##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended June 30, 2009
 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
 o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller Reporting Company o  o þ
   DOCUMENTS INCORPORATED BY REFERENCE




---



##### 



FIRST ACCEPTANCE CORPORATION 10-K
 Index to Annual Report on Form 10-K
 PagePART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    15Item 1B.
    
    Unresolved Staff Comments
    
    
    21Item 2.
    
    Properties
    
    
    21Item 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
    
    
    24Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 8.
    
    Financial Statements and Supplementary Data
    
    
    44Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    75Item 9A.
    
    Controls and Procedures
    
    
    75Item 9B.
    
    Other Information
    
    
    75PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    76Item 11.
    
    Executive Compensation
    
    
    76Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    76Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    76Item 14.
    
    Principal Accountant Fees and Services
    
    
    76PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    77SIGNATURES
    
    
    
    
    81EX-10.11EX-21EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
  i




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 PART I
 
 Item 1. Business
 General
  Our Business Strategy
  
    
    Integrated Operations. To meet the preference of our customers for convenient, personal
service, we have integrated the retail distribution, underwriting and service functions of
personal automobile insurance into one system. By doing so, we are able to provide prompt
and personal service to meet effectively the insurance needs of our customers, while
capturing revenue that would otherwise be shared with several participants under a
traditional, non-integrated insurance business model. Our integrated model is supported by
both point of sale agency and back office systems.
    
    Extensive Office Network. We emphasize the use of employee-agents as the cornerstone of
our customer relationship. We believe our customers value face-to-face contact, speed of
service and convenient locations. Consequently, we train our employee-agents to cultivate
client relationships and utilize real-time service and information enabled by our
information systems. As of September 1, 2009, we leased and operated 418 retail locations
staffed with our employee-agents and located strategically in geographic markets to reach
and service our customers.
    
    Favorable Customer Payment Plans. Our customers can initiate insurance coverage with a
modest down payment. Any remaining premium is paid in monthly installments over the term
of the policy. We believe this modest initial payment and favorable payment plan is a
major factor in meeting the market demand for low monthly insurance payments.
    
    Effective Sales and Marketing. We build brand recognition and generate valuable sales
leads through the use of local print advertising (including the Yellow Pages®), television
and radio advertising, direct mailings and a broad network of retail locations.
    
    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 locations transmit information directly to our central data center where
policy information, customer profiles, risk assessment and underwriting criteria are
maintained in our database.
 Our Business Model
  1




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
      Personal Automobile Insurance Market
   2




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  At June 30 (in thousands)
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Net liability for loss and loss
adjustment expense reserves, originally
estimated
    
    $
    18,137
    
    
    $
    39,289
    
    
    $
    61,521
    
    
    $
    91,137
    
    
    $
    101,148
    
    
    $
    83,895Cumulative amounts paid as of:One year later
    
    
    13,103
    
    
    
    28,024
    
    
    
    51,420
    
    
    
    68,196
    
    
    
    62,964Two years later
    
    
    16,579
    
    
    
    34,754
    
    
    
    61,627
    
    
    
    84,095Three years later
    
    
    17,795
    
    
    
    37,025
    
    
    
    64,986Four years later
    
    
    18,472
    
    
    
    37,802Five years later
    
    
    18,743Liability re-estimated as of:One year later
    
    
    17,781
    
    
    
    37,741
    
    
    
    65,386
    
    
    
    89,738
    
    
    
    89,766Two years later
    
    
    17,244
    
    
    
    38,226
    
    
    
    68,491
    
    
    
    92,860Three years later
    
    
    16,973
    
    
    
    37,484
    
    
    
    67,100Four years later
    
    
    17,978
    
    
    
    38,289Five years later
    
    
    18,900Net cumulative redundancy (deficiency)
    
    
    (763
    )
    
    
    1,000
    
    
    
    (5,579
    )
    
    
    (1,723
    )
    
    
    11,382Gross liability  end of year
    
    $
    30,434
    
    
    $
    42,897
    
    
    $
    62,822
    
    
    $
    91,446
    
    
    $
    101,407
    
    
    $
    83,973Reinsurance receivables
    
    
    12,297
    
    
    
    3,608
    
    
    
    1,301
    
    
    
    309
    
    
    
    259
    
    
    
    78Net liability  end of year
    
    $
    18,137
    
    
    $
    39,289
    
    
    $
    61,521
    
    
    $
    91,137
    
    
    $
    101,148
    
    
    $
    83,895Gross re-estimated liability  latest
    
    $
    31,170
    
    
    $
    41,600
    
    
    $
    68,186
    
    
    $
    93,182
    
    
    $
    89,894Re-estimated reinsurance receivables  latest
    
    
    12,270
    
    
    
    3,311
    
    
    
    1,086
    
    
    
    322
    
    
    
    128Net re-estimated  latest
    
    $
    18,900
    
    
    $
    38,289
    
    
    $
    67,100
    
    
    $
    92,860
    
    
    $
    89,766Gross cumulative redundancy (deficiency)
    
    $
    (736
    )
    
    $
    1,297
    
    
    $
    (5,364
    )
    
    $
    (1,736
    )
    
    $
    11,513
    6




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
    Reinsurance
    Technology
  7




---



##### Table of Contents



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




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Required Licensing.
 Alabama 

Arizona 
Arkansas 
Colorado 
Florida 
Georgia 

Illinois 

Indiana 

Iowa
    


    Kansas 

Kentucky 

Louisiana 

Mississippi 

Missouri 

Nevada 

New Mexico 

Ohio 

Oklahoma
    
    Pennsylvania 

South Carolina

Tennessee 

Texas

Utah 

Virginia 

West Virginia
  Insurance Holding Company Regulation
 Restrictions on Paying Dividends
 Regulation of Rates and Policy Forms
 9




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Guaranty Funds
 Investment Regulation
 Restrictions on Cancellation, Non-Renewal or Withdrawal
 Privacy Regulations
 Licensing of Our Employee-Agents and Adjusters.
 10




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
   
    
    Both FAIC and FAIC-GA had ratios above the defined threshold for the two-year
overall operating ratio as their calculated ratios were above 100%. FAICs ratio was
101% and was primarily attributable to an increase in its expense ratio for 2008 as a
result of a decrease in net premiums written. FAIC-GAs ratio was 102% and was
primarily the result of the $9.2 million litigation settlement expense recognized in
2008. Without this expense, FAIC-GAs ratio would have been 95.1%.
    
    Both FAIC-GA and FAIC-TN had ratios outside of the defined range for the gross
change in policyholders surplus, which is between plus 50% and minus 10%. During the
twelve months ended December 31, 2008, FAIC-GA and FAIC-TN reduced their policyholders
surplus by 26% and 11%, respectively. FAIC-GAs surplus was reduced by approximately
$6.4 million as a result of the after-tax litigation settlement expense. Without this
charge, FAIC-GAs change would have only been minus 4%. FAIC-TNs surplus was reduced
by $1.4 million as the result of paying a dividend during the year to its parent
company. Without this payment, FAIC-TNs change would have been plus 3%. For these same
reasons, both FAIC-GA and FAIC-TN had ratios (also minus 26% and minus 11%,
respectively) outside of the defined range for the change in adjusted policyholders
surplus, which is between plus 25% and minus 10%. The change in adjusted policyholders
surplus excludes amounts related to paid in surplus.
    
    FAIC had a ratio outside the high end of the defined investment yield range as the
calculated yield was above 6.5%. The calculated yield was 6.6% and was inflated as a
result of the inclusion of dividends received during the year from FAIC-GA and FAIC-TN.
Excluding these dividends, the calculated yield would have been 4.2%, which is above
the low end of the defined investment yield range of 3%.
    
    FAIC-GA had a ratio outside of the defined threshold for net premiums written to
policyholders surplus, which is 300%. FAIC-GAs ratio was 327% which included
approximately $7.0 million in net premiums written related to the transfer of the
beginning policy liabilities under an intercompany pooling agreement that was effected
during 2008. Excluding the effect of this one-time transfer, FAIC-GA would have had a
net premiums written to policyholders surplus ratio of 294%.
    
    FAIC-GA had a ratio of 20% which equaled the defined threshold for the two-year
reserve development. This ratio was primarily the result of continued adverse
development on FAIC-GAs 2006 accident year loss and loss adjustment expense reserves.
In 2007, FAIC-GA recorded $3.8 million in adverse development as a result of an
unanticipated increase in severity related to Bodily Injury and Property Damage losses.
In 2008, additional development of $1.0 million was recorded on this accident year.
  Employees
  13




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Available Information
  Internet Website
  14




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 Item 1A. Risk Factors
 Our loss and loss adjustment expenses may exceed our reserves, which would adversely impact our
results of operations and financial condition.
  Our results may fluctuate as a result of cyclical changes in the non-standard personal automobile
insurance industry.
  Due to our largely fixed cost structure, our profitability may decline if our sales volume were to
decline significantly.
  Our business may be adversely affected by negative developments in the non-standard personal
automobile insurance industry.
  Our investment portfolio may suffer reduced returns or other-than-temporary losses, which could
reduce our profitability.
  15




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Our business is highly competitive, which may make it difficult for us to market our core products
effectively and profitably.
  Our business may be adversely affected by negative developments in the states in which we operate.
  We may have difficulties in managing any expansion into new markets.
  16




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 We may not be successful in identifying acquisition candidates or integrating their operations,
which could harm our financial results.
  New pricing, claim and coverage issues and class action litigation are continually emerging in the
automobile insurance industry, and these new issues could adversely impact our revenues,
profitability, or our methods of doing business.
  
    
    concerns over the use of an applicants credit score or zip code as a factor in making
risk selections and pricing decisions;
    
    a growing trend of plaintiffs targeting automobile insurers in purported class action
litigation relating to sales and marketing practices and claims-handling practices, such as
total loss evaluation methodology, the use of aftermarket (non-original equipment
manufacturer) parts and the alleged diminution in value to insureds vehicles involved in
accidents; and
    
    consumer groups lobbying state legislatures to regulate and require separate licenses
for individuals and companies engaged in the sale of ancillary products or services.
  We may write-off intangible assets, such as goodwill.
  Our ability to use net operating loss carryforwards to reduce future tax payments may be limited by
applicable law.
  17




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
    Our insurance company subsidiaries are subject to regulatory restrictions on paying dividends to
us.
  18




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Our insurance company subsidiaries are subject to statutory capital and surplus requirements and
other standards, and their failure to meet these requirements or standards could subject them to
regulatory actions.
    We rely on our information technology and communication systems, and the failure of these systems
could materially adversely affect our business.
  Severe weather conditions and other catastrophes may result in an increase in the number and amount
of claims filed against us.
   19




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 A few of our stockholders have significant control over us, and their interests may differ from
yours.
  We and our subsidiaries are subject to comprehensive regulation and supervision that may restrict
our ability to earn profits.
   Required Licensing.
 Transactions Between Insurance Companies and Their Affiliates
 Regulation of Rates and Policy Forms.
 Investment Restrictions.
 20




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Restrictions on Cancellation, Non-Renewal or Withdrawal.
 Provisions in our certificate of incorporation and bylaws may prevent a takeover or a change in
management that you may deem favorable.
   
    
    the requirement that only stockholders owning at least one-third of the outstanding
shares of our common stock may call a special stockholders meeting; and
    
    the requirement that stockholders owning at least two-thirds of the outstanding shares
of our common stock must approve any amendment to our certificate of incorporation
provisions concerning the transfer restrictions and the ability to call special
stockholders meetings.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  21




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 Item 3. Legal Proceedings
      
 Item 4. Submission of Matters to a Vote of Security Holders
  22




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 Market Information
  Price RangeHigh
    
    LowYear Ended June 30, 2008First Quarter
    
    $
    10.37
    
    
    $
    4.60Second Quarter
    
    
    5.46
    
    
    
    3.12Third Quarter
    
    
    4.52
    
    
    
    2.85Fourth Quarter
    
    
    4.33
    
    
    
    2.90Year Ended June 30, 2009First Quarter
    
    $
    4.70
    
    
    $
    2.76Second Quarter
    
    
    3.80
    
    
    
    2.18Third Quarter
    
    
    3.45
    
    
    
    1.66Fourth Quarter
    
    
    3.20
    
    
    
    1.81
 Holders
  Dividends
  Stock Transfer Restrictions
  23




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Performance Graph
  CUMULATIVE VALUE OF $100 INVESTMENT
 
 June 30,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009First Acceptance Corporation
    
    
    100.00
    
    
    
    135.14
    
    
    
    168.29
    
    
    
    145.14
    
    
    
    45.71
    
    
    
    30.43Russell 3000
    
    
    100.00
    
    
    
    108.05
    
    
    
    118.38
    
    
    
    142.14
    
    
    
    124.11
    
    
    
    91.14S&P Property & Casualty
Insurance
    
    
    100.00
    
    
    
    113.67
    
    
    
    120.31
    
    
    
    137.62
    
    
    
    96.35
    
    
    
    74.97
 
 Item 6. Selected Financial Data
  24




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Year Ended June 30,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(in thousands, except per share data)Statement of Operations Data:Revenues:Premiums earned
    
    $
    224,113
    
    
    $
    285,914
    
    
    $
    300,661
    
    
    $
    208,771
    
    
    $
    132,677Commission and fee income
    
    
    31,759
    
    
    
    36,479
    
    
    
    37,324
    
    
    
    26,757
    
    
    
    26,821Investment income
    
    
    9,504
    
    
    
    11,250
    
    
    
    8,863
    
    
    
    5,762
    
    
    
    3,353Net realized gains (losses) on fixed
maturities, available-for-sale
    
    
    89
    
    
    
    (1,244
    )
    
    
    (61
    )
    
    
    3,562
    
    
    
    3,944Other
    
    
    
    
    
    
    
    
    
    
    850
    
    
    
    4,150
    
    
    
    265,465
    
    
    
    332,399
    
    
    
    347,637
    
    
    
    249,002
    
    
    
    166,795Costs and expenses:Losses and loss adjustment expenses
    
    
    149,277
    
    
    
    219,943
    
    
    
    241,908
    
    
    
    140,845
    
    
    
    87,493Insurance operating expenses
    
    
    87,124
    
    
    
    98,433
    
    
    
    97,629
    
    
    
    75,773
    
    
    
    49,921Other operating expenses
    
    
    1,307
    
    
    
    2,415
    
    
    
    2,623
    
    
    
    2,494
    
    
    
    2,775Litigation settlement
    
    
    1,570
    
    
    
    7,468
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    2,053
    
    
    
    1,507
    
    
    
    1,063
    
    
    
    500
    
    
    
    332Depreciation and amortization
    
    
    1,910
    
    
    
    1,679
    
    
    
    1,624
    
    
    
    1,463
    
    
    
    1,920Interest expense
    
    
    4,138
    
    
    
    4,977
    
    
    
    1,874
    
    
    
    898
    
    
    
    351Goodwill impairment(1)
    
    
    67,990
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    315,369
    
    
    
    336,422
    
    
    
    346,721
    
    
    
    221,973
    
    
    
    142,792Income (loss) before income taxes
    
    
    (49,904
    )
    
    
    (4,023
    )
    
    
    916
    
    
    
    27,029
    
    
    
    24,003Provision (benefit) for income taxes(1)
    
    
    18,396
    
    
    
    13,822
    
    
    
    17,586
    
    
    
    (1,039
    )
    
    
    (2,153
    )Net income (loss)
    
    $
    (68,300
    )
    
    $
    (17,845
    )
    
    $
    (16,670
    )
    
    $
    28,068
    
    
    $
    26,156Per Share Data:Net income (loss) per share:Basic
    
    $
    (1.43
    )
    
    $
    (0.37
    )
    
    $
    (0.35
    )
    
    $
    0.59
    
    
    $
    0.56Diluted
    
    $
    (1.43
    )
    
    $
    (0.37
    )
    
    $
    (0.35
    )
    
    $
    0.57
    
    
    $
    0.53Number of shares used to calculate net income
(loss) per share:Basic
    
    
    47,664
    
    
    
    47,628
    
    
    
    47,584
    
    
    
    47,487
    
    
    
    47,055Diluted
    
    
    47,664
    
    
    
    47,628
    
    
    
    47,584
    
    
    
    49,576
    
    
    
    48,989
 June 30,2009
    
    2008
    
    2007
    
    2006
    
    2005(in thousands, except per share data)Balance Sheet Data:Cash, cash equivalents and total
investments
    
    $
    217,512
    
    
    $
    228,216
    
    
    $
    210,716
    
    
    $
    159,362
    
    
    $
    110,522Total assets
    
    
    358,956
    
    
    
    473,230
    
    
    
    498,892
    
    
    
    435,327
    
    
    
    331,645Loss and loss adjustment expense reserves
    
    
    83,973
    
    
    
    101,407
    
    
    
    91,446
    
    
    
    62,822
    
    
    
    42,897Notes and debentures payable
    
    
    41,240
    
    
    
    45,153
    
    
    
    23,060
    
    
    
    23,612
    
    
    
    Total liabilities
    
    
    199,100
    
    
    
    247,771
    
    
    
    259,408
    
    
    
    181,904
    
    
    
    103,316Total stockholders equity
    
    
    159,856
    
    
    
    225,459
    
    
    
    239,484
    
    
    
    253,423
    
    
    
    228,329Book value per common share
    
    $
    3.31
    
    
    $
    4.69
    
    
    $
    5.03
    
    
    $
    5.33
    
    
    $
    4.81
 
 (1)
    
    The year ended June 30, 2009 includes a goodwill impairment charge of $68.0 million,
a related increase in the tax provision of $15.3 million, and a tax benefit of $5.1 million
related to the utilization of federal net operating loss (NOL) carryforwards that were
previously reserved for through a valuation allowance. The provision for income taxes for the
year ended June 30, 2008 includes a charge of $11.4 million related to the expiration of
certain federal NOL carryforwards as well as an increase in the valuation allowance of $3.6
million for the deferred tax asset for certain federal NOL carryforwards resulting in a charge
totaling $15.0 million. The provision for income taxes for the year ended June 30, 2007
includes an increase in the valuation allowance for the deferred tax asset of $6.9 million as
well as $10.0 million related to the expiration of certain federal NOL carryforwards resulting
in a charge totaling $16.9 million. The benefit from income taxes for the 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. 25




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion should be read in conjunction with our consolidated financial
statements and accompanying notes included in this report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various factors, including
those discussed below and elsewhere in this report, particularly under the caption Item 1A. Risk
Factors.
 General
    Year Ended June 30,2009
    
    2008Retail locations  beginning of period
    
    
    431
    
    
    
    462Opened
    
    
    1
    
    
    
    4Closed
    
    
    (14
    )
    
    
    (35
    )Retail locations  end of period
    
    
    418
    
    
    
    431
  June 30,2009
    
    2008
    
    2007Alabama
    
    
    25
    
    
    
    25
    
    
    
    25Florida
    
    
    39
    
    
    
    40
    
    
    
    41Georgia
    
    
    61
    
    
    
    61
    
    
    
    62Illinois
    
    
    78
    
    
    
    80
    
    
    
    81Indiana
    
    
    18
    
    
    
    19
    
    
    
    24Mississippi
    
    
    8
    
    
    
    8
    
    
    
    8Missouri
    
    
    12
    
    
    
    14
    
    
    
    15Ohio
    
    
    27
    
    
    
    29
    
    
    
    30Pennsylvania
    
    
    17
    
    
    
    19
    
    
    
    25South Carolina
    
    
    27
    
    
    
    28
    
    
    
    28Tennessee
    
    
    20
    
    
    
    20
    
    
    
    20Texas
    
    
    86
    
    
    
    88
    
    
    
    103Total
    
    
    418
    
    
    
    431
    
    
    
    462
 26




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Consolidated Results of Operations
 Overview
   Year Ended June 30,2009
    
    
    2008
    
    
    2007Revenues:Insurance
    
    $
    265,341
    
    
    $
    332,219
    
    
    $
    347,431Real estate and corporate
    
    
    124
    
    
    
    180
    
    
    
    206Consolidated total
    
    $
    265,465
    
    
    $
    332,399
    
    
    $
    347,637Income (loss) before income taxes:Insurance
    
    $
    (42,536
    )
    
    $
    4,685
    
    
    $
    6,252Real estate and corporate
    
    
    (7,368
    )
    
    
    (8,708
    )
    
    
    (5,336
    )Consolidated total
    
    $
    (49,904
    )
    
    $
    (4,023
    )
    
    $
    916
  
    
    premiums earned, including policy and renewal fees, from sales of policies written
and assumed by our insurance company subsidiaries;
    
    commission and fee income, including installment billing fees on policies written,
agency fees and commissions and fees for other ancillary products and services; and
    
    investment income earned on the invested assets of the insurance company
subsidiaries.
  Year Ended June 30,2009
    
    
    2008
    
    
    2007Premiums earned:Georgia
    
    $
    49,762
    
    
    $
    60,928
    
    
    $
    70,312Illinois
    
    
    27,583
    
    
    
    32,009
    
    
    
    31,201Florida
    
    
    26,113
    
    
    
    43,017
    
    
    
    55,117Texas
    
    
    25,971
    
    
    
    33,769
    
    
    
    32,480Alabama
    
    
    23,948
    
    
    
    28,780
    
    
    
    30,316South Carolina
    
    
    17,887
    
    
    
    23,634
    
    
    
    14,797Tennessee
    
    
    15,269
    
    
    
    20,772
    
    
    
    23,800Ohio
    
    
    12,914
    
    
    
    15,416
    
    
    
    16,455Pennsylvania
    
    
    11,437
    
    
    
    10,041
    
    
    
    6,937Indiana
    
    
    5,537
    
    
    
    7,131
    
    
    
    8,186Missouri
    
    
    3,907
    
    
    
    5,630
    
    
    
    6,087Mississippi
    
    
    3,785
    
    
    
    4,787
    
    
    
    4,973Total premiums earned
    
    $
    224,113
    
    
    $
    285,914
    
    
    $
    300,661
 27




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Year Ended June 30,2009
    
    2008
    
    2007Policies in force  beginning of period
    
    
    194,079
    
    
    
    226,974
    
    
    
    200,401Net increase (decrease) during period
    
    
    (35,857
    )
    
    
    (32,895
    )
    
    
    26,573Policies in force  end of period
    
    
    158,222
    
    
    
    194,079
    
    
    
    226,974
  Loss Ratio 
 Expense Ratio 
 Combined Ratio 
  Year Ended June 30,2009
    
    2008
    
    2007Loss and loss adjustment expense
    
    
    66.6
    %
    
    
    76.9
    %
    
    
    80.4
    %Expense
    
    
    24.7
    %
    
    
    21.7
    %
    
    
    19.8
    %Combined
    
    
    91.3
    %
    
    
    98.6
    %
    
    
    100.2
    %
  28




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Investments
       Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. government and agencies
    
    $
    10,744
    
    
    $
    473
    
    
    $
    (37
    )
    
    $
    11,180State
    
    
    8,238
    
    
    
    344
    
    
    
    (19
    )
    
    
    8,563Political subdivisions
    
    
    1,834
    
    
    
    52
    
    
    
    (32
    )
    
    
    1,854Revenue and assessment
    
    
    27,816
    
    
    
    831
    
    
    
    (166
    )
    
    
    28,481Corporate bonds
    
    
    45,737
    
    
    
    1,654
    
    
    
    (665
    )
    
    
    46,726Collateralized mortgage obligations:Agency backed
    
    
    30,656
    
    
    
    1,270
    
    
    
    
    
    
    
    31,926Non-agency backed  residential
    
    
    8,178
    
    
    
    1
    
    
    
    (2,561
    )
    
    
    5,618Non-agency backed  commercial
    
    
    7,646
    
    
    
    
    
    
    
    (1,683
    )
    
    
    5,963$
    140,849
    
    
    $
    4,625
    
    
    $
    (5,163
    )
    
    $
    140,311
 29




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  SecuritiesSecurities
    
    
    Securities
    
    
    with No
    
    
    Allwith
    
    
    with
    
    
    Unrealized
    
    
    FixedUnrealized
    
    
    Unrealized
    
    
    Gains or
    
    
    MaturityGains
    
    
    Losses
    
    
    Losses
    
    
    SecuritiesOne year or less
    
    $
    4,376
    
    
    $
    905
    
    
    $
    250
    
    
    $
    5,531After one through five years
    
    
    50,827
    
    
    
    1,951
    
    
    
    
    
    
    
    52,778After five through ten years
    
    
    21,554
    
    
    
    5,490
    
    
    
    
    
    
    
    27,044After ten years
    
    
    4,777
    
    
    
    6,674
    
    
    
    
    
    
    
    11,451No single maturity date
    
    
    32,531
    
    
    
    10,862
    
    
    
    114
    
    
    
    43,507$
    114,065
    
    
    $
    25,882
    
    
    $
    364
    
    
    $
    140,311
 Year Ended June 30, 2009 Compared with the Year Ended June 30, 2008
 Consolidated Results
  Insurance Operations
  Premiums Earned
   Commission and Fee Income
  30




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Investment Income
  Net realized gains (losses) on fixed maturities, available-for-sale
  Recognition and
Presentation of Other-Than-Temporary Impairments
    Amendments to the Impairment
Guidance of EITF Issue No. 99-20
 31




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
     Loss and Loss Adjustment Expenses
   Operating Expenses
    32




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Litigation Settlement
      Goodwill Impairment
 Goodwill and Other
Intangible Assets,
  33




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
    Provision for Income Taxes
   Real Estate and Corporate
  Year Ended June 30, 2008 Compared with the Year Ended June 30, 2007
 Consolidated Results
  34




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Insurance Operations
  Premiums Earned
    Commission and Fee Income
  Investment Income
  Net realized gains (losses) on fixed maturities, available-for-sale
  Other
  35




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Loss and Loss Adjustment Expenses
    Operating Expenses
    Litigation Settlement
  36




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  Provision for Income Taxes
    Real Estate and Corporate
  Liquidity and Capital Resources
    37




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
      Former Credit Facility
  Trust Preferred Securities
 Consolidation of Variable Interest Entities 
An Interpretation of ARB No. 51.
 38




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Off-Balance Sheet Arrangements
  Contractual Obligations
  Payments Due By PeriodLessthan
    
    
    1-3
    
    
    3-5
    
    
    More thanTotal
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    5 yearsLoss and loss adjustment expense
reserves (1)
    
    $
    83,973
    
    
    $
    31,154
    
    
    $
    37,788
    
    
    $
    11,168
    
    
    $
    3,863Debentures payable (2)
    
    
    97,833
    
    
    
    3,826
    
    
    
    7,652
    
    
    
    3,753
    
    
    
    82,602Capitalized lease obligations
    
    
    227
    
    
    
    70
    
    
    
    145
    
    
    
    12
    
    
    
    Operating leases (3)
    
    
    21,050
    
    
    
    9,242
    
    
    
    8,897
    
    
    
    1,639
    
    
    
    1,272Litigation settlement (4)
    
    
    3,093
    
    
    
    3,093
    
    
    
    
    
    
    
    
    
    
    
    Severance agreement obligations
    
    
    444
    
    
    
    410
    
    
    
    34
    
    
    
    
    
    
    
    Other
    
    
    189
    
    
    
    103
    
    
    
    86
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    206,809
    
    
    $
    47,898
    
    
    $
    54,602
    
    
    $
    16,572
    
    
    $
    87,737
 
 (1)
    
    Loss and loss adjustment expense reserves do not have contractual maturity dates;
however, based on historical payment patterns, the amount presented is our estimate of the
expected timing of these payments. The timing of these payments is subject to significant
uncertainty. We maintain a portfolio of marketable investments with varying maturities and a
substantial amount of cash and cash equivalents intended to provide adequate cash flows for
such payments.(2)
    
    Payments due by period assume a contractual fixed interest rate of 9.277% until
July 30, 2012, after which the rate becomes variable (LIBOR plus 375 basis points, or 4.345%
as of June 30, 2009).(3)
    
    Consists primarily of rental obligations under real estate leases related to our
retail locations and corporate offices.(4)
    
    Consists primarily of the provision associated with the estimated utilization of
available premium credits for Georgia and Alabama litigation settlement class members who
were insured by the Company at June 30, 2009 and received the premium credits. For additional
information with respect to the litigation settlements, see Item 3. Legal Proceedings and
Note 17 to our consolidated financial statements. Critical Accounting Estimates
  Valuation of deferred tax asset
 Accounting for Income Taxes
 39




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Goodwill and identifiable intangible assets
 Goodwill and
Other Intangible Assets,
   Investments
    Losses and loss adjustment expense reserves
   40




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  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.
   
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  41




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
 Interest Rate Risk
   Sensitivity to Instantaneous Interest Rate Changes (basis points)(100)
    
    
    (50)
    
    
    0
    
    
    50
    
    
    100
    
    
    200Fair value of fixed
maturity portfolio
    
    $
    145,403
    
    
    $
    142,833
    
    
    $
    140,311
    
    
    $
    137,851
    
    
    $
    135,440
    
    
    $
    130,804
  SecuritiesSecurities
    
    
    Securities
    
    
    with Nowith
    
    
    with
    
    
    UnrealizedUnrealized
    
    
    Unrealized
    
    
    Gains orYear Ended June 30,
    
    Gains
    
    
    Losses
    
    
    Losses
    
    
    Amount2010
    
    $
    8,655
    
    
    $
    1,703
    
    
    $
    250
    
    
    $
    10,6082011
    
    
    14,980
    
    
    
    901
    
    
    
    
    
    
    
    15,8812012
    
    
    22,556
    
    
    
    3,301
    
    
    
    
    
    
    
    25,8572013
    
    
    15,137
    
    
    
    3,257
    
    
    
    
    
    
    
    18,3942014
    
    
    7,783
    
    
    
    1,878
    
    
    
    
    
    
    
    9,661Thereafter
    
    
    39,076
    
    
    
    20,707
    
    
    
    
    
    
    
    59,783Total
    
    $
    108,187
    
    
    $
    31,747
    
    
    $
    250
    
    
    $
    140,184Fair value
    
    $
    114,065
    
    
    $
    25,882
    
    
    $
    364
    
    
    $
    140,311
  Credit Risk
  42




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION 10-K
  % of
    
    
    
    
    
    
    % ofAmortized
    
    
    Amortized
    
    
    Fair
    
    
    FairComparable Rating
    
    Cost
    
    
    Cost
    
    
    Value
    
    
    ValueAAA
    
    $
    55,069
    
    
    
    39.1
    %
    
    $
    56,165
    
    
    
    40.0
    %AA+, AA, AA-
    
    
    24,256
    
    
    
    17.2
    %
    
    
    24,200
    
    
    
    17.2
    %A+, A, A-
    
    
    42,602
    
    
    
    30.3
    %
    
    
    42,968
    
    
    
    30.6
    %BBB+, BBB, BBB-
    
    
    15,514
    
    
    
    11.0
    %
    
    
    14,272
    
    
    
    10.2
    %Total investment grade
    
    
    137,441
    
    
    
    97.6
    %
    
    
    137,605
    
    
    
    98.0
    %BB+, BB, BB-
    
    
    2,955
    
    
    
    2.1
    %
    
    
    2,473
    
    
    
    1.8
    %CCC+, CCC, CCC-
    
    
    60
    
    
    
    0.1
    %
    
    
    60
    
    
    
    0.1
    %CC+, CC, CC-
    
    
    393
    
    
    
    0.2
    %
    
    
    173
    
    
    
    0.1
    %Total non-investment grade
    
    
    3,408
    
    
    
    2.4
    %
    
    
    2,706
    
    
    
    2.0
    %Total
    
    $
    140,849
    
    
    
    100.0
    %
    
    $
    140,311
    
    
    
    100.0
    %
    Insured
    
    
    Uninsured
    
    
    Total% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofFair
    
    
    Fair
    
    
    Fair
    
    
    Fair
    
    
    Fair
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value
    
    
    Value
    
    
    ValueAAA
    
    $
    
    
    
    
    
    
    
    $
    4,792
    
    
    
    39
    %
    
    $
    4,792
    
    
    
    12
    %AA+, AA, AA-
    
    
    13,573
    
    
    
    51
    %
    
    
    6,254
    
    
    
    52
    %
    
    
    19,827
    
    
    
    51
    %A+, A, A-
    
    
    11,727
    
    
    
    44
    %
    
    
    1,050
    
    
    
    9
    %
    
    
    12,777
    
    
    
    33
    %BBB+, BBB, BBB-
    
    
    1,502
    
    
    
    5
    %
    
    
    
    
    
    
    
    
    
    
    1,502
    
    
    
    4
    %Total
    
    $
    26,802
    
    
    
    100
    %
    
    $
    12,096
    
    
    
    100
    %
    
    $
    38,898
    
    
    
    100
    %
 43




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(in thousands, except per share data)
 June 30,2009
    
    
    2008ASSETSFixed maturities, available-for-sale at fair value (amortized
cost of $140,849 and $190,040, respectively)
    
    $
    140,311
    
    
    $
    189,570Cash and cash equivalents
    
    
    77,201
    
    
    
    38,646Premiums and fees receivable, net of allowance of $419 and $651
    
    
    45,309
    
    
    
    63,377Deferred tax asset, net
    
    
    
    
    
    
    17,593Other assets
    
    
    11,866
    
    
    
    10,177Property and equipment, net
    
    
    3,921
    
    
    
    4,876Deferred acquisition costs
    
    
    3,896
    
    
    
    4,549Goodwill
    
    
    70,092
    
    
    
    138,082Identifiable intangible assets
    
    
    6,360
    
    
    
    6,360TOTAL ASSETS
    
    $
    358,956
    
    
    $
    473,230LIABILITIES AND STOCKHOLDERS EQUITYLoss and loss adjustment expense reserves
    
    $
    83,973
    
    
    $
    101,407Unearned premiums and fees
    
    
    57,350
    
    
    
    77,237Notes payable
    
    
    
    
    
    
    3,913Debentures payable
    
    
    41,240
    
    
    
    41,240Other liabilities
    
    
    16,537
    
    
    
    23,974Total liabilities
    
    
    199,100
    
    
    
    247,771Stockholders equity:Preferred stock, $.01 par value, 10,000 shares authorized
    
    
    
    
    
    
    Common stock, $.01 par value, 75,000 shares authorized;
48,312 and 48,055 shares issued and outstanding,
respectively
    
    
    483
    
    
    
    481Additional paid-in capital
    
    
    464,720
    
    
    
    462,601Accumulated other comprehensive loss
    
    
    (538
    )
    
    
    (470
    )Accumulated deficit
    
    
    (304,809
    )
    
    
    (237,153
    )Total stockholders equity
    
    
    159,856
    
    
    
    225,459TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    358,956
    
    
    $
    473,230
  47




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share data)
 Year Ended June 30,2009
    
    
    2008
    
    
    2007Revenues:Premiums earned
    
    $
    224,113
    
    
    $
    285,914
    
    
    $
    300,661Commission and fee income
    
    
    31,759
    
    
    
    36,479
    
    
    
    37,324Investment income
    
    
    9,504
    
    
    
    11,250
    
    
    
    8,863Net realized gains (losses) on fixed maturities,
available-for-sale
    
    
    89
    
    
    
    (1,244
    )
    
    
    (61
    )Other
    
    
    
    
    
    
    
    
    
    
    850265,465
    
    
    
    332,399
    
    
    
    347,637Costs and expenses:Losses and loss adjustment expenses
    
    
    149,277
    
    
    
    219,943
    
    
    
    241,908Insurance operating expenses
    
    
    87,124
    
    
    
    98,433
    
    
    
    97,629Other operating expenses
    
    
    1,307
    
    
    
    2,415
    
    
    
    2,623Litigation settlement
    
    
    1,570
    
    
    
    7,468
    
    
    
    Stock-based compensation
    
    
    2,053
    
    
    
    1,507
    
    
    
    1,063Depreciation and amortization
    
    
    1,910
    
    
    
    1,679
    
    
    
    1,624Interest expense
    
    
    4,138
    
    
    
    4,977
    
    
    
    1,874Goodwill impairment
    
    
    67,990
    
    
    
    
    
    
    
    315,369
    
    
    
    336,422
    
    
    
    346,721Income (loss) before income taxes
    
    
    (49,904
    )
    
    
    (4,023
    )
    
    
    916Provision for income taxes
    
    
    18,396
    
    
    
    13,822
    
    
    
    17,586Net loss
    
    $
    (68,300
    )
    
    $
    (17,845
    )
    
    $
    (16,670
    )Net loss per share:Basic and diluted
    
    $
    (1.43
    )
    
    $
    (0.37
    )
    
    $
    (0.35
    )Number of shares used to calculate net loss per share:Basic and diluted
    
    
    47,664
    
    
    
    47,628
    
    
    
    47,584Reconciliation of net loss to comprehensive loss:Net loss
    
    $
    (68,300
    )
    
    $
    (17,845
    )
    
    $
    (16,670
    )Unrealized change in investments
    
    
    (68
    )
    
    
    2,303
    
    
    
    690Other
    
    
    
    
    
    
    (121
    )
    
    
    121(68,368
    )
    
    
    (15,663
    )
    
    
    (15,859
    )Applicable provision for income taxes
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss
    
    $
    (68,368
    )
    
    $
    (15,663
    )
    
    $
    (15,859
    )Detail of net realized gains (losses) on fixed
maturities, available-for-sale:Net realized gains (losses) on sales
    
    $
    2,509
    
    
    $
    170
    
    
    $
    (61
    )Unrealized losses on fixed maturities with
other-than-temporary impairment charges
    
    
    (3,640
    )
    
    
    
    
    
    
    Non-credit portion included in comprehensive
income (loss)
    
    
    1,220
    
    
    
    (1,414
    )
    
    
    Other-than-temporary impairment charges recognized
in income (loss)
    
    
    (2,420
    )
    
    
    (1,414
    )
    
    
    Net realized gains (losses) on fixed maturities,
available-for-sale
    
    $
    89
    
    
    $
    (1,244
    )
    
    $
    (61
    )
  48




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


(in thousands)
 AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    paid-in
    
    
    comprehensive
    
    
    Accumulated
    
    
    stockholdersShares
    
    
    Amount
    
    
    capital
    
    
    loss
    
    
    deficit
    
    
    equityBalances at June 30, 2006
    
    
    47,535
    
    
    $
    475
    
    
    $
    459,049
    
    
    $
    (3,463
    )
    
    $
    (202,638
    )
    
    $
    253,423Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,670
    )
    
    
    (16,670
    )Net unrealized change on
investments (net of tax of $0)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    690
    
    
    
    
    
    
    
    690Unrealized change on interest rate
swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    121Sale of common stock
    
    
    50
    
    
    
    1
    
    
    
    590
    
    
    
    
    
    
    
    
    
    
    
    591Stock-based compensation
    
    
    5
    
    
    
    
    
    
    
    1,063
    
    
    
    
    
    
    
    
    
    
    
    1,063Issuance of shares under Employee
Stock Purchase Plan
    
    
    25
    
    
    
    
    
    
    
    266
    
    
    
    
    
    
    
    
    
    
    
    266Balances at June 30, 2007
    
    
    47,615
    
    
    
    476
    
    
    
    460,968
    
    
    
    (2,652
    )
    
    
    (219,308
    )
    
    
    239,484Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,845
    )
    
    
    (17,845
    )Net unrealized change on
investments (net of tax of $0)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,303
    
    
    
    
    
    
    
    2,303Unrealized change on interest rate
swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (121
    )
    
    
    
    
    
    
    (121
    )Issuance of restricted common stock
    
    
    400
    
    
    
    4
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    5
    
    
    
    1
    
    
    
    1,506
    
    
    
    
    
    
    
    
    
    
    
    1,507Issuance of shares under Employee
Stock Purchase Plan
    
    
    35
    
    
    
    
    
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    131Balances at June 30, 2008
    
    
    48,055
    
    
    
    481
    
    
    
    462,601
    
    
    
    (470
    )
    
    
    (237,153
    )
    
    
    225,459Cumulative
effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (644
    )
    
    
    644
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,300
    )
    
    
    (68,300
    )Net unrealized change on
investments (net of tax of $0)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    576
    
    
    
    
    
    
    
    576Issuance of restricted common stock
    
    
    225
    
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    5
    
    
    
    
    
    
    
    2,053
    
    
    
    
    
    
    
    
    
    
    
    2,053Issuance of shares under Employee
Stock Purchase Plan
    
    
    27
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    68Balances at June 30, 2009
    
    
    48,312
    
    
    $
    483
    
    
    $
    464,720
    
    
    $
    (538
    )
    
    $
    (304,809
    )
    
    $
    159,856
  49




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)
 Year Ended June 30,2009
    
    
    2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (68,300
    )
    
    $
    (17,845
    )
    
    $
    (16,670
    )Adjustments to reconcile net loss to cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    1,910
    
    
    
    1,679
    
    
    
    1,624Stock-based compensation
    
    
    2,053
    
    
    
    1,507
    
    
    
    1,063Deferred income taxes
    
    
    17,593
    
    
    
    13,343
    
    
    
    17,132Goodwill impairment
    
    
    67,990
    
    
    
    
    
    
    
    Other-than-temporary impairment on investment securities
    
    
    2,420
    
    
    
    1,414
    
    
    
    Net realized gains (losses) on sales of investments
    
    
    (2,509
    )
    
    
    (170
    )
    
    
    61Other
    
    
    129
    
    
    
    113
    
    
    
    132Change in:Premiums and fees receivable
    
    
    18,023
    
    
    
    8,349
    
    
    
    (6,614
    )Loss and loss adjustment expense reserves
    
    
    (17,434
    )
    
    
    9,961
    
    
    
    28,624Unearned premiums and fees
    
    
    (19,887
    )
    
    
    (11,594
    )
    
    
    10,500Litigation settlement
    
    
    (3,975
    )
    
    
    6,721
    
    
    
    Other
    
    
    (3,328
    )
    
    
    4,890
    
    
    
    875Net cash provided by (used in) operating activities
    
    
    (5,315
    )
    
    
    18,368
    
    
    
    36,727Cash flows from investing activities:Purchases of fixed maturities, available-for-sale
    
    
    (16,228
    )
    
    
    (44,408
    )
    
    
    (101,295
    )Maturities and paydowns of fixed maturities, available-for-sale
    
    
    19,980
    
    
    
    13,697
    
    
    
    7,048Sales of fixed maturities, available-for-sale
    
    
    46,128
    
    
    
    18,719
    
    
    
    45,932Net change in receivable/payable for securities
    
    
    (1,045
    )
    
    
    20,019
    
    
    
    (22,889
    )Purchase of common stock in trust
    
    
    
    
    
    
    
    
    
    
    (1,240
    )Capital expenditures
    
    
    (1,003
    )
    
    
    (2,422
    )
    
    
    (1,769
    )Cash paid for acquisitions
    
    
    
    
    
    
    
    
    
    
    (1,037
    )Other
    
    
    (130
    )
    
    
    (253
    )
    
    
    (254
    )Net cash provided by (used in) investing activities
    
    
    47,702
    
    
    
    5,352
    
    
    
    (75,504
    )Cash flows from financing activities:Proceeds from borrowings
    
    
    
    
    
    
    
    
    
    
    5,000Payments on borrowings
    
    
    (3,913
    )
    
    
    (19,147
    )
    
    
    (5,552
    )Proceeds from issuance of debentures
    
    
    
    
    
    
    
    
    
    
    41,240Net proceeds from issuance of common stock
    
    
    68
    
    
    
    131
    
    
    
    857Other
    
    
    13
    
    
    
    (219
    )
    
    
    (141
    )Net cash provided by (used in) financing activities
    
    
    (3,832
    )
    
    
    (19,235
    )
    
    
    41,404Net increase in cash and cash equivalents
    
    
    38,555
    
    
    
    4,485
    
    
    
    2,627Cash and cash equivalents, beginning of year
    
    
    38,646
    
    
    
    34,161
    
    
    
    31,534Cash and cash equivalents, end of year
    
    $
    77,201
    
    
    $
    38,646
    
    
    $
    34,161
  50




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109
 Advertising Costs
  Property and Equipment
  Foreclosed Real Estate Held for Sale
  Deferred Acquisition Costs
  Goodwill and Other Identifiable Intangible Assets
 Goodwill and Other
Intangible Assets,
 53




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    Loss and Loss Adjustment Expense Reserves
  Recent Accounting Pronouncements
 Fair
Value Measurements Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Indentifying Transactions That Are Not Orderly
 54




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Establishing the Fair Value Option for Financial Assets and Liabilities Accounting for Certain Investments in Debt and
Equity Securities
  Interim Disclosures about Fair Value of Financial Instruments,
 Subsequent Events
 The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles FASB Accounting Standards Codification
 Supplemental Cash Flow Information
  Basic and Diluted Net Income (Loss) Per Share
  55




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  2. Business Combinations
   3. Investments
 Restrictions
  Fair Value
   Level 1
    
    Quoted prices in active markets for identical assets or liabilities.Level 2
    
    Quoted market prices for similar assets or liabilities in active
markets; quoted prices by independent pricing services for identical or similar
assets or liabilities in markets that are not active; and valuations, using models
or other valuation techniques, that use observable market data. All significant
inputs are observable, or derived from observable information in the marketplace, or
are supported by observable levels at which transactions are executed in the market
place.Level 3
    
    Instruments that use non-binding broker quotes or model driven
valuations that do not have observable market data.
 56




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Fair Value Measurements UsingQuoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsDescription
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Fixed maturities, available-for-sale:U.S. government and agencies
    
    $
    11,180
    
    
    $
    11,180
    
    
    $
    
    
    
    $
    State
    
    
    8,563
    
    
    
    
    
    
    
    8,563
    
    
    
    Political subdivisions
    
    
    1,854
    
    
    
    
    
    
    
    1,854
    
    
    
    Revenue and assessment
    
    
    28,481
    
    
    
    
    
    
    
    28,481
    
    
    
    Corporate bonds
    
    
    46,726
    
    
    
    
    
    
    
    46,726
    
    
    
    Collateralized mortgage obligations:Agency backed
    
    
    31,926
    
    
    
    
    
    
    
    31,926
    
    
    
    Non-agency backed  residential
    
    
    5,618
    
    
    
    
    
    
    
    3,688
    
    
    
    1,930Non-agency backed  commercial
    
    
    5,963
    
    
    
    
    
    
    
    5,256
    
    
    
    707Total fixed maturities, available-for-sale
    
    
    140,311
    
    
    
    11,180
    
    
    
    126,494
    
    
    
    2,637Cash and cash equivalents
    
    
    77,201
    
    
    
    77,201
    
    
    
    
    
    
    
    Total
    
    $
    217,512
    
    
    $
    88,381
    
    
    $
    126,494
    
    
    $
    2,637
   57




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Fair ValueMeasurementsUsingSignificantUnobservableInputs(Level 3)Balance at July 1, 2008
    
    $
    167Total gains or losses (realized or unrealized):Included in net income (loss)
    
    
    (63
    )Included in comprehensive income (loss)
    
    
    (24
    )Purchases, sales, issuances and settlements
    
    
    (25
    )Transfers in and/or out of Level 3
    
    
    2,582Balance at June 30, 2009
    
    $
    2,637
 Investment Income and Net Realized Gains and Losses
  Year Ended June 30,2009
    
    
    2008
    
    
    2007Fixed maturities, available-for-sale
    
    $
    9,588
    
    
    $
    9,747
    
    
    $
    7,770Cash and cash equivalents
    
    
    383
    
    
    
    1,824
    
    
    
    1,520Other
    
    
    116
    
    
    
    117
    
    
    
    5Investment expenses
    
    
    (583
    )
    
    
    (438
    )
    
    
    (432
    )$
    9,504
    
    
    $
    11,250
    
    
    $
    8,863
  Year Ended June 30,2009
    
    
    2008
    
    
    2007Realized gains on sales
    
    $
    2,662
    
    
    $
    424
    
    
    $
    90Realized losses on sales
    
    
    (153
    )
    
    
    (254
    )
    
    
    (151
    )Other-than-temporary impairment losses
    
    
    (2,420
    )
    
    
    (1,414
    )
    
    
    $
    89
    
    
    $
    (1,244
    )
    
    $
    (61
    )
  58




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Fixed Maturities, Available-for-Sale
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairJune 30, 2009
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. government and agencies
    
    $
    10,744
    
    
    $
    473
    
    
    $
    (37
    )
    
    $
    11,180State
    
    
    8,238
    
    
    
    344
    
    
    
    (19
    )
    
    
    8,563Political subdivisions
    
    
    1,834
    
    
    
    52
    
    
    
    (32
    )
    
    
    1,854Revenue and assessment
    
    
    27,816
    
    
    
    831
    
    
    
    (166
    )
    
    
    28,481Corporate bonds
    
    
    45,737
    
    
    
    1,654
    
    
    
    (665
    )
    
    
    46,726Collateralized mortgage obligations:Agency backed
    
    
    30,656
    
    
    
    1,270
    
    
    
    
    
    
    
    31,926Non-agency backed  residential
    
    
    8,178
    
    
    
    1
    
    
    
    (2,561
    )
    
    
    5,618Non-agency backed  commercial
    
    
    7,646
    
    
    
    
    
    
    
    (1,683
    )
    
    
    5,963$
    140,849
    
    
    $
    4,625
    
    
    $
    (5,163
    )
    
    $
    140,311
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairJune 30, 2008
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. government and agencies
    
    $
    32,046
    
    
    $
    1,112
    
    
    $
    (1
    )
    
    $
    33,157State
    
    
    7,423
    
    
    
    168
    
    
    
    (77
    )
    
    
    7,514Political subdivisions
    
    
    3,606
    
    
    
    7
    
    
    
    (28
    )
    
    
    3,585Revenue and assessment
    
    
    30,066
    
    
    
    288
    
    
    
    (440
    )
    
    
    29,914Corporate bonds
    
    
    47,381
    
    
    
    154
    
    
    
    (1,006
    )
    
    
    46,529Collateralized mortgage obligations:Agency backed
    
    
    52,701
    
    
    
    650
    
    
    
    (255
    )
    
    
    53,096Non-agency backed  residential
    
    
    8,766
    
    
    
    
    
    
    
    (721
    )
    
    
    8,045Non-agency backed  commercial
    
    
    8,051
    
    
    
    
    
    
    
    (321
    )
    
    
    7,730$
    190,040
    
    
    $
    2,379
    
    
    $
    (2,849
    )
    
    $
    189,570
  SecuritiesSecurities
    
    
    Securities
    
    
    with No
    
    
    Allwith
    
    
    with
    
    
    Unrealized
    
    
    FixedUnrealized
    
    
    Unrealized
    
    
    Gains or
    
    
    MaturityGains
    
    
    Losses
    
    
    Losses
    
    
    SecuritiesOne year or less
    
    $
    4,376
    
    
    $
    905
    
    
    $
    250
    
    
    $
    5,531After one through five years
    
    
    50,827
    
    
    
    1,951
    
    
    
    
    
    
    
    52,778After five through ten years
    
    
    21,554
    
    
    
    5,490
    
    
    
    
    
    
    
    27,044After ten years
    
    
    4,777
    
    
    
    6,674
    
    
    
    
    
    
    
    11,451No single maturity date
    
    
    32,531
    
    
    
    10,862
    
    
    
    114
    
    
    
    43,507$
    114,065
    
    
    $
    25,882
    
    
    $
    364
    
    
    $
    140,311
 59




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Less than 12 months
    
    
    12 months or longerGross
    
    
    
    
    
    
    Gross
    
    
    Total GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    UnrealizedJune 30, 2009
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    LossesU.S. government and agencies
    
    $
    963
    
    
    $
    (37
    )
    
    $
    
    
    
    $
    
    
    
    $
    (37
    )State
    
    
    
    
    
    
    
    
    
    
    678
    
    
    
    (19
    )
    
    
    (19
    )Political subdivisions
    
    
    48
    
    
    
    (1
    )
    
    
    471
    
    
    
    (31
    )
    
    
    (32
    )Revenue and assessment
    
    
    533
    
    
    
    (11
    )
    
    
    4,305
    
    
    
    (155
    )
    
    
    (166
    )Corporate bonds
    
    
    
    
    
    
    
    
    
    
    8,022
    
    
    
    (665
    )
    
    
    (665
    )Collateralized mortgage obligationsAgency backed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-agency backed 
residential
    
    
    
    
    
    
    
    
    
    
    4,898
    
    
    
    (2,561
    )
    
    
    (2,561
    )Non-agency backed 
commercial
    
    
    
    
    
    
    
    
    
    
    5,964
    
    
    
    (1,683
    )
    
    
    (1,683
    )$
    1,544
    
    
    $
    (49
    )
    
    $
    24,338
    
    
    $
    (5,114
    )
    
    $
    (5,163
    )
 Less than 12 months
    
    
    12 months or longerGross
    
    
    
    
    
    
    Gross
    
    
    Total GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    UnrealizedJune 30, 2008
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    LossesU.S. government and agencies
    
    $
    1,000
    
    
    $
    (1
    )
    
    $
    
    
    
    $
    
    
    
    $
    (1
    )State
    
    
    1,056
    
    
    
    (77
    )
    
    
    
    
    
    
    
    
    
    
    (77
    )Political subdivisions
    
    
    1,540
    
    
    
    (6
    )
    
    
    537
    
    
    
    (22
    )
    
    
    (28
    )Revenue and assessment
    
    
    13,237
    
    
    
    (439
    )
    
    
    23
    
    
    
    (1
    )
    
    
    (440
    )Corporate bonds
    
    
    30,055
    
    
    
    (566
    )
    
    
    2,572
    
    
    
    (440
    )
    
    
    (1,006
    )Collateralized mortgage obligationsAgency backed
    
    
    13,365
    
    
    
    (255
    )
    
    
    
    
    
    
    
    
    
    
    (255
    )Non-agency backed 
residential
    
    
    2,080
    
    
    
    (78
    )
    
    
    5,216
    
    
    
    (643
    )
    
    
    (721
    )Non-agency backed 
commercial
    
    
    4,857
    
    
    
    (110
    )
    
    
    2,041
    
    
    
    (211
    )
    
    
    (321
    )$
    67,190
    
    
    $
    (1,532
    )
    
    $
    10,389
    
    
    $
    (1,317
    )
    
    $
    (2,849
    )
  Gross Unrealized LossesLess than
    
    Greater
    
    Grossor equal to
    
    than 12
    
    UnrealizedAs of:
    
    12 months
    
    months
    
    GainsJune 30, 2009
    
    
    3
    
    
    
    37
    
    
    
    133June 30, 2008
    
    
    79
    
    
    
    16
    
    
    
    108
  Number
    
    
    
    
    
    
    Grossof
    
    
    Fair
    
    
    UnrealizedGross Unrealized Losses
    
    Securities
    
    
    Value
    
    
    LossesLess than 10%
    
    
    17
    
    
    $
    15,368
    
    
    $
    (766
    )Greater than 10%
    
    
    20
    
    
    
    8,970
    
    
    
    (4,348
    )37
    
    
    $
    24,338
    
    
    $
    (5,114
    )
 60




---



##### Table of Contents



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




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Year Ended June 30,2009
    
    
    2008Number of
    
    
    
    
    
    
    Number ofSecurities
    
    
    OTTI
    
    
    Securities
    
    
    OTTICorporate bonds
    
    
    3
    
    
    $
    (871
    )
    
    
    
    
    
    $
    Collateralized mortgage obligations:Non-agency backed  residential
    
    
    5
    
    
    
    (1,564
    )
    
    
    3
    
    
    
    (778
    )Non-agency backed  commercial
    
    
    4
    
    
    
    (1,205
    )
    
    
    3
    
    
    
    (636
    )12
    
    
    
    (3,640
    )
    
    
    6
    
    
    
    (1,414
    )Portion of loss recognized in accumulated
other comprehensive loss
    
    
    
    
    
    
    1,220
    
    
    
    
    
    
    
    Net OTTI recognized in income
    
    
    
    
    
    $
    (2,420
    )
    
    
    
    
    
    $
    (1,414
    )
  Recognized in net loss:Year ended June 30, 2008
    
    $
    (1,414
    )Nine months ended March 31, 2009
    
    
    (1,987
    )(3,401
    )Cumulative effect of accounting change
    
    
    644Balance at April 1, 2009
    
    
    (2,757
    )Recognized in net loss:Three months ended June 30, 2009
    
    
    (433
    )$
    (3,190
    )
 Amendments to the
Impairment Guidance of EITF Issue No. 99-20
  62




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   4. Reinsurance
  Year Ended June 30,2009
    
    
    2008
    
    
    2007Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    187,935
    
    
    $
    206,358
    
    
    $
    253,807
    
    
    $
    265,630
    
    
    $
    290,784
    
    
    $
    280,946Assumed
    
    
    17,044
    
    
    
    17,755
    
    
    
    20,167
    
    
    
    20,284
    
    
    
    19,872
    
    
    
    19,715Total
    
    $
    204,979
    
    
    $
    224,113
    
    
    $
    273,974
    
    
    $
    285,914
    
    
    $
    310,656
    
    
    $
    300,661
   5. Stock-Based Compensation Plans
 Employee Stock-Based Incentive Plan
 Share
Based Payment
  63




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Year Ended June 30,2009
    
    2008
    
    2007Expected option term
    
    
    
    
    
    10 years
    
    
    10 yearsAnnualized volatility rate
    
    
    
    
    
    
    31 to 43
    %
    
    
    32 to 33
    %Risk-free rate of return
    
    
    
    
    
    
    3.48 to 5.02
    %
    
    
    4.74 to 4.77
    %Dividend yield
    
    
    
    
    
    
    0
    %
    
    
    0
    %
  WeightedAverage
    
    
    AggregateExercise
    
    
    IntrinsicOptions
    
    
    Exercise Price
    
    
    Price
    
    
    ValueOptions outstanding at June 30, 2006
    
    
    4,081
    
    
    $
    3.00-$  8.13
    
    
    $
    3.37Granted
    
    
    635
    
    
    $
    10.12-$11.81
    
    
    $
    11.61Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    Options outstanding at June 30, 2007
    
    
    4,716
    
    
    $
    3.00-$11.81
    
    
    $
    4.48Granted
    
    
    955
    
    
    $
    3.04-$10.08
    
    
    $
    3.26Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (215
    )
    
    $
    3.04-$11.81
    
    
    $
    7.89Options outstanding at June 30, 2008
    
    
    5,456
    
    
    $
    3.00-$11.81
    
    
    $
    4.13Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (148
    )
    
    $
    3.00-$11.81
    
    
    $
    7.51Options outstanding at June 30, 2009
    
    
    5,308
    
    
    $
    3.00-$11.81
    
    
    $
    4.04
    
    
    
    Options exercisable/vested at June 30, 2009
    
    
    4,402
    
    
    $
    3.00-$11.81
    
    
    $
    3.71
    
    
    
    
  Employee Stock Purchase Plan
  64




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 6. Employee Benefit Plan
  7. Property and Equipment
  June 30,2009
    
    
    2008Furniture and equipment
    
    $
    8,027
    
    
    $
    7,967Leasehold improvements
    
    
    2,105
    
    
    
    2,060Capitalized leases
    
    
    826
    
    
    
    588Aircraft
    
    
    190
    
    
    
    19011,148
    
    
    
    10,805Less: accumulated depreciation
    
    
    (7,227
    )
    
    
    (5,929
    )Property and equipment, net
    
    $
    3,921
    
    
    $
    4,876
  8. Lease Commitments
 Operating Leases
  Year Ending June 30,
    
    Amount2010
    
    $
    9,2422011
    
    
    5,8672012
    
    
    3,0302013
    
    
    1,2192014
    
    
    420Thereafter
    
    
    1,272Total
    
    $
    21,050
 65




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Capital Leases
  CapitalizedLeaseYear Ending June 30,
    
    Obligations2010
    
    $
    702011
    
    
    812012
    
    
    642013
    
    
    12$
    227Less: Amount representing executory costs
    
    
    (4
    )Net minimum lease payments
    
    
    223Less: Amount representing interest
    
    
    (4
    )Present value of net minimum lease payments
    
    $
    219
 9. Losses and Loss Adjustment Expenses Incurred and Paid
  Year Ended June 30,2009
    
    
    2008
    
    
    2007Liability for unpaid losses and LAE at beginning of year, gross
    
    $
    101,407
    
    
    $
    91,446
    
    
    $
    62,822Reinsurance balances receivable
    
    
    (259
    )
    
    
    (309
    )
    
    
    (1,301
    )Liability for unpaid losses and LAE at beginning of year, net
    
    
    101,148
    
    
    
    91,137
    
    
    
    61,521Add: Provision for losses and LAE:Current year
    
    
    160,659
    
    
    
    221,342
    
    
    
    238,043Prior years
    
    
    (11,382
    )
    
    
    (1,399
    )
    
    
    3,865Net losses and LAE incurred
    
    
    149,277
    
    
    
    219,943
    
    
    
    241,908Less: Losses and LAE paid:Current year
    
    
    103,566
    
    
    
    141,736
    
    
    
    160,872Prior years
    
    
    62,964
    
    
    
    68,196
    
    
    
    51,420Net losses and LAE paid
    
    
    166,530
    
    
    
    209,932
    
    
    
    212,292Liability for unpaid losses and LAE at end of year, net
    
    
    83,895
    
    
    
    101,148
    
    
    
    91,137Reinsurance balances receivable
    
    
    78
    
    
    
    259
    
    
    
    309Liability for unpaid losses and LAE at end of year, gross
    
    $
    83,973
    
    
    $
    101,407
    
    
    $
    91,446
   66




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  10. Notes Payable
  11. Debentures Payable
    12. Income Taxes
  Year Ended June 30,2009
    
    
    2008
    
    
    2007Federal:Current
    
    $
    295
    
    
    $
    31
    
    
    $
    75Deferred
    
    
    17,440
    
    
    
    13,496
    
    
    
    17,13217,735
    
    
    
    13,527
    
    
    
    17,207State:Current
    
    
    508
    
    
    
    448
    
    
    
    379Deferred
    
    
    153
    
    
    
    (153
    )
    
    
    661
    
    
    
    295
    
    
    
    379$
    18,396
    
    
    $
    13,822
    
    
    $
    17,586
 67




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Year Ended June 30,2009
    
    
    2008
    
    
    2007Provision (benefit) for income taxes at
statutory rate
    
    $
    (17,466
    )
    
    $
    (1,408
    )
    
    $
    321Tax effect of:Tax-exempt investment income
    
    
    (16
    )
    
    
    (32
    )
    
    
    (78
    )Change in the beginning of the year
balance of the valuation allowance for
deferred tax asset allocated to income
taxes
    
    
    (6,113
    )
    
    
    3,571
    
    
    
    6,882Net operating loss carryforward expirations
    
    
    24,534
    
    
    
    11,380
    
    
    
    9,990Goodwill
    
    
    16,724
    
    
    
    
    
    
    
    State income taxes, net of federal income
tax benefit and state valuation allowance
    
    
    482
    
    
    
    139
    
    
    
    246Other
    
    
    251
    
    
    
    172
    
    
    
    225$
    18,396
    
    
    $
    13,822
    
    
    $
    17,586
  2009
    
    
    2008Deferred tax assets:Net operating loss carryforwards
    
    $
    4,207
    
    
    $
    33,884Stock option compensation
    
    
    4,089
    
    
    
    3,475Unearned
premiums and loss and loss adjustment expense reserves
    
    
    5,524
    
    
    
    7,316Goodwill
    
    
    3,847
    
    
    
    Net unrealized change on investments
    
    
    188
    
    
    
    164Alternative minimum tax (AMT) credit carryforwards
    
    
    1,609
    
    
    
    1,314Accrued expenses and other nondeductible items
    
    
    4,290
    
    
    
    3,993Other
    
    
    2,532
    
    
    
    1,37726,286
    
    
    
    51,523Deferred tax liabilities:Deferred acquisition costs
    
    
    (1,364
    )
    
    
    (1,592
    )Goodwill
    
    
    
    
    
    
    (2,264
    )(1,364
    )
    
    
    (3,856
    )Total net deferred tax asset
    
    
    24,922
    
    
    
    47,667Less: Valuation allowance
    
    
    (24,922
    )
    
    
    (30,074
    )Net deferred tax asset
    
    $
    
    
    
    $
    17,593
  Accounting for Income Taxes
 68




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
     Expiration Year Ended June 30,
    
    Amount2010
    
    $
    7,0952011
    
    
    2,0992012
    
    
    2013
    
    
    2Thereafter
    
    
    2,823Total NOL carryforwards
    
    $
    12,019
 13. Net Loss Per Share
 Earnings Per Share
  Year Ended June 30,2009
    
    
    2008
    
    
    2007Net loss
    
    $
    (68,300
    )
    
    $
    (17,845
    )
    
    $
    (16,670
    )Weighted average common basic shares
    
    
    47,664
    
    
    
    47,628
    
    
    
    47,584Effect of dilutive securities
    
    
    
    
    
    
    
    
    
    
    Weighted average common dilutive shares
    
    
    47,664
    
    
    
    47,628
    
    
    
    47,584Basic and diluted net loss per share
    
    $
    (1.43
    )
    
    $
    (0.37
    )
    
    $
    (0.35
    )
  69




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   14. Concentrations of Credit Risk
   15. Related Party Transactions
    16. Severance
  70




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 17. Litigation
 Accounting for Contingencies
     71




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   18. Fair Value of Financial Instruments
  2009
    
    2008Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    ValueAssets:Fixed maturities, available-for-sale
    
    $
    140,311
    
    
    $
    140,311
    
    
    $
    189,570
    
    
    $
    189,570Cash and cash equivalents
    
    
    77,201
    
    
    
    77,201
    
    
    
    38,646
    
    
    
    38,646Premiums and fees receivable, net
    
    
    45,309
    
    
    
    45,309
    
    
    
    63,377
    
    
    
    63,377Liabilities:Notes payable
    
    
    
    
    
    
    
    
    
    
    3,913
    
    
    
    3,913Capitalized lease obligations
    
    
    224
    
    
    
    224
    
    
    
    211
    
    
    
    211Debentures payable
    
    
    41,240
    
    
    
    15,568
    
    
    
    41,240
    
    
    
    30,668
  72




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 19. Segment Information
   Year Ended June 30,2009
    
    
    2008
    
    
    2007Revenues:Insurance
    
    $
    265,341
    
    
    $
    332,219
    
    
    $
    347,431Real estate and corporate
    
    
    124
    
    
    
    180
    
    
    
    206Consolidated total
    
    $
    265,465
    
    
    $
    332,399
    
    
    $
    347,637Income (loss) before income taxes:Insurance
    
    $
    (42,536
    )
    
    $
    4,685
    
    
    $
    6,252Real estate and corporate
    
    
    (7,368
    )
    
    
    (8,708
    )
    
    
    (5,336
    )Consolidated total
    
    $
    (49,904
    )
    
    $
    (4,023
    )
    
    $
    916
 June 30,2009
    
    
    2008Total assets:Insurance
    
    $
    348,801
    
    
    $
    458,120Real estate and corporate
    
    
    10,155
    
    
    
    15,110Consolidated total
    
    $
    358,956
    
    
    $
    473,230
 20. Statutory Financial Information and Accounting Policies
 Accounting Practices and Procedures Manual
   73




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 21. Selected Quarterly Financial Data (unaudited)
  Quarters EndedSeptember 30,
    
    December 31,
    
    March 31,
    
    June 30,Year Ended June 30, 2009:Total revenues
    
    $
    71,589
    
    
    $
    65,080
    
    
    $
    67,097
    
    
    $
    61,699Income (loss) before income taxes
    
    $
    3,753
    
    
    $
    (1,388
    )
    
    $
    3,991
    
    
    $
    (56,260
    )Net income (loss)
    
    $
    1,841
    
    
    $
    (1,003
    )
    
    $
    2,394
    
    
    $
    (71,532
    )Basic and diluted net income
(loss) per share
    
    $
    0.04
    
    
    $
    (0.02
    )
    
    $
    0.05
    
    
    $
    (1.50
    )Year Ended June 30, 2008:Total revenues
    
    $
    87,158
    
    
    $
    82,341
    
    
    $
    83,985
    
    
    $
    78,915Income (loss) before income taxes
    
    $
    2,963
    
    
    $
    33
    
    
    $
    1,287
    
    
    $
    (8,306
    )Net income (loss)
    
    $
    1,892
    
    
    $
    (11,731
    )
    
    $
    758
    
    
    $
    (8,764
    )Basic and diluted net income
(loss) per share
    
    $
    0.04
    
    
    $
    (0.25
    )
    
    $
    0.02
    
    
    $
    (0.18
    )
   74




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



ExhibitNumber10.6
    
    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).*10.7
    
    Registration Rights Agreement, dated as of April 30, 2004, by and
among First Acceptance Corporation, Stephen J. Harrison and Thomas
M. Harrison, Jr. (incorporated by reference to Exhibit 10.7 of the
Companys Current Report on Form 8-K dated May 3, 2004).10.8
    
    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).*10.9
    
    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).*10.10
    
    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).10.11
    
    Summary of Compensation for Non- Employee Directors and Named
Executive Officers.10.12
    
    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).10.13
    
    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).*10.14
    
    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).*10.15
    
    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).*10.16
    
    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).*10.17
    
    Second Amendment to the First Acceptance Corporation 2002 Long Term
Incentive Plan (incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 10-Q dated May 10, 2007).*10.18
    
    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).*10.19
    
    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).*10.20
    
    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).
 78




---



##### Table of Contents



ExhibitNumber10.21
    
    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).10.22
    
    Amended and Restated Trust Agreement, dated June 15, 2007, among
First Acceptance Corporation, Wilmington Trust Company and the
Administrative Trustees Named Therein (incorporated by reference to
Exhibit 99.4 of the Companys Current Report on Form 8-K dated June
18, 2007).10.23
    
    Release Agreement, dated December 31, 2007, between First
Acceptance Corporation and Thomas M. Harrison, Jr. (incorporated by
reference to Exhibit 99.1 of the Companys Current Report on Form
8-K dated January 4, 2008).*10.24
    
    Amended and Restated Employment Agreement, made as of February 8,
2008, to be effective January 1, 2008, by and between First
Acceptance Corporation and Stephen J. Harrison (incorporated by
reference to Exhibit 99.3 of the Companys Current Report on Form
8-K dated February 11, 2008).*10.25
    
    Amended and Restated Employment Agreement, made as of February 8,
2008, to be effective January 1, 2008, by and between First
Acceptance Corporation and Edward Pierce (incorporated by reference
to Exhibit 99.4 of the Companys Current Report on Form 8-K dated
February 11, 2008).*10.26
    
    Amended and Restated Employment Agreement, made as of February 8,
2008, to be effective January 1, 2008, by and between First
Acceptance Corporation and Kevin P. Cohn (incorporated by reference
to Exhibit 99.5 of the Companys Current Report on Form 8-K dated
February 11, 2008).*10.27
    
    Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and
William R. Pentecost (incorporated by reference to Exhibit 99.6 of
the Companys Current Report on Form 8-K dated February 11, 2008).*10.28
    
    First Amendment to First Acceptance Corporation Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.1 of the
Companys Quarterly Report on Form 10-Q dated February 11, 2008).10.29
    
    Restricted Stock Award Agreement, dated as of March 18, 2008,
between First Acceptance Corporation and Edward Pierce
(incorporated by reference to Exhibit 99.1 of the Companys Current
Report on Form 8-K dated March 21, 2008).*10.30
    
    Form of Restricted Stock Award Agreement between First Acceptance
Corporation and Stephen J. Harrison and Edward Pierce (incorporated
by reference to Exhibit 99 of the Companys Current Report on Form
8-K dated October 6, 2008).*10.31
    
    Stipulation and Agreement of Settlement, made and entered into as
of September 10, 2008, by First Acceptance Insurance Company of
Georgia, Inc., and its predecessors and affiliates, Village Auto
Insurance Company, U.S. Auto Insurance Company, and Transit Auto
Club, Inc., and Annette Rush and all other persons similarly
situated by and through their undersigned attorneys of record
(incorporated by reference to Exhibit 10 of the Companys Quarterly
Report on Form 10-Q dated November 10, 2008).10.32
    
    Stipulation and Agreement of Settlement, dated as of December 5,
2008, by First Acceptance Insurance Company, Inc., and its
predecessors and affiliates, USAuto Insurance Company, and Transit
Automobile Club, Inc., by and through their attorneys of record,
and Margaret Franklin and all other persons similarly situated, by
and through their attorneys of record (incorporated by reference to
Exhibit 99 of the Companys Current Report on Form 8-K dated
December 11, 2008).10.33
    
    Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, between First Acceptance Corporation and Daniel L.
Walker (incorporated by reference to Exhibit 10.1 of the Companys
Quarterly Report on Form 10-Q dated May 11, 2009).*
 79




---



##### Table of Contents



10.34
    
    Amended and Restated Employment Agreement, made as of February 8,
2008, to be effective January 1, 2008, between First Acceptance
Corporation and Keith E. Bornemann (incorporated by reference to
Exhibit 10.2 of the Companys Quarterly Report on Form 10-Q dated
May 11, 2009).*14
    
    First Acceptance Corporation Code of Business Conduct and Ethics
(incorporated by reference to Exhibit 14 of the Companys Annual
Report on Form 10-K dated September 28, 2004).21
    
    Subsidiaries of First Acceptance Corporation.23.1
    
    Consent of Ernst & Young LLP.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).32.1
    
    Chief Executive Officers Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Chief Financial Officers Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Management contract or compensatory plan or arrangement. 80




---



##### Table of Contents



SIGNATURES
  FIRST ACCEPTANCE CORPORATIONDate:  September 14, 2009
    By
    /s/ Stephen J. HarrisonStephen J. HarrisonChief Executive Officer  Signature
    
    Title
    
    Date/s/ Stephen J. Harrison

Stephen J. Harrison
    
    Chief Executive Officer and
Director (Principal Executive
Officer)
    
    September 14, 2009/s/ Kevin P. Cohn

Kevin P. Cohn
    
    Senior Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
    
    September 14, 2009/s/ Gerald J. Ford

Gerald J. Ford
    
    Chairman of the Board of Directors
    
    September 14, 2009/s/ Thomas M. Harrison, Jr.

Thomas M. Harrison, Jr.
    
    Director
    
    September 14, 2009/s/ Rhodes R. Bobbitt

Rhodes R. Bobbitt
    
    Director
    
    September 14, 2009Harvey B. Cash
    
    Director/s/ Donald J. Edwards

Donald J. Edwards
    
    Director
    
    September 14, 2009/s/ Tom C. Nichols

Tom C. Nichols
    
    Director
    
    September 14, 2009/s/ Lyndon L. Olson

Lyndon L. Olson
    
    Director
    
    September 14, 2009/s/ William A. Shipp, Jr.

William A. Shipp, Jr.
    
    Director
    
    September 14, 2009
 81




---



##### Table of Contents



FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
SCHEDULE I. FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
(in thousands)
 June 30,2009
    
    
    2008Balance SheetsAssets:Investment in subsidiaries, at equity in net assets
    
    $
    190,941
    
    
    $
    257,305Cash and cash equivalents
    
    
    3,058
    
    
    
    2,465Deferred tax asset, net
    
    
    
    
    
    
    8,927Other assets
    
    
    7,035
    
    
    
    3,335Amounts due from subsidiaries
    
    
    62
    
    
    
    383$
    201,096
    
    
    $
    272,415Liabilities:Notes payable
    
    $
    
    
    
    $
    3,913Debentures payable
    
    
    41,240
    
    
    
    41,240Other liabilities
    
    
    
    
    
    
    1,803Stockholders equity
    
    
    159,856
    
    
    
    225,459$
    201,096
    
    
    $
    272,415
 Year Ended June 30,2009
    
    
    2008
    
    
    2007Statements of OperationsInvestment income
    
    $
    124
    
    
    $
    180
    
    
    $
    206Equity in income (loss) of subsidiaries, net of tax
    
    
    (58,650
    )
    
    
    2,805
    
    
    
    3,677Expenses
    
    
    (7,492
    )
    
    
    (8,888
    )
    
    
    (5,542
    )Loss before income taxes
    
    
    (66,018
    )
    
    
    (5,903
    )
    
    
    (1,659
    )Provision for income taxes
    
    
    2,282
    
    
    
    11,942
    
    
    
    15,011Net loss
    
    $
    (68,300
    )
    
    $
    (17,845
    )
    
    $
    (16,670
    )
 Year Ended June 30,2009
    
    
    2008
    
    
    2007Statements of Cash FlowsCash flows from operating activities:Net loss
    
    $
    (68,300
    )
    
    $
    (17,845
    )
    
    $
    (16,670
    )Equity in income (loss) of subsidiaries, net of tax
    
    
    58,650
    
    
    
    (2,805
    )
    
    
    (3,677
    )Stock-based compensation
    
    
    2,053
    
    
    
    1,507
    
    
    
    1,063Deferred income taxes
    
    
    8,927
    
    
    
    15,747
    
    
    
    18,037Change in assets and liabilities
    
    
    (5,044
    )
    
    
    (2,829
    )
    
    
    3,322Net cash provided by (used in) operating activities
    
    
    (3,714
    )
    
    
    (6,225
    )
    
    
    2,075Cash flows from investing activities:Investment in subsidiary
    
    
    (2,685
    )
    
    
    
    
    
    
    (45,765
    )Dividend from subsidiary
    
    
    10,975
    
    
    
    17,609
    
    
    
    6,435Improvements to foreclosed real estate
    
    
    (138
    )
    
    
    (253
    )
    
    
    (254
    )Purchase of common stock in trust
    
    
    
    
    
    
    
    
    
    
    (1,240
    )Net cash provided by (used in) investing activities
    
    
    8,152
    
    
    
    17,356
    
    
    
    (40,824
    )Cash flows from financing activities:Proceeds from borrowings
    
    
    
    
    
    
    
    
    
    
    5,000Payments on borrowings
    
    
    (3,913
    )
    
    
    (19,147
    )
    
    
    (5,552
    )Proceeds from issuance of debentures
    
    
    
    
    
    
    
    
    
    
    41,240Net proceeds from issuance of common stock
    
    
    68
    
    
    
    131
    
    
    
    857Net cash provided by (used in) financing activities
    
    
    (3,845
    )
    
    
    (19,016
    )
    
    
    41,545Net increase (decrease) in cash and cash equivalents
    
    
    593
    
    
    
    (7,885
    )
    
    
    2,796Cash and cash equivalents, beginning of year
    
    
    2,465
    
    
    
    10,350
    
    
    
    7,554Cash and cash equivalents, end of year
    
    $
    3,058
    
    
    $
    2,465
    
    
    $
    10,350
 82