##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 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.)3322 West End Ave. Ste. 1000, Nashville, Tennessee(Address of principal executive offices)
    
    37203(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
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o o þ
   DOCUMENTS INCORPORATED BY REFERENCE




---



##### 



FIRST ACCEPTANCE CORPORATION 10-K
 Index to Annual Report on Form 10-K
 PagePART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    14Item 1B.
    
    Unresolved Staff Comments
    
    
    20Item 2.
    
    Properties
    
    
    20Item 3.
    
    Legal Proceedings
    
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    23Item 6.
    
    Selected Financial Data
    
    
    25Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 8.
    
    Financial Statements and Supplementary Data
    
    
    44Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    73Item 9A.
    
    Controls and Procedures
    
    
    73Item 9B.
    
    Other Information
    
    
    73PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    74Item 11.
    
    Executive Compensation
    
    
    74Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    74Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    74Item 14.
    
    Principal Accountant Fees and Services
    
    
    74PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    75SIGNATURES
    
    
    79Ex-10.16 Summary of Compensation for Non-Employee Directors and Named Executive OfficersEx-10.38 Waiver and Sixth Amendment to Revolving Credit and Term Loan AgreementEx-21 Subsidiaries of First Acceptance CorporationEx-23.1 Consent of Ernst & Young LLPEx-31.1 Section 302 Certification of the CEOEx-31.2 Section 302 Certification of the CFOEx-32.1 Section 906 Certification of the CEOEx-32.2 Section 906 Certification of the CFO
  i




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 PART I
 
 Item 1. Business
 General
  Our Business Strategy
  
    
    Integrated Operations. To meet the preference of our customers for convenient, personal
service, we have integrated the retail distribution, underwriting and service functions of
personal automobile insurance into one system. By doing so, we are able to provide prompt
and personal service to meet effectively the insurance needs of our customers, while
capturing revenue that would otherwise be shared with several participants under a
traditional, non-integrated insurance business model. Our integrated model is supported by
both point of sale agency and back office systems.
    
    Extensive Office Network. We emphasize the use of employee-agents as the cornerstone of
our customer relationship. We believe our customers value face-to-face contact, speed of
service and convenient locations. Consequently, we train our employee-agents to cultivate
client relationships and utilize real-time service and information enabled by access to our
information systems. As of September 1, 2008, we leased and operated 431 retail sales
offices staffed with our employee-agents and located strategically in geographic markets to
reach and service our customers.
    
    Favorable Customer Payment Plans. Our customers can initiate insurance coverage with a
modest down payment. Any remaining premium is paid in monthly installments over the term
of the policy. We believe this modest initial payment and favorable payment plan is a
major factor in our success in meeting the market demand for low monthly insurance
payments.
    
    Strong Sales and Marketing. We build brand recognition and generate valuable sales
leads through extensive use of television advertising, Yellow Pages® advertisements and a
broad network of retail sales offices.
    
    Efficient Systems. We have developed systems that enable timely and efficient
communication and data sharing among the various segments of our integrated operations. All
of our retail sales office computers transmit information directly to our central
processing computer where policy information, customer profiles, risk assessment and
underwriting criteria are entered and stored in our database.
 Our Business Model
  1




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
      Personal Automobile Insurance Market
   2




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Our Products
     Our Growth Strategy
  Competition
  3




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Marketing and Distribution
 ®
   Underwriting and Pricing
   Claims Handling
    4




---



##### Table of Contents



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




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  At June 30 (in thousands)
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Net liability for loss and loss
adjustment expense reserves,
originally estimated
    
    $
    18,137
    
    
    $
    39,289
    
    
    $
    61,521
    
    
    $
    91,137
    
    
    $
    101,148Cumulative amounts paid as of:One year later
    
    
    13,103
    
    
    
    28,024
    
    
    
    51,420
    
    
    
    74,526Two years later
    
    
    16,579
    
    
    
    34,754
    
    
    
    62,514Three years later
    
    
    17,795
    
    
    
    37,320Four years later
    
    
    18,532Liability re-estimated as of:One year later
    
    
    17,781
    
    
    
    37,741
    
    
    
    65,386
    
    
    
    89,738Two years later
    
    
    17,244
    
    
    
    38,226
    
    
    
    68,491Three years later
    
    
    16,973
    
    
    
    37,484Four years later
    
    
    17,978Net cumulative redundancy (deficiency)
    
    
    159
    
    
    
    1,805
    
    
    
    (6,970
    )
    
    
    1,399Gross liability  end of year
    
    $
    30,434
    
    
    $
    42,897
    
    
    $
    62,822
    
    
    $
    91,446
    
    
    $
    101,407Reinsurance receivables
    
    
    12,297
    
    
    
    3,608
    
    
    
    1,301
    
    
    
    309
    
    
    
    259Net liability  end of year
    
    $
    18,137
    
    
    $
    39,289
    
    
    $
    61,521
    
    
    $
    91,137
    
    
    $
    101,148Gross re-estimated liability  latest
    
    $
    30,382
    
    
    $
    40,926
    
    
    $
    69,708
    
    
    $
    90,191Re-estimated reinsurance receivables  latest
    
    
    12,404
    
    
    
    3,442
    
    
    
    1,217
    
    
    
    453Net re-estimated  latest
    
    $
    17,978
    
    
    $
    37,484
    
    
    $
    68,491
    
    
    $
    89,738Gross cumulative redundancy (deficiency)
    
    $
    52
    
    
    $
    1,971
    
    
    $
    (6,886
    )
    
    $
    1,255
     6




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
    Reinsurance
     7




---



##### Table of Contents



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




---



##### Table of Contents



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.
 
  Insurance Holding Company Regulation
 9




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Restrictions on Paying Dividends
 Regulation of Rates and Policy Forms
 Guaranty Funds
 Investment Regulation
 Restrictions on Cancellation, Non-Renewal or Withdrawal
 Privacy Regulations
 10




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Licensing of Our Employee-Agents and Adjusters.
 Unfair Claims Practices
 
    
    misrepresenting pertinent facts or insurance policy provisions relating to coverages at
issue;
    
    failing to acknowledge and act reasonably promptly upon communications regarding claims
arising under insurance policies;
    
    failing to affirm or deny coverage of claims within a reasonable time after proof of
loss statements have been completed;
    
    attempting to settle claims for less than the amount to which a reasonable person would
have believed such person was entitled;
    
    attempting to settle claims on the basis of an application that was altered without
notice to, knowledge or consent of the insured;
    
    making known to insureds or claimants a policy of appealing from arbitration awards in
favor of insureds or claimants for the purpose of compelling them to accept settlements or
compromises less than the amount awarded in arbitration;
    
    delaying the investigation or payment of claims by requiring an insured, claimant or the
physician of either to submit a preliminary claim report and then requiring the subsequent
submission of formal proof of loss forms, both of which submissions contain substantially
the same information;
    
    failing to settle claims promptly, where liability has become reasonably clear, under
one portion of the insurance policy coverage in order to influence settlements under other
portions of the insurance policy coverage; and
    
    not attempting in good faith to effectuate prompt, fair and equitable settlements of
claims in which liability has become reasonably clear.
  Quarterly and Annual Financial Reporting.
 Periodic Financial and Market Conduct Examinations
 11




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Risk-Based Capital
    IRIS Ratios
 12




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
   
    
    FAIC had a ratio outside of the defined range for the change in adjusted
policyholders surplus, which is between plus 25% and minus 10%. The change in adjusted
policyholders surplus excludes amounts related to paid in surplus. During the twelve
months ended December 31, 2007, FAIC reduced its adjusted policyholders surplus by 14%
primarily as the result of paying dividends during the year to its parent company.
    
    FAIC-TN had a ratio outside of the defined range for the change in net premiums
written, which is plus or minus 33%, because 2007 was the first year it wrote any
business. FAIC-TN also had a ratio outside of the defined limit for net premiums
written to policyholders surplus, which is 300%. FAIC-TNs ratio of 305% was primarily
the result of a portfolio transfer from FAIC of its Tennessee business on January 1,
2007. Excluding the effect of this one-time transfer, FAIC-TN would have had a net
premiums written to policyholders surplus ratio of 228%.
  Employees
  Available Information
  Internet Website
  13




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 Item 1A. Risk Factors
 Our loss and loss adjustment expenses may exceed our reserves, which would adversely impact our
results of operations and financial condition .
  Our results may fluctuate as a result of cyclical changes in the non-standard personal automobile
insurance industry.
  Our investment portfolio may suffer reduced returns or other-than-temporary losses, which could
reduce our profitability.
  14




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Our business is highly competitive, which may make it difficult for us to market our core products
effectively and profitably .
  Our business may be adversely affected by negative developments in the states in which we operate .
  Our business may be adversely affected by negative developments in the non-standard personal
automobile insurance industry .
  Our ability to use net operating loss carryforwards to reduce future tax payments may be limited by
applicable law .
   15




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
    We may have difficulties in managing our expansion into new markets .
  We may not be successful in identifying acquisition candidates or integrating their operations,
which could harm our financial results .
  16




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  New pricing, claim and coverage issues and class action litigation are continually emerging in the
automobile insurance industry, and these new issues could adversely impact our revenues or our
methods of doing business .
  
    
    concerns over the use of an applicants credit score or zip code as a factor in making
risk selections and pricing decisions;
    
    a growing trend of plaintiffs targeting automobile insurers in purported class action
litigation relating to sales and marketing practices and claims-handling practices, such as
total loss evaluation methodology, the use of aftermarket (non-original equipment
manufacturer) parts and the alleged diminution in value to insureds vehicles involved in
accidents; and
    
    consumer groups lobbying state legislatures to regulate and require separate licenses
for individuals and companies engaged in the sale of ancillary products or services.
  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 .
    17




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 We rely on our information technology and communication systems, and the failure of these systems
could materially adversely affect our business.
  Due to our largely fixed cost structure, our profitability may decline if our sales volume were to
decline significantly .
  Severe weather conditions and other catastrophes may result in an increase in the number and amount
of claims filed against us .
   A few of our stockholders have significant control over us, and their interests may differ from
yours
  18




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Our insurance company subsidiaries are subject to regulatory restrictions on paying dividends to
us .
  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
 Investment Restrictions
 19




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Restrictions on Cancellation, Non-Renewal or Withdrawal
 Provisions in our certificate of incorporation and bylaws may prevent a takeover or a change in
management that you may deem favorable.
   
    
    the requirement that only stockholders owning at least one-third of the outstanding shares of our common stock may call a special stockholders meeting; and
    
    the requirement that stockholders owning at least two-thirds of the outstanding shares
of our common stock must approve any amendment to our certificate of incorporation
provisions concerning the transfer restrictions and the ability to call special
stockholders meetings.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  20




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 Item 3. Legal Proceedings
 Annette Rush v. Village Auto Insurance Company, Inc. Margaret Franklin v. Vesta Insurance Corp., et al. Keisha Milbry Monday, et al. v. First Acceptance Corp., et al. Carrie Jackson v. Alabama Acceptance
Insurance Agency, Inc. Solomon and Catherine Warren, et al. v. First Acceptance Corp., et al.
   21




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
    
 Item 4. Submission of Matters to a Vote of Security Holders
  22




---



##### Table of Contents



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, 2007First Quarter
    
    $
    12.17
    
    
    $
    10.80Second Quarter
    
    
    11.65
    
    
    
    10.07Third Quarter
    
    
    10.78
    
    
    
    10.00Fourth Quarter
    
    
    10.83
    
    
    
    9.97Year Ended June 30, 2008First Quarter
    
    $
    10.37
    
    
    $
    4.60Second Quarter
    
    
    5.46
    
    
    
    3.12Third Quarter
    
    
    4.52
    
    
    
    2.85Fourth Quarter
    
    
    4.33
    
    
    
    2.90
 Holders
  Dividends
  Stock Transfer Restrictions
  23




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Performance Graph
  
 June 30,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008First Acceptance Corporation
    
    
    100.00
    
    
    
    128.91
    
    
    
    174.22
    
    
    
    216.94
    
    
    
    187.11
    
    
    
    58.93Russell 3000
    
    
    100.00
    
    
    
    120.46
    
    
    
    130.16
    
    
    
    142.60
    
    
    
    171.22
    
    
    
    149.50S&P Property & Casualty Insurance
    
    
    100.00
    
    
    
    118.77
    
    
    
    135.01
    
    
    
    142.90
    
    
    
    163.45
    
    
    
    114.44
 24




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 Item 6. Selected Financial Data
    25




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Year Ended June 30,ProformaActual
    
    
    20042008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    (unaudited)(in thousands, except per share data)Statement of Operations Data:Revenues:Premiums earned
    
    $
    285,914
    
    
    $
    300,661
    
    
    $
    208,771
    
    
    $
    132,677
    
    
    $
    11,728
    
    
    $
    57,716Commission and fee income
    
    
    36,479
    
    
    
    37,324
    
    
    
    26,757
    
    
    
    26,821
    
    
    
    4,401
    
    
    
    26,275Investment income
    
    
    11,250
    
    
    
    8,863
    
    
    
    5,762
    
    
    
    3,353
    
    
    
    958
    
    
    
    1,431Other
    
    
    (1,244
    )
    
    
    789
    
    
    
    7,712
    
    
    
    3,944
    
    
    
    6,066
    
    
    
    14,901Total revenues
    
    
    332,399
    
    
    
    347,637
    
    
    
    249,002
    
    
    
    166,795
    
    
    
    23,153
    
    
    
    100,323Expenses:Losses and loss adjustment expenses
    
    
    219,943
    
    
    
    241,908
    
    
    
    140,845
    
    
    
    87,493
    
    
    
    7,167
    
    
    
    36,616Insurance operating expenses
    
    
    98,433
    
    
    
    97,629
    
    
    
    75,773
    
    
    
    49,921
    
    
    
    7,194
    
    
    
    41,142Other operating expenses
    
    
    2,415
    
    
    
    2,623
    
    
    
    2,494
    
    
    
    2,775
    
    
    
    6,235
    
    
    
    2,278Litigation settlement
    
    
    7,468
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    1,507
    
    
    
    1,063
    
    
    
    500
    
    
    
    332
    
    
    
    7,850
    
    
    
    Depreciation and amortization
    
    
    1,679
    
    
    
    1,624
    
    
    
    1,463
    
    
    
    1,920
    
    
    
    648
    
    
    
    1,366Interest expense
    
    
    4,977
    
    
    
    1,874
    
    
    
    898
    
    
    
    351
    
    
    
    44
    
    
    
    318Total expenses
    
    
    336,422
    
    
    
    346,721
    
    
    
    221,973
    
    
    
    142,792
    
    
    
    29,138
    
    
    
    81,720Income (loss) before income taxes
    
    
    (4,023
    )
    
    
    916
    
    
    
    27,029
    
    
    
    24,003
    
    
    
    (5,985
    )
    
    
    18,603Provision (benefit) for income taxes
    
    
    13,822
    
    
    
    17,586
    
    
    
    (1,039
    )
    
    
    (2,153
    )
    
    
    (2,189
    )
    
    
    6,983Net income (loss)
    
    $
    (17,845
    )
    
    $
    (16,670
    )
    
    $
    28,068
    
    
    $
    26,156
    
    
    $
    (3,796
    )
    
    $
    11,620Per Share Data:Net income (loss) per share:Basic
    
    $
    (0.37
    )
    
    $
    (0.35
    )
    
    $
    0.59
    
    
    $
    0.56
    
    
    $
    (0.15
    )
    
    $
    0.25Diluted
    
    $
    (0.37
    )
    
    $
    (0.35
    )
    
    $
    0.57
    
    
    $
    0.53
    
    
    $
    (0.15
    )
    
    $
    0.24Number of shares used to calculate net
income (loss) per share:Basic
    
    
    47,628
    
    
    
    47,584
    
    
    
    47,487
    
    
    
    47,055
    
    
    
    24,965
    
    
    
    46,405Diluted
    
    
    47,628
    
    
    
    47,584
    
    
    
    49,576
    
    
    
    48,989
    
    
    
    24,965
    
    
    
    47,883
 June 30,2008
    
    2007
    
    2006
    
    2005
    
    2004(in thousands, except per share data)Balance Sheet Data:Fixed maturities, available-for-sale at fair value
    
    $
    189,570
    
    
    $
    176,555
    
    
    $
    127,828
    
    
    $
    74,840
    
    
    $
    33,243Cash, cash equivalents and other invested assets
    
    
    38,646
    
    
    
    34,161
    
    
    
    31,534
    
    
    
    35,682
    
    
    
    38,352Deferred tax asset, net
    
    
    17,593
    
    
    
    30,936
    
    
    
    48,068
    
    
    
    48,106
    
    
    
    45,493Total assets
    
    
    473,230
    
    
    
    498,892
    
    
    
    435,327
    
    
    
    331,645
    
    
    
    286,450Total liabilities
    
    
    247,771
    
    
    
    259,408
    
    
    
    181,904
    
    
    
    103,316
    
    
    
    92,224Total stockholders equity
    
    
    225,459
    
    
    
    239,484
    
    
    
    253,423
    
    
    
    228,329
    
    
    
    194,226Book value per common share
    
    $
    4.69
    
    
    $
    5.03
    
    
    $
    5.33
    
    
    $
    4.81
    
    
    $
    4.17
 26




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion should be read in conjunction with our consolidated financial
statements and accompanying notes included in this report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various factors, including
those discussed below and elsewhere in this report, particularly under the caption Risk Factors.
 General
     Year Ended June 30,2008
    
    2007Retail locations  beginning of period
    
    
    462
    
    
    
    460Opened
    
    
    4
    
    
    
    18Closed
    
    
    (35
    )
    
    
    (16
    )Retail locations  end of period
    
    
    431
    
    
    
    462
  June 30,2008
    
    2007
    
    2006Alabama
    
    
    25
    
    
    
    25
    
    
    
    25Florida
    
    
    40
    
    
    
    41
    
    
    
    39Georgia
    
    
    61
    
    
    
    62
    
    
    
    63Illinois
    
    
    80
    
    
    
    81
    
    
    
    86Indiana
    
    
    19
    
    
    
    24
    
    
    
    26Mississippi
    
    
    8
    
    
    
    8
    
    
    
    8Missouri
    
    
    14
    
    
    
    15
    
    
    
    18Ohio
    
    
    29
    
    
    
    30
    
    
    
    30Pennsylvania
    
    
    19
    
    
    
    25
    
    
    
    25South Carolina
    
    
    28
    
    
    
    28
    
    
    
    21Tennessee
    
    
    20
    
    
    
    20
    
    
    
    20Texas
    
    
    88
    
    
    
    103
    
    
    
    99Total
    
    
    431
    
    
    
    462
    
    
    
    460
 27




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Consolidated Results of Operations
 Overview
   Year Ended June 30,2008
    
    
    2007
    
    
    2006(in thousands)Revenues:Insurance
    
    $
    332,219
    
    
    $
    347,431
    
    
    $
    244,557Real estate and corporate
    
    
    180
    
    
    
    206
    
    
    
    4,445Consolidated total
    
    $
    332,399
    
    
    $
    347,637
    
    
    $
    249,002Income (loss) before income taxes:Insurance
    
    $
    4,685
    
    
    $
    6,252
    
    
    $
    26,476Real estate and corporate
    
    
    (8,708
    )
    
    
    (5,336
    )
    
    
    553Consolidated total
    
    $
    (4,023
    )
    
    $
    916
    
    
    $
    27,029
  
    
    premiums earned, including policy and renewal fees, from sales of policies written
and assumed by our insurance company subsidiaries;
    
    fee income, including installment billing fees on policies written, agency fees and
fees for other ancillary services (principally motor club and bond card products); and
    
    investment income earned on the invested assets of the insurance company
subsidiaries.
  Year Ended June 30,2008
    
    
    2007
    
    
    2006(in thousands)Premiums earned:Georgia
    
    $
    60,928
    
    
    $
    70,312
    
    
    $
    68,905Florida
    
    
    43,017
    
    
    
    55,117
    
    
    
    26,320Texas
    
    
    33,769
    
    
    
    32,480
    
    
    
    18,595Illinois
    
    
    32,009
    
    
    
    31,201
    
    
    
    7,679Alabama
    
    
    28,780
    
    
    
    30,316
    
    
    
    28,942South Carolina
    
    
    23,634
    
    
    
    14,797
    
    
    
    1,238Tennessee
    
    
    20,772
    
    
    
    23,800
    
    
    
    24,378Ohio
    
    
    15,416
    
    
    
    16,455
    
    
    
    14,043Pennsylvania
    
    
    10,041
    
    
    
    6,937
    
    
    
    1,994Indiana
    
    
    7,131
    
    
    
    8,186
    
    
    
    6,161Missouri
    
    
    5,630
    
    
    
    6,087
    
    
    
    5,331Mississippi
    
    
    4,787
    
    
    
    4,973
    
    
    
    5,185Total premiums earned
    
    $
    285,914
    
    
    $
    300,661
    
    
    $
    208,771
 28




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Year Ended June 30,2008
    
    2007
    
    2006Policies in force  beginning of period
    
    
    226,974
    
    
    
    200,401
    
    
    
    119,422Net increase (decrease) during period
    
    
    (32,895
    )
    
    
    26,573
    
    
    
    80,979Policies in force  end of period
    
    
    194,079
    
    
    
    226,974
    
    
    
    200,401
  Loss Ratio 
 Expense Ratio 
 Combined Ratio 
 Year Ended June 30,2008
    
    2007
    
    2006Loss and loss adjustment expense
    
    
    76.9
    %
    
    
    80.4
    %
    
    
    67.5
    %Expense
    
    
    21.7
    %
    
    
    19.8
    %
    
    
    21.5
    %Combined
    
    
    98.6
    %
    
    
    100.2
    %
    
    
    89.0
    %
   29




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Investments
       Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. government and agencies
    
    $
    32,046
    
    
    $
    1,112
    
    
    $
    (1
    )
    
    $
    33,157State
    
    
    7,423
    
    
    
    168
    
    
    
    (77
    )
    
    
    7,514Political subdivisions
    
    
    3,606
    
    
    
    7
    
    
    
    (28
    )
    
    
    3,585Revenue and assessment
    
    
    30,066
    
    
    
    288
    
    
    
    (440
    )
    
    
    29,914Corporate bonds
    
    
    47,381
    
    
    
    154
    
    
    
    (1,006
    )
    
    
    46,529Collateralized mortgage obligations
    
    
    69,518
    
    
    
    650
    
    
    
    (1,297
    )
    
    
    68,871$
    190,040
    
    
    $
    2,379
    
    
    $
    (2,849
    )
    
    $
    189,570
 30




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Securities with No
    
    
    AllSecurities with
    
    
    Securities with
    
    
    Unrealized Gains or
    
    
    Fixed MaturityUnrealized Gains
    
    
    Unrealized Losses
    
    
    Losses
    
    
    SecuritiesOne year or less
    
    $
    7,352
    
    
    $
    980
    
    
    $
    225
    
    
    $
    8,557After one through five years
    
    
    40,287
    
    
    
    16,227
    
    
    
    
    
    
    
    56,514After five through ten years
    
    
    20,085
    
    
    
    24,732
    
    
    
    
    
    
    
    44,817After ten years
    
    
    2,730
    
    
    
    8,081
    
    
    
    
    
    
    
    10,811No single maturity date
    
    
    39,730
    
    
    
    27,559
    
    
    
    1,582
    
    
    
    68,871$
    110,184
    
    
    $
    77,579
    
    
    $
    1,807
    
    
    $
    189,570
 Year Ended June 30, 2008 Compared with the Year Ended June 30, 2007
 Consolidated Results
  Insurance Operations
  Premiums Earned
    31




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Commission and Fee Income
  Investment Income
  Other
   Loss and Loss Adjustment Expenses
    32




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Operating Expenses
    Litigation Settlement
    33




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Provision for Income Taxes
  Real Estate and Corporate
  Year Ended June 30, 2007 Compared with the Year Ended June 30, 2006
 Consolidated Results
   Insurance Operations
  Premiums Earned
  Commission and Fee Income
  34




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Investment Income
  Other
  Loss and Loss Adjustment Expenses
   Operating Expenses
    Provision (Benefit) for Income Taxes
  35




---



##### Table of Contents



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




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
     Credit Facility
   37




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Trust Preferred Securities
 Consolidation of Variable Interest
Entities  An Interpretation of ARB No. 51.
 Off-Balance Sheet Arrangements
  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)
    
    $
    101,407
    
    
    $
    60,844
    
    
    $
    36,507
    
    
    $
    3,752
    
    
    $
    304Notes payable (2)
    
    
    3,987
    
    
    
    3,987
    
    
    
    
    
    
    
    
    
    
    
    Debentures payable (3)
    
    
    124,219
    
    
    
    3,826
    
    
    
    7,652
    
    
    
    6,614
    
    
    
    106,127Capitalized lease obligations
    
    
    211
    
    
    
    210
    
    
    
    1
    
    
    
    
    
    
    
    Operating leases (4)
    
    
    25,476
    
    
    
    9,214
    
    
    
    11,989
    
    
    
    2,769
    
    
    
    1,504Litigation settlement (5)
    
    
    6,721
    
    
    
    6,721
    
    
    
    
    
    
    
    
    
    
    
    Severance agreement obligations
    
    
    862
    
    
    
    661
    
    
    
    201
    
    
    
    
    
    
    
    Other
    
    
    1,105
    
    
    
    452
    
    
    
    516
    
    
    
    137
    
    
    
    Total contractual cash obligations
    
    $
    263,988
    
    
    $
    85,915
    
    
    $
    56,866
    
    
    $
    13,272
    
    
    $
    107,935
 
 (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. The noted payments due by period of $101.4 million include $0.3 million
related to reinsurance receivables.(2)
    
    Payments assume a fixed interest rate of 7.38% consistent with the interest rate
swap agreement effective through the maturity date of October 31, 2008.(3)
    
    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 6.53%
as of June 30, 2008).(4)
    
    Consists primarily of rental obligations under real estate leases related to our
retail locations and corporate offices.(5)
    
    Consists of the provision associated with the settlement agreement relating to the
Georgia litigation and the preliminary settlement terms relating to the Alabama litigation.
Other costs associated with the litigation cannot be reasonably estimated at this time. For
additional information with respect to the litigation settlements,
see Item 3. Legal Proceedings. 38




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Critical Accounting Policies
  Valuation of deferred tax asset
 Accounting for Income Taxes
  Goodwill and identifiable intangible assets
   Investments
  39




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
     Losses and loss adjustment expense reserves
   40




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Revenue Recognition
    Forward-Looking Statements
  
    
    statements and assumptions relating to future growth, income, income per share and
other financial performance measures, as well as managements short-term and long-term
performance goals;
    
    statements relating to the anticipated effects on results of operations or financial
condition from recent and expected developments or events;
    
    statements relating to our business and growth strategies; and
    
    any other statements or assumptions that are not historical facts.
   41




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
   Sensitivity to Instantaneous Interest Rate Changes (basis points)(100)
    
    
    (50)
    
    
    0
    
    
    50
    
    
    100
    
    
    200Fair value of fixed
maturity
portfolio
    
    $
    197,126
    
    
    $
    193,393
    
    
    $
    189,570
    
    
    $
    185,651
    
    
    $
    181,697
    
    
    $
    173,861
  Year Ended June 30,
    
    Amount2009
    
    $
    22,4162010
    
    
    14,7162011
    
    
    13,9612012
    
    
    23,8852013
    
    
    17,513Thereafter
    
    
    99,529Total
    
    $
    192,020Fair value
    
    $
    189,570
  42




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Credit Risk
   % of
    
    
    
    
    
    
    % ofAmortized
    
    
    Amortized
    
    
    Fair
    
    
    FairComparable S&P Rating
    
    Cost
    
    
    Cost
    
    
    Value
    
    
    ValueAAA
    
    $
    107,354
    
    
    
    56.5
    %
    
    $
    108,127
    
    
    
    57.0
    %AA+, AA, AA-
    
    
    35,387
    
    
    
    18.6
    %
    
    
    35,139
    
    
    
    18.5
    %A+, A, A-
    
    
    39,930
    
    
    
    21.0
    %
    
    
    39,128
    
    
    
    20.7
    %BBB+, BBB, BBB-
    
    
    6,861
    
    
    
    3.6
    %
    
    
    6,753
    
    
    
    3.6
    %Total investment grade
    
    
    189,532
    
    
    
    99.7
    %
    
    
    189,147
    
    
    
    99.8
    %BB+,
BB, BB-
    
    
    508
    
    
    
    0.3
    %
    
    
    423
    
    
    
    0.2
    %Total non-investment grade
    
    
    508
    
    
    
    0.3
    %
    
    
    423
    
    
    
    0.2
    %Total
    
    $
    190,040
    
    
    
    100.0
    %
    
    $
    189,570
    
    
    
    100.0
    %
    Insured
    
    
    Uninsured
    
    
    Total% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofFair
    
    
    Fair
    
    
    Fair
    
    
    Fair
    
    
    Fair
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value
    
    
    Value
    
    
    ValueAAA
    
    $
    
    
    
    
    
    
    
    $
    3,812
    
    
    
    32
    %
    
    $
    3,812
    
    
    
    9
    %AA+, AA, AA-
    
    
    16,232
    
    
    
    56
    %
    
    
    8,015
    
    
    
    68
    %
    
    
    24,247
    
    
    
    59
    %A+, A, A-
    
    
    11,470
    
    
    
    39
    %
    
    
    
    
    
    
    
    
    
    
    11,470
    
    
    
    28
    %BBB+, BBB, BBB-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NR (not rated)
    
    
    1,484
    
    
    
    5
    %
    
    
    
    
    
    
    
    
    
    
    1,484
    
    
    
    4
    %Total
    
    $
    29,186
    
    
    
    100
    %
    
    $
    11,827
    
    
    
    100
    %
    
    $
    41,013
    
    
    
    100
    %
 43




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 June 30,2008
    
    
    2007ASSETSFixed maturities, available-for-sale at fair value (amortized
cost of $190,040 and $179,328, respectively)
    
    $
    189,570
    
    
    $
    176,555Cash and cash equivalents
    
    
    38,646
    
    
    
    34,161Premiums and fees receivable, net of allowance of $651 and $606
    
    
    63,377
    
    
    
    71,771Reinsurance receivables
    
    
    283
    
    
    
    326Receivable for securities
    
    
    
    
    
    
    19,973Deferred tax asset, net
    
    
    17,593
    
    
    
    30,936Other assets
    
    
    9,894
    
    
    
    11,396Property and equipment, net
    
    
    4,876
    
    
    
    4,116Deferred acquisition costs
    
    
    4,549
    
    
    
    5,166Goodwill
    
    
    138,082
    
    
    
    138,082Identifiable intangible assets
    
    
    6,360
    
    
    
    6,410TOTAL ASSETS
    
    $
    473,230
    
    
    $
    498,892LIABILITIES AND STOCKHOLDERS EQUITYLoss and loss adjustment expense reserves
    
    $
    101,407
    
    
    $
    91,446Unearned premiums and fees
    
    
    77,237
    
    
    
    88,831Notes payable and capitalized lease obligations
    
    
    4,124
    
    
    
    23,490Debentures payable
    
    
    41,240
    
    
    
    41,240Payable for securities
    
    
    1,045
    
    
    
    999Other liabilities
    
    
    22,718
    
    
    
    13,402Total liabilities
    
    
    247,771
    
    
    
    259,408Stockholders equity:Preferred stock, $.01 par value, 10,000 shares authorized
    
    
    
    
    
    
    Common stock, $.01 par value, 75,000 shares authorized;
48,055 and 47,615 shares issued and outstanding,
respectively
    
    
    481
    
    
    
    476Additional paid-in capital
    
    
    462,601
    
    
    
    460,968Accumulated other comprehensive loss
    
    
    (470
    )
    
    
    (2,652
    )Accumulated deficit
    
    
    (237,153
    )
    
    
    (219,308
    )Total stockholders equity
    
    
    225,459
    
    
    
    239,484TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    473,230
    
    
    $
    498,892
  47




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Year Ended June 30,2008
    
    
    2007
    
    
    2006Revenues:Premiums earned
    
    $
    285,914
    
    
    $
    300,661
    
    
    $
    208,771Fee income
    
    
    36,479
    
    
    
    37,324
    
    
    
    26,757Investment income
    
    
    11,250
    
    
    
    8,863
    
    
    
    5,762Other
    
    
    (1,244
    )
    
    
    789
    
    
    
    7,712332,399
    
    
    
    347,637
    
    
    
    249,002Costs and expenses:Losses and loss adjustment expenses
    
    
    219,943
    
    
    
    241,908
    
    
    
    140,845Insurance operating expenses
    
    
    98,433
    
    
    
    97,629
    
    
    
    75,773Other operating expenses
    
    
    2,415
    
    
    
    2,623
    
    
    
    2,494Litigation settlement
    
    
    7,468
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    1,507
    
    
    
    1,063
    
    
    
    500Depreciation and amortization
    
    
    1,679
    
    
    
    1,624
    
    
    
    1,463Interest expense
    
    
    4,977
    
    
    
    1,874
    
    
    
    898336,422
    
    
    
    346,721
    
    
    
    221,973Income (loss) before income taxes
    
    
    (4,023
    )
    
    
    916
    
    
    
    27,029Provision (benefit) for income taxes
    
    
    13,822
    
    
    
    17,586
    
    
    
    (1,039
    )Net income (loss)
    
    $
    (17,845
    )
    
    $
    (16,670
    )
    
    $
    28,068Net income (loss) per share:Basic
    
    $
    (0.37
    )
    
    $
    (0.35
    )
    
    $
    0.59Diluted
    
    $
    (0.37
    )
    
    $
    (0.35
    )
    
    $
    0.57Number of shares used to calculate net
income (loss) per share:Basic
    
    
    47,628
    
    
    
    47,584
    
    
    
    47,487Diluted
    
    
    47,628
    
    
    
    47,584
    
    
    
    49,576Reconciliation of net income (loss) to
comprehensive income (loss):Net income (loss)
    
    $
    (17,845
    )
    
    $
    (16,670
    )
    
    $
    28,068Unrealized change in investments
    
    
    2,303
    
    
    
    690
    
    
    
    (3,765
    )Other
    
    
    (121
    )
    
    
    121
    
    
    
    (15,663
    )
    
    
    (15,859
    )
    
    
    24,303Applicable provision for income taxes
    
    
    
    
    
    
    
    
    
    
    353Comprehensive income (loss)
    
    $
    (15,663
    )
    
    $
    (15,859
    )
    
    $
    23,950
  48




---



##### 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 July 1, 2005
    
    
    47,455
    
    
    $
    475
    
    
    $
    457,905
    
    
    $
    655
    
    
    $
    (230,706
    )
    
    $
    228,329Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,068
    
    
    
    28,068Net unrealized change on
investments (net of tax of $353)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,118
    )
    
    
    
    
    
    
    (4,118
    )Stock-based compensation
    
    
    3
    
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    500Issuance of shares under Employee
Stock Purchase Plan
    
    
    22
    
    
    
    
    
    
    
    223
    
    
    
    
    
    
    
    
    
    
    
    223Exercise of stock options
    
    
    55
    
    
    
    
    
    
    
    421
    
    
    
    
    
    
    
    
    
    
    
    421Balances at June 30, 2006
    
    
    47,535
    
    
    
    475
    
    
    
    459,049
    
    
    
    (3,463
    )
    
    
    (202,638
    )
    
    
    253,423Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,670
    )
    
    
    (16,670
    )Net unrealized change on
investments (net of tax of $0)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    690
    
    
    
    
    
    
    
    690Unrealized change on interest rate
swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    121Sale of common stock
    
    
    50
    
    
    
    1
    
    
    
    590
    
    
    
    
    
    
    
    
    
    
    
    591Stock-based compensation
    
    
    5
    
    
    
    
    
    
    
    1,063
    
    
    
    
    
    
    
    
    
    
    
    1,063Issuance of shares under Employee
Stock Purchase Plan
    
    
    25
    
    
    
    
    
    
    
    266
    
    
    
    
    
    
    
    
    
    
    
    266Balances at June 30, 2007
    
    
    47,615
    
    
    
    476
    
    
    
    460,968
    
    
    
    (2,652
    )
    
    
    (219,308
    )
    
    
    239,484Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,845
    )
    
    
    (17,845
    )Net unrealized change on
investments (net of tax of $0)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,303
    
    
    
    
    
    
    
    2,303Unrealized change on interest rate
swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (121
    )
    
    
    
    
    
    
    (121
    )Issuance of restricted common stock
    
    
    400
    
    
    
    4
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    5
    
    
    
    1
    
    
    
    1,506
    
    
    
    
    
    
    
    
    
    
    
    1,507Issuance of shares under Employee
Stock Purchase Plan
    
    
    35
    
    
    
    
    
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    131Balances at June 30, 2008
    
    
    48,055
    
    
    $
    481
    
    
    $
    462,601
    
    
    $
    (470
    )
    
    $
    (237,153
    )
    
    $
    225,459
  49




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Year Ended June 30,2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (17,845
    )
    
    $
    (16,670
    )
    
    $
    28,068Adjustments to reconcile net income (loss) to cash provided by
operating activities:Depreciation and amortization
    
    
    1,679
    
    
    
    1,624
    
    
    
    1,463Stock-based compensation
    
    
    1,507
    
    
    
    1,063
    
    
    
    500Deferred income taxes
    
    
    13,343
    
    
    
    17,132
    
    
    
    (1,533
    )Gains on sales of foreclosed real estate
    
    
    
    
    
    
    
    
    
    
    (3,638
    )Other-than-temporary impairment on investment securities
    
    
    1,414
    
    
    
    
    
    
    
    Other
    
    
    (57
    )
    
    
    193
    
    
    
    906Change in:Premiums and fees receivable
    
    
    8,349
    
    
    
    (6,614
    )
    
    
    (21,634
    )Deferred acquisition costs
    
    
    617
    
    
    
    164
    
    
    
    (2,059
    )Loss and loss adjustment expense reserves
    
    
    9,961
    
    
    
    28,624
    
    
    
    19,925Unearned premiums and fees
    
    
    (11,594
    )
    
    
    10,500
    
    
    
    28,307Litigation settlement
    
    
    6,721
    
    
    
    
    
    
    
    Other
    
    
    4,273
    
    
    
    711
    
    
    
    2,564Net cash provided by operating activities
    
    
    18,368
    
    
    
    36,727
    
    
    
    52,869Cash flows from investing activities:Purchases of fixed maturities, available-for-sale
    
    
    (44,408
    )
    
    
    (101,295
    )
    
    
    (82,144
    )Maturities and paydowns of fixed maturities, available-for-sale
    
    
    13,697
    
    
    
    7,048
    
    
    
    8,748Sales of fixed maturities, available-for-sale
    
    
    18,719
    
    
    
    45,932
    
    
    
    15,400Sale of investment in mutual fund
    
    
    
    
    
    
    
    
    
    
    10,920Net change in receivable/payable for securities
    
    
    20,019
    
    
    
    (22,889
    )
    
    
    3,915Purchase of common stock in trust
    
    
    
    
    
    
    (1,240
    )
    
    
    Capital expenditures
    
    
    (2,422
    )
    
    
    (1,769
    )
    
    
    (2,265
    )Cash paid for acquisitions, net of cash acquired
    
    
    
    
    
    
    (1,037
    )
    
    
    (29,853
    )Proceeds from sales of foreclosed real estate
    
    
    
    
    
    
    
    
    
    
    4,512Other
    
    
    (253
    )
    
    
    (254
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    5,352
    
    
    
    (75,504
    )
    
    
    (70,767
    )Cash flows from financing activities:Proceeds from borrowings
    
    
    
    
    
    
    5,000
    
    
    
    30,431Payments on borrowings
    
    
    (19,366
    )
    
    
    (5,693
    )
    
    
    (6,405
    )Proceeds from issuance of debentures
    
    
    
    
    
    
    41,240
    
    
    
    Net proceeds from issuance of common stock
    
    
    131
    
    
    
    857
    
    
    
    223Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    421Net cash provided by (used in) financing activities
    
    
    (19,235
    )
    
    
    41,404
    
    
    
    24,670Net increase in cash and cash equivalents
    
    
    4,485
    
    
    
    2,627
    
    
    
    6,772Cash and cash equivalents, beginning of year
    
    
    34,161
    
    
    
    31,534
    
    
    
    24,762Cash and cash equivalents, end of year
    
    $
    38,646
    
    
    $
    34,161
    
    
    $
    31,534
  50




---



##### Table of Contents



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




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Cash and Cash Equivalents
  Revenue Recognition
    Income Taxes
   Advertising Costs
  52




---



##### Table of Contents



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




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Stock-Based Compensation
 Share Based Payment Accounting for Stock Issued to Employees,
 Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  An
Interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurements
 Establishing the Fair Value Option for
Financial Assets and Liabilities Accounting for Certain Investments in Debt and Equity Securities
 Disclosures about Derivative Instruments and
Hedging Activities , Accounting
for Derivative Instruments and Hedging Activities
 54




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Supplemental Cash Flow Information
  Basic and Diluted Net Income (Loss) Per Share
  2.
    
    Business Combinations
 USAuto Holdings
  Texas Insurance Agency
   Chicago Insurance Agencies
  55




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Net tangible assets
    
    $
    330Identifiable intangible assets
    
    
    2,570Goodwill
    
    
    28,320Total assets acquired
    
    $
    31,220
    3.
    
    Investments
 Restrictions
  Investment Income and Net Realized Gains and Losses
  Year Ended June 30,2008
    
    
    2007
    
    
    2006Fixed maturities, available-for-sale
    
    $
    9,747
    
    
    $
    7,770
    
    
    $
    4,411Investment in mutual fund
    
    
    
    
    
    
    
    
    
    
    674Cash and cash equivalents
    
    
    1,824
    
    
    
    1,520
    
    
    
    983Other
    
    
    117
    
    
    
    5
    
    
    
    Investment expenses
    
    
    (438
    )
    
    
    (432
    )
    
    
    (306
    )$
    11,250
    
    
    $
    8,863
    
    
    $
    5,762
 56




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Year Ended June 30,2008
    
    
    2007
    
    
    2006Gains
    
    $
    424
    
    
    $
    90
    
    
    $
    88Losses
    
    
    (254
    )
    
    
    (151
    )
    
    
    (164
    )Other-than-temporary impairment
    
    
    (1,414
    )
    
    
    
    
    
    
    $
    (1,244
    )
    
    $
    (61
    )
    
    $
    (76
    )
 Fixed Maturities, Available-for-sale
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairJune 30, 2008
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. government and agencies
    
    $
    32,046
    
    
    $
    1,112
    
    
    $
    (1
    )
    
    $
    33,157State
    
    
    7,423
    
    
    
    168
    
    
    
    (77
    )
    
    
    7,514Political subdivisions
    
    
    3,606
    
    
    
    7
    
    
    
    (28
    )
    
    
    3,585Revenue and assessment
    
    
    30,066
    
    
    
    288
    
    
    
    (440
    )
    
    
    29,914Corporate bonds
    
    
    47,381
    
    
    
    154
    
    
    
    (1,006
    )
    
    
    46,529Collateralized mortgage obligations
    
    
    69,518
    
    
    
    650
    
    
    
    (1,297
    )
    
    
    68,871$
    190,040
    
    
    $
    2,379
    
    
    $
    (2,849
    )
    
    $
    189,570
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairJune 30, 2007
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. government and agencies
    
    $
    40,118
    
    
    $
    66
    
    
    $
    (411
    )
    
    $
    39,773State
    
    
    7,445
    
    
    
    46
    
    
    
    (131
    )
    
    
    7,360Political subdivisions
    
    
    4,389
    
    
    
    7
    
    
    
    (65
    )
    
    
    4,331Revenue and assessment
    
    
    26,876
    
    
    
    57
    
    
    
    (463
    )
    
    
    26,470Corporate bonds
    
    
    32,696
    
    
    
    17
    
    
    
    (626
    )
    
    
    32,087Collateralized mortgage obligations
    
    
    67,804
    
    
    
    6
    
    
    
    (1,276
    )
    
    
    66,534$
    179,328
    
    
    $
    199
    
    
    $
    (2,972
    )
    
    $
    176,555
  Amortized
    
    
    FairCost
    
    
    ValueOne year or less
    
    $
    8,498
    
    
    $
    8,557After one through five years
    
    
    55,917
    
    
    
    56,514After five through ten years
    
    
    44,860
    
    
    
    44,817After ten years
    
    
    11,247
    
    
    
    10,811No single maturity date
    
    
    69,518
    
    
    
    68,871$
    190,040
    
    
    $
    189,570
  57




---



##### 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, 2008
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    LossesU.S. government and agencies
    
    $
    1,000
    
    
    $
    (1
    )
    
    $
    
    
    
    $
    
    
    
    $
    (1
    )State
    
    
    1,056
    
    
    
    (77
    )
    
    
    
    
    
    
    
    
    
    
    (77
    )Political subdivisions
    
    
    1,540
    
    
    
    (6
    )
    
    
    537
    
    
    
    (22
    )
    
    
    (28
    )Revenue and assessment
    
    
    13,237
    
    
    
    (439
    )
    
    
    23
    
    
    
    (1
    )
    
    
    (440
    )Corporate bonds
    
    
    30,055
    
    
    
    (566
    )
    
    
    2,572
    
    
    
    (440
    )
    
    
    (1,006
    )Collateralized mortgage obligations
    
    
    20,302
    
    
    
    (443
    )
    
    
    7,257
    
    
    
    (854
    )
    
    
    (1,297
    )$
    67,190
    
    
    $
    (1,532
    )
    
    $
    10,389
    
    
    $
    (1,317
    )
    
    $
    (2,849
    )
 Less than 12 months
    
    
    12 months or longerGross
    
    
    
    
    
    
    Gross
    
    
    Total GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    UnrealizedJune 30, 2007
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    LossesU.S. government and agencies
    
    $
    21,343
    
    
    $
    (150
    )
    
    $
    8,571
    
    
    $
    (262
    )
    
    $
    (412
    )State
    
    
    2,469
    
    
    
    (68
    )
    
    
    1,833
    
    
    
    (63
    )
    
    
    (131
    )Political subdivisions
    
    
    912
    
    
    
    (9
    )
    
    
    2,296
    
    
    
    (56
    )
    
    
    (65
    )Revenue and assessment
    
    
    13,400
    
    
    
    (303
    )
    
    
    6,655
    
    
    
    (160
    )
    
    
    (463
    )Corporate bonds
    
    
    17,761
    
    
    
    (488
    )
    
    
    9,215
    
    
    
    (138
    )
    
    
    (626
    )Collateralized mortgage obligations
    
    
    39,037
    
    
    
    (755
    )
    
    
    13,243
    
    
    
    (520
    )
    
    
    (1,275
    )$
    94,922
    
    
    $
    (1,773
    )
    
    $
    41,813
    
    
    $
    (1,199
    )
    
    $
    (2,972
    )
  Gross Unrealized Losses
    
    GrossLess than
    
    12 months
    
    UnrealizedAs of:
    
    12 months
    
    or longer
    
    GainsJune 30, 2008
    
    
    79
    
    
    
    16
    
    
    
    108June 30, 2007
    
    
    142
    
    
    
    68
    
    
    
    32
  Number
    
    
    
    
    
    
    Grossof
    
    
    Fair
    
    
    UnrealizedGross Unrealized Losses
    
    Securities
    
    
    Value
    
    
    LossesLess than 10%
    
    
    8
    
    
    $
    5,346
    
    
    $
    (126
    )Greater than 10%
    
    
    8
    
    
    
    5,043
    
    
    
    (1,191
    )16
    
    
    $
    10,389
    
    
    $
    (1,317
    )
  58




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Fair Value ofSecurities with
    
    
    
    
    
    
    Severity of Gross Unrealized LossesGross
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    GreaterGross Unrealized Losses
    
    Unrealized
    
    
    Unrealized
    
    
    Less
    
    
    5% to
    
    
    thanLess than or Equal to:
    
    Losses
    
    
    Losses
    
    
    than 5%
    
    
    10%
    
    
    10%Three months
    
    $
    50,385
    
    
    $
    (1,018
    )
    
    $
    (836
    )
    
    $
    
    
    
    $
    (182
    )Six months
    
    
    14,487
    
    
    
    (409
    )
    
    
    (369
    )
    
    
    (40
    )
    
    
    Nine months
    
    
    2,318
    
    
    
    (105
    )
    
    
    (77
    )
    
    
    (28
    )
    
    
    Twelve months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total less than twelve months
    
    
    67,190
    
    
    
    (1,532
    )
    
    
    (1,282
    )
    
    
    (68
    )
    
    
    (182
    )Greater than twelve months
    
    
    10,389
    
    
    
    (1,317
    )
    
    
    (172
    )
    
    
    (136
    )
    
    
    (1,009
    )Total greater than twelve
months
    
    
    10,389
    
    
    
    (1,317
    )
    
    
    (172
    )
    
    
    (136
    )
    
    
    (1,009
    )Total
    
    $
    77,579
    
    
    $
    (2,849
    )
    
    $
    (1,454
    )
    
    $
    (204
    )
    
    $
    (1,191
    )
    4. Reinsurance
  59




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  June 30,2008
    
    
    2007Unpaid losses
    
    $
    259
    
    
    $
    309Paid losses receivable
    
    
    24
    
    
    
    17$
    283
    
    
    $
    326
  Year Ended June 30,2008
    
    2007
    
    2006Ceded premiums earned
    
    $
    
    
    
    $
    
    
    
    $
    81Reinsurance receivables (payables) on losses and LAE
    
    
    192
    
    
    
    (437
    )
    
    
    (188
    )
   Year Ended June 30,2008
    
    
    2007
    
    
    2006Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    253,807
    
    
    $
    265,630
    
    
    $
    290,784
    
    
    $
    280,946
    
    
    $
    216,131
    
    
    $
    186,833Assumed
    
    
    20,167
    
    
    
    20,284
    
    
    
    19,872
    
    
    
    19,715
    
    
    
    21,581
    
    
    
    22,019Ceded
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (81
    )
    
    
    (81
    )Net
    
    $
    273,974
    
    
    $
    285,914
    
    
    $
    310,656
    
    
    $
    300,661
    
    
    $
    237,631
    
    
    $
    208,771
  5. Stock-Based Compensation Plans
 Employee Stock-Based Incentive Plan
  st
 60




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Year Ended June 30,2008
    
    2007
    
    2006Expected option term
    
    10 years
    
    10 years
    
    10 yearsAnnualized volatility rate
    
    
    31 to 43
    %
    
    
    32 to 33
    %
    
    
    32 to 38
    %Risk-free rate of return
    
    
    3.48 to 5.02
    %
    
    
    4.74 to 4.77
    %
    
    
    4.02 to 5.25
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  WeightedAverage
    
    
    AggregateExercise
    
    
    Exercise
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Price
    
    
    ValueOptions outstanding at July 1, 2005
    
    
    4,136
    
    
    $
    3.00-$8.13
    
    
    $
    3.42Granted
    
    
    
    
    
    
    
    
    
    $
    Exercised
    
    
    (55
    )
    
    $
    3.00-$8.13
    
    
    $
    7.66Forfeited
    
    
    
    
    
    
    
    
    
    $
    Options outstanding at June 30, 2006
    
    
    4,081
    
    
    $
    3.00-$8.13
    
    
    $
    3.37Granted
    
    
    635
    
    
    $
    10.12-$11.81
    
    
    $
    11.61Exercised
    
    
    
    
    
    
    
    
    
    $
    Forfeited
    
    
    
    
    
    
    
    
    
    $
    Options outstanding at June 30, 2007
    
    
    4,716
    
    
    $
    3.00-$11.81
    
    
    $
    4.48Granted
    
    
    955
    
    
    $
    3.04-$10.08
    
    
    $
    3.26Exercised
    
    
    
    
    
    
    
    
    
    $
    Forfeited
    
    
    (215
    )
    
    $
    3.04-$11.81
    
    
    $
    7.89Options outstanding at June 30, 2008
    
    
    5,456
    
    
    $
    3.00-$11.81
    
    
    $
    4.13
    
    
    $
    882Options exercisable/vested at June 30, 2008
    
    
    4,129
    
    
    $
    3.00-$11.81
    
    
    $
    3.54
    
    
    $
    746
  Employee Stock Purchase Plan
  61




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 6.
    
    Employee Benefit Plan
  7.
    
    Other Revenues
  Year Ended June 30,2008
    
    
    2007
    
    
    2006Net gains (losses) on sales of investments
    
    $
    170
    
    
    $
    (61
    )
    
    $
    (76
    )Other-than-temporary impairment on
investment securities
    
    
    (1,414
    )
    
    
    
    
    
    
    Transaction service fee
    
    
    
    
    
    
    850
    
    
    
    4,150Gain on sale of foreclosed real estate
    
    
    
    
    
    
    
    
    
    
    3,638$
    (1,244
    )
    
    $
    789
    
    
    $
    7,712
 8.
    
    Property and Equipment
  June 30,2008
    
    
    2007Furniture and equipment
    
    $
    7,967
    
    
    $
    5,876Leasehold improvements
    
    
    2,060
    
    
    
    1,980Capitalized leases
    
    
    588
    
    
    
    588Aircraft
    
    
    190
    
    
    
    19010,805
    
    
    
    8,634Less: accumulated depreciation
    
    
    (5,929
    )
    
    
    (4,518
    )Total property and equipment, net
    
    $
    4,876
    
    
    $
    4,116
  9.
    
    Lease Commitments
  Year Ended June 30,
    
    Amount2009
    
    $
    9,0502010
    
    
    7,4032011
    
    
    4,2592012
    
    
    1,8062013
    
    
    830Thereafter
    
    
    1,504Total
    
    $
    24,852
 62




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  10.
    
    Losses and Loss Adjustment Expenses Incurred and Paid
  Year Ended June 30,2008
    
    
    2007
    
    
    2006Liability for unpaid losses and LAE at beginning of year, gross
    
    $
    91,446
    
    
    $
    62,822
    
    
    $
    42,897Reinsurance balances receivable
    
    
    (309
    )
    
    
    (1,301
    )
    
    
    (3,608
    )Liability for unpaid losses and LAE at beginning of year, net
    
    
    91,137
    
    
    
    61,521
    
    
    
    39,289Add: Provision for losses and LAE:Current year
    
    
    221,342
    
    
    
    238,043
    
    
    
    142,436Prior years
    
    
    (1,399
    )
    
    
    3,865
    
    
    
    (1,548
    )Accretion of net risk margin/discounting as of the date of acquisition
    
    
    
    
    
    
    
    
    
    
    (43
    )Net losses and LAE incurred
    
    
    219,943
    
    
    
    241,908
    
    
    
    140,845Less: Losses and LAE paid:Current year
    
    
    135,406
    
    
    
    160,872
    
    
    
    90,589Prior years
    
    
    74,526
    
    
    
    51,420
    
    
    
    28,024Net losses and LAE paid
    
    
    209,932
    
    
    
    212,292
    
    
    
    118,613Liability for unpaid losses and LAE at end of year, net
    
    
    101,148
    
    
    
    91,137
    
    
    
    61,521Reinsurance balances receivable
    
    
    259
    
    
    
    309
    
    
    
    1,301Liability for unpaid losses and LAE at end of year, gross
    
    $
    101,407
    
    
    $
    91,446
    
    
    $
    62,822
   11.
    
    Notes Payable and Capitalized Lease Obligations
  63




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
     CapitalizedLease
    
    
    NotesYear Ended June 30,
    
    Obligations
    
    
    Payable
    
    
    Total2009
    
    $
    214
    
    
    $
    3,913
    
    
    $
    4,1272010
    
    
    1
    
    
    
    
    
    
    
    1$
    215
    
    
    $
    3,913
    
    
    $
    4,128Less: Amount representing executory costs
    
    
    (14
    )Net minimum lease payments
    
    
    201Less: Amount representing interest
    
    
    (4
    )Present value of net minimum lease
payments
    
    $
    197
 12.
    
    Debentures Payable
    64




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 13. Income Taxes
  Year Ended June 30,2008
    
    
    2007
    
    
    2006Federal:Current
    
    $
    31
    
    
    $
    75
    
    
    $
    161Deferred
    
    
    13,496
    
    
    
    17,132
    
    
    
    (1,533
    )State income taxes
    
    
    295
    
    
    
    379
    
    
    
    333$
    13,822
    
    
    $
    17,586
    
    
    $
    (1,039
    )
  Year Ended June 30,2008
    
    
    2007
    
    
    2006Provision (benefit) for income taxes at
statutory rate
    
    $
    (1,408
    )
    
    $
    321
    
    
    $
    9,460Tax effect of:Tax-exempt investment income
    
    
    (32
    )
    
    
    (78
    )
    
    
    (221
    )Change in the beginning of the year
balance of the valuation allowance for
deferred tax assets allocated to income
taxes
    
    
    3,571
    
    
    
    6,882
    
    
    
    (10,540
    )Net operating loss carryforward expirations
    
    
    11,380
    
    
    
    9,990
    
    
    
    302State income taxes, net of federal income
tax benefit and state valuation allowance
    
    
    139
    
    
    
    246
    
    
    
    216Other
    
    
    172
    
    
    
    225
    
    
    
    (256
    )$
    13,822
    
    
    $
    17,586
    
    
    $
    (1,039
    )
  2008
    
    
    2007Deferred tax assets:Net operating loss carryforwards
    
    $
    33,884
    
    
    $
    46,549Stock option compensation
    
    
    3,475
    
    
    
    3,063Unearned premiums and loss and loss adjustment expense reserves
    
    
    7,316
    
    
    
    8,254Net unrealized change on investments
    
    
    164
    
    
    
    929Alternative minimum tax (AMT) credit carryforwards
    
    
    1,314
    
    
    
    1,232Accrued expenses
    
    
    3,993
    
    
    
    809Other
    
    
    1,377
    
    
    
    26151,523
    
    
    
    61,097Deferred tax liabilities:Deferred acquisition costs
    
    
    (1,592
    )
    
    
    (1,808
    )Goodwill
    
    
    (2,264
    )
    
    
    (1,320
    )(3,856
    )
    
    
    (3,128
    )Total net deferred tax assets
    
    
    47,667
    
    
    
    57,969Less: Valuation allowance:Net operating loss carryforwards
    
    
    (29,676
    )
    
    
    (26,104
    )Net unrealized change on investments
    
    
    (164
    )
    
    
    (929
    )Other
    
    
    (234
    )
    
    
    (30,074
    )
    
    
    (27,033
    )Net deferred tax assets
    
    $
    17,593
    
    
    $
    30,936
 65




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
     Expiration Year Ended June 30,
    
    Amount2009
    
    $
    84,7912010
    
    
    7,0952011
    
    
    2,0992012
    
    
    Thereafter
    
    
    2,825Total NOL carryforwards
    
    $
    96,810
 66




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 14. Net Income (Loss) Per Share
 Earnings Per Share
  Year Ended June 30,2008
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (17,845
    )
    
    $
    (16,670
    )
    
    $
    28,068Weighted average common basic shares
    
    
    47,628
    
    
    
    47,584
    
    
    
    47,487Effect of dilutive securities
    
    
    
    
    
    
    
    
    
    
    2,089Weighted average common dilutive shares
    
    
    47,628
    
    
    
    47,584
    
    
    
    49,576Basic net income (loss) per share
    
    $
    (0.37
    )
    
    $
    (0.35
    )
    
    $
    0.59Diluted net income (loss) per share
    
    $
    (0.37
    )
    
    $
    (0.35
    )
    
    $
    0.57
   15. Concentrations of Credit Risk
   16. Related Party Transactions
   67




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   17. Severance
  18. Litigation
 Accounting for Contingencies
 Annette Rush v. Village Auto Insurance
Company, Inc. Margaret Franklin v. Vesta Insurance Corp., et al. Keisha Milbry Monday, et al. v. First
Acceptance Corp., et al. Carrie Jackson v. Alabama Acceptance Insurance Agency, Inc. Solomon and Catherine
Warren, et al. v. First Acceptance Corp., et al.
 68




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    69




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    19. Fair Value of Financial Instruments
  2008
    
    
    2007Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueAssets:Fixed maturities, available-for-sale
    
    $
    189,570
    
    
    $
    189,570
    
    
    $
    176,555
    
    
    $
    176,555Cash and cash equivalents
    
    
    38,646
    
    
    
    38,646
    
    
    
    34,161
    
    
    
    34,161Premiums and fees receivable, net
    
    
    63,377
    
    
    
    63,377
    
    
    
    71,771
    
    
    
    71,771Liabilities:Notes payable
    
    
    3,913
    
    
    
    3,913
    
    
    
    23,060
    
    
    
    23,060Capitalized lease obligations
    
    
    211
    
    
    
    211
    
    
    
    430
    
    
    
    430Debentures payable
    
    
    41,240
    
    
    
    30,668
    
    
    
    41,240
    
    
    
    41,240
  70




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 20.
    
    Segment Information
   Year Ended June 30,2008
    
    
    2007
    
    
    2006Revenues:Insurance
    
    $
    332,219
    
    
    $
    347,431
    
    
    $
    244,557Real estate and corporate
    
    
    180
    
    
    
    206
    
    
    
    4,445Consolidated total
    
    $
    332,399
    
    
    $
    347,637
    
    
    $
    249,002Income (loss) before income taxes:Insurance
    
    $
    4,685
    
    
    $
    6,252
    
    
    $
    26,476Real estate and corporate
    
    
    (8,708
    )
    
    
    (5,336
    )
    
    
    553Consolidated total
    
    $
    (4,023
    )
    
    $
    916
    
    
    $
    27,029
 June 30,2008
    
    
    2007Total assets:Insurance
    
    $
    458,121
    
    
    $
    460,356Real estate and corporate
    
    
    15,109
    
    
    
    38,536Consolidated total
    
    $
    473,230
    
    
    $
    498,892
 21.
    
    Statutory Financial Information and Accounting Policies
 Accounting Practices and Procedures Manual
    71




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 22.
    
    Selected Quarterly Financial Data (unaudited)
  Quarters EndedSeptember 30,
    
    December 31,
    
    March 31,
    
    June 30,Year Ended June 30, 2008:Total revenues
    
    $
    87,158
    
    
    $
    82,341
    
    
    $
    83,985
    
    
    $
    78,915Net income (loss) before income
taxes
    
    $
    2,963
    
    
    $
    33
    
    
    $
    1,287
    
    
    $
    (8,306
    )Net income (loss)
    
    $
    1,892
    
    
    $
    (11,731
    )
    
    $
    758
    
    
    $
    (8,764
    )Basic net income (loss) per share
    
    $
    0.04
    
    
    $
    (0.25
    )
    
    $
    0.02
    
    
    $
    (0.18
    )Diluted net income (loss) per share
    
    $
    0.04
    
    
    $
    (0.25
    )
    
    $
    0.02
    
    
    $
    (0.18
    )Year Ended June 30, 2007:Total revenues
    
    $
    79,102
    
    
    $
    84,321
    
    
    $
    91,983
    
    
    $
    92,231Net income (loss) before income
taxes
    
    $
    2,336
    
    
    $
    4,241
    
    
    $
    4,833
    
    
    $
    (10,494
    )Net income (loss)
    
    $
    1,493
    
    
    $
    2,701
    
    
    $
    3,066
    
    
    $
    (23,930
    )Basic net income (loss) per share
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    (0.50
    )Diluted net income (loss) per share
    
    $
    0.03
    
    
    $
    0.05
    
    
    $
    0.06
    
    
    $
    (0.50
    )
   72




---



##### Table of Contents



Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A.
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Managements Annual Report on Internal Control Over Financial Reporting
   Internal Control 
Integrated Framework Internal Control  Integrated Framework
  Changes in Internal Control over Financial Reporting
  
 Item 9B.
    
    Other Information
   73




---



##### Table of Contents



PART III
 
 Item 10.
    
    Directors, Executive Officers and Corporate Governance
      
 Item 11.
    
    Executive Compensation
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
  
 Item 14.
    
    Principal Accountant Fees and Services
  74




---



##### Table of Contents



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.
 ExhibitNumber2.1
    
    Plan of Reorganization, dated as of April 1, 1996, between the Trust and the Company
(incorporated by reference to Exhibit 2.1 of Registration Statement No. 333-07439 on Form S-4,
filed July 2, 1996 (the Registration Statement)).2.2
    
    Stock Purchase Agreement, dated as of January 16, 1996, between Liberté Investors Trust and
Hunters Glen/Ford, Ltd. (the Purchaser) (incorporated by reference to Exhibit 4.1 of
Liberté Investors Trusts Current Report on Form 8-K filed with the Commission on January 24,
1996), as amended by the Amendment to the Stock Purchase Agreement, dated as of February 27,
1996, and the Second Amendment to the Stock Purchase Agreement, dated as of March 28, 1996
(incorporated by reference to Exhibit 2.1 of Liberté Investors Trusts Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996).2.3
    
    Agreement and Plan of Merger by and among the Company, USAH Merger Sub, Inc., USAuto
Holdings, Inc. and the Stockholders of USAuto Holdings, Inc., dated as of December 15, 2003
(incorporated by reference to Exhibit 2.1 of Registration Statement No. 333-111161 on Form
S-1, filed December 15, 2003).3.1
    
    Restated Certificate of Incorporation of First Acceptance Corporation (incorporated by
reference to Exhibit 3.1 of the Companys Current Report on Form 8-K dated May 3, 2004).3.2
    
    Second Amended and Restated Bylaws of First Acceptance Corporation (incorporated by reference
to Exhibit 3 of the Companys Current Report on Form 8-K dated November 9, 2007).4.1
    
    Form of Registration Rights Agreement, dated August 16, 1996, between the Company and the
Purchaser (incorporated by reference to Exhibit 4.1 of the Registration Statement).4.2
    
    Form of Agreement Clarifying Registration Rights, dated August 16, 1996, between the Company,
the Purchaser, the Enloe Descendants Trust, and Robert Ted Enloe, III (incorporated by
reference to Exhibit 4.3 of the Registration Statement).4.3
    
    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).4.4
    
    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).
 75




---



##### Table of Contents



ExhibitNumber10.1
    
    Employment Agreement, dated as of July 1, 2002, by and between the Company and Donald J.
Edwards (incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K
dated July 11, 2002).*10.2
    
    First Acceptance Corporation 2002 Long Term Incentive Plan, as amended (incorporated by
reference to Exhibit 4.4 of the Companys Registration Statement on Form S-8 filed May 18,
2004).*10.3
    
    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).*10.4
    
    Indemnification Agreement, dated as of July 1, 2002, by and between the Company and Donald J.
Edwards (incorporated by reference to Exhibit 10.4 of the Companys Current Report on Form 8-K
dated July 11, 2002).10.5
    
    Stock Purchase 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 Registration Statement on
Form S-8 dated December 26, 2002).*10.6
    
    Stock Purchase Agreement, dated as of June 30, 2003, by and between the Company and Donald J.
Edwards (incorporated by reference to Exhibit 10.8 of the Companys Annual Report on Form 10-K
dated September 26, 2003).*10.7
    
    Advisory Services Agreement, dated as of April 30, 2004, by and between First Acceptance
Corporation and Edwards Capital LLC (incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K dated May 3, 2004).*10.8
    
    Separation Agreement, dated as of April 30, 2004, by and between First Acceptance Corporation
and Donald J. Edwards (incorporated by reference to Exhibit 10.2 of the Companys Current
Report on Form 8-K dated May 3, 2004).*10.9
    
    Employment Agreement, dated as of April 30, 2004, by and between First Acceptance Corporation
and Thomas M. Harrison, Jr. (incorporated by reference to Exhibit 10.4 of the Companys
Current Report on Form 8-K dated May 3, 2004).*10.10
    
    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).*10.11
    
    Nonqualified Stock Option Agreement, dated as of April 30, 2004, by and between First
Acceptance Corporation and Thomas M. Harrison, Jr. (incorporated by reference to Exhibit 10.6
of the Companys Current Report on Form 8-K dated May 3, 2004).*10.12
    
    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).10.13
    
    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).*10.14
    
    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).*10.15
    
    First Acceptance Corporation Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.1 of the Registration Statement No. 333-121551 on Form S-8, filed December 22,
2004).
 76




---



##### Table of Contents



ExhibitNumber10.16
    
    Summary of Compensation for Non-Employee Directors and Named Executive Officers.10.17
    
    Asset Purchase Agreement, dated as of January 12, 2006, by and among First Acceptance
Corporation, Acceptance Insurance Agency of Illinois, Inc., Insurance Plus Agency II, Inc.,
Yale International Insurance Agency, Inc. and Constantine Danos (incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K dated January 18, 2006).10.18
    
    Credit Agreement, dated as of January 12, 2006, by and among First Acceptance Corporation,
SunTrust Bank, in its capacity as a lender and as administrative agent for the lenders, and
First Bank (incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form
8-K dated January 18, 2006).10.19
    
    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).*10.20
    
    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).*10.21
    
    Amendment to Employment Agreement, dated as of September 13, 2006, by and between First
Acceptance Corporation and Thomas M. Harrison, Jr. (incorporated by reference to Exhibit 99.5
of the Companys Current Report on Form 8-K dated September 19, 2006).*10.22
    
    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).*10.23
    
    Second Amendment to the First Acceptance Corporation 2002 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 10-Q dated
May 10, 2007).*10.24
    
    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).*10.25
    
    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).*10.26
    
    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).10.27
    
    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).10.28
    
    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).10.29
    
    Waiver and Fourth Amendment to Revolving Credit and Term Loan Agreement, dated September 13,
2007, by and among First Acceptance Corporation, Suntrust Bank, as administrative agent and as
a lender, and First Bank, as a lender (incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K dated September 18, 2007).
 77




---



##### Table of Contents



ExhibitNumber10.30
    
    Release Agreement, dated December 31, 2007, between First Acceptance Corporation and Thomas
M. Harrison, Jr. (incorporated by reference to Exhibit 99.1 of the Companys Current Report on
Form 8-K dated January 4, 2008).*10.31
    
    Waiver and Fifth Amendment to Revolving Credit and Term Loan Agreement, dated February 6,
2008, by and among First Acceptance Corporation, Suntrust Bank, as administrative agent and as
a lender, and First Bank, as a lender (incorporated by reference to Exhibit 99.1 of the
Companys Current Report on Form 8-K dated February 11, 2008).10.32
    
    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).*10.33
    
    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).*10.34
    
    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).*10.35
    
    Employment Agreement, made as of February 8, 2008, to be effective January 1, 2008, by and
between First Acceptance Corporation and William R. Pentecost (incorporated by reference to
Exhibit 99.6 of the Companys Current Report on Form 8-K dated February 11, 2008).*10.36
    
    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).10.37
    
    Restricted Stock Award Agreement, dated as of March 18, 2008, between First Acceptance
Corporation and Edward Pierce (incorporated by reference to Exhibit 99.1 of the Companys
Current Report on Form 8-K dated March 21, 2008).*10.38
    
    Waiver and Sixth Amendment to
Revolving Credit and Term Loan Agreement, dated September 10, 2008,
by and among First Acceptance Corporation, Suntrust Bank, as
administrative agent and as a lender, and First Bank, as a lender.14
    
    First Acceptance Corporation Code of Business Conduct and Ethics (incorporated by reference
to Exhibit 14 of the Companys Annual Report on Form 10-K dated September 28, 2004).21
    
    Subsidiaries of First Acceptance Corporation.23.1
    
    Consent of Ernst & Young LLP.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).32.1
    
    Chief Executive Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Chief Financial Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Management contract or compensatory plan or arrangement. 78




---



##### Table of Contents



SIGNATURES
  FIRST ACCEPTANCE CORPORATIONDate:  September 11, 2008
    By
    /s/ Stephen J. HarrisonStephen J. HarrisonChief Executive Officer  Signature
    
    Title
    
    Date/s/ Stephen J. Harrison
    
    Chief Executive Officer and
Director (Principal Executive
Officer)
    
    September 11, 2008Stephen J. Harrison/s/ Kevin P. Cohn
    
    Senior Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
    
    September 11, 2008Kevin P. Cohn/s/ Gerald J. Ford
    
    Chairman of the Board of Directors
    
    September 11, 2008Gerald J. Ford/s/ Thomas M. Harrison, Jr.
    
    Director
    
    September 11, 2008Thomas M. Harrison, Jr./s/ Rhodes R. Bobbitt
    
    Director
    
    September 11, 2008Rhodes R. BobbittDirectorHarvey B. CashDirectorDonald J. Edwards/s/ Tom C. Nichols
    
    Director
    
    September 11, 2008Tom C. NicholsDirectorLyndon L. Olson/s/ William A. Shipp, Jr.
    
    Director
    
    September 11, 2008William A. Shipp, Jr.
 79




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
SCHEDULE I. FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
(in thousands)
 June 30,2008
    
    
    2007Balance SheetsAssets:Investment in subsidiaries, at equity in net assets
    
    $
    257,305
    
    
    $
    269,806Cash and cash equivalents
    
    
    2,465
    
    
    
    10,350Deferred tax asset
    
    
    8,927
    
    
    
    24,674Other assets
    
    
    2,741
    
    
    
    3,161Foreclosed real estate held for sale
    
    
    594
    
    
    
    341Amounts due from (to) subsidiaries
    
    
    383
    
    
    
    (3,136
    )$
    272,415
    
    
    $
    305,196Liabilities:Notes payable
    
    $
    3,913
    
    
    $
    23,060Debentures payable
    
    
    41,240
    
    
    
    41,240Other liabilities
    
    
    1,803
    
    
    
    1,412Stockholders equity
    
    
    225,459
    
    
    
    239,484$
    272,415
    
    
    $
    305,196
 Year Ended June 30,2008
    
    
    2007
    
    
    2006Statements of OperationsGains on sales of foreclosed real estate
    
    $
    
    
    
    $
    
    
    
    $
    3,637Investment income
    
    
    180
    
    
    
    206
    
    
    
    807Equity in income of subsidiaries, net of tax
    
    
    2,805
    
    
    
    3,677
    
    
    
    17,282Expenses
    
    
    (8,888
    )
    
    
    (5,542
    )
    
    
    (3,891
    )Income (loss) before income taxes
    
    
    (5,903
    )
    
    
    (1,659
    )
    
    
    17,835Provision (benefit) for income taxes
    
    
    11,942
    
    
    
    15,011
    
    
    
    (10,233
    )Net income (loss)
    
    $
    (17,845
    )
    
    $
    (16,670
    )
    
    $
    28,068
 Year Ended June 30,2008
    
    
    2007
    
    
    2006Statements of Cash FlowsCash flows from operating activities:Net income (loss)
    
    $
    (17,845
    )
    
    $
    (16,670
    )
    
    $
    28,068Equity in income of subsidiaries, net of tax
    
    
    (2,805
    )
    
    
    (3,677
    )
    
    
    (17,282
    )Stock-based compensation
    
    
    1,507
    
    
    
    1,063
    
    
    
    500Deferred income taxes
    
    
    15,747
    
    
    
    18,037
    
    
    
    514Gains on sales of foreclosed real estate
    
    
    
    
    
    
    
    
    
    
    (3,637
    )Change in assets and liabilities
    
    
    (2,829
    )
    
    
    3,322
    
    
    
    5,726Net cash provided by (used in) operating activities
    
    
    (6,225
    )
    
    
    2,075
    
    
    
    13,889Cash flows from investing activities:Sale of investment in mutual fund
    
    
    
    
    
    
    
    
    
    
    10,920Investment in subsidiary
    
    
    
    
    
    
    (45,765
    )
    
    
    (47,026
    )Dividend from subsidiary
    
    
    17,609
    
    
    
    6,435
    
    
    
    750Improvements to foreclosed real estate
    
    
    (253
    )
    
    
    (254
    )
    
    
    Purchase of common stock in trust
    
    
    
    
    
    
    (1,240
    )
    
    
    Proceeds from sales of foreclosed real estate
    
    
    
    
    
    
    
    
    
    
    4,512Net cash provided by (used in) investing activities
    
    
    17,356
    
    
    
    (40,824
    )
    
    
    (30,844
    )Cash flows from financing activities:Proceeds from borrowings
    
    
    
    
    
    
    5,000
    
    
    
    30,000Payments on borrowings
    
    
    (19,147
    )
    
    
    (5,552
    )
    
    
    (6,388
    )Proceeds from issuance of debentures
    
    
    
    
    
    
    41,240
    
    
    
    Net proceeds from issuance of common stock
    
    
    131
    
    
    
    857
    
    
    
    223Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    421Net cash provided by (used in) financing activities
    
    
    (19,016
    )
    
    
    41,545
    
    
    
    24,256Net increase (decrease) in cash and cash equivalents
    
    
    (7,885
    )
    
    
    2,796
    
    
    
    7,301Cash and cash equivalents, beginning of year
    
    
    10,350
    
    
    
    7,554
    
    
    
    253Cash and cash equivalents, end of year
    
    $
    2,465
    
    
    $
    10,350
    
    
    $
    7,554
 80