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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended June 30, 2010
 Commission file number 001-12117
 FIRST ACCEPTANCE CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    75-1328153(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)3813 Green Hills Village Drive, Nashville, Tennessee
    
    37215(Address of principal executive offices)
    
    (Zip Code)
 (615) 844-2800  (Registrants telephone number, including area code)  Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of exchange on which registeredCommon Stock, $.01 par value per share
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:
  o þ
  o þ
  þ o
  o o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company þ(Do not check if a smaller reporting company)
  o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



FIRST ACCEPTANCE CORPORATION 10-K
 Index to Annual Report on Form 10-K
 PagePART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    14Item 1B. Unresolved Staff Comments
    
    
    22Item 2. Properties
    
    
    22Item 3. Legal Proceedings
    
    
    22Item 4. (Removed and Reserved)
    
    
    22PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    23Item 6. Selected Financial Data
    
    
    24Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    26Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 8. Financial Statements and Supplementary Data
    
    
    44Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    
    75Item 9A. Controls and Procedures
    
    
    75Item 9B. Other Information
    
    
    75PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    76Item 11. Executive Compensation
    
    
    76Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    76Item 13. Certain Relationships and Related Transactions, and Director
Independence
    
    
    76Item 14. Principal Accountant Fees and Services
    
    
    76PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    77SIGNATURES
    
    
    81EX-10.10EX-21EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
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FIRST ACCEPTANCE CORPORATION 10-K
 
 PART I
 
 Item 1. Business
 General
  Our Business Strategy
  
    
    Integrated Operations. To meet the preference of our customers for convenient, personal
service, we have integrated the retail distribution, underwriting and service functions of
personal automobile insurance into one system. By doing so, we are able to provide prompt
and personal service to meet effectively the insurance needs of our customers, while
capturing revenue that would otherwise be shared with several participants under a
traditional, non-integrated insurance business model. Our integrated model is supported by
both point-of-sale agency and back office systems.
    
    Extensive Office Network. We emphasize the use of employee-agents as the cornerstone of
our customer relationship. We believe our customers value face-to-face contact, speed of
service and convenient locations. Consequently, we train our employee-agents to cultivate
client relationships and utilize real-time service and information enabled by our
information systems. At August 31, 2010, we leased and operated 393 retail locations
staffed with our employee-agents and located strategically in geographic markets to reach
and service our customers.
    
    Favorable Customer Payment Plans. Our customers can initiate insurance coverage with a
modest down payment. Any remaining premium is paid in monthly installments over the term
of the policy. We believe this modest initial payment and favorable payment plan is a
major factor in meeting the market demand for low monthly insurance payments.
    
    Effective Sales and Marketing. We build brand recognition and generate valuable sales
leads through the use of local print advertising (including the Yellow Pages®), television
and radio advertising, direct mailings and our broad network of retail locations.
    
    Efficient Information Systems. We have developed information systems that enable timely
and efficient communication and data sharing among the various segments of our integrated
operations. All of our retail locations transmit information directly to our central data
center where policy information, customer profiles, risk assessment and underwriting
criteria are maintained in our database.
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FIRST ACCEPTANCE CORPORATION 10-K
 Our Business Model
      2




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FIRST ACCEPTANCE CORPORATION 10-K
 New Pricing Program
   Personal Automobile Insurance Market
   Our Products
     3




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FIRST ACCEPTANCE CORPORATION 10-K
 Our Strategy
  Competition
  Marketing and Distribution
 ®
  Underwriting and Pricing
   4




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FIRST ACCEPTANCE CORPORATION 10-K
 Claims Handling
    Loss and Loss Adjustment Expense Reserves
    5




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FIRST ACCEPTANCE CORPORATION 10-K
    At June 30 (in thousands)
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Net liability for loss and loss
adjustment expense reserves, originally
estimated
    
    $
    18,137
    
    
    $
    39,289
    
    
    $
    61,521
    
    
    $
    91,137
    
    
    $
    101,148
    
    
    $
    83,895
    
    
    $
    73,152Cumulative amounts paid at:One year later
    
    
    13,103
    
    
    
    28,024
    
    
    
    51,420
    
    
    
    68,196
    
    
    
    62,964
    
    
    
    50,641Two years later
    
    
    16,579
    
    
    
    34,754
    
    
    
    61,627
    
    
    
    84,095
    
    
    
    78,232Three years later
    
    
    17,795
    
    
    
    37,025
    
    
    
    64,986
    
    
    
    88,888Four years later
    
    
    18,472
    
    
    
    37,802
    
    
    
    66,721Five years later
    
    
    18,743
    
    
    
    38,068Six years later
    
    
    18,894Liability re-estimated at:One year later
    
    
    17,781
    
    
    
    37,741
    
    
    
    65,386
    
    
    
    89,738
    
    
    
    89,766
    
    
    
    72,672Two years later
    
    
    17,244
    
    
    
    38,226
    
    
    
    68,491
    
    
    
    92,860
    
    
    
    86,726Three years later
    
    
    16,973
    
    
    
    37,484
    
    
    
    67,100
    
    
    
    91,864Four years later
    
    
    17,978
    
    
    
    38,289
    
    
    
    67,599Five years later
    
    
    18,900
    
    
    
    38,411Six years later
    
    
    18,975Net cumulative redundancy (deficiency)
    
    
    (838
    )
    
    
    878
    
    
    
    (6,078
    )
    
    
    (727
    )
    
    
    14,422
    
    
    
    11,223Gross liability  end of year
    
    $
    30,434
    
    
    $
    42,897
    
    
    $
    62,822
    
    
    $
    91,446
    
    
    $
    101,407
    
    
    $
    83,973
    
    
    $
    73,198Reinsurance receivables
    
    
    12,297
    
    
    
    3,608
    
    
    
    1,301
    
    
    
    309
    
    
    
    259
    
    
    
    78
    
    
    
    46Net liability  end of year
    
    $
    18,137
    
    
    $
    39,289
    
    
    $
    61,521
    
    
    $
    91,137
    
    
    $
    101,148
    
    
    $
    83,895
    
    
    $
    73,152Gross re-estimated liability  latest
    
    $
    31,252
    
    
    $
    41,729
    
    
    $
    68,692
    
    
    $
    92,193
    
    
    $
    86,861
    
    
    $
    72,757Re-estimated
reinsurance receivables  latest
    
    
    12,277
    
    
    
    3,318
    
    
    
    1,093
    
    
    
    329
    
    
    
    135
    
    
    
    85Net re-estimated  latest
    
    $
    18,975
    
    
    $
    38,411
    
    
    $
    67,599
    
    
    $
    91,864
    
    
    $
    86,726
    
    
    $
    72,672Gross cumulative redundancy (deficiency)
    
    $
    (818
    )
    
    $
    1,168
    
    
    $
    (5,870
    )
    
    $
    (747
    )
    
    $
    14,546
    
    
    $
    11,216
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FIRST ACCEPTANCE CORPORATION 10-K
      Reinsurance
   7




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FIRST ACCEPTANCE CORPORATION 10-K
   Technology
  Sales Office Automation
 Payment Processing
 Ratings
    8




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FIRST ACCEPTANCE CORPORATION 10-K
 Regulatory Environment
 Insurance Company Regulation
 
    
    regulating premium rates and forms;
    
    setting minimum solvency standards;
    
    setting capital and surplus requirements;
    
    licensing companies, agents and, in some states, adjusters;
    
    setting requirements for and limiting the types and amounts of investments;
    
    establishing requirements for the filing of annual statements and other financial
reports;
    
    conducting periodic statutory examinations of the affairs of insurance companies;
    
    requiring prior approval of changes in control and of certain transactions with
affiliates;
    
    limiting the amount of dividends that may be paid without prior regulatory approval; and
    
    setting standards for advertising and other market conduct activities.
 Required Licensing.
 Alabama
    
    Kansas
    
    PennsylvaniaArizona
    
    Kentucky
    
    South CarolinaArkansas
    
    Louisiana
    
    TennesseeColorado
    
    Mississippi
    
    TexasFlorida
    
    Missouri
    
    UtahGeorgia
    
    Nevada
    
    VirginiaIllinois
    
    New Mexico
    
    West VirginiaIndiana
    
    OhioIowa
    
    Oklahoma
  Insurance Holding Company Regulation
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FIRST ACCEPTANCE CORPORATION 10-K
 Restrictions on Paying Dividends
 Regulation of Rates and Policy Forms
 Guaranty Funds
 Investment Regulation
 Restrictions on Cancellation, Non-Renewal or Withdrawal
 Privacy Regulations
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FIRST ACCEPTANCE CORPORATION 10-K
  Licensing of Our Employee-Agents and Adjusters.
 Unfair Claims Practices
 
    
    misrepresenting pertinent facts or insurance policy provisions relating to coverages at
issue;
    
    failing to acknowledge and act reasonably promptly upon communications regarding claims
arising under insurance policies;
    
    failing to affirm or deny coverage of claims in a reasonable time after proof of loss
statements have been completed;
    
    attempting to settle claims for less than the amount to which a reasonable person would
have believed such person was entitled;
    
    attempting to settle claims on the basis of an application that was altered without
notice to, knowledge or consent of the insured;
    
    making known to insureds or claimants a policy of appealing from arbitration awards in
favor of insureds or claimants for the purpose of compelling them to accept settlements or
compromises less than the amount awarded in arbitration;
    
    delaying the investigation or payment of claims by requiring an insured, claimant or the
physician of either to submit a preliminary claim report and then requiring the subsequent
submission of formal proof of loss forms, both of which submissions contain substantially
the same information;
    
    failing to settle claims promptly, where liability has become reasonably clear, under
one portion of the insurance policy coverage in order to influence settlements under other
portions of the insurance policy coverage; and
    
    not attempting in good faith to effectuate prompt, fair and equitable settlements of
claims in which liability has become reasonably clear.
  Quarterly and Annual Financial Reporting.
 Periodic Financial and Market Conduct Examinations
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FIRST ACCEPTANCE CORPORATION 10-K
  Risk-Based Capital
    12




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FIRST ACCEPTANCE CORPORATION 10-K
 IRIS Ratios
  
    
    FAIC-GA had a ratio above the defined threshold for the two-year overall operating
ratio as the calculated ratio was above 100%. FAIC-GAs ratio was 102% and was
primarily the result of the $9.2 million litigation settlement expense recognized in
2008. Without this expense, FAIC-GAs ratio would have been 94% which would have been
below the defined threshold.
    
    FAIC-TN had a ratio right at the defined threshold for the change in net premiums
written which is 33%. FAIC-TNs decrease in net premiums written from 2008 to 2009
included approximately $3.5 million in net premiums written related to the transfer of
the beginning policy liabilities under an intercompany pooling agreement that was
effected at the beginning of 2008. Excluding the effect of this one-time transfer,
FAIC-TN would have had a change in net premiums written of 21% which would have been
below the defined threshold.
  Employees
  Available Information
  Internet Website
  13




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FIRST ACCEPTANCE CORPORATION 10-K
 
 Item 1A.
    
    Risk Factors
 Investing in the Company involves risk. You should carefully consider the following risk
factors, any of which could have a significant or material adverse effect on the Company. This
information should be considered together with the other information contained in this report and
in the other reports and materials filed by us with the SEC, as well as news releases and other
information publicly disseminated by us from time to time.
 Our loss and loss adjustment expenses may exceed our reserves, which would adversely impact our
results of operations and financial condition .
  Our results may fluctuate as a result of cyclical changes in the non-standard personal automobile
insurance industry.
  Our business may be adversely affected by negative developments in the non-standard personal
automobile insurance industry .
  Due to our largely fixed cost structure, our profitability may decline if our sales volume were to
decline significantly .
  14




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FIRST ACCEPTANCE CORPORATION 10-K
 Our investment portfolio may suffer reduced returns or other-than-temporary losses, which could
reduce our profitability.
  Our business is highly competitive, which may make it difficult for us to market our core products
effectively and profitably .
  Our business may be adversely affected by negative developments in the states in which we operate .
  Our ability to attract, develop, and retain talented employees, managers, and executives, and to
maintain appropriate staffing levels, is critical to our success.
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FIRST ACCEPTANCE CORPORATION 10-K
  We may have difficulties in managing any expansion into new markets .
  We may not be successful in identifying acquisition candidates or integrating their operations,
which could harm our financial results .
  New pricing, claim and coverage issues and class action litigation are continually emerging in the
automobile insurance industry, and these new issues could adversely impact our revenues,
profitability, or our methods of doing business .
  
    
    concerns over the use of an applicants credit score or zip code as a factor in making
risk selections and pricing decisions;
    
    a growing trend of plaintiffs targeting automobile insurers in purported class action
litigation relating to sales and marketing practices and claims-handling practices, such as
total loss evaluation methodology, the use of aftermarket (non-original equipment
manufacturer) parts and the alleged diminution in value to insureds vehicles involved in
accidents; and
    
    consumer groups lobbying state legislatures to regulate and require separate licenses
for individuals and companies engaged in the sale of ancillary products or services.
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FIRST ACCEPTANCE CORPORATION 10-K
 We may have difficulties successfully implementing our new pricing program.
  Our business may be adversely affected if we do not underwrite risks accurately and charge adequate
rates to policyholders.
  
    
    the availability of sufficient reliable data;
    
    uncertainties inherent in estimates and assumptions, generally;
    
    our ability to conduct a complete and accurate analysis of available data;
    
    our ability to timely recognize changes in trends and to predict both the severity and
frequency of future losses with reasonable accuracy;
    
    our ability to predict changes in certain operating expenses with reasonable accuracy;
    
    the development, selection, and application of appropriate rating formulae or other
pricing methodologies;
    
    our ability to innovate with new pricing strategies, and the success of those
innovations;
    
    our ability to implement rate changes and obtain any required regulatory approvals on a
timely basis;
    
    our ability to predict policyholder retention accurately;
    
    unanticipated court decisions, legislation, or regulatory action;
    
    the occurrence and severity of catastrophic events, such as hurricanes, hail storms,
other severe weather, and terrorist events;
    
    understanding the impact of ongoing changes in our claim settlement practices; and
    
    changing driving patterns.
  17




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FIRST ACCEPTANCE CORPORATION 10-K
 Our
results are dependent on our ability to adjust claims accurately.
  We may write-off intangible assets, such as goodwill.
  Our insurance company subsidiaries are subject to regulatory restrictions on paying dividends to
us .
  Our ability to use net operating loss carryforwards to reduce future tax payments may be limited by
applicable law .
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FIRST ACCEPTANCE CORPORATION 10-K
   Our insurance company subsidiaries are subject to statutory capital and surplus requirements and
other standards, and their failure to meet these requirements or standards could subject them to
regulatory actions .
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FIRST ACCEPTANCE CORPORATION 10-K
 We rely on our information technology and communication systems, and the failure of these systems
could materially adversely affect our business.
  Severe weather conditions and other catastrophes may result in an increase in the number and amount
of claims filed against us .
   A few of our stockholders have significant control over us, and their interests may differ from
yours
  We and our subsidiaries are subject to comprehensive regulation and supervision that may restrict
our ability to earn profits.
   Required Licensing
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FIRST ACCEPTANCE CORPORATION 10-K
 Transactions Between Insurance Companies and Their Affiliates
 Regulation of Rates and Policy Forms
 Investment Restrictions
 Restrictions on Cancellation, Non-Renewal or Withdrawal
 Provisions in our certificate of incorporation and bylaws may prevent a takeover or a change in
management that you may deem favorable.
   
    
    the requirement that only stockholders owning at least one-third of the outstanding shares of our common stock may call a special stockholders meeting; and
    
    the requirement that stockholders owning at least two-thirds of the outstanding shares
of our common stock must approve any amendment to our certificate of incorporation
provisions concerning the transfer restrictions and the ability to call special
stockholders meetings.
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FIRST ACCEPTANCE CORPORATION 10-K
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. (Removed and Reserved)
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FIRST ACCEPTANCE CORPORATION 10-K
 
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 Market Information
  Price RangeHigh
    
    
    LowYear Ended June 30, 2009First Quarter
    
    $
    4.70
    
    
    $
    2.76Second Quarter
    
    
    3.80
    
    
    
    2.18Third Quarter
    
    
    3.45
    
    
    
    1.66Fourth Quarter
    
    
    3.20
    
    
    
    1.81Year Ended June 30, 2010First Quarter
    
    $
    3.12
    
    
    $
    1.92Second Quarter
    
    
    2.80
    
    
    
    1.68Third Quarter
    
    
    2.63
    
    
    
    1.78Fourth Quarter
    
    
    2.28
    
    
    
    1.55
  Holders
  Dividends
  Stock Transfer Restrictions
  23




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FIRST ACCEPTANCE CORPORATION 10-K
 Performance Graph
  COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 June 30,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010First Acceptance Corporation
    
    
    100.00
    
    
    
    124.52
    
    
    
    107.40
    
    
    
    33.83
    
    
    
    22.52
    
    
    
    18.08Russell 3000
    
    
    100.00
    
    
    
    109.56
    
    
    
    131.55
    
    
    
    114.86
    
    
    
    84.35
    
    
    
    97.61S&P Property & Casualty Insurance
    
    
    100.00
    
    
    
    105.84
    
    
    
    121.07
    
    
    
    84.77
    
    
    
    65.96
    
    
    
    83.59
 
 Item 6. Selected Financial Data
  24




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FIRST ACCEPTANCE CORPORATION 10-K
 Year Ended June 30,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(in thousands, except per share data)Statement of Operations Data:Revenues:Premiums earned
    
    $
    187,046
    
    
    $
    224,113
    
    
    $
    285,914
    
    
    $
    300,661
    
    
    $
    208,771Commission and fee income
    
    
    28,852
    
    
    
    31,759
    
    
    
    36,479
    
    
    
    37,324
    
    
    
    26,757Investment income
    
    
    7,958
    
    
    
    9,504
    
    
    
    11,250
    
    
    
    8,863
    
    
    
    5,762Net realized gains (losses) on investments,
available-for-sale
    
    
    (683
    )
    
    
    89
    
    
    
    (1,244
    )
    
    
    (61
    )
    
    
    3,562Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    850
    
    
    
    4,150223,173
    
    
    
    265,465
    
    
    
    332,399
    
    
    
    347,637
    
    
    
    249,002Costs and expenses:Losses and loss adjustment expenses
    
    
    126,995
    
    
    
    149,277
    
    
    
    219,943
    
    
    
    241,908
    
    
    
    140,845Insurance operating expenses
    
    
    79,833
    
    
    
    87,124
    
    
    
    98,433
    
    
    
    97,629
    
    
    
    75,773Other operating expenses
    
    
    2,233
    
    
    
    1,307
    
    
    
    2,415
    
    
    
    2,623
    
    
    
    2,494Litigation settlement
    
    
    (361
    )
    
    
    1,570
    
    
    
    7,468
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    1,048
    
    
    
    2,053
    
    
    
    1,507
    
    
    
    1,063
    
    
    
    500Depreciation and amortization
    
    
    2,013
    
    
    
    1,910
    
    
    
    1,679
    
    
    
    1,624
    
    
    
    1,463Interest expense
    
    
    3,931
    
    
    
    4,138
    
    
    
    4,977
    
    
    
    1,874
    
    
    
    898Goodwill impairment(1)
    
    
    
    
    
    
    67,990
    
    
    
    
    
    
    
    
    
    
    
    215,692
    
    
    
    315,369
    
    
    
    336,422
    
    
    
    346,721
    
    
    
    221,973Income (loss) before income taxes
    
    
    7,481
    
    
    
    (49,904
    )
    
    
    (4,023
    )
    
    
    916
    
    
    
    27,029Provision (benefit) for income taxes(1)
    
    
    441
    
    
    
    18,396
    
    
    
    13,822
    
    
    
    17,586
    
    
    
    (1,039
    )Net income (loss)
    
    $
    7,040
    
    
    $
    (68,300
    )
    
    $
    (17,845
    )
    
    $
    (16,670
    )
    
    $
    28,068Per Share Data:Net income (loss) per share:Basic
    
    $
    0.15
    
    
    $
    (1.43
    )
    
    $
    (0.37
    )
    
    $
    (0.35
    )
    
    $
    0.59Diluted
    
    $
    0.14
    
    
    $
    (1.43
    )
    
    $
    (0.37
    )
    
    $
    (0.35
    )
    
    $
    0.57Number of shares used to calculate net income (loss)
per share:Basic
    
    
    47,961
    
    
    
    47,664
    
    
    
    47,628
    
    
    
    47,584
    
    
    
    47,487Diluted
    
    
    48,638
    
    
    
    47,664
    
    
    
    47,628
    
    
    
    47,584
    
    
    
    49,576
 June 30,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(in thousands, except per share data)Balance Sheet Data:Cash, cash
equivalents and total investments
    
    $
    222,734
    
    
    $
    217,512
    
    
    $
    228,216
    
    
    $
    210,716
    
    
    $
    159,362Total assets
    
    
    356,342
    
    
    
    358,956
    
    
    
    473,230
    
    
    
    498,892
    
    
    
    435,327Loss and loss adjustment expense reserves
    
    
    73,198
    
    
    
    83,973
    
    
    
    101,407
    
    
    
    91,446
    
    
    
    62,822Notes and debentures payable
    
    
    41,240
    
    
    
    41,240
    
    
    
    45,153
    
    
    
    64,300
    
    
    
    23,612Total liabilities
    
    
    179,152
    
    
    
    199,100
    
    
    
    247,771
    
    
    
    259,408
    
    
    
    181,904Total stockholders equity
    
    
    177,190
    
    
    
    159,856
    
    
    
    225,459
    
    
    
    239,484
    
    
    
    253,423Book value per common share
    
    $
    3.65
    
    
    $
    3.31
    
    
    $
    4.69
    
    
    $
    5.03
    
    
    $
    5.33
 
 (1)
    
    The year ended June 30, 2009 includes a goodwill impairment charge of $68.0
million, a related increase in the tax provision of $15.3 million, and a tax benefit of $5.1
million related to the utilization of federal net operating loss (NOL) carryforwards that
were previously reserved for through a valuation allowance. The provision for income taxes for
the year ended June 30, 2008 includes a charge of $11.4 million related to the expiration of
certain federal NOL carryforwards as well as an increase in the valuation allowance of $3.6
million for the deferred tax asset for certain federal NOL carryforwards resulting in a charge
totaling $15.0 million. The provision for income taxes for the year ended June 30, 2007
includes an increase in the valuation allowance for the deferred tax asset of $6.9 million as
well as $10.0 million related to the expiration of certain federal NOL carryforwards resulting
in a charge totaling $16.9 million. The benefit from income taxes for the year ended June 30,
2006 includes a decrease in the valuation allowance for the deferred tax asset of $10.5
million. 25




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 The following discussion should be read in conjunction with our consolidated financial
statements and accompanying notes included in this report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various factors, including
those discussed below and elsewhere in this report, particularly under the caption Item 1A. Risk
Factors.
 Forward-Looking Statements
  
    
    our future growth, income, income per share and other financial performance
measures;
    
    the anticipated effects on our results of operations or financial condition from
recent and expected developments or events;
    
    the financial condition of, and other issues relating to the strength of and
liquidity available to, issuers of securities held in our investment portfolio;
    
    the accuracy and adequacy of our loss reserving methodologies; and
    
    our business and growth strategies.
   26




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 General
    Year Ended June 30,2010
    
    
    2009Retail locations  beginning of period
    
    
    418
    
    
    
    431Opened
    
    
    1
    
    
    
    1Closed
    
    
    (25
    )
    
    
    (14
    )Retail locations  end of period
    
    
    394
    
    
    
    418
  June 30,2010
    
    
    2009
    
    
    2008Alabama
    
    
    25
    
    
    
    25
    
    
    
    25Florida
    
    
    31
    
    
    
    39
    
    
    
    40Georgia
    
    
    60
    
    
    
    61
    
    
    
    61Illinois
    
    
    74
    
    
    
    78
    
    
    
    80Indiana
    
    
    17
    
    
    
    18
    
    
    
    19Mississippi
    
    
    8
    
    
    
    8
    
    
    
    8Missouri
    
    
    12
    
    
    
    12
    
    
    
    14Ohio
    
    
    27
    
    
    
    27
    
    
    
    29Pennsylvania
    
    
    16
    
    
    
    17
    
    
    
    19South Carolina
    
    
    26
    
    
    
    27
    
    
    
    28Tennessee
    
    
    19
    
    
    
    20
    
    
    
    20Texas
    
    
    79
    
    
    
    86
    
    
    
    88Total
    
    
    394
    
    
    
    418
    
    
    
    431
 27




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Consolidated Results of Operations
 Overview
   Year Ended June 30,2010
    
    
    2009
    
    
    2008Revenues:Insurance
    
    $
    223,054
    
    
    $
    265,341
    
    
    $
    332,219Real estate and corporate
    
    
    119
    
    
    
    124
    
    
    
    180Consolidated total
    
    $
    223,173
    
    
    $
    265,465
    
    
    $
    332,399Income (loss) before income taxes:Insurance
    
    $
    14,568
    
    
    $
    (42,536
    )
    
    $
    4,685Real estate and corporate
    
    
    (7,087
    )
    
    
    (7,368
    )
    
    
    (8,708
    )Consolidated total
    
    $
    7,481
    
    
    $
    (49,904
    )
    
    $
    (4,023
    )
  
    
    premiums earned, including policy and renewal fees, from sales of policies
written and assumed by our insurance company subsidiaries;
    
    commission and fee income, including installment billing fees on policies
written and assumed, agency fees and commissions and fees for other ancillary products
and services; and
    
    investment income earned on the invested assets of the insurance company
subsidiaries.
  Year Ended June 30,2010
    
    
    2009
    
    
    2008Premiums earned:Georgia
    
    $
    40,712
    
    
    $
    49,762
    
    
    $
    60,928Illinois
    
    
    24,550
    
    
    
    27,583
    
    
    
    32,009Texas
    
    
    24,243
    
    
    
    25,971
    
    
    
    33,769Florida
    
    
    20,808
    
    
    
    26,113
    
    
    
    43,017Alabama
    
    
    19,338
    
    
    
    23,948
    
    
    
    28,780Ohio
    
    
    12,452
    
    
    
    12,914
    
    
    
    15,416Tennessee
    
    
    11,764
    
    
    
    15,269
    
    
    
    20,772South Carolina
    
    
    11,424
    
    
    
    17,887
    
    
    
    23,634Pennsylvania
    
    
    10,566
    
    
    
    11,437
    
    
    
    10,041Indiana
    
    
    4,962
    
    
    
    5,537
    
    
    
    7,131Missouri
    
    
    3,261
    
    
    
    3,907
    
    
    
    5,630Mississippi
    
    
    2,966
    
    
    
    3,785
    
    
    
    4,787Total premiums earned
    
    $
    187,046
    
    
    $
    224,113
    
    
    $
    285,914
 28




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Year Ended June 30,2010
    
    
    2009
    
    
    2008Policies in force  beginning of period
    
    
    158,222
    
    
    
    194,079
    
    
    
    226,974Net decrease during period
    
    
    (3,567
    )
    
    
    (35,857
    )
    
    
    (32,895
    )Policies in force  end of period
    
    
    154,655
    
    
    
    158,222
    
    
    
    194,079
  Loss Ratio 
 Expense Ratio 
 Combined Ratio 
  Year Ended June 30,2010
    
    
    2009
    
    
    2008Loss and loss adjustment expense
    
    
    67.9
    %
    
    
    66.6
    %
    
    
    76.9
    %Expense
    
    
    27.3
    %
    
    
    24.7
    %
    
    
    21.7
    %Combined
    
    
    95.2
    %
    
    
    91.3
    %
    
    
    98.6
    %
  Investments
   29




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
     Amortized
    
    
    Gross Unrealized
    
    
    Gross Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. government and agencies
    
    $
    28,263
    
    
    $
    1,236
    
    
    $
    
    
    
    $
    29,499State
    
    
    7,461
    
    
    
    387
    
    
    
    
    
    
    
    7,848Political subdivisions
    
    
    1,792
    
    
    
    52
    
    
    
    (14
    )
    
    
    1,830Revenue and assessment
    
    
    28,209
    
    
    
    1,217
    
    
    
    (140
    )
    
    
    29,286Corporate bonds
    
    
    73,868
    
    
    
    5,181
    
    
    
    (246
    )
    
    
    78,803Collateralized mortgage obligations:Agency backed
    
    
    26,262
    
    
    
    1,774
    
    
    
    
    
    
    
    28,036Non-agency backed  residential
    
    
    7,189
    
    
    
    56
    
    
    
    (633
    )
    
    
    6,612Non-agency backed  commercial
    
    
    7,363
    
    
    
    158
    
    
    
    (341
    )
    
    
    7,180Total fixed maturities, available-for-sale
    
    
    180,407
    
    
    
    10,061
    
    
    
    (1,374
    )
    
    
    189,094Investment in mutual fund,
available-for-sale
    
    
    7,500
    
    
    
    
    
    
    
    (44
    )
    
    
    7,456$
    187,907
    
    
    $
    10,061
    
    
    $
    (1,418
    )
    
    $
    196,550
  Securities with No
    
    
    AllSecurities with
    
    
    Securities with
    
    
    Unrealized Gains or
    
    
    Fixed MaturityUnrealized Gains
    
    
    Unrealized Losses
    
    
    Losses
    
    
    SecuritiesOne year or less
    
    $
    9,137
    
    
    $
    
    
    
    $
    
    
    
    $
    9,137After one through five years
    
    
    82,250
    
    
    
    642
    
    
    
    
    
    
    
    82,892After five through ten years
    
    
    39,567
    
    
    
    
    
    
    
    
    
    
    
    39,567After ten years
    
    
    8,607
    
    
    
    7,063
    
    
    
    
    
    
    
    15,670No single maturity date
    
    
    33,676
    
    
    
    8,085
    
    
    
    67
    
    
    
    41,828$
    173,237
    
    
    $
    15,790
    
    
    $
    67
    
    
    $
    189,094
 30




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Other-Than-Temporary Impairment
 Recognition and Presentation of
Other-Than-Temporary Impairments Prior authoritative literature
    Amendments to the Impairment
Guidance of EITF Issue No. 99-20 Prior authoritative literature
   31




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
   Year Ended June 30, 2010 Compared with the Year Ended June 30, 2009
 Consolidated Results
  Insurance Operations
  Premiums Earned
   Commission and Fee Income
  Investment Income
  32




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Net realized gains (losses) on investments, available-for-sale
  Loss and Loss Adjustment Expenses
   Operating Expenses
    Litigation Settlement
   33




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
   Balance at December 31, 2008
    
    $
    5,227Credits utilized
    
    
    (1,338
    )Credits forfeited
    
    
    (904
    )Balance at June 30, 2009
    
    
    2,985Credits utilized
    
    
    (2,622
    )Credits forfeited
    
    
    (317
    )Balance at June 30, 2010
    
    $
    46
   Goodwill Impairment
    34




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Provision for Income Taxes
   Real Estate and Corporate
   Year Ended June 30, 2009 Compared with the Year Ended June 30, 2008
 Consolidated Results
  35




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Insurance Operations
  Premiums Earned
   Commission and Fee Income
  Investment Income
  Net realized gains (losses) on investments, available-for-sale
  Loss and Loss Adjustment Expenses
   36




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Operating Expenses
    Litigation Settlement
   Goodwill Impairment
   Provision for Income Taxes
  37




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Real Estate and Corporate
  Liquidity and Capital Resources
      38




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Contractual Obligations
  Payments Due By PeriodMore than 5Total
    
    
    Less than 1 year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    yearsLoss and loss adjustment expense
reserves (1)
    
    $
    73,198
    
    
    $
    26,571
    
    
    $
    32,134
    
    
    $
    9,369
    
    
    $
    5,124Debentures payable (2)
    
    
    93,378
    
    
    
    3,826
    
    
    
    5,764
    
    
    
    3,533
    
    
    
    80,255Capitalized lease obligations
    
    
    155
    
    
    
    79
    
    
    
    76
    
    
    
    
    
    
    
    Operating leases (3)
    
    
    21,172
    
    
    
    7,837
    
    
    
    8,276
    
    
    
    3,301
    
    
    
    1,758Litigation settlement (4)
    
    
    46
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    358
    
    
    
    231
    
    
    
    127
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    188,307
    
    
    $
    38,590
    
    
    $
    46,377
    
    
    $
    16,203
    
    
    $
    87,137
 
 (1)
    
    Loss and loss adjustment expense reserves do not have contractual maturity
dates; however, based on historical payment patterns, the amount presented is our estimate of
the expected timing of these payments. The timing of these payments is subject to significant
uncertainty. We maintain a portfolio of marketable investments with varying maturities and a
substantial amount of cash and cash equivalents intended to provide adequate cash flows for
such payments.(2)
    
    Payments due by period assume a contractual fixed interest rate of 9.277% until
July 30, 2012, after which the rate becomes variable (LIBOR plus 375 basis points, or 4.284%
at June 30, 2010).(3)
    
    Consists primarily of rental obligations under real estate leases related to our
retail locations and corporate offices.(4)
    
    Consists primarily of the provision associated with the estimated utilization of
premium credits for Georgia and Alabama litigation settlement class members who were insured
by the Company at June 30, 2010 and received the premium credits. For additional information
with respect to the litigation settlements, see Note 16 to our consolidated financial
statements. Trust Preferred Securities
 Variable Interest Entities Prior authoritative literature: .
 Off-Balance Sheet Arrangements
  39




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Critical Accounting Estimates
  Valuation of deferred tax asset
 Income Taxes (Prior authoritative
literature:
 Goodwill and identifiable intangible assets
    Investments
   40




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
   Losses and loss adjustment expense reserves
   
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  41




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Sensitivity to Instantaneous Interest Rate Changes (basis points)(100)
    
    
    (50)
    
    
    0
    
    
    50
    
    
    100
    
    
    200Fair value of fixed maturity portfolio
    
    $
    195,683
    
    
    $
    192,412
    
    
    $
    189,094
    
    
    $
    185,741
    
    
    $
    182,400
    
    
    $
    175,871
  Securities with No
    
    
    AllSecurities with
    
    
    Securities with
    
    
    Unrealized Gains or
    
    
    Fixed MaturityYear Ended June 30,
    
    Unrealized Gains
    
    
    Unrealized Losses
    
    
    Losses
    
    
    Securities2011
    
    $
    13,393
    
    
    $
    1,234
    
    
    $
    1
    
    
    $
    14,6282012
    
    
    20,832
    
    
    
    582
    
    
    
    
    
    
    
    21,4142013
    
    
    26,074
    
    
    
    1,115
    
    
    
    
    
    
    
    27,1892014
    
    
    25,454
    
    
    
    797
    
    
    
    
    
    
    
    26,2512015
    
    
    20,868
    
    
    
    798
    
    
    
    
    
    
    
    21,666Thereafter
    
    
    55,684
    
    
    
    11,802
    
    
    
    
    
    
    
    67,486Total
    
    $
    162,305
    
    
    $
    16,328
    
    
    $
    1
    
    
    $
    178,634Fair value
    
    $
    173,237
    
    
    $
    15,790
    
    
    $
    67
    
    
    $
    189,094
  Credit Risk
  42




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Amortized
    
    
    
    
    
    
    FairComparable Rating
    
    Cost
    
    
    % of Amortized Cost
    
    
    Value
    
    
    % of Fair ValueAAA
    
    $
    73,167
    
    
    
    40.5
    %
    
    $
    77,016
    
    
    
    40.7
    %AA+, AA, AA-
    
    
    37,169
    
    
    
    20.6
    %
    
    
    39,484
    
    
    
    20.9
    %A+, A, A-
    
    
    49,525
    
    
    
    27.5
    %
    
    
    52,243
    
    
    
    27.6
    %BBB+, BBB, BBB-
    
    
    11,307
    
    
    
    6.3
    %
    
    
    11,467
    
    
    
    6.1
    %Total investment grade
    
    
    171,168
    
    
    
    94.9
    %
    
    
    180,210
    
    
    
    95.3
    %Not rated
    
    
    3,949
    
    
    
    2.2
    %
    
    
    4,059
    
    
    
    2.1
    %BB+, BB, BB-
    
    
    1,874
    
    
    
    1.0
    %
    
    
    1,821
    
    
    
    1.0
    %B+, B, B-
    
    
    1,142
    
    
    
    0.6
    %
    
    
    1,089
    
    
    
    0.6
    %CCC+, CCC, CCC-
    
    
    1,606
    
    
    
    0.9
    %
    
    
    1,439
    
    
    
    0.8
    %CC+, CC, CC-
    
    
    505
    
    
    
    0.3
    %
    
    
    286
    
    
    
    0.1
    %C+, C, C-
    
    
    163
    
    
    
    0.1
    %
    
    
    190
    
    
    
    0.1
    %Total non-investment grade
    
    
    5,290
    
    
    
    2.9
    %
    
    
    4,825
    
    
    
    2.6
    %Total
    
    $
    180,407
    
    
    
    100.0
    %
    
    $
    189,094
    
    
    
    100.0
    %
    Insured
    
    
    Uninsured
    
    
    TotalFair
    
    
    
    
    
    
    Fair
    
    
    
    
    
    
    Fair
    
    
    % ofValue
    
    
    % of Fair Value
    
    
    Value
    
    
    % of Fair Value
    
    
    Value
    
    
    Fair ValueAAA
    
    $
    
    
    
    
    
    
    
    $
    4,776
    
    
    
    33
    %
    
    $
    4,776
    
    
    
    12
    %AA+, AA, AA-
    
    
    11,772
    
    
    
    48
    %
    
    
    5,565
    
    
    
    39
    %
    
    
    17,337
    
    
    
    45
    %A+, A, A-
    
    
    11,287
    
    
    
    46
    %
    
    
    3,951
    
    
    
    28
    %
    
    
    15,238
    
    
    
    39
    %BBB+, BBB, BBB-
    
    
    1,613
    
    
    
    6
    %
    
    
    
    
    
    
    
    
    
    
    1,613
    
    
    
    4
    %Total
    
    $
    24,672
    
    
    
    100
    %
    
    $
    14,292
    
    
    
    100
    %
    
    $
    38,964
    
    
    
    100
    %
 43




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 Item 8. Financial Statements and Supplementary Data
 PageReports of Independent Registered Public Accounting Firm
    
    
    45Consolidated Balance Sheets
    
    
    47Consolidated Statements of Operations
    
    
    48Consolidated Statements of Stockholders Equity
    
    
    49Consolidated Statements of Cash Flows
    
    
    50Notes to Consolidated Financial Statements
    
    
    51
 44




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 Report of Independent Registered Public Accounting Firm
      Internal
ControlIntegrated Framework
 /s/ ERNST & YOUNG LLP 
 45




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Report of Independent Registered Public Accounting Firm
 
 Internal
ControlIntegrated Framework Managements Annual Report on
Internal Control Over Financial Reporting
      /s/ ERNST & YOUNG LLP 
 46




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share data)
 June 30,2010
    
    
    2009ASSETSInvestments, available-for-sale at fair value (amortized cost
of $187,907 and $140,849, respectively)
    
    $
    196,550
    
    
    $
    140,311Cash and cash equivalents
    
    
    26,184
    
    
    
    77,201Premiums and fees receivable, net of allowance of $418 and $419
    
    
    41,276
    
    
    
    45,309Other assets
    
    
    8,733
    
    
    
    11,866Property and equipment, net
    
    
    3,524
    
    
    
    3,921Deferred acquisition costs
    
    
    3,623
    
    
    
    3,896Goodwill
    
    
    70,092
    
    
    
    70,092Identifiable intangible assets
    
    
    6,360
    
    
    
    6,360TOTAL ASSETS
    
    $
    356,342
    
    
    $
    358,956LIABILITIES AND STOCKHOLDERS EQUITYLoss and loss adjustment expense reserves
    
    $
    73,198
    
    
    $
    83,973Unearned premiums and fees
    
    
    52,563
    
    
    
    57,350Debentures payable
    
    
    41,240
    
    
    
    41,240Other liabilities
    
    
    12,151
    
    
    
    16,537Total liabilities
    
    
    179,152
    
    
    
    199,100Stockholders equity:Preferred stock, $.01 par value, 10,000 shares authorized
    
    
    
    
    
    
    Common stock, $.01 par value, 75,000 shares authorized;
48,509 and 48,312 shares issued and outstanding,
respectively
    
    
    485
    
    
    
    483Additional paid-in capital
    
    
    465,831
    
    
    
    464,720Accumulated other comprehensive income (loss)
    
    
    8,643
    
    
    
    (538
    )Accumulated deficit
    
    
    (297,769
    )
    
    
    (304,809
    )Total stockholders equity
    
    
    177,190
    
    
    
    159,856TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    356,342
    
    
    $
    358,956
  47




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 Year Ended June 30,2010
    
    
    2009
    
    
    2008Revenues:Premiums earned
    
    $
    187,046
    
    
    $
    224,113
    
    
    $
    285,914Commission and fee income
    
    
    28,852
    
    
    
    31,759
    
    
    
    36,479Investment income
    
    
    7,958
    
    
    
    9,504
    
    
    
    11,250Net realized gains (losses) on investments,
available-for-sale
    
    
    (683
    )
    
    
    89
    
    
    
    (1,244
    )223,173
    
    
    
    265,465
    
    
    
    332,399Costs and expenses:Losses and loss adjustment expenses
    
    
    126,995
    
    
    
    149,277
    
    
    
    219,943Insurance operating expenses
    
    
    79,833
    
    
    
    87,124
    
    
    
    98,433Other operating expenses
    
    
    2,233
    
    
    
    1,307
    
    
    
    2,415Litigation settlement
    
    
    (361
    )
    
    
    1,570
    
    
    
    7,468Stock-based compensation
    
    
    1,048
    
    
    
    2,053
    
    
    
    1,507Depreciation and amortization
    
    
    2,013
    
    
    
    1,910
    
    
    
    1,679Interest expense
    
    
    3,931
    
    
    
    4,138
    
    
    
    4,977Goodwill impairment
    
    
    
    
    
    
    67,990
    
    
    
    215,692
    
    
    
    315,369
    
    
    
    336,422Income (loss) before income taxes
    
    
    7,481
    
    
    
    (49,904
    )
    
    
    (4,023
    )Provision for income taxes
    
    
    441
    
    
    
    18,396
    
    
    
    13,822Net income (loss)
    
    $
    7,040
    
    
    $
    (68,300
    )
    
    $
    (17,845
    )Net income (loss) per share:Basic
    
    $
    0.15
    
    
    $
    (1.43
    )
    
    $
    (0.37
    )Diluted
    
    $
    0.14
    
    
    $
    (1.43
    )
    
    $
    (0.37
    )Number of shares used to calculate net income
(loss) per share:Basic
    
    
    47,961
    
    
    
    47,664
    
    
    
    47,628Diluted
    
    
    48,638
    
    
    
    47,664
    
    
    
    47,628Reconciliation of net income (loss) to
comprehensive income (loss):Net income (loss)
    
    $
    7,040
    
    
    $
    (68,300
    )
    
    $
    (17,845
    )Unrealized change in investments
    
    
    9,181
    
    
    
    (68
    )
    
    
    2,303Other
    
    
    
    
    
    
    
    
    
    
    (121
    )16,221
    
    
    
    (68,368
    )
    
    
    (15,663
    )Applicable provision for income taxes
    
    
    
    
    
    
    
    
    
    
    Comprehensive income (loss)
    
    $
    16,221
    
    
    $
    (68,368
    )
    
    $
    (15,663
    )
 
 Detail of net realized gains (losses) on
investments, available-for-sale:Net realized gains on sales
    
    $
    300
    
    
    $
    2,509
    
    
    $
    170Unrealized losses on investments with
other-than-temporary impairment charges
    
    
    (1,937
    )
    
    
    (3,640
    )
    
    
    (1,414
    )Non-credit portion included in
comprehensive income (loss)
    
    
    954
    
    
    
    1,220
    
    
    
    Other-than-temporary impairment charges
recognized in net income (loss)
    
    
    (983
    )
    
    
    (2,420
    )
    
    
    (1,414
    )Net realized gains (losses) on
investments, available-for-sale
    
    $
    (683
    )
    
    $
    89
    
    
    $
    (1,244
    )
  48




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 (in thousands)
 AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    paid-in
    
    
    comprehensive
    
    
    Accumulated
    
    
    stockholdersShares
    
    
    Amount
    
    
    capital
    
    
    income (loss)
    
    
    deficit
    
    
    equityBalances at June 30, 2007
    
    
    47,615
    
    
    $
    476
    
    
    $
    460,968
    
    
    $
    (2,652
    )
    
    $
    (219,308
    )
    
    $
    239,484Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,845
    )
    
    
    (17,845
    )Net unrealized change on investments
(net of tax of $0)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,303
    
    
    
    
    
    
    
    2,303Unrealized change on interest rate
swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (121
    )
    
    
    
    
    
    
    (121
    )Issuance of restricted common stock
    
    
    400
    
    
    
    4
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    5
    
    
    
    1
    
    
    
    1,506
    
    
    
    
    
    
    
    
    
    
    
    1,507Issuance of shares under Employee
Stock Purchase Plan
    
    
    35
    
    
    
    
    
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    131Balances at June 30, 2008
    
    
    48,055
    
    
    
    481
    
    
    
    462,601
    
    
    
    (470
    )
    
    
    (237,153
    )
    
    
    225,459Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (644
    )
    
    
    644
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,300
    )
    
    
    (68,300
    )Net unrealized change on investments
(net of tax of $0)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    576
    
    
    
    
    
    
    
    576Issuance of restricted common stock
    
    
    225
    
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    5
    
    
    
    
    
    
    
    2,053
    
    
    
    
    
    
    
    
    
    
    
    2,053Issuance of shares under Employee
Stock Purchase Plan
    
    
    27
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    68Balances at June 30, 2009
    
    
    48,312
    
    
    
    483
    
    
    
    464,720
    
    
    
    (538
    )
    
    
    (304,809
    )
    
    
    159,856Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,040
    
    
    
    7,040Net unrealized change on investments
(net of tax of $0)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,181
    
    
    
    
    
    
    
    9,181Issuance of restricted common stock
    
    
    160
    
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted common stock
    
    
    (5
    )
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Stock-based compensation
    
    
    5
    
    
    
    
    
    
    
    1,048
    
    
    
    
    
    
    
    
    
    
    
    1,048Issuance of shares under Employee
Stock Purchase Plan
    
    
    37
    
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    67Balances at June 30, 2010
    
    
    48,509
    
    
    $
    485
    
    
    $
    465,831
    
    
    $
    8,643
    
    
    $
    (297,769
    )
    
    $
    177,190
  49




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Year Ended June 30,2010
    
    
    2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    7,040
    
    
    $
    (68,300
    )
    
    $
    (17,845
    )Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    2,013
    
    
    
    1,910
    
    
    
    1,679Stock-based compensation
    
    
    1,048
    
    
    
    2,053
    
    
    
    1,507Deferred income taxes
    
    
    
    
    
    
    17,593
    
    
    
    13,343Goodwill impairment
    
    
    
    
    
    
    67,990
    
    
    
    Other-than-temporary impairment on investment securities
    
    
    983
    
    
    
    2,420
    
    
    
    1,414Net realized gains on sales of investments
    
    
    (300
    )
    
    
    (2,509
    )
    
    
    (170
    )Other
    
    
    521
    
    
    
    129
    
    
    
    113Change in:Premiums and fees receivable
    
    
    4,032
    
    
    
    18,023
    
    
    
    8,349Loss and loss adjustment expense reserves
    
    
    (10,775
    )
    
    
    (17,434
    )
    
    
    9,961Unearned premiums and fees
    
    
    (4,787
    )
    
    
    (19,887
    )
    
    
    (11,594
    )Litigation settlement
    
    
    (97
    )
    
    
    (3,975
    )
    
    
    6,721Other
    
    
    (795
    )
    
    
    (3,328
    )
    
    
    4,890Net cash provided by (used in) operating activities
    
    
    (1,117
    )
    
    
    (5,315
    )
    
    
    18,368Cash flows from investing activities:Purchases of investments, available-for-sale
    
    
    (71,939
    )
    
    
    (16,228
    )
    
    
    (44,408
    )Maturities and paydowns of investments, available-for-sale
    
    
    11,326
    
    
    
    19,980
    
    
    
    13,697Sales of investments, available-for-sale
    
    
    12,362
    
    
    
    46,128
    
    
    
    18,719Net change in receivable/payable for securities
    
    
    
    
    
    
    (1,045
    )
    
    
    20,019Capital expenditures
    
    
    (1,628
    )
    
    
    (1,003
    )
    
    
    (2,422
    )Other
    
    
    (22
    )
    
    
    (130
    )
    
    
    (253
    )Net cash provided by (used in) investing activities
    
    
    (49,901
    )
    
    
    47,702
    
    
    
    5,352Cash flows from financing activities:Payments on borrowings
    
    
    
    
    
    
    (3,913
    )
    
    
    (19,147
    )Net proceeds from issuance of common stock
    
    
    67
    
    
    
    68
    
    
    
    131Other
    
    
    (66
    )
    
    
    13
    
    
    
    (219
    )Net cash provided by (used in) financing activities
    
    
    1
    
    
    
    (3,832
    )
    
    
    (19,235
    )Net increase (decrease) in cash and cash equivalents
    
    
    (51,017
    )
    
    
    38,555
    
    
    
    4,485Cash and cash equivalents, beginning of year
    
    
    77,201
    
    
    
    38,646
    
    
    
    34,161Cash and cash equivalents, end of year
    
    $
    26,184
    
    
    $
    77,201
    
    
    $
    38,646
  50




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
 General
  Basis of Consolidation and Reporting
  Reclassifications
  Use of Estimates
  Investments
    51




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Recognition and Presentation of
Other-Than-Temporary Impairments Prior authoritative literature:
  Cash and Cash Equivalents
  Revenue Recognition
  Income Taxes
   Income Taxes (Prior authoritative literature:
 52




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Advertising Costs
  Property and Equipment
  Foreclosed Real Estate Held for Sale
  Deferred Acquisition Costs
  Goodwill and Other Identifiable Intangible Assets
    53




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Loss and Loss Adjustment Expense Reserves
  Recent Accounting Pronouncements
 Generally
Accepted Accounting Principles (Topic 105)
 Measuring Liabilities at Fair Value (Topic
820) Fair Value Measurements and Disclosures
(Prior authoritative literature:
 Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities (Topic 810) Variable Interest Entities (Prior authoritative literature:
 54




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Improving Disclosures about Fair Value
Measurements (Topic 820)
 Supplemental Cash Flow Information
  Basic and Diluted Net Income (Loss) Per Share
  2. Investments
 Restrictions
  Fair Value
   Level 1 
    
    Quoted prices in active markets for identical assets or liabilities.Level 2 
    
    Quoted market prices for similar assets or liabilities in active
markets; quoted prices by independent pricing services for identical or similar
assets or liabilities in markets that are not active; and valuations, using models
or other valuation techniques, that use observable market data. All significant
inputs are observable, or derived from observable information in the marketplace, or
are supported by observable levels at which transactions are executed in the market
place.Level 3 
    
    Instruments that use non-binding broker quotes or model driven
valuations that do not have observable market data.
 55




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Fair Value Measurements UsingQuoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsJune 30, 2010
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Fixed maturities, available-for-sale:U.S. government and agencies
    
    $
    29,499
    
    
    $
    29,499
    
    
    $
    
    
    
    $
    State
    
    
    7,848
    
    
    
    
    
    
    
    7,848
    
    
    
    Political subdivisions
    
    
    1,830
    
    
    
    
    
    
    
    1,830
    
    
    
    Revenue and assessment
    
    
    29,286
    
    
    
    
    
    
    
    29,286
    
    
    
    Corporate bonds
    
    
    78,803
    
    
    
    
    
    
    
    78,803
    
    
    
    Collateralized mortgage obligations:Agency backed
    
    
    28,036
    
    
    
    
    
    
    
    28,036
    
    
    
    Non-agency backed 
residential
    
    
    6,612
    
    
    
    
    
    
    
    6,612
    
    
    
    Non-agency backed 
commercial
    
    
    7,180
    
    
    
    
    
    
    
    7,180
    
    
    
    Total fixed maturities,
available-for-sale
    
    
    189,094
    
    
    
    29,499
    
    
    
    159,595
    
    
    
    Investment in mutual fund,
available-for-sale
    
    
    7,456
    
    
    
    7,456
    
    
    
    
    
    
    
    Total investments,
available-for-sale
    
    
    196,550
    
    
    
    36,955
    
    
    
    159,595
    
    
    
    Cash and cash equivalents
    
    
    26,184
    
    
    
    26,184
    
    
    
    
    
    
    
    Total
    
    $
    222,734
    
    
    $
    63,139
    
    
    $
    159,595
    
    
    $
    
 Fair Value Measurements UsingQuoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsJune 30, 2009
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Fixed maturities, available-for-sale:U.S. government and agencies
    
    $
    11,180
    
    
    $
    11,180
    
    
    $
    
    
    
    $
    State
    
    
    8,563
    
    
    
    
    
    
    
    8,563
    
    
    
    Political subdivisions
    
    
    1,854
    
    
    
    
    
    
    
    1,854
    
    
    
    Revenue and assessment
    
    
    28,481
    
    
    
    
    
    
    
    28,481
    
    
    
    Corporate bonds
    
    
    46,726
    
    
    
    
    
    
    
    46,726
    
    
    
    Collateralized mortgage obligations:Agency backed
    
    
    31,926
    
    
    
    
    
    
    
    31,926
    
    
    
    Non-agency backed 
residential
    
    
    5,618
    
    
    
    
    
    
    
    3,688
    
    
    
    1,930Non-agency backed 
commercial
    
    
    5,963
    
    
    
    
    
    
    
    5,256
    
    
    
    707Total fixed maturities,
available-for-sale
    
    
    140,311
    
    
    
    11,180
    
    
    
    126,494
    
    
    
    2,637Cash and cash equivalents
    
    
    77,201
    
    
    
    77,201
    
    
    
    
    
    
    
    Total
    
    $
    217,512
    
    
    $
    88,381
    
    
    $
    126,494
    
    
    $
    2,637
  56




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    Fair Value Measurements UsingSignificant Unobservable Inputs (Level 3)Collateralized mortgage obligationsNon-agency
    
    
    Non-agencyCorporate
    
    
    backed -
    
    
    backed bonds
    
    
    residential
    
    
    commercial
    
    
    TotalBalance at July 1,
2008
    
    $
    
    
    
    $
    167
    
    
    $
    
    
    
    $
    167Total gains or losses
(realized or unrealized):Included in net
income
(loss)
    
    
    
    
    
    
    (66
    )
    
    
    3
    
    
    
    (63
    )Included in other
comprehensive
income
(loss)
    
    
    
    
    
    
    (21
    )
    
    
    (3
    )
    
    
    (24
    )Sales
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    (25
    )Transfers into Level
3
    
    
    
    
    
    
    1,875
    
    
    
    707
    
    
    
    2,582Transfers out of Level
3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at July 1,
2009
    
    
    
    
    
    
    1,930
    
    
    
    707
    
    
    
    2,637Total gains or losses
(realized or unrealized):Included in net
income
(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Included in other
comprehensive
income
(loss)
    
    
    
    
    
    
    421
    
    
    
    242
    
    
    
    663Transfers into Level
3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transfers out of Level
3(a)
    
    
    
    
    
    
    (2,351
    )
    
    
    (949
    )
    
    
    (3,300
    )Balance at June 30,
2010
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (a)
    
    Transferred from Level 3 to Level 2 as observable market data became available during
the period presented due to the increase in market activity for these securities. Investment Income and Net Realized Gains and Losses
  Year Ended June 30,2010
    
    
    2009
    
    
    2008Fixed maturities, available-for-sale
    
    $
    8,467
    
    
    $
    9,588
    
    
    $
    9,747Cash and cash equivalents
    
    
    30
    
    
    
    383
    
    
    
    1,824Other
    
    
    117
    
    
    
    116
    
    
    
    117Investment expenses
    
    
    (656
    )
    
    
    (583
    )
    
    
    (438
    )$
    7,958
    
    
    $
    9,504
    
    
    $
    11,250
 57




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Year Ended June 30,2010
    
    
    2009
    
    
    2008Gains
    
    $
    326
    
    
    $
    2,662
    
    
    $
    424Losses
    
    
    (26
    )
    
    
    (153
    )
    
    
    (254
    )Other-than-temporary impairment
    
    
    (983
    )
    
    
    (2,420
    )
    
    
    (1,414
    )$
    (683
    )
    
    $
    89
    
    
    $
    (1,244
    )
  Investments, Available-for-Sale
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairJune 30, 2010
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. government and agencies
    
    $
    28,263
    
    
    $
    1,236
    
    
    $
    
    
    
    $
    29,499State
    
    
    7,461
    
    
    
    387
    
    
    
    
    
    
    
    7,848Political subdivisions
    
    
    1,792
    
    
    
    52
    
    
    
    (14
    )
    
    
    1,830Revenue and assessment
    
    
    28,209
    
    
    
    1,217
    
    
    
    (140
    )
    
    
    29,286Corporate bonds
    
    
    73,868
    
    
    
    5,181
    
    
    
    (246
    )
    
    
    78,803Collateralized mortgage obligations:Agency backed
    
    
    26,262
    
    
    
    1,774
    
    
    
    
    
    
    
    28,036Non-agency backed  residential
    
    
    7,189
    
    
    
    56
    
    
    
    (633
    )
    
    
    6,612Non-agency backed  commercial
    
    
    7,363
    
    
    
    158
    
    
    
    (341
    )
    
    
    7,180Total fixed maturities, available-for-sale
    
    
    180,407
    
    
    
    10,061
    
    
    
    (1,374
    )
    
    
    189,094Investment in mutual fund,
available-for-sale
    
    
    7,500
    
    
    
    
    
    
    
    (44
    )
    
    
    7,456$
    187,907
    
    
    $
    10,061
    
    
    $
    (1,418
    )
    
    $
    196,550
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairJune 30, 2009
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. government and agencies
    
    $
    10,744
    
    
    $
    473
    
    
    $
    (37
    )
    
    $
    11,180State
    
    
    8,238
    
    
    
    344
    
    
    
    (19
    )
    
    
    8,563Political subdivisions
    
    
    1,834
    
    
    
    52
    
    
    
    (32
    )
    
    
    1,854Revenue and assessment
    
    
    27,816
    
    
    
    831
    
    
    
    (166
    )
    
    
    28,481Corporate bonds
    
    
    45,737
    
    
    
    1,654
    
    
    
    (665
    )
    
    
    46,726Collateralized mortgage obligations:Agency backed
    
    
    30,656
    
    
    
    1,270
    
    
    
    
    
    
    
    31,926Non-agency backed  residential
    
    
    8,178
    
    
    
    1
    
    
    
    (2,561
    )
    
    
    5,618Non-agency backed  commercial
    
    
    7,646
    
    
    
    
    
    
    
    (1,683
    )
    
    
    5,963$
    140,849
    
    
    $
    4,625
    
    
    $
    (5,163
    )
    
    $
    140,311
 58




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  SecuritiesSecurities
    
    
    Securities
    
    
    with No
    
    
    Allwith
    
    
    with
    
    
    Unrealized
    
    
    FixedUnrealized
    
    
    Unrealized
    
    
    Gains or
    
    
    MaturityGains
    
    
    Losses
    
    
    Losses
    
    
    SecuritiesOne year or less
    
    $
    9,137
    
    
    $
    
    
    
    $
    
    
    
    $
    9,137After one through five years
    
    
    82,250
    
    
    
    642
    
    
    
    
    
    
    
    82,892After five through ten years
    
    
    39,567
    
    
    
    
    
    
    
    
    
    
    
    39,567After ten years
    
    
    8,607
    
    
    
    7,063
    
    
    
    
    
    
    
    15,670No single maturity date
    
    
    33,676
    
    
    
    8,085
    
    
    
    67
    
    
    
    41,828$
    173,237
    
    
    $
    15,790
    
    
    $
    67
    
    
    $
    189,094
  Less than 12 months
    
    
    12 months or longerGross
    
    
    
    
    
    
    Gross
    
    
    Total GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    UnrealizedJune 30, 2010
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    LossesU.S. government and agencies
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Political subdivisions
    
    
    
    
    
    
    
    
    
    
    488
    
    
    
    (14
    )
    
    
    (14
    )Revenue and assessment
    
    
    3,057
    
    
    
    (96
    )
    
    
    1,490
    
    
    
    (44
    )
    
    
    (140
    )Corporate bonds
    
    
    930
    
    
    
    (32
    )
    
    
    1,739
    
    
    
    (214
    )
    
    
    (246
    )Collateralized mortgage obligations:Agency backed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-agency backed  residential
    
    
    505
    
    
    
    (5
    )
    
    
    5,848
    
    
    
    (628
    )
    
    
    (633
    )Non-agency backed  commercial
    
    
    
    
    
    
    
    
    
    
    1,732
    
    
    
    (341
    )
    
    
    (341
    )Total fixed maturities, available-for-sale
    
    
    4,492
    
    
    
    (133
    )
    
    
    11,297
    
    
    
    (1,241
    )
    
    
    (1,374
    )Investment in mutual fund,
available-for-sale
    
    
    7,456
    
    
    
    (44
    )
    
    
    
    
    
    
    
    
    
    
    (44
    )$
    11,948
    
    
    $
    (177
    )
    
    $
    11,297
    
    
    $
    (1,241
    )
    
    $
    (1,418
    )
 Less than 12 months
    
    
    12 months or longerGross
    
    
    
    
    
    
    Gross
    
    
    Total GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    UnrealizedJune 30, 2009
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    LossesU.S. government and agencies
    
    $
    963
    
    
    $
    (37
    )
    
    $
    
    
    
    $
    
    
    
    $
    (37
    )State
    
    
    
    
    
    
    
    
    
    
    678
    
    
    
    (19
    )
    
    
    (19
    )Political subdivisions
    
    
    48
    
    
    
    (1
    )
    
    
    471
    
    
    
    (31
    )
    
    
    (32
    )Revenue and assessment
    
    
    533
    
    
    
    (11
    )
    
    
    4,305
    
    
    
    (155
    )
    
    
    (166
    )Corporate bonds
    
    
    
    
    
    
    
    
    
    
    8,022
    
    
    
    (665
    )
    
    
    (665
    )Collateralized mortgage obligationsAgency backed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-agency backed 
residential
    
    
    
    
    
    
    
    
    
    
    4,898
    
    
    
    (2,561
    )
    
    
    (2,561
    )Non-agency backed 
commercial
    
    
    
    
    
    
    
    
    
    
    5,964
    
    
    
    (1,683
    )
    
    
    (1,683
    )$
    1,544
    
    
    $
    (49
    )
    
    $
    24,338
    
    
    $
    (5,114
    )
    
    $
    (5,163
    )
 59




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Gross Unrealized LossesLess than
    
    Greater
    
    Grossor equal to
    
    than 12
    
    UnrealizedAt:
    
    12 months
    
    months
    
    GainsJune 30, 2010
    
    6
    
    18
    
    153June 30, 2009
    
    3
    
    37
    
    133
  Number
    
    
    
    
    
    
    GrossGross Unrealized Losses
    
    of
    
    
    Fair
    
    
    Unrealizedat June 30, 2010:
    
    Securities
    
    
    Value
    
    
    LossesLess than 10%
    
    
    11
    
    
    $
    7,931
    
    
    $
    (276
    )Greater than 10%
    
    
    7
    
    
    
    3,366
    
    
    
    (965
    )18
    
    
    $
    11,297
    
    
    $
    (1,241
    )
 Number
    
    
    
    
    
    
    GrossGross Unrealized Losses
    
    of
    
    
    Fair
    
    
    Unrealizedat June 30, 2009:
    
    Securities
    
    
    Value
    
    
    LossesLess than 10%
    
    
    17
    
    
    $
    15,368
    
    
    $
    (766
    )Greater than 10%
    
    
    20
    
    
    
    8,970
    
    
    
    (4,348
    )37
    
    
    $
    24,338
    
    
    $
    (5,114
    )
  Fair Value ofSecurities with
    
    
    
    
    
    
    Severity of Gross Unrealized LossesLength of
    
    Gross
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    GreaterGross Unrealized Losses
    
    Unrealized
    
    
    Unrealized
    
    
    Less
    
    
    5% to
    
    
    thanat June 30, 2010:
    
    Losses
    
    
    Losses
    
    
    than 5%
    
    
    10%
    
    
    10%Less than or equal to:Three
months
    
    $
    11,291
    
    
    $
    (170
    )
    
    $
    (145
    )
    
    $
    (25
    )
    
    $
    Six
months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nine
months
    
    
    152
    
    
    
    (2
    )
    
    
    (2
    )
    
    
    
    
    
    
    Twelve
months
    
    
    505
    
    
    
    (5
    )
    
    
    (5
    )
    
    
    
    
    
    
    Greater than twelve
months
    
    
    11,297
    
    
    
    (1,241
    )
    
    
    (153
    )
    
    
    (123
    )
    
    
    (965
    )Total
    
    $
    23,245
    
    
    $
    (1,418
    )
    
    $
    (305
    )
    
    $
    (148
    )
    
    $
    (965
    )
 60




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Fair Value ofSecurities with
    
    
    
    
    
    
    Severity of Gross Unrealized LossesLength of
    
    Gross
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    GreaterGross Unrealized Losses
    
    Unrealized
    
    
    Unrealized
    
    
    Less
    
    
    5% to
    
    
    thanat June 30, 2009:
    
    Losses
    
    
    Losses
    
    
    than 5%
    
    
    10%
    
    
    10%Less than or equal to:Three
months
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Six
months
    
    
    1,011
    
    
    
    (38
    )
    
    
    (38
    )
    
    
    
    
    
    
    Nine
months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Twelve
months
    
    
    533
    
    
    
    (11
    )
    
    
    (11
    )
    
    
    
    
    
    
    Greater than twelve
months
    
    
    24,338
    
    
    
    (5,114
    )
    
    
    (249
    )
    
    
    (517
    )
    
    
    (4,348
    )Total
    
    $
    25,882
    
    
    $
    (5,163
    )
    
    $
    (298
    )
    
    $
    (517
    )
    
    $
    (4,348
    )
 Other-Than-Temporary Impairment
     61




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Year Ended June 30,2010
    
    
    2009Number of Securities
    
    
    OTTI
    
    
    Number of Securities
    
    
    OTTICorporate bonds
    
    
    
    
    
    $
    
    
    
    
    3
    
    
    $
    (871
    )Collateralized mortgage obligations:Non-agency backed 
residential
    
    
    10
    
    
    
    (1,723
    )
    
    
    5
    
    
    
    (1,564
    )Non-agency backed  commercial
    
    
    5
    
    
    
    (214
    )
    
    
    4
    
    
    
    (1,205
    )15
    
    
    
    (1,937
    )
    
    
    12
    
    
    
    (3,640
    )Portion of loss recognized in accumulated
other comprehensive income
(loss)
    
    
    
    
    
    
    954
    
    
    
    
    
    
    
    1,220Net OTTI recognized in net income
(loss)
    
    
    
    
    
    $
    (983
    )
    
    
    
    
    
    $
    (2,420
    )
  Recognized in net loss:Year ended June 30, 2008
    
    $
    (1,414
    )Nine months ended March 31, 2009
    
    
    (1,987
    )(3,401
    )Cumulative effect of accounting change
    
    
    644Balance at April 1, 2009
    
    
    (2,757
    )Additional credit impairments on:Previously impaired securities
    
    
    (148
    )Securities without previous impairments
    
    
    (285
    )(433
    )Reductions for securities sold
    
    
    320Balance at July 1, 2009
    
    
    (2,870
    )Additional credit impairments on:Previously impaired securities
    
    
    (491
    )Securities without previous impairments
    
    
    (492
    )(983
    )Reductions for securities sold
    
    
    552Balance at June 30, 2010
    
    $
    (3,301
    )
 Amendments to the
Impairment Guidance of EITF Issue No. 99-20 Prior authoritative literature:
  62




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    3. Reinsurance
  Year Ended June 30,2010
    
    
    2009
    
    
    2008Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    162,150
    
    
    $
    167,744
    
    
    $
    187,935
    
    
    $
    206,358
    
    
    $
    253,807
    
    
    $
    265,630Assumed
    
    
    19,858
    
    
    
    19,302
    
    
    
    17,044
    
    
    
    17,755
    
    
    
    20,167
    
    
    
    20,284Total
    
    $
    182,008
    
    
    $
    187,046
    
    
    $
    204,979
    
    
    $
    224,113
    
    
    $
    273,974
    
    
    $
    285,914
   4. Stock-Based Compensation Plans
 Employee Stock-Based Incentive Plan
 Compensation  Stock Compensation (Prior authoritative literature:
 63




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    Year Ended June 30,2010
    
    2009
    
    2008Expected option term
    
    
    
    
    
    10 yearsAnnualized volatility rate
    
    
    
    
    
    31 to 43%Risk-free rate of return
    
    
    
    
    
    3.48 to 5.02%Dividend yield
    
    
    
    
    
    0%
  WeightedAverage
    
    
    AggregateExercise
    
    
    Exercise
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Price
    
    
    ValueOptions outstanding at June 30, 2007
    
    
    4,716
    
    
    $
    3.00-$11.81
    
    
    $
    4.48Granted
    
    
    955
    
    
    $
    3.04-$10.08
    
    
    $
    3.26Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (215
    )
    
    $
    3.04-$11.81
    
    
    $
    7.89Options outstanding at June 30, 2008
    
    
    5,456
    
    
    $
    3.00-$11.81
    
    
    $
    4.13Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (148
    )
    
    $
    3.00-$11.81
    
    
    $
    7.51Options outstanding at June 30, 2009
    
    
    5,308
    
    
    $
    3.00-$11.81
    
    
    $
    4.04Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Exchanged and Cancelled
    
    
    (605
    )
    
    $
    6.64-$11.81
    
    
    $
    10.69Forfeited
    
    
    (142
    )
    
    $
    3.10-$11.81
    
    
    $
    6.91Options outstanding at June 30, 2010
    
    
    4,561
    
    
    
    
    
    
    $
    3.06
    
    
    
    Options exercisable/vested at June 30, 2010
    
    
    4,128
    
    
    
    
    
    
    $
    3.07
    
    
    
    
  64




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  WeightedRestricted
    
    
    AverageStock
    
    
    Grant DateAwards
    
    
    Fair ValueRestricted Stock Awards outstanding at June 30, 2007
    
    
    
    
    
    
    Granted
    
    
    400
    
    
    $
    3.04Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Restricted Stock Awards outstanding at June 30, 2008
    
    
    400
    
    
    $
    3.04Granted
    
    
    225
    
    
    $
    2.63Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Restricted Stock Awards outstanding at June 30, 2009
    
    
    625
    
    
    $
    2.89Granted
    
    
    160
    
    
    $
    1.97Vested
    
    
    (309
    )
    
    $
    3.01Forfeited
    
    
    (4
    )
    
    $
    2.50Restricted Stock Awards outstanding at June 30, 2010
    
    
    472
    
    
    $
    2.50
   Employee Stock Purchase Plan
  5. Employee Benefit Plan
  65




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 6. Property and Equipment
  June 30,2010
    
    
    2009Furniture and equipment
    
    $
    7,693
    
    
    $
    8,027Leasehold improvements
    
    
    2,879
    
    
    
    2,105Capitalized leases
    
    
    826
    
    
    
    826Aircraft
    
    
    190
    
    
    
    19011,588
    
    
    
    11,148Less: Accumulated depreciation
    
    
    (8,064
    )
    
    
    (7,227
    )Property and equipment, net
    
    $
    3,524
    
    
    $
    3,921
  7. Lease Commitments
 Operating Leases
  Year Ending June 30,
    
    Amount2011
    
    $
    7,8372012
    
    
    5,1782013
    
    
    3,0982014
    
    
    1,8392015
    
    
    1,462Thereafter
    
    
    1,758Total
    
    $
    21,172
 Capital Leases
  CapitalizedLeaseYear Ending June 30,
    
    Obligations2011
    
    $
    792012
    
    
    642013
    
    
    12$
    155Less: Amount representing executory costs
    
    
    (11
    )Net minimum lease payments
    
    
    144Less: Amount representing interest
    
    
    (8
    )Present value of net minimum lease payments
    
    $
    136
 66




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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 8. Losses and Loss Adjustment Expenses Incurred and Paid
  Year Ended June 30,2010
    
    
    2009
    
    
    2008Liability for unpaid losses and LAE at beginning of year, gross
    
    $
    83,973
    
    
    $
    101,407
    
    
    $
    91,446Reinsurance balances receivable
    
    
    (78
    )
    
    
    (259
    )
    
    
    (309
    )Liability for unpaid losses and LAE at beginning of year, net
    
    
    83,895
    
    
    
    101,148
    
    
    
    91,137Add: Provision for losses and LAE:Current year
    
    
    138,218
    
    
    
    160,659
    
    
    
    221,342Prior years
    
    
    (11,223
    )
    
    
    (11,382
    )
    
    
    (1,399
    )Net losses and LAE incurred
    
    
    126,995
    
    
    
    149,277
    
    
    
    219,943Less: Losses and LAE paid:Current year
    
    
    87,097
    
    
    
    103,566
    
    
    
    141,736Prior years
    
    
    50,641
    
    
    
    62,964
    
    
    
    68,196Net losses and LAE paid
    
    
    137,738
    
    
    
    166,530
    
    
    
    209,932Liability for unpaid losses and LAE at end of year, net
    
    
    73,152
    
    
    
    83,895
    
    
    
    101,148Reinsurance balances receivable
    
    
    46
    
    
    
    78
    
    
    
    259Liability for unpaid losses and LAE at end of year, gross
    
    $
    73,198
    
    
    $
    83,973
    
    
    $
    101,407
   9. Notes Payable
  67




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 10. Debentures Payable
    11. Income Taxes
  Year Ended June 30,2010
    
    
    2009
    
    
    2008Federal:Current
    
    $
    
    
    
    $
    295
    
    
    $
    31Deferred
    
    
    
    
    
    
    17,440
    
    
    
    13,496
    
    
    
    17,735
    
    
    
    13,527State:Current
    
    
    441
    
    
    
    508
    
    
    
    448Deferred
    
    
    
    
    
    
    153
    
    
    
    (153
    )441
    
    
    
    661
    
    
    
    295$
    441
    
    
    $
    18,396
    
    
    $
    13,822
  Year Ended June 30,2010
    
    
    2009
    
    
    2008Provision (benefit) for income taxes at
statutory rate
    
    $
    2,618
    
    
    $
    (17,466
    )
    
    $
    (1,408
    )Tax effect of:Tax-exempt investment income
    
    
    (16
    )
    
    
    (16
    )
    
    
    (32
    )Change in the beginning of the year
balance of the valuation allowance for
deferred tax asset allocated to income
taxes
    
    
    (5,278
    )
    
    
    (6,291
    )
    
    
    3,571Net operating loss carryforward expirations
    
    
    2,483
    
    
    
    24,534
    
    
    
    11,380Goodwill
    
    
    
    
    
    
    16,724
    
    
    
    Restricted stock
    
    
    240
    
    
    
    
    
    
    
    State income taxes, net of federal income
tax benefit and valuation allowance
    
    
    441
    
    
    
    661
    
    
    
    139Other
    
    
    (47
    )
    
    
    250
    
    
    
    172$
    441
    
    
    $
    18,396
    
    
    $
    13,822
 68




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  June 30,2010
    
    
    2009Deferred tax assets:Net operating loss carryforwards
    
    $
    3,613
    
    
    $
    4,207Stock option compensation
    
    
    3,965
    
    
    
    4,089Unearned premiums and loss and loss adjustment
expense reserves
    
    
    5,099
    
    
    
    5,524Goodwill
    
    
    2,886
    
    
    
    3,847Net unrealized change on investments
    
    
    
    
    
    
    188Alternative minimum tax (AMT) credit carryforwards
    
    
    1,612
    
    
    
    1,609Accrued expenses and other nondeductible items
    
    
    934
    
    
    
    4,290Other
    
    
    3,089
    
    
    
    2,53221,198
    
    
    
    26,286Deferred tax liabilities:Deferred acquisition costs
    
    
    (1,268
    )
    
    
    (1,364
    )Net unrealized change on investments
    
    
    (3,025
    )
    
    
    (4,293
    )
    
    
    (1,364
    )Total net deferred tax asset
    
    
    16,905
    
    
    
    24,922Less: Valuation allowance
    
    
    (16,905
    )
    
    
    (24,922
    )Net deferred tax asset
    
    $
    
    
    
    $
    
    69




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Expiration Year Ended June 30,
    
    Amount2011
    
    $
    2,0992012
    
    
    2013
    
    
    22014
    
    
    Thereafter
    
    
    8,223Total NOL carryforwards
    
    $
    10,324
 12. Net Income (Loss) Per Share
 Earnings Per share (Prior authoritative literature:
  Year Ended June 30,2010
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    7,040
    
    
    $
    (68,300
    )
    
    $
    (17,845
    )Weighted average common basic shares
    
    
    47,961
    
    
    
    47,664
    
    
    
    47,628Effect of dilutive securities
    
    
    677
    
    
    
    
    
    
    
    Weighted average common dilutive shares
    
    
    48,638
    
    
    
    47,664
    
    
    
    47,628Basic net income (loss) per share
    
    $
    0.15
    
    
    $
    (1.43
    )
    
    $
    (0.37
    )Diluted net income (loss) per share
    
    $
    0.14
    
    
    $
    (1.43
    )
    
    $
    (0.37
    )
    70




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 13. Concentrations of Credit Risk
   14. Related Party Transactions
   15. Severance
  16. Litigation
 Loss Contingencies Prior authoritative literature:
 71




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    Balance at December 31, 2008
    
    $
    5,227Credits utilized
    
    
    (1,338
    )Credits forfeited
    
    
    (904
    )Balance at June 30, 2009
    
    
    2,985Credits utilized
    
    
    (2,622
    )Credits forfeited
    
    
    (317
    )Balance at June 30, 2010
    
    $
    46
    72




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 17. Fair Value of Financial Instruments
  June 30, 2010
    
    
    June 30, 2009Carrying

    
    
    Fair
    
    
     Carrying

    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueAssets:Investments, available-for-sale
    
    $
    187,907
    
    
    $
    196,550
    
    
    $
    140,849
    
    
    $
    140,311Cash and cash equivalents
    
    
    26,184
    
    
    
    26,184
    
    
    
    77,201
    
    
    
    77,201Premiums and fees receivable, net
    
    
    41,276
    
    
    
    41,276
    
    
    
    45,309
    
    
    
    45,309Liabilities:Debentures payable
    
    
    41,240
    
    
    
    19,701
    
    
    
    41,240
    
    
    
    15,568
  18. Segment Information
   Year Ended June 30,2010
    
    
    2009
    
    
    2008Revenues:Insurance
    
    $
    223,054
    
    
    $
    265,341
    
    
    $
    332,219Real estate and corporate
    
    
    119
    
    
    
    124
    
    
    
    180Consolidated total
    
    $
    223,173
    
    
    $
    265,465
    
    
    $
    332,399Income (loss) before income taxes:Insurance
    
    $
    14,568
    
    
    $
    (42,536
    )
    
    $
    4,685Real estate and corporate
    
    
    (7,087
    )
    
    
    (7,368
    )
    
    
    (8,708
    )Consolidated total
    
    $
    7,481
    
    
    $
    (49,904
    )
    
    $
    (4,023
    )
 June 30,2010
    
    
    2009Total assets:Insurance
    
    $
    343,499
    
    
    $
    348,801Real estate and corporate
    
    
    12,843
    
    
    
    10,155Consolidated total
    
    $
    356,342
    
    
    $
    358,956
 73




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 19. Statutory Financial Information and Accounting Policies
 Accounting Practices and Procedures Manual
   20. Selected Quarterly Financial Data (unaudited)
  Quarters EndedSeptember 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30,Year Ended June 30, 2010:Total revenues
    
    $
    57,312
    
    
    $
    53,775
    
    
    $
    56,116
    
    
    $
    55,970Income before income taxes
    
    $
    2,861
    
    
    $
    1,577
    
    
    $
    2,193
    
    
    $
    850Net income
    
    $
    2,760
    
    
    $
    1,475
    
    
    $
    2,069
    
    
    $
    736Basic and diluted net income per share
    
    $
    0.06
    
    
    $
    0.03
    
    
    $
    0.04
    
    
    $
    0.02Year Ended June 30, 2009:Total revenues
    
    $
    71,589
    
    
    $
    65,080
    
    
    $
    67,097
    
    
    $
    61,699Income (loss) before income taxes
    
    $
    3,753
    
    
    $
    (1,388
    )
    
    $
    3,991
    
    
    $
    (56,260
    )Net income (loss)
    
    $
    1,841
    
    
    $
    (1,003
    )
    
    $
    2,394
    
    
    $
    (71,532
    )Basic and diluted net income (loss)
per share
    
    $
    0.04
    
    
    $
    (0.02
    )
    
    $
    0.05
    
    
    $
    (1.50
    )
  74




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##### Table of Contents



Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Managements Annual Report on Internal Control Over Financial Reporting
   Internal Control 
Integrated Framework Internal Control  Integrated Framework
  Changes in Internal Control over Financial Reporting
  
 Item 9B. Other Information
  75




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
     
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  76




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PART IV
 
 Item 15. Exhibits, Financial Statement Schedules
 (a)
    
    Financial Statements, Financial Statement Schedules and Exhibits
 (1)
    
    Consolidated Financial Statements: See Index to Consolidated Financial
Statements in Part II, Item 8 of this Form 10-K.(2)
    
    Financial Statement Schedules:Schedule I  Financial Information of Registrant (Parent Company)(3)
    
    Exhibits: See the exhibit listing set forth below.
 ExhibitNumber2.1
    
    Agreement and Plan of Merger by and among the Company, USAH Merger Sub, Inc., USAuto
Holdings, Inc. and the Stockholders of USAuto Holdings, Inc., dated as of December 15, 2003
(incorporated by reference to Exhibit 2.1 of Registration Statement No. 333-111161 on Form
S-1, filed December 15, 2003).3.1
    
    Restated Certificate of Incorporation of First Acceptance Corporation (incorporated by
reference to Exhibit 3.1 of the Companys Current Report on Form 8-K dated May 3, 2004).3.2
    
    Second Amended and Restated Bylaws of First Acceptance Corporation (incorporated by reference
to Exhibit 3 of the Companys Current Report on Form 8-K dated November 9, 2007).4.1
    
    Registration Rights Agreement, dated as of July 1, 2002, by and between the Company and
Donald J. Edwards (incorporated by reference to Exhibit 4.1 of the Companys Current Report on
Form 8-K dated July 11, 2002).4.2
    
    Form of certificate representing shares of common stock, par value $0.01 per share
(incorporated by reference to Exhibit 4.1 of the Companys Registration Statement on Form S-8
filed December 26, 2002).10.1
    
    Amended and Restated First Acceptance Corporation 2002 Long Term Incentive Plan (incorporated
by reference to Exhibit 99.1 of the Companys Current Report on Form 8-K dated November 23,
2009).*10.2
    
    Nonqualified Stock Option Agreement, dated as of July 9, 2002, by and between the Company and
Donald J. Edwards (incorporated by reference to Exhibit 10.3 of the Companys Current Report
on Form 8-K dated July 11, 2002).*10.3
    
    Advisory Services Agreement, dated as of April 30, 2004, by and between First Acceptance
Corporation and Edwards Capital LLC (incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K dated May 3, 2004).*10.4
    
    Nonqualified Stock Option Agreement, dated as of April 30, 2004, by and between First
Acceptance Corporation and Stephen J. Harrison (incorporated by reference to Exhibit 10.5 of
the Companys Current Report on Form 8-K dated May 3, 2004).*10.5
    
    Nonqualified Stock Option Agreement, dated as of April 30, 2004, by and between First
Acceptance Corporation and Thomas M. Harrison, Jr. (incorporated by reference to Exhibit 10.6
of the Companys Current Report on Form 8-K dated May 3, 2004).*
 77




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##### Table of Contents



ExhibitNumber10.6
    
    Registration Rights Agreement, dated as of April 30, 2004, by and among First Acceptance
Corporation, Stephen J. Harrison and Thomas M. Harrison, Jr. (incorporated by reference to
Exhibit 10.7 of the Companys Current Report on Form 8-K dated May 3, 2004).10.7
    
    Form of Restricted Stock Award Agreement under the Companys 2002 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K dated
November 3, 2004).*10.8
    
    Form of Nonqualified Stock Option Agreement under the Companys 2002 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K dated
November 3, 2004).*10.9
    
    First Acceptance Corporation Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.1 of the Registration Statement No. 333-121551 on Form S-8, filed December 22,
2004).10.10
    
    Summary of Compensation for Non- Employee Directors and Named Executive Officers.10.11
    
    Asset Purchase Agreement, dated as of January 12, 2006, by and among First Acceptance
Corporation, Acceptance Insurance Agency of Illinois, Inc., Insurance Plus Agency II, Inc.,
Yale International Insurance Agency, Inc. and Constantine Danos (incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K dated January 18, 2006).10.12
    
    Stock Purchase Agreement, dated as of September 13, 2006, by and between First Acceptance
Corporation and Edward Pierce (incorporated by reference to Exhibit 99.2 of the Companys
Current Report on Form 8-K dated September 19, 2006).*10.13
    
    Nonqualified Stock Option Agreement, dated as of September 13, 2006, by and between First
Acceptance Corporation and Edward Pierce (incorporated by reference to Exhibit 99.3 of the
Companys Current Report on Form 8-K dated September 19, 2006).*10.14
    
    Nonqualified Stock Option Agreement, dated as of October 9, 2006, by and between First
Acceptance Corporation and Kevin P. Cohn (incorporated by reference to Exhibit 99.2 of the
Companys Current Report on Form 8-K dated October 12, 2006).*10.15
    
    Form of Restricted Stock Award Agreement of Outside Directors under the Companys 2002 Long
Term Incentive Plan (incorporated by reference to Exhibit 10.2 of the Companys Current Report
on Form 10-Q dated May 10, 2007).*10.16
    
    Form of Indemnification Agreement between the Company and each of the Companys directors
and executive officers (incorporated by reference to Exhibit 10.3 of the Companys Current
Report on Form 10-Q dated May 10, 2007).*10.17
    
    Junior Subordinated Indenture, dated June 15, 2007, between First Acceptance Corporation and
Wilmington Trust Company (incorporated by reference to Exhibit 99.2 of the Companys Current
Report on Form 8-K dated June 18, 2007).10.18
    
    Guarantee Agreement, dated June 15, 2007, between First Acceptance Corporation and
Wilmington Trust Company (incorporated by reference to Exhibit 99.3 of the Companys Current
Report on Form 8-K dated June 18, 2007).10.19
    
    Amended and Restated Trust Agreement, dated June 15, 2007, among First Acceptance
Corporation, Wilmington Trust Company and the Administrative Trustees Named Therein
(incorporated by reference to Exhibit 99.4 of the Companys Current Report on Form 8-K dated
June 18, 2007).
 78




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##### Table of Contents



ExhibitNumber10.20
    
    Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and Stephen J. Harrison
(incorporated by reference to Exhibit 99.3 of the Companys Current Report on Form 8-K dated
February 11, 2008).*10.21
    
    Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and Edward Pierce (incorporated
by reference to Exhibit 99.4 of the Companys Current Report on Form 8-K dated February 11,
2008).*10.22
    
    Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and Kevin P. Cohn (incorporated
by reference to Exhibit 99.5 of the Companys Current Report on Form 8-K dated February 11,
2008).*10.23
    
    Employment Agreement, made as of February 8, 2008, to be effective January 1, 2008, by and
between First Acceptance Corporation and William R. Pentecost (incorporated by reference to
Exhibit 99.6 of the Companys Current Report on Form 8-K dated February 11, 2008).*10.24
    
    First Amendment to First Acceptance Corporation Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q dated February 11,
2008).10.25
    
    Restricted Stock Award Agreement, dated as of March 18, 2008, between First Acceptance
Corporation and Edward Pierce (incorporated by reference to Exhibit 99.1 of the Companys
Current Report on Form 8-K dated March 21, 2008).*10.26
    
    Form of Restricted Stock Award Agreement between First Acceptance Corporation and Stephen J.
Harrison and Edward Pierce (incorporated by reference to Exhibit 99 of the Companys Current
Report on Form 8-K dated October 6, 2008).*10.27
    
    Stipulation and Agreement of Settlement, made and entered into as of September 10, 2008, by
First Acceptance Insurance Company of Georgia, Inc., and its predecessors and affiliates,
Village Auto Insurance Company, U.S. Auto Insurance Company, and Transit Auto Club, Inc., and
Annette Rush and all other persons similarly situated by and through their undersigned
attorneys of record (incorporated by reference to Exhibit 10 of the Companys Quarterly Report
on Form 10-Q dated November 10, 2008).10.28
    
    Stipulation and Agreement of Settlement, dated as of December 5, 2008, by First Acceptance
Insurance Company, Inc., and its predecessors and affiliates, USAuto Insurance Company, and
Transit Automobile Club, Inc., by and through their attorneys of record, and Margaret Franklin
and all other persons similarly situated, by and through their attorneys of record
(incorporated by reference to Exhibit 99 of the Companys Current Report on Form 8-K dated
December 11, 2008).10.29
    
    Employment Agreement, made as of February 8, 2008, to be effective January 1, 2008, between
First Acceptance Corporation and Daniel L. Walker (incorporated by reference to Exhibit 10.1
of the Companys Quarterly Report on Form 10-Q dated May 11, 2009).*10.30
    
    Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, between First Acceptance Corporation and Keith E. Bornemann (incorporated by
reference to Exhibit 10.2 of the Companys Quarterly Report on Form 10-Q dated May 11, 2009).*10.31
    
    Option Cancellation and Restricted Award Agreement, made as of November 18, 2009, between
First Acceptance Corporation and Keith E. Bornemann (incorporated by reference to Exhibit 99.2
of the Companys Current Report on Form 8-K dated November 23, 2009).*10.32
    
    Option Cancellation and Restricted Award Agreement, made as of November 18, 2009, between
First Acceptance Corporation and Kevin P. Cohn (incorporated by reference to Exhibit 99.3 of
the Companys Current Report on Form 8-K dated November 23, 2009).*
 79




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##### Table of Contents



ExhibitNumber10.33
    
    Option Cancellation and Restricted Award Agreement, made as of November 18, 2009, between
First Acceptance Corporation and Stephen J. Harrison (incorporated by reference to Exhibit
99.4 of the Companys Current Report on Form 8-K dated November 23, 2009).*10.34
    
    Option Cancellation and Restricted Award Agreement, made as of November 18, 2009, between
First Acceptance Corporation and Edward L. Pierce (incorporated by reference to Exhibit 99.5
of the Companys Current Report on Form 8-K dated November 23, 2009).*14
    
    First Acceptance Corporation Code of Business Conduct and Ethics (incorporated by reference
to Exhibit 14 of the Companys Annual Report on Form 10-K dated September 28, 2004).21
    
    Subsidiaries of First Acceptance Corporation.23.1
    
    Consent of Ernst & Young LLP.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).32.1
    
    Chief Executive Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Chief Financial Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Management contract or compensatory plan or arrangement. 80




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##### Table of Contents



SIGNATURES
  FIRST ACCEPTANCE CORPORATIONDate:  August 31, 2010
    By
    /s/ Stephen J. HarrisonStephen J. HarrisonChief Executive Officer  Signature
    
    Title
    
    Date/s/ Stephen J. Harrison
    
    Chief Executive Officer and
Director (Principal Executive
Officer)
    
    August 31, 2010Stephen J. Harrison/s/ Kevin P. Cohn
    
    Senior Vice President and Chief
Financial Officer
    
    August 31, 2010Kevin P. Cohn
    
    (Principal
Financial Officer and Principal
Accounting Officer)/s/ Gerald J. Ford
    
    Chairman of the Board of Directors
    
    August 31, 2010Gerald J. Ford/s/ Thomas M. Harrison, Jr.
    
    Director
    
    August 31, 2010Thomas M. Harrison, Jr./s/ Rhodes R. Bobbitt
    
    Director
    
    August 31, 2010Rhodes R. Bobbitt/s/ Harvey B. Cash
    
    Director
    
    August 31, 2010Harvey B. Cash/s/ Donald J. Edwards
    
    Director
    
    August 31, 2010Donald J. Edwards/s/ Tom C. Nichols
    
    Director
    
    August 31, 2010Tom C. Nichols/s/ Lyndon L. Olson
    
    Director
    
    August 31, 2010Lyndon L. Olson/s/ William A. Shipp, Jr.
    
    Director
    
    August 31, 2010William A. Shipp, Jr.
 81




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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
SCHEDULE I. FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
(in thousands)
 June 30,2010
    
    
    2009Balance SheetsAssets:Investment in subsidiaries, at equity in net assets
    
    $
    206,265
    
    
    $
    190,941Cash and cash equivalents
    
    
    9,534
    
    
    
    3,058Other assets
    
    
    3,309
    
    
    
    7,035Amounts due from subsidiaries
    
    
    
    
    
    
    62$
    219,108
    
    
    $
    201,096Liabilities:Debentures payable
    
    $
    41,240
    
    
    $
    41,240Other liabilities
    
    
    678
    
    
    
    Stockholders equity
    
    
    177,190
    
    
    
    159,856$
    219,108
    
    
    $
    201,096
 Year Ended June 30,2010
    
    
    2009
    
    
    2008Statements of OperationsInvestment income
    
    $
    119
    
    
    $
    124
    
    
    $
    180Equity in income (loss) of subsidiaries, net of tax
    
    
    13,813
    
    
    
    (58,650
    )
    
    
    2,805Expenses
    
    
    (7,206
    )
    
    
    (7,492
    )
    
    
    (8,888
    )Income (loss) before income taxes
    
    
    6,726
    
    
    
    (66,018
    )
    
    
    (5,903
    )Provision (benefit) for income taxes
    
    
    (314
    )
    
    
    2,282
    
    
    
    11,942Net income (loss)
    
    $
    7,040
    
    
    $
    (68,300
    )
    
    $
    (17,845
    )
 Year Ended June 30,2010
    
    
    2009
    
    
    2008Statements of Cash FlowsCash flows from operating activities:Net income (loss)
    
    $
    7,040
    
    
    $
    (68,300
    )
    
    $
    (17,845
    )Equity in income (loss) of subsidiaries, net of tax
    
    
    (13,813
    )
    
    
    58,650
    
    
    
    (2,805
    )Stock-based compensation
    
    
    1,048
    
    
    
    2,053
    
    
    
    1,507Deferred income taxes
    
    
    
    
    
    
    8,927
    
    
    
    15,747Other
    
    
    (2
    )
    
    
    
    
    
    
    Change in assets and liabilities
    
    
    4,488
    
    
    
    (5,044
    )
    
    
    (2,829
    )Net cash used in operating activities
    
    
    (1,239
    )
    
    
    (3,714
    )
    
    
    (6,225
    )Cash flows from investing activities:Investment in subsidiary
    
    
    
    
    
    
    (2,685
    )
    
    
    Dividend from subsidiary
    
    
    7,670
    
    
    
    10,975
    
    
    
    17,609Improvements to foreclosed real estate
    
    
    (22
    )
    
    
    (138
    )
    
    
    (253
    )Net cash provided by investing activities
    
    
    7,648
    
    
    
    8,152
    
    
    
    17,356Cash flows from financing activities:Payments on borrowings
    
    
    
    
    
    
    (3,913
    )
    
    
    (19,147
    )Net proceeds from issuance of common stock
    
    
    67
    
    
    
    68
    
    
    
    131Net cash provided by (used in) financing activities
    
    
    67
    
    
    
    (3,845
    )
    
    
    (19,016
    )Net increase (decrease) in cash and cash equivalents
    
    
    6,476
    
    
    
    593
    
    
    
    (7,885
    )Cash and cash equivalents, beginning of year
    
    
    3,058
    
    
    
    2,465
    
    
    
    10,350Cash and cash equivalents, end of year
    
    $
    9,534
    
    
    $
    3,058
    
    
    $
    2,465
 82