-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AXzJ5AH3r4KzceksTGO5k4DU2vcC2nx5/JcCQsLrR235b2TXWXcYo9eqFsIv8anO v/qcRcTuKdHPvSVDFVRJ7w== 0000950172-05-001929.txt : 20050615 0000950172-05-001929.hdr.sgml : 20050614 20050614200203 ACCESSION NUMBER: 0000950172-05-001929 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20050615 DATE AS OF CHANGE: 20050614 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: AFFIRMATIVE INSURANCE HOLDINGS INC CENTRAL INDEX KEY: 0001282543 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 752770432 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-79966 FILM NUMBER: 05896152 BUSINESS ADDRESS: STREET 1: 4450 SOJOURN DRIVE STREET 2: SUITE 500 CITY: ADDISON STATE: TX ZIP: 75001 BUSINESS PHONE: 972-728-6300 MAIL ADDRESS: STREET 1: 4450 SOJOURN DRIVE STREET 2: SUITE 500 CITY: ADDISON STATE: TX ZIP: 75001 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: DSC Advisors, L.P. CENTRAL INDEX KEY: 0001299434 IRS NUMBER: 383662495 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 900 NORTH MICHIGAN AVENUE STREET 2: SUITE 1900 CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: (312) 915-2485 MAIL ADDRESS: STREET 1: 900 NORTH MICHIGAN AVENUE STREET 2: SUITE 1900 CITY: CHICAGO STATE: IL ZIP: 60611 SC 13D/A 1 nyc513834.txt AMENDMENT NO. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 13D (Amendment No. 1) Under the Securities Exchange Act of 1934 AFFIRMATIVE INSURANCE HOLDINGS, INC. ------------------------------------------------------------------------- (Name of Issuer) COMMON STOCK, PAR VALUE $.01 PER SHARE ------------------------------------------------------------------------- (Title of Class of Securities) 008272106 ------------------------------------------------------------------------- (CUSIP Number) Andrew G. Bluhm DSC Advisors, L.P. 900 N. Michigan Avenue, Suite 1900 Chicago, Illinois 60611 Telephone: (312) 915-2400 Facsimile: (312) 915-2487 ---------------------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) With a copy to: Thomas W. Greenberg, Esq. Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 (212) 735-3000 June 14, 2005 ------------------------------------------------------------------------- (Date of Event Which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of sections 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box. [ ] The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or otherwise subject to the liabilities of that section of the Exchange Act but shall be subject to all other provisions of the Exchange Act (however, see the Notes). - ------------------------------------------------------------------------------- 1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only) DSC Advisors, L.P. I.R.S. Identification No.: 38-3662495 - ------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (See Instructions) (a) [ ] (b) [ ] - ------------------------------------------------------------------------------- 3. SEC USE ONLY - ------------------------------------------------------------------------------- 4. Source of Funds (See Instructions) AF - ------------------------------------------------------------------------------- 5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) [ ] - ------------------------------------------------------------------------------- 6. Citizenship or Place of Organization Delaware - ------------------------------------------------------------------------------- Number of 7. Sole Voting Power Shares Beneficially 0 Owned by ----------------------------------------- Each 8. Shared Voting Power Reporting Person with 1,159,699 ----------------------------------------- 9. Sole Dispositive Power 0 ----------------------------------------- 10. Shared Dispositive Power 1,159,699 - ------------------------------------------------------------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 1,159,699 - ------------------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) [ ] - ------------------------------------------------------------------------------- 13. Percent of Class Represented by Amount in Row (11) 7.8% - ------------------------------------------------------------------------------- 14. Type of Reporting Person (See Instructions) PN - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only) Andrew G. Bluhm - ------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (See Instructions) (a) [ ] (b) [ ] - ------------------------------------------------------------------------------- 3. SEC USE ONLY - ------------------------------------------------------------------------------- 4. Source of Funds (See Instructions) AF - ------------------------------------------------------------------------------- 5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) [ ] - ------------------------------------------------------------------------------- 6. Citizenship or Place of Organization U.S. Citizen - ------------------------------------------------------------------------------- Number of 7. Sole Voting Power Shares Beneficially 0 Owned by ------------------------------------ Each 8. Shared Voting Power Reporting Person with 1,159,699 ------------------------------------ 9. Sole Dispositive Power 0 ------------------------------------ 10. Shared Dispositive Power 1,159,699 - ------------------------------------------------------------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 1,159,699 - ------------------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) [ ] - ------------------------------------------------------------------------------- 13. Percent of Class Represented by Amount in Row (11) 7.8% - ------------------------------------------------------------------------------- 14. Type of Reporting Person (See Instructions) IN - ------------------------------------------------------------------------------- This statement on Schedule 13D (the "Statement") is being filed as Amendment No. 1 to the statement on Schedule 13D originally filed with the Securities and Exchange Commission on June 13, 2005 (the "Original Statement"). This Statement is being filed by the Reporting Persons to report the entering into of a Stock Purchase Agreement (as defined below) resulting from the discussions disclosed in the the Original Statement. This Statement is intended to amend and restate the Original Statement in its entirety. Item 1. Security and Issuer. This Statement relates to the common stock, par value $.01 per share (the "Common Stock"), of Affirmative Insurance Holdings, Inc., a Delaware corporation (the "Company"). The principal executive offices of the Company are located at 4450 Sojourn Drive, Suite 500, Addison, TX 75001. Item 2. Identity and Background. This Statement is being filed jointly on behalf of DSC Advisors, L.P., a Delaware limited partnership ("DSC"), and Andrew G. Bluhm, the managing member and principal of DSC Advisors, L.L.C., a Delaware limited liability company ("Advisors LLC") which serves as the general partner of DSC (Mr. Bluhm, together with DSC, the "Reporting Persons"). The principal office of each of the Reporting Persons is located at 900 N. Michigan Avenue, Suite 1900, Chicago, Illinois 60611. The names, business addresses and present principal occupations or employment of the directors and executive officers of DSC are set forth on Schedule I, which is incorporated herein by reference. Except as noted on Schedule I, all directors and executive officers of DSC, including Mr. Bluhm, are citizens of the United States. None of the Reporting Persons has, during the last five years, been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). None of the persons identified on Schedule I has, during the last five years, been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). None of the Reporting Persons has, during the last five years, been a party to any civil proceeding as a result of which it was subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violations with respect to such laws. None of the persons identified on Schedule I hereto has, during the last five years, been a party to any civil proceeding as a result of which such person was subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violations with respect to such laws. Item 3. Source and Amount of Funds or Other Consideration. From time to time on or prior to May 6, 2005, the Reporting Persons acquired an aggregate of 1,159,699 shares of Common Stock of the Company through open market purchases. The aggregate purchase price of the Common Stock acquired in such purchases was $16,691,593, including brokerage fees and commissions. The purchase price was paid out of the capital provided by and on behalf of Delaware Street Capital Master Fund, L.P., a Cayman Islands exempted limited partnership ("DSC Master Fund"), of which DSC is the investment manager. DSC Master Fund holds the shares of Common Stock for the accounts of Delaware Street Capital L.P., a Delaware limited partnership, Delaware Street Capital II, L.P., a Delaware limited partnership, and Delaware Street Capital Offshore, Ltd., a Cayman Islands exempted company. DSC makes all investment decisions for DSC Master Fund and DSC Master Fund does not hold the power to dispose of or vote any of the Common Stock. The Reporting Persons did not borrow any funds in connection with the purchase of the Common Stock. In connection with the transaction described in Item 4, New Affirmative LLC (the "Purchaser") has entered into an agreement, subject to the conditions set forth therein, to acquire the Additional Shares (as defined below) for an aggregate of $78,273,420. The Purchaser intends to fund such purchases with cash to be provided by affiliates of DSC AFFM, LLC ("DSC AFFM"), which has been formed by Advisors LLC, and J.C. Flowers I LP ("JC Flowers"). Item 4. Purpose of Transaction. From time to time on or prior to May 6, 2005, the Reporting Persons purchased shares of Common Stock in the open market. The Reporting Persons made such purchases of Common Stock for investment purposes and the Reporting Persons did not have an intent to influence or control the Company's management or policies. On June 1, 2005, the Reporting Persons and representatives of JC Flowers conducted exploratory discussions with Vesta Insurance Group, Inc. ("VIG") regarding a potential purchase of the Common Stock owned by VIG and Vesta Fire Insurance Corporation, a subsidiary of VIG ("VFIC", and together with VIG, "Vesta") and thereafter determined to proceed with negotiating a definitive agreement with respect thereto. On June 14, 2005, the Purchaser and, for certain sections thereof, DSC Master Fund and JC Flowers entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with VIG and VFIC pursuant to which Vesta agreed to sell to the Purchaser, and the Purchaser agreed to acquire from Vesta, an aggregate of 5,218,228 shares of Common Stock (the "Additional Shares") for a purchase price of $15.00 per share. The consummation of the transactions contemplated by the Stock Purchase Agreement is subject to various conditions, including but not limited to: (i) expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (ii) the filing of a Form A, Statement Regarding the Acquisition of, Control of a Domestic Insurer (the "Form A") with the Illinois Department of Financial and Professional Regulation - - Division of Insurance (the "Department") and the receipt of written approval from the Department with respect to the Form A and (iii) the representations and warranties in the Stock Purchase Agreement being true and correct as of the closing date under the Stock Purchase Agreement. A copy of the Stock Purchase Agreement is attached as Exhibit 1 hereto and is incorporated by reference in its entirety herein. On June 13, 2005, DSC AFFM and JC Flowers entered into (i) a subscription agreement (the "Purchaser Subscription Agreement") with respect to the purchase of membership units of the Purchaser and (ii) a limited liability company agreement (the "Purchaser LLC Agreement") with respect to the operation and management of the Purchaser. The Purchaser was formed for the sole purpose of acquiring, holding, voting and disposing of the Additional Shares and any shares of Common Stock that may be acquired by the Purchaser in the future. Pursuant to a subscription agreement, entered into concurrently with the execution of the Stock Purchase Agreement, DSC Master Fund has agreed to contribute the shares of Common Stock it currently holds to DSC AFFM within ten business days of the execution of the Purchaser Subscription Agreement. Advisors LLC is the sole managing member of DSC AFFM pursuant to the limited liability agreement of DSC AFFM; consequently Mr. Bluhm controls DSC AFFM. Pursuant to the Purchaser Subscription Agreement, DSC AFFM and JC Flowers each agreed to contribute any shares of Common Stock owned by each of them immediately prior to the closing of the transactions contemplated by the Stock Purchase Agreement to the Purchaser. The Reporting Persons and JC Flowers agreed that, following the execution of the Purchaser Subscription Agreement, neither party will acquire any additional shares of Common Stock, nor sell any shares of Common Stock, without the consent of the other party and the receipt of any applicable regulatory approval from the Department. In addition, the Reporting Persons and JC Flowers agreed that, following the closing of the transactions contemplated by the Stock Purchase Agreement, neither party will acquire, sell or vote any shares of Affirmative Common Stock other than through, or by, the Purchaser. The Reporting Persons have been informed by JC Flowers that, as of the date of this Statement, JC Flowers does not own any shares of Common Stock. A copy of (1) the Purchaser Subscription Agreement is attached as Exhibit 2 hereto and is incorporated by reference in its entirety herein and (2) the Purchaser LLC Agreement is attached as Exhibit 3 hereto and is incorporated by reference in its entirety herein. The Reporting Persons believe that recent and current trading prices do not adequately reflect the value of the underlying businesses and assets of the Company and that there is potential for appreciation in the market value of the Common Stock and the Additional Shares. Following the execution of the Stock Purchase Agreement, the Purchaser notified the Company's management of the Purchaser's agreement to purchase the Additional Shares. The Reporting Persons do not presently intend to seek to replace the Company's current management or to take any adverse or opposing position to the current policies of the Company. The Reporting Persons intend, from time to time, through the Purchaser, to discuss with management the direction of any future plans for the Company. The Reporting Persons may, from time to time, hold discussions with third parties or with management in which the Reporting Persons may suggest or take a position with respect to the operations or policies of the Company as a means of enhancing shareholder value. Subject to the receipt of written approval from the Department with respect to the Form A to be filed by the Purchaser with the Department and upon the closing of the purchase of the Additional Shares, the Reporting Persons may seek to cause, through the Purchaser, changes in the present composition of the board of directors of the Company, including by nominating some or all of the members of the board of directors. The Reporting Persons reserve the right to change their intentions and to develop plans or proposals that could result in any of the transactions described in subparagraphs (a) through (j) of Item 4 of Schedule 13D of the Securities Exchange Act of 1934, as amended, or any other transaction which the Reporting Persons believe could enhance shareholder value, any such transactions, subject to any applicable regulatory approval from the Department. The Reporting Persons also intend to review on a regular basis their investment in the Company and reserve the right to acquire additional shares of the Common Stock, maintain its holdings at its current levels or dispose of all or some of the shares of Common Stock in the open market or through privately negotiated transactions, any such transactions, subject to any applicable regulatory approval from the Department. Item 5. Interest in Securities of the Issuer. (a) Based upon information set forth in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 filed on May 16, 2005, there were 16,852,753 shares of Common Stock outstanding as of May 12, 2005. On May 19, 2005, the Company announced that it had entered into a definitive agreement to repurchase 2,000,000 shares of Company common stock held by VIG. The Company announced on June 1, 2005 that the repurchase had been consummated. As a result, the Reporting Persons believe that 14,852,753 shares of Common Stock are currently outstanding. As of June 13, 2005, the Reporting Persons believe that they beneficially owned an aggregate of 1,159,699 shares of Common Stock, or 7.8% of the outstanding shares of Common Stock. (b) The Reporting Persons share the power to vote or to direct to vote and to dispose or to direct the disposition of all 1,159,699 shares of Common Stock beneficially owned by them. As a result of his indirect ownership interest in DSC, Mr. Bluhm may be deemed to control DSC and therefore may be deemed to hold voting and/or dispositive power over such shares of Common Stock. Mr. Bluhm disclaims beneficial ownership of such shares of Common Stock. The Reporting Persons disclaim beneficial ownership of the Additional Shares until the consummation of the transactions contemplated by the Stock Purchase Agreement. (c) Other than as set forth on Schedule II hereto, during the past sixty days, there were no purchases of the shares of Common Stock, or securities convertible into or exchangeable for shares of Common Stock, by the Reporting Persons or any person or entity controlled by the Reporting Persons or any person or entity for which the Reporting Persons possess voting control over the securities thereof. During such sixty day period, there were no sales of the shares of Common Stock, or securities convertible into or exchangeable for shares of Common Stock, by the Reporting Persons or any person or entity controlled by the Reporting Persons or any person or entity for which the Reporting Persons possess voting control over the securities thereof. (d) Except as described in Item 3 of this Statement, no other person is known by the Reporting Persons to have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the Common Stock beneficially owned by the Reporting Persons. Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer. Except as described in Items 3, 4 and 5 of this Statement, there are no contracts, arrangements, understandings or relationships (legal or otherwise) between the Reporting Persons and any person, with respect to any securities of the Company, including, but not limited to, transfer or voting of any of the securities of the Company, finder's fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss or the giving or withholding of proxies. The Reporting Persons have previously entered into a joint filing agreement, which is filed as Exhibit 4 hereto. Item 7. Material to be Filed as Exhibits. Exhibit 1 Stock Purchase Agreement, dated June 14, 2005, by and among, New Affirmative LLC, Vesta Insurance Group, Inc., Vesta Fire Insurance Corporation and solely with respect to Section 1.1(b) thereof, Delaware Street Capital Master Fund, L.P. and J.C. Flowers I LP Exhibit 2 Subscription Agreement, dated June 14, 2005, by and among New Affirmative LLC, DSC AFFM, LLC and J.C. Flowers I LP Exhibit 3 Limited Liability Company Agreement, dated June 14, 2005, by and between DSC AFFM, LLC and J.C. Flowers I LP Exhibit 4 Joint Filing Agreement, dated June 13, 2005, by and among the Reporting Persons (incorporated by reference to Exhibit 1 to the Original Statement) SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth herein is true, complete and correct. DSC ADVISORS, L.P. By: /s/ Prashant Gupta ------------------------------ Name: Prashant Gupta Title: Chief Financial Officer ANDREW G. BLUHM /s/ Andrew G. Bluhm ----------------------------------- Dated: June 14, 2005 Schedule I DIRECTORS AND EXECUTIVE OFFICERS OF DSC The names, present principal occupations and business addresses of the directors and executive officers' of DSC are set forth below. Except as set forth below, the control person's or executive officer's business address is that of DSC. Unless otherwise indicated, each occupation set forth opposite an individual's name refers to such person's position with DSC. Andrew G. Bluhm Portfolio Manager Prashant Gupta Chief Financial Officer Gary Katz Director and General Counsel 153 East 53rd Street, 26th Fl. New York, New York 10022 Schedule II Date of Acquisition Number of Shares Purchased Price Per Share ($) 4/25/2005 6,000 15.42 4/26/2005 4,600 15.28 4/27/2005 6,499 15.07 4/29/2005 5,000 14.84 5/2/2005 25,000 15.05 5/6/2005 27,500 15.05 EX-99 2 nyc513960-12.txt EXHIBIT 1 - STOCK PURCHASE AGREEMENT Exhibit 1 EXECUTION COPY -------------- ============================================================================== STOCK PURCHASE AGREEMENT by and among VESTA INSURANCE GROUP, INC., VESTA FIRE INSURANCE CORPORATION, NEW AFFIRMATIVE LLC, J.C. FLOWERS I LP (SOLELY WITH RESPECT TO SECTIONS 1.1(b), 4.3, 5.2, 5.5, 5.8 and ARTICLE VIII (other than 8.1 and 8.2)) and DELAWARE STREET CAPITAL MASTER FUND, L.P. (SOLELY WITH RESPECT TO SECTIONS 1.1(b), 4.3, 5.2, 5.5, 5.8 and ARTICLE VIII (other than 8.1 and 8.2)) dated as of June 14, 2005 ==============================================================================
Table of Contents Page ---- ARTICLE I PURCHASE AND SALE OF THE SHARES............................................................1 Section 1.1 Purchase and Sale of the Shares..................................................1 Section 1.2 Closing..........................................................................2 Section 1.3 Closing Deliveries...............................................................2 ARTICLE II PURCHASE PRICE............................................................................3 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLERS............................................3 Section 3.1 Organization.....................................................................4 Section 3.2 Ownership of Shares..............................................................4 Section 3.3 Authorization; Validity of Agreements............................................4 Section 3.4 No Violations; Consents and Approvals............................................5 Section 3.5 Agreements With the Company......................................................6 Section 3.6 Litigation.......................................................................7 Section 3.7 Disclosure.......................................................................7 Section 3.8 Brokers..........................................................................7 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER...........................................7 Section 4.1 Organization.....................................................................7 Section 4.2 Authorization; Validity of Agreement.............................................8 Section 4.3 No Violations; Consents and Approvals............................................8 Section 4.4 Financing........................................................................9 Section 4.5 Accredited Investor..............................................................9 Section 4.6 Brokers..........................................................................9 Section 4.7 Information.....................................................................10 ARTICLE V COVENANTS.................................................................................10 Section 5.1 Certain Agreements with Respect to the Company..................................10 Section 5.2 Consents and Approvals; Performance; Reasonable Best Efforts....................11 Section 5.3 Acquisition Proposals...........................................................14 Section 5.4 Agreements with the Company.....................................................14 Section 5.5 Acquisition of Other Shares Prior to Closing....................................15 Section 5.6 Release of Liens................................................................15 Section 5.7 Notification of Certain Matters.................................................16 Section 5.8 Press Releases and Public Announcements.........................................16 Section 5.9 Further Assurances..............................................................16 Section 5.10 Confidentiality.................................................................16 ARTICLE VI CONDITIONS...............................................................................17 Section 6.1 Conditions to Each Party's Obligation...........................................17 Section 6.2 Conditions to the Obligation of the Sellers.....................................18 Section 6.3 Conditions to Obligation of the Purchaser.......................................19 Section 6.4 Frustration of Closing Conditions...............................................21 ARTICLE VII TERMINATION.............................................................................21 Section 7.1 Termination.....................................................................21 Section 7.2 Effect of Termination...........................................................22 ARTICLE VIII MISCELLANEOUS..........................................................................23 Section 8.1 Survival........................................................................23 Section 8.2 Indemnification.................................................................23 Section 8.3 Amendment; Waiver...............................................................24 Section 8.4 Fees and Expenses...............................................................24 Section 8.5 Notices.........................................................................24 Section 8.6 Interpretation; Seller Obligations..............................................27 Section 8.7 Headings........................................................................27 Section 8.8 Counterparts....................................................................28 Section 8.9 Entire Agreement................................................................28 Section 8.10 No Third Party Beneficiaries....................................................28 Section 8.11 Severability....................................................................28 Section 8.12 Specific Performance............................................................28 Section 8.13 Governing Law...................................................................28 Section 8.14 Submission to Jurisdiction......................................................28 Section 8.15 Waiver of Jury Trial............................................................29 Section 8.16 Assignment......................................................................29
TABLE OF DEFINED TERMS Term Page - ---- ---- Acquisition Proposal........................................................14 Action.......................................................................7 affiliate...................................................................27 Agreement....................................................................1 beneficial ownership........................................................27 Business Day.................................................................2 Closing......................................................................2 Closing Date.................................................................2 Closing Date Gross Amount...................................................20 Closing Date Net Amount.....................................................20 Common Stock.................................................................1 Company......................................................................1 Company Contracts............................................................6 Confidential Information....................................................17 Contract.....................................................................6 Department...................................................................6 Deposit Amount..............................................................20 Determination Date...........................................................2 DSC..........................................................................1 DSC Percentage...............................................................2 Form A Filing................................................................8 Governmental Approvals......................................................12 Governmental Entity..........................................................5 HSR Act......................................................................9 JCF..........................................................................1 JCF Percentage...............................................................1 JCF Stake....................................................................2 knowledge...................................................................27 Laws........................................................................12 Liens........................................................................4 Material Negative Condition.................................................12 Other Shares................................................................15 Outside Date................................................................22 Per Share Purchase Price.....................................................3 Person.......................................................................4 Purchaser....................................................................1 Registration Rights Agreement...............................................15 Reinsurance Contracts........................................................6 Release of Liens............................................................15 Representatives.............................................................14 Seller.......................................................................1 Seller Disclosure Schedule...................................................4 Sellers......................................................................1 Shares.......................................................................1 Subsidiary...................................................................7 VFIC.........................................................................1 VIG..........................................................................1 VIG Credit Agreement........................................................15 VIG Liens...................................................................15 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of June 14, 2005 (this "Agreement"), by and among Vesta Insurance Group, Inc., a Delaware corporation ("VIG"), Vesta Fire Insurance Corporation, an Illinois insurance company ("VFIC", and together with VIG, collectively the "Sellers" and each individually, a "Seller"), and New Affirmative LLC, a Delaware limited liability company (the "Purchaser"), and in each case solely for the purposes of Sections 1.1(b), 4.3, 5.2, 5.5, 5.8 and Article VIII (other than 8.1 and 8.2) hereof, J.C. Flowers I LP, a Delaware limited partnership ("JCF"), and Delaware Street Capital Master Fund, L.P., a Cayman Islands exempted limited partnership ("DSC") (it being understood that the obligations of JCF and DSC, respectively, under Sections 1.1(b), 4.3, 5.2, 5.5, 5.8 and the applicable Sections of Article VIII shall be as to itself only several and not joint and several). WHEREAS, the Sellers collectively own in the aggregate 5,218,228 shares (the "Shares") of common stock, par value $.01 per share (the "Common Stock"), of Affirmative Insurance Holdings, Inc., a Delaware corporation (the "Company"); WHEREAS, the Sellers desires to sell to the Purchaser, and the Purchaser desires to purchase from the Sellers, the Shares, on the terms and subject to the conditions set forth herein; and NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows. ARTICLE I PURCHASE AND SALE OF THE SHARES Section 1.1 Purchase and Sale of the Shares. (a) At the Closing (as defined in Section 1.2) and upon the terms and subject to the conditions set forth in this Agreement, the Sellers shall sell, assign, transfer, convey and deliver to the Purchaser, and the Purchaser shall accept and purchase from the Sellers, the Shares, free and clear of all Liens (as defined in Section 3.2). (b) In connection with the obligations of the Purchaser, (a) JCF agrees to severally, but not jointly, at the Closing guarantee the full and punctual payment of the JCF Percentage (as defined herein) of the aggregate Per Share Purchase Price by the Purchaser and (b) DSC agrees to severally, but not jointly, at the Closing guarantee the full and punctual payment of the DSC Percentage (as defined herein) of the aggregate Per Share Purchase Price by the Purchaser. For the purposes of this Agreement, the "JCF Percentage" shall be equal to the amount (expressed as a percentage) of (i)(A)(I) the sum of (x) the number of shares of common stock of Affirmative owned by DSC two (2) days prior to the Closing Date (such date, the "Determination Date"), (y) the number of shares, if any, of common stock of Affirmative owned by JCF and its affiliates on the Determination Date (the "JCF Stake") and (z) 5,218,228 shares of common stock of Affirmative divided by (II) two (2) minus (B) the JCF Stake divided by (ii) 5,218,228. For the purposes of this Agreement, the "DSC Percentage" shall be equal to one hundred percent (100%) minus the JCF Percentage. Section 1.2 Closing. The closing of the purchase and sale of the Shares and the other transactions contemplated hereby (the "Closing") will take place at 10:00 a.m., New York time, on the date that is two (2) Business Days (as defined below) after satisfaction or waiver of all of the conditions set forth in Article VI hereof (other than those conditions which by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions) (the "Closing Date"), at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York 10036 unless another date or place is agreed to in writing by the parties hereto. For purposes of this Agreement, "Business Day" shall mean any day other than a Saturday, Sunday or other day on which banks in New York, New York are authorized or required by Law to be closed for regular banking business. Section 1.3 Closing Deliveries. (a) Deliveries by the Sellers. At the Closing, the Sellers shall deliver to the Purchaser: (i) stock certificates representing the Shares, duly endorsed in favor of the Purchaser or accompanied by a separate stock power duly and validly executed by the applicable Seller and otherwise sufficient to vest in the Purchaser good and valid title to the Shares (with all necessary transfer tax and all other revenue stamps attached thereto), free and clear of all Liens; (ii) an executed receipt for the aggregate Per Share Purchase Price (as defined in Article II); (iii) an executed certificate signed by an executive officer of each of the Sellers delivered pursuant to Section 6.3(d); (iv) an executed instrument of assignment and transfer with respect to the Sellers' rights under the Registration Rights Agreement with respect to the Shares pursuant to Section 5.4(c); (v) the certificates referred to in Section 6.3(h) and (i) duly executed by an executive officer of each of the Sellers (which shall have been delivered five (5) days prior to the Closing Date pursuant to Section 6.3(h) and (i), respectively); (vi) a statement of each of the Sellers in form and substance reasonably satisfactory to the Purchaser that satisfies the Purchaser's obligations under Treasury Regulation ss. 1.1445-2(b) or (c), as applicable; and (vii) such other documents, agreements, instruments, writings and certificates as the Purchaser may reasonably request to effect the transactions contemplated hereby, in form and substance reasonably satisfactory to the Purchaser. (b) Deliveries by the Purchaser. At the Closing, the Purchaser shall deliver to the Sellers: (i) the aggregate Per Share Purchase Price for the Shares, by delivery by wire transfer of immediately available funds to an account designated by the Sellers not later than two (2) Business Days prior to the Closing Date; (ii) an executed certificate signed by an executive officer of the Purchaser delivered pursuant to Section 6.2(c); and (iii) such other documents, agreements, instruments, writings and certificates as the Sellers may reasonably request to effect the transactions contemplated hereby, in form and substance reasonably satisfactory to the Sellers. ARTICLE II PURCHASE PRICE The purchase price per share for the Shares shall be equal to $15.00 (the "Per Share Purchase Price"). The Per Share Purchase Price shall be adjusted to reflect appropriately the effect of any forward or reverse stock split, stock dividend (including any dividend or distribution of securities exercisable or exchangeable for or convertible into Common Stock), cash or "in kind" dividend (other than regular cash dividends in amounts which are not in excess of the amounts previously paid by the Company), stock issuance or sale, reorganization, recapitalization, reclassification, combination, exchange of shares or other similar change with respect to the Common Stock occurring or with a record date on or after the date hereof and on or prior to the Closing. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLERS Simultaneously with the execution and delivery of this Agreement, the Sellers shall deliver to the Purchaser a disclosure schedule with numbered sections corresponding to the relevant sections in this Agreement (the "Seller Disclosure Schedule"). VIG and VFIC severally but not jointly represent and warrant to the Purchaser as follows: Section 3.1 Organization. VIG is a corporation duly organized, validly existing and in good standing under the Laws (as defined in Section 5.2) of the State of Delaware. VFIC is a corporation duly organized, validly existing and in good standing under the Laws of the State of Illinois. Section 3.2 Ownership of Shares. Except for VIG Liens with respect to the Shares held by VIG (as defined in Section 5.6), which shall be released at or prior to the Closing, the Sellers, as of the date hereof and at all times up to the Closing shall, own and have good and valid title to the Shares free and clear of all liens, claims, charges, encumbrances, security interests, mortgages, pledges, options, assessments, licenses, buy/sell agreements, preferential arrangements or other restrictions of any kind or nature whatsoever, including any restriction or covenant with respect to, or condition governing, the use, voting, transfer, receipt of income or other exercise of any attributes of, or material benefits associated with, ownership (collectively, "Liens"). At the Closing, the Sellers shall deliver to the Purchaser good and valid title to the Shares free and clear of all Liens. VIG owns directly 1,045,600 shares of Common Stock and VFIC owns directly 4,172,628 shares of Common Stock. The Shares represent all equity interests owned, directly or indirectly, by the Sellers or their affiliates in the Company or any of its Subsidiaries (as defined in Section 3.5(a)). Except for VIG with respect to the VIG Liens, which shall be released at or prior to the Closing, none of the Sellers is a party to any agreement creating rights with respect to the Shares in any individual, partnership, joint venture, trust, corporation, unincorporated entity or Governmental Entity (as defined in Section 3.4(b)) ("Person") and each of the Sellers has the full power and legal right to sell, assign, transfer and deliver the Shares. There are no existing warrants, options, stock purchase agreements, redemption agreements, restrictions of any nature, voting trust agreements, proxies, calls or rights to subscribe of any character relating to the Shares owned by any of the Sellers. None of the Sellers has received any notice of any adverse claim to the ownership of any of the Shares and has no knowledge of any facts that would reasonably be likely to give rise to any adverse claim to the ownership of the Shares. Section 3.3 Authorization; Validity of Agreements. Each of the Sellers has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by each of the Sellers and, assuming due authorization, execution and delivery of this Agreement by each of the other parties hereto, is a valid and binding obligation of each of the Sellers enforceable against such Sellers in accordance with its terms. Section 3.4 No Violations; Consents and Approvals. (a) Neither the execution, delivery and performance of this Agreement by the Sellers nor the consummation by the Sellers of the transactions contemplated hereby will (i) violate any provision of the certificate of incorporation or bylaws of either of the Sellers, (ii) except as set forth in Section 3.4(a) of the Seller Disclosure Schedule, result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any loan or credit agreement, note, bond, mortgage, indenture, guarantee, other evidence of indebtedness, lease, license, contract, agreement or other instrument or obligation to which the Sellers or to the knowledge of the Sellers, the Company or any of its Subsidiaries, is a party or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Sellers or the Shares or any of the Sellers' properties or assets, except in the case of the preceding clauses (ii) and (iii), for those conflicts, breaches, violations, defaults or accelerations that would not, individually or in the aggregate (x) have, or be reasonably likely to have a material adverse effect on the ability of the Sellers to (1) perform their obligations under this Agreement or (2) consummate the transactions contemplated hereby or (y) reasonably be likely to (1) adversely affect the attributes of, or material benefits associated with, ownership of the Shares by the Purchaser (including dividend and voting rights) at and following the Closing or (2) result in the Purchaser incurring a material liability. No representation is being made with regard to any conflicts, breaches, violations, defaults or accelerations which occur by reason of the regulatory or legal status of the Purchaser, JCF or DSC or facts specifically pertaining to any of them. (b) Except as disclosed in Section 3.4(b) of the Seller Disclosure Schedule, no filing or registration with, notification to, or authorization, consent, approval or waiver of, any Governmental Entity (as defined below) is required in connection with the execution, delivery and performance of this Agreement by the Sellers or the consummation by the Sellers of the transactions contemplated hereby. For the purposes of this Agreement, "Governmental Entity" shall mean any (A) nation, principality, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature, (B) governmental or quasi-governmental entity of any nature, including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board, instrumentality, officer, official, representative, organization, taxing authority or unit and any court or other tribunal (foreign, federal, state or local), (C) Person, or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any nature, including the Department (as defined below), or (D) arbitrator or arbitration panel or similar person or body. For the purposes of this Agreement, "Department" shall mean the Illinois Department of Financial and Professional Regulation - Division of Insurance. No representation is being made with regard to any filing or registration, notification, authorization, consent, approval or waiver which is required by reason of the regulatory or legal status of the Purchaser, JCF or DSC or facts specifically pertaining to any of them. Section 3.5 Agreements With the Company. Section 3.5 of the Seller Disclosure Schedule sets forth a complete, accurate and current list of all material contracts, commitments, arrangements, licenses, obligations, indentures, deeds of trust or other instruments or agreements (each, a "Contract") between the Sellers or any of their affiliates (other than the Company and its Subsidiaries), on the one hand, and the Company or any of its Subsidiaries (as defined below), on the other hand (collectively the "Company Contracts"), including any Contract pursuant to which the Sellers provide reinsurance to the Company or any of its Subsidiaries (or vice versa), any related arrangement pursuant to which the Sellers have collateralized (to the Company or its Subsidiaries or to any third party) their obligations under such Contracts or any Contract pursuant to which the Seller has authorized the Company or any of its Subsidiaries to underwrite insurance on its behalf (or vice versa) (collectively, the "Reinsurance Contracts"). The Sellers have previously delivered to the Purchaser the Sellers' forecasted Case and IBNR reserves for the Reinsurance Contracts as of each quarter end in 2005. Each Company Contract is a valid and binding obligation of the Sellers or their affiliates and, to the knowledge of the Sellers, is a valid and binding obligation of the Company or its Subsidiaries, as applicable, and is in full force and effect and enforceable by the applicable Seller or its affiliates, on the one hand, and the Company or its Subsidiaries, on the other hand, in accordance with its terms. Each of the Sellers or their applicable affiliates has performed, and to the knowledge of the Sellers, each of the Company and its Subsidiaries has performed, all material obligations required to be performed by it under each Company Contract, and there has been no breach or default or claim of default by it or, to its knowledge, by the Company or any of its Subsidiaries, under any provision thereof and no event has occurred which, with or without notice, the passage of time or both, would constitute a breach or default by it, or, to its knowledge, the Company or any of its Subsidiaries as applicable, under any provision thereof or that would permit modification, acceleration or termination of any Company Contract by any of the Sellers or their affiliates, on the one hand, or the Company or any of its Subsidiaries, on the other hand, or any other party thereto. Except as set forth in Section 3.5 of the Seller Disclosure Schedule, the enforceability after the Closing by the Company or its Subsidiaries of the Company Contracts shall not be adversely affected by the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby and no notice to, or consent, approval or waiver is required from any Person. From and after the Closing, the Registration Rights Agreement shall be enforceable against the Company by the Purchaser and no notice to, or consent or approval of any Person is required in order to effect the assignments of the Registration Rights Agreement pursuant to this Agreement. Complete, accurate and current copies of each of the Company Contracts (including any amendments and/or supplements thereto) set forth in Section 3.5 of the Seller Disclosure Schedule have been delivered to the Purchaser by the Sellers. Neither Seller has knowledge of any facts or circumstances that would reasonably be likely to be the basis for any material Action (as defined in Section 3.6) by the Sellers, or any of their Subsidiaries, on the one hand, against the Company or any of its Subsidiaries, on the other hand, relating to or under any Company Contract. As used in this Agreement, the term "Subsidiary" shall mean, with respect to any Person, any corporation or other entity of which 50% or more of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such entity is directly or indirectly owned by such Person. Section 3.6 Litigation. There is no suit, action, arbitration, proceeding or investigation (each, an "Action") which is pending or, to the knowledge of the Sellers, threatened, against either of the Sellers or their respective Subsidiaries or any of their respective assets, properties or businesses which would, individually or in the aggregate have, or be reasonably likely to have a material adverse effect on the ability of the Sellers to (a) perform their obligations under this Agreement or (b) consummate the transactions contemplated hereby. Section 3.7 Disclosure. No statement in this Agreement, any schedule attached hereto or certificate delivered pursuant hereto contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. Section 3.8 Brokers. Other than Sagent Advisors, the fees and expenses of which shall be paid solely by the Sellers, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Sellers. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to the Sellers as follows: Section 4.1 Organization. The Purchaser, and solely for the purposes of Section 4.3, JCF and DSC (each as to itself only several and not joint and several) is a limited liability company duly organized, validly existing and in good standing under the Laws of the State of Delaware. Section 4.2 Authorization; Validity of Agreement. The Purchaser has the requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Purchaser of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized, and no other proceedings on the part of the Purchaser are necessary to authorize the execution and delivery of this Agreement by the Purchaser and the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Purchaser and, assuming due authorization, execution and delivery of this Agreement by the Sellers, is a valid and binding obligation of the Purchaser enforceable against it in accordance with its terms. Section 4.3 No Violations; Consents and Approvals. (a) Neither the execution, delivery and performance of this Agreement by the Purchaser, JFC or DSC nor the consummation by the Purchaser, JFC or DSC of the transactions contemplated, JCF or DSC hereby will (i) violate any provision of the limited liability company agreement or limited partnership agreement, as the case may be, of the Purchaser, JCF or DSC, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any material note, bond, mortgage, indenture, guarantee, other evidence of indebtedness, license, lease, contract, agreement or other instrument or obligation to which the Purchaser, JCF or DSC or any of its respective Subsidiaries is a party or by which any of them or any of their assets may be bound or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Purchaser, JCF or DSC, any of its respective Subsidiaries or any of its respective properties or assets, except in the case of the preceding clauses (ii) and (iii), for those conflicts, breaches, violations, defaults or accelerations that would not, individually or in the aggregate, have, or be reasonably likely to have a material adverse effect on the ability of the Purchaser, JCF or DSC to (x) perform its obligations under this Agreement or (y) consummate the transactions contemplated hereby. No representation is being made with regard to any conflicts, breaches, violations, defaults or accelerations which occur by reason of the regulatory or legal status of the Sellers or the Company or facts specifically pertaining to any of them. (b) Except for (i) the filing with, and the written approval of the Department in respect of, the Form A, Statement Regarding the Acquisition of, Control of a Domestic Insurer with respect to the transactions contemplated hereby (the "Form A Filing"), (ii) the filing of a Statement on Schedule 13D with the Securities and Exchange Commission and any securities exchange on which the Company's securities are listed, (iii) the filing of a Form 3 with the SEC and any other filings with the SEC as may be necessary or appropriate and (iv) the required filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), no filing or registration with, notification to, or authorization, consent, approval or waiver of, any Governmental Entity is required in connection with the execution and delivery of this Agreement by the Purchaser, JCF or DSC or the consummation by the Purchaser, JCF or DSC of the transactions contemplated hereby, except for such consents, approvals, orders, authorizations, notifications, registrations, declarations and filings the failure of which to be obtained or made would not, individually or in the aggregate, have, or be reasonably likely to have a material adverse effect on the ability of the Purchaser, JCF or DSC to (x) perform its respective obligations under this Agreement or (y) consummate the transactions contemplated hereby. No representation is being made with regard to any filing or registration, notification, authorization, consent, approval or waiver which is required by reason of the regulatory or legal status of the Sellers or the Company or facts specifically pertaining to any of them. Section 4.4 Financing. Subject to the satisfaction, or waiver by the Purchaser, of the conditions set forth in Section 6.1 and Section 6.3, the Purchaser will have at the Closing sufficient funds available to pay the Purchase Price and to satisfy and perform its obligations hereunder. Section 4.5 Accredited Investor (a) The Purchaser is acquiring the Shares to be acquired by it hereunder for its own account, solely for the purpose of investment and not with a view toward, or for sale in connection with, any distribution thereof, in violation of the federal securities Laws or any applicable foreign or state securities Law. (b) The Purchaser is an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act of 1933, as amended. (c) The Purchaser understands that the acquisition of the Shares to be acquired by it pursuant to the terms of this agreement involves substantial risk. The Purchaser and its officers have experience as an investor in securities and equity interests of companies such as the ones being transferred pursuant to this Agreement and the Purchaser acknowledges that it can bear the economic risk of its investment (which may be for an indefinite period) and has such knowledge and experience in financial or business matters that the Purchaser is capable of evaluating the merits and risks of its investment in the Shares to be acquired by it pursuant to the transactions contemplated hereby. Section 4.6 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Purchaser. Section 4.7 Information. Purchaser, JCF and DSC have sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the acquisition of the Shares and to make an informed investment decision with respect to such acquisition, and further acknowledge that the Sellers make no representation specifically regarding the value of the Shares. ARTICLE V COVENANTS Section 5.1 Certain Agreements with Respect to the Company. (a) During the period from the date hereof to the Closing Date, except (x) as expressly permitted by this Agreement or (y) with the express written consent of the Purchaser, the Sellers shall not, and shall cause each of their Subsidiaries not to: (i) acquire or hold any equity interest in the Company other than the Shares; (ii) transfer (which term shall include, without limitation, any sale, gift, pledge or other disposition), or consent to any transfer of (or enter into any contract, option or other agreement or understanding with respect to any transfer of), any or all of the Shares, or any interest therein; (iii) grant any proxy, power-of-attorney or other authorization in or with respect to the Shares or enter into any agreement relating to the Shares; (iv) incur or suffer to be incurred any Lien on any of the Shares (other than the VIG Liens, which shall be released at Closing); (v) make any loan, advance or capital contributions to, or investments in, the Company or its Subsidiaries; (vi) cause, or seek to cause, the Company and its Subsidiaries to declare, pay or make any regular or special cash dividends or other cash distributions with respect to the Shares or any other capital stock of the Company; (vii) agree or take any action, including by voting or giving a consent, to amend the certificate of incorporation or the bylaws of the Company; (viii) amend or terminate, waive any benefit under or exercise any registration right under, or agree to amend, terminate, waive any benefit under or exercise any registration right under, the Registration Rights Agreement; (ix) take any other action that would in any way restrict, limit or interfere with the performance of its obligations pursuant to this Agreement; or (x) agree or commit (including by voting the Shares) to do any of the foregoing. (b) The Sellers shall use their reasonable best efforts to cause the transactions contemplated hereby to be consummated as promptly as practicable and to permit the Purchaser to realize the attributes of, and material benefits associated with, ownership of the Shares, including dividend and voting rights; without limiting the generality of the foregoing, prior to the Closing, the Sellers shall not propose or consent to, and shall vote the Shares against, any action that is intended, or could reasonably be expected, to materially impede or delay, postpone or adversely affect the consummation of the transactions contemplated hereby or could otherwise adversely affect the attributes of, or material benefits associated with, ownership of the Shares by the Purchaser (including dividend and voting rights) at and following the Closing. Section 5.2 Consents and Approvals; Performance; Reasonable Best Efforts. (a) The parties shall, and shall use their reasonable best efforts to cause their affiliates (other than in the case of the Sellers with respect to the Company and its Subsidiaries) to, cooperate with each other and shall use their reasonable best efforts to (i) promptly prepare and to file all necessary documentation, and to effect all applications, notices, petitions and filings, with each Governmental Entity and each third party (other than a Governmental Entity) that are necessary or advisable to consummate the transactions contemplated hereby, including the purchase and sale of the Shares and (ii) obtain as promptly as practicable (A) all Governmental Approvals (as defined below), and (B) any permit, consent, approval, waiver or authorization of such third parties that are necessary or advisable to consummate the transactions contemplated hereby, including the purchase and sale of the Shares. Notwithstanding the other provisions of this Agreement, none of the Purchaser, DSC or JCF shall be obligated to take or refrain from taking, or to agree to take or refrain from taking, any action or to suffer to exist any restriction, limitation, condition or requirement that would, individually or in the aggregate with all other such actions, restrictions, limitations, conditions or requirements related thereto, reasonably be expected to result in (i) a material negative effect on the business or the condition (financial or otherwise), results of operations, operations, assets, properties or liabilities of (A) the Purchaser or any of its respective affiliates, as the case may be, or (B) the Company and its Subsidiaries, taken as a whole, including with respect to the Company and its Subsidiaries, any limitation or restriction on the declaration or payment of dividends, including with respect to the Shares; provided, that notwithstanding the foregoing, in no event shall the Purchaser or any of its affiliates be required to take any action (or refrain from taking any action) with respect to, or agree to the imposition of any limitation or restriction on, any of JCF's or DSC's other investments, (ii) a material negative effect on the benefits, taken as a whole, which the Purchaser, DSC or JCF or any of their respective affiliates, as the case may be, reasonably expected to derive from the consummation of the transactions contemplated hereby, including the purchase and sale of the Shares, (iii) a limitation on the ability of the Purchaser to vote (or act by written consent with respect to) all or a portion of the Shares or (iv) any requirement that any of the Purchaser, DSC or JCF or any of their respective affiliates make (or become obligated to make whether through notice, lapse of time or otherwise) any capital contribution to, or investment in, the Company or any of its Subsidiaries (clauses (i), (ii), (iii) and (iv) shall each be referred to as a "Material Negative Condition"). The parties and their respective directors and officers shall use their reasonable best efforts to (x) file as promptly as practicable, but in no event later than twenty (20) days after the date of this Agreement, all required applications and documents in connection with obtaining the Governmental Approvals (including as set forth in Section 5.2(c)) and shall act reasonably and promptly thereafter in responding to additional requests and comments in connection therewith and (y) obtain as promptly as practicable all other consents, authorizations, approvals and waivers, including, if applicable, after the Closing. "Governmental Approvals" shall mean all permits, licenses, certificates, franchises, concessions, approvals, consents, ratifications, permissions, clearances, confirmations, endorsements, waivers, certifications, filings, franchises, notices, variances, rights, designations, ratings, registrations, qualifications, authorizations or orders that are or have been issued, granted, given or otherwise made available by or under the authority of any Governmental Entity or pursuant to any Law. "Laws" shall mean applicable laws (including common law), statutes, codes, rules, regulations, orders, ordinances, judgments or decrees or other pronouncements having the effect of law in the United States or any foreign country or any state, county, city or other subdivision of any Governmental Entity. (b) Each of the parties shall (i) subject to Laws relating to exchange of information, consult with each of the other parties on all of the information relating to such party and any of their respective affiliates that appears in any filing made with, or written materials submitted to, any Governmental Entity or any other third party in connection with the transactions contemplated hereby, (ii) consult with each of the other parties with respect to the obtaining of any Governmental Approvals and any permit, consent, approval, waiver or authorization of a third party necessary or advisable to consummate the transactions contemplated hereby and (iii) keep each of the other parties apprised of the status of obtaining any Governmental Approvals and any permit, consent, approval, waiver or authorization of a third party necessary or advisable to consummate the transactions contemplated hereby. The party responsible for any such action shall promptly deliver to the other party evidence of the filing or making of all applications, filings, registrations, notifications, permits, consents, approvals, waivers and authorizations relating thereto, and any supplement, amendment or item of additional information in connection therewith, except for documents filed or submitted on a confidential basis with a Governmental Entity. (c) Without limiting the generality of the foregoing, as soon as practicable after the date hereof, (i) but in no event later than twenty (20) days following the date hereof, the Purchaser and, to the extent applicable, JCF and DSC shall submit a Form A Filing to the Department, (ii) the Sellers and their affiliates shall make all filings contemplated by Section 3.4(b) of the Seller Disclosure Schedule and (iii) the Purchaser and, to the extent applicable, JCF and DSC shall make the required filings under the HSR Act with the Federal Trade Commission and the Department of Justice. The parties shall promptly make any and all other filings and submissions of information with the Department and other Governmental Entities that are reasonably requested by the Department and other Governmental Entities in order to obtain the Governmental Approvals required by the Department and other Governmental Entities to consummate the transactions contemplated hereby. The Sellers agree to furnish the Purchaser with such necessary information and reasonable assistance as may be reasonably requested in connection with the preparation by the Purchaser of the Form A Filing and other filings or submissions (including, if requested by the Purchaser, by participating in telephonic or in-person meetings with the Department or any other Governmental Entity). (d) Each of the parties shall, upon request, furnish each other with all information concerning themselves and their affiliates, and such other matters as may be reasonably necessary in connection with any statement, filing, notice or application made by or on behalf of the Purchaser, the Sellers, the Company, DSC or JCF or any of their respective affiliates to any Governmental Entity in connection with the transactions contemplated hereby, including the purchase and sale of the Shares, except to the extent that such information would be, or relates to information that would be, filed under a bona fide claim of confidentiality. (e) Each of the parties shall (i) promptly advise each other party upon receiving any communication from any Governmental Entity or third party whose permit, consent, approval, waiver or authorization is required for consummation of the transactions contemplated hereby, including the purchase and sale of the Shares that causes such party to reasonably believe that there is a reasonable likelihood that any requisite permit, consent, approval, waiver or authorization of a Governmental Entity or third party will not be obtained or that the receipt of any such permit, consent, approval, waiver or authorization will be materially delayed and (ii) supply each other party with copies of all correspondence between such party or any of its representatives and Governmental Entities with respect to Governmental Approvals within two (2) Business Days of sending or receipt. (f) Each of the parties shall perform all acts to be performed by it pursuant to this Agreement and shall refrain from taking or omitting to take any action that would violate or cause to remain unfilled its covenants, obligations or agreements or breach its representations and warranties hereunder or render them inaccurate in any material respect as of the date of this Agreement or the Closing Date or that in any way would prevent or materially adversely affect the consummation of the transactions contemplated hereby. Subject to the limitations contained elsewhere in this Section 5.2, each of the parties shall use its reasonable best efforts to satisfy or cause to be satisfied all of the conditions to the obligations of the other parties set forth in Sections 6.2 and 6.3, respectively, and shall do all such further acts and things, as such either party may reasonably request for the purpose of carrying out the intent of this Agreement and transactions contemplated hereby. Section 5.3 Acquisition Proposals. The Sellers shall not, and shall cause their Subsidiaries and each of their respective directors, officers, employees, agents, consultants, advisors or other representatives, including legal counsel and accountants (collectively, "Representatives") not to, directly or indirectly, (x) solicit, initiate, knowingly encourage or knowingly facilitate (including by way of furnishing information) any inquiries or the making or submission of any proposal that constitutes, or may reasonably be expected to lead to, an Acquisition Proposal (as defined below), (y) participate or engage in discussions or negotiations with, or disclose any non public information or data relating to the Shares, the Company or its Subsidiaries or any of the Company Contracts to any Person that has made an Acquisition Proposal or to any Person in contemplation of an Acquisition Proposal, or (z) accept an Acquisition Proposal or enter into any agreement or agreement in principle providing for or relating to an Acquisition Proposal or enter into any agreement or agreement in principle requiring the Sellers to, or which contemplates that the Sellers shall, abandon, terminate or fail to consummate the transactions contemplated hereby. Concurrently with execution of this Agreement, the Sellers shall, and shall cause their respective Representatives to, immediately cease any existing discussions or negotiations, if any, with any Persons conducted heretofore with respect to any Acquisition Proposal and request the return or destruction of any confidential information concerning the Company and it Subsidiaries that has been provided to any such Person in connection therewith. The Sellers shall notify the Purchaser (and provide all details reasonably requested by the Purchaser) promptly, but in any event within seventy-two (72), if the Sellers or any of their affiliates receives any Acquisition Proposal. For the purposes of this Agreement, "Acquisition Proposal" shall mean any inquiry, proposal or offer from any Person (other than the Purchaser or any of its affiliates) concerning any sale, transfer, lease, assignment, pledge, hypothecation or other disposition of any or all of the Shares or any other capital stock or other equity interests of the Company, including any single or multi-step transaction or series of related transactions. Section 5.4 Agreements with the Company. (a) The Sellers shall not, without the prior written consent of the Purchaser, extend, modify, terminate or renew (or take any action to cause the Company to extend, modify, terminate or renew) any Company Contract (including any Reinsurance Contract, except as expressly set forth in clause (b) below), or enter (or agree to enter) into any Contract which would have been a Company Contract had such Contract been in existence on the date hereof. (b) The Sellers shall maintain and renew each Reinsurance Contract for a period of one (1) year following the Closing on the terms currently in force, unless such Reinsurance Contract is earlier terminated by the Company in accordance with the terms of such Reinsurance Contract following the Closing; provided, that the arrangements under each such Reinsurance Contract shall continue in all material respects in a manner consistent with past practice and any unilateral action by the Sellers shall not be considered in determining whether arrangements under such Reinsurance Contract continue in all material respects in a manner consistent with past practice. (c) At the Closing, the Sellers shall assign and transfer to the Purchaser all rights of the Sellers under the Registration Rights Agreement, dated May 27, 2004 between the Sellers, on the one hand, and the Company, on the other hand (the "Registration Rights Agreement"). Section 5.5 Acquisition of Other Shares Prior to Closing. If prior to Closing, the Purchaser, JCF or DSC enter into an agreement to acquire, or commence a tender offer to acquire (which is in fact consummated), all of the Common Stock of the Company not held by the Sellers (the "Other Shares") then, in the event that such acquisition is subsequently consummated (whether before or after the Closing), the Purchaser shall pay to the Sellers, at the time of the consummation of the purchase of the Other Shares, an amount equal to (i) one half of the excess of the per share price paid for the Other Shares over the Per Share Purchase Price, multiplied by (ii) the number of Shares. Section 5.6 Release of Liens. At or prior to the Closing, in connection with the foregoing and with respect to any Liens of any kind on any of the Shares pursuant to the VIG Credit Agreement (as defined below) (the "VIG Liens"), the Sellers shall take all necessary action to negotiate and enter into appropriate agreements with First Commercial Bank to obtain the release of all such Liens in connection with VIG's credit agreement (the "VIG Credit Agreement"), dated September 30, 2004 with First Commercial Bank (collectively, the "Release of Liens") and shall deliver to the Purchaser evidence in form and substance reasonably satisfactory to the Purchaser of the Release of Liens. To the extent applicable, such evidence shall include the delivery of Uniform Commercial Code financing UCC-3 collateral change statements, discharges or other appropriate termination statements, recordings and other actions that the Purchaser deems necessary or advisable. For the avoidance of doubt, the Sellers' obligations pursuant to this Section 5.6 shall include, if necessary, the payment at or prior to the Closing by Sellers in full of any and all outstanding indebtedness and other amounts due under the VIG Credit Agreement. Section 5.7 Notification of Certain Matters. From the date hereof through the Closing, the Sellers shall give prompt written notice to the Purchaser and the Purchaser shall give prompt written notice to the Sellers of (a) the occurrence, or failure to occur, of any event which occurrence or failure would be reasonably likely to cause any of the Sellers' or the Purchaser's respective representations or warranties contained in this Agreement to be untrue or inaccurate in any material respect and (b) any material failure of the Sellers or the Purchaser to comply with or satisfy any of their or its respective covenants, conditions or agreements to be complied with or satisfied by them under this Agreement; provided, however, that such disclosure shall not be deemed to cure any breach of a representation, warranty, covenant or agreement, or to satisfy any condition. Section 5.8 Press Releases and Public Announcements. No party shall issue any press release or make any public announcement relating to the subject matter of this Agreement prior to the Closing without the prior written approval of the other party; provided, however, that any party may make any disclosure it believes in good faith is required by applicable Law (including, without limitation, the Form A Filing with the Department and any requirement to file a Form 8-K or Statement on Schedule 13D with the Securities and Exchange Commission and any securities exchange on which the Company's securities are listed) or any listing or trading agreement concerning its publicly-traded securities. In the case of any such public disclosure (other than the filing of the Form A Filing with the Department and a Form 8-K or Statement on Schedule 13D with the Securities and Exchange Commission and any securities exchange on which the Company's securities are listed), the disclosing party shall, prior to making such disclosure, use its reasonable best efforts to advise the other party as promptly as practicable, allow the other party reasonable time to comment on such disclosure and consider the views of the other party in respect of such disclosure, all unless impracticable. Section 5.9 Further Assurances. At any time and from time to time after the Closing Date, the parties hereto shall (a) furnish upon reasonable request to each other such further assurances, information, documents, instruments of transfer or assignment, files and books and records, (b) promptly execute, acknowledge, and deliver any such further assurances, documents, instruments of transfer or assignment, files and books and records and (c) do all such further acts and things, as such other party may reasonably request for the purpose of carrying out the intent of this Agreement and transactions contemplated hereby. Section 5.10 Confidentiality. (a) Each of the parties hereto shall hold and shall cause their respective affiliates to hold, and shall each cause their respective past, present and future Representatives to hold, in confidence and not disclose or release without the prior written consent of the party to which such Confidential Information (as defined below) belongs, any and all Confidential Information of the other parties; provided, that any party may disclose, or may permit disclosure of, Confidential Information (i) to its Representatives who have a need to know such information and are informed of their obligation to hold such information confidential to the same extent as is applicable to the parties hereto and in respect of whose failure to comply with such obligations such disclosing party will be responsible or (ii) if a party hereto, its affiliates or its Representatives are compelled to disclose any such Confidential Information by judicial or administrative process or, in its reasonable judgment, by other requirements of Law (including without limitation the Form A Filing with the Department and any requirement to file a Form 8-K or Statement on Schedule 13D with the Securities and Exchange Commission and any securities exchange on which the Company's securities are listed). Notwithstanding the foregoing, in the event that any demand or request for disclosure of Confidential Information is made pursuant to clause (ii) above (except for the matters set forth in the parenthetical contained in clause (ii) above), the applicable parties, as the case may be, shall promptly notify the other relevant parties of the existence of such request or demand and shall provide such other parties a reasonable opportunity to seek an appropriate protective order or other remedy, which both parties will cooperate in obtaining (each at their own expense). For the purposes of this Agreement, "Confidential Information" shall mean all proprietary technical, economic, environmental, operational, financial and/or other business information or material of one party which, prior to the Closing Date, has been disclosed by any such party in written, oral (including by recording), electronic or visual form to, or otherwise has come into the possession of, any other party (except, in each case, to the extent that such information can be shown to have been (1) in the public domain through no fault of any other such party or its affiliates, (2) lawfully acquired from other sources by any other such party or its affiliates to which it was furnished or (3) developed by or for any other such party without reference to the Confidential Information; provided, however, in the case of subclause (2) that such sources did not provide such information in breach of any confidentiality or other legal obligations of which the receiving party had knowledge). ARTICLE VI CONDITIONS Section 6.1 Conditions to Each Party's Obligation. The respective obligation of each party to effect the transactions contemplated hereby shall be subject to the satisfaction or, to the extent permitted by applicable Law, waiver at or prior to the Closing of each of the following conditions: (a) no statute, rule, order, decree or regulation shall have been enacted or promulgated by any Governmental Entity of competent jurisdiction which prohibits the transactions contemplated hereby or makes such transactions illegal; (b) all Governmental Approvals which are necessary for the consummation of the transactions contemplated hereby shall have been filed, have occurred or have been obtained and all such Governmental Approvals shall be in full force and effect (other than the expiration of the applicable waiting period under the HSR Act that is addressed in Section 6.1(c)); (c) the waiting period (and any extension thereof) applicable to the transactions contemplated hereby under the HSR Act or any other applicable competition, merger control, antitrust or similar Law shall have been terminated or shall have expired; and (d) there shall be no order, writ, judgment, injunction, decree, stipulation, determination, or award entered and in effect precluding, restraining, enjoining or prohibiting consummation of the transactions contemplated hereby and there shall not be pending any suit, action, proceeding or investigation by a Governmental Entity seeking to restrain, enjoin or prohibit the transactions contemplated hereby. Section 6.2 Conditions to the Obligation of the Sellers. The obligation of the Sellers to effect the transactions contemplated hereby is further subject to the satisfaction or, to the extent permitted by applicable Law, waiver at or prior to the Closing of the following conditions: (a) the representations and warranties of the Purchaser contained herein shall be true and correct as of the date hereof and as of the Closing Date as though made on the Closing Date (without regard to materiality qualifiers contained therein), except (i) to the extent such representations and warranties expressly speak as of an earlier date, in which case as of such earlier date and (ii) for those failures to be true and correct that would not, individually or in the aggregate, have, or be reasonably likely to (x) have a material adverse effect on the ability of the Purchaser to (1) perform their obligations under this Agreement or (2) consummate the transactions contemplated hereby or (y) result in the Sellers incurring a material liability; (b) the Purchaser, JCF and DSC shall have performed in all material respects each of its respective agreements and covenants contained in or contemplated by this Agreement that are required to be performed by it at or prior to the Closing pursuant to the terms hereof; and (c) each of the Sellers shall have received a certificate signed by an executive officer of the Purchaser, dated the Closing Date, to the effect that, to such executive officer's knowledge, the conditions set forth in Sections 6.2(a) and 6.2(b) hereof have been satisfied. Section 6.3 Conditions to Obligation of the Purchaser. The obligation of the Purchaser to effect the transactions contemplated hereby is further subject to the satisfaction or, to the extent permitted by applicable Law, waiver at or prior to the Closing of the following conditions: (a) the representations and warranties of the Sellers contained herein shall be true and correct as of the date hereof and as of the Closing Date as though made on the Closing Date (without regard to materiality qualifiers contained therein), except (i) to the extent such representations and warranties expressly speak as of an earlier date, in which case as of such earlier date and (ii) for those failures to be true and correct that would not, individually or in the aggregate have, or be reasonably likely to (A) have a material adverse effect on (x) the ability of the Sellers to (1) perform its obligations under this Agreement or (2) consummate the transactions contemplated hereby or (y) the attributes of, or material benefits associated with, ownership of the Shares by the Purchaser (including dividend and voting rights) at and following the Closing or (B) result in the Purchaser incurring a material liability; (b) the Sellers shall have performed in all material respects each of its agreements and covenants contained in or contemplated by this Agreement that are required to be performed by it at or prior to the Closing pursuant to the terms hereof; (c) neither the Sellers nor the Company nor any of their respective affiliates shall have taken any action which (i) has the effect of prohibiting the Purchaser from acquiring all of the Shares or (ii) could reasonably be likely to adversely affect any attributes of, or material benefits associated with, the Purchaser's ownership of the Shares (including dividend and voting rights); provided, however, that in the event of the occurrence of any action with respect to any matter described in clause (ii) above, this condition shall be deemed to have been automatically waived by the Purchaser for the limited purposes of such action if the Purchaser has not terminated this Agreement under Section 7.1(f) on or before the date that is ten (10) Business Days from the date that the Purchaser received written notice from the Sellers of such action; (d) the Purchaser shall have received a separate certificate signed by an executive officer each of the Sellers, dated the Closing Date, to the effect that the conditions set forth in Sections 6.3(a), 6.3(b), 6.3(c), 6.3(e), 6.3(g), 6.3(h), 6.3(i) and 6.3(j) hereof have been satisfied; (e) the Sellers shall deliver evidence in form and substance reasonably satisfactory to the Purchaser that the Release of Liens has occurred including, without limitation, the delivery of Uniform Commercial Code financing UCC-3 collateral change statements, discharges or other appropriate termination statements, recordings and other actions that the Purchaser deems necessary or advisable; (f) no Governmental Approval that is necessary for the consummation of the transactions contemplated hereby shall contain a Material Negative Condition; provided, however, that, without limiting the Purchaser's rights under this condition with respect to any of clauses 5.2(a)(i), (iii) and (iv), the Purchaser's right to invoke the condition as it solely relates to any action, limitation, condition or restriction of the type described in Section 5.2(a)(ii) shall expire on the next Business Day following the date that is one-hundred twenty (120) days following the date of this Agreement; (g) the capital and surplus of VFIC set forth in its latest quarterly statement on file with or submitted to the Department as of the business day immediately preceding the Closing Date shall not be less than $90,000,000; (h) the gross amounts owed as of the most recent quarter-end prior to the Closing Date for which such data is available (which in any event shall be for the most recent quarter then ended if the Closing Date occurs on or after forty-five (45) days following the end of the most recent quarter then ended) by the Sellers and their affiliates to the Company and its affiliates pursuant to the Reinsurance Contracts (the "Closing Date Gross Amount") shall at the Closing in no event exceed the amounts stated in the information previously provided by the Sellers to the Purchaser; provided, that five (5) Business Days prior to the Closing Date the Sellers shall deliver to the Purchaser a statement of the such Closing Date Gross Amount and, to the extent such Closing Date Gross Amount exceeds the amounts stated in the information previously provided by the Sellers to the Purchaser, the Sellers shall have ten (10) Business Days to cure such excess amounts; (i) at the Closing Date: (A) the amount equal to (x) the Closing Date Gross Amount less (y) the amounts on deposit in the security fund (the "Deposit Amount") as of the Closing Date securing the obligations of the Seller to the Company under the Reinsurance Agreements pursuant to the Security Fund Agreement, dated September 3, 2004 (or any successor thereto) (such resulting amount, the "Closing Date Net Amount"), shall be not more than (B) the amount equal to 2/3 multiplied by (x) the gross amounts stated in the information previously provided by the Sellers to the Purchaser as of December 31, 2004 less (y) the Deposit Amount as of December 31, 2004; provided that five (5) Business Days prior to the Closing Date the Sellers shall deliver to the Purchaser a statement of the Closing Date Net Amount and to the extent the Closing Date Net Amount exceeds the Closing Date Target Net Amount, the Sellers shall have ten (10) Business Days to cure such excess amounts; (j) (x) neither VFIC nor any of its business, operations, assets or contractual arrangements is subject (whether through notice, lapse of time or otherwise) to (i) a plan of supervision or monitorship or (ii) an order of rehabilitation, receivership or liquidation, in each case, by the Department or other Governmental Entity and (y) neither of the Sellers nor any of their respective subsidiaries has commenced or have filed a petition with respect to, or is reasonably expected to commence or file a petition to, in each case, whether voluntary or involuntary, any liquidation, receivership, rehabilitation, bankruptcy, winding-up, dissolution or similar proceeding under applicable law; and (k) the Sellers shall have delivered, or have caused to be delivered, to the Purchaser, as applicable, all of the items set forth in Section 1.3(a). Section 6.4 Frustration of Closing Conditions. None of the parties may rely on the failure of any condition set forth in this Article VI to be satisfied if such failure was caused by the failure of such party to act in good faith or to use its reasonable best efforts to cause the Closing to occur. ARTICLE VII TERMINATION Section 7.1 Termination. Notwithstanding anything herein to the contrary, this Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time before the Closing occurs: (a) by the mutual written consent of each of the Purchaser and the Sellers; (b) by either the Sellers or the Purchaser, if any Governmental Entity shall have issued a statute, order, decree or regulation or taken any other action (which statute, order, decree, regulation or other action the parties hereto shall use their reasonable commercial efforts to lift), in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated hereby or making the transactions contemplated hereby illegal and such statute, order, decree, regulation or other action shall have become final and non-appealable; (c) by written notice of the Purchaser, if the Sellers breach or fail to perform in any material respect any of their representations, warranties or covenants contained in this Agreement, which breach or failure to perform (i) would or would reasonably be expected to give rise to the failure of a condition set forth in Section 6.1 or 6.3, and (ii) cannot be or has not been cured within thirty (30) days after the giving of written notice to the Sellers of such breach; (d) by written notice of the Sellers, if the Purchaser breaches or fails to perform in any material respect any of its representations, warranties or covenants contained in this Agreement, which breach or failure to perform (i) would or would reasonably be expected to give rise to the failure of a condition set forth in Section 6.1 or 6.2, and (ii) cannot be or has not been cured within thirty (30) days after the giving of written notice to the Purchaser of such breach; (e) by written notice of either the Sellers or the Purchaser if the Closing shall not have occurred on or prior to December 12, 2005 (the "Outside Date"); provided, further, that the right to terminate this Agreement under this Section 7.1(e) shall not be available to a party hereto, if such party hereto has failed to perform in all material respects its obligations under this Agreement and such failure has been the cause of, or results in, the failure of the Closing to occur on or before the Outside Date; (f) by the Purchaser if the Sellers or the Company, or any of their respective affiliates have taken any action, which action could reasonably be likely to adversely affect any attributes of, or material benefits associated with the Purchaser's ownership of the Shares; provided, that the Purchaser's ability to exercise its termination rights pursuant to this Section 7.1(f) due to any such specific action shall expire (for the limited purpose of such action) if the Purchaser has not exercised its termination right hereunder on or prior to the date that is ten (10) Business Days from the date the Purchaser received written notice from the Sellers of the occurrence of such action; or (g) by written notice of the Purchaser, in the event that the Department notifies the Purchaser, at any time that on or prior to the date that is one-hundred twenty (120) days following the date of this Agreement, in writing (specifically detailing any action, limitation, condition or restriction) that as a requirement of approving the Form A Filing it will impose or require a Material Negative Condition of the type described in Section 5.2(a)(ii) in the approval order with respect to the Form A Filing; provided, that the Purchaser's ability to exercise its termination rights pursuant to this Section 7.1(g) due to any such action, limitation, condition or restriction shall expire on the date that is the next Business Day following the date that is one hundred twenty (120) days following the date of this Agreement; provided, further, that nothing in this Section 7.1(g) shall in any way limit the Purchaser's rights under the conditions set forth in Section 6.3(f) with respect to any of clauses 5.2(a)(i), (iii) and (iv) whether prior to or after such date. Section 7.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 7.1 hereof, written notice thereof shall forthwith be given to the other party specifying the provision hereof pursuant to which such termination is made, and this Agreement shall forthwith become null and void, and there shall be no liability on the part of the Purchaser or the Sellers, except that such termination shall not limit a party's liability with respect to any breach or violation of any representation, warranty, covenant, agreement or obligation occurring prior to the time of such termination; provided, that the agreements contained in Section 5.8, Section 5.10, this Article VII and Article VIII hereof shall survive the termination of this Agreement. ARTICLE VIII MISCELLANEOUS Section 8.1 Survival. (a) All of the representations and warranties contained in this Agreement or on any schedule hereto shall survive the Closing until the first anniversary after the Closing; provided, that the representations and warranties contained in Section 3.2 (Ownership of Shares), Section 3.3 (Authorization; Validity of Agreements) and Section 3.8 (Brokers) shall survive the Closing indefinitely. (b) All of the covenants, agreements, undertakings and obligations of the parties contained in this Agreement shall survive until fully performed or fulfilled in accordance with their terms (unless earlier terminated as provided in Section 7.2), unless non-compliance with such covenants, agreements, undertakings or obligations is waived in writing by the party entitled to such performance. (c) It is understood by each of the parties hereto that, following the Closing, neither JCF nor DSC shall have any liability (whether for indemnification or otherwise) to the Sellers or to any of their affiliates by reason of, or under, this Agreement or the transactions contemplated hereby. Section 8.2 Indemnification. (a) VIG agrees to indemnify and hold harmless Purchaser and each of its respective directors, officers, employees, members, affiliates and agents from and against any and all costs, expenses (including reasonable attorneys' fees and expenses), judgments, fines, penalties, claims, losses, damages and assessments arising out of or in connection with a breach or non-fulfillment by either VIG or VFIC of any of their representations, warranties, covenants, obligations, or agreements under this Agreement or any certificate of VIG or VFIC, in each case delivered to the Purchaser pursuant to Section 6.3(d). VFIC agrees to indemnify and hold harmless Purchaser and each of its respective directors, officers, employees, affiliates and agents from and against any and all costs, expenses (including reasonable attorneys' fees and expenses), judgments, fines, penalties, claims, losses, damages and assessments arising out of or in connection with a breach or non-fulfillment by VFIC of any of its representations, warranties, covenants, obligations or agreements under this Agreement or any certificate of VFIC delivered to the Purchaser pursuant to Section 6.3(d). (b) The Purchaser agrees to indemnify and hold harmless the Sellers and each of their respective directors, officers, employees, affiliates and agents from and against any and all costs, expenses (including reasonable attorneys' fees and expenses), judgments, fines, penalties, claims, losses, damages and assessments arising out of or in connection with a breach or non-fullfilment by the Purchaser of any of its representations, warranties, covenants, obligations or agreements under this Agreement or any certificate of the Purchaser delivered to the Sellers pursuant to Section 6.2(c). Section 8.3 Amendment; Waiver. (a) This Agreement may not be amended or modified by the parties except by an instrument in writing signed on behalf of each of the parties hereto. (b) At any time prior to the Closing, the parties may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties of the other parties contained herein or in any document, certificate or writing delivered pursuant hereto or (iii) waive compliance with any of the agreements, covenants or conditions of the other parties hereto contained herein. Any agreement on the part of any party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. Section 8.4 Fees and Expenses. All costs and expenses incurred in connection with this Agreement and the consummation of the transactions contemplated hereby shall be paid by the party incurring such expenses. In the event of the termination of this Agreement, the obligation of each party to pay its own expenses will be subject to any rights of such party arising from a breach of this Agreement by any other party. Section 8.5 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given upon (a) transmitter's confirmation of a receipt of a facsimile transmission, (b) confirmed delivery by a standard overnight carrier or when delivered by hand or (c) the expiration of five (5) Business Days after the day when mailed in the United States by certified or registered mail, postage prepaid, addressed at the following addresses (or at such other address for a party as shall be specified by like notice): (i) if to the Sellers: Vesta Insurance Group, Inc. P.O. Box 43360 3760 River Run Road Birmingham, Alabama 35243 Facsimile: (205) 970-7016 Attn: John W. McCullough, Esq. with a copy to: Balch & Bingham LLP 1901 Sixth Avenue North Birmingham, Alabama 35203 Facsimile: (205) 226-8799 Attention: James F. Hughey, Jr., Esq. (ii) if to the Purchaser, to: New Affirmative LLC c/o J.C. Flowers I LP 717 Fifth Avenue, 26th Floor New York, NY 10022 Telephone: (212) 404-6808 Facsimile: (646) 304-6424 Attention: Avshalom Kalichstein DSC AFFM, LLC 900 N. Michigan, 19th Floor Chicago, IL 60611 Telephone: (312) 915-2845 Facsimile: (312) 915-2487 Attention: Mike Ryan with a copy to: DSC AFFM, LLC 153 East 53rd Street, 26th Floor New York, New York 10022 Telephone: (212) 521-5129 Facsimile: (212) 521-5127 Attention: Gary Katz and with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 Telephone: (212) 735-3000 Facsimile: (212) 735-2000 Attention: Lou R. Kling, Esq. Thomas W. Greenberg, Esq. (iii) if to JCF: J.C. Flowers I LP 717 Fifth Avenue, 26th Floor New York, New York 10022 Telephone: (212) 404-6808 Facsimile: (646) 304-6424 Attention: Avshalom Kalichstein with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 Telephone: (212) 735-3000 Facsimile: (212) 735-2000 Attention: Lou R. Kling, Esq. Thomas W. Greenberg, Esq. (iv) if to DSC: Delaware Street Capital Master Fund, L.P. c/o DSC Advisors, L.P. Chicago, IL 60611 Telephone: (312) 915-2845 Facsimile: (312) 915-2487 Attention: Mike Ryan with a copy to: Delaware Street Capital Master Fund, L.P. c/o DSC Advisors, L.P. 153 East 53rd Street, 26th Floor New York, New York 10022 Telephone: (212) 521-5129 Facsimile: (212) 521-5127 Attention: Gary Katz and a copy to: Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 Telephone: (212) 735-3000 Facsimile: (212) 735-2000 Attention: Lou R. Kling, Esq. Thomas W. Greenberg, Esq. Section 8.6 Interpretation; Seller Obligations. (a) For purposes of this Agreement, words in the singular shall be held to include the plural and vice versa, and words of one gender shall be held to include the other gender as the context requires. Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." The terms "hereof," "herein" and "hereto" shall be interpreted to refer to this Agreement in its entirety and to all of the Schedules and not to any particular provision, unless otherwise stated. The term "affiliate" when used in this Agreement shall have the meaning ascribed to it in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. The term "knowledge" when used with respect to the Sellers shall mean the actual knowledge, without any requirement of due inquiry, of Norman W. Gayle III, Donald W. Thornton, Hopson B. Nance, John W. McCullough, Art Gonzalez, and David Lacefield. The phrase "beneficial ownership" and words of similar import when used in this Agreement shall have the meaning ascribed to it in Rule 13d-3 under the Securities Exchange Act of 1934, as amended. (b) VIG shall be jointly and severally liable for its and VFIC's obligations under this Agreement. VFIC shall be liable for its obligations under this Agreement. In the event that any party receives any notice or waiver from either of the Sellers, such notice or waiver shall be deemed to be binding on each of the Sellers. Section 8.7 Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. Section 8.8 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original but all of which shall be considered one and the same agreement. Section 8.9 Entire Agreement. This Agreement, the Seller Disclosure Schedule, the Confidentiality Agreement, dated as of June 3, 2005, by and among the Sellers, Delaware Street Capital, LLC and JCF, any schedules and any other writing signed by the parties in connection herewith constitute the entire agreement, and supersede all prior agreements and understandings (written and oral), among the parties with respect to the subject matter hereof. Section 8.10 No Third Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors and permitted assigns, and it is not the intention of the parties to confer third-party beneficiary rights, and this Agreement does not confer any such rights, upon any other Person other than any Person entitled to indemnity under Section 8.2. Section 8.11 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 8.12 Specific Performance. The parties hereto agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. Section 8.13 Governing Law. This Agreement, and any disputes arising hereunder or controversies related hereto, shall be governed by and construed in accordance with the internal Laws, and not the Laws governing conflicts of Laws, of the State of Delaware; provided, that the submission and approval of the Form A Filing shall be governed by the Illinois Insurance Code. Section 8.14 Submission to Jurisdiction. Each of the parties hereto hereby irrevocably submit in any action, suit or proceeding arising out of this Agreement or any of the transactions contemplated hereby to the exclusive jurisdiction of the state and federal courts located in Cook County, Illinois, for any action or proceeding arising under or relating to this Agreement. The parties hereto waive any and all objections to the laying of venue of any such litigation in such jurisdiction and agree not to plead or claim in any such litigation that such litigation has been brought in an inconvenient forum. Section 8.15 Waiver of Jury Trial. Each party acknowledges and agrees that any controversy which may arise under this Agreement is likely to involve complicated and difficult issues, and therefore each such party hereby irrevocably and unconditionally waives any right such party may have to a trial by jury in respect of any litigation directly or indirectly arising out of or relating to this Agreement, or the transactions contemplated hereby. Each party certifies and acknowledges that (a) no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver, (b) each such party understands and has considered the implications of this waiver, (c) each such party makes this waiver voluntarily and (d) each such party has been induced to enter into this Agreement by, among other things, the mutual waivers and certifications in this Section 8.15. Section 8.16 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto (whether by operation of Law or otherwise) without the prior written consent of the other party; provided, that the Purchaser shall have the right without obtaining the consent of the Sellers (a) to assign its rights and obligations under this Agreement to any affiliate of the Purchaser or (b) collaterally assign (or grant a security interest in), in whole or in part, this Agreement; provided, further, that nothing herein shall relieve the Purchaser, JCF or DSC of their respective obligations hereunder unless a novation in writing is provided by the Sellers. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by, the parties and their respective successors and assigns, and the provisions of this Agreement are not intended to confer upon any Person other than the parties hereto and their respective successors and assigns any rights or remedies hereunder. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the undersigned have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. NEW AFFIRMATIVE LLC By: /s/ Michael J. Ryan ----------------------------------- Name: Michael J. Ryan Title: Authorized Person By: /s/ Avshalom Kalichstein ----------------------------------- Name: Avshalom Kalichstein Title: Authorized Person VESTA INSURANCE GROUP, INC. By: /s/ Norman W. Gayle, III ----------------------------------- Name: Norman W. Gayle, III Title: President and Chief Executive Officer VESTA FIRE INSURANCE CORPORATION By: /s/ David Lacefield ----------------------------------- Name: David Lacefield Title: President J.C. FLOWERS I LP By: JCF Associates I LLC, its General Partner By: /s/ Avshalom Kalichstein ----------------------------------- Name: Avshalom Kalichstein Title: Principal DELAWARE STREET CAPITAL MASTER FUND, L.P. By: /s/ Andrew G. Bluhm ----------------------------------- Name: Andrew G. Bluhm Title: (Signature Page to Stock Purchase Agreement) EX-99 3 nyc514031.txt EXHIBIT 2 - SUBSCRIPTION AGREEMENT Exhibit 2 EXECUTION VERSION SUBSCRIPTION AGREEMENT This Subscription Agreement (this "Agreement") is made and entered into as of June 13, 2005 between New Affirmative LLC, a Delaware limited liability company (the "Purchaser"), DSC AFFM, LLC, a Delaware limited liability company ("DSC"), and J.C. Flowers I LP, a Delaware limited partnership ("JCF," and collectively with DSC, the "Investors"). WHEREAS, DSC and JCF have caused the Purchaser to be formed as a limited liability company under the Delaware Limited Liability Company Act as in effect on the date of this Agreement (currently Chapter 18 of Title 6, Sections 18-101 through 18-1109 of the Delaware Code). WHEREAS, concurrently with the execution of this Agreement, the Purchaser, Vesta Insurance Group, Inc. ("VIG"), and Vesta Fire Insurance Corporation ("VFIC" and collectively with VIG, the "Sellers"), and solely for the purposes of Section 1.1(b) therein, Delaware Street Capital Master Fund, L.P. and JCF have entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to which, among other things, the Company has agreed to purchase 5,218,228 shares of common stock of Affirmative Insurance Holdings, Inc. ("Affirmative") owned, collectively, by VIG and VFIC. WHEREAS, the Purchaser has been formed for the sole purpose of acquiring and holding the shares of common stock of Affirmative purchased pursuant to the Stock Purchase Agreement as well as additional shares of common stock of Affirmative, if any, held directly by the Investors upon the closing of the transactions (the "Stock Purchase") contemplated by the Stock Purchase Agreement. WHEREAS, in connection with, and as an integral part of, the Stock Purchase Agreement (i) DSC desires to invest the DSC Investment Amount (as defined herein) in the Purchaser in exchange for the DSC Purchased Membership Units (as defined herein) at a per unit purchase price equal to the Per Unit Purchase Price (as defined herein), and (ii) JCF desires to invest the JCF Investment Amount (as defined herein) in the Purchaser in exchange for the JCF Purchased Membership Units (as defined herein) at a per unit purchase price equal to the Per Unit Purchase Price (the transactions described in clauses (i) and (ii), collectively the "Subscription"). WHEREAS, at the Subscription Closing (as defined herein), DSC wishes to contribute and the Purchaser desires to accept all shares of common stock of Affirmative held by DSC at such time (the "DSC Stake") as partial consideration of the DSC Investment Amount. WHEREAS, at the Subscription Closing, JCF wishes to contribute and the Purchaser desires to accept all shares, if any, of common stock of Affirmative held by JCF at such time (the "JCF Stake" and each of the JCF Stake and the DSC Stake, a "Contributed Stake") as partial consideration for the JCF Investment Amount. WHEREAS, capitalized terms used herein and not otherwise defined herein shall have the meanings given to them in the Stock Purchase Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants, representations and warranties herein contained, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Purchaser and the Investors, intending to be legally bound, hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the meanings set forth below: "Expenses" shall mean all of the reasonable and documented out-of-pocket fees (including legal, accounting and other advisory fees), costs, expenses and disbursements incurred at any time by the Investors or by the Purchaser, whether before or after the date hereof in connection with their consideration and negotiation of the Stock Purchase. "Membership Units" shall have the meaning set forth in the LLC Agreement (as defined herein). "Per Unit Purchase Price" shall mean (x) $15.00 or (y) with respect to the Membership Units purchased by shares comprising the JCF Stake, the cost basis of JCF for each such share (unless otherwise agreed to by the parties); provided, that, if there is any adjustment to the Per Share Purchase Price pursuant to the terms of the Stock Purchase Agreement the Per Share Unit Purchase Price shall be concurrently adjusted by the same amount. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations in effect from time to time thereunder. "Total Value" means the sum of (x)(i) the number of shares of common stock of Affirmative represented by the DSC Stake, multiplied by (ii) $15.00 per share, (y)(i) the number of shares, if any, of common stock of Affirmative represented by the JCF Stake multiplied by (ii) the cost basis of JCF for each such share (unless otherwise agreed to by the parties) and (z)(i) 5,218,228 shares of common stock of Affirmative multiplied by (ii) $15.00 per share. 2. Closing. (a) Time and Place. The closing of this Agreement (the "Subscription Closing") shall occur at, or substantially simultaneously with, the time and the place of the Closing. (b) Termination. If the Stock Purchase Agreement or the LLC Agreement has been terminated pursuant to its terms, the obligations of the Investors and the Purchaser pursuant to this Agreement shall terminate without liability of either party to the other except for breach hereof prior to the date of termination. (c) Subscription for Purchased Membership Units; Purchase Price. Upon the terms and subject to the conditions hereinafter set forth: (i) each of DSC and JCF hereby subscribes for and shall purchase, and the Purchaser shall issue and sell to DSC and JCF, respectively, a number of Membership Units (such number, the "DSC Purchased Membership Units" and the "JCF Purchased Membership Units", respectively) at the Per Unit Purchase Price with a value equal to fifty percent (50%) of the Total Value (such amount with respect to DSC, the "DSC Investment Amount" and such amount with respect to JCF, the "JCF Investment Amount"); (ii) (A) the DSC Investment Amount shall be payable by DSC in the form of shares of common stock of Affirmative representing the DSC Stake and cash and (B) the JCF Investment Amount shall be payable by JCF in the form of shares of common stock of Affirmative representing the JCF Stake, if any, and cash; (iii) for the purposes of calculating the DSC Investment Amount and the JCF Investment Amount, respectively (A) the per share value of the DSC Stake shall be equal to $15.00 (which shall be adjusted if there is any adjustment to the Per Share Purchase Price pursuant to the terms of the Stock Purchase Agreement by the same amount) per share of Affirmative common stock and (B) the per share value of the JCF Stake, if any, shall be equal to the cost basis of each share, unless otherwise agreed to in writing by the parties; and (iv) at least five (5) business days prior to the Subscription Closing, the Investors shall deliver to the Purchaser Exhibit A setting forth: (i) the DSC Stake; (ii) the JCF Stake, if any; (iii) the calculation of the DSC Purchased Membership Units; (iv) the calculation of the JCF Purchased Membership Units; (v) the calculation of the DSC Investment Amount; and (vi) the calculation of the JCF Investment Amount. (d) No Partial Funding. At the Subscription Closing, (i)(A) DSC shall purchase all, but not less than all, of the DSC Purchased Membership Units and (B) JCF shall purchase all, but not less than all, of the JCF Purchased Membership Units and (ii) each of DSC and JCF shall contribute all shares of common stock of Affirmative then held by such party. (e) Additional Purchases and Sales. Notwithstanding any provision of the LLC Agreement (as defined below), following the date hereof until the Subscription Closing, neither party may acquire additional shares of common stock of Affirmative or sell any common stock of Affirmative which either party currently owns or subsequently acquires without the consent of the other party hereto. Following the Subscription Closing, the terms of the LLC Agreement shall prevail. (f) Limited Liability Company Agreement. Concurrently with the execution of this Agreement, the Investors shall execute the limited liability company agreement in the form attached hereto as Exhibit B (the "LLC Agreement") and DSC and JCF shall be treated as the "DSC Member" and the "JCF Member", respectively, thereunder. (g) Delivery. At or prior to the Subscription Closing, (i) DSC shall deliver to the Purchaser the DSC Investment Amount (in the form indicated on Exhibit A hereto), (ii) the Purchaser shall issue to DSC the DSC Purchased Membership Units and cause such issuance to be reflected in the records of the Purchaser, (iii) JCF shall deliver to the Purchaser the JCF Investment Amount (in the form indicated on Exhibit A hereto), and (iv) the Purchaser shall issue to JCF the JCF Purchased Membership Units and cause such issuance to be reflected in the records of the Purchaser. 3. Representations and Warranties and Other Agreements. (a) Representations and Warranties and Agreements of the Investors. Each Investor, with respect to itself and not the other Investor, hereby represents and warrants the following to the Purchaser and to the other Investor: (i) Such Investor, pursuant to this Agreement, is purchasing the Purchased Membership Units to be acquired by it hereunder for investment for its own account and not with a view to, or for sale in connection with, any distribution thereof. Such Investor (either alone or together with its advisors) has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in such Purchased Membership Units and are capable of bearing the economic risks of such investments. Such Investor is an "accredited investor" as defined in Rule 501 of Regulation D promulgated under the Securities Act. Such Investor acknowledges that such Purchased Membership Units are not registered pursuant to the Securities Act and that none of the Purchased Membership Units may be transferred, except pursuant to an applicable exemption under the Securities Act. (ii) Such Investor's Contributed Stake represents all of the common stock of Affirmative owned by such Investor as of the Subscription Closing; (iii) Such Investor is a limited liability company or limited partnership duly organized and validly existing under the laws of the State of Delaware and has all requisite organizational power and authority to conduct its business as it is now being conducted and to own, lease and operate its property and assets, except where the failure to be in good standing or to have such power or authority would not, in the aggregate, be reasonably likely to have a material adverse effect on the ability of such Investor to perform its obligations hereunder. (iv) Such Investor has all requisite company authority and power to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement has been, and, as of the Subscription Closing, the consummation of the transactions contemplated hereby will have been, duly and validly authorized by all required company and other action on the part of such Investor and no other company proceedings on the part of such Investor are necessary to authorize the execution and delivery of this Agreement. This Agreement has been duly and validly executed and delivered by such Investor and, assuming this Agreement constitutes the valid and binding obligation of the Purchaser, constitutes the valid and binding obligations of such Investor, enforceable against each Investor in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally, including the effect of statutory and other laws regarding fraudulent conveyances and preferential transfers, and subject to the limitations imposed by general equitable principles (regardless whether such enforceability is considered in a proceeding at law or in equity). (v) Except for (A) the filing with, and the written approval of the Department in respect of the Form A, Statement Regarding the Acquisition of, Control of a Domestic Insurer with respect to the transactions contemplated hereby (the "Form A Filing") and (B) the required filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, neither the execution and delivery of this Agreement by such Investor nor the consummation by each Investor of the transactions contemplated hereby, in any case will (x) violate any provision of such Investor's certificate of formation or limited liability company agreements, in each case as presently in effect or (y) require any consent, waiver, approval, license, authorization or permit of, or filing with or notification to, any federal, state, local or foreign government, executive official thereof, governmental or regulatory authority, agency or commission, including courts of competent jurisdiction, domestic or foreign. (b) Representations and Warranties of the Purchaser. The Purchaser represents and warrants to each of the Investors the following: (i) The Purchaser is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to conduct its business as it is now being conducted in all material respects and to own, lease and operate its property and assets, except where the failure to be in good standing or to have such power or authority would not, in the aggregate, have a material adverse effect on the ability of the Purchaser to perform its obligations hereunder. (ii) As of the date hereof, the Purchaser has not issued any Membership Units to any person. (iii) The Purchaser has all requisite authority and power to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement has been, and, as of the Subscription Closing, the consummation of the transactions contemplated hereby will have been, duly and validly authorized by all required corporate action on the part of the Purchaser and no other proceedings on the part of the Purchaser are necessary to authorize the execution and delivery of this Agreement. This Agreement has been duly and validly executed and delivered by the Purchaser and, assuming this Agreement constitutes the valid and binding obligation of the Investors, constitutes the valid and binding obligations of the Purchaser, enforceable against the Purchaser in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally, including the effect of statutory and other laws regarding fraudulent conveyances and preferential transfers, and subject to the limitations imposed by general equitable principles (regardless whether such enforceability is considered in a proceeding at law or in equity). (iv) Except for Form A Filing, neither the execution and delivery of this Agreement by the Purchaser nor the consummation by the Purchaser of the transactions contemplated hereby, in any case will (a) violate any provision of the Purchaser's certificate of incorporation or by-laws, in each case as presently in effect, (b) require any consent, waiver, approval, license, authorization or permit of, or filing with or notification to, any federal, state, local or foreign government, executive official thereof, governmental or regulatory authority, agency or commission, including courts of competent jurisdiction, domestic or foreign. (v) At the Subscription Closing, the Purchased Membership Units will be duly authorized, validly issued, fully paid and non-assessable and free and clear of all Liens (other than those set forth in the LLC Agreement). 4. Conditions to Performance. The obligations of the Purchaser and the Investors to effect the transaction contemplated hereby shall be subject to the fulfillment, or written waiver by the Purchaser or each Investor, at or prior to the Closing, of each of the following conditions: (a) Each of the Purchaser's conditions to Closing under the Stock Purchase set forth in Article VII thereof, respectively, shall have been satisfied or waived and the Sellers are ready to proceed with the Closing under the Merger Agreement. (b) The Investors' and the Purchaser's representations and warranties set forth in Section 3(a) and 3(b) hereof, respectively, shall be true and correct in all material respects as of the Subscription Closing and no statute, rule, regulation or order of any court or administrative agency shall be in effect which prohibits the Purchaser or either of the Investors from consummating the transactions contemplated hereby. (c) Each of the Investors shall have concurrently funded their obligations hereunder or one or more of them shall have funded any obligations not so funded; provided that each Investor is only obligated to fund their respective Investment Amounts and not the other Investor's portion of the Investment Amount. 5. Covenants (a) Further Assurances. Upon the terms and subject to the conditions herein provided, each of the parties hereto agrees to use its reasonable best efforts to take or cause to be taken all action, to do or cause to be done, and to assist and cooperate with the other party hereto in doing, all things necessary, proper or advisable under applicable Laws and regulations to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement, including, but not limited to, (i) the satisfaction of the conditions precedent to the obligations of any of the parties hereto; (ii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the performance of the obligations hereunder or thereunder; and (iii) the execution and delivery of such instruments, and the taking of such other actions as the other party hereto may reasonably require in order to carry out the intent of this Agreement. (b) Expenses. (i) In the event the Stock Purchase is consummated, each of the Investors and the Purchaser agree that all Expenses set forth on Schedule 5(b) shall be borne by the Purchaser. In the event the Stock Purchase is terminated or otherwise not consummated, the Investors shall bear all Expenses incurred by the Investors or by the Purchaser equally. Upon request by the Purchaser, each of the Investors shall provide the Purchaser with a detailed account of its Expenses, with supporting documentation (including evidence of payment of any such Expense by an Investor, if any such payment has been made). Within 30 days of receipt of such information, the Purchaser shall calculate the total Expenses incurred by each of the Investors and the total Expenses allocable to each such Investor pursuant to this Agreement (and the transactions contemplated hereby). Within 15 days of such calculation, the Purchaser shall pay the Expenses incurred by each Investor by wire transfer to an account designated by each such Investor. All Expenses to the extent to be paid by the Investors shall be shared equally. (ii) In the event the Stock Purchase is terminated or otherwise not consummated, all fees (including termination fees thereunder) or other amounts collected by the Purchaser pursuant to the Stock Purchase Agreement will be applied against the payment of Expenses of the Purchaser and the Investors, with the remainder paid to the Investors equally. 6. Miscellaneous. (a) Amendments and Modifications; Waivers. This Agreement may be amended, modified or supplemented, and any provision hereof may be waived, at any time only by an instrument in writing duly executed by the Investors and the Purchaser. At any time prior to the Subscription Closing, the Investors, with respect to any term or provision hereof to which it is entitled to the benefits, and the Purchaser, with respect to any term or provision hereof to which it is entitled to the benefits, may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document, certificate or writing delivered pursuant hereto or (c) waive compliance with any obligation, covenant, agreement or condition contained herein. (b) Effectiveness; Entire Agreement; Assignability. This Agreement, the Stock Purchase Agreement and the LLC Agreement shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof and shall supersede all prior agreements and understandings, both written and oral, among such parties or any of them with respect to the subject matter hereof. This Agreement shall not be assigned by operation of Law or otherwise; provided, however, that each of the Investors may its their rights and obligations to any wholly owned subsidiary of the Investors (unless to do so would restrict or delay the consummation of the transactions contemplated by this Agreement), but no such assignment shall relieve such Investors of its obligations hereunder. Notwithstanding the foregoing, each of the Investors may assign its rights hereunder for collateral purposes only, to any of such Investor's financing sources that originally provides financing in connection with the transactions contemplated by this Agreement and the Stock Purchase Agreement (or any such financing sources' successors or permitted assigns and any other secured lenders that may refinance any such financings), provided that no such assignment shall relieve such Investor of its obligations hereunder. (c) Applicable Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of New York, regardless of the Laws that might otherwise govern under applicable principles of conflict or choice of Law (other than Section 5-1401 of the New York General Obligations Law). (d) Submission to Jurisdiction. Each of the parties hereto hereby irrevocably submit in any action, suit or proceeding arising out of this Agreement or any of the transactions contemplated hereby to the exclusive jurisdiction of the United States District Court for the Southern District of New York and the jurisdiction of any court of the State of New York located in the City of New York, Borough of Manhattan. The parties hereto waive any and all objections to the laying of venue of any such litigation in such jurisdiction and agree not to plead or claim in any such litigation that such litigation has been brought in an inconvenient forum. (e) Specific Performance. The parties hereto agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at Law would exist and damages would be difficult to determine, and that the parties hereto shall be entitled to specific performance of the terms hereof, in addition to any other remedy available at Law or in equity. (f) Notices. All notices, requests, claims, demands and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given (i) when received, if delivered personally, (ii) when transmitted, if by facsimile (which is confirmed) (iii) upon receipt, if by registered or certified mail (postage prepaid, return receipt requested) or (iv) the day after it is sent, if sent for next-day delivery to a domestic address by overnight mail, to the relevant parties hereto at the following addresses: If to DSC, to: DSC AFFM, LLC 900 N. Michigan, 19th Floor Chicago, IL 60611 Telephone: (312) 915-2845 Facsimile: (312) 915-2487 Attention: Mike Ryan with a copy to: DSC AFFM, LLC 153 East 53rd Street, 26th Floor New York, New York 10022 Telephone: (212) 521-5129 Facsimile: (212) 521-5127 Attention: Gary Katz and a copy to: Jenner & Block LLP One IBM Plaza Chicago, Illinois 60611-7603 Telephone: (312) 840-7296 Facsimile: (312) 840-7396 Attention: John F. Cox, Esq. If to JCF, to: J.C. Flowers I LP 717 Fifth Avenue, 26th Floor New York, NY 10022 Telephone: (212) 404-6808 Facsimile: (646) 304-6424 Attention: Avshalom Kalichstein If to the Purchaser, to: New Affirmative LLC c/o J.C. Flowers I LP 717 Fifth Avenue, 26th Floor New York, NY 10022 Telephone: (212) 404-6808 Facsimile: (646) 304-6424 Attention: Avshalom Kalichstein DSC AFFM, LLC 900 N. Michigan, 19th Floor Chicago, IL 60611 Telephone: (312) 915-2845 Facsimile: (312) 915-2487 Attention: Mike Ryan with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 Telephone: (212) 735-3000 Facsimile: (212) 735-2000 Attention: Lou R. Kling, Esq. Thomas W. Greenberg, Esq. or to such other address as the Person to whom notice is given may have previously furnished to the others in writing in the manner set forth above (provided that notice of any change of address shall be effective only upon receipt thereof). (g) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same instrument. (h) Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, each of which shall remain in full force and effect. If any one or more of the provisions contained in this Agreement or in any other instrument referred to herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by Law, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such instrument. Furthermore, in lieu of any such invalid or unenforceable term or provision, the parties hereto intend that there shall be added as a part of this Agreement a valid and enforceable provision as similar in terms and commercial effect to such invalid or unenforceable provision as shall be possible. (i) Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and nothing in this Agreement, express or implied, is intended by or shall confer upon any other Person or Persons any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. Any Person who is a beneficiary of any of the aforementioned provisions shall be entitled to enforce his rights thereunder. (j) Third Party Beneficiaries. Nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give to any third party any rights or remedies against any party hereto. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, DSC, JCF and the Purchaser have executed this Agreement as of the date first above written. NEW AFFIRMATIVE LLC By: /s/ Michael J. Ryan ---------------------------------- Name: Michael J. Ryan Title: Authorized Person By: /s/ Avshalom Kalichstein ---------------------------------- Name: Avshalom Kalichstein Title: Authorized Person DSC AFFM, LLC By: /s/ Andrew G. Bluhm ---------------------------------- Name: Andrew G. Bluhm Title: Authorized Signatory J.C. FLOWERS I LP By: JCF Associates I LLC, its General Partner By: /s/ Avshalom Kalichstein ----------------------------------- Name: Avshalom Kalichstein Title: Authorized Person
Exhibit A Investment Amounts - ---------------------- ------------- -------------- -------------- ---------------- ---------------- --------------- Investor Investment Contributed Aggregate Cash Purchased Per Membership Amount Stake Value of Contributed(1) Membership Unit Purchase Contributed Units Price Stake - ---------------------- ------------- -------------- -------------- ---------------- ---------------- --------------- DSC AFFM, LLC $[ ] [ ] $[ ] $[ ] [ ] [ ] - ---------------------- ------------- -------------- -------------- ---------------- ---------------- --------------- J.C. Flowers I LP $[ ] [ ] $[ ] $[ ] [ ] [ ] - ---------------------- ------------- -------------- -------------- ---------------- ---------------- ---------------
_________________ (1) All cash contributed at the Subscription Closing shall be delivered by wire transfer of immediately available funds to an account designated in writing by the Purchaser Exhibit B LLC Agreement EX-99 4 nyc513103.txt EXHIBIT 3 - LIMITED LIABILITY CO. AGMT. Exhibit 3 EXECUTION VERSION LIMITED LIABILITY COMPANY AGREEMENT OF NEW AFFIRMATIVE LLC dated as of June 13, 2005 THE MEMBERSHIP UNITS CREATED BY THIS LIMITED LIABILITY COMPANY AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY OTHER APPLICABLE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND SUCH OTHER APPLICABLE SECURITIES LAWS PURSUANT TO EFFECTIVE REGISTRATION OR AN EXEMPTION THEREFROM. IN ADDITION, SUCH MEMBERSHIP UNITS MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED, IN WHOLE OR IN PART, EXCEPT AS PROVIDED IN ARTICLE VIII OF THIS AGREEMENT. ACCORDINGLY, THE HOLDERS OF SUCH MEMBERSHIP UNITS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE RISKS OF THEIR RESPECTIVE INVESTMENTS IN SUCH MEMBERSHIP UNITS FOR AN INDEFINITE PERIOD OF TIME. TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS.....................................................1 ARTICLE II FORMATION OF THE LIMITED LIABILITY COMPANY......................8 Section 2.1 Formation; Filings...........................................8 Section 2.2 Name and Office..............................................8 Section 2.3 Company Purpose; Powers......................................8 Section 2.4 Term.........................................................9 Section 2.5 Fiscal Year..................................................9 ARTICLE III RIGHTS AND DUTIES OF THE MEMBERS AND CONDUCT OF THE BUSINESS OF THE COMPANY.........................................9 Section 3.1 Members......................................................9 Section 3.2 Board of Managers...........................................10 Section 3.3 Officers....................................................12 Section 3.4 Evidence of Company Action..................................12 Section 3.5 Cooperation; Exculpation and Indemnification................12 Section 3.6 Freedom of Action; Confidentiality; Business Opportunities..14 Section 3.7 Consents and Approvals......................................16 ARTICLE IV FINANCING......................................................16 Section 4.1 Initial Financing...........................................16 Section 4.2 Additional Capital..........................................17 Section 4.3 No Other Capital Contributions..............................17 Section 4.4 No Interest on Capital Contributions........................17 Section 4.5 No Loans to Company.........................................17 Section 4.6 Membership Units............................................17 ARTICLE V CAPITAL ACCOUNTS; DIVISION OF PROFITS AND LOSSES; DISTRIBUTIONS..................................................18 Section 5.1 Capital Accounts............................................18 Section 5.2 Allocations of Net Income and Net Loss......................18 Section 5.3 Distributions...............................................19 Section 5.4 No Right of Withdrawal......................................20 Section 5.5 Amounts Held in Reserve.....................................20 Section 5.6 Account Balances............................................20 ARTICLE VI BANKING, ACCOUNTING, BOOKS AND RECORDS.........................20 Section 6.1 Banking.....................................................21 Section 6.2 Maintenance of Accounts and Accounting Method...............21 Section 6.3 Company Tax Returns.........................................21 Section 6.4 Designation of Tax Matters Partner..........................21 Section 6.5 Withholding.................................................22 ARTICLE VII INFORMATION....................................................22 Section 7.1 Reports of Affirmative......................................22 Section 7.2 Inspection of Records.......................................23 Section 7.3 Tax Information.............................................23 ARTICLE VIII ADMISSION OF NEW MEMBERS; TRANSFER OF MEMBERSHIP UNITS; WITHDRAWAL OF A MEMBER.........................................23 Section 8.1 Admission of New Members....................................23 Section 8.2 Transfer of Membership Units by Members.....................23 Section 8.3 Company Sale................................................24 Section 8.4 Drag-Along Sale.............................................26 Section 8.5 Withdrawal of a Member......................................28 ARTICLE IX DISSOLUTION AND TERMINATION OF COMPANY.........................30 Section 9.1 Dissolution.................................................30 Section 9.2 Distribution Upon Dissolution...............................30 Section 9.3 Distributions in Cash or in Kind............................30 Section 9.4 Final Accounting............................................31 Section 9.5 Time for Liquidation........................................31 Section 9.6 Termination.................................................31 Section 9.7 Members Not Personally Liable for Return of Capital Contributions.............................................31 ARTICLE X MISCELLANEOUS PROVISIONS.......................................31 Section 10.1 Amendments..................................................31 Section 10.2 Termination of Agreement....................................31 Section 10.3 Notices.....................................................32 Section 10.4 Counterparts................................................34 Section 10.5 Table of Contents and Headings..............................34 Section 10.6 Successors and Assigns......................................34 Section 10.7 Severability................................................34 Section 10.8 Non-Waiver..................................................34 Section 10.9 Applicable Law..............................................34 Section 10.10 Entirety of Agreement.......................................34 Section 10.11 Recapitalization, etc.......................................34 Section 10.12 Interpretation..............................................35 Schedules - --------- Schedule I Percentage Interests Schedule 3.2(a) Managers LIMITED LIABILITY COMPANY AGREEMENT OF NEW AFFIRMATIVE LLC THIS LIMITED LIABILITY COMPANY AGREEMENT OF NEW AFFIRMATIVE LLC (the "Company"), dated as of the 13th day of June, 2005, by and among DSC AFFM, LLC (the "DSC Member") and J.C. Flowers I LP (the "JCF Member" and together with the DSC Member, the "Initial Members"), as the members; and such other Persons (as hereinafter defined) who may be admitted from time to time as members hereunder. WHEREAS, the DSC Member and the JCF Member have caused to be formed the Company as a limited liability company under the Act (as hereinafter defined) pursuant to this Agreement (as hereinafter defined). WHEREAS, concurrently with the execution of this Agreement, the Initial Members, the Company, Vesta Insurance Group, Inc. ("VIG") and Vesta Fire Insurance Corporation ("VFIC") have entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to which, among other things, the Company has agreed to purchase 5,218,228 shares of common stock of Affirmative Insurance Holdings, Inc. ("Affirmative") owned, collectively, by VIG and VFIC. WHEREAS, the Company has been formed for the sole purpose of acquiring and holding the shares of common stock of Affirmative purchased pursuant to the Stock Purchase Agreement as well as additional shares of common stock of Affirmative, if any, held directly by the Members as of the closing of the transactions contemplated by the Stock Purchase Agreement. NOW, THEREFORE, it is mutually agreed that: ARTICLE I DEFINITIONS As used herein the following terms have the meaning set forth below: "Act" shall mean the Delaware Limited Liability Company Act as in effect on the date of this Agreement (currently Chapter 18 of Title 6, Sections 18-101 through 18-1109 of the Delaware Code) and as it may be amended hereafter from time to time. "Adjusted Capital Account" shall mean, at any time, the then balance in the Capital Account of a Member, after giving effect to the following adjustments: (i) credit to such Capital Account any amounts that such Member is deemed obligated to restore as described in the penultimate sentences of Treasury Regulations Section 1.704-2(g)(1) and Treasury Regulations Section 1.704-2(i)(5) and (ii) debit to such Capital Account the items described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of "Adjusted Capital Account" is intended to comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "Affiliate" shall mean, in respect of any specified Person, a Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, the Person specified. For purposes of this Agreement, neither the Company nor any of its Affiliates shall be deemed to be an Affiliate of the DSC Member or any of its Affiliates or of the JCF Member or any of its Affiliates. "Affirmative" shall have the meaning set forth in the recitals to this Agreement. "Affirmative Equity Securities" shall have the meaning set forth in Section 3.6(b) hereof. "Agreement" shall mean this Limited Liability Company Agreement of New Affirmative LLC, as the same may be amended or restated from time to time. "Appraiser" shall have the meaning set forth in Section 8.5(b) hereof. "Beneficial Ownership" means the ownership interest in any securities which such Person or any of its Affiliates is deemed to "beneficially own" within the meaning of Rule 13d-3 under the Exchange Act. "Board" shall have the meaning set forth in Section 3.1(b) hereof. "Board Determination" shall have the meaning set forth in Section 3.2(c) hereof. "Business" shall have the meaning set forth in Section 2.3 hereof. "Business Day" shall mean any day other than a Saturday, Sunday or other day on which banks in New York, New York are authorized or required by law to be closed for regular banking business. "Capital Account" shall have the meaning set forth in Section 5.1 hereof. "Capital Contribution" shall mean, with respect to a particular Member, the amount of capital contributed (or assumption of indebtedness of the Company by a Member) or deemed to have been contributed by such Member to the Company pursuant to Articles IV or VIII hereof. "Cash Flow" means, for any period, the sum (without duplication), determined in accordance with GAAP, of (i) the Company's cash flow from operating activities, plus (ii) the Company's cash flow from investing activities, in each case from the applicable statement of cash flows. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder. "Company" shall have the meaning set forth in the first paragraph of this Agreement. "Company Sale" shall have the meaning set forth in Section 8.3(a) hereof. "Company Sale Notice" shall have the meaning set forth in Section 8.3(a) hereof. "Confidential Information" shall mean confidential, proprietary or other non-public information and documents, processes or trade secrets relating to the Company or its Subsidiaries or their respective assets, business or operations, including the terms and provisions of this Agreement, subject to the exceptions set forth in Section 3.6(c) of this Agreement. "Control" shall mean, with respect to a particular Person, the possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of Voting Securities or partnership or membership interests, by contract or otherwise) of such Person. "Consent Transferee" shall have the meaning set forth in Section 8.2(c) hereof. "Cure Period" shall have the meaning set forth in Section 8.5(a) hereof. "Damages" shall have the meaning set forth in Section 3.5(b) hereof. "Defaulting Member" shall have the meaning set forth in Section 4.1 hereof. "Department" shall mean the Illinois Department of Financial and Professional Regulation - Division of Insurance. "Drag-Along Notice" shall have the meaning set forth in Section 8.4(a) hereof. "Drag-Along Sale" shall have the meaning set forth in Section 8.4(a) hereof. "Drag Transferee" shall have the meaning set forth in Section 8.4(a) hereof. "DSC Member" shall have the meaning set forth in the first paragraph of this Agreement. "Exchange Act" shall mean the Securities Exchange Act of 1934 and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, as amended from time to time. "Excluded Activities" shall have the meaning set forth in Section 3.5(b) hereof. "Fair Market Value" shall mean the amount that an informed and willing purchaser under no compulsion to buy would pay to acquire the relevant interest in the Company in an arm's-length transaction and which an informed and willing seller under no compulsion to sell would accept for such interest in an arm's length transaction without taking into account any control premium or the existence of any approval rights under this Agreement. "Fiscal Year" shall mean the fiscal year of the Company, as determined pursuant to Section 2.5 hereof. "Form A" shall mean Form A, Statement Regarding the Acquisition of Control of a Domestic Insurer. "Form A Approval Date" shall mean the date of receipt of written approval from the Department with respect to the Form A filed by the Company with respect to the transactions contemplated by the Stock Purchase Agreement. "Formation Date" shall have the meaning set forth in Section 2.4 hereof. "GAAP" shall mean United States generally accepted accounting principles as in effect from time to time. "Governmental Entity" shall have the meaning set forth in Section 2.6(e) hereof. "Indemnified Parties" shall have the meaning set forth in Section 3.5(b) hereof. "Initial Members" shall have the meaning set forth in the first paragraph of this Agreement. "JCF Member" shall have the meaning set forth in the first paragraph of this Agreement. "Majority of the Managers" shall mean a number of Managers constituting more than 50% of the number of Managers of the entire Board, as such latter number may be adjusted from time to time pursuant to Section 3.2(a) hereof, without taking into account any vacancies thereon. "Managers" shall have the meaning set forth in Section 3.2(a) hereof. "Member" shall mean: (i) the DSC Member; (ii) the JCF Member; (iii) any Person admitted as a Member pursuant to Section 8.1, 8.2 or 10.6 hereof; and (iv) any transferee of any of the foregoing admitted as a Member pursuant to Section 8.2 hereof. "Members Capital Contributions" shall have the meaning set forth in Section 4.1 hereof. "Membership Units" shall mean the equity interests of the Company designated as "Membership Units" as more fully described in Section 4.6. "Nasdaq" shall have the meaning set forth in Section 8.5(b) hereof. "Net Income" and "Net Loss" mean, for each Fiscal Year or part thereof, the taxable income or loss of the Company for such Fiscal Year or part thereof determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments (without duplication): (i) any income of the Company exempt from federal income tax shall be added to such taxable income or loss; (ii) any expenditure of the Company described in Code Section 705(a)(2)(B) or treated as such pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(i) shall be subtracted from such taxable income or loss; (iii) any depreciation, amortization and other cost recovery deductions allowable for federal income tax purposes shall be computed with reference to the book value of the assets (as adjusted under Section 5.2(b)), as opposed to the adjusted tax bases of such assets, in computing such taxable income or loss; and (iv) gain or loss resulting from any disposition of Company property with respect to which gain or loss is recognized for federal income tax purposes shall be computed with reference to the book value of the property (as adjusted under Section 5.2(b) hereof) disposed of, rather than the adjusted tax basis of such property. "Notice" shall have the meaning set forth in Section 10.3 hereof. "Observer" shall have the meaning set forth in Section 3.2(b) hereof. "Percentage Interest" shall mean, with respect to each Member, the number of Membership Units owned by such Member divided by the aggregate number of Membership Units of the Company which are outstanding as of the date of measurement. "Permitted Consideration" shall mean (i) cash, (ii) equity securities of a class which is traded on a national securities exchange or on the Nasdaq; provided, that the number of such equity securities payable to any Member shall be no greater than the sum of the average trading volume of such equity securities for each of the ten (10) trading days prior to and ending on the date prior to the date of the acceptance of an offer in connection with a Company Sale or Drag-Along Sale (or, if the DSC Member and the JCF Member otherwise agree, such other date of determination) and (iii) common equity securities of a class which is not traded on a national securities exchange or on the Nasdaq, or any combination of any of the items referred to in clauses (i), (ii) and (iii); provided, however, that if any portion of the consideration offered in any Drag-Along Sale or Company Sale includes common equity securities of the type described in clause (iii), then (A) not more than five percent (5%) of the aggregate consideration offered shall consist of such equity securities, and (B) such consideration shall also include customary registration rights. "Permitted Person" shall have the meaning set forth in Section 3.6 hereof. "Permitted Transferees" shall mean with respect to each Member, any Persons that are Affiliates of such Member; provided, that any transfer to a "Permitted Transferee" shall not be permitted if a Board Determination is made that such Transfer, together with all other Transfers of Membership Units previously made, could result in a termination of the Company for federal or state income tax purposes or could result in or create a significant risk that the Company could be terminated for federal or state income tax purposes, or if the Company reasonably determines that such Transfer will be materially financially detrimental to the Company. "Person" shall mean any natural person, entity, firm, corporation, partnership, association, limited liability company, joint-stock company, trust, or unincorporated organization. "Proposed Seller" shall have the meaning set forth in Section 8.3(a) hereof. "Related Party" shall mean, with respect to any Person who is not an individual, a stockholder, director, officer, employee, partner or member of such Person, including, with respect to a Member, any individual who is designated a Manager by such Member. "Remaining Member" shall have the meaning set forth in Section 8.4(a) hereof. "Subscription Agreement" shall have the meaning set forth in Section 4.1 hereof. "Subsidiaries" of any Person means any corporation, partnership, joint venture, limited liability company, trust, estate or other Person of which (or in which), directly or indirectly, more than 50% of (i) the issued and outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (ii) the interest in the capital or profits of such partnership, joint venture or limited liability company or other Person or (iii) the Beneficial Ownership interest in such trust or estate is at the time owned by such first Person, or by such first Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries. "Suspended Member" shall have the meaning set forth in Section 3.2(c) hereof. "Tax Matters Partner" shall have the meaning set forth in Section 6.4 hereof. "Transfer" shall mean, with respect to any interest in the Company (whether direct or indirect, of record, beneficial or other) to sell, assign, transfer, convey, exchange, mortgage, pledge or grant a participation, security interest or any other rights in, or otherwise encumber or dispose of, including by merger, consolidation, dividend or distribution, such Company interest, in each case, whether made directly or indirectly, voluntarily or involuntarily, absolutely or conditionally, or by operation of law or otherwise; provided, that for the purpose of Sections 8.2(a) through (c) hereof, a "Transfer" shall not be deemed to have occurred by reason of any indirect transfer of Membership Units by reason of an acquisition or transfer of any non-Controlling, non-voting equity interest or income participation right in any of the Members or their respective Affiliates; provided, further, that a Member shall notify all other Members of each such transfer within five (5) Business Days after the consummation thereof. "Transferring Member" shall have the meaning set forth in Section 8.4(a) hereof. "Voting Securities" shall mean, with respect to a Person, all classes of capital stock, partnership interests, limited liability company interests or other securities of such Person then outstanding and normally entitled to vote in the election of directors or members of a similar governing body (irrespective of whether or not at the time securities of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "VIG" shall have the meaning set forth in the recitals to this Agreement. "VFIC" shall have the meaning set forth in the recitals to this Agreement. "Withdrawal" shall have the meaning set forth in Section 8.5(a) hereof. "Withdrawing Member" shall have the meaning set forth in Section 8.5(a) hereof. ARTICLE II FORMATION OF THE LIMITED LIABILITY COMPANY Section 2.1 Formation; Filings. The Company has been formed as a limited liability company pursuant to the provisions of the Act by the execution and filing of a Certificate of formation by an authorized person as required by the Act. The Members and the Company hereby adopt, approve, confirm and ratify all actions previously taken by or on behalf of the Company (including the actions of the authorized person) in connection with the filing of the Certificate of Formation for the Company with the Office of the Secretary of State of the State of Delaware and other initial formation and operational matters. Each of the Members intends that the Company shall be treated as a partnership for all relevant tax purposes and agree to take all reasonable actions as may be reasonably required to qualify for and receive such treatment and shall execute or cause to be executed from time to time all other instruments, certificates, notices and documents, and shall do or cause to be done, at the expense of the Company, all such filing, recording, publishing and other acts, in each case, as may be necessary or appropriate from time to time to comply with all applicable requirements for the operation and, when appropriate, termination of a limited liability company in the State of Delaware and all other jurisdictions where the Company shall desire to conduct its business. Section 2.2 Name and Office. (a) The name of the Company shall be "New Affirmative LLC" and its business shall be carried on in this name with such variations and changes the Board in its sole judgment pursuant to a Board Determination deems necessary or appropriate to comply with requirements of the jurisdictions in which the Company's operations are conducted. (b) The Company shall maintain an office or offices at such location or locations as the Board may from time to time select pursuant to a Board Determination. (c) The registered office of the Company shall be located at 1209 Orange Street, Wilmington, Delaware 19801 (New Castle County), and the registered agent for service of process on the Company at such address shall be The Corporation Trust Company, unless and until changed by the Board pursuant to a Board Determination. Section 2.3 Company Purpose; Powers. The Company is formed for the object and purpose of, and the nature of the business to be conducted and promoted by the Company is, issuing its Membership Units, acquiring, holding, owning, voting, pledging, selling, exchanging, transferring or otherwise disposing of Affirmative Equity Securities (the "Business") and any other lawful act or activity for which limited liability companies may be organized under the Act. Subject to the provisions of this Agreement, the Company and the Board (acting on the Company's behalf) shall have the power and authority to take any and all actions necessary, appropriate, advisable, desirable or incidental to or for the furtherance and accomplishment of the foregoing purposes. Notwithstanding anything herein to the contrary, nothing set forth herein shall be construed as authorizing the Company to possess any purpose or power, or to do any act or thing, forbidden by law to a limited liability company organized under the laws of the State of Delaware. Section 2.4 Term. The term of the Company commenced on the date of the filing of a Certificate of Formation in the office of the Secretary of State of the State of Delaware (the "Formation Date"), and shall continue in perpetuity, unless dissolved and liquidated in accordance with Article IX hereof. Section 2.5 Fiscal Year. Unless the Members shall at any time otherwise determine, the Fiscal Year shall end on December 31. The initial Fiscal Year commenced on the Formation Date and shall end on December 31, 2005. ARTICLE III RIGHTS AND DUTIES OF THE MEMBERS AND CONDUCT OF THE BUSINESS OF THE COMPANY Section 3.1 Members. (a) The name, address, Members Capital Contribution, number of Membership Units and Percentage Interest of each Member as of the date of this Agreement (prior to any amendments or restatements) are set forth in the books and records of the Company, which books and records shall be amended from time to time to reflect any additional Capital Contribution or acquisition of additional Membership Units by an existing Member or the Withdrawal of a Member pursuant to the terms hereof. (b) Subject to the provisions of this Agreement, the business, property and affairs of the Company shall be managed, and all powers of the Company shall be exercised, and all decisions to cause the Company to act shall be made, by or under the direction of a Board of Managers (the "Board") by a Board Determination (unless otherwise expressly provided in this Agreement). (c) Except as otherwise provided by the Act or herein, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and the Members shall not be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member of the Company. No Member or any of its Affiliates shall have any liability for the debts, obligations or liabilities of any other Member solely by reason of being a Member of the Company. No member shall be obligated to cure any deficit in any Capital Account. (d) For so long as (i) the JCF Member is a Member, J. Christopher Flowers shall Control the JCF Member and (ii) the DSC Member is a Member, Andrew W. Bluhm shall control the DSC Member; provided, that foregoing provisions shall not apply to the JCF Member or the DSC Member, as the case may be, in the event (A) of any involuntary dissolution of such Member or its Controlling Affiliates or (B) that the limited partners (or the equivalent thereof) of such Member or its Controlling Affiliates remove J. Christopher Flowers or Andrew G. Bluhm, respectively. Section 3.2 Board of Managers. (a) The Board shall consist of four (4) individuals (the "Managers"); provided, that the number of Managers may be changed from time to time by the unanimous approval of the Managers. Except as set forth in this Section 3.2, a Manager shall remain in office until removed by the Members designating such Manager. The DSC Member shall designate two (2) Managers (the "DSC Managers") and the JCF Member shall designate two (2) Managers (the "JCF Managers"), and, unless otherwise agreed by the Members, in the event that the size of Board is increased each of the DSC Member and the JCF Member shall be entitled to designate a number of individuals to the Board such that the composition of the Board is comprised of an equal number of DSC Managers and JCF Managers at any one time. The Members shall take all actions necessary to maintain the composition of the Board set forth in the preceding sentence. Each of the Initial Members shall, in their respective sole discretion, be entitled to remove or discharge (with or without cause and with or without prior notice) any of the Managers designated by them at any time, and to designate alternates (who shall be permitted to attend, and have full voting powers at, any meeting at which any designated Manager is absent) or successors therefor. Each Manager shall remain in office until his or her death, incapacity, resignation or removal. In the event of death, incapacity, resignation or removal of a Manager, the vacancy created thereby shall be filled in by the Member who appointed such former Manager. To the extent applicable, any required notice filings will be made with the Department prior to the effectiveness of any such action by a Member. The current Managers are set forth in Schedule 3.2(a) to this Agreement. Schedule 3.2(a) to this Agreement shall be updated from time to time to reflect the addition or removal of Managers. (b) The Board shall have the right at any time to, pursuant to a Board Determination, appoint one (1) or more non-voting observers to the Board (the "Observers"). The Board reserves the right to remove and replace the Observers at any time. Each of the Observers, if any, shall agree (i) to hold in confidence and trust and not use or disclose to any third parties any confidential information related to the Company's business, finances, plans, investors and other material non-public information provided to or learned by them in connection with their rights under this Article III and (ii) prior to any such Observer being granted any of the rights hereunder, enter into a letter agreement with the Company with respect to such Observer's obligations set forth in clause (i). (c) Unless otherwise stated herein, all Managers shall be eligible to vote on all matters submitted to the Board. The Board at times as may be necessary for the Company's business on at least two (2) Business Days prior written notice of such meeting (unless otherwise determined by the Board pursuant to a Board Determination) given by any one (1) Manager, which notice shall contain the time and place of such meeting and the proposed items of business. A number of Managers representing a Majority of the Managers then on the Board shall constitute a quorum for the transaction of business by the Board. Each Manager shall have one (1) vote on all matters before the Board. Except as otherwise expressly set forth herein, all actions of the Board shall require (A) a vote of a Majority of the Managers or (B) with respect to an action taken without a meeting, the consent of all of the Managers in writing (a "Board Determination"); provided, that following the effectiveness of any order or ruling from the Department suspending, revoking, limiting or restricting any Member or any of its representatives from participating in the management of the business and affairs of the Company or any of its insurance subsidiaries (a "Suspended Member") until the earlier of (x) the revocation of such order or ruling or (y) Withdrawal of such Suspended Member pursuant to Section 8.5 hereof, (i) the Managers appointed by such Suspended Member may be restricted from voting (or acting by written consent) with respect to any matter before the Board and actions of the Board with respect to such matters shall require the unanimous vote of the Managers appointed by the other Member; provided, that if the replacement by the affected Member of its designated Manager(s) would address the concerns raised in the order or ruling from the Department, nothing herein shall limit or restrict such Member from so replacing such Manager and (ii) if applicable, the Suspended Member's right to appoint Managers shall be suspended. The parties acknowledge and agree that the remedies set forth in subclause (i) and (ii) of the preceding sentence shall be narrowly tailored, to the extent practicable, to address the concerns raised in the order or ruling from the Department. (d) In the case of a tie in any vote of the Managers, the Company shall continue to operate pursuant to the policies and authorizations with respect to such matter then prevailing (i.e., the status quo shall be maintained); provided, however, that any one (1) Manager may (i) cause the Company to issue a notice of termination under the Stock Purchase Agreement and cause the Company to terminate the Stock Purchase Agreement pursuant to the terms of Sections 7.1(b), (c), (e) or (f) thereof or (ii) notify the Sellers (as defined under the Stock Purchase Agreement) that a condition set forth in Section 6.1 of the Stock Purchase Agreement (as it relates to the Company) or Section 6.3 of the Stock Purchase Agreement has not been satisfied. (e) Notice of any Board meeting may be waived by any Manager before or after such meeting. Any Manager may participate in any meeting of the Board by conference telephone facilities or other media. In accordance with Section 18-404(d) of the Act, any action required or permitted to be taken at any meeting of the Board may be taken without a meeting if all the members of the Board consent thereto in writing. The writing or writings evidencing any such consent shall be filed with the minutes of proceedings of the Board. (f) Subject to Section 3.4 hereof, no Manager (acting in his or her capacity as such) shall have any authority to bind the Company to any third party with respect to any matter except pursuant to a resolution expressly authorizing such action and which is duly adopted by the Board by the affirmative vote required for such matter pursuant to the terms of this Agreement. (g) Any Manager may vote in accordance with the instructions of the Member who has appointed him without any duty (fiduciary or otherwise) or obligation or liability to the Company or any other Member to the fullest extent allowed by Section 1101(c) of the Act. (h) In performing their duties, the Managers shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, of any attorney, independent accountant or other Person as to matters that the Managers believe to be within such Person's professional or expert competence unless the Managers have actual knowledge concerning the matter in question that would cause such reliance to be unwarranted. Section 3.3 Officers. Subject to Section 3.2 hereof, the Board may, from time to time, pursuant to a Board Determination employ and retain such other Persons as may be necessary or appropriate for the conduct of the Company's business (subject to the supervision and control of the Board), including employees, agents and other Persons (any of whom may be a Member or Manager) who may be designated as officers of the Company, with titles including but not limited to "chief executive officer," "president," vice president," "treasurer," "secretary," "general manager," "director" and "chief financial officer," as and to the extent authorized by the Board. Any number of offices may be held by the same person. In its discretion, the Board may choose not to fill any office for any period as it may deem advisable. Officers need not be residents of the State of Delaware. Any officers so designated shall have such authority and perform such duties as the Board may, from time to time, expressly delegate to them pursuant to a Board Determination, including to enter into and perform under any document on behalf of the Company. Each officer shall hold office until his successor shall be duly designated and shall qualify, or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. The salaries or other compensation, if any, of the officers of the Company shall be fixed from time to time by the Board pursuant to a Board Determination. Section 3.4 Evidence of Company Action. Any documents or instruments to be executed in connection with any matter of the Company which has been approved by the Board pursuant to a Board Determination shall be binding upon the Company upon the execution of any such document or instrument by a representative of each of the DSC Member and the JCF Member, which representatives shall be appointed at such time by the DSC Managers and the JCF Managers, respectively. Section 3.5 Cooperation; Exculpation and Indemnification. (a) For so long as such Person is a Member, each Member shall, subject to any specific provisions set forth herein, cooperate in good faith to foster the Business; provided, however, that the foregoing covenant shall not require the investment of funds in the Company or the making of any loan to, or any guarantee or accommodation on behalf of, the Company except to the extent specifically provided herein. (b) None of the Members, their respective Affiliates and Related Parties, the Managers, officers or employees of the Company or any of the agents or authorized representatives of any of the foregoing (collectively, the "Indemnified Parties") shall have any obligation or liability (whether direct or indirect, in contract or tort or otherwise) to any other Indemnified Party or to the Company for any losses, claims, damages, liabilities, costs or expenses (including fees and expenses of counsel) (collectively, "Damages") asserted against or incurred by the Company or any Indemnified Party arising out of or in connection with (i) any activities of any Indemnified Party involving the formation of the Company and the offering and selling of Membership Units, or (ii) the management or conduct of the business, operations and affairs of the Company, or any Indemnified Party insofar as it relates to the Company or any Member, including activities of an Indemnified Party in the conduct of any other business engaged in by it which might involve an actual or potential conflict of interest vis-a-vis the Company or the Members (or any of them), or which are for the account of such Indemnified Party, or in respect of which such Indemnified Party profits in any manner; provided, however, that the foregoing shall not relieve any Indemnified Party for Damages asserted against or incurred by the Company or another Indemnified Party that result from any violation of law, gross negligence or willful misconduct (including intentional misrepresentation) by such Indemnified Party or any material breach by such Indemnified Party of the covenants or agreements contained in this Agreement (collectively, "Excluded Activities"). For the avoidance of doubt, a Manager shall not have any obligation or liability to an Indemnified Party by reason of taking any action or failing to act in accordance with the instructions of the Member who appointed such Manager. (c) The Company shall indemnify and hold harmless each Indemnified Party from and against any and all Damages asserted against or incurred by such Indemnified Party arising out of or in connection with (i) the management or conduct of the business, operations and affairs of the Company or (ii) any activities of any Indemnified Party involving the formation of the Company and the offering and selling of Membership Units; provided, however, that the foregoing indemnification shall not apply with respect to Excluded Activities committed by any such Indemnified Party. Expenses incurred by an Indemnified Party in investigating or defending any claim shall be paid by the Company in advance of the final disposition of such claim upon receipt by the Company of a written agreement by or on behalf of such Indemnified Party to repay such amount if it shall be ultimately determined that such Indemnified Party is not entitled to be indemnified by the Company as authorized by this Section 3.5(c). (d) The personal liability of the Managers of the Company is hereby eliminated to the fullest extent permitted by the Act, as the same may be amended and supplemented. A Manager of the Company shall not be personally liable to the Company or its Members for monetary damages for breach of fiduciary duty as a Manager, except as to liability to the extent such exemption from liability or limitation thereof is not permitted under the Act, as the same exists or may hereafter be amended. If the Act hereafter is amended to further eliminate or limit the liability of a Manager, then a Manager of the Company, in addition to the circumstances in which a Manager is not personally liable as set forth in the preceding sentence, shall not be liable to the fullest extent permitted by the Act. In furtherance of, and without limiting the generality of the foregoing, no Manager shall be (a) personally liable for the debts, obligations or liabilities of the Company, including any such debts, obligations or liabilities arising under a judgment, decree or order of a court; (b) obligated to cure any deficit in any Capital Account; (c) required to return all or any portion of any Capital Contribution; or (d) required to lend any funds to the Company. Any repeal or modification of this Section 3.5 by the Members shall not adversely affect any right or protection of a Manager existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. (e) None of the provisions of this Section 3.5 shall be deemed to create or grant any rights in favor of any third party, including, without limitation, any right of subrogation in favor of any insurer or surety. The rights of indemnification granted hereunder shall survive the dissolution, winding up and termination of the Company. Section 3.6 Freedom of Action; Confidentiality; Business Opportunities. (a) Subject to the specific provisions of any other agreement between the Company and a Member and Section 3.6(b) hereof, each Member and its respective Affiliates and Related Parties (collectively, the "Permitted Persons") may have other business and financial interests and investments and may engage in any other business or trade, profession or employment whatsoever, on its own account, or in partnership with, or as an employee, officer, director, creditor, advisor or stockholder of any other Person, and no Permitted Person shall be required to devote its or his entire time to the business of the Company. Without limiting the generality of the foregoing, each Permitted Person, except as set forth in Section 3.6(b) hereof, (i) may engage in the same or similar activities or lines of business as the Company or develop or market any products or services that compete, directly or indirectly, with those of the Company, (ii) may invest or own any interest publicly or privately in, or develop a business relationship with, any Person engaged in the same or similar activities or lines of business as, or otherwise in competition with, the Company and (iii) do business with any client or customer of the Company. Neither the Company nor any other Member nor any Affiliate thereof by virtue of this Agreement shall have any rights in and to any such independent venture or the income or profits derived therefrom, regardless of whether or not such venture was presented to a Permitted Person as a direct or indirect result of its or his connection with the Company. Except as set forth in Section 3.6(a) hereof, no Permitted Person shall have any obligation to present any business opportunity to the Company, even if the opportunity is one that the Company might have pursued or had the ability or desire to pursue, in each case, if granted the opportunity to do so and no Permitted Person shall be liable to the Company or any Member or any Affiliate thereof for breach of any fiduciary or other duty, as a member or otherwise, by reason of the fact that a Permitted Person pursues or acquires such business opportunity, directs such business opportunity to another Person or fails to present such business opportunity, or information regarding such business opportunity, to the Company. (b) Notwithstanding the foregoing, no Member or any of its Affiliates may, directly or indirectly, acquire or Transfer (except as otherwise provided in this Agreement) any shares of common stock of Affirmative, securities convertible or exercisable into or exchangeable for the common stock of Affirmative, options, warrants or other rights to purchase or subscribe for the common stock of Affirmative, notes, debentures, rights and other forms of investment of any kind in Affirmative (collectively, "Affirmative Equity Securities") for its own account or for the account of any other Person (other than through or by the Company). (c) Each Member shall, and shall cause its Affiliates and Related Parties and the respective agents and other representatives of the foregoing to, hold strictly confidential, and not disclose to any Person, any Confidential Information that is furnished to or obtained by such Member (or the Manager designated by such Member), and (ii) if a Member shall cease to be a Member, it shall either return all Confidential Information to the Company or destroy such Confidential Information without retaining any record, copy or image of such Confidential Information in any physical, electronic or other form; provided that (1) the foregoing provisions shall not apply to any disclosure, to the extent reasonably required, to those of such Member's Related Parties and their respective agents and other representatives who agree to be bound by the provisions of this Section 3.6(c), (2) the foregoing provisions shall not apply where such Member or any of its Related Parties and the respective agents and other representatives of the foregoing are compelled to disclose such Confidential Information, by judicial or administrative process or, in the reasonable opinion of counsel, by other requirements of law; provided that prior written notice of such disclosure is given to the Company and any such disclosure is limited to only that portion of the Confidential Information that such Person is compelled to disclose, (3) the term "Confidential Information" shall not include information (A) that is or becomes generally available to the public other than as a result of disclosure of such information by such Member or any of its Affiliates or Related Parties or the respective agents and other representatives of the foregoing, (B) that is or becomes available to the recipient of such information on a non-confidential basis from a source that is not, to the recipient's knowledge, bound by a confidentiality or other similar agreement, or by any other legal, contractual or fiduciary obligation that prohibits or limits disclosure of such information to the other Members and their respective Related Parties and the respective agents and other representatives of the foregoing or (C) that can be demonstrated to have been developed independently by the representatives of such recipient which representatives have not had any access to any information that would otherwise be deemed to be "Confidential Information" pursuant to the provisions of this Section 3.6(c), and (4) each of the Members acknowledges and agrees that any information they may receive from the Company in its reports to Members is confidential, proprietary and non-public in nature. Notwithstanding the foregoing (w) a Member may disclose Confidential Information to a proposed transferee in connection with any Transfer pursuant to Sections 8.2, 8.3 or 8.4 hereof (or pursuant to a transfer of the type described in the proviso to the definition of "Transfer") so long as such transferee enters into a confidentiality agreement with respect thereto with terms which are no less restrictive that the terms set forth in this Section 3.6(c); provided, that any such Member acknowledges that any disclosure of Confidential Information in violation of such confidentiality agreement by a proposed transferee shall constitute a breach of this Section 3.6(c) by such Member and, in the case of disclosure made by any such Member pursuant to this clause (w) in connection with any Transfer pursuant to Section 8.2 hereof or any transfer described in the proviso to the definition of "Transfer", such Member shall indemnify the Company and the other Members for all Damages arising out of the disclosure of such Confidential Information by a proposed transferee, (x) in the event that any demand or request for disclosure of Confidential Information is made pursuant to clause (2) above, the disclosing Member shall promptly notify the Board and the other Members of the existence of such request or demand and shall provide the other (and/or the Company) a reasonable opportunity to seek an appropriate protective order or other remedy, which such Members will cooperate in obtaining (each at its own expense), (y) each of the Members may, to the extent applicable, file a copy of this Agreement as an exhibit to (I) a Statement on Schedule 13D filed by the Members with the Securities and Exchange Commission and any securities exchange on which Affirmative Equity Securities are listed and (II) a Form A Filing with the Department and (z) the Members and their respective Affiliates and Related Parties and the respective agents and other representatives of the foregoing, are hereby expressly authorized to disclose to any and all Persons, without limitation of any kind, the tax treatment and any facts that may be relevant to the tax structure of the transactions contemplated by this Agreement; provided, however, that such parties may not disclose any other information that is not relevant to understanding the tax treatment and tax structure of such transactions (including the identity of any party and any information that could lead another to determine the identity of any party), or any other information to the extent that such disclosure could reasonably result in a violation of any applicable securities law. Section 3.7 Consents and Approvals. Each of the Members agrees, and shall cause its respective Affiliates and Related Parties to agree, to assist, to the extent it is reasonable to do so, the Company in obtaining as promptly as practicable all consents, authorizations, approvals and waivers from any Governmental Entity, including the Department, required to be obtained by the Company (or such Member) in order to operate the Company's business in accordance with any business plan then in effect, including assisting the Company in making any required filings, submissions and notifications with any Governmental Entity, including the Department. Each of the Members shall, and shall cause their respective Affiliates and Related Parties to, to the extent it is reasonable to do so, furnish to the Company such necessary information and reasonable assistance as the Company may reasonably request in connection with the foregoing. For the purposes of this Section 3.7, without limiting this Section 3.7, it shall not be reasonable for any Person to be required to take any action which such Person reasonably believes may cause such Person undue harm. ARTICLE IV FINANCING Section 4.1 Initial Financing. Concurrently with the closing under the Stock Purchase Agreement and as specified in the Subscription Agreement, dated as of the date hereof, by and among the Initial Members and the Company (the "Subscription Agreement"), each Initial Member shall contribute the "Members Capital Contribution" set forth opposite its name on Schedule I to this Agreement (which shall be updated and filled in concurrently with the delivery, pursuant to the terms of the Subscription Agreement, of Exhibit A to the Subscription Agreement. If any Member fails to contribute its pro-rata amount (a "Defaulting Member"), then the other Member may, if it has contributed the amount requested to be contributed by such Member pursuant to this Section 4.1, contribute an additional amount up to the full amount which the Defaulting Member failed to contribute and this Agreement shall automatically terminate and be of no further force or effect. Section 4.2 Additional Capital. (a) No Member shall be obligated to contribute any capital to the Company other than its Members Capital Contribution. If it is determined by the Board pursuant to a Board Determination that such additional Capital Contributions are necessary or appropriate for the conduct of the Company's business and affairs, including without limitation expansion or diversification, the Members may be permitted from time to time to make additional Capital Contributions on such terms and conditions as may be determined by the Board pursuant to a Board Determination. (b) Schedule I to this Agreement shall be amended from time to time as appropriate to reflect any change in a Member's Percentage Interest and/or number of Membership Units held by any Member resulting from a purchase and sale of Membership Units. Section 4.3 No Other Capital Contributions. Except as set forth in this Agreement, no Member shall have any right, obligation or ability to make any other Capital Contributions. Section 4.4 No Interest on Capital Contributions. No Member shall be entitled to receive interest on its Capital Contributions. Section 4.5 No Loans to Company. No Member shall lend or advance funds to the Company without the consent of the Board pursuant to a Board Determination. Section 4.6 Membership Units. (a) Subject to the provisions of this Agreement, the Company is authorized to issue equity interests designated as "Membership Units." (b) Each Membership Unit will be identical in all respects and will entitle the holders thereof to the same rights and privileges, except as otherwise provided herein. (c) For the purposes of determining the vote of the Members pursuant to Section 9.1, each Member shall be entitled to one (1) vote per Membership Unit. ARTICLE V CAPITAL ACCOUNTS; DIVISION OF PROFITS AND LOSSES; DISTRIBUTIONS Section 5.1 Capital Accounts. Each Member shall have a capital account (a "Capital Account") which account shall be (a) increased by the amount of cash and the fair market value of any property (net of liabilities assumed by the Company and liabilities to which the property is subject) contributed by such Member, plus all items of income and gain of the Company allocated to such Member, plus (without duplication) any amount of indebtedness of the Company assumed by such Member (b) decreased by the amount of distributions to such Member of cash or other property (net of liabilities assumed by the Member and liabilities to which the property is subject), plus all items of loss and deduction of the Company allocated to such Member. The provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulations Section 1.704-1(b) and shall be interpreted and applied in a manner consistent with such Treasury Regulations. Section 5.2 Allocations of Net Income and Net Loss. (a) Allocations to Capital Accounts: After giving effect to the special allocations provided in Sections 5.2(b) and (d) hereof: (i) Net Income shall be allocated to the Members in accordance with their Percentage Interests. (ii) Net Losses shall be allocated to the Members in accordance with their Percentage Interests. (b) Adjustments. Any allocation pursuant to Section 5.2(a) hereof shall, however, be subject to any adjustment required to comply with Treasury Regulations Sections 1.704-1 and 1.704-2, including any qualified income offset within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and any nonrecourse deduction or minimum gain chargeback within the meaning of Treasury Regulations Section 1.704-2. In the event that any Member has a deficit Adjusted Capital Account balance as of the close of any Fiscal Year, such Member shall be specially allocated items of Company income and gain in the amount of such deficit as quickly as possible. The value of the Company assets shall be adjusted on the Company's books to equal their respective fair market values, in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(f), upon the occurrence of the following events: (i) the contribution of money or other property to the Company for an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (ii) the distribution by the Company to a Member of more than a de minimis amount of Company property in exchange for an interest in the Company; and (iii) the liquidation of the Company within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g). The value of the Company's assets will be increased or decreased to reflect any adjustment to the adjusted basis of such assets under Code Sections 734(b) or 743(b). In the event that the value of any Company asset is adjusted pursuant to the two immediately preceding sentences, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset which shall be allocated to the Members and their respective Capital Accounts in accordance with Section 5.2(a) hereof. Any special allocations of items pursuant to this Section 5.2(b) hereof shall be taken into account, to the extent permitted by the Treasury Regulations, in computing subsequent allocations of income, gain, loss or deductions pursuant to Section 5.2(a) hereof so that the net amount of any items so allocated and all other items allocated to each Member shall, to the extent possible, be equal to the amount that would have been allocated to each Member pursuant to Section 5.2(a) hereof had such special allocations under this Section 5.2(b) hereof not occurred. (c) Tax Allocations. Items of income, gain, loss, deduction and credit realized by the Company shall, for each fiscal period, be allocated, for federal, state and local tax purposes, among the Members in the same manner as the items of income, gain, loss, deduction and credit were allocated pursuant to Sections 5.2(a) and (b) hereof, except that, solely for federal, state and local tax purposes, allocations with respect to any property contributed to the capital of the Company shall be made using a reasonable method of allocation, determined by the Board pursuant to a Board Determination, in their sole discretion to take into account pre-contribution gain or loss by any contributing Member with respect to any contributed property, that is consistent with Code Section 704(c) and Treasury Regulations promulgated thereunder. This Section 5.2(c) is intended to comply with the requirements of Code Section 704(c) and the Treasury Regulations promulgated thereunder. (d) Redeterminations. If for any taxable period of the Company, the Company is deemed to have a net increase (or decrease) in income for tax purposes as a result of a redetermination by a tax authority resulting from transactions between the Company and any Member or any Affiliate or Related Party of any Member, the item or items of income or gain (or loss or deduction) that resulted in such increase (or decrease) in income shall be allocated to the Member that was (or the Affiliate or Related Party of which was) a party to the transaction and the Capital Accounts of the Members shall reflect such allocations but shall not result in any change in the respective Percentage Interests of the Members. (e) Federal Income Tax. It is the intent of this Company and its Members that this Company shall be governed by the applicable provisions of Subchapter K, Chapter 1, of the Code. Section 5.3 Distributions. (a) The Company shall not make any distributions to its Members other than (i) pursuant to Section 5.3(d), (ii) pursuant to a Board Determination or (iii) as set forth in Article IX. (b) In the event of a distribution of property other than cash, the value of such property shall be deemed to be equal to its fair market value (net of any liabilities securing such distributed property that the recipient Members are considered to assume or take subject to under Section 752 of the Code). Any gain or loss associated with such property shall be allocated to Members' Capital Accounts in accordance with Section 5.2 hereof, and adjustments to Capital Accounts in respect of distributions of such property shall reflect its fair market value. (c) Any distributions, other than distributions made pursuant to Section 5.3(d) or Article IX, shall be made to the Members as and if approved by the Board as of a record date determined by the Board pursuant to a Board Determination (which date shall not be less than 10 nor more than 45 days before the date of the distribution), pro rata, in accordance with their respective Percentage Interests. (d) In the event of any dividend or distribution (other than dividends or distributions of Affirmative Equity Securities) with respect to the Affirmative Equity Securities or the receipt of any proceeds by the Company with respect to the sale of Affirmative Equity Securities, unless a Board Determination mandates otherwise, the Company shall as soon as practicable upon receipt of such dividend or distribution, distribute to the Members pro-rata, in accordance with their respective Percentage Interests, the entire amount of such dividend or distribution. Section 5.4 No Right of Withdrawal. No Member shall have the right to withdraw any portion of such Member's Capital Contributions or Capital Account in the Company, except as expressly provided herein. Section 5.5 Amounts Held in Reserve. In regard to all distributions made out of amounts in the Capital Accounts, the Board shall (pursuant to a Board Determination) have the power, in its sole judgment, to withhold amounts otherwise distributable in order to maintain the Company in a sound financial and cash position and to make such provision as it in its sole judgment deems necessary or advisable for any and all liabilities and obligations, contingent, unforeseen or otherwise, of the Company. Section 5.6 Account Balances. Notwithstanding the foregoing, at any time any Member may have a positive, negative, or zero balance in its Capital Account; provided, however, that no Member shall be required to pay to any Member or to the Company the amount of any negative balance in any such account. Notwithstanding the other provisions of this Article V, any amount otherwise distributable to a Member may be withheld by the Board (pursuant to a Board Determination), in its sole discretion, and distributed to the other Members if the distribution of such amount to such Member would result in its Adjusted Capital Account balance being reduced to an amount less than zero. The immediately preceding sentence shall not apply to the extent that, pursuant to the second sentence of Section 5.2(b) hereof, items of Company income and gain are specially allocated to such Member in a manner that increases such Member's Adjusted Capital Account balance to zero. ARTICLE VI BANKING, ACCOUNTING, BOOKS AND RECORDS Section 6.1 Banking. All funds of the Company shall be deposited in such bank or money market accounts as shall be established by the Board pursuant to a Board Determination. Withdrawals from and checks drawn on any such account shall be made upon the signature or signatures of the individuals as may be designated by the Board pursuant to a Board Determination. Section 6.2 Maintenance of Accounts and Accounting Method. The Tax Matters Partner shall keep or cause to be kept at the office of the Company set forth in Section 2.2(b) hereof full and accurate accounts of the transactions of the Company in proper books of account. Such books and records shall be kept in accordance with GAAP consistently applied and be available for inspection and copying at reasonable times during business hours by the Members or their duly authorized agents or representatives. Section 6.3 Company Tax Returns. The Company shall cause to be prepared and timely filed all tax returns required to be filed for the Company in the jurisdictions in which the Company conducts business or derives income for all applicable tax years, and shall furnish within 30 days after the original due date, without extensions, of the Company's federal income tax return (IRS Form 1065 or any successor form thereto), a statement of each Member's distributive share of income, gains, losses, deductions and credits for such tax year prepared by the Company's independent public accountants (including IRS Form 1065 and Schedule K-1 and similar or successor forms and schedules thereto) and a copy of the Company's federal tax return required to be filed by the Company for such Fiscal Year. The Tax Matters Partner may make, subject to the approval of the Board pursuant to a Board Determination, any income or other tax elections for the Company; provided, however, upon the Transfer of an Membership Unit in the Company, the Tax Matters Partner shall, at the request of any Member, cause the Company to file an election under Section 754 of the Code and the Treasury Regulations thereunder and a corresponding election under the applicable section of state or local law. The Members shall file their individual returns or corporate returns in a manner consistent with the Company tax and information returns to the extent such returns pertain to the business of the Company. Any filing by the Company of any federal, state or local income tax returns of the Company, including IRS Form 1065 and Schedule K-1 and similar or successor forms and schedules shall be approved by a Board Determination. Section 6.4 Designation of Tax Matters Partner. The DSC Member is hereby designated as the "Tax Matters Partner", under Section 6231(a)(7) of the Code, with respect to the Company. The Tax Matters Partner is specifically directed and authorized to take whatever steps the Tax Matters Partner, in its sole discretion, deems necessary or desirable to perfect such designation, including, subject to Section 6.3 hereof, filing any forms or documents with the Internal Revenue Service and taking such other action as may from time to time be required under regulations of the United States Department of the Treasury. The Tax Matters Partner shall at all times assure that each Member is a "notice partner" as defined in Section 6231(a)(8) of the Code with respect to the Company. The Tax Matters Partner shall promptly deliver to each of the other Members a copy of all notices, communications, reports and writings received from the Internal Revenue Service or other tax authority relating to or potentially resulting in an adjustment of Company items and keep each of the Members advised of all material developments with respect to any proposed adjustments which come to its attention. Any Member has the right to participate in administrative or judicial proceedings relating to the determination of Company items at the Company level. Expenses of such administrative or judicial proceedings undertaken by the Tax Matters Partner shall, upon submission of an adequate accounting, be deemed expenses of the Company. Each Member, other than the Tax Matters Partner, who elects to participate in such proceedings shall be responsible for any expenses incurred by such Member in connection with such participation. Further, the cost of any adjustments to a Member and the cost of any resulting audits or adjustments of such Member's tax return, shall be borne solely by the affected Member. Notwithstanding the foregoing, the Tax Matters Partner may not settle any administrative or judicial proceeding or enter into any agreement (including extending the period of limitations) with the Internal Revenue Service or other tax authority, in each case, without a Board Determination. This Section 6.4 is not intended to authorize the Tax Matters Partner to exercise or limit any right that is exercisable by any other Member under Sections 6222 through 6232 of the Code. Section 6.5 Withholding. Notwithstanding any other provision of this Agreement, the Company is authorized to take any action that it reasonably determines to be necessary or appropriate to cause the Company to comply with any foreign or United States federal, state or local withholding requirement with respect to any allocation, payment or distribution by the Company to any Member or other Person. All amounts so withheld, and, in the manner determined by the Company, amounts withheld with respect to any allocation, payment or distribution by any Person to the Company, shall be treated as distributions to the applicable Members under the applicable provisions of this Agreement, as the case may be. Notwithstanding any other provision of this Agreement, if any such withholding requirement with respect to any Member exceeds the amount distributable to such Member under applicable provisions of this Agreement or if any such withholding requirement was not satisfied with respect to any amount previously allocated, paid or distributed to such Member, such Member and any successor or assignee with respect to such Member's Membership Units hereby indemnifies and agrees to hold harmless the other Members and the Company for such excess amount or such withholding requirement, as the case may be. Any amount so withheld by the Company shall be promptly paid by the Company to the appropriate federal, state or local taxing authority. ARTICLE VII INFORMATION Section 7.1 Reports of Affirmative. To the extent the Board receives financial reports or other information from Affirmative, the Board shall furnish any Member with such information at the Member's request. Section 7.2 Inspection of Records. A Member and its duly authorized representatives may, for any reason reasonably related to its interest as a Member of the Company, examine the Company's books of account and make copies and extracts therefrom at its own expense. The Managers shall maintain the records of the Company for three years following the termination of the Company. The Managers shall be permitted to keep information confidential from the Members pursuant to 18-305(c) of the Act. Section 7.3 Tax Information. The Company shall send or cause to be sent to each Member within 30 days after filing of the Company's federal income tax (IRS Form 1065 or any successor form thereto), state income tax, local or any other tax or information returns, including any amendments and supplements thereto, such information as is reasonably necessary for each Member to complete its applicable foreign, federal, state, local and any other tax or information returns, including a copy of the Company's foreign, federal, state, local and any other tax or information returns for such Fiscal Year, including any amendments and supplements thereto. ARTICLE VIII ADMISSION OF NEW MEMBERS; TRANSFER OF MEMBERSHIP UNITS; WITHDRAWAL OF A MEMBER Section 8.1 Admission of New Members. Subject to Section 3.2 hereof, additional Members may be admitted to the Company from time to time on such terms and conditions as shall be determined in accordance with such Section, including upon execution and delivery of a counterpart of this Agreement. Schedule I to this Agreement shall be amended from time to time as appropriate to reflect (x) the number of Membership Units held by such additional Member, (x) the Percentage Interest of any additional Member admitted to the Company in accordance this Section 8.1 hereof and (y) any change in the number of Membership Units held by any Member and/or an existing Member's Percentage Interest resulting from an admission of an additional Member in accordance with this Section 8.1 hereof. Section 8.2 Transfer of Membership Units by Members. (a) Except as otherwise provided in Section 8.2 or Section 8.4 hereof, a Member may not (without the approval of the other Members) otherwise withdraw or resign from the Company or take any action to dissolve, terminate or liquidate the Company or Transfer (other than to a Permitted Transferee of such Member) any or all of the Membership Units held by such Member except as permitted pursuant to this Section 8.2 or Sections 8.3 or 8.4 hereof. (b) A Member may Transfer any or all of its Membership Units to a Permitted Transferee of such Member at any time; provided, that a Member shall notify all other Members of each Transfer to a Permitted Transferee within five (5) Business Days after the consummation thereof; provided, further, that the Permitted Transferee shall be required to execute a joinder to this Agreement in which the Permitted Transferee agrees to be bound by the terms and conditions of this Agreement to the same extent and in the same manner as the Member transferring such Membership Units and all references to the transferring Member in this Agreement (e.g., "DSC Member", "JCF Member") shall thereafter be deemed to be references to such Permitted Transferee; provided, further, that the Transfer to any Permitted Transferee shall be in compliance with all applicable federal, state and foreign securities laws. Schedule I to this Agreement shall be amended from time to time as appropriate to reflect the addition of any Permitted Transferee. (c) At any time after the Form A Approval Date, any Member may Transfer any or all of its Membership Units to a third party (a "Consent Transferee"), subject to the written consent of the other Member, which consent shall not be unreasonably withheld; provided, it being understood that that it is not unreasonable to withhold consent in the event that any Consent Transferee (or the transferring Member) requests any material changes to the terms and provisions of this Agreement or requests any changes to the provisions relating to the governance of the Company; provided, further, that the Consent Transferee shall be required to execute a joinder to this Agreement in which the Consent Transferee agrees to be bound by the terms and conditions of this Agreement to the same extent and in the same manner as the Member transferring such Membership Units and all references to the transferring Member in this Agreement and if any Initial Member transfers all but not less than all of its Membership Units then all references to the transferring (e.g., "DSC Member", "JCF Member") shall thereafter be deemed to be references to such Consent Transferee. Subject to any notice or filing with the Department, a Member transferring Membership Units may agree, in its sole discretion, to grant to any Consent Transferee the right to appoint (or assign the voting rights with respect to) the Managers appointed by such Member; provided, that (x) a Consent Transferee may not receive the right to appoint more than one (1) Manager unless such Consent Transferee purchases a Member's entire fifty percent (50%) aggregate Percentage Interest in the Company (unless each of the Managers on the Board otherwise consents) and (y) a Member may in no event appoint (or assign the voting rights with respect to a Manager to) more than one (1) Consent Transferee at any time (except to a transferee of such Member's entire fifty percent (50%) aggregate Percentage Interest in the Company). Schedule I to this Agreement shall be amended from time to time as appropriate to reflect the addition of any Consent Transferee. (d) Any purported Transfer of a Member's Membership Units in violation of this Section 8.2 or Section 8.3 or 8.4 hereof shall be void and of no effect. (e) In the event of any Transfer of Membership Units by a Member of any or all of its Membership Units during any year, the Company and its Members agree that the allocations made pursuant to Article V of this Agreement will be made to such Member and transferee of such Member as determined by a closing of the books of the Company as of the date of such Transfer. Section 8.3 Company Sale. (a) Following the fifth (5th) anniversary of the closing under the Stock Purchase Agreement, either Initial Member (or any transferee of an Initial Member's entire fifty percent (50%) Percentage Interest in the Company) (such Person, the "Proposed Seller"), shall have the right to elect to cause the auction and sale of all, but not less than all, of the Company or its assets or outstanding Membership Units, and, if applicable, all other outstanding equity securities, options, warrants or other rights to exercise, purchase or otherwise acquire the Beneficial Ownership of, any Membership Units, of the Company in an arm's-length third party transaction for consideration consisting solely of Permitted Consideration (a "Company Sale") in accordance with the terms and conditions set forth in this Section 8.3. The Proposed Seller shall have the right to exercise its right to effectuate a Company Sale hereunder by providing written notice of such Proposed Seller's intention to effectuate such Company Sale (the "Company Sale Notice") to the Company and each other Member. (b) The Proposed Seller shall be free for a period of one hundred eighty (180) days from the date of delivery of the Company Sale Notice to enter into a definitive purchase agreement with respect to a proposed Company Sale. The Company Sale shall be conducted pursuant to an auction process by an independent nationally recognized investment banking firm selected by the Proposed Seller (and approved by the DSC Member or JCF Member, as the case may be, which approval shall not be unreasonably withheld) in such manner and on such terms as the Proposed Seller determines, provided that all Members are entitled to receive the same price per Membership Unit, and participate in the transaction on the same terms. No Member shall have the right to participate as a bidder in the auction. The Company and all other Members shall cooperate with the investment banking firm in any Company Sale. The Board shall be kept fully informed and be given the opportunity to participate in the negotiations and discussion concerning the Company Sale process. All Members agree, and will cause their representatives on the Board, to vote in favor of any Company Sale in accordance with this Section 8.3. At the election of the Proposed Seller, the Proposed Seller shall have the right to terminate or not go forward with any Company Sale if it is dissatisfied with the result thereof, and the Proposed Seller shall retain the right to provide additional Company Sale Notices pursuant to this Section 8.3 for so long as it is a Member, provided, however, that if the Proposed Seller does not enter into a definitive purchase agreement with respect to the proposed Company Sale prior to the end of the one hundred eighty (180) day period, then no such Company Sale shall be consummated. If the Proposed Seller of such Company Sale requests within the next twelve (12) month period that another Company Sale process be conducted, then such Proposed Seller shall pay all fees and expenses incurred in connection with such additional Company Sale process if such further Company Sale process is unsuccessful. (c) In the event that the Company Sale is effectuated, each of the Members shall (i) prior to closing of any such proposed Company Sale, execute any purchase agreement or other certificates, instruments and other agreement required to consummate the proposed Company Sale; provided, however, that any such purchase agreement or other certificates, instruments and other agreements shall be on terms no less favorable to the other Members than those executed by either of the Proposed Seller in connection with such Company Sale, including without limitation, the purchase price (and form of consideration) per Membership Unit therefor, the provision of, and reasonable representation and warranty as to, information requested by the proposed purchaser from the Proposed Seller and the provision of requisite indemnifications from the Proposed Seller; provided, further, that (x) if at the commencement of such Company Sale process more than thirty-five (35%) of the outstanding publicly traded equity securities are held by Persons other than the Company (a "Public Company Sale"), then in the event that any Member is required as part of such Public Company Sale to make unreasonable representations or warranties or provide unreasonable indemnities, such Member which refuses to make any such unreasonable representation or warranty shall have the right to trigger a Withdrawal as a Withdrawing Member pursuant to Section 8.5 hereof (it being understood that the terms of Section 8.5(d) shall be inapplicable) and (y) for any Company Sale other than a Public Company Sale, the Members will use reasonable best efforts to pursue reasonable representations and warranties and reasonable indemnities in connection with such Company Sale; provided, further, that any indemnification provided to the proposed purchaser by the Proposed Seller and by the other Members shall be made pro-rata in proportion to the respective Membership Units or other equity securities of the Company beneficially owned by each of them (except in the case of indemnifications arising as a result of a breach of a representation or warranty relating specifically to a particular seller which shall be borne solely by such seller), and (ii) use their commercially reasonable efforts to obtain all necessary consents from third parties and take such other actions as may be necessary to effectuate the intent of the foregoing. At the closing of any such proposed Company Sale, such other Members shall deliver to the proposed purchaser (i) such instruments of transfer as shall be requested by the proposed purchaser with respect to the Membership Units or other equity securities of the Company to be Transferred, against receipt of the purchase price therefor in such Company Sale and (ii) such Members' Shares or other Equity Securities, free and clear of any liens. At such closing the transferee shall deliver payment (in full in immediately available funds in the case of all cash payments) for the Membership Units and other equity securities purchased by such transferee. (d) In the event that the Company Sale is effectuated through a business combination (whether by way of merger, recapitalization or otherwise), the Members shall use their commercially reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary or advisable to consummate and make effective the business combination. (e) Notwithstanding anything else in this Agreement, a Member that has Transferred all of its Membership Units shall remain bound by the terms of sections 3.6(c) and 6.3 hereof and Article X hereof. Section 8.4 Drag-Along Sale. (a) In the event that the sale process set forth in Section 8.3 hereof does not result in a Company Sale, then at any time within sixty (60) days of the end of such process, if either Initial Member (or any transferee of an Initial Member's entire fifty percent (50%) Percentage Interest in the Company) (any such Person, the "Transferring Member") has received a bona-fide offer consisting of Permitted Consideration from a third party (which is not an Affiliate of the Transferring Member) regarding the Transfer of all of the Membership Units owned by the Transferring Member to such third party (the "Drag Transferee"), then the Transferring Member may, at its option and without the approval of any of any of the other Members (the "Remaining Members"), require each of the Remaining Members to include in any such Transfer to a Drag Transferee all, but not less than all, of the Membership Units (and, if applicable, any other securities of the Company) owned by each Remaining Member, as determined in accordance with this Section 8.4. In such event, the Transferring Member shall send written notice (the "Drag-Along Notice") of the exercise of its rights pursuant to this Section 8.4 to each Remaining Member, setting forth the sales price consideration per Membership Unit to be paid by the Drag Transferee and the other material terms and conditions of such transaction (such transaction, a "Drag-Along Sale"). The Drag-Along Notice shall state that the Remaining Members shall be required to participate in the Drag-Along Sale according to the terms and conditions of this Section 8.4. Within sixty (60) days following the receipt of the Drag-Along Notice, the Remaining Members shall deliver to a representative of the Transferring Member designated in the Drag-Along Notice all documents required to be executed in connection with the Drag-Along Sale and, upon consummation of the Transfer of Membership Units by the Transferring Member and the Drag-Along Sale, shall cause the transfer all of such Remaining Member's Membership Units to be recorded in the books of the Company in the name of the Drag Transferee. In the event that any Remaining Holder should fail to deliver any such documents or cause the Company to record the transfer of the Remaining Member's Membership Units, then the Transferring Member shall be authorized to unilaterally cause the books and records of the Company to show that such Membership Units are bound by the provisions of this Section 8.4 and may be Transferred only to the Drag Transferee. (b) The obligations of the Remaining Members pursuant to Section 8.4(b) are subject to the satisfaction of the following conditions: (i) in an arm's-length third party transaction for consideration consisting solely of Permitted Consideration in accordance with the terms and conditions set forth in this Section 8.4; (ii) the Drag-Along Sale shall be effectuated at or above the price set forth in the Drag-Along Notice, consist of Permitted Consideration, and upon any other terms and conditions (including contractual terms) which are equal to or more favorable, considered as a whole, than as set forth in the Drag-Along Notice; and (iii) each of the Remaining Members shall prior to the closing of any such proposed Drag-Along Sale, execute any purchase agreement or other certificates, instruments and other agreement required to consummate the proposed Drag-Along Sale; provided, however, that any such purchase agreement or other certificates, instruments and other agreements shall be on terms no less favorable to the other Remaining Members than those executed by the Transferring Member in connection with such Drag-Along Sale, including without limitation, the purchase price (and form of consideration) per Membership Unit therefor, the provision of, reasonable representation and warranty as to, information requested by the proposed purchaser from the Proposed Seller and the provision of requisite indemnifications from the Proposed Seller; ; provided, further, that (x) if at the commencement of such Drag-Along Sale is a Public Company Sale, then in the event that any Member is required as part of such Public Company Sale to make unreasonable representations or warranties or provide unreasonable indemnities, such Member which refuses to make any such unreasonable representation or warranty shall have the right to trigger a Withdrawal as a Withdrawing Member pursuant to Section 8.5 hereof (it being understood that the terms of Section 8.5(d) shall be inapplicable) and (y) for any Drag-Along Sale other than a Public Company Sale, the Members will use reasonable best efforts to pursue reasonable representations and warranties and reasonable indemnities in connection with such Company Sale; provided, further, that any indemnification provided to the Drag Transferee by the Transferring Member and by the other Members shall be made pro-rata in proportion to the respective Membership Units or other equity securities of the Company beneficially owned by each of them (except in the case of indemnifications arising as a result of a breach of a representation or warranty relating specifically to a particular seller which shall be borne solely by such seller). Section 8.5 Withdrawal of a Member. (a) In the event of (i) the death, incapacity, permanent disability, bankruptcy or involuntary dissolution of any Member or (ii) that any such Member becomes a Suspended Member; provided, that a Suspended Member shall have a ninety (90) day period (the "Cure Period") during which to cure and cause to be lifted such order or ruling which caused the Member to become a Suspended Member (each such event, a "Withdrawal"), the Company shall dissolve and be wound up as provided in Article IX hereof unless all the Members, excluding, if applicable, the Member who is the Withdrawing Member (as hereinafter defined) consent to continue the Company. The Member that is the subject of the Withdrawal (the "Withdrawing Member") shall deliver prompt written notice to the Company and the other Members of the occurrence of a Withdrawal. If the Members decide to continue the Company pursuant to the first sentence of this paragraph, the Company shall inform the Withdrawing Member of such decision by written notice delivered within ninety (90) days of the occurrence of the Withdrawal. (b) If the Members elect to continue the Company following a Withdrawal in accordance with Section 8.5(a) hereof, the Company shall make payment in cash and Affirmative Equity Securities (as set forth below) in liquidation of the Withdrawing Member's Membership Units. Any such payment(s) shall be equal to the Fair Market Value of the Membership Units owned by the Withdrawing Member, as determined pursuant to the following sentence. Fair Market Value shall be determined by an independent nationally recognized investment banking firm selected by the Company (the "Appraiser"), and the fee of such Appraiser shall be paid by the Company and the Members agree that such fee amount shall be deducted from the amount payable to the Withdrawing Member. Absent manifest error, the determination of the Appraiser of the Fair Market Value of the Membership Units owned by the Withdrawing Member shall be final and binding on the Company, the Withdrawing Member and the other Members. The Fair Market Value of the Withdrawing Member's Membership Units shall be satisfied and paid to the Withdrawing Member by the Company in the form of (i) up to that number of Affirmative Equity Securities which were contributed to the Company upon the closing of the Subscription Agreement by such Member (with an aggregate value less than or equal to the Fair Market Value of the Withdrawing Member's Membership Units) and (ii) second, to the extent that the value of the Affirmative Equity Securities set forth in clause (i) is less than the Fair Market Value of the Membership Units owned by the Withdrawing Member, an amount of cash equal to such deficit; provided, that for the purposes of this Section 8.5, the value of any Affirmative Equity Securities on the date of such payment shall be (x) if there should be a public market for the Affirmative Equity Securities on such date, the arithmetic mean of the high and low prices of the Affirmative Equity Securities as reported on such date on the composite tape of the principal national securities exchange on which the Affirmative Equity Securities are listed or admitted to trading, or, if the Affirmative Equity Securities are not listed or admitted on any national securities exchange, the arithmetic mean of the per-share closing bid price and per-share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System (or such market in which such prices are regularly quoted) (the "Nasdaq"), or, if no sale of Affirmative Equity Securities shall have been reported on the composite tape of any national securities exchange or quoted on the Nasdaq on such date, the arithmetic mean of the per-share closing bid price and per-share closing asked price on the immediately preceding date on which sales of the Affirmative Equity Securities have been so reported or quoted, and (ii) if there is not a public market for the Affirmative Equity Securities on such date, the value established by the Appraiser. (c) Subject to the penultimate sentence of Section 8.5(b) hereof, redemption of a Membership Interest in accordance with Section 8.5(b) hereof shall take place no later than five (5) Business Days after the determination of Fair Market Value of the Membership Units (or such later date as may be the soonest practicable date). (d) In the event of any Withdrawal, the Initial Members (or a 50% transferee thereof) may jointly and severally (unless one of the Initial Members is the Withdrawing Member in its sole election) elect to require that the Company, in lieu of making the liquidating payment(s) to the Withdrawing Member pursuant to Section 8.5(b) hereof, initiate a Company Sale pursuant to Section 8.3 hereof (disregarding for the purposes of this Section 8.5 only, the five (5) year period referred to therein). In the event that the sale process set forth in Section 8.3 hereof does not result in a Company Sale, then the Company shall make all required liquidating payment(s) to the Withdrawing Member pursuant to Section 8.5(b) hereof. (e) Schedule I to this Agreement shall be amended from time to time as appropriate to reflect any change in a Member's Percentage Interest or the number of Membership Units owned by such Member resulting from a purchase and sale or liquidation of Membership Units pursuant to this Section 8.5. ARTICLE IX DISSOLUTION AND TERMINATION OF COMPANY Section 9.1 Dissolution. The Company shall be dissolved upon the earliest to occur of any of the following: (a) the termination of the Stock Purchase Agreement; (b) a Board Determination to dissolve the Company; or (c) the entry of a decree of judicial dissolution under the Act. Section 9.2 Distribution Upon Dissolution. Upon the dissolution of the Company as a result of any of the events set forth in Section 9.1 hereof, the Members (or, if dissolution should occur by reason of Section 8.4(d) hereof, the last remaining Member), acting together shall proceed, subject to the provisions herein, to liquidate the Company and apply the proceeds in such liquidation, or in their sole discretion to distribute Company assets, in the following order of priority: (a) First, to the payment of debts and liabilities of the Company, in order of their priority (including loans or advances that may have been made by any of the Members to the Company), and the expenses of liquidation; (b) Second, to the establishment of any reserve which a Board Determination deems reasonably necessary for any contingent or unforeseen liabilities or obligations of the Company. Such reserve may be paid over to any attorney at law, or other acceptable party, as escrow agent to be held for disbursement in payment of any of the aforementioned liabilities and, at the expiration of such period as shall be deemed advisable by a Board Determination in the manner provided in this Section 9.2; (c) Third, to all Members with positive Capital Account balances (after giving effect to Section 9.3 hereof) in proportion to such Capital Account balances, until such balances are reduced to zero; and (d) Finally, any remaining proceeds shall be distributed to the Members in accordance with their respective Percentage Interests as set forth on Schedule I to this Agreement. Section 9.3 Distributions in Cash or in Kind. Upon dissolution, the Members, their successors or other representatives may in their sole discretion (a) liquidate all or a portion of the Company assets and apply the proceeds of such liquidation as set forth in Section 9.2 hereof or (b) determine the value of any Company assets not sold or otherwise disposed of (including, if they so determine, hiring an appraiser, in which event the cost of such appraisal shall be considered a debt of the Company), allocate any unrealized gain or loss based on such value to the Members' accounts as though the properties in question had been sold on the date of distribution and, after giving effect to any such adjustment, distribute said assets in a manner consistent with Article V hereof; provided that the Members shall in good faith attempt to liquidate sufficient Company assets to satisfy in cash the debts and liabilities (foreseen, contingent or otherwise) set forth in Sections 9.2(a) and 9.2(b) hereof. Section 9.4 Final Accounting. In the event of the dissolution of the Company, prior to any liquidation, a proper accounting shall be made to the Members from the date of the last previous accounting to the date of dissolution. Section 9.5 Time for Liquidation. A reasonable time period shall be allowed for the orderly liquidation of the assets of the Company and the discharge of liabilities to creditors so as to enable the Members to minimize the losses attendant upon such liquidation. Section 9.6 Termination. Upon compliance with the foregoing distribution plan, the Company shall cease to be such and the Members shall execute and cause to be filed a certificate of cancellation of the Company in accordance with Section 18-203 of the Act. Section 9.7 Members Not Personally Liable for Return of Capital Contributions. None of the Members or any of their respective Affiliates and Related Parties shall be personally liable for the return of the Capital Contributions of any Member and such return shall be made solely from available Company assets, if any, and each Member hereby waives any and all claims it may have against the other Members and their respective Affiliates and Related Parties in this regard. ARTICLE X MISCELLANEOUS PROVISIONS Section 10.1 Amendments. The terms and provisions of this Agreement may not be modified or amended at any time without the written consent of each of the Members. Section 10.2 Termination of Agreement. Notwithstanding anything to the contrary in this Agreement, this Agreement shall terminate and be of no further force or effect: (a) in the event that either the closing of the transactions contemplated by the Stock Purchase Agreement or the Subscription Agreement fail to occur or if the Company does not receive the written approval of the Department in connection with the Company's filing of the Form A with respect to Affirmative; or (b) pursuant to Section 4.1 hereof. Section 10.3 Notices. Any notice, request, consent or communication (collectively a "Notice") under this Agreement shall be effective only if it is in writing and (i) personally delivered, (ii) sent by certified or registered mail, return receipt requested, postage prepaid (iii) sent by a nationally recognized overnight delivery service, with delivery confirmed, or (iv) telexed or telecopied, with receipt confirmed, addressed as follows: If to DSC, to: DSC AFFM, LLC 900 N. Michigan, 19th Floor Chicago, IL 60611 Telephone: (312) 915-2845 Facsimile: (312) 915-2487 Attention: Prashant Gupta Mike Ryan with a copy to: DSC AFFM, LLC 153 East 53rd Street, 26th Floor New York, New York 10022 Telephone: (212) 521-5129 Facsimile: (212) 521-5127 Attention: Gary Katz and a copy to: Jenner & Block LLP One IBM Plaza Chicago, Illinois 60611-7603 Telephone: (312) 840-7296 Facsimile: (312) 840-7396 Attention: John F. Cox, Esq. If to JCF, to: J.C. Flowers I LP 717 Fifth Avenue, 26th Floor New York, NY 10022 Telephone: (212) 404-6808 Facsimile: (646) 304-6424 Attention: Avshalom Kalichstein If to the Company, to: New Affirmative LLC c/o J.C. Flowers I LP 717 Fifth Avenue, 26th Floor New York, NY 10022 Telephone: (212) 404-6808 Facsimile: (646) 304-6424 Attention: Avshalom Kalichstein c/o DSC AFFM, LLC 900 N. Michigan, 19th Floor Chicago, IL 60611 Telephone: (312) 915-2845 Facsimile: (312) 915-2487 Attention: Prashant Gupta Mike Ryan with a copy to: DSC AFFM, LLC 153 East 53rd Street, 26th Floor New York, New York 10022 Telephone: (212) 521-5129 Facsimile: (212) 521-5127 Attention: Gary Katz with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 Telephone: (212) 735-3000 Facsimile: (212) 735-2000 Attention: Lou R. Kling, Esq. Thomas W. Greenberg, Esq. (a) if to any other Member, to such address as set forth in a writing delivered to the Company at the time of its admission; or such other Persons or addresses as shall be furnished in writing by any Member to the other Members. A Notice shall be deemed to have been given as of the date when (i) personally delivered, (ii) three (3) days after when so deposited with the United States mail properly addressed, (iii) the next day when delivered during business hours to said overnight delivery service properly addressed, or (iv) when receipt of the telex or telecopy is confirmed, as the case may be, unless the sending party has actual knowledge that a Notice was not received by the intended recipient. All Notices shall specifically state: (i) the provision (or provisions) of this Agreement with respect to which such Notice is given; and (ii) the relevant time period, if any, in which the Member given such Notice must respond. If a party notifies the other parties that it is willing to receive electronic notices (by internet, e-mail or otherwise), Notice may (but is not required to be) given to such party by such electronic methods. Section 10.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be considered an original. Section 10.5 Table of Contents and Headings. The table of contents and the headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part hereof. Section 10.6 Successors and Assigns. Except as otherwise permitted herein, no Member may assign its rights hereunder, whether by operation of law or otherwise, without the prior written consent of the other Members given in accordance with Section 8.2(a) hereof. Notwithstanding the foregoing, a Member may assign its rights hereunder to an Affiliate of such Member by Notice to the other parties to this Agreement. This Agreement shall inure to the benefit of and be binding upon the parties and their respective heirs, executors, administrators, successors and permitted assigns. Section 10.7 Severability. Every provision of this Agreement is intended to be severable. If any term or provision hereof is held to be illegal or invalid for any reason whatsoever such term or provision shall be enforced to the maximum extent permitted by law and, in any event, such illegality or invalidity shall not affect the validity of the remainder of this Agreement. Section 10.8 Non-Waiver. No provision of this Agreement shall be deemed to have been waived except if the giving of such waiver is contained in a written notice given to the party claiming such waiver and no such waiver shall be deemed to be a waiver of any other or further obligation or liability of the party or parties in whose favor the waiver was given. Section 10.9 Applicable Law. This Agreement and the rights and obligations of the parties hereto shall be interpreted and enforced in accordance with and governed by the laws of the State of Delaware applicable to agreements made and to be performed wholly within that jurisdiction. Section 10.10 Entirety of Agreement. This Agreement, including the schedules and exhibits hereto, constitute the entire agreement among the parties hereto with respect to the subject matter hereof. Section 10.11 Recapitalization, etc. Except as otherwise provided in this Agreement, the provisions of this Agreement shall apply to any and all Membership Units or any successor or assign of the Company (whether by merger, consolidation, transfer or sale of assets, conversion or otherwise) which may be issued in respect of, in exchange for, or in substitution of, any Membership Units by reason of any reorganization, any recapitalization, reclassification, merger, consolidation, partial or complete liquidation, sale of assets, stock dividend, split, distribution to Members or combination of the Membership Units or any other change in the Company's capital structure, in order to preserve fairly and equitably as far as practicable, the original rights and obligations of the parties hereto under this Agreement. Section 10.12 Interpretation. Unless otherwise expressly provided, for purposes of this Agreement, (a) any reference in this Agreement to gender shall include both genders, and words imparting the singular number only shall include the plural and vice versa, unless, in each case, the context otherwise requires, (b) the provision of a Table of Contents, the division of this Agreement into Articles, Sections and other subdivisions and the insertion of headings are for convenience of reference only and shall not affect or be utilized in construing or interpreting this Agreement, (c) all references in this Agreement to any "Section," "Article," "Schedule" or "Exhibit" are to the corresponding Section, Article, Schedule or Exhibit of this Agreement unless otherwise specified, (d) the words such as "herein," "hereinafter," "hereof," and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires and (e) the word "including" or any variation thereof means "including, without limitation" and shall not be construed to limit any general statement that it follows to the specific or similar items or matters immediately following it. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the undersigned have duly executed this Limited Liability Company Agreement of New Affirmative LLC, as of the day and year first above written. DSC AFFM, LLC By: /s/ Andrew G. Bluhm ------------------------------ Name: Andrew G. Bluhm Title: Authorized Signatory J.C. FLOWERS I LP By: JCF Associates I LLC, its General Partner By: /s/ Avshalom Kalichstein -------------------------------- Name: Avshalom Kalichstein Title: Principal Schedule I Percentage Interests -------------------- (as of June 13, 2005) Member Percentage Interest Membership Units Capital Contribution DSC Member JCF Member Schedule 3.2(a) Managers -------- Designated by DSC Member (the DSC Managers): - ------------------------------------------- Andrew G. Bluhm Michael J. Ryan Designated by JCF Member (the JCF Managers): - ------------------------------------------- Avshalom Kalichstein Sally Rocker -----END PRIVACY-ENHANCED MESSAGE-----