##### 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, 2007
 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
    
    75-1328153(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)3322 West End Ave. Ste. 1000, Nashville, Tennessee
    
    37203(Address of principal executive offices)
    
    (Zip Code)
 (615) 844-2800  (Registrants telephone number, including area code)  Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of exchange on which registeredCommon Stock, $.01 par value per share
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



FIRST ACCEPTANCE CORPORATION
 Table of Contents
  
 PagePART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    14Item 1B. Unresolved Staff Comments
    
    
    21Item 2. Properties
    
    
    22Item 3. Legal Proceedings
    
    
    22Item 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
    
    
    39Item 8. Financial Statements and Supplementary Data
    
    
    40Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    66Item 9A. Controls and Procedures
    
    
    66Item 9B. Other Information
    
    
    66PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    67Item 11. Executive Compensation
    
    
    67Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    67Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    67Item 14. Principal Accountant Fees and Services
    
    
    67PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    68SIGNATURES
    
    
    72Ex-10.19 Summary of Compensation for Non-Emloyee Directors and Named Executive OfficersEx-21 List of SubsidiariesEx-23.1 Consent of Ernst & Young, LLPEx-23.2 Consent of KPMG 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




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION
 
 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 August 31, 2007, we leased and operated 462 retail sales offices
staffed with our employee-agents and strategically located 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.
 1




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Our Business Model
      Personal Automobile Insurance Market
  2




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Our Products
     Our Growth Strategy
  
    
    Increase the Number of Customers in Existing Geographic Markets. We intend to work to
continue to increase the number of our customers through advertising campaigns and we may
open new retail sales offices in some of the states where we currently do business. We
believe that the number of our customers will also increase as our recently-added sales
offices continue to add new customers.
    
    Expand into New Geographic Markets. We currently operate in 12 states and are licensed
as an insurer in 13 additional states. We may expand into additional states through the
opening of new sales offices and through selective acquisitions.
    
    Pursue Acquisitions of Local Agencies.We may selectively pursue acquisitions of local
agencies who write non-standard automobile insurance for other insurance companies in our
existing markets and in new markets. During 2006, we completed the acquisition of a local
insurance agency operation in Chicago, Illinois and in 2005 we completed a similar
acquisition in Texas.
 3




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Competition
  Marketing and Distribution
 ®
   Underwriting and Pricing
   Claims Handling
  4




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Loss and Loss Adjustment Expense Reserves
     5




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At June 30 (in thousands)
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007Net liability for loss and loss
adjustment expense reserves, originally
estimated
    
    $
    18,137
    
    
    $
    39,289
    
    
    $
    61,521
    
    
    $
    91,137Cumulative amounts paid as of:One year later
    
    
    13,103
    
    
    
    28,024
    
    
    
    51,420Two years later
    
    
    16,579
    
    
    
    34,754Three years later
    
    
    17,795Liability re-estimated as of:One year later
    
    
    17,781
    
    
    
    37,741
    
    
    
    65,386Two years later
    
    
    17,244
    
    
    
    38,226Three years later
    
    
    16,973Net cumulative redundancy (deficiency)
    
    
    1,164
    
    
    
    1,063
    
    
    
    (3,865
    )Gross liability  end of year
    
    $
    30,434
    
    
    $
    42,897
    
    
    $
    62,822
    
    
    $
    91,446Reinsurance receivables
    
    
    12,297
    
    
    
    3,608
    
    
    
    1,301
    
    
    
    309Net liability  end of year
    
    $
    18,137
    
    
    $
    39,289
    
    
    $
    61,521
    
    
    $
    91,137Gross re-estimated liability  latest
    
    $
    29,233
    
    
    $
    41,524
    
    
    $
    66,458Re-estimated reinsurance receivables 
latest
    
    
    12,260
    
    
    
    3,298
    
    
    
    1,072Net re-estimated  latest
    
    $
    16,973
    
    
    $
    38,226
    
    
    $
    65,386Gross cumulative redundancy (deficiency)
    
    $
    1,201
    
    
    $
    1,373
    
    
    $
    (3,636
    )
   6




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Reinsurance
  7




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Technology
  Sales Office Automation
 Payment Processing
 Ratings
  8




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Regulatory Environment
 Insurance Company Regulation
 
    
    regulating premium rates and forms;
    
    setting minimum solvency standards;
    
    setting capital and surplus requirements;
    
    licensing companies, agents and, in some states, adjusters;
    
    setting requirements for and limiting the types and amounts of investments;
    
    establishing requirements for the filing of annual statements and other financial reports;
    
    conducting periodic statutory examinations of the affairs of insurance companies;
    
    requiring prior approval of changes in control and of certain transactions with affiliates;
    
    limiting the amount of dividends that may be paid without prior regulatory approval; and
    
    setting standards for advertising and other market conduct activities.
 Required Licensing.
 Alabama
    
    MissouriArizona
    
    NevadaArkansas
    
    New MexicoColorado
    
    OhioFlorida
    
    OklahomaGeorgia
    
    PennsylvaniaIllinois
    
    South CarolinaIndiana
    
    TennesseeIowa
    
    TexasKansas
    
    Utah
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Kentucky
    
    VirginiaLouisiana
    
    West VirginiaMississippi
  Insurance Holding Company Regulation
 Restrictions on Paying Dividends
 Regulation of Rates and Policy Forms
 Guaranty Funds
 10




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Investment Regulation
 Restrictions on Cancellation, Non-Renewal or Withdrawal
 Privacy Regulations
 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 or 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;
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
    
    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
 Risk-Based Capital
  12




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IRIS Ratios
  
    
    FAIC had a ratio outside the usual range for high investment yield as the calculated
yield was above 6.5%. The calculated yield was 18.9% and was inflated as a result of
the inclusion of a dividend received during the year from FAIC-GA. Excluding this
dividend, the calculated yield would have been 4.0% which is above the low end of the
investment yield range of 3%.
    
    FAIC had a ratio outside of the usual IRIS range for the change in net premiums
written, which is plus or minus 33%. Net premiums written increased 82% primarily as
the result of FAICs growth from the development of recently-added retail locations in
Florida and Texas and from the acquisition of retail stores in Chicago, Illinois in
January 2006.
    
    FAIC had ratios outside of the usual IRIS range for both the gross and net changes
in capital and surplus, which are plus or minus 50% and 25%, respectively. FAIC
increased its gross and net capital and surplus by 125% and 83%, respectively,
primarily through capital contributions to support its premium growth. The net change
in capital and surplus excludes amounts that are paid in. FAIC-GA also had a ratio out
of the usual IRIS range for the net change in capital and surplus. On a net basis,
FAIC-GA reduced its capital and surplus by 26% which was primarily the result of paying
a dividend during the year to FAIC.
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Employees
  Available Information
  Internet Website
  
 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 ability to use net operating loss carryforwards to reduce future tax payments may be limited .
  14




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The loss of our President and Chief Executive Officer, Stephen J. Harrison, could negatively affect
our ability to conduct our business efficiently and could lead to loss of customers .
  Our business is highly competitive, which may make it difficult for us to market our core products
effectively and profitably .
  15




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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 results may fluctuate as a result of cyclical changes in the personal automobile insurance
industry.
  Our investment portfolio may suffer reduced returns or losses, which could reduce our
profitability.
  16




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We rely on our information technology and communication systems, and the failure of these systems
could materially and adversely affect our business.
  We may have difficulties in managing our expansion into new markets .
  We may not be successful in identifying agency acquisition candidates or integrating their
operations, which could harm our financial results .
  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




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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 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.
  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 .
  18




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A few of our stockholders have significant control over us, and their interests may differ from
yours
  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
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Regulation of Rates and Policy Forms
 Investment Restrictions
 Restrictions on Cancellation, Non-Renewal or Withdrawal
 Provisions in our certificate of incorporation and bylaws may prevent a takeover or a change in
management that you may deem favorable.
   
    
    the requirement that only stockholders owning at least one-third of the outstanding
shares of our common stock may call a special stockholders meeting; and
    
    the requirement that stockholders owning at least two-thirds of the outstanding shares
of our common stock must approve any amendment to our certificate of incorporation
provisions concerning the transfer restrictions and the special stockholders meetings.
 20




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Item 1B. Unresolved Staff Comments
  Executive Officers of the Registrant
   Name
    
    Age
    
    PositionStephen J. Harrison
    
    
    55
    
    
    President and Chief Executive OfficerThomas M. Harrison, Jr.
    
    
    57
    
    
    Executive Vice President and SecretaryEdward L. Pierce
    
    
    50
    
    
    Executive Vice President and Chief Financial OfficerKevin P. Cohn
    
    
    38
    
    
    Chief Accounting Officer and Corporate ControllerMichael J. Bodayle
    
    
    51
    
    
    Chief Financial Officer  Insurance Company
OperationsWilliam R. Pentecost
    
    
    49
    
    
    Chief Information OfficerRandy L. Reed
    
    
    51
    
    
    Senior Vice President  Sales and Marketing
 Stephen J. Harrison
 Thomas M. Harrison, Jr.
 Edward L. Pierce
 Kevin P. Cohn
 21




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##### Table of Contents



Michael J. Bodayle
 William R. Pentecost
 Randy L. Reed
 
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  22




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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, 2006First Quarter
    
    $
    10.37
    
    
    $
    8.77Second Quarter
    
    
    10.66
    
    
    
    9.59Third Quarter
    
    
    13.34
    
    
    
    10.06Fourth Quarter
    
    
    13.40
    
    
    
    10.95Year Ended June 30, 2007First Quarter
    
    $
    12.09
    
    
    $
    10.55Second Quarter
    
    
    11.74
    
    
    
    9.61Third Quarter
    
    
    10.69
    
    
    
    9.91Fourth Quarter
    
    
    10.82
    
    
    
    9.86
 Holders
  Dividends
  Stock Transfer Restrictions
  23




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##### Table of Contents



Performance Graph
  CUMULATIVE VALUE OF $100 INVESTMENT
 
 June 30,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007First Acceptance Corporation
    
    
    
    100.00
    
    
    
    
    139.23
    
    
    
    
    179.49
    
    
    
    
    242.56
    
    
    
    
    302.05
    
    
    
    
    260.51Russell 3000
    
    
    
    100.00
    
    
    
    
    100.77
    
    
    
    
    121.38
    
    
    
    
    131.16
    
    
    
    
    143.70
    
    
    
    
    172.54S&P Property & Casualty
Insurance
    
    
    
    100.00
    
    
    
    
    95.64
    
    
    
    
    113.59
    
    
    
    
    129.12
    
    
    
    
    136.66
    
    
    
    
    156.32
 24




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Item 6. Selected Financial Data
    25




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Year Ended June 30,Proforma
    
    
    
    
    
    
    ProformaActual
    
    
    2004
    
    
    Actual
    
    
    20032007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    (unaudited)
    
    
    2003
    
    
    (unaudited)(in thousands, except per share data)Statement of Operations Data:Revenues:Premiums earned
    
    $
    300,661
    
    
    $
    208,771
    
    
    $
    132,677
    
    
    $
    11,728
    
    
    $
    57,716
    
    
    $
    
    
    
    $
    38,353Commission and fee income
    
    
    37,324
    
    
    
    26,757
    
    
    
    26,821
    
    
    
    4,401
    
    
    
    26,275
    
    
    
    
    
    
    
    33,462Investment income
    
    
    8,863
    
    
    
    5,762
    
    
    
    3,353
    
    
    
    958
    
    
    
    1,431
    
    
    
    1,098
    
    
    
    1,289Other
    
    
    789
    
    
    
    7,712
    
    
    
    3,944
    
    
    
    6,066
    
    
    
    14,901
    
    
    
    233
    
    
    
    7,333Total revenues
    
    
    347,637
    
    
    
    249,002
    
    
    
    166,795
    
    
    
    23,153
    
    
    
    100,323
    
    
    
    1,331
    
    
    
    80,437Expenses:Losses and loss adjustment expenses
    
    
    241,908
    
    
    
    140,845
    
    
    
    87,493
    
    
    
    7,167
    
    
    
    36,616
    
    
    
    
    
    
    
    25,905Insurance operating expenses
    
    
    97,629
    
    
    
    75,773
    
    
    
    49,921
    
    
    
    7,194
    
    
    
    41,142
    
    
    
    
    
    
    
    35,962Other operating expenses
    
    
    2,623
    
    
    
    2,494
    
    
    
    2,775
    
    
    
    6,235
    
    
    
    2,278
    
    
    
    2,637
    
    
    
    1,648Stock-based compensation
    
    
    1,063
    
    
    
    500
    
    
    
    332
    
    
    
    7,850
    
    
    
    
    
    
    
    546
    
    
    
    Depreciation and amortization
    
    
    1,624
    
    
    
    1,463
    
    
    
    1,920
    
    
    
    648
    
    
    
    1,366
    
    
    
    10
    
    
    
    1,954Interest expense
    
    
    1,874
    
    
    
    898
    
    
    
    351
    
    
    
    44
    
    
    
    318
    
    
    
    
    
    
    
    29Total expenses
    
    
    346,721
    
    
    
    221,973
    
    
    
    142,792
    
    
    
    29,138
    
    
    
    81,720
    
    
    
    3,193
    
    
    
    65,498Income (loss) before income taxes
    
    
    916
    
    
    
    27,029
    
    
    
    24,003
    
    
    
    (5,985
    )
    
    
    18,603
    
    
    
    (1,862
    )
    
    
    14,939Provision (benefit) for income taxes (1)
    
    
    17,586
    
    
    
    (1,039
    )
    
    
    (2,153
    )
    
    
    (2,189
    )
    
    
    6,983
    
    
    
    
    
    
    
    5,844Net income (loss)
    
    $
    (16,670
    )
    
    $
    28,068
    
    
    $
    26,156
    
    
    $
    (3,796
    )
    
    $
    11,620
    
    
    $
    (1,862
    )
    
    $
    9,095Per Share Data:Income (loss) per share:Basic
    
    $
    (0.35
    )
    
    $
    0.59
    
    
    $
    0.56
    
    
    $
    (0.15
    )
    
    $
    0.25
    
    
    $
    (0.09
    )
    
    $
    0.20Diluted
    
    $
    (0.35
    )
    
    $
    0.57
    
    
    $
    0.53
    
    
    $
    (0.15
    )
    
    $
    0.24
    
    
    $
    (0.09
    )
    
    $
    0.19Weighted average shares outstanding:Basic
    
    
    47,584
    
    
    
    47,487
    
    
    
    47,055
    
    
    
    24,965
    
    
    
    46,405
    
    
    
    20,420
    
    
    
    46,229Diluted
    
    
    47,584
    
    
    
    49,576
    
    
    
    48,989
    
    
    
    24,965
    
    
    
    47,883
    
    
    
    20,420
    
    
    
    46,985
 June 30,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(in thousands, except per share data)Balance Sheet Data:Fixed maturities, available-for-sale
    
    $
    176,555
    
    
    $
    127,828
    
    
    $
    74,840
    
    
    $
    33,243
    
    
    $
    Cash, cash equivalents and other
invested assets
    
    
    34,161
    
    
    
    31,534
    
    
    
    35,682
    
    
    
    38,352
    
    
    
    56,847Deferred tax asset
    
    
    30,936
    
    
    
    48,068
    
    
    
    48,106
    
    
    
    45,493
    
    
    
    Total assets
    
    
    498,892
    
    
    
    435,327
    
    
    
    331,645
    
    
    
    286,450
    
    
    
    59,053Total liabilities
    
    
    259,408
    
    
    
    181,904
    
    
    
    103,316
    
    
    
    92,224
    
    
    
    978Total stockholders equity
    
    
    239,484
    
    
    
    253,423
    
    
    
    228,329
    
    
    
    194,226
    
    
    
    58,075Book value per common share
    
    $
    5.03
    
    
    $
    5.33
    
    
    $
    4.81
    
    
    $
    4.17
    
    
    $
    2.82
 
 (1)
    
    The provision for income taxes for the year ended June 30, 2007 includes an increase
in the valuation allowance for the deferred tax asset of $6.9 million as well as $10.0 million
related to the expiration of certain net operating loss carryforwards (NOLs) resulting in a
charge totaling $16.9 million. The benefit from income taxes for the years ended June 30, 2006
and 2005 include decreases in the valuation allowance for the deferred tax asset of $10.5
million and $10.6 million, respectively. There was no provision (benefit) for income tax
expense recorded for the year ended June 30, 2003 because we had NOLs available to offset
federal taxable income for which a full valuation allowance had been established. For the
year ended June 30, 2003, the benefit resulting from the utilization of NOLs directly offsets
federal income taxes that would have otherwise been payable. 26




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##### Table of Contents



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 30,2007
    
    
    2006Retail locations  beginning of period
    
    
    460
    
    
    
    248Opened
    
    
    18
    
    
    
    149Acquired
    
    
    
    
    
    
    72Closed
    
    
    (16
    )
    
    
    (9
    )Retail locations  end of period
    
    
    462
    
    
    
    460
  June 30,2007
    
    
    2006
    
    
    2005Alabama
    
    
    25
    
    
    
    25
    
    
    
    25Florida
    
    
    41
    
    
    
    39
    
    
    
    20Georgia
    
    
    62
    
    
    
    63
    
    
    
    62Illinois
    
    
    81
    
    
    
    86
    
    
    
    5Indiana
    
    
    24
    
    
    
    26
    
    
    
    21Mississippi
    
    
    8
    
    
    
    8
    
    
    
    8Missouri
    
    
    15
    
    
    
    18
    
    
    
    14Ohio
    
    
    30
    
    
    
    30
    
    
    
    29Pennsylvania
    
    
    25
    
    
    
    25
    
    
    
    7South Carolina
    
    
    28
    
    
    
    21
    
    
    
    Tennessee
    
    
    20
    
    
    
    20
    
    
    
    20Texas
    
    
    103
    
    
    
    99
    
    
    
    37Total
    
    
    462
    
    
    
    460
    
    
    
    248
 27




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##### Table of Contents



Consolidated Results of Operations
 Overview
   Year Ended June 30,2007
    
    
    2006
    
    
    2005(in thousands)Revenues:Insurance
    
    $
    347,431
    
    
    $
    244,557
    
    
    $
    164,974Real estate and corporate
    
    
    206
    
    
    
    4,445
    
    
    
    1,821Consolidated total
    
    $
    347,637
    
    
    $
    249,002
    
    
    $
    166,795Income (loss) before income taxes:Insurance
    
    $
    6,252
    
    
    $
    26,476
    
    
    $
    25,640Real estate and corporate
    
    
    (5,336
    )
    
    
    553
    
    
    
    (1,637
    )Consolidated total
    
    $
    916
    
    
    $
    27,029
    
    
    $
    24,003
  
    
    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 as well
as fees for other ancillary services (principally a motor club product); and
    
    investment income earned on the invested assets of the insurance company
subsidiaries.
  28




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##### Table of Contents



Year Ended June 30,2007
    
    
    2006
    
    
    2005(in thousands)Gross premiums earned:Georgia
    
    $
    70,312
    
    
    $
    68,948
    
    
    $
    69,806Florida
    
    
    55,117
    
    
    
    26,327
    
    
    
    1,181Texas
    
    
    32,480
    
    
    
    18,596
    
    
    
    4,899Illinois
    
    
    31,201
    
    
    
    7,680
    
    
    
    112Alabama
    
    
    30,316
    
    
    
    28,952
    
    
    
    26,610Tennessee
    
    
    23,800
    
    
    
    24,387
    
    
    
    26,205Ohio
    
    
    16,455
    
    
    
    14,046
    
    
    
    10,703South Carolina
    
    
    14,797
    
    
    
    1,238
    
    
    
    Indiana
    
    
    8,186
    
    
    
    6,163
    
    
    
    2,032Pennsylvania
    
    
    6,937
    
    
    
    1,996
    
    
    
    24Missouri
    
    
    6,087
    
    
    
    5,332
    
    
    
    4,193Mississippi
    
    
    4,973
    
    
    
    5,187
    
    
    
    4,431Total gross premiums earned
    
    
    300,661
    
    
    
    208,852
    
    
    
    150,196Premiums ceded
    
    
    
    
    
    
    (81
    )
    
    
    (8,732
    )Premiums not assumed
    
    
    
    
    
    
    
    
    
    
    (8,787
    )Total net premiums earned
    
    $
    300,661
    
    
    $
    208,771
    
    
    $
    132,677
  Year Ended June 30,2007
    
    
    2006
    
    
    2005Policies in force  beginning of period
    
    
    200,401
    
    
    
    119,422
    
    
    
    91,385Acquired
    
    
    
    
    
    
    
    
    
    
    6,473Net increase during period
    
    
    26,573
    
    
    
    80,979
    
    
    
    21,564Policies in force  end of period
    
    
    226,974
    
    
    
    200,401
    
    
    
    119,422
  Loss Ratio 
 Expense Ratio 
 Combined Ratio 
 29




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##### Table of Contents



Year Ended June 30,2007
    
    
    2006
    
    
    2005Loss and loss adjustment expense
    
    
    80.4
    %
    
    
    67.5
    %
    
    
    65.9
    %Expense
    
    
    19.8
    %
    
    
    21.5
    %
    
    
    17.9
    %Combined
    
    
    100.2
    %
    
    
    89.0
    %
    
    
    83.8
    %
   Year Ended June 30, 2007 Compared with the Year Ended June 30, 2006
 Consolidated Results
    Insurance Operations
  30




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Premiums Earned
  Commission and Fee Income
  Investment Income
  Other
  Loss and Loss Adjustment Expenses
    31




---



##### Table of Contents



Operating Expenses
    Real Estate and Corporate
  Year Ended June 30, 2006 Compared with the Year Ended June 30, 2005
 Consolidated Results
    Insurance Operations
  Premiums Earned
  32




---



##### Table of Contents



Commission and Fee Income
  Investment Income
  Other
  Loss and Loss Adjustment Expenses
  Operating Expenses
   33




---



##### Table of Contents



Real Estate and Corporate
   Liquidity and Capital Resources
    34




---



##### Table of Contents



Chicago Acquisition
  Credit
Facility
   Trust Preferred Securities
  35




---



##### Table of Contents



Consolidation of Variable Interest
Entities  An Interpretation of ARB No. 51.
 Off-Balance Sheet Arrangements
  Contractual Obligations
  Payments Due By PeriodMore than 5Total
    
    
    Less than 1 year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    yearsLoss and loss adjustment expense
reserves (1)
    
    $
    91,446
    
    
    $
    54,991
    
    
    $
    33,265
    
    
    $
    2,734
    
    
    $
    456Notes payable (2) (6)
    
    
    19,725
    
    
    
    6,481
    
    
    
    13,244
    
    
    
    
    
    
    
    Revolving credit agreement (3) (6)
    
    
    5,000
    
    
    
    
    
    
    
    5,000
    
    
    
    
    
    
    
    Debentures payable (4)
    
    
    154,299
    
    
    
    3,826
    
    
    
    7,652
    
    
    
    7,652
    
    
    
    135,169Capitalized lease obligations
    
    
    462
    
    
    
    231
    
    
    
    231
    
    
    
    
    
    
    
    Operating leases (5)
    
    
    28,965
    
    
    
    9,573
    
    
    
    13,461
    
    
    
    4,348
    
    
    
    1,583Employment agreements
    
    
    1,707
    
    
    
    965
    
    
    
    742
    
    
    
    
    
    
    
    Severance agreement obligation
    
    
    501
    
    
    
    264
    
    
    
    237
    
    
    
    
    
    
    
    Advisory services agreement
    
    
    208
    
    
    
    208
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    302,313
    
    
    $
    76,539
    
    
    $
    73,832
    
    
    $
    14,734
    
    
    $
    137,208
 
 (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 $91,446 include $309 related to
reinsurance receivables.(2)
    
    Noted payments due by period assume a fixed interest rate on notes payable of 6.63%
consistent with interest rate swap agreement effective through term loan facility maturity
date of June 30, 2010.(3)
    
    Noted payments due on revolving credit agreement of $5,000 was repaid in July 2007.(4)
    
    Noted 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 9.11%
as of June 30, 2007).(5)
    
    Consists primarily of rental obligations under real estate leases related to our
retail locations and corporate offices.(6)
    
    At June 30, 2007, we were not in compliance with
financial covenants in the credit agreement regarding a
minimum fixed charge coverage ratio and a maximum combined ratio.
Our lenders waived this non-compliance as of June 30, 2007 and we entered into an amendment to the credit
agreement dated September 13, 2007. The amended terms have less
restrictive financial covenants, increased the interest rate we pay
by 75 basis points and require us to make a prepayment of at least $6.0 million in principal before
December 31, 2007. In addition, the availability under the
revolving credit facility was
permanently reduced from $5.0 million to $2.0 million. 36




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Critical Accounting Policies
  Losses and loss adjustment expense reserves.
  Revenue Recognition.
   Valuation of deferred tax asset. Accounting for Income Taxes
 37




---



##### Table of Contents



Goodwill and identifiable intangible assets. Goodwill and Other Intangible
Assets
 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.
   38




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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
     39




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##### Table of Contents



Item 8.
Financial Statements and Supplementary Data
 PageReports of Independent Registered Public Accounting Firms
    
    
    41Consolidated Balance Sheets
    
    
    44Consolidated Statements of Operations
    
    
    45Consolidated Statements of Stockholders Equity
    
    
    46Consolidated Statements of Cash Flows
    
    
    47Notes to Consolidated Financial Statements
    
    
    48
 40




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Report of Independent Registered Public Accounting Firm
 
    Internal
ControlIntegrated Framework
  
 41




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
 Internal
ControlIntegrated Framework Internal Control Over Financial Reporting
       
 42




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
 43




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share data)
 June 30,2007
    
    
    2006ASSETSFixed maturities, available-for-sale at fair value (amortized
cost $179,328 and $131,291, respectively)
    
    $
    176,555
    
    
    $
    127,828Cash and cash equivalents
    
    
    34,161
    
    
    
    31,534Premiums and fees receivable, net of allowance of $606 and $668
    
    
    71,771
    
    
    
    65,095Reinsurance receivables
    
    
    326
    
    
    
    1,344Receivable for securities
    
    
    19,973
    
    
    
    999Deferred tax asset
    
    
    30,936
    
    
    
    48,068Other assets
    
    
    11,396
    
    
    
    7,883Property and equipment, net
    
    
    4,116
    
    
    
    3,376Deferred acquisition costs
    
    
    5,166
    
    
    
    5,330Goodwill
    
    
    138,082
    
    
    
    137,045Identifiable intangible assets
    
    
    6,410
    
    
    
    6,825TOTAL ASSETS
    
    $
    498,892
    
    
    $
    435,327LIABILITIES AND STOCKHOLDERS EQUITYLoss and loss adjustment expense reserves
    
    $
    91,446
    
    
    $
    62,822Unearned premiums and fees
    
    
    88,831
    
    
    
    78,331Notes payable and capitalized lease obligations
    
    
    23,490
    
    
    
    24,026Debentures payable
    
    
    41,240
    
    
    
    Payable for securities
    
    
    999
    
    
    
    4,914Other liabilities
    
    
    13,402
    
    
    
    11,811Total liabilities
    
    
    259,408
    
    
    
    181,904Stockholders equity:Preferred stock, $.01 par value, 10,000 shares authorized
    
    
    
    
    
    
    Common stock, $.01 par value, 75,000 shares authorized;
47,615 and 47,535 shares issued and outstanding,
respectively
    
    
    476
    
    
    
    475Additional paid-in capital
    
    
    460,968
    
    
    
    459,049Accumulated other comprehensive loss
    
    
    (2,652
    )
    
    
    (3,463
    )Accumulated deficit
    
    
    (219,308
    )
    
    
    (202,638
    )Total stockholders equity
    
    
    239,484
    
    
    
    253,423TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    498,892
    
    
    $
    435,327
  44




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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 Year Ended June 30,2007
    
    
    2006
    
    
    2005Revenues:Premiums earned
    
    $
    300,661
    
    
    $
    208,771
    
    
    $
    132,677Commissions and fee income
    
    
    37,324
    
    
    
    26,757
    
    
    
    26,821Investment income
    
    
    8,863
    
    
    
    5,762
    
    
    
    3,353Other
    
    
    789
    
    
    
    7,712
    
    
    
    3,944347,637
    
    
    
    249,002
    
    
    
    166,795Costs and expenses:Losses and loss adjustment expenses
    
    
    241,908
    
    
    
    140,845
    
    
    
    87,493Insurance operating expenses
    
    
    97,629
    
    
    
    75,773
    
    
    
    49,921Other operating expenses
    
    
    2,623
    
    
    
    2,494
    
    
    
    2,775Stock-based compensation
    
    
    1,063
    
    
    
    500
    
    
    
    332Depreciation and amortization
    
    
    1,624
    
    
    
    1,463
    
    
    
    1,920Interest expense
    
    
    1,874
    
    
    
    898
    
    
    
    351346,721
    
    
    
    221,973
    
    
    
    142,792Income before income taxes
    
    
    916
    
    
    
    27,029
    
    
    
    24,003Provision (benefit) for income taxes
    
    
    17,586
    
    
    
    (1,039
    )
    
    
    (2,153
    )Net income (loss)
    
    $
    (16,670
    )
    
    $
    28,068
    
    
    $
    26,156Net income (loss) per share:Basic
    
    $
    (0.35
    )
    
    $
    0.59
    
    
    $
    0.56Diluted
    
    $
    (0.35
    )
    
    $
    0.57
    
    
    $
    0.53Number of shares used to calculate net income
(loss) per share:Basic
    
    
    47,584
    
    
    
    47,487
    
    
    
    47,055Diluted
    
    
    47,584
    
    
    
    49,576
    
    
    
    48,989Reconciliation of net income (loss) to
comprehensive income (loss):Net income (loss)
    
    $
    (16,670
    )
    
    $
    28,068
    
    
    $
    26,156Net unrealized change on investments
    
    
    690
    
    
    
    (4,118
    )
    
    
    690Unrealized gain on interest rate swap agreement
    
    
    121
    
    
    
    
    
    
    
    Comprehensive income (loss)
    
    $
    (15,859
    )
    
    $
    23,950
    
    
    $
    26,846
  45




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 (in thousands)
 AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    paid-in
    
    
    comprehensive
    
    
    Accumulated
    
    
    Treasury
    
    
    stockholdersShares
    
    
    Amount
    
    
    capital
    
    
    income (loss)
    
    
    deficit
    
    
    stock
    
    
    equityBalances at July 1, 2004
    
    
    46,535
    
    
    $
    465
    
    
    $
    450,658
    
    
    $
    (35
    )
    
    $
    (256,862
    )
    
    $
    
    
    
    $
    194,226Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,156
    
    
    
    
    
    
    
    26,156Net unrealized change on 
investments (net of tax of $373)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    690
    
    
    
    
    
    
    
    
    
    
    
    690Issuance of contingent
shares related to
acquisition
    
    
    750
    
    
    
    8
    
    
    
    6,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,720Stock-based compensation
    
    
    3
    
    
    
    
    
    
    
    332
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    332Issuance of shares under
Employee Stock Purchase
Plan
    
    
    11
    
    
    
    1
    
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104Purchase of treasury
stock, at cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (639
    )
    
    
    (639
    )Retirement of treasury
stock, at cost
    
    
    (90
    )
    
    
    (1
    )
    
    
    (638
    )
    
    
    
    
    
    
    
    
    
    
    639
    
    
    
    Exercise of stock options
    
    
    246
    
    
    
    2
    
    
    
    738
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    740Balances at June 30, 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
    
    
    
    
    
    
    
    
    
    
    
    690Change in unrealized
gain 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
    )
    
    $
    
    
    
    $
    239,484
  46




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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Year Ended June 30,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (16,670
    )
    
    $
    28,068
    
    
    $
    26,156Adjustments to reconcile net income (loss) to cash provided by
operating activities:Depreciation and amortization
    
    
    1,624
    
    
    
    1,463
    
    
    
    1,920Stock-based compensation
    
    
    1,063
    
    
    
    500
    
    
    
    332Amortization of premium on fixed maturities
    
    
    217
    
    
    
    460
    
    
    
    357Deferred income taxes
    
    
    17,132
    
    
    
    (1,533
    )
    
    
    (2,986
    )Gains on sales of foreclosed real estate
    
    
    
    
    
    
    (3,638
    )
    
    
    (755
    )Other
    
    
    38
    
    
    
    76
    
    
    
    (214
    )Change in:Premiums and fees receivable
    
    
    (6,676
    )
    
    
    (21,264
    )
    
    
    (10,972
    )Reinsurance receivables
    
    
    1,018
    
    
    
    3,146
    
    
    
    7,807Prepaid reinsurance premiums
    
    
    
    
    
    
    
    
    
    
    12,384Deferred acquisition costs
    
    
    164
    
    
    
    (2,059
    )
    
    
    (3,571
    )Loss and loss adjustment expense reserves
    
    
    28,624
    
    
    
    19,925
    
    
    
    12,463Unearned premiums and fees
    
    
    10,500
    
    
    
    28,307
    
    
    
    14,001Amounts due to reinsurers
    
    
    
    
    
    
    
    
    
    
    (11,899
    )Other
    
    
    (307
    )
    
    
    (582
    )
    
    
    425Net cash provided by operating activities
    
    
    36,727
    
    
    
    52,869
    
    
    
    45,448Cash flows from investing activities:Purchases of fixed maturities, available-for-sale
    
    
    (101,295
    )
    
    
    (82,144
    )
    
    
    (48,493
    )Maturities and paydowns of fixed maturities, available-for-sale
    
    
    7,048
    
    
    
    8,748
    
    
    
    3,502Sales of fixed maturities, available-for-sale
    
    
    45,932
    
    
    
    15,400
    
    
    
    4,153Sales (purchases) of investment in mutual fund
    
    
    
    
    
    
    10,920
    
    
    
    (10,920
    )Net change in receivable/payable for securities
    
    
    (22,889
    )
    
    
    3,915
    
    
    
    Purchase of common stock in trust
    
    
    (1,240
    )
    
    
    
    
    
    
    Acquisitions of property and equipment
    
    
    (1,769
    )
    
    
    (2,265
    )
    
    
    (1,053
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    666Improvements to foreclosed real estate
    
    
    (254
    )
    
    
    
    
    
    
    (300
    )Proceeds from sales of foreclosed real estate
    
    
    
    
    
    
    4,512
    
    
    
    1,202Cash paid for acquisitions, net of cash acquired
    
    
    (1,037
    )
    
    
    (29,853
    )
    
    
    (4,000
    )Net cash used in investing activities
    
    
    (75,504
    )
    
    
    (70,767
    )
    
    
    (55,243
    )Cash flows from financing activities:Proceeds from borrowings
    
    
    5,000
    
    
    
    30,431
    
    
    
    Payments on borrowings
    
    
    (5,693
    )
    
    
    (6,405
    )
    
    
    (4,000
    )Proceeds from issuance of debentures
    
    
    41,240
    
    
    
    
    
    
    
    Net proceeds from issuance of common stock
    
    
    857
    
    
    
    223
    
    
    
    104Exercise of stock options
    
    
    
    
    
    
    421
    
    
    
    740Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (639
    )Net cash provided by (used in) financing activities
    
    
    41,404
    
    
    
    24,670
    
    
    
    (3,795
    )Net increase (decrease) in cash and cash equivalents
    
    
    2,627
    
    
    
    6,772
    
    
    
    (13,590
    )Cash and cash equivalents, beginning of year
    
    
    31,534
    
    
    
    24,762
    
    
    
    38,352Cash and cash equivalents, end of year
    
    $
    34,161
    
    
    $
    31,534
    
    
    $
    24,762
  47




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except per share data)
 1. Summary of Significant Accounting Policies
 General
  Basis of Consolidation and Reporting
  Reclassifications
  Use of Estimates
  Investments
    48




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##### Table of Contents



Cash and Cash Equivalents
  Revenue Recognition
    Reinsurance
  Income Taxes
   49




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##### Table of Contents



Advertising Costs
  Property and Equipment
  Foreclosed Real Estate Held for Sale
  Deferred Acquisition Costs / Deferred Ceding Commissions
  Goodwill and Other Identifiable Intangible Assets
  Loss and Loss Adjustment Expense Reserves
  50




---



##### Table of Contents



Stock-Based Compensation
 Share Based Payment Accounting for Stock Issued to Employees Accounting for
Stock-Based Compensation  Transition and Disclosure
 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 Fair
Value Measurements.
 51




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##### Table of Contents



Supplemental Cash Flow Information
  Basic and Diluted Net Income (Loss) Per Share
  2. Business Combinations
 USAuto Holdings
  Texas Insurance Agency
   Chicago Insurance Agencies
  52




---



##### Table of Contents



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 30,2007
    
    
    2006
    
    
    2005Fixed maturities, available-for-sale
    
    $
    7,770
    
    
    $
    4,411
    
    
    $
    2,419Investment in mutual fund
    
    
    
    
    
    
    674
    
    
    
    920Cash and cash equivalents
    
    
    1,525
    
    
    
    983
    
    
    
    198Investment expenses
    
    
    (432
    )
    
    
    (306
    )
    
    
    (184
    )$
    8,863
    
    
    $
    5,762
    
    
    $
    3,353
  Year Ended June 30,2007
    
    
    2006
    
    
    2005Gains
    
    $
    90
    
    
    $
    88
    
    
    $
    72Losses
    
    
    (151
    )
    
    
    (164
    )
    
    
    (19
    )$
    (61
    )
    
    $
    (76
    )
    
    $
    53
 53




---



##### Table of Contents



Fixed Maturities, Available-for-sale
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairJune 30, 2007
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government
    
    $
    15,014
    
    
    $
    13
    
    
    $
    (320
    )
    
    $
    14,707State
    
    
    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
    
    
    92,908
    
    
    
    59
    
    
    
    (1,367
    )
    
    
    91,600$
    179,328
    
    
    $
    199
    
    
    $
    (2,972
    )
    
    $
    176,555
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairJune 30, 2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government
    
    $
    14,808
    
    
    $
    6
    
    
    $
    (466
    )
    
    $
    14,348State
    
    
    7,706
    
    
    
    1
    
    
    
    (196
    )
    
    
    7,511Political subdivisions
    
    
    6,630
    
    
    
    
    
    
    
    (140
    )
    
    
    6,490Revenue and assessment
    
    
    25,597
    
    
    
    4
    
    
    
    (684
    )
    
    
    24,917Corporate bonds
    
    
    22,006
    
    
    
    
    
    
    
    (599
    )
    
    
    21,407Collateralized mortgage
    
    
    54,544
    
    
    
    25
    
    
    
    (1,414
    )
    
    
    53,155$
    131,291
    
    
    $
    36
    
    
    $
    (3,499
    )
    
    $
    127,828
  Amortized
    
    
    FairCost
    
    
    ValueOne year or less
    
    $
    4,780
    
    
    $
    4,740One to five years
    
    
    33,664
    
    
    
    33,248Five to ten years
    
    
    37,510
    
    
    
    36,902Greater than ten years
    
    
    10,466
    
    
    
    10,065No single maturity date
    
    
    92,908
    
    
    
    91,600$
    179,328
    
    
    $
    176,555
 54




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##### Table of Contents



Less than 12 months
    
    
    12 months or longerTotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    UnrealizedJune 30, 2007
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    LossesU.S. Government
    
    $
    6,155
    
    
    $
    (71
    )
    
    $
    7,546
    
    
    $
    (249
    )
    
    $
    (320
    )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
    
    
    54,225
    
    
    
    (834
    )
    
    
    14,268
    
    
    
    (533
    )
    
    
    (1,367
    )$
    94,922
    
    
    $
    (1,773
    )
    
    $
    41,813
    
    
    $
    (1,199
    )
    
    $
    (2,972
    )
 Less than 12 months
    
    
    12 months or longerTotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    UnrealizedJune 30, 2006
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    LossesU.S. Government
    
    $
    13,349
    
    
    $
    (466
    )
    
    $
    
    
    
    $
    
    
    
    $
    (466
    )State
    
    
    6,372
    
    
    
    (129
    )
    
    
    1,138
    
    
    
    (67
    )
    
    
    (196
    )Political subdivisions
    
    
    5,289
    
    
    
    (118
    )
    
    
    1,027
    
    
    
    (22
    )
    
    
    (140
    )Revenue and assessment
    
    
    18,236
    
    
    
    (472
    )
    
    
    4,610
    
    
    
    (212
    )
    
    
    (684
    )Corporate bonds
    
    
    15,492
    
    
    
    (406
    )
    
    
    5,915
    
    
    
    (193
    )
    
    
    (599
    )Collateralized mortgage
    
    
    41,269
    
    
    
    (934
    )
    
    
    8,986
    
    
    
    (480
    )
    
    
    (1,414
    )$
    100,007
    
    
    $
    (2,525
    )
    
    $
    21,676
    
    
    $
    (974
    )
    
    $
    (3,499
    )
  4. Reinsurance
   55




---



##### Table of Contents



Year Ended June 30,2007
    
    
    2006
    
    
    2005Ceded premiums earned
    
    $
    
    
    
    $
    81
    
    
    $
    8,732Reinsurance recoveries on losses and loss adjustment expenses
    
    
    437
    
    
    
    188
    
    
    
    5,867
   Year Ended June 30,2007
    
    
    2006
    
    
    2005Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    290,784
    
    
    $
    280,946
    
    
    $
    216,131
    
    
    $
    186,833
    
    
    $
    128,543
    
    
    $
    117,706Assumed
    
    
    19,872
    
    
    
    19,715
    
    
    
    21,581
    
    
    
    22,019
    
    
    
    25,855
    
    
    
    23,703Ceded
    
    
    
    
    
    
    
    
    
    
    (81
    )
    
    
    (81
    )
    
    
    6,051
    
    
    
    (8,732
    )Net
    
    $
    310,656
    
    
    $
    300,661
    
    
    $
    237,631
    
    
    $
    208,771
    
    
    $
    160,449
    
    
    $
    132,677
  5. Stock-Based Compensation Plans
 Employee Stock-Based Incentive Plan
   Year Ended June 30,2007
    
    2006
    
    2005Expected option term
    
    10 years
    
    10 years
    
    
    10 yearsAnnualized volatility rate
    
    32 to 33%
    
    32 to 38%
    
    
    36 to 38%Risk-free rate of return
    
    4.74 to 4.77%
    
    4.02 to 5.25%
    
    
    4.11%Dividend yield
    
    0%
    
    0%
    
    
    0%
 56




---



##### Table of Contents



WeightedAverage
    
    
    AggregateExercise
    
    
    Exercise
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Price
    
    
    ValueOptions outstanding at July 1, 2004
    
    
    4,182
    
    
    
    $3.00-$6.64
    
    
    $
    3.17Granted
    
    
    200
    
    
    
    $8.13
    
    
    $
    8.13Exercised
    
    
    (246
    )
    
    
    $3.00
    
    
    $
    3.00Forfeited
    
    
    
    
    
    
    
    
    
    $
    Options outstanding at June 30, 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
    
    
    $
    4.48
    
    
    $
    27,722Options exercisable/vested at June 30, 2007
    
    
    3,917
    
    
    
    $3.00-$8.13
    
    
    $
    3.20
    
    
    $
    27,279
  Employee Stock Purchase Plan
  6. Employee Benefit Plan
  57




---



##### Table of Contents



7. Property and Equipment
  June 30,2007
    
    
    2006Furniture and equipment
    
    $
    6,456
    
    
    $
    4,943Leasehold improvements
    
    
    1,999
    
    
    
    1,740Capitalized lease obligations
    
    
    588
    
    
    
    431Aircraft
    
    
    190
    
    
    
    1909,233
    
    
    
    7,304Less: accumulated depreciation
    
    
    (5,117
    )
    
    
    (3,928
    )Total property and equipment, net
    
    $
    4,116
    
    
    $
    3,376
  8. Lease Commitments
  Year Ended June 30,
    
    Amount2008
    
    $
    9,5732009
    
    
    7,5302010
    
    
    5,9312011
    
    
    3,0372012
    
    
    1,311Thereafter
    
    
    1,583Total
    
    $
    28,965
  58




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##### Table of Contents



9. Losses and Loss Adjustment Expenses Incurred and Paid
  Year Ended June 30,2007
    
    
    2006
    
    
    2005Liability for unpaid losses and LAE at beginning of year, gross
    
    $
    62,822
    
    
    $
    42,897
    
    
    $
    30,434Reinsurance balances receivable
    
    
    (1,301
    )
    
    
    (3,608
    )
    
    
    (12,297
    )Liability for unpaid losses and LAE at beginning of year, net
    
    
    61,521
    
    
    
    39,289
    
    
    
    18,137Add: Provision for losses and LAE:Current year
    
    
    238,043
    
    
    
    142,436
    
    
    
    88,068Prior years
    
    
    3,865
    
    
    
    (1,548
    )
    
    
    (356
    )Accretion of net risk margin/discounting as of the date of acquisition
    
    
    
    
    
    
    (43
    )
    
    
    (219
    )Net losses and LAE incurred
    
    
    241,908
    
    
    
    140,845
    
    
    
    87,493Less: Losses and LAE paid:Current year
    
    
    160,872
    
    
    
    90,589
    
    
    
    53,238Prior years
    
    
    51,420
    
    
    
    28,024
    
    
    
    13,103Net losses and LAE paid
    
    
    212,292
    
    
    
    118,613
    
    
    
    66,341Liability for unpaid losses and LAE at end of year, net
    
    
    91,137
    
    
    
    61,521
    
    
    
    39,289Reinsurance balances receivable
    
    
    309
    
    
    
    1,301
    
    
    
    3,608Liability for unpaid losses and LAE at end of year, gross
    
    $
    91,446
    
    
    $
    62,822
    
    
    $
    42,897
   10. Notes Payable and Capitalized Lease Obligations
   59




---



##### Table of Contents



CapitalizedLeaseYear Ended June 30,
    
    Obligations
    
    
    Notes Payable
    
    
    Total2008
    
    $
    231
    
    
    $
    5,552
    
    
    $
    5,7832009
    
    
    230
    
    
    
    5,552
    
    
    
    5,7822010
    
    
    1
    
    
    
    11,956
    
    
    
    11,957$
    462
    
    
    $
    23,060
    
    
    $
    23,522Less: Amount representing executory costs
    
    
    (30
    )Net minimum lease payments
    
    
    432Less: Amount representing interest
    
    
    (16
    )Present value of net minimum lease
payments
    
    $
    416
 11. Debentures Payable
    12. Income Taxes
  Year Ended June 30,2007
    
    
    2006
    
    
    2005Federal:Current
    
    $
    75
    
    
    $
    161
    
    
    $
    515Deferred
    
    
    17,132
    
    
    
    (1,533
    )
    
    
    (2,986
    )State income taxes
    
    
    379
    
    
    
    333
    
    
    
    318$
    17,586
    
    
    $
    (1,039
    )
    
    $
    (2,153
    )
 60




---



##### Table of Contents



Year Ended June 30,2007
    
    
    2006
    
    
    2005Provision for income taxes at statutory rate
    
    $
    321
    
    
    $
    9,460
    
    
    $
    8,401Tax effect of:Tax-exempt investment income
    
    
    (78
    )
    
    
    (221
    )
    
    
    (261
    )Change in the beginning of the year balance of
the valuation allowance for deferred tax asset
allocated to income taxes
    
    
    6,882
    
    
    
    (10,540
    )
    
    
    (10,594
    )Net operating loss carryforward expirations
    
    
    9,990
    
    
    
    302
    
    
    
    Other
    
    
    92
    
    
    
    (373
    )
    
    
    (17
    )$
    17,207
    
    
    $
    (1,372
    )
    
    $
    (2,471
    )
  2007
    
    
    2006Deferred tax assets:Net operating loss carryforwards
    
    $
    46,549
    
    
    $
    57,847Stock option compensation
    
    
    3,063
    
    
    
    2,718Unearned premiums and loss and loss adjustment
expense reserves
    
    
    8,254
    
    
    
    6,812Net unrealized change on investments
    
    
    929
    
    
    
    1,212Alternative minimum tax (AMT) credit carryforwards
    
    
    1,232
    
    
    
    1,154Other
    
    
    1,070
    
    
    
    84661,097
    
    
    
    70,589Deferred tax liabilities:Deferred acquisition costs
    
    
    (1,808
    )
    
    
    (1,865
    )Goodwill
    
    
    (1,320
    )
    
    
    (222
    )(3,128
    )
    
    
    (2,087
    )Total net deferred tax assets
    
    
    57,969
    
    
    
    68,502Less: Valuation allowance
    
    
    (27,033
    )
    
    
    (20,434
    )Net deferred tax assets
    
    $
    30,936
    
    
    $
    48,068
    61




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##### Table of Contents



Expiration Year Ended June 30,
    
    Amount2008
    
    $
    36,1882009
    
    
    84,7912010
    
    
    7,0952011
    
    
    2,099Thereafter
    
    
    2,825Total NOL carryforwards
    
    $
    132,998
 13. Net Income (Loss) Per Share
 Earnings Per Share
  Year Ended June 30,2007
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    (16,670
    )
    
    $
    28,068
    
    
    $
    26,156Weighted average common basic shares
    
    
    47,584
    
    
    
    47,487
    
    
    
    47,055Effect of dilutive securities  options
    
    
    
    
    
    
    2,089
    
    
    
    1,934Weighted average common dilutive shares
    
    
    47,584
    
    
    
    49,576
    
    
    
    48,989Basic net income (loss) per share
    
    $
    (0.35
    )
    
    $
    0.59
    
    
    $
    0.56Diluted net income (loss) per share
    
    $
    (0.35
    )
    
    $
    0.57
    
    
    $
    0.53
  14. Concentrations of Credit Risk
   62




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##### Table of Contents



15. Related Party Transactions
    16. Litigation
  17. Fair Value of Financial Instruments
      63




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##### Table of Contents



18. Segment Information
   Year Ended June 30,2007
    
    
    2006
    
    
    2005Revenues:Insurance
    
    $
    347,431
    
    
    $
    244,557
    
    
    $
    164,974Real estate and corporate
    
    
    206
    
    
    
    4,445
    
    
    
    1,821Consolidated total
    
    $
    347,637
    
    
    $
    249,002
    
    
    $
    166,795Income (loss) before income taxes:Insurance
    
    $
    6,252
    
    
    $
    26,476
    
    
    $
    25,640Real estate and corporate
    
    
    (5,336
    )
    
    
    553
    
    
    
    (1,637
    )Consolidated total
    
    $
    916
    
    
    $
    27,029
    
    
    $
    24,003
 June 30,2007
    
    
    2006Total assets:Insurance
    
    $
    460,356
    
    
    $
    384,358Real estate and corporate
    
    
    38,536
    
    
    
    50,969Consolidated total
    
    $
    498,892
    
    
    $
    435,327
 19. Statutory Financial Information and Accounting Policies
 Accounting Practices and Procedures Manual
   64




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##### Table of Contents



20. Selected Quarterly Financial Data (unaudited)
  Quarters EndedSeptember 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30,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
    )Year Ended June 30, 2006:Total revenues
    
    $
    50,258
    
    
    $
    53,481
    
    
    $
    70,068
    
    
    $
    75,195Net income before income taxes
    
    $
    5,633
    
    
    $
    5,448
    
    
    $
    9,031
    
    
    $
    6,917Net income
    
    $
    3,713
    
    
    $
    3,800
    
    
    $
    5,864
    
    
    $
    14,691Basic net income per share
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.31Diluted net income per share
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.30
     65




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Managements Annual Report on Internal Control Over Financial Reporting
     Changes in Internal Control over Financial Reporting
  
 Item 9B. Other Information
  66




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
      
 Item 11. Executive Compensation
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  67




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
  (1)
    
    Consolidated Financial Statements: See Index to Consolidated Financial
Statements on Page 40.(2)
    
    Financial Statement Schedules:Schedule I  Financial Information of Registrant (Parent Company)(3)
    
    Exhibits: See the exhibit listing set forth below.
 ExhibitNumber
 2.1
    
    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
    
    Amended and Restated Bylaws of First Acceptance Corporation (incorporated by reference to
Exhibit 3.2 of the Companys Annual Report on Form 10-K dated September 28, 2004).
 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).
 68




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##### Table of Contents



ExhibitNumber
 10.1
    
    Form of Indemnification Agreement for the Companys directors and officers and schedule of
substantially identical documents (incorporated by reference to Exhibit 10.2 of the
Registration Statement).
 10.2
    
    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).*
 10.3
    
    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).*
 10.4
    
    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).*
 10.5
    
    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).
 10.6
    
    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).*
 10.7
    
    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).*
 10.8
    
    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).*
 10.9
    
    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).*
 10.10
    
    Employment Agreement, dated as of April 30, 2004, by and between First Acceptance
Corporation and Stephen J. Harrison (incorporated by reference to Exhibit 10.3 of the
Companys Current Report on Form 8-K dated May 3, 2004).*
 10.11
    
    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).*
 10.12
    
    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).*
 10.13
    
    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).*
 10.14
    
    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).
 69




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ExhibitNumber
 10.15
    
    Severance Compensation Agreement, dated as of August 24, 2004, by and between First
Acceptance Corporation and Charles David Hamilton (incorporated by reference to Exhibit 10.15
of the Companys Annual Report on Form 10-K dated September 28, 2004).*
 10.16
    
    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).*
 10.17
    
    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).*
 10.18
    
    First Acceptance Corporation Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.1 of the Registration Statement No. 333-121551 on Form S-8, filed December 22,
2004).
 10.19
    
    Summary of Compensation for Non-Employee Directors and Named Executive Officers
 10.20
    
    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).
 10.21
    
    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).
 10.22
    
    Employment Agreement, dated as of September 13, 2006, by and 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 September 19, 2006).*
 10.23
    
    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).*
 10.24
    
    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).*
 10.25
    
    Amendment to Employment Agreement, dated as of September 13, 2006, by and between First
Acceptance Corporation and Stephen J. Harrison (incorporated by reference to Exhibit 99.4 of
the Companys Current Report on Form 8-K dated September 19, 2006).*
 10.26
    
    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).*
 10.27
    
    Employment Agreement, dated as of October 9, 2006, by and between First Acceptance
Corporation and Kevin P. Cohn (incorporated by reference to Exhibit 99.1 of the Companys
Current Report on Form 8-K dated October 12, 2006).*
 10.28
    
    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).*
 10.29
    
    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).*
 70




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##### Table of Contents



ExhibitNumber
 10.30
    
    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).*
 10.31
    
    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).*
 10.32
    
    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).
 10.33
    
    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).
 10.34
    
    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).
 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.
 23.2
    
    Consent of KPMG 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. 71




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##### Table of Contents



SIGNATURES
  FIRST ACCEPTANCE CORPORATIONDate:  September 13, 2007
    By      /s/ Stephen J. HarrisonStephen J. HarrisonPresident and Chief Executive Officer  Signature
    
    Title
    
    Date/s/ Stephen J. Harrison

Stephen J. Harrison
    
    President, Chief Executive
Officer and Director (Principal
Executive Officer)
    
    September 13, 2007/s/ Edward L. Pierce

Edward L. Pierce
    
    Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
    
    September 13, 2007/s/ Kevin P. Cohn

Kevin P. Cohn
    
    Vice President, Chief Accounting
Officer and Corporate Controller
(Principal Accounting Officer)
    
    September 13, 2007/s/ Gerald J. Ford

Gerald J. Ford
    
    Chairman of the Board of Directors
    
    September 13, 2007/s/ Thomas M. Harrison, Jr.

Thomas M. Harrison, Jr.
    
    Executive Vice President,
Secretary and Director
    
    September 13, 2007/s/ Rhodes R. Bobbitt

Rhodes R. Bobbitt
    
    Director
    
    September 13, 2007/s/ Harvey B. Cash

Harvey B. Cash
    
    Director
    
    September 13, 2007/s/ Donald J. Edwards

Donald J. Edwards
    
    Director
    
    September 13, 2007/s/ Tom C. Nichols

Tom C. Nichols
    
    Director
    
    September 13, 2007/s/ Lyndon L. Olson

Lyndon L. Olson
    
    Director
    
    September 13, 2007/s/ William A. Shipp, Jr.

William A. Shipp, Jr.
    
    Director
    
    September 13, 2007
 72




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##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
SCHEDULE I. FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
(in thousands)
 June 30,Balance Sheets
    
    2007
    
    
    2006Assets:Investment in subsidiaries, at equity in net assets
    
    $
    155,010
    
    
    $
    111,246Cash and cash equivalents
    
    
    10,350
    
    
    
    7,554Deferred tax asset
    
    
    24,674
    
    
    
    42,711Other assets
    
    
    3,395
    
    
    
    790Foreclosed real estate held for sale
    
    
    341
    
    
    
    87Goodwill and identifiable intangible assets
    
    
    114,562
    
    
    
    114,562Amounts due (to) from subsidiaries
    
    
    (3,136
    )
    
    
    1,544$
    305,196
    
    
    $
    278,494Liabilities:Notes payable
    
    $
    23,060
    
    
    $
    23,612Debentures payable
    
    
    41,240
    
    
    
    Other liabilities
    
    
    1,412
    
    
    
    1,459Stockholders equity
    
    
    239,484
    
    
    
    253,423$
    305,196
    
    
    $
    278,494
 Year Ended June 30,2007
    
    
    2006
    
    
    2005Statements of OperationsGains on sales of foreclosed real estate
    
    $
    
    
    
    $
    3,638
    
    
    $
    755Investment income
    
    
    206
    
    
    
    807
    
    
    
    1,066Equity in income of subsidiaries, net of tax
    
    
    3,743
    
    
    
    17,377
    
    
    
    17,197Expenses
    
    
    (5,608
    )
    
    
    (3,987
    )
    
    
    (4,036
    )Income (loss) before income taxes
    
    
    (1,659
    )
    
    
    17,835
    
    
    
    14,982Provision (benefit) for income taxes
    
    
    15,011
    
    
    
    (10,233
    )
    
    
    (11,174
    )Net income (loss)
    
    $
    (16,670
    )
    
    $
    28,068
    
    
    $
    26,156
 Year Ended June 30,Statements of Cash Flows
    
    2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (16,670
    )
    
    $
    28,068
    
    
    $
    26,156Equity in income of subsidiaries, net of tax
    
    
    (3,743
    )
    
    
    (17,377
    )
    
    
    (17,197
    )Depreciation and amortization
    
    
    66
    
    
    
    97
    
    
    
    928Stock-based compensation
    
    
    1,063
    
    
    
    500
    
    
    
    332Deferred income taxes
    
    
    18,037
    
    
    
    514
    
    
    
    (1,589
    )Gains on sales of foreclosed real estate
    
    
    
    
    
    
    (3,638
    )
    
    
    (755
    )Change in assets and liabilities
    
    
    3,322
    
    
    
    5,725
    
    
    
    (3,389
    )Net cash provided by operating activities
    
    
    2,075
    
    
    
    13,889
    
    
    
    4,486Cash flows from investing activities:Sales (purchases) of investment in mutual fund
    
    
    
    
    
    
    10,920
    
    
    
    (10,920
    )Investment in subsidiary
    
    
    (45,765
    )
    
    
    (47,026
    )
    
    
    (10,950
    )Dividend from subsidiary
    
    
    6,435
    
    
    
    750
    
    
    
    Improvements to foreclosed real estate
    
    
    (254
    )
    
    
    
    
    
    
    (300
    )Purchase of common stock in trust
    
    
    (1,240
    )
    
    
    
    
    
    
    Proceeds from sales of foreclosed real estate
    
    
    
    
    
    
    4,512
    
    
    
    1,202Cash paid for acquisitions, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (4,000
    )Net cash used in investing activities
    
    
    (40,824
    )
    
    
    (30,844
    )
    
    
    (24,968
    )Cash flows from financing activities:Proceeds from borrowings
    
    
    5,000
    
    
    
    30,000
    
    
    
    Payments on borrowings
    
    
    (5,552
    )
    
    
    (6,388
    )
    
    
    Proceeds from issuance of debentures
    
    
    41,240
    
    
    
    
    
    
    
    Net proceeds from issuance of common stock
    
    
    857
    
    
    
    223
    
    
    
    104Exercise of stock options
    
    
    
    
    
    
    421
    
    
    
    740Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (639
    )Net cash provided by financing activities
    
    
    41,545
    
    
    
    24,256
    
    
    
    205Net increase (decrease) in cash and cash equivalents
    
    
    2,796
    
    
    
    7,301
    
    
    
    (20,277
    )Cash and cash equivalents, beginning of year
    
    
    7,554
    
    
    
    253
    
    
    
    20,530Cash and cash equivalents, end of year
    
    $
    10,350
    
    
    $
    7,554
    
    
    $
    253
 73