fair value thereof.

(b)Payments and Distributions. Company property or the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed in the following order of priority, with no distribution being made in any category set forth below until each preceding category has been satisfied in full:

(i)To the payment and discharge of all of the Company’s debts and liabilities, including any debts and liabilities owed to any Member, and to the expenses of liquidation;

(ii)To the establishment of Reserves (which Reserves, to the extent no longer needed by the Company, shall be distributed in accordance with the order of priority set forth in subsection (iii) below);

(iii)To and among the Members in accordance with Article III of this Agreement.

Section 8.03Distribution In-Kind. If the Managers determine that a portion of the Company’s property should be distributed in-kind to the Members, the Managers shall obtain an independent third-party appraisal of the fair market value of each such property as of a date reasonably close to the date of liquidation. Any unrealized appreciation or depreciation with respect to any property to be distributed in-kind shall be allocated pro rata among the Members (assuming that such property was sold for the appraised value) and taken into consideration in determining the balance in the Members’ Capital Accounts as of the date of final liquidation.

Section 8.04Certificate of Cancellation. When all debts, liabilities and obligations of the Company have been paid and discharged or adequate provisions have been made therefor and all of the remaining property and assets of the Company have been distributed, a certificate of cancellation as required by the Act shall be executed and filed by the Managers with the Secretary of the State of New Jersey.

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Section 8.05Effect of Filing of Certificate of Cancellation. Upon the filing of a certificate of cancellation with the Secretary of the State of Delaware, the existence of the Company shall cease, except for the purpose of suits, other proceedings and appropriate action as provided in the Act. The Managers shall have the authority to distribute any Company property discovered after dissolution, to convey real estate and to take such other action as may be necessary on behalf of and in the name of the Company.

Section 8.06Return of Contribution Nonrecourse to Other Members. Except as provided by law or as expressly provided in this Agreement, upon dissolution, each Member shall look solely to the assets of the Company for the return of his Capital Contributions. If the Company property remaining after the payment or discharge of the debts and liabilities of the Company is insufficient to return the Capital Contributions of one or more Members, such Member or Members shall have no recourse against any other Member.

ARTICLE IX

Exculpation And Indemnification

Section 9.01Liability of Members. Except as otherwise provided by the Act or this Agreement, the Members and the Managers shall not be liable, responsible or otherwise accountable for damages to the Company or to any Member or Manager for any action taken or failure to act on behalf of the Company, unless such acts or omissions were fraudulent, in bad faith, a result of wanton or willful misconduct or gross negligence by such Member or Manager.

Section 9.02Indemnification of Covered Persons. To the fullest extent permitted by law, the Company shall indemnify, defend and hold harmless each Covered Person from and against any and all debts, losses, claims, damages, costs, demands, fines, judgments, contracts (implied and expressed, written and unwritten), penalties, obligations, payments, liabilities of every type and nature (whether known or unknown, fixed or contingent), including those arising out of any lawsuit, action or proceeding (whether brought by a party to this Agreement or by any third party), together with any reasonable costs and expenses (including reasonable attorneys’ fees, out-of-pocket expenses and other reasonable costs and expenses incurred in investigating, preparing or defending any pending or threatened lawsuit, action or proceeding) incurred in connection with the foregoing (collectively “Damages”) suffered or sustained by him/her/it by reason of any act, omission or alleged act or omission by him/her/it arising out of his/her/its activities taken primarily on behalf of the Company, or at the request or with the approval of the Company, or primarily in furtherance of the interests of the Company; provided, however,that the acts, omissions or alleged acts or omissions upon which such actual or threatened actions proceedings or claims are based were performed or omitted in good faith and were not fraudulent, in bad faith, a result of wanton and willful misconduct or gross negligence, by such Covered Person. Expenses (including, reasonable attorneys’ fees, out-of-pocket expenses and other reasonable costs and expenses incurred in investigating, preparing or defending any pending or threatened lawsuit, action or proceeding) incurred by a Covered Person in defending any lawsuit, action or proceeding shall be paid by the Company in advance of the final disposition of such lawsuit, action or proceeding upon receipt of an undertaking, by or on behalf of such Covered Person, to repay such amount if it shall ultimately be determined that such Covered Person is not entitled to be indemnified by the Company as authorized by this Section 9.02.

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Section 9.03Indemnification Procedure.

(a)A party seeking indemnification from the Company pursuant to this Article IX (an “Indemnified Party”) shall give prompt notice to the Company of the assertion of any claim, including any claim brought by a third party, in respect of which indemnity may be sought hereunder (a “Claim”) and shall give the Company such information with respect thereto as the Company may reasonably request, but no failure to give such notice shall relieve the Company of any liability hereunder (except to the extent the Company has suffered actual prejudice thereby). The Company shall have the right, exercisable by written notice (the “Notice”) to the Indemnified Party (which notice shall state that the Company expressly agrees that as between the Company and the Indemnified Party, the Company shall be solely obligated to satisfy and discharge the Claim) within thirty (30) days of receipt of notice from the Indemnified Party of the commencement of or assertion of any Claim, to assume the defense of such Claim, using counsel selected by the Company; provided that the Company shall not have the right to assume the defense of a Claim (A) seeking an injunction, restraining order, declaratory relief or other nonmonetary relief against the Indemnified Party (whether or not the Company is also named as a party) or (B) if the named parties to any such action (including any impleaded parties) includes both the Indemnified Party and the Company and the Indemnified Party shall have been advised by counsel that there are one or more legal or equitable defenses available to the Indemnified Party, which are different from those available to the Company; in which case such Indemnified Party shall have the right to participate in the defense of a Claim of the type set forth in clause (A) and/or (B) above and all Damages in connection therewith shall be reimbursed by the Company. In addition, if the Company fails to give the Indemnified Party the Notice complying with the provisions stated above within the stated time period, the Indemnified Party shall have the right to assume control of the defense of the Claim and all Damages in connection therewith shall be reimbursed by the Company upon demand of the Indemnified Party. In any event, no party assuming the defense of any Claim shall have the right to compromise or settle any claim for non-monetary relief against the other party or any claim for monetary relief against another party without such party’s consent (which consent shall not be unreasonably withheld or denied) unless such monetary relief is paid in full by the settling party (without any expectation of reimbursement therefor from the consenting party).

(b)If at any time after the Company assumes the defense of a Claim any of the conditions set forth above are no longer satisfied, the Indemnified Party shall have the same rights as if clause (A) or (B) above had been satisfied and the Company never assumed the defense of such Claim.

(c)The Company or the Indemnified Party, as the case may be, shall in any event have the right to participate, at its own expense, in the defense of any Claim which the other is defending.

(d)Whether or not the Indemnifying Party chooses to defend or prosecute any Claim involving a third party, all the Parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested in connection therewith.

ARTICLE X

Representations

Section 10.01General. As of the date hereof, each of the Members makes each of the representations and warranties applicable to such Member as set forth in this Section 10.01, and such representations and warranties shall survive the execution of this Agreement.

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(a)Due Incorporation or Formation; Authorization of Agreement. If such Member is a corporation, partnership, trust, limited liability company, or other legal entity, it is duly organized or formed, validly existing, and in good standing under the laws of the jurisdiction of its incorporation or formation and has the power and authority to own property and carry on its business as owned and carried on at the date hereof and as contemplated hereby. Such Member is duly licensed or qualified to do business and in good standing in each of the jurisdictions in which the failure to be so licensed or qualified would have a material adverse effect on its ability to perform its obligations hereunder, and the execution, delivery, and performance of this Agreement has been duly authorized by all necessary corporate or partnership or company action. This Agreement constitutes the legal, valid, and binding obligation of such Member.

(b)No Conflict or Default. The execution, delivery, and performance of this Agreement and the consummation by such Member of the transactions contemplated hereby (i) will not conflict with, violate, or result in a breach of any of the terms, conditions, or provisions of any law, regulation, order, writ, injunction, decree, determination, or award of any court, any governmental department, board, agency, or instrumentality, or any arbitrator, applicable to such Member, and (ii) will not conflict with, violate, result in a breach of, or constitute a default under any of the terms, conditions, or provisions of the articles of incorporation, bylaws, partnership agreement, operating agreement, or other organizational documents of such Member, or of any material agreement or instrument to which such Member is a party or by which such Member is or may be bound or to which any of its material properties or assets are or may be subject.

(c)Governmental Authorizations. Any registration, declaration or filing with or consent, approval, license, permit or other authorization or order by, any governmental or regulatory authority that is required in connection with the valid execution, delivery, acceptance, and performance by such Member under this Agreement or the consummation by such Member of any transaction contemplated hereby has been completed, made, or obtained on or before the effective date of this Agreement.

(d)Litigation. There are no actions, suits, proceedings, or investigations pending or, to the knowledge of such Member, threatened against or affecting such Member or any of such Member’s properties, assets, or businesses in any court or before or by any governmental department, board, agency, instrumentality, or arbitrator which, if adversely determined, could (or in the case of an investigation could lead to any action, suit, or proceeding which, if adversely determined, could) reasonably be expected to materially impair such Member’s ability to perform its obligations under this Agreement.

Section 10.02Investment Representations.

(a)Each Member represents and warrants that it has acquired its Units for its own account as part of a transaction exempt from registration under the Securities Act, and applicable state law for investment purposes and not with a view to the resale or distribution thereof, and that it has had access to any and all information necessary to arrive at its decision to acquire its Units. In addition to the restrictions on transfer of Units otherwise set forth in this Agreement, no Unit may be sold, transferred, assigned or otherwise disposed of by any Member in the absence of registration under the Securities Act and applicable state law, or an opinion of counsel experienced in securities matters and satisfactory to the Members that such assignment or other disposition will not be in violation of the Securities Act or state laws. No Member shall have any right to require registration of its Units under said Securities Act or applicable state law and, in view of the nature of the Company and its business, such registration is neither contemplated nor likely. Each Member further acknowledges that it understands that the effect of the foregoing representation and warranty and restriction on assignment or other disposition is generally to require that such Units be held indefinitely unless they are registered or an exemption from registration is available.

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(b)The Units being acquired by each Member in the Company are being acquired for its own account solely for investment and not with a present view to resale or distribution thereof.

(c)Each Member (either alone or together with any advisors retained by such Member in connection with evaluating the merits and risks of prospective investments) has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of purchasing Units, and is able to bear the economic risk of its investment in the Company for an indefinite period of time, including a complete loss of capital.

(d)Each Member has been given the opportunity (i) to ask questions of, and receive answers from, the Company concerning the terms and conditions of the offering of Units and other matters pertaining to an investment in the Company, and (ii) to obtain any additional information which the Company can acquire without unreasonable effort or expense that is necessary to evaluate the merits and risks of an investment in the Company.

(e)The foregoing representations, warranties and agreements shall survive the date of each Member’s admission to the Company.

ARTICLE XI

Miscellaneous

Section 11.01Notices. All notices, approvals, consents, requests, instructions, and other communications (collectively “Communications”) required to be given in writing pursuant to this Agreement shall be validly given, made or served only when delivered personally or by registered or certified mail, return receipt requested, postage prepaid, or by a reputable overnight or same day courier, addressed to the Company or the Member at the address that is on record at the principal office of the Company, or by facsimile to the number that is on record at the principal office of the Company. Any such Communication shall be treated as given under this Agreement when the Communication is delivered to such address or received at such facsimile number. The designation of the Person to receive such Communication on behalf of a Member or the address of any such Person for the purposes of such Communication may be changed from time to time by written notice given to the Company pursuant to this Section.

Section 11.02Parties Bound; No Third Party Beneficiaries. This Agreement shall inure to the benefit of and shall be binding upon all of the Parties and their respective heirs, successors and assigns. Except for the Covered Persons, no provision of this Agreement is intended to or shall be construed to grant or confer any right to enforce this Agreement or any remedy for breach of this Agreement to or upon any Person other than the Parties hereto.

Section 11.03Applicable Law. This Agreement, including the validity hereof and the rights and obligations of the Parties hereto, and all matters arising out of or relating to this Agreement and/or any and all related documents shall be governed by, and construed and enforced in accordance with the substantive laws of the State of New Jersey, without regard to its otherwise applicable principles of conflicts of laws. The Parties hereto irrevocably consent to the exclusive jurisdiction of the state and federal courts located in the State of New Jersey in any and all actions, proceedings and disputes whether arising hereunder or under any other related agreement, instrument or document. The Parties hereto hereby irrevocably and unconditionally waive any rights they may have to a jury trial in any and all disputes whether arising hereunder or under any other agreements, notes, papers, instruments or documents heretofore or hereafter executed whether similar or dissimilar.

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Section 11.04Amendment. No change or modification to this Agreement shall be valid unless the same is in writing and signed by the holders of majority of the Ownership Percentage Interests of the Members. Notwithstanding the foregoing, no amendment to this Agreement shall either (w) amend or modify Article III, Article V, Section 7.05 or this Section 11.04 (other than nonmaterial modifications thereto), (x) reduce material rights or economic interests of a Member in the Company, (y) adversely impact in a disproportionate manner, any rights or economic interests of a Member in the Company or (z) subject a Member to personal liability for any obligations of the Company, in each case without the consent of the affected Member.

Section 11.05Entire Agreement. This Agreement together with the Purchase Agreement and Heath Employment Agreement contains the entire understanding among the Parties and supersedes any prior understandings and agreements between them respecting the subject matter hereof. There are no representations, agreements, arrangements, or understandings, oral or written, between or among the Parties hereto relating to the subject matter of this Agreement which are not fully expressed herein.

Section 11.06Severability. If any provision of this Agreement or the application thereof to any Person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected thereby but rather shall be enforced to the greatest extent permitted by law.

Section 11.07Counterparts. This Agreement may be executed in one or more counterparts with the same effect as if all of the Members had signed the same document. All counterparts shall be construed together and shall constitute one and the same instrument. The exchange of copies of this Agreement and of signature pages by facsimile or Electronic Transmission shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of the original Agreement for all purposes. Signatures of the parties transmitted by facsimile or Electronic Transmission shall be deemed to be their original signatures for all purposes.

Section 11.08Construction. Words in the singular include the plural and in the plural include the singular. The words “including,” “includes,” “included” and “include,” when used, are deemed to be followed by the words “without limitation”. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All accounting terms not defined in this Agreement shall have the meanings determined by GAAP. Unless otherwise expressly provided herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes, and all attachments thereto and instruments incorporated therein.

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Section 11.09Headings and Captions. The headings and captions contained in this Agreement are inserted only as a matter of convenience and in no way define, limit or extend the scope or intent of this Agreement or any provisions hereof.

Section 11.10No Waiver. The failure of any Member to insist upon strict performance of a covenant hereunder or of any obligation hereunder or to exercise any right or remedy hereunder, regardless of how long such failure shall continue, shall not be a waiver of such Member’s right to demand strict compliance therewith in the future unless such waiver is in writing and signed by the Member giving the same.

Section 11.11Other Business and Investment Ventures. Except as otherwise provided in this Agreement or any other agreement to which a Member is a party (which other agreement shall control), each Member may engage in other business or investment ventures, including business or investment ventures in competition with the Company, and neither the Company nor the other Members shall have any rights in such business or investment ventures.

Section 11.12Additional Instruments. Each Member agrees to execute and deliver such additional agreements, certificates, and other documents as may be necessary or appropriate to carry out the intent and purposes of this Agreement.

Section 11.13Publicity. No Member shall make any publicity, media communications, press releases or other public announcements regarding the transactions contemplated hereby or with respect to this Agreement unless such publicity, media communications, press releases or other public announcements first shall be approved, in writing, by the Managers.

Section 11.14Specific Performance. Each Member acknowledges and agrees that his respective remedies at law for a breach or threatened breach of any of the provisions of this Agreement would be inadequate and, in recognition of that fact, agrees that, in the event of a breach or threatened breach by a Member of the provisions of this Agreement, in addition to any remedies at law, the Company or any other Member shall, without posting any bond, be entitled to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy which may then be available.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written.

Class A Member::
HALLMARK FINANCIAL SERVICES, INC.
By:
	Name:
	Title:
Class B Member:
HEATH HOLDINGS, LLC
By:
	Name: Jeffrey L. Heath
	Title: Manager
Company
HARDSCRABBLE DATA SOLUTIONS, LLC
By:
	Name: Jeffrey L. Heath
	Title: Chief Executive Officer

Hardscrabble Data Solutions, LLC.

Operating Agreement

Exhibit “A”

Capital Contributions, Units and Ownership Percentage Interests

Class	Units		Ownership Percentage Interest
Class A Members
Hallmark Financial Services, Inc.		800		80	%
Class B Members
Heath Holdings, LLC		200		20	%
Total		1,000		100	%

A-1

EX-10.4