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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, 2011
 Commission file number 001-12117
 FIRST ACCEPTANCE CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    75-1328153(I.R.S. Employer Identification No.)
 3813 Green Hills Village Drive, Nashville, Tennessee(Address of principal executive offices)
    
    37215(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 filero
    
    Accelerated filero
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 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
    
    
    12Item 1B. Unresolved Staff Comments
    
    
    20Item 2. Properties
    
    
    20Item 3. Legal Proceedings
    
    
    20Item 4. (Removed and Reserved)
    
    
    20PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    21Item 6. Selected Financial Data
    
    
    23Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    24Item 8. Financial Statements and Supplementary Data
    
    
    42Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    
    74Item 9A. Controls and Procedures
    
    
    74Item 9B. Other Information
    
    
    74PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    75Item 11. Executive Compensation
    
    
    75Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    75Item 13. Certain Relationships and Related Transactions, and Director
Independence
    
    
    75Item 14. Principal Accountant Fees and Services
    
    
    75PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    76SIGNATURES
    
    
    80EX-10.8EX-21EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
  i




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FIRST ACCEPTANCE CORPORATION 10-K
 
 PART I
 
 Item 1. Business
 General
  Personal Automobile Insurance Market
   Competition
  Our Business
   1




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FIRST ACCEPTANCE CORPORATION 10-K
    Our Products
   Marketing
  Distribution
  2




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FIRST ACCEPTANCE CORPORATION 10-K
  Underwriting and Pricing
    Claims Handling
    3




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FIRST ACCEPTANCE CORPORATION 10-K
 Loss and Loss Adjustment Expense Reserves
     4




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FIRST ACCEPTANCE CORPORATION 10-K
  At June 30 (in thousands)
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011Net liability for loss and loss
adjustment expense reserves, originally
estimated
    
    $
    18,137
    
    
    $
    39,289
    
    
    $
    61,521
    
    
    $
    91,137
    
    
    $
    101,148
    
    
    $
    83,895
    
    
    $
    73,152
    
    
    $
    68,291Cumulative amounts paid at:One year later
    
    
    13,103
    
    
    
    28,024
    
    
    
    51,420
    
    
    
    68,196
    
    
    
    62,964
    
    
    
    50,641
    
    
    
    49,292Two years later
    
    
    16,579
    
    
    
    34,754
    
    
    
    61,627
    
    
    
    84,095
    
    
    
    78,232
    
    
    
    64,644Three years later
    
    
    17,795
    
    
    
    37,025
    
    
    
    64,986
    
    
    
    88,888
    
    
    
    84,178Four years later
    
    
    18,472
    
    
    
    37,802
    
    
    
    66,721
    
    
    
    91,129Five years later
    
    
    18,743
    
    
    
    38,068
    
    
    
    67,725Six years later
    
    
    18,894
    
    
    
    38,393Seven years later
    
    
    18,979Liability re-estimated at:One year later
    
    
    17,781
    
    
    
    37,741
    
    
    
    65,386
    
    
    
    89,738
    
    
    
    89,766
    
    
    
    72,672
    
    
    
    71,431Two years later
    
    
    17,244
    
    
    
    38,226
    
    
    
    68,491
    
    
    
    92,860
    
    
    
    86,726
    
    
    
    73,593Three years later
    
    
    16,973
    
    
    
    37,484
    
    
    
    67,100
    
    
    
    91,864
    
    
    
    88,555Four years later
    
    
    17,978
    
    
    
    38,289
    
    
    
    67,599
    
    
    
    93,422Five years later
    
    
    18,900
    
    
    
    38,411
    
    
    
    68,783Six years later
    
    
    18,975
    
    
    
    38,583Seven years later
    
    
    19,084Net cumulative redundancy (deficiency)
    
    
    (947
    )
    
    
    706
    
    
    
    (7,262
    )
    
    
    (2,285
    )
    
    
    12,593
    
    
    
    10,302
    
    
    
    1,721Gross liability  end of year
    
    $
    30,434
    
    
    $
    42,897
    
    
    $
    62,822
    
    
    $
    91,446
    
    
    $
    101,407
    
    
    $
    83,973
    
    
    $
    73,198
    
    
    $
    68,424Reinsurance receivables
    
    
    12,297
    
    
    
    3,608
    
    
    
    1,301
    
    
    
    309
    
    
    
    259
    
    
    
    78
    
    
    
    46
    
    
    
    133Net liability  end of year
    
    $
    18,137
    
    
    $
    39,289
    
    
    $
    61,521
    
    
    $
    91,137
    
    
    $
    101,148
    
    
    $
    83,895
    
    
    $
    73,152
    
    
    $
    68,291Gross re-estimated liability  latest
    
    $
    31,393
    
    
    $
    41,933
    
    
    $
    69,908
    
    
    $
    93,783
    
    
    $
    88,722
    
    
    $
    73,710
    
    
    $
    71,509Re-estimated reinsurance receivables  latest
    
    
    12,309
    
    
    
    3,350
    
    
    
    1,125
    
    
    
    361
    
    
    
    167
    
    
    
    117
    
    
    
    78Net re-estimated  latest
    
    $
    19,084
    
    
    $
    38,583
    
    
    $
    68,783
    
    
    $
    93,422
    
    
    $
    88,555
    
    
    $
    73,593
    
    
    $
    71,431Gross cumulative redundancy (deficiency)
    
    $
    (959
    )
    
    $
    964
    
    
    $
    (7,086
    )
    
    $
    (2,337
    )
    
    $
    12,685
    
    
    $
    10,263
    
    
    $
    1,690
    5




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FIRST ACCEPTANCE CORPORATION 10-K
    Reinsurance
   Ratings
    6




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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 
Arizona 
Arkansas 
Colorado 
Florida 
Georgia 
Illinois 
Indiana 
Iowa
    
    Kansas
Kentucky
Louisiana
Mississippi
Missouri
Nevada
New Mexico
Ohio
Oklahoma
    
    Pennsylvania
South Carolina
Tennessee
Texas
Utah
Virginia
West Virginia
  Insurance Holding Company Regulation
 7




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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
 8




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FIRST ACCEPTANCE CORPORATION 10-K
 Privacy Regulations
 Licensing of Our Employee-Agents and Adjusters.
 Unfair Claims Practices
 
    
    misrepresenting pertinent facts or insurance policy provisions relating to coverages 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 insureds or claimants a policy of appealing from arbitration awards in
favor of insureds 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
 9




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FIRST ACCEPTANCE CORPORATION 10-K
  Risk-Based Capital
    10




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FIRST ACCEPTANCE CORPORATION 10-K
 IRIS Ratios
  Employees
  Available Information
  Internet Website
  11




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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 business may be adversely affected by adverse economic conditions and other negative
developments in the non-standard personal automobile insurance industry .
  Our results may fluctuate as a result of cyclical changes in the non-standard personal automobile
insurance industry.
  Due to our largely fixed cost structure, our profitability may decline if our sales volume declines
significantly .
  Our loss and loss adjustment expenses may exceed our reserves, which would adversely impact our
results of operations and financial condition .
  12




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FIRST ACCEPTANCE CORPORATION 10-K
 Our investment portfolio may suffer reduced returns or other-than-temporary impairment losses,
which could reduce our profitability.
  Our business may be adversely affected by negative developments in the states in which we operate .
  Our business is highly competitive, which may make it difficult for us to market our core products
effectively and profitably .
   13




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FIRST ACCEPTANCE CORPORATION 10-K
 Our ability to attract, develop, and retain talented employees, managers, and executives, and to
maintain appropriate staffing levels, is critical to our success.
  Pricing, claim and coverage issues and class action litigation are continually emerging in the
automobile insurance industry, and these 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;
    
    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 insureds 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.
  We may have difficulties successfully implementing and maintaining our new pricing program.
  14




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FIRST ACCEPTANCE CORPORATION 10-K
 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;
    
    our understanding of the impact of ongoing changes in our claim settlement practices;
and
    
    changing driving patterns.
  Our results are dependent on our ability to adjust claims accurately.
  We may write-off intangible assets, such as goodwill.
  15




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FIRST ACCEPTANCE CORPORATION 10-K
 Our insurance company subsidiaries are subject to regulatory restrictions on paying dividends to
our holding company .
  Our ability to use net operating loss carry forwards to reduce tax payments may be limited by
applicable law .
     16




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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 .
    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 .
  We may have difficulties in managing any expansion into new markets .
  17




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FIRST ACCEPTANCE CORPORATION 10-K
 A few of our stockholders have significant control over us, and their interests may differ from
yours
  We may not be successful in identifying acquisition candidates or integrating their operations,
which could harm our financial results .
  We and our subsidiaries are subject to comprehensive regulation and supervision that may restrict
our ability to earn profits.
   Required Licensing
 Transactions Between Insurance Companies and Their Affiliates
 Regulation of Rates and Policy Forms
 18




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FIRST ACCEPTANCE CORPORATION 10-K
  Investment Restrictions
 Restrictions on Cancellation, Non-Renewal or Withdrawal
 Our success depends partly on our ability to efficiently manage complexity.
  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.
 19




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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)
 20




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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, 2010First Quarter
    
    $
    3.12
    
    
    $
    1.92Second Quarter
    
    
    2.80
    
    
    
    1.68Third Quarter
    
    
    2.63
    
    
    
    1.78Fourth Quarter
    
    
    2.28
    
    
    
    1.55Year Ended June 30, 2011First Quarter
    
    $
    1.87
    
    
    $
    1.57Second Quarter
    
    
    1.95
    
    
    
    1.60Third Quarter
    
    
    2.00
    
    
    
    1.63Fourth Quarter
    
    
    2.05
    
    
    
    1.62
  Holders
  Dividends
  Stock Transfer Restrictions
  21




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FIRST ACCEPTANCE CORPORATION 10-K
 Performance Graph
  
 June 30,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011First Acceptance Corporation
    
    
    100.00
    
    
    
    86.25
    
    
    
    27.16
    
    
    
    18.08
    
    
    
    14.52
    
    
    
    15.70Russell 3000
    
    
    100.00
    
    
    
    120.07
    
    
    
    104.84
    
    
    
    76.99
    
    
    
    89.09
    
    
    
    117.93S&P Property & Casualty
Insurance
    
    
    100.00
    
    
    
    114.39
    
    
    
    80.09
    
    
    
    62.31
    
    
    
    78.97
    
    
    
    84.72
 Unregistered Sales of Equity Securities and Use of Proceeds
  ApproximateTotal Number of
    
    
    Dollar Value ofTotal
    
    
    Average
    
    
    Shares Purchased
    
    
    Shares that MayNumber
    
    
    Price
    
    
    as Part of Publicly
    
    
    Yet Be PurchasedPeriod
    
    Period
    
    
    of Shares
    
    
    Paid per
    
    
    Announced Plans
    
    
    Under the Plans orBeginning
    
    Ending
    
    
    Purchased
    
    
    Share
    
    
    or Programs
    
    
    ProgramsApril 1, 2011
    
    April 30, 2011
    
    
    3,350
    
    
    $
    1.84
    
    
    
    
    
    
    
    May 1, 2011
    
    May 31, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 1, 2011
    
    June 30, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    3,350
    
    
    $
    1.84
    
    
    
    
    
    
    
    
 22




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FIRST ACCEPTANCE CORPORATION 10-K
 
 Item 6. Selected Financial Data
  Year Ended June 30,2011
    
    
    2010
    
    
    2009
    
    
    2008
    
    
    2007(in thousands, except per share data)Statement of Operations Data:Revenues:Premiums earned
    
    $
    173,041
    
    
    $
    187,046
    
    
    $
    224,113
    
    
    $
    285,914
    
    
    $
    300,661Commission and fee income
    
    
    29,483
    
    
    
    28,852
    
    
    
    31,759
    
    
    
    36,479
    
    
    
    37,324Investment income
    
    
    8,395
    
    
    
    7,958
    
    
    
    9,504
    
    
    
    11,250
    
    
    
    8,863Net realized gains (losses) on
investments, available-for-sale
    
    
    (185
    )
    
    
    (683
    )
    
    
    89
    
    
    
    (1,244
    )
    
    
    (61
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    850210,734
    
    
    
    223,173
    
    
    
    265,465
    
    
    
    332,399
    
    
    
    347,637Costs and expenses:Losses and loss adjustment expenses
    
    
    129,167
    
    
    
    126,995
    
    
    
    149,277
    
    
    
    219,943
    
    
    
    241,908Insurance operating expenses
    
    
    77,822
    
    
    
    79,833
    
    
    
    87,124
    
    
    
    98,433
    
    
    
    97,629Other operating expenses
    
    
    1,369
    
    
    
    2,233
    
    
    
    1,307
    
    
    
    2,415
    
    
    
    2,623Litigation settlement
    
    
    (9
    )
    
    
    (361
    )
    
    
    1,570
    
    
    
    7,468
    
    
    
    Stock-based compensation
    
    
    998
    
    
    
    1,048
    
    
    
    2,053
    
    
    
    1,507
    
    
    
    1,063Depreciation and amortization
    
    
    1,605
    
    
    
    2,013
    
    
    
    1,910
    
    
    
    1,679
    
    
    
    1,624Interest expense
    
    
    3,930
    
    
    
    3,931
    
    
    
    4,138
    
    
    
    4,977
    
    
    
    1,874Goodwill and intangible assets
impairment(1)
    
    
    52,434
    
    
    
    
    
    
    
    67,990
    
    
    
    
    
    
    
    267,316
    
    
    
    215,692
    
    
    
    315,369
    
    
    
    336,422
    
    
    
    346,721Income (loss) before income taxes
    
    
    (56,582
    )
    
    
    7,481
    
    
    
    (49,904
    )
    
    
    (4,023
    )
    
    
    916Provision for income taxes(1)
    
    
    198
    
    
    
    441
    
    
    
    18,396
    
    
    
    13,822
    
    
    
    17,586Net income (loss)
    
    $
    (56,780
    )
    
    $
    7,040
    
    
    $
    (68,300
    )
    
    $
    (17,845
    )
    
    $
    (16,670
    )Per Share Data:Net income (loss) per share:Basic
    
    $
    (1.18
    )
    
    $
    0.15
    
    
    $
    (1.43
    )
    
    $
    (0.37
    )
    
    $
    (0.35
    )Diluted
    
    $
    (1.18
    )
    
    $
    0.15
    
    
    $
    (1.43
    )
    
    $
    (0.37
    )
    
    $
    (0.35
    )Number of shares used to calculate net
income (loss) per share:Basic
    
    
    48,171
    
    
    
    47,961
    
    
    
    47,664
    
    
    
    47,628
    
    
    
    47,584Diluted
    
    
    48,171
    
    
    
    48,418
    
    
    
    47,664
    
    
    
    47,628
    
    
    
    47,584
 
 (1)
    
    The year ended June 30, 2011 includes a goodwill and intangible assets
impairment charge of $52.4 million. 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. 23




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FIRST ACCEPTANCE CORPORATION 10-K
 June 30,2011
    
    
    2010
    
    
    2009
    
    
    2008
    
    
    2007(in thousands, except per share data)Balance Sheet Data:Cash, cash equivalents and total investments
    
    $
    216,120
    
    
    $
    222,734
    
    
    $
    217,512
    
    
    $
    228,216
    
    
    $
    210,716Total assets
    
    
    296,294
    
    
    
    356,342
    
    
    
    358,956
    
    
    
    473,230
    
    
    
    498,892Loss and loss adjustment expense reserves
    
    
    68,424
    
    
    
    73,198
    
    
    
    83,973
    
    
    
    101,407
    
    
    
    91,446Notes and debentures payable
    
    
    41,240
    
    
    
    41,240
    
    
    
    41,240
    
    
    
    45,153
    
    
    
    64,300Total liabilities
    
    
    174,066
    
    
    
    179,152
    
    
    
    199,100
    
    
    
    247,771
    
    
    
    259,408Total stockholders equity
    
    
    122,228
    
    
    
    177,190
    
    
    
    159,856
    
    
    
    225,459
    
    
    
    239,484Book value per common share
    
    $
    2.52
    
    
    $
    3.65
    
    
    $
    3.31
    
    
    $
    4.69
    
    
    $
    5.03
 
 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.
   24




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 General
    Year Ended June 30,2011
    
    
    2010Retail locations  beginning of period
    
    
    394
    
    
    
    418Opened
    
    
    1
    
    
    
    1Closed
    
    
    (10
    )
    
    
    (25
    )Retail locations  end of period
    
    
    385
    
    
    
    394
  June 30,2011
    
    
    2010
    
    
    2009Alabama
    
    
    24
    
    
    
    25
    
    
    
    25Florida
    
    
    31
    
    
    
    31
    
    
    
    39Georgia
    
    
    60
    
    
    
    60
    
    
    
    61Illinois
    
    
    68
    
    
    
    74
    
    
    
    78Indiana
    
    
    17
    
    
    
    17
    
    
    
    18Mississippi
    
    
    8
    
    
    
    8
    
    
    
    8Missouri
    
    
    12
    
    
    
    12
    
    
    
    12Ohio
    
    
    27
    
    
    
    27
    
    
    
    27Pennsylvania
    
    
    16
    
    
    
    16
    
    
    
    17South Carolina
    
    
    26
    
    
    
    26
    
    
    
    27Tennessee
    
    
    20
    
    
    
    19
    
    
    
    20Texas
    
    
    76
    
    
    
    79
    
    
    
    86Total
    
    
    385
    
    
    
    394
    
    
    
    418
 Developments during the Year
  25




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Consolidated Results of Operations
 Overview
   Year Ended June 30,2011
    
    
    2010
    
    
    2009Revenues:Insurance
    
    $
    210,618
    
    
    $
    223,054
    
    
    $
    265,341Real estate and corporate
    
    
    116
    
    
    
    119
    
    
    
    124Consolidated total
    
    $
    210,734
    
    
    $
    223,173
    
    
    $
    265,465Income (loss) before income taxes:Insurance
    
    $
    (50,407
    )
    
    $
    14,568
    
    
    $
    (42,536
    )Real estate and corporate
    
    
    (6,175
    )
    
    
    (7,087
    )
    
    
    (7,368
    )Consolidated total
    
    $
    (56,582
    )
    
    $
    7,481
    
    
    $
    (49,904
    )
  
    
    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, 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 30,2011
    
    
    2010
    
    
    2009Gross premiums earned:Georgia
    
    $
    37,666
    
    
    $
    40,712
    
    
    $
    49,762Texas
    
    
    23,262
    
    
    
    24,243
    
    
    
    25,971Illinois
    
    
    22,916
    
    
    
    24,550
    
    
    
    27,583Florida
    
    
    19,361
    
    
    
    20,808
    
    
    
    26,113Alabama
    
    
    16,871
    
    
    
    19,338
    
    
    
    23,948Ohio
    
    
    13,518
    
    
    
    12,452
    
    
    
    12,914Tennessee
    
    
    10,627
    
    
    
    11,764
    
    
    
    15,269South Carolina
    
    
    9,803
    
    
    
    11,424
    
    
    
    17,887Pennsylvania
    
    
    9,186
    
    
    
    10,566
    
    
    
    11,437Indiana
    
    
    4,547
    
    
    
    4,962
    
    
    
    5,537Missouri
    
    
    2,825
    
    
    
    3,261
    
    
    
    3,907Mississippi
    
    
    2,630
    
    
    
    2,966
    
    
    
    3,785Total gross premiums earned
    
    
    173,212
    
    
    
    187,046
    
    
    
    224,113Premiums ceded
    
    
    (171
    )
    
    
    
    
    
    
    Total net premiums earned
    
    $
    173,041
    
    
    $
    187,046
    
    
    $
    224,113
 26




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Year Ended June 30,2011
    
    
    2010
    
    
    2009Policies in force  beginning of period
    
    
    154,655
    
    
    
    158,222
    
    
    
    194,079Net decrease during period
    
    
    (10,245
    )
    
    
    (3,567
    )
    
    
    (35,857
    )Policies in force  end of period
    
    
    144,410
    
    
    
    154,655
    
    
    
    158,222
  June 30,2011
    
    
    2010Retail locations:Open retail locations:New
    
    
    63,957
    
    
    
    69,746Renewal
    
    
    76,215
    
    
    
    77,193140,172
    
    
    
    146,939Closed retail locations:New
    
    
    177
    
    
    
    1,763Renewal
    
    
    2,133
    
    
    
    3,7692,310
    
    
    
    5,532Independent agents
    
    
    1,928
    
    
    
    2,184Total policies in force
    
    
    144,410
    
    
    
    154,655
 June 30,2011
    
    
    2010Retail locations:Open retail locations:Liability-only
    
    
    85,439
    
    
    
    89,096Full coverage
    
    
    54,733
    
    
    
    57,843140,172
    
    
    
    146,939Closed retail locations:Liability-only
    
    
    1,354
    
    
    
    3,472Full coverage
    
    
    956
    
    
    
    2,0602,310
    
    
    
    5,532Independent agents
    
    
    1,928
    
    
    
    2,184Total policies in force
    
    
    144,410
    
    
    
    154,655
  Loss Ratio 
 27




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Expense Ratio 
 Combined Ratio 
  Year Ended June 30,2011
    
    
    2010
    
    
    2009Loss and loss adjustment expense
    
    
    74.7
    %
    
    
    67.9
    %
    
    
    66.6
    %Expense
    
    
    27.9
    %
    
    
    27.3
    %
    
    
    24.7
    %Combined
    
    
    102.6
    %
    
    
    95.2
    %
    
    
    91.3
    %
  Investments
      28




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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
    
    $
    24,897
    
    
    $
    1,250
    
    
    $
    
    
    
    $
    26,147State
    
    
    7,396
    
    
    
    280
    
    
    
    
    
    
    
    7,676Political subdivisions
    
    
    1,798
    
    
    
    20
    
    
    
    (1
    )
    
    
    1,817Revenue and assessment
    
    
    25,819
    
    
    
    1,123
    
    
    
    (171
    )
    
    
    26,771Corporate bonds
    
    
    78,199
    
    
    
    4,686
    
    
    
    (240
    )
    
    
    82,645Collateralized mortgage obligations:Agency backed
    
    
    19,541
    
    
    
    1,440
    
    
    
    
    
    
    
    20,981Non-agency backed  residential
    
    
    5,758
    
    
    
    243
    
    
    
    (173
    )
    
    
    5,828Non-agency backed  commercial
    
    
    6,215
    
    
    
    556
    
    
    
    (11
    )
    
    
    6,760Redeemable preferred stock
    
    
    176
    
    
    
    
    
    
    
    (3
    )
    
    
    173Total fixed maturities, available-for-sale
    
    
    169,799
    
    
    
    9,598
    
    
    
    (599
    )
    
    
    178,798Investment in mutual fund,
available-for-sale
    
    
    7,501
    
    
    
    516
    
    
    
    
    
    
    
    8,017$
    177,300
    
    
    $
    10,114
    
    
    $
    (599
    )
    
    $
    186,815
  Securities with No
    
    
    AllSecurities with
    
    
    Securities with
    
    
    Unrealized Gains or
    
    
    Fixed MaturityUnrealized Gains
    
    
    Unrealized Losses
    
    
    Losses
    
    
    SecuritiesOne year or less
    
    $
    14,120
    
    
    $
    80
    
    
    $
    1,500
    
    
    $
    15,700After one through five years
    
    
    75,186
    
    
    
    26
    
    
    
    
    
    
    
    75,212After five through ten years
    
    
    37,510
    
    
    
    
    
    
    
    
    
    
    
    37,510After ten years
    
    
    8,980
    
    
    
    7,827
    
    
    
    
    
    
    
    16,807No single maturity date
    
    
    31,450
    
    
    
    2,119
    
    
    
    
    
    
    
    33,569$
    167,246
    
    
    $
    10,052
    
    
    $
    1,500
    
    
    $
    178,798
 Other-Than-Temporary Impairment
 Recognition and Presentation of Other-Than-Temporary Impairments
   29




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FIRST ACCEPTANCE CORPORATION 10-K
  Amendments to the Impairment
Guidance of EITF Issue No. 99-20
   Year Ended June 30, 2011 Compared with the Year Ended June 30, 2010
 Consolidated Results
  Insurance Operations
  30




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Premiums Earned
  Commission and Fee Income
  Investment Income
  Net Realized Losses on Investments, Available-for-Sale
  Loss and Loss Adjustment Expenses
    31




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Operating Expenses
    Goodwill and Intangible Assets Impairment
      32




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Provision for Income Taxes
  Real Estate and Corporate
  Year Ended June 30, 2010 Compared with the Year Ended June 30, 2009
 Consolidated Results
  Insurance Operations
  33




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Premiums Earned
  Commission and Fee Income
  Investment Income
  Net Realized Gains (Losses) on Investments, Available-for-Sale
  Loss and Loss Adjustment Expenses
   34




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Operating Expenses
    Litigation Settlement
  Goodwill Impairment
  Provision for Income Taxes
   35




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Real Estate and Corporate
   Liquidity and Capital Resources
      36




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Contractual Obligations
  Payments Due By PeriodTotal
    
    
    Less than 1 year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 yearsLoss and loss adjustment expense
reserves (1)
    
    $
    68,424
    
    
    $
    25,522
    
    
    $
    29,833
    
    
    $
    8,553
    
    
    $
    4,516Debentures payable (2)
    
    
    86,581
    
    
    
    3,826
    
    
    
    3,477
    
    
    
    3,296
    
    
    
    75,982Capitalized lease obligations
    
    
    75
    
    
    
    63
    
    
    
    12
    
    
    
    
    
    
    
    Operating leases (3)
    
    
    18,505
    
    
    
    7,389
    
    
    
    7,673
    
    
    
    2,514
    
    
    
    929Severance obligations
    
    
    996
    
    
    
    996
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    127
    
    
    
    127
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    174,708
    
    
    $
    37,923
    
    
    $
    40,995
    
    
    $
    14,363
    
    
    $
    81,427
 
 (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 3.996%
at July 1, 2011).(3)
    
    Consists primarily of rental obligations under real estate leases related to our
retail locations and corporate offices. Trust Preferred Securities
 Variable Interest Entities.
 Off-Balance Sheet Arrangements
  37




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Critical Accounting Estimates
  Valuation of Deferred Tax Asset
 Income Taxes
 Goodwill and Identifiable Intangible Assets
    Investments
  38




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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
  39




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Interest Rate Risk
   Sensitivity to Instantaneous Interest Rate Changes (basis points)(100)
    
    
    (50)
    
    
    0
    
    
    50
    
    
    100
    
    
    200Fair value of fixed
maturity portfolio
    
    $
    185,252
    
    
    $
    181,989
    
    
    $
    178,798
    
    
    $
    175,696
    
    
    $
    172,682
    
    
    $
    166,916
  Securities with No
    
    
    AllSecurities with
    
    
    Securities with
    
    
    Unrealized Gains or
    
    
    Fixed MaturityYear Ended June 30,
    
    Unrealized Gains
    
    
    Unrealized Losses
    
    
    Losses
    
    
    Securities2012
    
    $
    14,630
    
    
    $
    80
    
    
    $
    1,500
    
    
    $
    16,2102013
    
    
    24,185
    
    
    
    25
    
    
    
    
    
    
    
    24,2102014
    
    
    19,365
    
    
    
    
    
    
    
    
    
    
    
    19,3652015
    
    
    19,378
    
    
    
    
    
    
    
    
    
    
    
    19,3782016
    
    
    12,662
    
    
    
    
    
    
    
    
    
    
    
    12,662Thereafter
    
    
    67,348
    
    
    
    9,805
    
    
    
    
    
    
    
    77,153Total
    
    $
    157,568
    
    
    $
    9,910
    
    
    $
    1,500
    
    
    $
    168,978Fair value
    
    $
    167,246
    
    
    $
    10,052
    
    
    $
    1,500
    
    
    $
    178,798
  Credit Risk
  40




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Amortized
    
    
    % of
    
    
    Fair
    
    
    % ofComparable Rating
    
    Cost
    
    
    Amortized Cost
    
    
    Value
    
    
    Fair ValueAAA
    
    $
    62,898
    
    
    
    37.0
    %
    
    $
    66,435
    
    
    
    37.2
    %AA+, AA, AA-
    
    
    35,255
    
    
    
    20.8
    %
    
    
    37,339
    
    
    
    20.9
    %A+, A, A-
    
    
    52,040
    
    
    
    30.7
    %
    
    
    54,559
    
    
    
    30.5
    %BBB+, BBB, BBB-
    
    
    12,086
    
    
    
    7.1
    %
    
    
    12,445
    
    
    
    6.9
    %Total investment grade
    
    
    162,279
    
    
    
    95.6
    %
    
    
    170,778
    
    
    
    95.5
    %Not rated
    
    
    3,642
    
    
    
    2.1
    %
    
    
    3,691
    
    
    
    2.1
    %BB+, BB, BB-
    
    
    3,038
    
    
    
    1.8
    %
    
    
    3,304
    
    
    
    1.9
    %B+, B, B-
    
    
    169
    
    
    
    0.1
    %
    
    
    251
    
    
    
    0.1
    %CCC+, CCC, CCC-
    
    
    657
    
    
    
    0.4
    %
    
    
    666
    
    
    
    0.4
    %CC+, CC, CC-
    
    
    14
    
    
    
    0.0
    %
    
    
    76
    
    
    
    0.0
    %C+, C, C-
    
    
    
    
    
    
    0.0
    %
    
    
    32
    
    
    
    0.0
    %Total non-investment grade
    
    
    3,878
    
    
    
    2.3
    %
    
    
    4,329
    
    
    
    2.4
    %Total
    
    $
    169,799
    
    
    
    100.0
    %
    
    $
    178,798
    
    
    
    100.0
    %
    Insured
    
    
    Uninsured
    
    
    TotalFair
    
    
    % of
    
    
    Fair
    
    
    % of
    
    
    Fair
    
    
    % ofValue
    
    
    Fair Value
    
    
    Value
    
    
    Fair Value
    
    
    Value
    
    
    Fair ValueAAA
    
    
    
    
    
    
    0
    %
    
    
    4,643
    
    
    
    33
    %
    
    
    4,643
    
    
    
    13
    %AA+, AA, AA-
    
    
    10,494
    
    
    
    47
    %
    
    
    5,366
    
    
    
    39
    %
    
    
    15,860
    
    
    
    43
    %A+, A, A-
    
    
    10,201
    
    
    
    46
    %
    
    
    3,908
    
    
    
    28
    %
    
    
    14,109
    
    
    
    39
    %BBB+, BBB, BBB-
    
    
    1,644
    
    
    
    7
    %
    
    
    
    
    
    
    0
    %
    
    
    1,644
    
    
    
    5
    %Not rated
    
    
    8
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    8
    
    
    
    0
    %Total
    
    
    22,347
    
    
    
    100
    %
    
    
    13,917
    
    
    
    100
    %
    
    
    36,264
    
    
    
    100
    %
 41




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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
    
    
    43Consolidated Balance Sheets
    
    
    45Consolidated Statements of Operations
    
    
    46Consolidated Statements of Stockholders Equity
    
    
    47Consolidated Statements of Cash Flows
    
    
    48Notes to Consolidated Financial Statements
    
    
    49
 42




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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 
 43




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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 
 44




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 June 30,2011
    
    
    2010ASSETSInvestments, available-for-sale at fair value (amortized cost
of $177,300 and $187,907, respectively)
    
    $
    186,815
    
    
    $
    196,550Cash and cash equivalents
    
    
    29,305
    
    
    
    26,184Premiums and fees receivable, net of allowance of $406 and $418
    
    
    40,447
    
    
    
    41,276Other assets
    
    
    7,999
    
    
    
    8,733Property and equipment, net
    
    
    2,533
    
    
    
    3,524Deferred acquisition costs
    
    
    3,305
    
    
    
    3,623Goodwill
    
    
    21,090
    
    
    
    70,092Identifiable intangible assets
    
    
    4,800
    
    
    
    6,360TOTAL ASSETS
    
    $
    296,294
    
    
    $
    356,342LIABILITIES AND STOCKHOLDERS EQUITYLoss and loss adjustment expense reserves
    
    $
    68,424
    
    
    $
    73,198Unearned premiums and fees
    
    
    50,772
    
    
    
    52,563Debentures payable
    
    
    41,240
    
    
    
    41,240Other liabilities
    
    
    13,630
    
    
    
    12,151Total liabilities
    
    
    174,066
    
    
    
    179,152Stockholders equity:Preferred stock, $.01 par value, 10,000 shares authorized
    
    
    
    
    
    
    Common stock, $.01 par value, 75,000 shares authorized;
48,458 and 48,509 shares issued and outstanding,
respectively
    
    
    485
    
    
    
    485Additional paid-in capital
    
    
    466,777
    
    
    
    465,831Accumulated other comprehensive income
    
    
    9,515
    
    
    
    8,643Accumulated deficit
    
    
    (354,549
    )
    
    
    (297,769
    )Total stockholders equity
    
    
    122,228
    
    
    
    177,190TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    296,294
    
    
    $
    356,342
  45




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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share data)
 Year Ended June 30,2011
    
    
    2010
    
    
    2009Revenues:Premiums earned
    
    $
    173,041
    
    
    $
    187,046
    
    
    $
    224,113Commission and fee income
    
    
    29,483
    
    
    
    28,852
    
    
    
    31,759Investment income
    
    
    8,395
    
    
    
    7,958
    
    
    
    9,504Net realized gains (losses) on investments,
available-for-sale
    
    
    (185
    )
    
    
    (683
    )
    
    
    89210,734
    
    
    
    223,173
    
    
    
    265,465Costs and expenses:Losses and loss adjustment expenses
    
    
    129,167
    
    
    
    126,995
    
    
    
    149,277Insurance operating expenses
    
    
    77,822
    
    
    
    79,833
    
    
    
    87,124Other operating expenses
    
    
    1,369
    
    
    
    2,233
    
    
    
    1,307Litigation settlement
    
    
    (9
    )
    
    
    (361
    )
    
    
    1,570Stock-based compensation
    
    
    998
    
    
    
    1,048
    
    
    
    2,053Depreciation and amortization
    
    
    1,605
    
    
    
    2,013
    
    
    
    1,910Interest expense
    
    
    3,930
    
    
    
    3,931
    
    
    
    4,138Goodwill and intangible assets impairment
    
    
    52,434
    
    
    
    
    
    
    
    67,990267,316
    
    
    
    215,692
    
    
    
    315,369Income (loss) before income taxes
    
    
    (56,582
    )
    
    
    7,481
    
    
    
    (49,904
    )Provision for income taxes
    
    
    198
    
    
    
    441
    
    
    
    18,396Net income (loss)
    
    $
    (56,780
    )
    
    $
    7,040
    
    
    $
    (68,300
    )Net income (loss) per share:Basic
    
    $
    (1.18
    )
    
    $
    0.15
    
    
    $
    (1.43
    )Diluted
    
    $
    (1.18
    )
    
    $
    0.15
    
    
    $
    (1.43
    )Number of shares used to calculate net income
(loss) per share:Basic
    
    
    48,171
    
    
    
    47,961
    
    
    
    47,664Diluted
    
    
    48,171
    
    
    
    48,418
    
    
    
    47,664Reconciliation of net income (loss) to
comprehensive income (loss):Net income (loss)
    
    $
    (56,780
    )
    
    $
    7,040
    
    
    $
    (68,300
    )Unrealized change in investments
    
    
    872
    
    
    
    9,181
    
    
    
    (68
    )(55,908
    )
    
    
    16,221
    
    
    
    (68,368
    )Applicable provision for income taxes
    
    
    
    
    
    
    
    
    
    
    Comprehensive income (loss)
    
    $
    (55,908
    )
    
    $
    16,221
    
    
    $
    (68,368
    )Detail of net realized gains (losses) on
investments, available-for-sale:Net realized gains on sales and redemptions
    
    $
    228
    
    
    $
    300
    
    
    $
    2,509Other-than-temporary impairment (OTTI) charges
    
    
    (22
    )
    
    
    (1,446
    )
    
    
    (3,640
    )Non-credit portion included in comprehensive income (loss)
    
    
    2
    
    
    
    954
    
    
    
    1,220OTTI charges reclassified from other
comprehensive income (loss)
    
    
    (393
    )
    
    
    (491
    )
    
    
    OTTI charges recognized in net income (loss)
    
    
    (413
    )
    
    
    (983
    )
    
    
    (2,420
    )Net realized gains (losses) on investments,
available-for-sale
    
    $
    (185
    )
    
    $
    (683
    )
    
    $
    89
  46




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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, 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
    )
    
    
    177,190Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,780
    )
    
    
    (56,780
    )Net unrealized change on investments
(net of tax of $0)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    872
    
    
    
    
    
    
    
    872Forfeiture of restricted common stock
    
    
    (88
    )
    
    
    (1
    )
    
    
    (107
    )
    
    
    
    
    
    
    
    
    
    
    (108
    )Stock-based compensation
    
    
    5
    
    
    
    
    
    
    
    998
    
    
    
    
    
    
    
    
    
    
    
    998Issuance of shares under Employee
Stock Purchase Plan
    
    
    32
    
    
    
    1
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    56Balances at June 30, 2011
    
    
    48,458
    
    
    $
    485
    
    
    $
    466,777
    
    
    $
    9,515
    
    
    $
    (354,549
    )
    
    $
    122,228
  47




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)
 Year Ended June 30,2011
    
    
    2010
    
    
    2009Cash flows from operating activities:Net income (loss)
    
    $
    (56,780
    )
    
    $
    7,040
    
    
    $
    (68,300
    )Adjustments to reconcile net income (loss) to cash used in
operating activities:Depreciation and amortization
    
    
    1,605
    
    
    
    2,013
    
    
    
    1,910Stock-based compensation
    
    
    998
    
    
    
    1,048
    
    
    
    2,053Deferred income taxes
    
    
    (98
    )
    
    
    
    
    
    
    17,593Goodwill and intangible assets impairment
    
    
    52,434
    
    
    
    
    
    
    
    67,990Other-than-temporary impairment on investment securities
    
    
    413
    
    
    
    983
    
    
    
    2,420Net realized gains on sales and redemptions of investments
    
    
    (228
    )
    
    
    (300
    )
    
    
    (2,509
    )Other
    
    
    397
    
    
    
    521
    
    
    
    129Change in:Premiums and fees receivable
    
    
    817
    
    
    
    4,032
    
    
    
    18,023Loss and loss adjustment expense reserves
    
    
    (4,774
    )
    
    
    (10,775
    )
    
    
    (17,434
    )Unearned premiums and fees
    
    
    (1,791
    )
    
    
    (4,787
    )
    
    
    (19,887
    )Litigation settlement
    
    
    (46
    )
    
    
    (97
    )
    
    
    (3,975
    )Other
    
    
    884
    
    
    
    (795
    )
    
    
    (3,328
    )Net cash used in operating activities
    
    
    (6,169
    )
    
    
    (1,117
    )
    
    
    (5,315
    )Cash flows from investing activities:Purchases of investments, available-for-sale
    
    
    (13,324
    )
    
    
    (71,939
    )
    
    
    (16,228
    )Maturities and redemptions of investments, available-for-sale
    
    
    23,260
    
    
    
    11,326
    
    
    
    19,980Sales of investments, available-for-sale
    
    
    
    
    
    
    12,362
    
    
    
    46,128Net change in receivable/payable for securities
    
    
    
    
    
    
    
    
    
    
    (1,045
    )Capital expenditures
    
    
    (620
    )
    
    
    (1,628
    )
    
    
    (1,003
    )Other
    
    
    (2
    )
    
    
    (22
    )
    
    
    (130
    )Net cash provided by (used in) investing activities
    
    
    9,314
    
    
    
    (49,901
    )
    
    
    47,702Cash flows from financing activities:Payments on borrowings
    
    
    
    
    
    
    
    
    
    
    (3,913
    )Net proceeds from issuance of common stock
    
    
    56
    
    
    
    67
    
    
    
    68Other
    
    
    (80
    )
    
    
    (66
    )
    
    
    13Net cash provided by (used in) financing activities
    
    
    (24
    )
    
    
    1
    
    
    
    (3,832
    )Net increase (decrease) in cash and cash equivalents
    
    
    3,121
    
    
    
    (51,017
    )
    
    
    38,555Cash and cash equivalents, beginning of year
    
    
    26,184
    
    
    
    77,201
    
    
    
    38,646Cash and cash equivalents, end of year
    
    $
    29,305
    
    
    $
    26,184
    
    
    $
    77,201
  48




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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
  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.
  49




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Investments
    Recognition and Presentation of
Other-Than-Temporary Impairments
  Cash and Cash Equivalents
  50




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Revenue Recognition
  Income Taxes
   Income Taxes
 Advertising Costs
  Property and Equipment
  Foreclosed Real Estate Held for Sale
  51




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Deferred Acquisition Costs
  Goodwill and Other Identifiable Intangible Assets
       52




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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
 Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (Topic
810) Variable Interest Entities
 Accounting for Costs Associated with
Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force) (Topic 944) Other Assets and Deferred Costs
 Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
 Presentation of Comprehensive Income
 Supplemental Cash Flow Information
  53




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Basic and Diluted Net Income (Loss) Per Share
  2. Investments
 Restrictions
  Fair Value
  Fair Value Measurements UsingQuoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsJune 30, 2011
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Fixed maturities, available-for-sale:U.S. government and agencies
    
    $
    26,147
    
    
    $
    26,147
    
    
    $
    
    
    
    $
    State
    
    
    7,676
    
    
    
    
    
    
    
    7,676
    
    
    
    Political subdivisions
    
    
    1,817
    
    
    
    
    
    
    
    1,817
    
    
    
    Revenue and assessment
    
    
    26,771
    
    
    
    
    
    
    
    26,771
    
    
    
    Corporate bonds
    
    
    82,645
    
    
    
    
    
    
    
    82,645
    
    
    
    Collateralized mortgage obligations:Agency backed
    
    
    20,981
    
    
    
    
    
    
    
    20,981
    
    
    
    Non-agency backed  residential
    
    
    5,828
    
    
    
    
    
    
    
    5,828
    
    
    
    Non-agency backed  commercial
    
    
    6,760
    
    
    
    
    
    
    
    6,760
    
    
    
    Redeemable preferred stock
    
    
    173
    
    
    
    173
    
    
    
    
    
    
    
    Total fixed maturities, available-for-sale
    
    
    178,798
    
    
    
    26,320
    
    
    
    152,478
    
    
    
    Investment in mutual fund,
available-for-sale
    
    
    8,017
    
    
    
    8,017
    
    
    
    
    
    
    
    Total investments, available-for-sale
    
    
    186,815
    
    
    
    34,337
    
    
    
    152,478
    
    
    
    Cash and cash equivalents
    
    
    29,305
    
    
    
    29,305
    
    
    
    
    
    
    
    Total
    
    $
    216,120
    
    
    $
    63,642
    
    
    $
    152,478
    
    
    $
    
 54




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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
    
    
    $
    
   55




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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, 2009
    
    $
    
    
    
    $
    1,930
    
    
    $
    707
    
    
    $
    2,637Total gains or losses (realized or
unrealized):Included in net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Included in other comprehensive
income
    
    
    
    
    
    
    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 30,2011
    
    
    2010
    
    
    2009Fixed maturities, available-for-sale
    
    $
    8,296
    
    
    $
    8,467
    
    
    $
    9,588Investment in mutual fund, available-for-sale
    
    
    625
    
    
    
    
    
    
    
    Cash and cash equivalents
    
    
    8
    
    
    
    30
    
    
    
    383Other
    
    
    117
    
    
    
    117
    
    
    
    116Investment expenses
    
    
    (651
    )
    
    
    (656
    )
    
    
    (583
    )$
    8,395
    
    
    $
    7,958
    
    
    $
    9,504
  Year Ended June 30,2011
    
    
    2010
    
    
    2009Gains
    
    $
    231
    
    
    $
    326
    
    
    $
    2,662Losses
    
    
    (3
    )
    
    
    (26
    )
    
    
    (153
    )Other-than-temporary impairment
    
    
    (413
    )
    
    
    (983
    )
    
    
    (2,420
    )$
    (185
    )
    
    $
    (683
    )
    
    $
    89
  56




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Investments, Available-for-Sale
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairJune 30, 2011
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. government and agencies
    
    $
    24,897
    
    
    $
    1,250
    
    
    $
    
    
    
    $
    26,147State
    
    
    7,396
    
    
    
    280
    
    
    
    
    
    
    
    7,676Political subdivisions
    
    
    1,798
    
    
    
    20
    
    
    
    (1
    )
    
    
    1,817Revenue and assessment
    
    
    25,819
    
    
    
    1,123
    
    
    
    (171
    )
    
    
    26,771Corporate bonds
    
    
    78,199
    
    
    
    4,686
    
    
    
    (240
    )
    
    
    82,645Collateralized mortgage obligations:Agency backed
    
    
    19,541
    
    
    
    1,440
    
    
    
    
    
    
    
    20,981Non-agency backed  residential
    
    
    5,758
    
    
    
    243
    
    
    
    (173
    )
    
    
    5,828Non-agency backed  commercial
    
    
    6,215
    
    
    
    556
    
    
    
    (11
    )
    
    
    6,760Redeemable preferred stock
    
    
    176
    
    
    
    
    
    
    
    (3
    )
    
    
    173Total fixed maturities, available-for-sale
    
    
    169,799
    
    
    
    9,598
    
    
    
    (599
    )
    
    
    178,798Investment in mutual fund,
available-for-sale
    
    
    7,501
    
    
    
    516
    
    
    
    
    
    
    
    8,017$
    177,300
    
    
    $
    10,114
    
    
    $
    (599
    )
    
    $
    186,815
 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
 57




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Securities with No
    
    
    AllSecurities with
    
    
    Securities with
    
    
    Unrealized Gains or
    
    
    Fixed MaturityJune 30, 2011
    
    Unrealized Gains
    
    
    Unrealized Losses
    
    
    Losses
    
    
    SecuritiesOne year or less
    
    $
    14,120
    
    
    $
    80
    
    
    $
    1,500
    
    
    $
    15,700After one through five years
    
    
    75,186
    
    
    
    26
    
    
    
    
    
    
    
    75,212After five through ten years
    
    
    37,510
    
    
    
    
    
    
    
    
    
    
    
    37,510After ten years
    
    
    8,980
    
    
    
    7,827
    
    
    
    
    
    
    
    16,807No single maturity date
    
    
    31,450
    
    
    
    2,119
    
    
    
    
    
    
    
    33,569$
    167,246
    
    
    $
    10,052
    
    
    $
    1,500
    
    
    $
    178,798
 Securities with No
    
    
    AllSecurities with
    
    
    Securities with
    
    
    Unrealized Gains or
    
    
    Fixed MaturityJune 30, 2010
    
    Unrealized 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
  Less than 12 months
    
    
    12 months or longerGross
    
    
    
    
    
    
    Gross
    
    
    Total GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    UnrealizedJune 30, 2011
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    LossesU.S. government and agencies
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Political subdivisions
    
    
    500
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Revenue and assessment
    
    
    2,956
    
    
    
    (125
    )
    
    
    947
    
    
    
    (46
    )
    
    
    (171
    )Corporate bonds
    
    
    1,654
    
    
    
    (9
    )
    
    
    1,677
    
    
    
    (231
    )
    
    
    (240
    )Collateralized mortgage obligations:Agency backed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-agency backed  residential
    
    
    920
    
    
    
    (31
    )
    
    
    710
    
    
    
    (142
    )
    
    
    (173
    )Non-agency backed  commercial
    
    
    
    
    
    
    
    
    
    
    489
    
    
    
    (11
    )
    
    
    (11
    )Redeemable preferred stock
    
    
    173
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (3
    )Total fixed maturities, available-for-sale
    
    
    6,229
    
    
    
    (169
    )
    
    
    3,823
    
    
    
    (430
    )
    
    
    (599
    )Investment in mutual fund, available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,229
    
    
    $
    (169
    )
    
    $
    3,823
    
    
    $
    (430
    )
    
    $
    (599
    )
 58




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 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
    )
  Gross Unrealized LossesLess than
    
    Greater
    
    Grossor equal to
    
    than 12
    
    UnrealizedAt:
    
    12 months
    
    months
    
    GainsJune 30, 2011
    
    
    7
    
    
    
    5
    
    
    
    151June 30, 2010
    
    
    6
    
    
    
    18
    
    
    
    153
  Number
    
    
    
    
    
    
    GrossGross Unrealized Losses
    
    of
    
    
    Fair
    
    
    Unrealizedat June 30, 2011:
    
    Securities
    
    
    Value
    
    
    LossesLess than or equal to 10%
    
    
    2
    
    
    $
    1,435
    
    
    $
    (57
    )Greater than 10%
    
    
    3
    
    
    
    2,388
    
    
    
    (373
    )5
    
    
    $
    3,823
    
    
    $
    (430
    )
 Number
    
    
    
    
    
    
    GrossGross Unrealized Losses
    
    of
    
    
    Fair
    
    
    Unrealizedat June 30, 2010:
    
    Securities
    
    
    Value
    
    
    LossesLess than or equal to 10%
    
    
    11
    
    
    $
    7,931
    
    
    $
    (276
    )Greater than 10%
    
    
    7
    
    
    
    3,366
    
    
    
    (965
    )18
    
    
    $
    11,297
    
    
    $
    (1,241
    )
 59




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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
    
    
    
    
    
    
    
    
    
    
    thanat June 30, 2011:
    
    Losses
    
    
    Losses
    
    
    Less than 5%
    
    
    5% to 10%
    
    
    10%Less than or equal to:Three months
    
    $
    6,056
    
    
    $
    (166
    )
    
    $
    (166
    )
    
    $
    
    
    
    $
    Six months
    
    
    173
    
    
    
    (3
    )
    
    
    (3
    )
    
    
    
    
    
    
    Nine months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Twelve months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Greater than twelve months
    
    
    3,823
    
    
    
    (430
    )
    
    
    (57
    )
    
    
    
    
    
    
    (373
    )Total
    
    $
    10,052
    
    
    $
    (599
    )
    
    $
    (226
    )
    
    $
    
    
    
    $
    (373
    )
 Fair Value ofSecurities with
    
    
    
    
    
    
    Severity of Gross Unrealized LossesLength of
    
    Gross
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    GreaterGross Unrealized Losses
    
    Unrealized
    
    
    Unrealized
    
    
    
    
    
    
    
    
    
    
    thanat June 30, 2010:
    
    Losses
    
    
    Losses
    
    
    Less than 5%
    
    
    5% to 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
    )
 Other-Than-Temporary Impairment
 Recognition and Presentation of Other-Than-Temporary
Impairments
   60




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Year Ended June 30,2011
    
    
    2010
    
    
    2009Number of
    
    
    
    
    
    
    Number of
    
    
    
    
    
    
    Number ofSecurities
    
    
    OTTI
    
    
    Securities
    
    
    OTTI
    
    
    Securities
    
    
    OTTICorporate bonds
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    3
    
    
    $
    (871
    )Collateralized mortgage obligations:Non-agency backed  residential
    
    
    5
    
    
    
    (119
    )
    
    
    10
    
    
    
    (1,723
    )
    
    
    5
    
    
    
    (1,564
    )Non-agency backed  commercial
    
    
    5
    
    
    
    (296
    )
    
    
    5
    
    
    
    (214
    )
    
    
    4
    
    
    
    (1,205
    )10
    
    
    
    (415
    )
    
    
    15
    
    
    
    (1,937
    )
    
    
    12
    
    
    
    (3,640
    )Portion of loss recognized in
accumulated other comprehensive income
(loss)
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    954
    
    
    
    
    
    
    
    1,220Net OTTI recognized in net income
(loss)
    
    
    
    
    
    $
    (413
    )
    
    
    
    
    
    $
    (983
    )
    
    
    
    
    
    $
    (2,420
    )
  Year EndedJune 30,2011
    
    
    2010Beginning balance
    
    $
    (3,301
    )
    
    $
    (2,870
    )Additional credit impairments on:Previously impaired securities
    
    
    (413
    )
    
    
    (491
    )Securities without previous impairments
    
    
    
    
    
    
    (492
    )(413
    )
    
    
    (983
    )Reductions for securities sold (realized)
    
    
    371
    
    
    
    552$
    (3,343
    )
    
    $
    (3,301
    )
 Amendments to the
Impairment Guidance of EITF Issue No. 99-20
  61




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   3. Reinsurance
  Year Ended June 30,2011
    
    
    2010
    
    
    2009Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    152,356
    
    
    $
    153,368
    
    
    $
    162,150
    
    
    $
    167,744
    
    
    $
    187,935
    
    
    $
    206,358Assumed
    
    
    19,435
    
    
    
    19,844
    
    
    
    19,858
    
    
    
    19,302
    
    
    
    17,044
    
    
    
    17,755Ceded
    
    
    (171
    )
    
    
    (171
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    171,620
    
    
    $
    173,041
    
    
    $
    182,008
    
    
    $
    187,046
    
    
    $
    204,979
    
    
    $
    224,113
    4. Stock-Based Compensation Plans
 Employee Stock-Based Incentive Plan
 Compensation  Stock Compensation
  62




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    WeightedAverage
    
    
    AggregateExercise
    
    
    IntrinsicOptions
    
    
    Exercise Price
    
    
    Price
    
    
    ValueOptions 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
    
    
    $
    3.00-$8.13
    
    
    $
    3.06Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (61
    )
    
    $
    3.04
    
    
    $
    3.04Options outstanding at June 30, 2011
    
    
    4,500
    
    
    
    
    
    
    $
    3.06
    
    
    
    Options exercisable/vested at June 30, 2011
    
    
    4,319
    
    
    
    
    
    
    $
    3.06
    
    
    
    
  WeightedRestricted
    
    
    AverageStock
    
    
    Grant DateAwards
    
    
    Fair ValueRestricted 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
    
    
    $
    2.50Granted
    
    
    
    
    
    
    Vested
    
    
    (307
    )
    
    $
    2.60Forfeited
    
    
    (29
    )
    
    $
    2.51Restricted Stock Awards outstanding at June 30, 2011
    
    
    136
    
    
    $
    2.30
 63




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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Employee Stock Purchase Plan
  5. Employee Benefit Plan
  6. Property and Equipment
  June 30,2011
    
    
    2010Furniture and equipment
    
    $
    7,949
    
    
    $
    7,693Leasehold improvements
    
    
    2,961
    
    
    
    2,879Capitalized leases
    
    
    826
    
    
    
    826Aircraft
    
    
    190
    
    
    
    19011,926
    
    
    
    11,588Less: Accumulated depreciation
    
    
    (9,393
    )
    
    
    (8,064
    )Property and equipment, net
    
    $
    2,533
    
    
    $
    3,524
  64




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 7. Lease Commitments
 Operating Leases
  Year Ending June 30,
    
    Amount2012
    
    $
    7,3892013
    
    
    4,7782014
    
    
    2,8952015
    
    
    1,6182016
    
    
    896Thereafter
    
    
    929Total
    
    $
    18,505
 Capital Leases
  Capitalized LeaseYear Ending June 30,
    
    Obligations2012
    
    $
    632013
    
    
    1275Less: Amount representing executory costs
    
    
    (5
    )Net minimum lease payments
    
    
    70Less: Amount representing interest
    
    
    (2
    )Present value of net minimum lease payments
    
    $
    68
 65




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 8. Losses and Loss Adjustment Expenses Incurred and Paid
  Year Ended June 30,2011
    
    
    2010
    
    
    2009Liability for unpaid losses and LAE at beginning of year,
gross
    
    $
    73,198
    
    
    $
    83,973
    
    
    $
    101,407Reinsurance balances receivable
    
    
    (46
    )
    
    
    (78
    )
    
    
    (259
    )Liability for unpaid losses and LAE at beginning of year, net
    
    
    73,152
    
    
    
    83,895
    
    
    
    101,148Add: Provision for losses and LAE:Current year
    
    
    130,888
    
    
    
    138,218
    
    
    
    160,659Prior years
    
    
    (1,721
    )
    
    
    (11,223
    )
    
    
    (11,382
    )Net losses and LAE incurred
    
    
    129,167
    
    
    
    126,995
    
    
    
    149,277Less: Losses and LAE paid:Current year
    
    
    84,736
    
    
    
    87,097
    
    
    
    103,566Prior years
    
    
    49,292
    
    
    
    50,641
    
    
    
    62,964Net losses and LAE paid
    
    
    134,028
    
    
    
    137,738
    
    
    
    166,530Liability for unpaid losses and LAE at end of year, net
    
    
    68,291
    
    
    
    73,152
    
    
    
    83,895Reinsurance balances receivable
    
    
    133
    
    
    
    46
    
    
    
    78Liability for unpaid losses and LAE at end of year, gross
    
    $
    68,424
    
    
    $
    73,198
    
    
    $
    83,973
  9. Debentures Payable
    66




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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 10. Income Taxes
  Year Ended June 30,2011
    
    
    2010
    
    
    2009Federal:Current
    
    $
    
    
    
    $
    
    
    
    $
    295Deferred
    
    
    
    
    
    
    
    
    
    
    17,440
    
    
    
    
    
    
    
    17,735State:Current
    
    
    296
    
    
    
    441
    
    
    
    508Deferred
    
    
    (98
    )
    
    
    
    
    
    
    153198
    
    
    
    441
    
    
    
    661$
    198
    
    
    $
    441
    
    
    $
    18,396
  Year Ended June 30,2011
    
    
    2010
    
    
    2009Provision (benefit) for income taxes at
statutory rate
    
    $
    (19,804
    )
    
    $
    2,618
    
    
    $
    (17,466
    )Tax effect of:Tax-exempt investment income
    
    
    (15
    )
    
    
    (16
    )
    
    
    (16
    )Change in the beginning of the year
balance of the valuation allowance for
deferred tax assets allocated to income
taxes
    
    
    4,761
    
    
    
    (5,278
    )
    
    
    (6,291
    )Net operating loss carryforward expirations
    
    
    735
    
    
    
    2,483
    
    
    
    24,534Goodwill and identifiable intangible assets
    
    
    14,084
    
    
    
    
    
    
    
    16,724Restricted stock
    
    
    248
    
    
    
    240
    
    
    
    State income taxes, net of federal income
tax benefit and valuation allowance
    
    
    198
    
    
    
    441
    
    
    
    661Other
    
    
    (9
    )
    
    
    (47
    )
    
    
    250$
    198
    
    
    $
    441
    
    
    $
    18,396
  June 30,2011
    
    
    2010Deferred tax assets:Net operating loss carryforwards
    
    $
    5,272
    
    
    $
    3,613Stock option compensation
    
    
    3,871
    
    
    
    3,965Unearned premiums and loss and loss adjustment
expense reserves
    
    
    4,798
    
    
    
    5,099Goodwill and identifiable intangible assets
    
    
    6,193
    
    
    
    2,886Alternative minimum tax (AMT) credit carryforwards
    
    
    1,612
    
    
    
    1,612Accrued expenses and other nondeductible items
    
    
    994
    
    
    
    934Other
    
    
    3,946
    
    
    
    3,08926,686
    
    
    
    21,198Deferred tax liabilities:Deferred acquisition costs
    
    
    (1,157
    )
    
    
    (1,268
    )Identifiable intangible assets
    
    
    (1,872
    )
    
    
    Net unrealized change on investments
    
    
    (3,330
    )
    
    
    (3,025
    )(6,359
    )
    
    
    (4,293
    )Total net deferred tax asset
    
    
    20,327
    
    
    
    16,905Less: Valuation allowance
    
    
    (22,101
    )
    
    
    (16,905
    )Net deferred tax liability
    
    $
    (1,774
    )
    
    $
    
 67




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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
      Expiration Year Ended June 30,
    
    Amount2012
    
    $
    2013
    
    
    22014
    
    
    2015
    
    
    Thereafter
    
    
    15,061Total NOL carryforwards
    
    $
    15,063
 68




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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 11. Net Income (Loss) Per Share
 Earnings Per share
  Year Ended June 30,2011
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    (56,780
    )
    
    $
    7,040
    
    
    $
    (68,300
    )Weighted average common basic shares
    
    
    48,171
    
    
    
    47,961
    
    
    
    47,664Effect of dilutive securities
    
    
    
    
    
    
    457
    
    
    
    Weighted average common dilutive shares
    
    
    48,171
    
    
    
    48,418
    
    
    
    47,664Basic net income (loss) per share
    
    $
    (1.18
    )
    
    $
    0.15
    
    
    $
    (1.43
    )Diluted net income (loss) per share
    
    $
    (1.18
    )
    
    $
    0.15
    
    
    $
    (1.43
    )
  12. Concentrations of Credit Risk
   69




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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 13. Related Party Transactions
  14. Severance
  15. Litigation
 Loss Contingencies
  70




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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
    
    
    46Credits utilized
    
    
    (39
    )Credits forfeited
    
    
    (7
    )Balance at June 30, 2011
    
    $
    
   16. Fair Value of Financial Instruments
  June 30, 2011
    
    
    June 30, 2010Fair
    
    
    
    
    
    
    FairCarrying Value
    
    
    Value
    
    
    Carrying Value
    
    
    ValueAssets:Investments, available-for-sale
    
    $
    186,815
    
    
    $
    186,815
    
    
    $
    196,550
    
    
    $
    196,550Liabilities:Debentures payable
    
    
    41,240
    
    
    
    17,841
    
    
    
    41,240
    
    
    
    19,701
  71




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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 17. Segment Information
   Year Ended June 30,2011
    
    
    2010
    
    
    2009Revenues:Insurance
    
    $
    210,618
    
    
    $
    223,054
    
    
    $
    265,341Real estate and corporate
    
    
    116
    
    
    
    119
    
    
    
    124Consolidated total
    
    $
    210,734
    
    
    $
    223,173
    
    
    $
    265,465Income (loss) before income taxes:Insurance
    
    $
    (50,407
    )
    
    $
    14,568
    
    
    $
    (42,536
    )Real estate and corporate
    
    
    (6,175
    )
    
    
    (7,087
    )
    
    
    (7,368
    )Consolidated total
    
    $
    (56,582
    )
    
    $
    7,481
    
    
    $
    (49,904
    )
 June 30,2011
    
    
    2010Total assets:Insurance
    
    $
    281,399
    
    
    $
    343,499Real estate and corporate
    
    
    14,895
    
    
    
    12,843Consolidated total
    
    $
    296,294
    
    
    $
    356,342
 18. Statutory Financial Information and Accounting Policies
 Accounting Practices and Procedures Manual
   72




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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 19. Selected Quarterly Financial Data (unaudited)
  Quarters EndedSeptember 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30,Year Ended June 30, 2011:Total revenues
    
    $
    53,123
    
    
    $
    51,677
    
    
    $
    52,800
    
    
    $
    53,134Income (loss) before income taxes
    
    $
    512
    
    
    $
    (1,969
    )
    
    $
    (1,910
    )
    
    $
    (53,215
    )Net income (loss)
    
    $
    392
    
    
    $
    (2,090
    )
    
    $
    (1,608
    )
    
    $
    (53,474
    )Basic and diluted net income (loss)
per share
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    (0.03
    )
    
    $
    (1.11
    )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
    
    
    $
    0.02
  73




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FIRST ACCEPTANCE CORPORATION 10-K
 
 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
  74




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FIRST ACCEPTANCE CORPORATION 10-K
 
 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
  75




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FIRST ACCEPTANCE CORPORATION 10-K
 
 PART IV
 
 Item 15.
    
    Exhibits, Financial Statement Schedules
  (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.
 Exhibit  Number
 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
    
    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).*10.4
    
    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).10.5
    
    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).*10.6
    
    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).*10.7
    
    Amended and Restated First Acceptance Corporation Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K dated November 17,
2010).
 76




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FIRST ACCEPTANCE CORPORATION 10-K
 10.8
    
    Summary of Compensation for Non- Employee Directors and Named Executive Officers.10.9
    
    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).*10.10
    
    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).*10.11
    
    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).*10.12
    
    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).*10.13
    
    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).*10.14
    
    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).10.15
    
    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).10.16
    
    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).10.17
    
    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).*10.18
    
    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).*10.19
    
    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).*10.20
    
    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).10.21
    
    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).*
 77




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FIRST ACCEPTANCE CORPORATION 10-K
 10.22
    
    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).*10.23
    
    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).10.24
    
    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).10.25
    
    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).*10.26
    
    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).*10.27
    
    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).*10.28
    
    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).*10.29
    
    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).*10.30
    
    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).*10.31
    
    Compensation Arrangement, made as of March 30, 2011, between First Acceptance Corporation
and Mark A. Kelly (incorporated by reference to Exhibit 10.35 of the Companys Amendment No. 1
to Current Report on Form 8-K dated April 1, 2011).*10.32
    
    Employment Agreement, made as of May 15, 2007, as amended March 3, 2009, between First
Acceptance Corporation and John Barnett (incorporated by reference to Exhibit 99 of the
Companys Current Report on Form 8-K dated May 23, 2011).*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 Principal Executive Officer pursuant to Rule 13a-14(a).
 78




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FIRST ACCEPTANCE CORPORATION 10-K
 31.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(a).32.1
    
    Principal 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
    
    Principal 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. 79




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FIRST ACCEPTANCE CORPORATION 10-K
 
 SIGNATURES
  FIRST ACCEPTANCE CORPORATIONDate:  August 31, 2011
    By
    /s/ Stephen J. HarrisonStephen J. HarrisonChief Executive Officer  Signature
    
    Title
    
    Date/s/ Stephen J. Harrison

Stephen J. Harrison
    
    Chief Executive Officer and
Director (Principal Executive
Officer)
    
    August 31, 2011/s/ John R. Barnett

John R. Barnett
    
    Senior Vice President of Finance
(Principal Financial Officer and
Principal Accounting Officer)
    
    August 31, 2011/s/ Gerald J. Ford

Gerald J. Ford
    
    Chairman of the Board of Directors
    
    August 31, 2011/s/ Thomas M. Harrison, Jr.

Thomas M. Harrison, Jr.
    
    Director
    
    August 31, 2011/s/ Rhodes R. Bobbitt
    
    Director
    
    August 31, 2011Rhodes R. Bobbitt/s/ Harvey B. Cash
    
    Director
    
    August 31, 2011Harvey B. Cash/s/ Donald J. Edwards
    
    Director
    
    August 31, 2011Donald J. Edwards/s/ Tom C. Nichols
    
    Director
    
    August 31, 2011Tom C. Nichols/s/ Lyndon L. Olson
    
    Director
    
    August 31, 2011Lyndon L. Olson/s/ William A. Shipp, Jr.
    
    Director
    
    August 31, 2011William A. Shipp, Jr.
 80




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
SCHEDULE I. FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
(in thousands)
 June 30,2011
    
    
    2010Balance SheetsAssets:Investment in subsidiaries, at equity in net assets
    
    $
    150,132
    
    
    $
    206,265Cash and cash equivalents
    
    
    11,674
    
    
    
    9,534Other assets
    
    
    3,252
    
    
    
    3,309$
    165,058
    
    
    $
    219,108Liabilities:Debentures payable
    
    $
    41,240
    
    
    $
    41,240Other liabilities
    
    
    1,590
    
    
    
    678Stockholders equity
    
    
    122,228
    
    
    
    177,190$
    165,058
    
    
    $
    219,108
 Year Ended June 30,2011
    
    
    2010
    
    
    2009Statements of OperationsInvestment income
    
    $
    116
    
    
    $
    119
    
    
    $
    124Equity in income (loss) of subsidiaries, net of tax
    
    
    (49,926
    )
    
    
    13,813
    
    
    
    (58,650
    )Expenses
    
    
    (6,005
    )
    
    
    (7,206
    )
    
    
    (7,492
    )Income (loss) before income taxes
    
    
    (55,815
    )
    
    
    6,726
    
    
    
    (66,018
    )Provision (benefit) for income taxes
    
    
    965
    
    
    
    (314
    )
    
    
    2,282Net income (loss)
    
    $
    (56,780
    )
    
    $
    7,040
    
    
    $
    (68,300
    )
 Year Ended June 30,2011
    
    
    2010
    
    
    2009Statements of Cash FlowsCash flows from operating activities:Net income (loss)
    
    $
    (56,780
    )
    
    $
    7,040
    
    
    $
    (68,300
    )Equity in income (loss) of subsidiaries, net of tax
    
    
    49,926
    
    
    
    (13,813
    )
    
    
    58,650Stock-based compensation
    
    
    998
    
    
    
    1,048
    
    
    
    2,053Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    8,927Other
    
    
    (108
    )
    
    
    (2
    )
    
    
    Change in assets and liabilities
    
    
    971
    
    
    
    4,488
    
    
    
    (5,044
    )Net cash used in operating activities
    
    
    (4,993
    )
    
    
    (1,239
    )
    
    
    (3,714
    )Cash flows from investing activities:Investment in subsidiary
    
    
    
    
    
    
    
    
    
    
    (2,685
    )Dividends from subsidiary
    
    
    7,079
    
    
    
    7,670
    
    
    
    10,975Improvements to foreclosed real estate
    
    
    (2
    )
    
    
    (22
    )
    
    
    (138
    )Net cash provided by investing activities
    
    
    7,077
    
    
    
    7,648
    
    
    
    8,152Cash flows from financing activities:Payments on borrowings
    
    
    
    
    
    
    
    
    
    
    (3,913
    )Net proceeds from issuance of common stock
    
    
    56
    
    
    
    67
    
    
    
    68Net cash provided by (used in) financing activities
    
    
    56
    
    
    
    67
    
    
    
    (3,845
    )Net increase in cash and cash equivalents
    
    
    2,140
    
    
    
    6,476
    
    
    
    593Cash and cash equivalents, beginning of year
    
    
    9,534
    
    
    
    3,058
    
    
    
    2,465Cash and cash equivalents, end of year
    
    $
    11,674
    
    
    $
    9,534
    
    
    $
    3,058
 81