UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

First Acceptance Corporation

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		75-1328153 (I.R.S. Employer Identification No.)
3813 Green Hills Village Drive Nashville, Tennessee (Address of principal executive offices)		37215 (Zip Code)

(615) 844-2800
(Registrant’s telephone number, including area code)

N/A
(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of February 3, 2006, there were outstanding 47,520,133 shares of the registrant’s common stock, par value $0.01 per share.

 

 

FIRST ACCEPTANCE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2005

INDEX

				Page
PART I — FINANCIAL INFORMATION				1
Item 1. Financial Statements				1
		Condensed Consolidated Balance Sheets December 31, 2005 and June 30, 2005		1
		Condensed Consolidated Statements of Income Three Months and Six Months Ended December 31, 2005 and 2004		2
		Condensed Consolidated Statements of Stockholders’ Equity Six Months Ended December 31, 2005 and 2004		3
		Condensed Consolidated Statements of Cash Flows Six Months Ended December 31, 2005 and 2004		4
		Notes to Condensed Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations				10
Item 3. Quantitative and Qualitative Disclosures About Market Risk				17
Item 4. Controls and Procedures				18
PART II — OTHER INFORMATION				19
Item 4. Submission of Matters to a Vote of Security Holders				19
Item 6. Exhibits				19
SIGNATURES				20
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

		December 31,
		2005				June 30,
		(Unaudited)				2005
ASSETS
Fixed maturities, available-for-sale at market value (amortized cost: $102,358 and $73,832)		$	101,720			$	74,840
Investment in mutual fund, at market value			11,239				10,920
Cash and cash equivalents			15,533				24,762
Fiduciary funds — restricted			424				935
Premiums and fees receivable from policyholders and agents			45,666				42,908
Reinsurance recoverables			3,108				4,490
Deferred tax asset			44,795				48,106
Other assets			5,487				4,863
Property and equipment, net			2,307				1,962
Foreclosed real estate held for sale			885				961
Deferred acquisition costs			4,214				3,271
Goodwill			107,837				107,837
Identifiable intangible assets			4,813				4,867
TOTAL		$	348,028			$	330,722
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loss and loss adjustment expense reserves		$	50,377			$	42,897
Unearned premiums			52,750				47,752
Deferred fee income			1,502				2,272
Amounts due to insurance companies			424				935
Other liabilities			7,959				8,537
Total liabilities			113,012				102,393
Stockholders’ equity:
Common stock, $.01 par value, 75,000 shares authorized; 47,470 and 47,455 shares issued and outstanding			475				475
Preferred stock, $.01 par value, 10,000 shares authorized			—				—
Additional paid-in capital			458,372				457,905
Accumulated other comprehensive income (loss):
Net unrealized appreciation (depreciation) on investments			(638	)			655
Accumulated deficit			(223,193	)			(230,706	)
Total stockholders’ equity			235,016				228,329
TOTAL		$	348,028			$	330,722

See notes to condensed consolidated financial statements.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2005				2004				2005				2004
Revenues:
Premiums earned		$	44,816			$	31,071			$	87,570			$	52,756
Commissions and fees			6,624				6,321				13,029				12,993
Ceding commissions from reinsurer			—				1,666				—				3,603
Gains on sales of foreclosed real estate			821				755				821				755
Investment income			1,216				741				2,315				1,350
Other gains			4				171				4				171
Total revenues			53,481				40,725				103,739				71,628
Expenses:
Losses and loss adjustment expenses			30,438				20,317				58,929				33,747
Insurance operating expenses			16,505				11,533				31,728				21,939
Other operating expenses			609				899				1,222				1,267
Stock-based compensation			262				91				346				152
Depreciation			201				298				379				587
Amortization of identifiable intangible assets			18				190				54				570
Interest expense			—				69				—				139
Total expenses			48,033				33,397				92,658				58,401
Income before income taxes			5,448				7,328				11,081				13,227
Income tax expense			1,648				2,641				3,568				4,676
Net income		$	3,800			$	4,687			$	7,513			$	8,551
Basic net income per share		$	0.08			$	0.10			$	0.16			$	0.18
Diluted net income per share		$	0.08			$	0.10			$	0.15			$	0.18
Weighted average basic shares			47,457				46,686				47,456				46,672
Weighted average diluted shares			49,490				48,519				49,489				48,514

See notes to condensed consolidated financial statements.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

														Accumulated
										Additional				other												Total
		Common stock								paid-in				comprehensive				Accumulated				Treasury				stockholders’
		Shares				Amount				capital				income/(loss)				deficit				stock				equity
Balances at July 1, 2004			46,535			$	465			$	450,658			$	(35	)		$	(256,862	)		$	—			$	194,226
Net income			—				—				—				—				8,551				—				8,551
Other comprehensive income — change in unrealized appreciation /(depreciation) on investments			—				—				—				325				—				—				325
Comprehensive income			—				—				—				—				—				—				8,876
Stock-based compensation			—				—				132				—				—				—				132
Purchase of treasury stock, at cost			—				—				—				—				—				(639	)			(639	)
Exercise of stock options			246				2				738				—				—				—				740
Balances at December 31, 2004			46,781			$	467			$	451,528			$	290			$	(248,311	)		$	(639	)		$	203,335

														Accumulated
										Additional				other												Total
		Common stock								paid-in				comprehensive				Accumulated				Treasury				stockholders’
		Shares				Amount				capital				income (loss)				deficit				stock				equity
Balances at July 1, 2005			47,455			$	475			$	457,905			$	655			$	(230,706	)		$	—			$	228,329
Net income			—				—				—				—				7,513				—				7,513
Other comprehensive loss — change in unrealized appreciation (depreciation) on investments			—				—				—				(1,293	)			—				—				(1,293	)
Comprehensive income			—				—				—				—				—				—				6,220
Stock-based compensation			2				—				346				—				—				—				346
Issuance of shares under Employee Stock Purchase Plan			13				—				121				—				—				—				121
Balances at December 31, 2005			47,470			$	475			$	458,372			$	(638	)		$	(223,193	)		$	—			$	235,016

See notes to condensed consolidated financial statements.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

		Six Months Ended
		December 31,
		2005				2004
Cash flows from operating activities:
Net income		$	7,513			$	8,551
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			433				1,157
Stock-based compensation			346				132
Amortization of premium on fixed maturities			287				167
Deferred income taxes			3,664				4,202
Gains on sales of foreclosed real estate			(821	)			(755	)
Other gains			(4	)			(171	)
Change in:
Fiduciary funds — restricted			511				21
Premiums and fees receivable from policyholders and agents			(2,758	)			1,242
Reinsurance recoverables			1,382				1,449
Prepaid reinsurance premiums			—				12,384
Other assets			(624	)			(63	)
Deferred acquisition costs			(943	)			(2,514	)
Loss and loss adjustment expense reserves			7,480				4,809
Unearned premiums			4,998				1,097
Deferred fee income			(770	)			(246	)
Amounts due to reinsurers			—				(11,899	)
Amounts due to insurance companies			(511	)			(21	)
Other liabilities			(578	)			(251	)
Net cash provided by operating activities			19,605				19,291
Cash flows from investing activities:
Proceeds from sales of foreclosed real estate			897				1,203
Addition to foreclosed real estate			—				(300	)
Proceeds from sale of property and equipment			—				625
Acquisitions of property and equipment			(724	)			(399	)
Purchases of fixed maturities, available-for-sale			(32,394	)			(18,608	)
Maturities and paydowns of fixed maturities, available-for-sale			3,046				1,344
Sales of fixed maturities, available for sale			539				—
Purchases of investment in mutual fund			(319	)			(10,393	)
Net cash used in investing activities			(28,955	)			(26,528	)
Cash flows from financing activities:
Net proceeds from issuance of common stock			121				—
Purchase of treasury stock			—				(639	)
Exercise of stock options			—				740
Payments on borrowings			—				(500	)
Net cash used in financing activities			121				(399	)
Net decrease in cash and cash equivalents			(9,229	)			(7,636	)
Cash and cash equivalents, beginning of period			24,762				38,352
Cash and cash equivalents, end of period		$	15,533			$	30,716

See notes to condensed consolidated financial statements.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

1. General

     First Acceptance Corporation (the “Company”) is a retailer, servicer and underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. As of December 31, 2005, the Company wrote non-standard personal automobile insurance in 12 states, principally Georgia, Alabama and Tennessee. The Company is licensed as an insurer in 12 additional states, and writes business through two insurance company subsidiaries, First Acceptance Insurance Company, Inc. (formerly known as USAuto Insurance Company, Inc.) and Village Insurance Company, Inc. In Alabama and Texas, the Company has assumed risk through reinsurance contracts with unaffiliated insurance companies.

2. Basis of Presentation

     The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended December 31, 2005 are not necessarily indicative of the results that may be expected for the year ending June 30, 2006. These unaudited consolidated financial statements and the notes thereto should be read in conjunction with the Company’s audited financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates.

     Certain amounts in the consolidated financial statements for the prior period have been reclassified to conform with the current period presentation.

3. Net Income Per Share

     The following table sets forth the computation of basic and diluted net income per share:

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2005				2004				2005				2004
Net income		$	3,800			$	4,687			$	7,513			$	8,551
Weighted average common basic shares			47,457				46,686				47,456				46,672
Effect of dilutive securities — options			2,033				1,833				2,033				1,842
Weighted average common dilutive shares			49,490				48,519				49,489				48,514
Basic net income per share		$	0.08			$	0.10			$	0.16			$	0.18
Diluted net income per share		$	0.08			$	0.10			$	0.15			$	0.18

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(Unaudited)

4. Stock-Based Compensation

     In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised), “Share – Based Payment,” (“SFAS No. 123(R).”) SFAS No. 123(R), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” supersedes Accounting Procedures Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS No. 123(R) is effective for public companies at the beginning of the first annual period beginning after June 15, 2005. The Company has already adopted the provisions of SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure” and uses the fair value method for expensing stock-based compensation. Therefore, the Company’s adoption of SFAS No. 123(R) as of July 1, 2005 had no impact on the Company’s consolidated financial position, results of operations, cash flows or net income per share.

     The Company has issued stock options to employees under its 2002 Long Term Incentive Plan (the “Plan”). There were no options granted, exercised or forfeited during the six months ended December 31, 2005. Shares remaining available for issuance under the Plan were 3,982 at December 31, 2005. Options outstanding as of December 31, 2005 were as follows:

Options to purchase 3,736 shares at $3.00 per share issued to former employees that are all fully vested and exercisable. These options expire on July 9, 2012 (3,726 shares) and on June 30, 2013 (10 shares).

Options to purchase 200 shares at $6.64 per share issued to USAuto Holdings, Inc. (“USAuto”) executives as a closing condition to the USAuto acquisition that vest monthly over a five-year period (67 exercisable at December 31, 2005). These options expire on April 30, 2014.

Options to purchase 150 shares at $8.13 per share issued to employees that vest equally in five annual installments (30 exercisable at December 31, 2005). These options expire on October 27, 2014.

Options to purchase 50 shares at $8.13 per share issued to a former employee that are fully vested and exercisable. These options were fully vested during the three months ended December 31, 2005 upon resignation of the employee in accordance with an employment agreement and now expire on November 30, 2006.

     Compensation expense related to stock options is calculated under the fair value method and is recorded on a straight-line basis over the vesting period. Fair value of the options was estimated at the grant dates using the Black-Sholes option pricing model, which includes the following assumptions: risk-free interest rate based on the ten-year U.S. Treasury Note rate; expected option life of ten years; expected volatility of 36% to 38%; and no expected dividends. Compensation expense related to stock options was $308 for the six months ended December 31, 2005 which included $142 related to the full vesting of existing options upon the resignation of a former employee. Total unamortized compensation cost related to non-vested awards at December 31, 2005 was $1,036, of which $492 will be amortized through April 2009 and $544 will be amortized through October 2009.

     Stock-based compensation for the six months ended December 31, 2005 also includes $25 related to shares issued to directors that were recorded based on the closing market price on the date of issuance and $13 related to shares issued under the Company’s Employee Stock Purchase Plan.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(Unaudited)

5. Segment Information

     The Company operates in two business segments with its primary focus in the selling, servicing and underwriting of non-standard personal automobile insurance. The real estate and corporate segment consists of activities related to the disposition of foreclosed real estate held for sale, interest expense associated with all debt and other general corporate overhead expenses. Total assets by segment are those assets used in the operation of each segment.

     The following tables present selected financial data by business segment:

						Real Estate
						and				Consolidated
		Insurance				Corporate				Total
Three Months Ended December 31, 2005
Revenues:
Premiums earned		$	44,816			$	—			$	44,816
Commissions and fees			6,624								6,624
Gains on sales of foreclosed real estate			—				821				821
Investment income			1,104				112				1,216
Other gains			4				—				4
Total revenues			52,548				933				53,481
Expenses:
Losses and loss adjustment expenses			30,438				—				30,438
Operating expenses			16,505				609				17,114
Stock-based compensation			—				262				262
Depreciation and amortization			219				—				219
Total expenses			47,162				871				48,033
Income before income taxes		$	5,386			$	62			$	5,448
Six Months Ended December 31, 2005
Revenues:
Premiums earned		$	87,570			$	—			$	87,570
Commissions and fees			13,029				—				13,029
Gains on sales of foreclosed real estate			—				821				821
Investment income			1,991				324				2,315
Other gains			4				—				4
Total revenues			102,594				1,145				103,739
Expenses:
Losses and loss adjustment expenses			58,929				—				58,929
Operating expenses			31,728				1,222				32,950
Stock-based compensation			—				346				346
Depreciation and amortization			433				—				433
Total expenses			91,090				1,568				92,658
Income (loss) before income taxes		$	11,504			$	(423	)		$	11,081
Total assets at December 31, 2005		$	186,671			$	161,357			$	348,028

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(Unaudited)

						Real Estate
						and				Consolidated
		Insurance				Corporate				Total
Three Months Ended December 31, 2004
Revenues:
Premiums earned		$	31,071			$	—			$	31,071
Commissions and fees			6,321				—				6,321
Ceding commissions from reinsurer			1,666				—				1,666
Gains on sales of foreclosed real estate			—				755				755
Investment income			500				241				741
Other			171				—				171
Total revenues			39,729				996				40,725
Expenses:
Losses and loss adjustment expenses			20,317				—				20,317
Operating expenses			11,533				899				12,432
Stock-based compensation			—				91				91
Depreciation and amortization			488				—				488
Interest expense			—				69				69
Total expenses			32,338				1,059				33,397
Income (loss) before income taxes		$	7,391			$	(63	)		$	7,328
Six Months Ended December 31, 2004
Revenues:
Premiums earned		$	52,756			$	—			$	52,756
Commissions and fees			12,993				—				12,993
Ceding commissions from reinsurer			3,603				—				3,603
Gains on sales of foreclosed real estate			—				755				755
Investment income			855				495				1,350
Other			171				—				171
Total revenues			70,378				1,250				71,628
Expenses:
Losses and loss adjustment expenses			33,747				—				33,747
Operating expenses			21,939				1,267				23,206
Stock-based compensation			—				152				152
Depreciation and amortization			1,157				—				1,157
Interest expense			—				139				139
Total expenses			56,843				1,558				58,401
Income (loss) before income taxes		$	13,535			$	(308	)		$	13,227
Total assets at December 31, 2004		$	129,926			$	164,259			$	294,185

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(Unaudited)

6. Subsequent Events

     A. Business Acquired

          On January 12, 2006, the Company acquired certain assets (principally the customer expiration rights and the lease rights to 73 retail locations) of two non-standard automobile insurance agencies under common control in Chicago, Illinois for $30,000 in cash. The purchase price was financed through a newly executed credit agreement (see note 6.B.). Up to $4,000 in additional consideration may also be paid to the agencies if certain financial targets through January 31, 2007 are reached. As a result of this acquisition, the Company is now writing business through First Acceptance Insurance Company, Inc. from these locations. The Company will also receive a monthly fee from the agencies through December 31, 2006 as compensation for servicing the run-off of business previously written by the agencies through other insurance companies.

     B. Note Payable to Banks

          In connection with the acquisition of the non-standard automobile insurance agencies, on January 12, 2006, the Company concurrently entered into, and borrowed under, a credit agreement with two banks consisting of a $5,000 revolving facility and a $25,000 term loan facility, both maturing on June 30, 2010. Both facilities bear interest at LIBOR plus 175 basis points per annum. The Company entered into an interest rate swap agreement on January 17, 2006 that effectively fixed the interest rate on the term loan facility at 6.63% through June 30, 2010. The term loan facility is due in equal quarterly installments of $1,388, plus interest, beginning April 30, 2006 and ending on April 30, 2010 with a final payment of $1,404 due on June 30, 2010. Both facilities are secured by the common stock and certain assets of selected subsidiaries. The credit agreement contains certain financial covenants commencing as of, and for the fiscal quarter ending March 31, 2006.

Item 2. 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.

General

     We are principally a retailer, servicer and underwriter of non-standard personal automobile insurance, based in Nashville, Tennessee. Non-standard personal automobile insurance is made available to individuals who are categorized as “non-standard” because of their inability or unwillingness to obtain standard insurance coverage due to various factors, including payment history, payment preference, failure in the past to maintain continuous insurance coverage, driving record and/or vehicle type. In most instances, our customers are required by law to buy a minimum amount of automobile insurance.

     Prior to our April 30, 2004 acquisition of USAuto Holdings, Inc. (“USAuto”), we were engaged in pursuing opportunities to acquire one or more operating companies. In addition, we marketed for sale a portfolio of foreclosed real estate. We have entered into a contract to sell three parcels of real estate, which we expect to close during February 2006, for estimated net proceeds of $3.6 million, which would result in a gain of $2.8 million. We will continue to market the remaining real estate held (consisting of two tracts of land in San Antonio, Texas) and will attempt to sell it on a basis that provides us with the best economic return. We do not anticipate making any new investments in real estate.

     As of February 1, 2006, we leased 457 retail locations, staffed by employee-agents, including 73 locations in Chicago, Illinois acquired on January 12, 2006. Our employee-agents exclusively sell insurance products either underwritten or serviced by us. As of December 31, 2005, we wrote non-standard personal automobile insurance in 12 states. We are currently licensed as an insurer in 12 additional states.

     The following table shows the changes in the number of our retail locations for the periods presented.

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2005				2004				2005				2004
Beginning of period			348				154				309				138
Opened			25				24				65				40
Closed			—				—				(1	)			—
End of period			373				178				373				178

     The following tables show the breakdown of our retail locations by state for the periods presented.

																		Change in Locations During
																		the Three Months Ended
		As of December 31,								As of September 30,								December 31,
		2005				2004				2005				2004				2005				2004
Alabama			25				23				25				23				—				—
Florida			37				7				36				1				1				6
Georgia			63				61				63				57				—				4
Illinois			15				1				15				—				—				1
Indiana			27				15				25				8				2				7
Mississippi			8				9				8				8				—				1
Missouri			21				14				21				11				—				3
Ohio			30				29				30				28				—				1
Pennsylvania			21				—				17				—				4				—
South Carolina			10				—				—				—				10				—
Tennessee			20				19				20				18				—				1
Texas			96				—				88				—				8				—
Total			373				178				348				154				25				24

																		Change in Locations During
																		the Six Months Ended
		As of December 31,								As of June 30,								December 31,
		2005				2004				2005				2004				2005				2004
Alabama			25				23				25				21				—				2
Florida			37				7				24				—				13				7
Georgia			63				61				63				55				—				6
Illinois			15				1				12				—				3				1
Indiana			27				15				22				4				5				11
Mississippi			8				9				9				6				(1	)			3
Missouri			21				14				18				11				3				3
Ohio			30				29				30				25				—				4
Pennsylvania			21				—				14				—				7				—
South Carolina			10				—				—				—				10				—
Tennessee			20				19				20				16				—				3
Texas			96				—				72				—				24				—
Total			373				178				309				138				64				40

Consolidated Results of Operations

Overview

     Our primary focus is the selling, servicing and underwriting of non-standard personal automobile insurance. Our real estate and corporate segment consists of activities related to the disposition of foreclosed real estate held for sale, interest expense associated with debt, and other general corporate overhead expenses. The following tables show the results of operations for our insurance operations and real estate and corporate segments for the periods presented:

		Three Months Ended December 31,								Six Months Ended December 31,
Insurance Operations		2005				2004				2005				2004
	(in thousands)
Revenues:
Premiums earned		$	44,816			$	31,071			$	87,570			$	52,756
Commissions and fees			6,624				6,321				13,029				12,993
Ceding commissions from reinsurer			—				1,666				—				3,603
Investment income			1,104				500				1,991				855
Other gains			4				171				4				171
Total revenues			52,548				39,729				102,594				70,378
Expenses:
Losses and loss adjustments expenses			30,438				20,317				58,929				33,747
Operating expenses			16,505				11,533				31,728				21,939
Depreciation and amortization			219				488				433				1,157
Total expenses			47,162				32,338				91,090				56,843
Income before income taxes		$	5,386			$	7,391			$	11,504			$	13,535

		Three Months Ended December 31,								Six Months Ended December 31,
Real Estate and Corporate		2005				2004				2005				2004
		(in thousands)
Revenues:
Gains on sales of foreclosed real estate		$	821			$	755			$	821			$	755
Investment income			112				241				324				495
Total revenues			933				996				1,145				1,250
Expenses:
Operating expenses			609				899				1,222				1,267
Stock-based compensation			262				91				346				152
Interest expense			—				69				—				139
Total expenses			871				1,059				1,568				1,558
Income (loss) before income taxes		$	62			$	(63	)		$	(423	)		$	(308	)

     Our insurance operations derive revenues from selling, servicing and underwriting non-standard personal automobile insurance policies in 12 states. We conduct our underwriting operations through two insurance company subsidiaries, First Acceptance Insurance Company, Inc. (formerly known as USAuto Insurance Company, Inc.) and Village Auto Insurance Company, Inc. Our insurance operations revenues are primarily derived from:

	•		premiums earned (which includes policy and renewal fees) from (i) sales of policies issued by our insurance company subsidiaries, net of the portion of those premiums that have been ceded to reinsurers, and (ii) the sales of policies issued by our managing general agency (“MGA”) subsidiaries that are assumed 100% by our insurance company subsidiaries through quota-share reinsurance;
	•		fee income, which includes installment billing fees on policies written as well as fees for other ancillary services (principally a motor club product);
	•		commission income paid by our reinsurer to us for ceded premiums (ceasing with the September 1, 2004 non-renewal of our quota-share reinsurance); and
	•		investment income earned on the invested assets of the insurance company subsidiaries.

     The following table presents gross premiums earned by state and includes policies written by the insurance company subsidiaries and policies issued by our MGA subsidiaries on behalf of other insurance companies that are assumed by one of the insurance company subsidiaries through quota-share reinsurance. Prior to May 2005, we were not licensed to write insurance in Alabama and for the six months ended December 31, 2005 and 2004 we assumed 100% and 50%, respectively, of the business written in Alabama through an MGA subsidiary. Since May 2005, all new Alabama business is written by one of the insurance company subsidiaries on a direct basis. Although we are licensed in Texas, we currently write most of our business in Texas through the Texas county mutual insurance company system. Therefore, most of our business in Texas is written through an MGA subsidiary and is assumed 100% by one of the insurance company subsidiaries. For the months of July and August of 2004, we ceded 50% of our gross premiums earned to a reinsurer under a quota-share reinsurance agreement that was non-renewed effective September 1, 2004. Premiums ceded after September 1, 2004 reflect only the cost of catastrophic reinsurance.

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2005				2004				2005				2004
Gross premiums earned:
Georgia		$	16,756			$	17,316			$	34,072			$	34,221
Alabama			7,001				6,278				13,931				12,587
Tennessee			5,880				6,406				12,211				12,807
Florida			4,624				1				7,213				1
Ohio			3,271				2,417				6,571				4,434
Texas			2,843				—				5,302				—
Indiana			1,367				335				2,528				468
Mississippi			1,267				1,013				2,478				1,974
Missouri			1,223				940				2,457				1,830
Pennsylvania			318				—				443				—
Illinois			256				10				378				10
South Carolina			34				—				34				—
Total gross premiums earned			44,840				34,716				87,618				68,332
Premiums ceded			(24	)			(39	)			(48	)			(8,379	)
Premiums not assumed			—				(3,606	)			—				(7,197	)
Total net premiums earned		$	44,816			$	31,071			$	87,570			$	52,756