Exhibit 10.3

 
EIGHTH AMENDMENT
TO
SEVENTH AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT
 
 
THIS EIGHTH AMENDMENT TO SEVENTH AMENDED AND RESTATED PLEDGE AND SECURITY
AGREEMENT (the "Amendment") made and entered into as of the 22 day of November,
2006, but with an Effective Date as defined hereinafter, by and among DIRECT
GENERAL CORPORATION, a Tennessee corporation (the "Pledgor"), and
FIRST TENNESSEE BANK NATIONAL ASSOCIATION, whose address is 165 Madison Avenue,
Memphis, Tennessee 38103, Attention: Metropolitan Division (in its agency
capacity being herein referred to as "Agent," and in its individual capacity as
"FTBNA"), as agent for itself, and for CAPITAL ONE, N.A. (successor by merger to
Hibernia National Bank), Baton Rouge, Louisiana ("Capital One"), and for U. S.
BANK NATIONAL ASSOCIATION, St. Louis, Missouri ("U. S. Bank"), and for REGIONS
BANK, Birmingham, Alabama ("Regions"), and for CAROLINA FIRST BANK, Greenville,
South Carolina ("Carolina First"), and for JPMORGAN CHASE BANK, N.A., successor
by merger to Bank One, N.A. (main office - Chicago, Illinois), Baton Rouge,
Louisiana ("JPMorgan"), and for NATIONAL CITY BANK OF KENTUCKY, Louisville,
Kentucky ("National City Bank"), and for FIFTH THIRD BANK, N.A. (Tennessee),
Franklin, Tennessee ("Fifth Third"), and for MIDFIRST BANK, Oklahoma City,
Oklahoma ("MidFirst") (FTBNA, Capital One, U. S. Bank, Regions, Carolina First
and JPMorgan collectively, the "Original Banks") (the Original Banks, Fifth
Third, National City Bank, and MidFirst collectively, the "Banks" and
individually, a "Bank").
 
Recitals of Fact
 
Pursuant to that certain Seventh Amended and Restated Pledge and Security
Agreement dated as of October 31, 2002 (the "Original Pledge Agreement"),
Pledgor pledged a second lien security interest in all of the stock in the
Agency Subsidiaries and Affiliated Insurers (as those terms are defined in the
Eighth Amended and Restated Loan Agreement dated as of October 31, 2002, as
amended, referred to hereafter as the "Loan Agreement") to the Agent for the
benefit of the Original Banks as security for all of Pledgor's obligations under
the Eighth Amended and Restated Guaranty Agreement dated October 31, 2002 (the
"Eighth Guaranty").
 
Pursuant to that certain First Amendment to Seventh Amended and Restated Pledge
and Security Agreement dated as of March 31, 2003 (the "First Amendment"),
Pledgor pledged a second lien security interest in all of the stock in the
Agency Subsidiaries and Affiliated Insurers (as those terms are defined in the
Loan Agreement) to the Agent for the benefit of the Original Banks as security
for all of Pledgor's obligations under the Ninth Amended and Restated Guaranty
Agreement dated March 31, 2003 (the "Ninth Guaranty").
 
Pursuant to that certain Second Amendment to Seventh Amended and Restated Pledge
and Security Agreement dated as of May 28, 2003 (the "Second Amendment"),
Pledgor pledged a second lien security interest in all of the stock in the
Agency Subsidiaries and Affiliated Insurers (as those terms are defined in the
Loan Agreement) to the Agent for the benefit of the Original Banks and National
City Bank as security for all of Pledgor's obligations under the Tenth Amended
and Restated Guaranty Agreement dated May 28, 2003 (the "Tenth Guaranty").
 

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Pursuant to that certain Third Amendment to Seventh Amended and Restated Pledge
and Security Agreement dated as of June 30, 2003 (the "Third Amendment"),
Pledgor pledged a second lien security interest in all of the stock in the
Agency Subsidiaries and Affiliated Insurers (as those terms are defined in the
Loan Agreement) to the Agent for the benefit of the Banks as security for all of
Pledgor's obligations under the Eleventh Amended and Restated Guaranty Agreement
dated June 30, 2003 (the "Eleventh Guaranty").
 
Pursuant to that certain Fourth Amendment to Seventh Amended and Restated Pledge
and Security Agreement dated as of November 26, 2003 (the "Fourth Amendment"),
Pledgor pledged a second lien security interest in all of the stock of the
Agency Subsidiaries and Affiliated Insurers (as those terms are defined in the
Loan Agreement) to the Agent for the benefit of the Banks as security for all of
Pledgor's obligations under the Twelfth Amended and Restated Guaranty Agreement
dated November 26, 2003 (the "Twelfth Guaranty").
 
Pursuant to that certain Fifth Amendment to Seventh Amended and Restated Pledge
and Security Agreement dated as of June 30, 2004 (the "Fifth Amendment"),
Pledgor pledged a second lien security interest in all of the stock in the
Agency Subsidiaries and Affiliated Insurers (as those terms are defined in the
Loan Agreement) to the Agent for the benefit of the Banks as security for all of
Pledgor's obligations under the Thirteenth Amended and Restated Guaranty
Agreement dated June 30, 2004 (the "Thirteenth Guaranty").
 
Pursuant to that certain Sixth Amendment to Seventh Amended and Restated Pledge
and Security Agreement dated as of December 3, 2004 (the "Sixth Amendment"; the
Original Pledge Agreement, as amended, the First Amendment, the Second
Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, and
the Sixth Amendment being collectively referred to hereinafter as the "Pledge
Agreement"), Pledgor pledged a second lien security interest in all of the stock
of the Agency Subsidiaries and Affiliated Insurers (as those terms are defined
in the Loan Agreement) to the Agent for the benefit of the Banks as security for
all of Pledgor's obligations under the Fourteenth Amended and Restated Guaranty
Agreement dated December 3, 2004 (the "Fourteenth Guaranty").
 
Pledgor has most recently entered into a Fifteenth Amended and Restated Guaranty
Agreement dated as of June 30, 2006 (the "Fifteenth Guaranty"). The obligations
guarantied by Pledgor and the other Guarantors in the Fifteenth Guaranty are
described therein and include the obligations of Direct General Financial
Services, Inc., a Tennessee corporation and Direct General Premium Finance
Company, a Tennessee corporation (collectively, the “Borrowers”) pursuant to
that certain Eighth Amended and Restated Loan Agreement dated as of October 31,
2002, as amended (the “Loan Agreement”).
 
The Pledgor anticipates entering into the Bear Stearns Facilities (as defined
below) as borrower, pursuant to which Pledgor will grant a first priority
security interest in all of the stock of the Agency Subsidiaries and Affiliated
Insurers (as those terms are defined in the Loan Agreement) to the lenders
making such loans.
 
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Pledgor has asked the Banks to enter into a further amendment of the Loan
Agreement of even date herewith (the “Ninth Amendment”) in order to permit the
Bear Stearns Facilities and to effect certain other amendments. In connection
therewith, the Pledgor has requested, and the Banks have agreed, to modify
certain terms of the Pledge Agreement as hereinafter set forth, provided that
this Amendment shall only become effective on the Effective Date (as defined in
Section 3 below).
 
NOW, THEREFORE, in consideration of the premises as set forth in the Recitals of
Fact, the mutual covenants and agreements hereinafter set out, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is agreed by the parties as follows:
 
Agreements
 
1.  All capitalized terms used and not defined herein shall have the meaning
ascribed to them in the Loan Agreement.
 
2.  To induce the Banks to enter into this Amendment, the Pledgor does hereby
absolutely and unconditionally, certify, represent and warrant to the Banks, and
covenants and agrees with the Banks, that:
 
(a)  All representations and warranties made by the Pledgor in the Loan
Agreement, as amended, in the Pledge Agreement, as amended, in the Security
Agreement, as amended, and in all other loan documents (all of which are herein
sometimes called the "Loan Documents"), are true, correct and complete in all
material respects as of the date of this Amendment.
 
(b)  As of the date hereof and with the execution of this Amendment, there are
no existing events, circumstances or conditions which constitute, or would, with
the giving of notice, lapse of time, or both, constitute Events of Default.
 
(c)  There are no existing offsets, defenses or counterclaims to the obligations
of the Pledgor, as set forth in the Pledge Agreement, as amended, the Security
Agreement, as amended, the Loan Agreement, as amended, or in any other Loan
Document executed by the Borrower, in connection with the Loan.
 
(d)  The Pledgor does not have any existing claim for damages against the Banks
arising out of or related to the Loan; and, if and to the extent (if any) that
the Borrower has or may have any such existing claim (whether known or unknown),
the Borrower does hereby forever release and discharge, in all respects, the
Banks with respect to such claim.
 
(e)  The Loan Documents, as amended by this Amendment, are valid, genuine,
enforceable in accordance with their respective terms, and in full force and
effect.
 
3.  As used herein, the following terms shall have the following meanings:
 
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(a) “Bear Stearns Facilities” means, collectively, (i) the term loan facility in
an aggregate original principal amount equal to $75,000,000, (ii) the revolving
credit facility in an amount of $20,000,000, and (iii) any additional
“incremental facility” borrowings up to $20,000,000, which facilities, in the
case of clauses (i) and (ii) above, contemplated to be entered into
substantially simultaneously with the Merger Transaction, among DGC and a group
of lenders led by Bear Stearns Corporate Lending Inc. as Agent, in each case as
amended, restated or otherwise modified or refinanced from time to time (such
amendment, restatement, modification or refinancing to be made in compliance
with the terms of the Intercreditor Agreement as hereinafter defined).
 
(b) “Merger Transaction” means the merger of Elara Merger Corporation, a wholly
owned subsidiary of Elara Holdings, Inc., into Direct General Corporation, which
is expected to occur substantially simultaneously with the closing of the Bear
Stearns Facilities.
 
(c) “Effective Date" means the Effective Date of that certain Ninth Amendment to
Eighth Amended and Restated Loan Agreement dated as of November 22, 2006.
 
(d) “Intercreditor Agreement” means the Intercreditor Agreement, dated as of the
Effective Date, between the Agent and the collateral agent in respect of the
Bear Stearns Facilities, as amended, restated, supplemented or otherwise
modified from time to time.
 
Section 3 of the Pledge Agreement, is hereby amended by adding thereto the
following new subsection (c):
 
“(c) For so long as the Intercreditor Agreement shall be in effect, to the
extent the Pledgor is required hereunder to deliver Pledged Collateral to the
Agent for purposes of possession and control, and is unable to do so as a result
of having previously delivered such Pledged Collateral to the collateral agent
for the Bear Stearns Facilities (the “Bear Stearns Agent”) in accordance with
the terms of the loan documents governing the Bear Stearns Facilities, the
Pledgor’s obligations hereunder with respect to such delivery shall be deemed
satisfied by the delivery to the Bear Stearns Agent, acting as a bailee of the
Agent pursuant to the terms of the Intercreditor Agreement.”
 
4.  Section 4(a) and (d) of the Pledge Agreement shall be deleted and the
following inserted in lieu thereof:
 
“(a) The Pledgor is the legal and beneficial owner of the Pledged Collateral
free and clear of any lien, security interest or other charge or encumbrance
except for (a) the prior, first priority lien granted to the collateral agent
for the Bear Stearns Facilities, and (b) the security interest created by this
Agreement.”
 
“(d) This Agreement creates a valid security interest in favor of the Agent, for
the benefit of the Banks, in the Pledged Collateral. The taking possession by
the Agent of the certificates representing the Pledged Shares and all other
certificates, instruments and cash constituting Pledged Collateral from time to
time will perfect the Agent's security interest hereunder in the Pledged
Collateral securing the Obligations. Except as set forth in this Section 4(d)
and Section 3(c) of this Agreement, no action is necessary or desirable to
perfect or otherwise protect such security interest.”
 
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5.  Section 5(c) and (g) shall be deleted and the following inserted in lieu
thereof:
 
“(c) at Pledgor’s expense, defend the Agent’s right, title and security interest
in and to the Pledged Collateral against the claims of any person or entity
other than the Bear Stearns Agent or Agent;”
 
“(g) not make or consent to any amendment or other modification or waiver with
respect to any Pledged Collateral or enter into any agreement or permit to exist
any restriction with respect to any Pledged Collateral, other than those
governing the Bear Stearns Facilities and the Loan Documents (including this
Agreement);”
 
6.  There shall be added to the Pledge Agreement the following new Section 12:
 
“12. Intercreditor Agreement. Notwithstanding anything herein to the contrary,
the liens and security interest granted to the Agent pursuant to this Agreement,
and the exercise of any right or remedy by the Agent hereunder, are subject in
all respects to the provisions of the Intercreditor Agreement.”
 
7.  All terms and provisions of the Pledge Agreement, as heretofore amended,
which are inconsistent with the provisions of this Amendment are hereby modified
and amended to conform hereto; and, as so modified and amended, the Pledge
Agreement is hereby ratified, approved and confirmed. Except as otherwise may be
expressly provided herein, this Amendment shall become effective as of the date
set forth in the initial paragraph hereof.
 
8.  All references in all Loan Documents (including, but not limited to, the
Pledge Agreement, the Security Agreement, and the Loan Agreement) to the "Pledge
Agreement" shall, except as the context may otherwise require, be deemed to
constitute references to the Pledge Agreement as amended hereby.
 
[SEPARATE SIGNATURE PAGES FOLLOW]
 

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SIGNATURE PAGE
TO
EIGHTH AMENDMENT TO
SEVENTH AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT
 

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IN WITNESS WHEREOF, the Pledgor, the Banks and the Agent have caused this
Amendment to be executed by their duly authorized officers, all as of the day
and year first above written.
 
PLEDGOR:
 

 
DIRECT GENERAL CORPORATION,
a Tennessee corporation
 
By:  /s/ William J. Harter                   
William J. Harter, Senior Vice-President
 

BANKS:
 
   FIRST TENNESSEE BANK NATIONAL
   ASSOCIATION
 
   By:  /s/ Sam Jenkins                       
 
   Title:  Senior Vice President
 
   CAPITAL ONE, N.A.
 
   By:  /s/ Janet Rack                       
 
   Title: Senior Vice President
 
   U.S. BANK NATIONAL ASSOCIATION
 
   By:  /s/ Derek Roudebush                   
 
   Title: Vice President
 
   CAROLINA FIRST BANK
 
   By:  /s/ Charles Chamberlain                  
 
   Title: Executive Vice President
 

 
 

 
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[SIGNATURE PAGE CONTINUED]

 
JPMORGAN CHASE BANK, N.A.
 
By:  /s/ Robert Bond                   
 
Title: Senior Vice President
 
REGIONS BANK
 
By:  /s/ Nathan Raines                  
 
Title: Senior Vice President
 
NATIONAL CITY BANK OF KENTUCKY
 
By:  /s/ Kevin Anderson                   
 
Title: Senior Vice President
 
 
FIFTH THIRD BANK, N.A. (Tennessee)
 
By:  /s/ Justin Fontenont                 
 
Title: Officer
 
MIDFIRST BANK
 
By:  /s/ Shawn Brewer                   
 
Title: Vice President
 
AGENT:
 
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION
 
By:  /s/ Sam Jenkins                       
 
Title: Executive Vice President
 

 
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