Document:

Exhibit 10.3

 

EMPLOYMENT AGREEMENT

 

THIS EMPLOYMENT
AGREEMENT (this “Agreement”) is made as of April 30, 2004 by and between
First Acceptance Corporation (f/k/a Liberté Investors Inc.), a Delaware
corporation (the “Company”), and Stephen J. Harrison (“Executive”).

 

In consideration
of the mutual covenants contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Company and Executive, intending to be legally bound, hereby agree as
follows:

 

1.                                       Employment.  The Company
agrees to employ Executive, and Executive accepts such employment, upon the
terms and conditions set forth in this Agreement, for the period beginning as
of the date hereof and ending upon his separation pursuant to Section 4
hereof (the “Employment Period”).

 

2.                                       Position and
Duties.

 

(a)                                  During the Employment Period, Executive
shall serve as the Chief Executive Officer and President of the Company and
shall have the normal duties, responsibilities, functions and authority of such
position, subject to the oversight of the Company’s board of directors (the “Board”).

 

(b)                                 During the Employment Period, Executive
shall report to the Board and shall devote his best efforts and his full
business time and attention (except for time devoted to charitable and
non-profit activities in a manner that does not interfere with the performance
of his duties to the Company, vacation periods 
in accordance with the Company’s policies for the Company’s senior
management, and periods of illness) to the business and affairs of the
Company.  Executive shall perform his
duties, responsibilities and functions to the Company hereunder to the best of
his abilities in a diligent, trustworthy and businesslike manner.

 

(c)                                  During the Employment Period, the Company
shall include Executive in any slate nominated by the Company for election to
the Board.

 

3.                                       Compensation
and Benefits.

 

(a)                                  Commencing on the date hereof and
continuing throughout the Employment Period, Executive’s initial base salary
shall be $500,000 per annum.  The
Board  shall review Executive’s
compensation for an increase not less often than annually.  Such base salary, as in effect from time to
time, is referred to herein as the “Base Salary.”  Executive’s Base Salary shall be payable by
the Company in regular installments consistent with the Company’s general
payroll practices.  Executive’s Base
Salary for any partial year shall be pro rated based upon the number of days
elapsed in such year within the Employment Period.

 

(b)                                 During the Employment Period, Executive
shall be eligible for an annual bonus of up to 100% of the Base Salary payable
to Executive for such year, which shall be prorated for any partial year based
on the number of days elapsed in such year within the Employment Period (the “Annual
Bonus”).  In each year, the amount
of the Annual Bonus shall be determined based upon the Company’s achievement of
targets established by the Board and in

 

 

accordance with the formulas
set forth on Exhibit A hereto. 
Such targets shall be set annually by the Board taking into account the
prior year’s results of operations and the Company’s budget for the year with
respect to which the targets are being established; provided, however, that
such targets for the year ending December 31, 2004 shall be as set forth on Exhibit
A hereto.

 

(c)                                  During the Employment Period, Executive
shall be entitled to medical, life, and disability insurance and to such other
benefits (including participation in any 401(k) plan and profit sharing plan,
and consideration for participation in any stock option plan) as are made
available to the Company’s senior management. 
Executive shall be entitled to vacation in accordance with the Company’s
vacation policies applicable to senior management.

 

(d)                                 During the Employment Period, the Company
shall pay or reimburse Executive for all reasonable expenses incurred by him in
the course of performing his duties and responsibilities under this Agreement
which are consistent with the Company’s policies in effect from time to time with
respect to travel, entertainment and other business expenses, subject to the
Company’s normal requirements with respect to reporting and documentation of
such expenses.

 

(e)                                  All amounts payable to Executive
hereunder shall be subject to all withholding of the Company by law.

 

(f)                                    In its charter and by-laws, the Company
shall exculpate officers and directors from liability to the Company, provide
for mandatory indemnification of officers and directors, and provide for the
advancement of expenses to officers and directors subject to pending or
threatened litigation for which indemnification may be available, in each case
to the maximum extent permitted by law. 
The Company shall use commercially reasonable efforts to maintain in
effect a director and officer insurance policy with a reputable insurer in an
amount of not less than $10 million, naming Executive as a named insured.  Such exculpation, indemnification,
advancement of expenses and commercially reasonable efforts to maintain
insurance shall remain in effect with respect to Executive for the periods
during which Executive serves as an officer or director of the Company
notwithstanding any termination of employment of Executive for any reason.

 

4.                                       Term;
Severance.

 

(a)                                  The Employment Period will continue until
Executive’s resignation, death or Disability or the Board’s termination of the
Employment Period at any time with or without Cause, in each case a “Separation”
hereunder.  Except as otherwise provided
herein, any termination of the Employment Period by the Board shall be
effective as specified in a written notice from the Board to Executive, but not
sooner than the date on which the notice is delivered.

 

(b)                                 In the event that the Company terminates
Executive’s employment without Cause or Executive resigns with Good Reason,
Executive shall be entitled to (i) receive his Base Salary through the
effective date of the Separation, (ii) receive compensation, in accordance with
Company policy, for any accrued and unused vacation as of the date of the Separation,
(iii) reimbursement for expenses in accordance with Section 3(d), (iv)
any accrued and unpaid bonus owed to Executive as of the date of the
Separation, (v) receive Executive’s then current Base Salary, payable in
regular installments in accordance with the Company’s general payroll

 

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practices, for the period
commencing on the day immediately following the Separation and continuing
through the later to occur of the second anniversary of the Separation and the
fifth anniversary of the date hereof (the “Severance Period”), (vi)
receive a lump sum payment for each 12-month period that falls within the
Severance Period, payable on the last business day of each such 12-month
period, equal to the Annual Bonus paid to Executive for the fiscal year
immediately preceding the fiscal year in which the Separation occurs or, if the
Separation occurs prior to the end of 2004, equal to the maximum target bonus
payable for 2004, and (vii) continue to participate during the Severance Period
(at the Company’s expense to the same extent as participation for other members
of the Company’s senior management is at the Company’s expense) in all employee
benefit programs made generally available to the Company’s senior management
(other than bonus and incentive compensation plans) to the extent permitted
under the terms of such programs and under applicable law (it being understood
that if Executive is unable to participate in any such plan by reason of
prohibitions under the terms of such programs or under applicable law, the
Company shall, in lieu of such participation, pay to Executive an amount in
cash equivalent to the value of such participation); provided that
Executive will be entitled to the amounts payable pursuant to clauses (v), (vi)
and (vii) of this Section 4(b) if and only if Executive has executed and
delivered to the Company a General Release in form and substance substantially
similar to Exhibit B attached hereto.  Notwithstanding the foregoing, in the event that the Company
determines that Executive has breached any provision of Section 5, Section
6 or Section 7 hereof, without limiting any other remedies that may
be available to it, the Company may withhold from payment of amounts otherwise
due under clauses (v), (vi) and (vii) of this Section 4(b) an amount
equal to the Company’s estimated damages as result of any such breach (the “Estimated
Damages”), which amount may be held by the Company pending settlement of
the alleged breach or final determination by a court of competent jurisdiction
of the actual damages to the Company resulting from any such breach (the “Actual
Damages”).  If the Actual Damages
are greater than the Estimated Damages, then, without limiting any other
remedies that may be available to it, the Company shall be entitled to withhold
from any future payment of amounts otherwise due under clauses (v), (vi) and
(vii) of this Section 4(b) an amount equal to the Actual Damages minus
the Estimated Damages; conversely, if the Estimated Damages are greater than
the Actual Damages, then the Company shall pay to Executive an amount equal to
the Estimated Damages minus the Actual Damages.

 

(c)                                  In the event that the Company
terminates Executive’s employment due to Disability, Executive shall be entitled
to:  (i) receive his Base Salary through the effective date of
the Separation, (ii) receive compensation, in accordance with Company policy,
for any accrued and unused vacation as of the date of the Separation, (iii)
reimbursement for expenses in accordance with Section 3(d), (iv) any
accrued and unpaid bonus owed to Executive as of the date of the Separation, (v) receive
payments during the Severance Period in an amount equal to 60% of Executive’s
initial Base Salary, payable in regular installments in accordance with the
Company’s general payroll practices, which payments shall be net of any
benefits Executive receives from any disability insurance, and (vi) continue to participate during the
Severance Period (at the Company’s expense to the same extent as participation
for other members of the Company’s senior management is at the Company’s
expense) in all employee benefit programs made generally available to the
Company’s senior management (other than bonus and incentive compensation plans)
to the extent permitted under the terms of such programs and under applicable
law (it being understood that if Executive is unable to participate in any such
plan by reason of prohibitions under the terms of such programs or under
applicable law, the Company

 

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shall, in lieu of such
participation, pay to Executive an amount in cash equivalent to the value of
such participation).  Notwithstanding
the foregoing, in the event that the Company determines that Executive has
breached any provision of Section 5, Section 6 or Section 7
hereof, without limiting any other remedies that may be available to it, the
Company may withhold from payment of amounts otherwise due under clauses (v)
and (vi) of this Section 4(c) an amount equal to the Company’s Estimated
Damages, which amount may be held by the Company pending settlement of the
alleged breach or final determination by a court of competent jurisdiction of
the Actual Damages.  If the Actual
Damages are greater than the Estimated Damages, then, without limiting any
other remedies that may be available to it, the Company shall be entitled to
withhold from any future payment of amounts otherwise due under clauses (v) and
(vi) of this Section 4(c) an amount equal to the Actual Damages minus
the Estimated Damages; conversely, if the Estimated Damages are greater than
the Actual Damages, then the Company shall pay to Executive an amount equal to
the Estimated Damages minus the Actual Damages.

 

(d)                                 In the event Executive ceases to be employed
by the Company for any reason other than a termination by the Company without
Cause or due to Disability or Executive’s resignation for Good Reason,
Executive shall be entitled to receive only his Base Salary through the
effective date of the Separation, compensation, in accordance with Company
policy, for any accrued and unused vacation, reimbursement for expenses in
accordance with Section 3(d), and any accrued and unpaid bonus, and
Executive shall not be entitled to any other salary, compensation or benefits
from the Company or its Subsidiaries thereafter; provided, however, that if
such termination is as a result of the death of Executive, then Executive’s
estate shall also be entitled to receive, at the time that the Annual Bonus for
the year in which the death occurs would have been payable, a bonus in amount
equal to the Annual Bonus to which the Executive would have been entitled had
he remained an employee for the entire year, multiplied by the number of the
days in such year prior to the date of death, divided by 365.

 

(e)                                  Except as otherwise expressly provided
herein, all of Executive’s rights to salary, bonuses, fringe benefits and other
compensation hereunder which would otherwise accrue or become payable after the
Separation shall cease upon such termination (other than those expressly
required under applicable law, such as COBRA).

 

(f)                                    For purposes of this Agreement, “Cause”
shall mean (i) Executive’s conviction of a felony or a crime involving moral
turpitude, (ii) any act of dishonesty or fraud on the part of Executive that
has caused material harm to the Company, and/or (iii) the willful and continued
failure by Executive to substantially perform his duties and obligations under
this Agreement (other than any such failure resulting from incapacity due to
physical or mental illness), or the gross negligence or willful misconduct by
Executive with respect to the Company or any of its Subsidiaries, after a
demand by the Board which specifically identifies the manner in which the Board
believes that he has not substantially performed his duties or has committed
gross negligence or willful misconduct and the failure by Executive to cure
such failure within 30 days after delivery of such demand.  Any determination of “Cause” must be made by
the Board and may be made only after Executive has had an opportunity to
address the Board with respect to an assertion of  “Cause.”

 

(g)                                 For purposes of this Agreement, “Good
Reason” shall mean one or more of the following reasons:  (i) the Company reduces the amount of
Executive’s compensation in a

 

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manner that constitutes a
breach of this Agreement, or otherwise fails to perform in any material respect
or breaches in any material respect its other obligations under this Agreement,
if such failure or breach is not cured within 30 days after notice by Executive
to the Board of such failure or breach; (ii) the Company assigns to Executive
any duties inconsistent with his position, duties, responsibilities and status
with the Company, reduces his authority, changes his reporting
responsibilities, titles or offices, or removes Executive from any such
positions (except in connection the termination of his employment by the
Company for Cause, by Executive other than for Good Reason, or as a result of
Executive’s death or Disability); (iii) the Company changes Executive’s place
of work to a location more than 25 miles from his present place of work, (iv)
there is a Change of Control (other than one that the Executive approved or
voted in favor of in his capacity as a director and/or stockholder of the
Company); (v) Executive is removed from the Board other than for Cause, or is
not reelected to the Board at the end of any term of service thereon; or (v)
the Company terminates the employment of Thomas Harrison without “Cause,” or
Thomas Harrison terminates his employment for “Good Reason,” as such terms are
defined in the Employment Agreement of even date herewith between the Company
and Thomas Harrison (other than in the case where the Executive approved or
voted in favor of the termination Thomas Harrison without “Cause” or the events
that constituted “Good Reason”, in his capacity as a director and/or
stockholder of the Company).

 

(h)                                 For purposes of this Agreement, “Disability”
shall mean Executive’s incapacitation or other absence from his full-time
duties hereunder for six consecutive months or for at least 180 days during any
12-month period, in either case as a result of a mental or physical illness or
injury.

 

(i)                                     For purposes of this Agreement, “Change
of Control” shall mean (i) any sale, transfer or issuance or series of
sales, transfers and/or issuances of capital stock of the Company by the
Company or any holders thereof (including without limitation, any merger,
consolidation or other transaction or series of related transactions having the
same effect) which results in any person or entity (a “Person”) or group
of Persons (as the term “group” is used under the Securities Exchange Act of
1934, as amended), other than Persons who hold more than 10% of Company’s
Common Stock as of immediately giving effect to the transactions occurring
concurrent with the execution of this Agreement (the “Current Significant
Stockholders”), owning capital stock of the Company possessing the voting
power (under ordinary circumstances) to elect a majority of the Board, and (ii)
any sale or transfer of all or substantially all of the assets of the Company
and its subsidiaries in any transaction or series of transactions (other than sales
in the ordinary course of business) to any Person or group of Persons (as the
term “group” is used under the Securities Exchange Act), other than Current
Significant Stockholders.

 

(j)                                     Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise, nor shall the amount of any payment provided for
herein be reduced by any compensation earned by Executive as a result of
employment by another employer or by retirement benefits after the date of
Separation or otherwise.

 

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(k)                                  Excise Tax Gross-Up.

 

(i)                                     In the event that it shall be determined
at any time (as hereafter provided) that any payment by the Company to the
Executive pursuant to this Agreement or otherwise (the “Subject Payments”)
in connection with the Executive’s termination by the Company without Cause or
resignation for Good Reason, in each case, prior to the third anniversary of
the date hereof, but only if such termination without Cause or resignation for
Good Reason is in connection with a change in the ownership or effective
control of the Company or in the ownership of a substantial portion of the
assets of the Company within the meaning of Code Section 280G (other than one
that the Executive approved or voted in favor of in his capacity as a director
and/or stockholder of the Company), would be subject to the excise tax imposed
by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”)
(or any successor provision thereto) by reason of being considered a “parachute
payment,” within the meaning of Section 280G of the Code (or any successor
provision thereto) or to any similar tax imposed by state or local law (such
tax or taxes being hereafter collectively referred to as the “Excise Tax”),
then the Executive shall be entitled to receive an additional payment or
payments (collectively, the “Gross-Up Payment”).  The Gross-Up Payment shall be in an amount
such that, after reducing the amount of the Gross-Up Payment by all applicable
U.S. federal, state and local taxes (computed at the maximum marginal rates and
including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on the Gross-Up Payment, there remains an
amount of Gross-Up Payment equal to the Excise Tax imposed on the Subject
Payments.

 

(ii)                                  Subject to the provisions of Section
4(k)(v), all determinations required to be made under this Section 4(k),
including whether an Excise Tax is payable by the Executive and the amount of
such Excise Tax and the amount of any associated Gross-Up Payment, shall be
made by a nationally recognized accounting firm (the “Accounting Firm”)
selected by the Company and reasonably acceptable to the Executive.  The Accounting Firm shall submit its
determination and detailed supporting calculations to both the Company and the
Executive within 30 calendar days of the request for such determination by the
Company or the Executive, but in no event later than 10 days before the date
when such tax is required by the applicable taxing authority to be paid, and at
such other time or times as may be requested by the Company.  All fees and expenses of the Accounting Firm
shall be borne solely by the Company. 
Any Gross-Up Payment shall be paid by the Company to the Executive
within 5 days of the receipt of the Accounting Firm’s determination.  Any determination by the Accounting Firm
shall be binding upon the Company and the Executive.  If the Executive after consultation with his tax counsel
determines that any legal position adopted by the Accounting Firm with respect
to the calculation is subject to uncertainty, at the written request of the
Executive, the Accounting Firm will deliver a written opinion to the Executive
that there is “substantial authority”, within the meaning of the Treas. Reg.
Section 1.6662-4(d), for the positions adopted.  If the Accounting Firm’s determination of the amount of the
Excise Tax payable by the Executive is determined to be erroneous by the
applicable taxing authority or court after any contest of such determination as
described in Section 4(k)(v) and, as a result of such erroneous
determination the Executive fails to report the full amount to the Excise Tax
determined to be due on his

 

6

 

applicable
federal income tax return, then the Company shall indemnify, without
duplication for any amounts required to be paid under Section 4(k)(v),
the Executive on an after tax basis for the amount of any tax deficiency and
negligence penalty or other penalty imposed on the Executive by the Internal
Revenue Service or other taxing authority in connection therewith.  Any such indemnity payment shall be made by
the Company to the Executive no later than the earlier of 10 days after the
resolution of any contest of such determination as described in Section
4(k)(v) or 2 days before the date when such tax is required by the
applicable taxing authority or court to be paid.

 

(iii)                               The Company and the Executive shall each provide the
Accounting Firm access to and copies of any books, records and documents in the
possession of the Company or the Executive, as the case may be, reasonably
requested by the Accounting Firm, and otherwise cooperate with the Accounting
Firm in connection with the preparation and issuance of the determinations and
calculations contemplated by Section 4(k)(ii).

 

(iv)                              The federal, state and local income or
other tax returns filed by the Executive shall be prepared and filed on a
consistent basis with the determination of the Accounting Firm with respect to
the Excise Tax payable by the Executive. The Executive shall make proper
payment of the amount of any Excise Payment. 
If prior to the filing of the Executive’s federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting Firm
determines that the amount of the Gross-Up Payment should be reduced, the
Executive shall within 10 business days pay to the Company the amount of such
reduction.

 

(v)                                 The Executive shall notify the Company in
writing of any claim by the Internal Revenue Service or any other taxing
authority that, if successful, would require the payment by the Company of a
Gross-Up Payment or increasing the amount of any Gross-Up Payment previously
made.  Such notification shall be given
as promptly as practicable but no later than 10 business days after the
Executive actually receives notice of such claim and the Executive shall
further inform the Company of the nature of such claim and the date on which
such claim is requested to be paid.  The
Executive shall not pay such claim prior to the earlier of (x) the expiration
of the 30-calendar-day period following the date on which he gives such notice
to the Company and (y) the date that any payment of amount with respect to such
claim is due.  If the Company notifies
the Executive in writing prior to the expiration of such period that it desires
to contest such claim in a legally permissible manner, the Executive shall:  (A) 
provide the Company with any written records or documents in his
possession relating to such claim reasonably requested by the Company; (B) take
such action in connection with contesting such claim as the Company shall
reasonably request in writing from time to time including, without limitation,
accepting legal representation with respect to such claim by an attorney
competent in respect of the subject matter and reasonably selected by the
Company and reasonably acceptable to the Executive; (C) cooperate with the
Company in good faith in order effectively to contest such claim; and (D)
permit the Company to participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses incurred in connection with such contest and shall indemnify and hold
harmless the Executive, on an after-tax basis, for and against any

 

7

 

Excise Tax or income tax
(including interest and penalties with respect thereto), imposed as a result of
the resolution of such claim and such representation and payment of  all costs and expenses (including with
respect to any imputed income amounts). 
The Company shall control all proceedings taken in connection with the
contest of any claim contemplated by this Section 4(k)(v) and, at its
sole option, may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim (provided, however, that the Executive may participate therein at
his own cost and expense) and may, at its option, either direct the Executive
to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
the tax claimed and sue for a refund, the Company shall advance the amount of
such payment to the Executive on an interest-free basis and shall indemnify and
hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income or other tax, including interest or penalties with respect thereto,
imposed with respect to the resolution of such claim and such advance
(including with respect to any imputed income amounts); and provided further,
however, that any extension of the statute of limitations relating to payment
of taxes for the taxable year of the Executive with respect to which the
contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company’s control of any such contested claim shall be
limited to issues with respect to which a Gross-Up Payment would be payable hereunder
and the Executive shall be entitled to settle or contest, as the case may be,
any other issue raised by the Internal Revenue Service or any other taxing
authority.

 

(vi)                              If, after the receipt by the Executive of
an amount advanced by the Company pursuant to Section 4(k)(v), the
Executive receives any refund with respect to such claim, the Executive shall
(subject to the Company’s complying with the requirements of Section 4(k)(v))
promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after any taxes applicable thereto).  If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 4(k)(v), a
determination is made that the Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial or refund prior to the expiration
of 30 calendar days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of any such
advance shall be credited against, to the extent thereof, the amount of
Gross-Up Payment or indemnity required to be paid by the Company to the
Executive pursuant to this Section 4(k).

 

5.                                       Confidential Information. 
Executive acknowledges that the information, observations and data
(including trade secrets) obtained by him while employed by the Company, USAuto
Holdings, Inc. (“USAuto”) and/or any of their respective Subsidiaries
(as defined below) (including those obtained by him while employed by USAuto
prior to the date of this Agreement) concerning the business or affairs of the
Company, USAuto and/or their respective Subsidiaries (“Confidential
Information”) are the property of the Company and its Subsidiaries.  Therefore, Executive agrees that he shall
not disclose to any person, other than in the course of the performance of his
duties to the Company, or use for his own purposes any

 

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Confidential Information,
unless and to the extent that (i) the Confidential Information becomes
generally known to and available for use by the public other than as a result
of Executive’s acts or omissions or (ii) such disclosure or use is authorized
by the Board.  Executive shall deliver
to the Company at the termination of the Employment Period, or at any other
time the Company may request, all memoranda, notes, plans, records, reports,
computer tapes, printouts and software and other documents and data (and copies
thereof) embodying or relating to the Confidential Information, Work Product
(as defined below) or the business of the Company or any of its Subsidiaries
which Executive may then possess or have under his control.  For purposes of this Agreement, “Subsidiary”
shall mean any corporation or other entity of which the securities or other
ownership interests having the voting power to elect a majority of the board of
directors or other governing body are, at the time of determination, owned by
the Company directly or through one of more Subsidiaries.

 

6.                                       Inventions, Patents and Other
Intellectual Property. Executive acknowledges that all discoveries, concepts, ideas,
inventions, innovations, improvements, developments, methods, designs,
analyses, drawings, reports, patent applications, copyrightable work and mask
work (whether or not including any Confidential Information) and all
registrations or applications related thereto, and all other proprietary
information and all similar or related information (whether or not patentable)
which relate to the Company’s or any of its Subsidiaries’ actual or anticipated
business, research and development or existing or future products or services
and which are conceived, developed or made by Executive (whether alone or
jointly with others) while employed by the Company, USAuto and/or their
respective Subsidiaries, whether before or after the date of this Agreement (“Work
Product”), belong to the Company or such Subsidiary.  Executive shall promptly disclose such Work
Product to the Board and, at the Company’s expense, perform all actions
reasonably requested by the Board (whether during or after the Employment
Period) to establish and confirm such ownership (including, without limitation,
assignments, consents, powers of attorney and other instruments).

 

7.                                       Non-Compete, Non-Solicitation. 
In further consideration of the compensation to be paid to Executive
hereunder, Executive acknowledges that in the course of his employment with
USAuto and the Company he has and will become familiar with the trade secrets
of the Company, USAuto and their respective Subsidiaries and with other
Confidential Information concerning the Company, USAuto and their respective
Subsidiaries and that his services have been and will be of special, unique and
extraordinary value to the Company and its Subsidiaries.  Therefore, Executive agrees that:

 

(a)                                  during the Employment Period and for the
period commencing with the Separation and continuing until the later to occur
of the second anniversary of the Separation and the fifth anniversary of the
date hereof (the “Noncompete Period”), Executive shall not, within the
United States, directly or indirectly own any interest in, manage, control,
participate in, consult with, render services for, or in any manner engage in
any business that is involved in the development, marketing, retail sale,
administration or underwriting of non-standard automobile insurance
programs anywhere in the United States; provided that nothing herein
shall prohibit Executive from being a passive owner of not more than 5% of the
outstanding equity interests of any class of a corporation, partnership,
limited liability company, or other entity, so long as Executive has no active
participation in the business of such entity;

 

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(b)                                 during the Noncompete Period, Executive
shall not, other than in the course of performing his duties on behalf of the
Company while an officer thereof, directly or indirectly through another person
or entity (i) induce or attempt to induce any employee of the Company or
any of its Subsidiaries, other than a member of Executive’s family, to leave
the employ of the Company or any of its Subsidiaries, or in any way interfere
with the relationship between the Company or any of its Subsidiaries and any
employee thereof, (ii) hire any person, other than a member of Executive’s
family, who was an employee of the Company or any of its Subsidiaries at any
time during the one-year period immediately preceding the Separation, (iii) induce
or attempt to induce any customer, supplier, licensee or other business
relation of the Company or any of its Subsidiaries to cease doing business with
the Company or any of its Subsidiaries, or (iv) directly or indirectly
acquire or attempt to acquire an interest in any business relating to the
business of the Company or any of its Subsidiaries and with which the Company
or any of its Subsidiaries has entertained discussions, or has requested and
received information, relating to the acquisition of such business by the
Company or any Subsidiary in the two-year period immediately preceding the
Separation;

 

(c)                                  if, at the time of enforcement of this Section
7, a court shall hold that the duration, scope or area restrictions stated
herein are unreasonable under circumstances then existing, the parties agree
that the maximum duration, scope or area reasonable under such circumstances
shall be substituted for the stated duration, scope or area and that the court
shall be allowed to revise the restrictions contained herein to cover the
maximum period, scope and area permitted by law;

 

(d)                                 in the event of the breach or a
threatened breach by Executive of any of the provisions of this Section 7,
the Company and its Subsidiaries, in addition and supplementary to other rights
and remedies existing in their favor, shall be entitled to specific performance
and/or injunctive or other equitable relief from a court of competent
jurisdiction in order to enforce or prevent any violations of the provisions
hereof (without posting a bond or other security).  In addition, Executive agrees that, in the event of a breach or
violation by Executive of this Section 7, the Noncompete Period shall be
tolled until such breach or violation has been duly cured; and

 

(e)                                  the provisions of this Section 7  are in consideration of:
(i) employment with the Company and (ii) additional good and valuable
consideration as set forth in this Agreement. 
In addition, Executive agrees and acknowledges that the restrictions
contained in Section 5,  Section
6 and this Section 7 do not preclude Executive from earning a
livelihood, nor do they unreasonably impose limitations on Executive’s ability
to earn a living.  In addition,
Executive agrees and acknowledges that the potential harm to the Company of the
non-enforcement of Section 5, 
Section 6 and/or this Section 7 outweighs any
potential harm to Executive of its enforcement by injunction or otherwise.  In addition, Executive acknowledges that he
has carefully read this Agreement and has given careful consideration to the
restraints imposed upon Executive by this Agreement and is in full accord as to
their necessity for the reasonable and proper protection of confidential and
proprietary information of the Company now existing or to be developed in the future.  Executive expressly acknowledges and agrees
that each and every restraint imposed by this Agreement is reasonable with
respect to subject matter, time period and geographical area.

 

10

 

8.                                       Executive’s Representations. 
Executive hereby represents and warrants to the Company that (i) the
execution, delivery and performance of this Agreement by Executive do not and
shall not conflict with, breach, violate or cause a default under any contract,
agreement, instrument, order, judgment or decree to which Executive is a party
or by which Executive is bound, (ii) Executive is not a party to or bound by
any employment agreement, noncompete agreement, confidentiality agreement or
any similar agreement with any other person or entity and (iii) upon the
execution and delivery of this Agreement by the Company, this Agreement shall
be the valid and binding obligation of Executive, enforceable in accordance
with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and similar laws relating to or
affecting creditors generally or by general equity principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law).  Executive hereby acknowledges and represents
that he has consulted with independent legal counsel regarding his rights and
obligations under this Agreement.

 

9.                                       Survival.  Sections
3(f) and 4 through 18 (inclusive), and all rights of
Executive to compensation and benefits relating to periods prior to the
termination of the Employment Period, shall survive and continue in full force
in accordance with their terms notwithstanding the termination of the
Employment Period.

 

10.                                 Notices.  All notices
and other communications hereunder shall be in writing and shall be deemed duly
given (a) on the date of delivery if delivered personally, or upon confirmation
of receipt if delivered by telecopy or facsimile (but only if a copy of such
telecopy or facsimile is delivered to the recipient by a recognized next-day
courier service), (b) on the first business day following the date of dispatch
if delivered by a recognized next-day courier service or (c) on the fifth
business day following the date of mailing if delivered by registered or
certified mail, return receipt requested, postage prepaid.  All notices hereunder shall be delivered as
set forth below, or pursuant to such other instructions as have been previously
designated in writing to the party sending such notice by the party to receive
such notice:

 

Notices to Executive:

 

Stephen J. Harrison

3813 Green Hills Village Drive

Nashville, Tennessee 37215

Fax:  (615) 327-2266

 

with a copy to:

 

Covington & Burling

1201 Pennsylvania Ave., NW

Washington, DC   20004

Fax: (202) 662-6291

Attention:  Ralph C. Voltmer,
Jr.

 

Notices to the Company:

 

First Acceptance Corporation

676 North Michigan Avenue, Suite 3300

 

11

 

Chicago, Illinois 60611

Fax: (312) 327-4525

Attention:  President

 

with a copy to:

 

Kirkland & Ellis LLP

200 East Randolph Drive

Chicago, Illinois 60602

Fax: (312) 861-2200

Attention: Sanford E. Perl

 

or such other
address or facsimile number or to the attention of such other person as the
recipient party shall have specified by prior written notice to the sending
party.  Any notice under this Agreement
shall be deemed to have been given when so delivered, sent or mailed.

 

11.                                 Severability. 
Whenever possible, each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
or any action in any other jurisdiction, but this Agreement shall be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.

 

12.                                 Complete Agreement. 
This Agreement, those documents expressly referred to herein and other
documents of even date herewith embody the complete agreement and understanding
among the parties and supersede and preempt any prior understandings,
agreements or representations by or among the parties, written or oral, which
may have related to the subject matter hereof in any way.  All employment agreements between Executive
and USAuto dated prior to the date hereof and currently in effect are hereby
terminated; provided, however, that Executive shall continue to be entitled to
receive base salary and expense reimbursement payments under those agreements
for periods prior to the date hereof to the extent not duplicative with
compensation and benefits payable hereunder.

 

13.                                 No Strict Construction. 
The language used in this Agreement shall be deemed to be the language
chosen by the parties hereto to express their mutual intent, and no rule of
strict construction shall be applied against any party.

 

14.                                 Counterparts. 
This Agreement may be executed in separate counterparts, each of which
is deemed to be an original and all of which taken together constitute one and
the same agreement.

 

15.                                 Successors and Assigns. 
This Agreement is intended to bind and inure to the benefit of and be
enforceable by Executive and the Company and their respective heirs, successors
and assigns, provided that neither party may assign his or its rights or
delegate his  or its duties or
obligations hereunder without the prior written consent of the other.

 

12

 

16.                                 Choice of Law. 
All issues and questions concerning the construction, validity,
enforcement and interpretation of this Agreement and the exhibits and schedules
hereto shall be governed by, and construed in accordance with, the laws of the
State of Tennessee.

 

17.                                 Amendment and Waiver. 
The provisions of this Agreement may be amended or waived only with the
prior written consent of the Company (as approved by the Board), its successors
and assignees, and Executive, and no course of conduct or course of dealing or
failure or delay by any party hereto in enforcing or exercising any of the
provisions of this Agreement shall be deemed to be an implied waiver of any
provision of this Agreement.

 

18.                                 Arbitration.

 

(a)                                  Except with respect to any dispute or
claim under Section 5, Section 6 or Section 7 hereof in
which Executive’s right to payments under Section 4(b) is not at issue
(which  dispute or claim may be pursued
in any court of competent jurisdiction as specified below and with respect to
which each party shall bear the cost of its own attorneys’ fees and expenses
except as otherwise required by applicable law), each party hereto agrees that
arbitration, conducted in Nashville, Tennessee, in accordance with the rules of
the American Arbitration Association, shall be the sole and exclusive method
for resolving any claim or dispute (“Claim”) arising out of or relating
to the rights and obligations acknowledged and agreed to in this Agreement and
the employment of Executive by the Company and its Subsidiaries (including,
without limitation, disputes and claims regarding employment discrimination,
sexual harassment, termination and discharge). 
The arbitrator shall be directed to issue a written decision to be
delivered to both parties, addressing each issue disputed by the parties,
stating the arbitrator’s findings and reasons therefor, and stating the nature
and amount of any damages, compensation or other relief awarded (the “Final
Determination”).  The parties agree
that the result of any arbitration hereunder shall be final, conclusive and
binding on all of the parties hereto.

 

(b) Any party
hereto may institute litigation to enforce any Final Determination.  Each party hereto hereby irrevocably submits
to the jurisdiction of any United States District Court or state court of
competent jurisdiction sitting in Nashville, Tennessee, and agrees that such
court shall be the exclusive forum with respect to any dispute or claim under Section
5, Section 6 or Section 7 hereof and for the enforcement of
any Final Determination.  Each party
hereto irrevocably consents to service of process by registered mail or
personal service and waives any objection on the grounds of personal jurisdiction,
venue or inconvenience of the forum. 
Each party hereto further agrees that each other party hereto may
initiate litigation in any court of competent jurisdiction to execute any
judicial judgment enforcing a Final Determination.

 

19.                                 Insurance.  Each of the
Company and its Subsidiaries, at its discretion, may apply for and procure in
its own name and for its own benefit life and/or disability insurance on
Executive in any amount or amounts considered available.  In addition, Executive agrees to cooperate
in any medical or other examination, supply any information, and to execute and
deliver any applications or other instruments in writing as may be reasonably
necessary to obtain and maintain such insurance.

 

*   
*    *    *    *

 

13

 

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

 

	
   

  	
  FIRST ACCEPTANCE CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Donald J. Edwards

  	
   

  
	
   

  	
  By:

  	
  Donald J. Edwards

  
	
   

  	
  Its:

  	
  Chief Executive Officer and President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Stephen J. Harrison

  	
   

  
	
   

  	
  Stephen J. Harrison

  
					

 

14Exhibit 10.4

 

EMPLOYMENT AGREEMENT

 

THIS EMPLOYMENT
AGREEMENT (this “Agreement”) is made as of April 30, 2004 by and between
First Acceptance Corporation (f/k/a Liberté Investors Inc.), a Delaware
corporation (the “Company”), and Thomas M. Harrison, Jr. (“Executive”).

 

In consideration
of the mutual covenants contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Company and Executive, intending to be legally bound, hereby agree as follows:

 

1.             Employment.  The Company agrees to employ Executive, and
Executive accepts such employment, upon the terms and conditions set forth in
this Agreement, for the period beginning as of the date hereof and ending upon
his separation pursuant to Section 4 hereof (the “Employment
Period”).

 

2.             Position and Duties.

 

(a)           During
the Employment Period, Executive shall serve as the Executive Vice President of
the Company and shall have the normal duties, responsibilities, functions and
authority of such position, subject to the oversight of the Company’s board of
directors (the “Board”).

 

(b)           During
the Employment Period, Executive shall report to the Board and shall devote his
best efforts and his full business time and attention (except for time devoted
to charitable and non-profit activities in a manner that does not interfere
with the performance of his duties to the Company, vacation periods  in accordance with the Company’s policies
for the Company’s senior management, and periods of illness) to the business
and affairs of the Company.  Executive
shall perform his duties, responsibilities and functions to the Company
hereunder to the best of his abilities in a diligent, trustworthy and
businesslike manner.

 

(c)           During the Employment Period, the
Company shall include Executive in any slate nominated by the Company for
election to the Board.

 

3.             Compensation and Benefits.

 

(a)           Commencing
on the date hereof and continuing throughout the Employment Period, Executive’s
initial base salary shall be $300,000 per annum.  The Board  shall review
Executive’s compensation for an increase not less often than annually.  Such base salary, as in effect from time to
time, is referred to herein as the “Base Salary.”  Executive’s Base Salary shall be payable by
the Company in regular installments consistent with the Company’s general
payroll practices.  Executive’s Base
Salary for any partial year shall be pro rated based upon the number of days
elapsed in such year within the Employment Period.

 

(b)           During
the Employment Period, Executive shall be eligible for an annual bonus of up to
50% of the Base Salary payable to Executive for such year, which shall be
prorated for any partial year based on the number of days elapsed in such year
within the Employment Period (the “Annual Bonus”).  In each year, the amount of the Annual Bonus
shall be determined based upon the Company’s achievement of targets established
by the Board and in

 

 

accordance with the formulas
set forth on Exhibit A hereto. 
Such targets shall be set annually by the Board taking into account the
prior year’s results of operations and the Company’s budget for the year with
respect to which the targets are being established; provided, however, that
such targets for the year ending December 31, 2004 shall be as set forth on Exhibit
A hereto.

 

(c)           During the Employment Period,
Executive shall be entitled to medical, life, and disability insurance and to
such other benefits (including participation in any 401(k) plan and profit
sharing plan, and consideration for participation in any stock option plan) as
are made available to the Company’s senior management.  Executive shall be entitled to vacation in
accordance with the Company’s vacation policies applicable to senior management.

 

(d)           During
the Employment Period, the Company shall pay or reimburse Executive for all
reasonable expenses incurred by him in the course of performing his duties and
responsibilities under this Agreement which are consistent with the Company’s
policies in effect from time to time with respect to travel, entertainment and
other business expenses, subject to the Company’s normal requirements with
respect to reporting and documentation of such expenses.

 

(e)           All amounts payable to Executive
hereunder shall be subject to all withholding of the Company by law.

 

(f)            In its charter and by-laws, the
Company shall exculpate officers and directors from liability to the Company,
provide for mandatory indemnification of officers and directors, and provide
for the advancement of expenses to officers and directors subject to pending or
threatened litigation for which indemnification may be available, in each case
to the maximum extent permitted by law. 
The Company shall use commercially reasonable efforts to maintain in
effect a director and officer insurance policy with a reputable insurer in an
amount of not less than $10 million, naming Executive as a named insured.  Such exculpation, indemnification,
advancement of expenses and commercially reasonable efforts to maintain
insurance shall remain in effect with respect to Executive for the periods
during which Executive serves as an officer or director of the Company
notwithstanding any termination of employment of Executive for any reason.

 

4.             Term; Severance.

 

(a)           The
Employment Period will continue until Executive’s resignation, death or
Disability or the Board’s termination of the Employment Period at any time with
or without Cause, in each case a “Separation” hereunder.  Except as otherwise provided herein, any
termination of the Employment Period by the Board shall be effective as
specified in a written notice from the Board to Executive, but not sooner than
the date on which the notice is delivered.

 

(b)           In
the event that the Company terminates Executive’s employment without Cause or
Executive resigns with Good Reason, Executive shall be entitled to (i) receive
his Base Salary through the effective date of the Separation, (ii) receive
compensation, in accordance with Company policy, for any accrued and unused
vacation as of the date of the Separation, (iii) reimbursement for expenses in
accordance with Section 3(d), (iv) any accrued and unpaid bonus owed to
Executive as of the date of the Separation, (v) receive Executive’s then
current Base Salary, payable in regular installments in accordance with the Company’s
general payroll

 

2

 

practices, for the period
commencing on the day immediately following the Separation and continuing
through the later to occur of the second anniversary of the Separation and the
fifth anniversary of the date hereof (the “Severance Period”), (vi)
receive a lump sum payment for each 12-month period that falls within the
Severance Period, payable on the last business day of each such 12-month
period, equal to the Annual Bonus paid to Executive for the fiscal year
immediately preceding the fiscal year in which the Separation occurs or, if the
Separation occurs prior to the end of 2004, equal to the maximum target bonus
payable for 2004, and (vii) continue to participate during the Severance Period
(at the Company’s expense to the same extent as participation for other members
of the Company’s senior management is at the Company’s expense) in all employee
benefit programs made generally available to the Company’s senior management (other
than bonus and incentive compensation plans) to the extent permitted under the
terms of such programs and under applicable law (it being understood that if
Executive is unable to participate in any such plan by reason of prohibitions
under the terms of such programs or under applicable law, the Company shall, in
lieu of such participation, pay to Executive an amount in cash equivalent to
the value of such participation); provided that Executive will be
entitled to the amounts payable pursuant to clauses (v), (vi) and (vii) of this
Section 4(b) if and only if Executive has executed and delivered to the
Company a General Release in form and substance substantially similar to Exhibit B
attached hereto.  Notwithstanding the
foregoing, in the event that the Company determines that Executive has breached
any provision of Section 5, Section 6 or Section 7 hereof,
without limiting any other remedies that may be available to it, the Company
may withhold from payment of amounts otherwise due under clauses (v), (vi) and
(vii) of this Section 4(b) an amount equal to the Company’s estimated
damages as result of any such breach (the “Estimated Damages”), which
amount may be held by the Company pending settlement of the alleged breach or
final determination by a court of competent jurisdiction of the actual damages
to the Company resulting from any such breach (the “Actual Damages”).  If the Actual Damages are greater than the
Estimated Damages, then, without limiting any other remedies that may be
available to it, the Company shall be entitled to withhold from any future
payment of amounts otherwise due under clauses (v), (vi) and (vii) of this Section
4(b) an amount equal to the Actual Damages minus the Estimated Damages;
conversely, if the Estimated Damages are greater than the Actual Damages, then
the Company shall pay to Executive an amount equal to the Estimated Damages
minus the Actual Damages.

 

(c)           In the event that the Company
terminates Executive’s employment due to Disability, Executive shall be
entitled to:  (i) receive his Base Salary through the
effective date of the Separation, (ii) receive compensation, in accordance with
Company policy, for any accrued and unused vacation as of the date of the
Separation, (iii) reimbursement for expenses in accordance with Section 3(d),
(iv) any accrued and unpaid bonus owed to Executive as of the date of the
Separation, (v) receive payments during the Severance Period in
an amount equal to 60% of Executive’s initial Base Salary, payable in regular
installments in accordance with the Company’s general payroll practices, which
payments shall be net of any benefits Executive receives from any disability
insurance, and (vi) continue
to participate during the Severance Period (at the Company’s expense to the
same extent as participation for other members of the Company’s senior
management is at the Company’s expense) in all employee benefit programs made
generally available to the Company’s senior management (other than bonus and
incentive compensation plans) to the extent permitted under the terms of such
programs and under applicable law (it being understood that if Executive is
unable to participate in any such plan by reason of prohibitions under the
terms of such programs or under applicable law, the Company

 

3

 

shall, in lieu of such
participation, pay to Executive an amount in cash equivalent to the value of
such participation).  Notwithstanding
the foregoing, in the event that the Company determines that Executive has breached
any provision of Section 5, Section 6 or Section 7 hereof,
without limiting any other remedies that may be available to it, the Company
may withhold from payment of amounts otherwise due under clauses (v) and (vi)
of this Section 4(c) an amount equal to the Company’s Estimated Damages,
which amount may be held by the Company pending settlement of the alleged
breach or final determination by a court of competent jurisdiction of the
Actual Damages.  If the Actual Damages
are greater than the Estimated Damages, then, without limiting any other
remedies that may be available to it, the Company shall be entitled to withhold
from any future payment of amounts otherwise due under clauses (v) and (vi) of
this Section 4(c) an amount equal to the Actual Damages minus the
Estimated Damages; conversely, if the Estimated Damages are greater than the
Actual Damages, then the Company shall pay to Executive an amount equal to the
Estimated Damages minus the Actual Damages.

 

(d)           In the event Executive ceases to be
employed by the Company for any reason other than a termination by the Company
without Cause or due to Disability or Executive’s resignation for Good Reason,
Executive shall be entitled to receive only his Base Salary through the
effective date of the Separation, compensation, in accordance with Company
policy, for any accrued and unused vacation, reimbursement for expenses in
accordance with Section 3(d), and any accrued and unpaid bonus, and
Executive shall not be entitled to any other salary, compensation or benefits
from the Company or its Subsidiaries thereafter; provided, however, that if
such termination is as a result of the death of Executive, then Executive’s
estate shall also be entitled to receive, at the time that the Annual Bonus for
the year in which the death occurs would have been payable, a bonus in amount
equal to the Annual Bonus to which the Executive would have been entitled had
he remained an employee for the entire year, multiplied by the number of the
days in such year prior to the date of death, divided by 365.

 

(e)           Except as otherwise expressly
provided herein, all of Executive’s rights to salary, bonuses, fringe benefits
and other compensation hereunder which would otherwise accrue or become payable
after the Separation shall cease upon such termination (other than those
expressly required under applicable law, such as COBRA).

 

(f)            For purposes of this Agreement, “Cause”
shall mean (i) Executive’s conviction of a felony or a crime involving moral
turpitude, (ii) any act of dishonesty or fraud on the part of Executive that
has caused material harm to the Company, and/or (iii) the willful and continued
failure by Executive to substantially perform his duties and obligations under
this Agreement (other than any such failure resulting from incapacity due to
physical or mental illness), or the gross negligence or willful misconduct by
Executive with respect to the Company or any of its Subsidiaries, after a
demand by the Board which specifically identifies the manner in which the Board
believes that he has not substantially performed his duties or has committed
gross negligence or willful misconduct and the failure by Executive to cure
such failure within 30 days after delivery of such demand.  Any determination of “Cause” must be made by
the Board and may be made only after Executive has had an opportunity to
address the Board with respect to an assertion of  “Cause.”

 

(g)           For purposes of this Agreement, “Good
Reason” shall mean one or more of the following reasons:  (i) the Company reduces the amount of
Executive’s compensation in a

 

4

 

manner that constitutes a
breach of this Agreement, or otherwise fails to perform in any material respect
or breaches in any material respect its other obligations under this Agreement,
if such failure or breach is not cured within 30 days after notice by Executive
to the Board of such failure or breach; (ii) the Company assigns to Executive
any duties inconsistent with his position, duties, responsibilities and status with
the Company, reduces his authority, changes his reporting responsibilities,
titles or offices, or removes Executive from any such positions (except in
connection the termination of his employment by the Company for Cause, by
Executive other than for Good Reason, or as a result of Executive’s death or
Disability); (iii) the Company changes Executive’s place of work to a location
more than 25 miles from his present place of work, (iv) there is a Change of
Control (other than one that the Executive approved or voted in favor of in his
capacity as a director and/or stockholder of the Company); (v) Executive is
removed from the Board other than for Cause, or is not reelected to the Board
at the end of any term of service thereon; or (v) the Company terminates the
employment of Stephen J. Harrison without “Cause,” or Stephen J. Harrison
terminates his employment for “Good Reason,” as such terms are defined in the
Employment Agreement of even date herewith between the Company and Stephen J.
Harrison (other than in the case where the Executive approved or voted in favor
of the termination Stephen J. Harrison without “Cause” or the events that
constituted “Good Reason”, in his capacity as a director and/or stockholder of
the Company).

 

(h)           For purposes of this Agreement, “Disability”
shall mean Executive’s incapacitation or other absence from his full-time
duties hereunder for six consecutive months or for at least 180 days during any
12-month period, in either case as a result of a mental or physical illness or
injury.

 

(i)            For purposes of this Agreement, “Change
of Control” shall mean (i) any sale, transfer or issuance or series of
sales, transfers and/or issuances of capital stock of the Company by the
Company or any holders thereof (including without limitation, any merger,
consolidation or other transaction or series of related transactions having the
same effect) which results in any person or entity (a “Person”) or group
of Persons (as the term “group” is used under the Securities Exchange Act of
1934, as amended), other than Persons who hold more than 10% of Company’s
Common Stock as of immediately giving effect to the transactions occurring
concurrent with the execution of this Agreement (the “Current Significant
Stockholders”), owning capital stock of the Company possessing the voting
power (under ordinary circumstances) to elect a majority of the Board, and (ii)
any sale or transfer of all or substantially all of the assets of the Company
and its subsidiaries in any transaction or series of transactions (other than
sales in the ordinary course of business) to any Person or group of Persons (as
the term “group” is used under the Securities Exchange Act), other than Current
Significant Stockholders.

 

(j)            Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise, nor shall the amount of any payment provided for
herein be reduced by any compensation earned by Executive as a result of
employment by another employer or by retirement benefits after the date of
Separation or otherwise.

 

5

 

(k)           Excise Tax Gross-Up.

 

(i)            In
the event that it shall be determined at any time (as hereafter provided) that
any payment by the Company to the Executive pursuant to this Agreement or
otherwise (the “Subject Payments”) in connection with the Executive’s
termination by the Company without Cause or resignation for Good Reason, in
each case, prior to the third anniversary of the date hereof, but only if such
termination without Cause or resignation for Good Reason is in connection with
a change in the ownership or effective control of the Company or in the
ownership of a substantial portion of the assets of the Company within the
meaning of Code Section 280G (other than one that the Executive approved or
voted in favor of in his capacity as a director and/or stockholder of the
Company), would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the “Code”) (or any successor
provision thereto) by reason of being considered a “parachute payment,” within
the meaning of Section 280G of the Code (or any successor provision thereto) or
to any similar tax imposed by state or local law (such tax or taxes being hereafter
collectively referred to as the “Excise Tax”), then the Executive shall
be entitled to receive an additional payment or payments (collectively, the “Gross-Up
Payment”).  The Gross-Up Payment
shall be in an amount such that, after reducing the amount of the Gross-Up
Payment by all applicable U.S. federal, state and local taxes (computed at the
maximum marginal rates and including any interest or penalties imposed with
respect to such taxes), including any Excise Tax imposed on the Gross-Up
Payment, there remains an amount of Gross-Up Payment equal to the Excise Tax
imposed on the Subject Payments.

 

(ii)           Subject
to the provisions of Section 4(k)(v), all determinations required to be
made under this Section 4(k), including whether an Excise Tax is payable
by the Executive and the amount of such Excise Tax and the amount of any
associated Gross-Up Payment, shall be made by a nationally recognized
accounting firm (the “Accounting Firm”) selected by the Company and
reasonably acceptable to the Executive. 
The Accounting Firm shall submit its determination and detailed
supporting calculations to both the Company and the Executive within 30
calendar days of the request for such determination by the Company or the
Executive, but in no event later than 10 days before the date when such tax is
required by the applicable taxing authority to be paid, and at such other time
or times as may be requested by the Company. 
All fees and expenses of the Accounting Firm shall be borne solely by
the Company.  Any Gross-Up Payment shall
be paid by the Company to the Executive within 5 days of the receipt of the
Accounting Firm’s determination.  Any
determination by the Accounting Firm shall be binding upon the Company and the
Executive.  If the Executive after
consultation with his tax counsel determines that any legal position adopted by
the Accounting Firm with respect to the calculation is subject to uncertainty,
at the written request of the Executive, the Accounting Firm will deliver a
written opinion to the Executive that there is “substantial authority”, within
the meaning of the Treas. Reg. Section 1.6662-4(d), for the positions
adopted.  If the Accounting Firm’s
determination of the amount of the Excise Tax payable by the Executive is
determined to be erroneous by the applicable taxing authority or court after
any contest of such determination as described in Section 4(k)(v) and,
as a result of such erroneous determination the Executive fails to report the
full amount to the Excise Tax determined to be due on his

 

6

 

applicable
federal income tax return, then the Company shall indemnify, without
duplication for any amounts required to be paid under Section 4(k)(v),
the Executive on an after tax basis for the amount of any tax deficiency and
negligence penalty or other penalty imposed on the Executive by the Internal
Revenue Service or other taxing authority in connection therewith.  Any such indemnity payment shall be made by
the Company to the Executive no later than the earlier of 10 days after the
resolution of any contest of such determination as described in Section
4(k)(v) or 2 days before the date when such tax is required by the
applicable taxing authority or court to be paid.

 

(iii)          The
Company and the Executive shall each provide the Accounting Firm access to and
copies of any books, records and documents in the possession of the Company or
the Executive, as the case may be, reasonably requested by the Accounting Firm,
and otherwise cooperate with the Accounting Firm in connection with the
preparation and issuance of the determinations and calculations contemplated by
Section 4(k)(ii).

 

(iv)          The
federal, state and local income or other tax returns filed by the Executive
shall be prepared and filed on a consistent basis with the determination of the
Accounting Firm with respect to the Excise Tax payable by the Executive. The
Executive shall make proper payment of the amount of any Excise Payment.  If prior to the filing of the Executive’s
federal income tax return, or corresponding state or local tax return, if
relevant, the Accounting Firm determines that the amount of the Gross-Up
Payment should be reduced, the Executive shall within 10 business days pay to
the Company the amount of such reduction.

 

(v)           The
Executive shall notify the Company in writing of any claim by the Internal
Revenue Service or any other taxing authority that, if successful, would
require the payment by the Company of a Gross-Up Payment or increasing the
amount of any Gross-Up Payment previously made.  Such notification shall be given as promptly as practicable but
no later than 10 business days after the Executive actually receives notice of
such claim and the Executive shall further inform the Company of the nature of
such claim and the date on which such claim is requested to be paid.  The Executive shall not pay such claim prior
to the earlier of (x) the expiration of the 30-calendar-day period following
the date on which he gives such notice to the Company and (y) the date that any
payment of amount with respect to such claim is due.  If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim in a legally
permissible manner, the Executive shall: 
(A)  provide the Company with any
written records or documents in his possession relating to such claim
reasonably requested by the Company; (B) take such action in connection with
contesting such claim as the Company shall reasonably request in writing from
time to time including, without limitation, accepting legal representation with
respect to such claim by an attorney competent in respect of the subject matter
and reasonably selected by the Company and reasonably acceptable to the
Executive; (C) cooperate with the Company in good faith in order effectively to
contest such claim; and (D) permit the Company to participate in any
proceedings relating to such claim; provided, however, that the Company shall
bear and pay directly all costs and expenses incurred in connection with such
contest and shall indemnify and hold harmless the Executive, on an after-tax
basis, for and against any

 

7

 

Excise Tax or
income tax (including interest and penalties with respect thereto), imposed as
a result of the resolution of such claim and such representation and payment
of  all costs and expenses (including
with respect to any imputed income amounts). 
The Company shall control all proceedings taken in connection with the
contest of any claim contemplated by this Section 4(k)(v) and, at its
sole option, may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim (provided, however, that the Executive may participate therein at his
own cost and expense) and may, at its option, either direct the Executive to
pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
the tax claimed and sue for a refund, the Company shall advance the amount of
such payment to the Executive on an interest-free basis and shall indemnify and
hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income or other tax, including interest or penalties with respect thereto,
imposed with respect to the resolution of such claim and such advance
(including with respect to any imputed income amounts); and provided further,
however, that any extension of the statute of limitations relating to payment
of taxes for the taxable year of the Executive with respect to which the
contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company’s control of any such contested claim shall be
limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and the Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.

 

(vi)          If,
after the receipt by the Executive of an amount advanced by the Company
pursuant to Section 4(k)(v), the Executive receives any refund with
respect to such claim, the Executive shall (subject to the Company’s complying
with the requirements of Section 4(k)(v)) promptly pay to the Company
the amount of such refund (together with any interest paid or credited thereon
after any taxes applicable thereto). 
If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 4(k)(v), a determination is made that the
Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial or refund prior to the expiration of 30 calendar days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of any such advance shall be credited against, to the
extent thereof, the amount of Gross-Up Payment or indemnity required to be paid
by the Company to the Executive pursuant to this Section 4(k).

 

5.             Confidential Information.  Executive acknowledges that the information,
observations and data (including trade secrets) obtained by him while employed
by the Company, USAuto Holdings, Inc. (“USAuto”) and/or any of their
respective Subsidiaries (as defined below) (including those obtained by him
while employed by USAuto prior to the date of this Agreement) concerning the
business or affairs of the Company, USAuto and/or their respective Subsidiaries
(“Confidential Information”) are the property of the Company and its Subsidiaries.  Therefore, Executive agrees that he shall
not disclose to any person, other than in the course of the performance of his
duties to the Company, or use for his own purposes any

 

8

 

Confidential Information,
unless and to the extent that (i) the Confidential Information becomes
generally known to and available for use by the public other than as a result
of Executive’s acts or omissions or (ii) such disclosure or use is authorized
by the Board.  Executive shall deliver
to the Company at the termination of the Employment Period, or at any other
time the Company may request, all memoranda, notes, plans, records, reports,
computer tapes, printouts and software and other documents and data (and copies
thereof) embodying or relating to the Confidential Information, Work Product
(as defined below) or the business of the Company or any of its Subsidiaries
which Executive may then possess or have under his control.  For purposes of this Agreement, “Subsidiary”
shall mean any corporation or other entity of which the securities or other
ownership interests having the voting power to elect a majority of the board of
directors or other governing body are, at the time of determination, owned by
the Company directly or through one of more Subsidiaries.

 

6.             Inventions, Patents and Other
Intellectual Property. Executive acknowledges that all discoveries,
concepts, ideas, inventions, innovations, improvements, developments, methods,
designs, analyses, drawings, reports, patent applications, copyrightable work
and mask work (whether or not including any Confidential Information) and all
registrations or applications related thereto, and all other proprietary
information and all similar or related information (whether or not patentable)
which relate to the Company’s or any of its Subsidiaries’ actual or anticipated
business, research and development or existing or future products or services
and which are conceived, developed or made by Executive (whether alone or jointly
with others) while employed by the Company, USAuto and/or their respective
Subsidiaries, whether before or after the date of this Agreement (“Work
Product”), belong to the Company or such Subsidiary.  Executive shall promptly disclose such Work
Product to the Board and, at the Company’s expense, perform all actions
reasonably requested by the Board (whether during or after the Employment
Period) to establish and confirm such ownership (including, without limitation,
assignments, consents, powers of attorney and other instruments).

 

7.             Non-Compete, Non-Solicitation.  In further consideration of the compensation
to be paid to Executive hereunder, Executive acknowledges that in the course of
his employment with USAuto and the Company he has and will become familiar with
the trade secrets of the Company, USAuto and their respective Subsidiaries and
with other Confidential Information concerning the Company, USAuto and their
respective Subsidiaries and that his services have been and will be of special,
unique and extraordinary value to the Company and its Subsidiaries.  Therefore, Executive agrees that:

 

(a)           during the Employment Period and for
the period commencing with the Separation and continuing until the later to
occur of the second anniversary of the Separation and the fifth anniversary of
the date hereof (the “Noncompete Period”), Executive shall not, within
the United States, directly or indirectly own any interest in, manage, control,
participate in, consult with, render services for, or in any manner engage in
any business that is involved in the development, marketing, retail sale,
administration or underwriting of non-standard automobile insurance
programs anywhere in the United States; provided that nothing herein
shall prohibit Executive from being a passive owner of not more than 5% of the
outstanding equity interests of any class of a corporation, partnership,
limited liability company, or other entity, so long as Executive has no active
participation in the business of such entity;

 

9

 

(b)           during the Noncompete Period,
Executive shall not, other than in the course of performing his duties on
behalf of the Company while an officer thereof, directly or indirectly through
another person or entity (i) induce or attempt to induce any employee of
the Company or any of its Subsidiaries, other than a member of Executive’s
family, to leave the employ of the Company or any of its Subsidiaries, or in
any way interfere with the relationship between the Company or any of its
Subsidiaries and any employee thereof, (ii) hire any person, other than a
member of Executive’s family, who was an employee of the Company or any of its
Subsidiaries at any time during the one-year period immediately preceding the
Separation, (iii) induce or attempt to induce any customer, supplier,
licensee or other business relation of the Company or any of its Subsidiaries
to cease doing business with the Company or any of its Subsidiaries, or
(iv) directly or indirectly acquire or attempt to acquire an interest in
any business relating to the business of the Company or any of its Subsidiaries
and with which the Company or any of its Subsidiaries has entertained
discussions, or has requested and received information, relating to the
acquisition of such business by the Company or any Subsidiary in the two-year
period immediately preceding the Separation;

 

(c)           if, at the time of enforcement of
this Section 7, a court shall hold that the duration, scope or area
restrictions stated herein are unreasonable under circumstances then existing,
the parties agree that the maximum duration, scope or area reasonable under
such circumstances shall be substituted for the stated duration, scope or area
and that the court shall be allowed to revise the restrictions contained herein
to cover the maximum period, scope and area permitted by law;

 

(d)           in the event of the breach or a
threatened breach by Executive of any of the provisions of this Section 7,
the Company and its Subsidiaries, in addition and supplementary to other rights
and remedies existing in their favor, shall be entitled to specific performance
and/or injunctive or other equitable relief from a court of competent
jurisdiction in order to enforce or prevent any violations of the provisions
hereof (without posting a bond or other security).  In addition, Executive agrees that, in the event of a breach or
violation by Executive of this Section 7, the Noncompete Period shall be
tolled until such breach or violation has been duly cured; and

 

(e)           the provisions of this Section 7  are in consideration of:
(i) employment with the Company and (ii) additional good and valuable
consideration as set forth in this Agreement. 
In addition, Executive agrees and acknowledges that the restrictions
contained in Section 5,  Section
6 and this Section 7 do not preclude Executive from earning a
livelihood, nor do they unreasonably impose limitations on Executive’s ability
to earn a living.  In addition,
Executive agrees and acknowledges that the potential harm to the Company of the
non-enforcement of Section 5, 
Section 6 and/or this Section 7 outweighs any
potential harm to Executive of its enforcement by injunction or otherwise.  In addition, Executive acknowledges that he
has carefully read this Agreement and has given careful consideration to the
restraints imposed upon Executive by this Agreement and is in full accord as to
their necessity for the reasonable and proper protection of confidential and
proprietary information of the Company now existing or to be developed in the
future.  Executive expressly
acknowledges and agrees that each and every restraint imposed by this Agreement
is reasonable with respect to subject matter, time period and geographical
area.

 

10

 

8.             Executive’s Representations.  Executive hereby represents and warrants to
the Company that (i) the execution, delivery and performance of this Agreement
by Executive do not and shall not conflict with, breach, violate or cause a
default under any contract, agreement, instrument, order, judgment or decree to
which Executive is a party or by which Executive is bound, (ii) Executive is
not a party to or bound by any employment agreement, noncompete agreement,
confidentiality agreement or any similar agreement with any other person or
entity and (iii) upon the execution and delivery of this Agreement by the
Company, this Agreement shall be the valid and binding obligation of Executive,
enforceable in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium and similar laws
relating to or affecting creditors generally or by general equity principles
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).  Executive hereby
acknowledges and represents that he has consulted with independent legal
counsel regarding his rights and obligations under this Agreement.

 

9.             Survival.  Sections 3(f) and 4 through 18
(inclusive), and all rights of Executive to compensation and benefits relating
to periods prior to the termination of the Employment Period, shall survive and
continue in full force in accordance with their terms notwithstanding the
termination of the Employment Period.

 

10.           Notices.  All notices and other communications
hereunder shall be in writing and shall be deemed duly given (a) on the date of
delivery if delivered personally, or upon confirmation of receipt if delivered
by telecopy or facsimile (but only if a copy of such telecopy or facsimile is
delivered to the recipient by a recognized next-day courier service), (b) on
the first business day following the date of dispatch if delivered by a
recognized next-day courier service or (c) on the fifth business day following
the date of mailing if delivered by registered or certified mail, return
receipt requested, postage prepaid.  All
notices hereunder shall be delivered as set forth below, or pursuant to such
other instructions as have been previously designated in writing to the party
sending such notice by the party to receive such notice:

 

Notices to Executive:

 

Thomas M. Harrison, Jr.

3813 Green Hills Village Drive

Nashville, Tennessee 37215

Fax:  (615) 327-2266

 

with a copy to:

 

Covington & Burling

1201 Pennsylvania Ave., NW

Washington, DC   20004

Fax: (202) 662-6291

Attention:  Ralph C. Voltmer,
Jr.

 

Notices to the Company:

 

First Acceptance Corporation

 

11

 

676 North Michigan Avenue, Suite 3300

Chicago, Illinois 60611

Fax: (312) 327-4525

Attention:  President

 

with a copy to:

 

Kirkland & Ellis LLP

200 East Randolph Drive

Chicago, Illinois 60602

Fax: (312) 861-2200

Attention: Sanford E. Perl

 

or such other
address or facsimile number or to the attention of such other person as the
recipient party shall have specified by prior written notice to the sending
party.  Any notice under this Agreement
shall be deemed to have been given when so delivered, sent or mailed.

 

11.           Severability.  Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision or any action in any other jurisdiction, but
this Agreement shall be reformed, construed and enforced in such jurisdiction
as if such invalid, illegal or unenforceable provision had never been contained
herein.

 

12.           Complete Agreement.  This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the
complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof
in any way.  All employment agreements
between Executive and USAuto dated prior to the date hereof and currently in
effect are hereby terminated; provided, however, that Executive shall continue
to be entitled to receive base salary and expense reimbursement payments under
those agreements for periods prior to the date hereof to the extent not
duplicative with compensation and benefits payable hereunder.

 

13.           No Strict Construction.  The language used in this Agreement shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party.

 

14.           Counterparts.  This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.

 

15.           Successors and Assigns.  This Agreement is intended to bind and inure
to the benefit of and be enforceable by Executive and the Company and their
respective heirs, successors and assigns, provided that neither party may
assign his or its rights or delegate his 
or its duties or obligations hereunder without the prior written consent
of the other.

 

12

 

16.           Choice of Law.  All issues and questions concerning the
construction, validity, enforcement and interpretation of this Agreement and
the exhibits and schedules hereto shall be governed by, and construed in
accordance with, the laws of the State of Tennessee.

 

17.           Amendment and Waiver.  The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company (as
approved by the Board), its successors and assignees, and Executive, and no
course of conduct or course of dealing or failure or delay by any party hereto
in enforcing or exercising any of the provisions of this Agreement shall be
deemed to be an implied waiver of any provision of this Agreement.

 

18.           Arbitration.

 

(a)           Except with respect to any dispute or
claim under Section 5, Section 6 or Section 7 hereof in
which Executive’s right to payments under Section 4(b) is not at issue
(which  dispute or claim may be pursued
in any court of competent jurisdiction as specified below and with respect to
which each party shall bear the cost of its own attorneys’ fees and expenses
except as otherwise required by applicable law), each party hereto agrees that
arbitration, conducted in Nashville, Tennessee, in accordance with the rules of
the American Arbitration Association, shall be the sole and exclusive method
for resolving any claim or dispute (“Claim”) arising out of or relating
to the rights and obligations acknowledged and agreed to in this Agreement and
the employment of Executive by the Company and its Subsidiaries (including,
without limitation, disputes and claims regarding employment discrimination,
sexual harassment, termination and discharge). 
The arbitrator shall be directed to issue a written decision to be
delivered to both parties, addressing each issue disputed by the parties,
stating the arbitrator’s findings and reasons therefor, and stating the nature
and amount of any damages, compensation or other relief awarded (the “Final
Determination”).  The parties agree
that the result of any arbitration hereunder shall be final, conclusive and
binding on all of the parties hereto.

 

(b) Any party
hereto may institute litigation to enforce any Final Determination.  Each party hereto hereby irrevocably submits
to the jurisdiction of any United States District Court or state court of
competent jurisdiction sitting in Nashville, Tennessee, and agrees that such
court shall be the exclusive forum with respect to any dispute or claim under Section
5, Section 6 or Section 7 hereof and for the enforcement of
any Final Determination.  Each party
hereto irrevocably consents to service of process by registered mail or
personal service and waives any objection on the grounds of personal jurisdiction,
venue or inconvenience of the forum. 
Each party hereto further agrees that each other party hereto may
initiate litigation in any court of competent jurisdiction to execute any
judicial judgment enforcing a Final Determination.

 

19.           Insurance.  Each of the Company and its Subsidiaries, at
its discretion, may apply for and procure in its own name and for its own
benefit life and/or disability insurance on Executive in any amount or amounts
considered available.  In addition,
Executive agrees to cooperate in any medical or other examination, supply any
information, and to execute and deliver any applications or other instruments
in writing as may be reasonably necessary to obtain and maintain such
insurance.

 

*   
*    *    *    *

 

13

 

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

 

	
   

  	
  FIRST ACCEPTANCE CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Donald J. Edwards

  	
   

  
	
   

  	
  By:

  	
  Donald J. Edwards

  
	
   

  	
  Its:

  	
  Chief Executive Officer and President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Thomas M. Harrison, Jr.

  	
   

  
	
   

  	
  Thomas M. Harrison, Jr.

  
						

 

14

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