FIRST ACCEPTANCE CORPORATION - FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-12117
First Acceptance Corporation
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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75-1328153
(I.R.S. Employer
Identification No.) |
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3322 West End Ave, Suite 1000
Nashville, Tennessee
(Address of principal executive offices)
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37203
(Zip Code) |
(615) 844-2800
(Registrants telephone number, including area code)
Not applicable
(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,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company 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 8, 2008, there were 47,639,526 shares outstanding of the registrants common stock,
par value $0.01 per share.
FIRST ACCEPTANCE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2007
INDEX
i
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
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December 31, |
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June 30, |
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2007 |
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2007 |
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(Unaudited) |
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ASSETS |
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Fixed maturities, available-for-sale at fair value (amortized
cost of $183,461 and $179,328, respectively) |
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$ |
185,078 |
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$ |
176,555 |
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Cash and cash equivalents |
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41,106 |
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34,161 |
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Premiums and fees receivable, net of allowance of $626 and $606 |
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61,712 |
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71,771 |
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Receivable for securities |
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19,973 |
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Deferred tax asset |
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17,757 |
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30,936 |
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Other assets |
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11,179 |
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11,722 |
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Property and equipment, net |
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4,355 |
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4,116 |
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Deferred acquisition costs |
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4,797 |
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5,166 |
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Goodwill |
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138,082 |
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138,082 |
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Identifiable intangible assets |
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6,385 |
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6,410 |
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TOTAL ASSETS |
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$ |
470,451 |
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$ |
498,892 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Loss and loss adjustment expense reserves |
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$ |
95,357 |
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$ |
91,446 |
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Unearned premiums and fees |
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75,639 |
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88,831 |
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Notes payable and capitalized lease obligations |
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10,104 |
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23,490 |
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Debentures payable |
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41,240 |
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41,240 |
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Payable for securities |
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999 |
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Other liabilities |
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14,088 |
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13,402 |
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Total liabilities |
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236,428 |
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259,408 |
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Stockholders equity: |
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Preferred stock, $.01 par value, 10,000 shares authorized |
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Common stock, $.01 par value, 75,000 shares authorized;
47,640 shares issued and outstanding |
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476 |
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476 |
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Additional paid-in capital |
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461,727 |
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460,968 |
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Accumulated other comprehensive income (loss) |
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967 |
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(2,652 |
) |
Accumulated deficit |
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(229,147 |
) |
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(219,308 |
) |
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Total stockholders equity |
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234,023 |
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239,484 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
470,451 |
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$ |
498,892 |
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See notes to consolidated financial statements.
1
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
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Three Months Ended |
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Six Months Ended |
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December 31, |
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December 31, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenues: |
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Premiums earned |
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$ |
70,484 |
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$ |
72,911 |
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$ |
145,287 |
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$ |
140,788 |
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Fee income |
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8,987 |
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9,067 |
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18,285 |
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17,823 |
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Investment income |
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2,859 |
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2,098 |
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5,886 |
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4,045 |
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Other |
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11 |
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245 |
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41 |
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767 |
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82,341 |
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84,321 |
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169,499 |
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163,423 |
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Costs and expenses: |
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Losses and loss adjustment expenses |
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54,346 |
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54,886 |
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112,017 |
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107,306 |
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Insurance operating expenses |
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25,180 |
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23,509 |
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49,166 |
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45,839 |
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Other operating expenses |
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759 |
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514 |
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1,264 |
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1,622 |
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Stock-based compensation |
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354 |
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354 |
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678 |
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458 |
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Depreciation and amortization |
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380 |
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399 |
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748 |
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791 |
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Interest expense |
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1,289 |
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418 |
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2,630 |
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830 |
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82,308 |
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80,080 |
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166,503 |
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156,846 |
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Income before income taxes |
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33 |
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4,241 |
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2,996 |
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6,577 |
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Provision for income taxes |
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11,764 |
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1,540 |
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12,835 |
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2,383 |
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Net income (loss) |
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$ |
(11,731 |
) |
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$ |
2,701 |
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$ |
(9,839 |
) |
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$ |
4,194 |
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Net income (loss) per share: |
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Basic |
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$ |
(0.25 |
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$ |
0.06 |
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$ |
(0.21 |
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$ |
0.09 |
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Diluted |
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$ |
(0.25 |
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$ |
0.05 |
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$ |
(0.21 |
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$ |
0.08 |
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Number of shares used to calculate net income
(loss) per share: |
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Basic |
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47,618 |
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47,588 |
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47,617 |
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47,566 |
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Diluted |
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47,618 |
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49,694 |
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47,617 |
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49,672 |
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Reconciliation of net income (loss) to comprehensive
income (loss): |
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Net income (loss) |
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$ |
(11,731 |
) |
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$ |
2,701 |
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$ |
(9,839 |
) |
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$ |
4,194 |
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Unrealized change on investments |
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2,371 |
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(211 |
) |
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4,390 |
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3,060 |
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Other |
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(83 |
) |
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(250 |
) |
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(9,443 |
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2,490 |
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(5,699 |
) |
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7,254 |
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Applicable provision for income taxes |
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520 |
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520 |
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Comprehensive income (loss) |
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$ |
(9,963 |
) |
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$ |
2,490 |
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$ |
(6,219 |
) |
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$ |
7,254 |
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See notes to consolidated financial statements.
2
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
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Six Months Ended |
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December 31, |
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2007 |
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2006 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
(9,839 |
) |
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$ |
4,194 |
|
Adjustments to reconcile net income (loss) to cash provided by
operating activities: |
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Depreciation and amortization |
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748 |
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|
791 |
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Stock-based compensation |
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678 |
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458 |
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Deferred income taxes |
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12,659 |
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2,019 |
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Other |
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(1 |
) |
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213 |
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Change in: |
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Premiums and fees receivable |
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10,059 |
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(3,937 |
) |
Deferred acquisition costs |
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369 |
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(65 |
) |
Loss and loss adjustment expense reserves |
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3,911 |
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11,943 |
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Unearned premiums and fees |
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(13,192 |
) |
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4,227 |
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Other |
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1,098 |
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1,091 |
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Net cash provided by operating activities |
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6,490 |
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20,934 |
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Cash flows from investing activities: |
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Purchases of fixed maturities, available-for-sale |
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(19,957 |
) |
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(54,117 |
) |
Maturities and paydowns of fixed maturities, available-for-sale |
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3,636 |
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1,891 |
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Sales of fixed maturities, available-for-sale |
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12,210 |
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12,542 |
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Net change in receivable/payable for securities |
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18,974 |
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(3,940 |
) |
Capital expenditures |
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(984 |
) |
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(634 |
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Other |
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(119 |
) |
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(120 |
) |
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Net cash provided by (used in) investing activities |
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13,760 |
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(44,378 |
) |
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Cash flows from financing activities: |
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Proceeds from borrowings |
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5,000 |
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Payments on borrowings |
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(13,386 |
) |
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(2,881 |
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Net proceeds from issuance of common stock |
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81 |
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728 |
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Net cash provided by (used in) financing activities |
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(13,305 |
) |
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2,847 |
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Net increase (decrease) in cash and cash equivalents |
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6,945 |
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(20,597 |
) |
Cash and cash equivalents, beginning of period |
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34,161 |
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31,534 |
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Cash and cash equivalents, end of period |
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$ |
41,106 |
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$ |
10,937 |
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|
See notes to consolidated financial statements.
3
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The consolidated financial statements of First Acceptance Corporation (the Company) included
herein have been prepared without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Accordingly, certain information and disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted. In the opinion of management, the consolidated
financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair statement of the interim periods. Certain reclassifications have been made to the prior
years consolidated financial statements to conform with the current year presentation.
The results of operations for the interim periods are not necessarily indicative of the
results of operations to be expected for the full year. These consolidated financial statements
should be read in conjunction with the Companys audited consolidated financial statements included
in its Annual Report on Form 10-K for the fiscal year ended June 30, 2007.
2. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per
share:
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Three Months Ended |
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Six Months Ended |
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|
December 31, |
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December 31, |
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|
2007 |
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|
2006 |
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|
2007 |
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|
2006 |
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|
(In thousands, except per share data) |
|
Net income (loss) |
|
$ |
(11,731 |
) |
|
$ |
2,701 |
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|
$ |
(9,839 |
) |
|
$ |
4,194 |
|
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|
Weighted average common basic shares |
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47,618 |
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|
47,588 |
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|
47,617 |
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|
47,566 |
|
Effect of
dilutive securities options |
|
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|
2,106 |
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|
2,106 |
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|
Weighted average common dilutive shares |
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47,618 |
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|
49,694 |
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|
47,617 |
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|
49,672 |
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Basic net income (loss) per share |
|
$ |
(0.25 |
) |
|
$ |
0.06 |
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|
$ |
(0.21 |
) |
|
$ |
0.09 |
|
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Diluted net income (loss) per share |
|
$ |
(0.25 |
) |
|
$ |
0.05 |
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|
$ |
(0.21 |
) |
|
$ |
0.08 |
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|
Options to purchase approximately 1,315,000 and 1,693,000 shares of common stock for the three
and six months ended December 31, 2007, respectively, were outstanding, but were not included in
the computation of diluted loss per share as their inclusion would have been anti-dilutive.
3. Stock-Based Compensation
During the six months ended December 31, 2007, the Company issued options to purchase 30,000
shares of common stock to employees under its 2002 Long Term Incentive Plan (the Plan). The
options were issued at a weighted average exercise price of $10.08 per share. The options expire
over ten years and vest equally in annual installments over five years. Compensation expense
related to these options was $161,000, which will be amortized through July 2012. None of these
options were exercisable at December 31, 2007. There were no options exercised during the six
months ended December 31, 2007; however, options to purchase 80,000 shares of common stock were
forfeited in July 2007. Shares remaining available for issuance under the Plan were 3,382,322 at
December 31, 2007.
4
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Income Taxes
After considering the recent declines in premiums written, premiums earned and policies in
force, the Company assessed the realization of its net operating loss (NOL) carryforwards, which
comprises the majority of its deferred tax asset. The Company concluded that it was appropriate to
increase its valuation allowance for the deferred tax asset related to the NOL carryforwards that
expire in fiscal years 2008 and 2009 by $11.6 million, or $0.24 per share on a basic and diluted
basis, at December 31, 2007. As in its prior assessments, the Company considered its historical and
expected taxable income to determine the sufficiency of its valuation allowance. Management remains
optimistic about the Companys future outlook and expects to generate taxable income sufficient to
realize its remaining net deferred tax asset. However, the Companys evaluation includes multiple
assumptions and estimates that may change over time. If future taxable income is less than current
projections, an additional valuation allowance may become necessary that could have a materially
adverse impact on our results of operations and financial position. At December 31, 2007, the total
gross deferred tax asset was $55.5 million, and the valuation allowance was $37.7 million.
5. Goodwill and Identifiable Intangible Assets
After considering the recent declines in premiums written, premiums earned and policies in
force, the Company conducted an interim impairment test in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets
(SFAS 142). In the event that facts and circumstances indicate that goodwill and other
identifiable intangible assets may be impaired, SFAS 142 requires an evaluation of the
recoverability of such assets. The estimated future discounted cash flows associated with these
assets are compared with their carrying amounts to determine if a write-down to market value or
discounted cash flow value is necessary. The Company evaluated the recent trends in its historical
results and expected future discounted cash flows and concluded that goodwill and other
identifiable intangible assets are fully realizable as of December 31, 2007. However, the Companys
evaluation includes multiple assumptions, including estimated discounted cash flows, and estimates
that may change over time. If future discounted cash flows become less than those projected by the
Company, an impairment charge may become necessary that could have a materially adverse impact on
our results of operations and financial position.
6. Notes Payable
At December 31, 2007, the Company was not in compliance with financial covenants in its credit
agreement regarding a minimum fixed charge coverage ratio and a minimum net income requirement. In
January 2008, the Company made a principal prepayment of $5.0 million, which reduced the unpaid
balance under the credit agreement to $4.8 million. The Company obtained waivers of its
non-compliance under the credit agreement from its lenders as of December 31, 2007 and entered into
an amendment to the credit agreement, dated February 6, 2008, that contains less restrictive
financial covenants for future periods.
7. Severance
On December 31, 2007, the Company entered into a separation agreement with an executive
officer who resigned from the Company. Under terms of the agreement, the officer will receive
severance and related benefits for the period from December 31, 2007 through December 31, 2009, as
well as accelerated vesting of all outstanding stock options held by the former officer as of
December 31, 2007. Accordingly, the Company incurred a charge of approximately $0.8 million,
comprised of $0.7 million in accrued severance and benefits and a $0.1 million non-cash charge
related to vesting of remaining unvested stock options. The severance and benefit accrual is
classified within other liabilities on the Companys consolidated balance sheet. The severance and
benefits charge is included in insurance operating expenses and the non-cash charge related to the
vesting of remaining unvested stock options is included within stock-based compensation expense in
the consolidated statements of operations. The insurance operations segment includes the accrued severance and benefits charge, and the real estate and
corporate segment includes the accelerated vesting charge (see Note 8).
5
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Segment Information
The Company operates in two business segments: (1) insurance operations and (2) real estate
and corporate. The Companys primary focus is 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.
The following table presents selected financial data by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
82,299 |
|
|
$ |
84,253 |
|
|
$ |
169,389 |
|
|
$ |
163,267 |
|
Real estate and corporate |
|
|
42 |
|
|
|
68 |
|
|
|
110 |
|
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
82,341 |
|
|
$ |
84,321 |
|
|
$ |
169,499 |
|
|
$ |
163,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
2,390 |
|
|
$ |
5,459 |
|
|
$ |
7,451 |
|
|
$ |
9,331 |
|
Real estate and corporate |
|
|
(2,357 |
) |
|
|
(1,218 |
) |
|
|
(4,455 |
) |
|
|
(2,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
33 |
|
|
$ |
4,241 |
|
|
$ |
2,996 |
|
|
$ |
6,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(in thousands) |
|
Total assets: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
452,929 |
|
|
$ |
460,356 |
|
Real estate and corporate |
|
|
17,522 |
|
|
|
38,536 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
470,451 |
|
|
$ |
498,892 |
|
|
|
|
|
|
|
|
9. Recent Accounting Pronouncements
Effective July 1, 2007, the Company adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
FASB Statement No. 109. FIN 48 also prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return, as well as providing guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. In accordance with FIN 48,
a tax position is a position in a previously filed tax return or a position expected to be taken in
a future tax filing that is reflected in measuring current or deferred income tax assets and
liabilities. Tax positions shall be recognized only when it is more likely than not (likelihood of
greater than 50%), based on technical merits, that the position will be sustained upon examination.
Tax positions that meet the more likely than not threshold should be measured using a probability
weighted approach as the largest amount of tax benefit that is greater than 50% likely of being
realized upon settlement. As a result, we recognized no additional liability or reduction in
deferred tax asset for unrecognized tax benefits. Accordingly, the Company had no FIN 48 tax
liabilities at the time of adoption or as of December 31, 2007. Any interest and penalties incurred
in connection with income taxes are recorded as a component of tax expense. The Company is no longer subject to U.S. federal, state, local or non-U.S. income tax
examinations by tax authorities for taxable years prior to June 30, 2003.
6
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. Recent Accounting Pronouncements (continued)
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157),
which defines fair value, establishes a framework for measuring fair value in GAAP and expands
disclosures about fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having previously concluded
in those accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this statement does not require any new fair value measurements. SFAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. Earlier application is encouraged, provided that the reporting
entity has not yet issued financial statements for the fiscal year, including financial statements
for an interim period within that fiscal year. The Company has not evaluated the requirements of
SFAS 157 and has not yet determined if SFAS 157 will have a material impact on future consolidated
financial statements.
In February 2007, the FASB issued Statement No. 159, Establishing the Fair Value Option for
Financial Assets and Liabilities (SFAS 159), which includes an amendment to FASB No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This statement is expected to expand
the use of fair value measurement, which is consistent with the FASBs long-term measurement
objectives for accounting for financial instruments. This statement applies to all entities and
most of the provisions of this statement apply only to entities that elect the fair value option.
However, the amendment to SFAS 115 applies to all entities with available-for-sale and trading
securities. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early
adoption permitted for an entity that has also elected to apply the provisions of SFAS 157. An
entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption.
SFAS 159 also applies to eligible items existing at November 15, 2007 (or early adoption). The
Company has not evaluated the requirements of SFAS 159 and has not yet determined if SFAS 159 will
have a material impact on future consolidated financial statements.
7
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements which involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements. Factors that might
cause such a difference include those discussed in Item 1A. Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2007. The following discussion should be read in
conjunction with our consolidated financial statements included with this report and our
consolidated financial statements and related Managements Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal year ended June 30, 2007 included in our Annual
Report on Form 10-K.
General
As of December 31, 2007, we leased and operated 440 retail locations (or stores), staffed by
employee-agents. Our employee-agents exclusively sell insurance products either underwritten or
serviced by us. As of December 31, 2007, we wrote non-standard personal automobile insurance in 12
states and were licensed in 13 additional states. See the discussion in Item 1. Business -
General in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007 for additional
information with respect to our business.
The following table shows the change in the number of our retail locations for the periods
presented. Retail location counts are based upon the date that a location commenced or ceased
writing business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Retail locations beginning of period |
|
|
458 |
|
|
|
466 |
|
|
|
462 |
|
|
|
460 |
|
Opened |
|
|
1 |
|
|
|
4 |
|
|
|
2 |
|
|
|
13 |
|
Closed |
|
|
(19 |
) |
|
|
(3 |
) |
|
|
(24 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail locations end of period |
|
|
440 |
|
|
|
467 |
|
|
|
440 |
|
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables show the number of our retail locations by state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Alabama |
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
Florida |
|
|
40 |
|
|
|
41 |
|
|
|
41 |
|
|
|
40 |
|
|
|
41 |
|
|
|
39 |
|
Georgia |
|
|
61 |
|
|
|
63 |
|
|
|
62 |
|
|
|
63 |
|
|
|
62 |
|
|
|
63 |
|
Illinois |
|
|
80 |
|
|
|
85 |
|
|
|
81 |
|
|
|
85 |
|
|
|
81 |
|
|
|
86 |
|
Indiana |
|
|
22 |
|
|
|
26 |
|
|
|
23 |
|
|
|
26 |
|
|
|
24 |
|
|
|
26 |
|
Mississippi |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
Missouri |
|
|
16 |
|
|
|
15 |
|
|
|
16 |
|
|
|
17 |
|
|
|
15 |
|
|
|
18 |
|
Ohio |
|
|
29 |
|
|
|
30 |
|
|
|
30 |
|
|
|
30 |
|
|
|
30 |
|
|
|
30 |
|
Pennsylvania |
|
|
19 |
|
|
|
26 |
|
|
|
24 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
South Carolina |
|
|
28 |
|
|
|
26 |
|
|
|
28 |
|
|
|
26 |
|
|
|
28 |
|
|
|
21 |
|
Tennessee |
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
21 |
|
|
|
20 |
|
|
|
20 |
|
Texas |
|
|
92 |
|
|
|
102 |
|
|
|
100 |
|
|
|
100 |
|
|
|
103 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
440 |
|
|
|
467 |
|
|
|
458 |
|
|
|
466 |
|
|
|
462 |
|
|
|
460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
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. Our insurance operations generate revenues from
selling, servicing and underwriting non-standard personal automobile insurance policies in 12
states. We conduct our underwriting operations through three insurance company subsidiaries, First
Acceptance Insurance Company, Inc., First Acceptance Insurance Company of Georgia, Inc. and First
Acceptance Insurance Company of Tennessee, Inc. Our insurance revenues are primarily generated
from:
|
|
|
premiums earned, including policy and renewal fees, from sales of policies
written and assumed by our insurance company subsidiaries; |
|
|
|
|
fee income, including installment billing fees on policies written as well as
fees for other ancillary services (principally motor club and bond card products);
and |
|
|
|
|
investment income earned on the invested assets of the insurance company
subsidiaries. |
The following table presents premiums earned by state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Georgia |
|
$ |
15,135 |
|
|
$ |
17,581 |
|
|
$ |
31,238 |
|
|
$ |
34,771 |
|
Florida |
|
|
10,820 |
|
|
|
13,612 |
|
|
|
23,181 |
|
|
|
25,841 |
|
Texas |
|
|
8,217 |
|
|
|
7,780 |
|
|
|
16,743 |
|
|
|
14,897 |
|
Illinois |
|
|
7,931 |
|
|
|
7,638 |
|
|
|
16,100 |
|
|
|
14,275 |
|
Alabama |
|
|
7,034 |
|
|
|
7,282 |
|
|
|
14,538 |
|
|
|
14,571 |
|
South Carolina |
|
|
5,650 |
|
|
|
3,019 |
|
|
|
11,290 |
|
|
|
4,841 |
|
Tennessee |
|
|
5,168 |
|
|
|
5,837 |
|
|
|
10,690 |
|
|
|
11,784 |
|
Ohio |
|
|
3,814 |
|
|
|
3,981 |
|
|
|
7,814 |
|
|
|
7,843 |
|
Pennsylvania |
|
|
2,360 |
|
|
|
1,571 |
|
|
|
4,661 |
|
|
|
2,757 |
|
Indiana |
|
|
1,806 |
|
|
|
1,991 |
|
|
|
3,774 |
|
|
|
3,928 |
|
Missouri |
|
|
1,382 |
|
|
|
1,457 |
|
|
|
2,852 |
|
|
|
2,887 |
|
Mississippi |
|
|
1,167 |
|
|
|
1,162 |
|
|
|
2,406 |
|
|
|
2,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned |
|
$ |
70,484 |
|
|
$ |
72,911 |
|
|
$ |
145,287 |
|
|
$ |
140,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the change in the total number of policies in force for the
insurance operations for the periods presented. Policies in force increase as a result of new
policies issued and decrease as a result of policies that cancel or expire and are not renewed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Policies in force beginning of period |
|
|
212,511 |
|
|
|
217,308 |
|
|
|
226,974 |
|
|
|
200,401 |
|
Net increase (decrease) during period |
|
|
(9,503 |
) |
|
|
252 |
|
|
|
(23,966 |
) |
|
|
17,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies in force end of period |
|
|
203,008 |
|
|
|
217,560 |
|
|
|
203,008 |
|
|
|
217,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance companies present a combined ratio as a measure of their overall underwriting
profitability. The components of the combined ratio are as follows:
Loss Ratio Loss ratio is the ratio (expressed as a percentage) of losses and loss adjustment
expenses incurred to premiums earned and is a basic element of underwriting profitability. We
calculate this ratio based on all direct and assumed premiums earned.
Expense Ratio Expense ratio is the ratio (expressed as a percentage) of operating expenses
to premiums earned. This is a measurement that illustrates relative management efficiency in
administering our operations. We calculate this ratio as a percentage of premiums earned.
Insurance operating expenses are reduced by fee income
9
from insureds and, for the period from January 1, 2006 through December 31, 2006, a
transaction service fee we received for servicing the run-off business previously written by the
Chicago agencies whose business we acquired in January 2006 (Chicago acquisition).
Combined Ratio Combined ratio is the sum of the loss ratio and the expense ratio. If the
combined ratio is at or above 100%, an insurance company cannot be profitable without sufficient
investment income. The following table presents the combined ratios for the insurance operations
for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Loss and loss adjustment expense |
|
|
77.1 |
% |
|
|
75.3 |
% |
|
|
77.1 |
% |
|
|
76.2 |
% |
Expense |
|
|
23.0 |
% |
|
|
19.4 |
% |
|
|
21.3 |
% |
|
|
19.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
100.1 |
% |
|
|
94.7 |
% |
|
|
98.4 |
% |
|
|
95.5 |
% |
|
|
|
|
|
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The invested assets of the insurance operations are generally highly liquid and consist
substantially of readily marketable, investment grade, municipal and corporate bonds and
collateralized mortgage obligations. We invest in certain securities issued by political
subdivisions in the states of Georgia and Tennessee, as these investments enable our insurance
company subsidiaries to obtain premium tax credits. Investment income is comprised primarily of
interest earned on these securities, net of related investment expenses. Realized gains and losses
on our investment portfolio may occur from time to time as changes are made to our holdings to
enable premium tax credits or based upon changes in interest rates and changes in the credit
quality of securities held.
Three and Six Months Ended December 31, 2007 Compared with the Three and Six Months Ended December
31, 2006
Consolidated Results
Revenues for the three months ended December 31, 2007 decreased 2% to $82.3 million from $84.3
million in the same period last year. Net loss for the three months ended December 31, 2007 was
$11.7 million, compared with net income of $2.7 million for the three months ended December 31,
2006. Both basic and diluted net loss per share were $(0.25) for the three months ended December
31, 2007, compared with basic and diluted net income per share of $0.06 and $0.05, respectively,
for the three months ended December 31, 2006.
Revenues for the six months ended December 31, 2007 increased 4% to $169.5 million from $163.4
million in the same period last year. Net loss for the six months ended December 31, 2007 was $9.8
million, compared with net income of $4.2 million for the six months ended December 31, 2006. Both
basic and diluted net loss per share were $(0.21) for the six months ended December 31, 2007,
compared with basic and diluted net income per share of $0.09 and $0.08, respectively, for the six
months ended December 31, 2006.
Insurance Operations
Revenues from insurance operations were $82.3 million for the three months ended December 31,
2007, compared with $84.3 million for the three months ended December 31, 2006. For the six months
ended December 31, 2007, revenues from insurance operations were $169.4 million, compared with
$163.3 million for the six months ended December 31, 2006.
Income before income taxes from insurance operations for the three months ended December 31,
2007 was $2.4 million, compared with $5.5 million for the three months ended December 31, 2006.
Income before income taxes for the six months ended December 31, 2007 was $7.5 million, compared
with $9.3 million for the six months ended December 31, 2006.
Premiums Earned
Premiums earned decreased by $2.4 million, or 3%, to $70.5 million for the three months ended
December 31, 2007 from $72.9 million for the three months ended December 31, 2006. The decrease in
premiums earned resulted primarily from (1) the closure of 36 underperforming stores during the
twelve months ended December 31, 2007, (2) continued soft economic conditions in our markets
coupled with a competitive pricing environment, and (3) a decrease in our average premium per
policy in Florida as a result of the October 1, 2007 through December 31, 2007 temporary expiration
of Floridas Motor Vehicle No-Fault Law (Personal Injury Protection, or PIP) coverage.
10
These declines were partially offset by premium growth in our South Carolina, Pennsylvania,
Texas and Illinois markets. The total number of insured policies in force at December 31, 2007
decreased 7% over the same date in 2006 from 217,560 to 203,008, primarily due to the factors noted
above. At December 31, 2007, we operated 440 stores, compared with 467 stores at December 31,
2006.
For the six months ended December 31, 2007, premiums earned increased by $4.5 million, or 3%,
to $145.3 million from $140.8 million for the six months ended December 31, 2006. This increase
was the result of premium growth in our South Carolina, Pennsylvania, Illinois and Texas markets.
Fee Income
Fee income decreased 1% to $9.0 million for the three months ended December 31, 2007 from $9.1
million for the three months ended December 31, 2006. The decrease in fee income was a result of
the decrease in policies in force partially offset by an increased billing fee and a new ancillary
hospital indemnity product in our Florida market.
For the six months ended December 31, 2007, fee income increased 3% to $18.3 million from
$17.8 million for the six months ended December 31, 2006. This increase was the result of the
premium growth for the six months ended December 31, 2007 noted above.
Investment Income
Investment income increased during the three and six months ended December 31, 2007 as a
result of the increase in invested assets. Invested assets increased during the three and six
months ended December 31, 2007 as a result of cash provided by operating activities and the
proceeds received from the sale of debentures in June 2007. At December 31, 2007 and 2006, the
tax-equivalent book yields for our fixed maturities portfolio were 5.2% and 5.1%, respectively,
with effective durations of 3.46 years and 3.47 years, respectively. The yields for the comparable
Lehman Brothers indices were 4.6% and 5.0% at December 31, 2007 and 2006, respectively.
Other
Other revenues for the three and six months ended December 31, 2006 are primarily comprised of
$0.3 million and $0.9 million in transaction service fees earned in connection with the Chicago
acquisition for servicing the run-off business previously written by the Chicago agencies whose
assets we acquired in January 2006. We received the transaction service fee from the effective date
of the acquisition in January 2006 through December 31, 2006.
Losses and Loss Adjustment Expenses
The loss and loss adjustment expense ratio was 77.1% for the three months ended December 31,
2007 and 75.3% for the three months ended December 31, 2006. The loss and loss adjustment expense
ratio was 77.1% for the six months ended December 31, 2007 and 76.2% for the six months ended
December 31, 2006. These increases are primarily the result of increased severity attributable to
Bodily Injury and Property Damage losses in several states.
For the three and six months ended December 31, 2007, we did not experience any significant
adverse development for prior accident periods. We had previously reported that the three months
ended September 30, 2006 included approximately $3.7 million (5.5% of the ratio) of adverse
development related primarily to the estimation of the severity of losses in Florida and Texas,
where we had significant growth during 2006, and Georgia, where we reduced our physical damage
premium rates effective January 2006.
New rates were approved October 1, 2007 for Bodily Injury, Medical Payments, and Uninsured
Motorists Coverage in Florida in conjunction with the change in coverage resulting from the
expiration of PIP. Effective January 1, 2008, the State of Florida reinstated PIP, which coincided
with new higher rates for most of our coverages.
11
Operating Expenses
Insurance operating expenses increased 7% to $25.2 million for the three months ended December
31, 2007 from $23.5 million for the three months ended December 31, 2006. This increase was
primarily a result of the costs associated with the closure of underperforming stores, an increased
investment in our product, actuarial and finance functions, and severance and related benefits
charges of $0.7 million incurred in connection with the separation of an executive officer. For
the six months ended December 31, 2007, operating expenses increased 7% to $49.2 million from $45.8
million for the six months ended December 31, 2006. This increase was primarily related to the
factors discussed above and an increase in expenses (such as variable compensation costs and
premium taxes) that vary along with the increase in premiums earned.
The expense ratio increased from 19.4% for the three months ended December 31, 2006 to 23.0%
for the same period in the current fiscal year. The expense ratio increased from 19.3% for the six
months ended December 31, 2006 to 21.3% for the same period in the current fiscal year. These
increases were primarily due to the factors discussed above and the positive impact on the prior
fiscal year expense ratios of the transaction service fee of $0.3 million, or 0.4%, and $0.9
million, or 0.6%, respectively, earned through December 31, 2006 in connection with the Chicago
acquisition.
Overall, the combined ratio increased to 100.1% for the three months ended December 31, 2007
from 94.7% for the three months ended December 31, 2006. For the six months ended December 31,
2007, the combined ratio increased to 98.4% from 95.5% for the six months ended December 31, 2006.
These increases were primarily the result of the increased expense ratio.
Real Estate and Corporate
Loss before income taxes for the three months ended December 31, 2007 was $2.4 million,
compared with a loss of $1.2 million for the three months ended December 31, 2006. For the six
months ended December 31, 2007, loss before income taxes was $4.5 million, compared with a loss of
$2.8 million for the six months ended December 31, 2006.
During the three and six months ended December 31, 2007, we incurred $0.2 million and $0.6
million, respectively, of interest expense in connection with borrowings related to the Chicago
acquisition compared with $0.4 million and $0.8 million for the three and six months ended December
31, 2006, respectively. In addition, we incurred $1.0 million and $2.0 million of interest expense
during the three and six months ended December 31, 2007 related to the debentures issued in June
2007. The three and six months ended December 31, 2006 included gains on sales of foreclosed real
estate held for sale of $0.8 million. There were no gains on sales of foreclosed real estate held
for sale during the three and six months ended December 31, 2007. The three and six months ended
December 31, 2007 also includes a non-cash severance charge of $0.1 million related to the vesting
of unvested stock options resulting from the separation of an executive officer.
Provision for Income Taxes
The provision for income taxes for the three and six months ended December 31, 2007 includes
an increase in the valuation allowance for the deferred tax asset of $11.6 million, $0.24 per share
on a diluted basis. After considering the recent declines in premiums written, premiums earned and
policies in force, we assessed the realization of our net operating loss (NOL) carryforwards,
which comprises the majority of our deferred tax asset. We concluded that it was appropriate to
increase our valuation allowance for the deferred tax asset related to the NOL carryforwards that
expire in fiscal years 2008 and 2009. As in our prior assessments, we considered our historical and
expected taxable income to determine the sufficiency of our valuation allowance. We remain
optimistic about the Companys future outlook and expect to generate taxable income sufficient to
realize our remaining net deferred tax asset. However, our evaluation includes multiple assumptions
and estimates that may change over time. If future taxable income is less than current projections,
an additional valuation allowance may become necessary that could have a materially adverse impact
on our results of operations and financial position. At December 31, 2007, the total gross deferred
tax asset was $55.5 million, and the valuation allowance was $37.7 million.
12
Liquidity and Capital Resources
Our primary sources of funds are premiums, fee income and investment income. Our primary uses
of funds are the payment of claims and operating expenses. Operating activities for the six months
ended December 31, 2007 provided $6.5 million of cash, compared with $20.9 million provided in the
same period in fiscal 2007. The decrease in cash provided by operating activities was the result
of an increase in paid loss and loss adjustment expenses and a decrease in cash collected on
premiums written. Net cash provided by investing activities for the six months ended December 31,
2007 was $13.8 million, compared with net cash used in investing activities of $44.4 million in the
same period in fiscal 2007. Both periods reflect net additions to our investment portfolio, while
the six months ended December 31, 2007 includes the settlement of a $20.0 million receivable for
securities in July 2007. Financing activities for the six months ended December 31, 2007 included
the repayment of $5.0 million related to our revolving credit facility and the required principal
prepayment of $6.0 million on our term loan facility made in accordance with the amendment to the
credit agreement in September 2007. The six months ended December 31, 2007 and 2006 included
scheduled quarterly principal payments on our term loan facility of $2.3 million and $2.8 million,
respectively.
In October 2007, the holding company received a $6.5 million ordinary dividend from the
insurance company subsidiaries. We used $6.0 million of these funds to make the required principal
prepayment noted above. In addition, in December 2007, the holding company received a $5.5 million
ordinary dividend from the insurance company subsidiaries. We used these funds in January 2008 to
make an additional principal prepayment of $5.0 million. Future debt payments will be serviced by
the unrestricted cash from the sources described below. At December 31, 2007, we had $6.7 million
available in unrestricted cash outside of the insurance company subsidiaries, $5.0 million of which
was used in January 2008 to make the above mentioned principal prepayment on our term loan
facility.
We are part of an insurance holding company system with substantially all of our operations
conducted by our insurance company subsidiaries. Accordingly, the holding companys primary source
of cash is from dividends from our insurance company subsidiaries and from our non-insurance
company subsidiaries that sell ancillary products to our insureds. The holding company will receive
cash from operating activities as a result of investment income and the ultimate liquidation of our
foreclosed real estate held for sale. However, in accordance with the terms of our credit
agreement, any proceeds from the sale of our foreclosed real estate must be applied against our
outstanding term loan. In addition, as a result of our tax net operating loss carryforwards,
taxable income generated by the insurance company subsidiaries through June 30, 2009 will provide
cash to the holding company through an intercompany tax allocation agreement through which the
insurance company subsidiaries reimburse the holding company for current tax benefits utilized
through recognition of the net operating loss carryforwards. Cash could also be made available
through loans from financial institutions (although currently restricted under our credit
agreement) and the issuance of securities.
State insurance laws limit the amount of dividends that may be paid from the insurance company
subsidiaries. These limitations relate to statutory capital and surplus and net income. In
addition, the National Association of Insurance Commissioners Model Act for risk-based capital
(RBC) provides formulas to determine the amount of statutory capital and surplus that an
insurance company needs to ensure that it has an acceptable expectation of not becoming financially
impaired. A low RBC ratio would prevent an insurance company from paying dividends. Statutory
guidelines suggest that the insurance company subsidiaries should not exceed a ratio of net
premiums written to statutory capital and surplus of 3-to-1. We believe that our insurance company
subsidiaries have sufficient financial resources available to support their net premium writings in
both the short-term and the reasonably foreseeable future.
Based on our December 31, 2007 statutory capital and surplus and our currently anticipated
operating results in calendar 2008, we expect that our ordinary dividend capacity for calendar 2008
will be approximately $11.0 million. Such amount will be limited to the amount of earned surplus,
which at December 31, 2007 was approximately $3.0 million. Timing of dividend payments during
calendar 2008 will be affected by the amount of dividend payments made in the preceding
twelve-month period. Therefore, based upon our currently anticipated operating results in calendar
2008, we expect that we will have sufficient capital surplus in our insurance company subsidiaries
to permit us to pay an ordinary dividend of $6.5 million in October 2008 and an additional $4.5
million in December 2008.
13
We believe that existing cash and investment balances, when combined with anticipated cash
flows as noted above, will be adequate to meet our expected liquidity needs in both the short-term
and the reasonably foreseeable future. Our growth strategy may include possible acquisitions. Any
acquisitions or other unexpected growth opportunities may require external financing, and we may
from time to time seek to obtain external financing. We cannot assure you that additional sources
of financing will be available to us on favorable terms, or at all, or that any such financing
would not negatively impact our results of operations.
Credit Facility
At December 31, 2007, we were not in compliance with financial covenants in our credit
agreement regarding a minimum fixed charge coverage ratio and a minimum net income requirement. In
January 2008, we made a principal prepayment of $5.0 million, which reduced the unpaid balance
under the credit agreement to $4.8 million. We obtained waivers of our non-compliance under the
credit agreement from our lenders as of December 31, 2007 and entered into an amendment to the
credit agreement, dated February 6, 2008, that contains less restrictive financial covenants for
future periods.
Critical Accounting Policies
There have been no significant changes, other than those discussed below, to our critical
accounting policies and estimates during the six months ended December 31, 2007 compared with those
disclosed in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies included in our Annual Report on Form 10-K for the
fiscal year ended June 30, 2007.
Valuation of deferred tax asset. Income taxes are maintained in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, whereby deferred
income tax assets and liabilities result from temporary differences. Temporary differences are
differences between the tax basis of assets and liabilities and operating loss and tax credit
carryforwards and their reported amounts in the consolidated financial statements that will result
in taxable or deductible amounts in future years. Valuation of the deferred tax asset is considered
a critical accounting policy because the determination of our ability to utilize the asset involves
a number of management assumptions relating to future operations that could materially affect the
determination of the ultimate value and, therefore, the carrying amount of our deferred tax asset.
After considering the recent declines in premiums written, premiums earned and policies in
force, we assessed the realization of our net operating loss (NOL) carryforwards, which comprises
the majority of our deferred tax asset. We concluded that it was appropriate to increase our
valuation allowance for the deferred tax asset related to the NOL carryforwards that expire in
fiscal years 2008 and 2009 by $11.6 million at December 31, 2007. As in our prior assessments, we
considered our historical and expected taxable income to determine the sufficiency of our valuation
allowance. We remain optimistic about the Companys future outlook and expect to generate taxable
income sufficient to realize our remaining net deferred tax asset. However, our evaluation includes
multiple assumptions and estimates that may change over time. If future taxable income is less than
current projections, an additional valuation allowance may become necessary that could have a
materially adverse impact on our results of operations and financial position. At December 31,
2007, the total gross deferred tax asset was $55.5 million, and the valuation allowance was $37.7
million.
Goodwill and identifiable intangible assets. After considering the recent declines in
premiums written, premiums earned and policies in force, we conducted an interim impairment test in
accordance with the provisions of SFAS No. 142. In the event that facts and circumstances indicate
that goodwill and other identifiable intangible assets may be impaired, SFAS No. 142 requires an
evaluation of the recoverability of such assets. The estimated future discounted cash flows
associated with these assets are compared with their carrying amounts to determine if a write-down
to market value or discounted cash flow value is necessary. We evaluated the recent trends in our
historical results and expected future discounted cash flows and concluded that goodwill and other
identifiable intangible assets are fully realizable as of December 31, 2007. However, our
evaluation includes multiple assumptions, including estimated discounted cash flows, and estimates
that may change over time. If future discounted cash flows become less than those projected, an
impairment charge may become necessary that could have a materially adverse impact on our results
of operations and financial position.
14
Off-Balance Sheet Arrangements
There have been no new off-balance sheet arrangements since June 30, 2007. Refer to Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Off-Balance Sheet Arrangements included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2007.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements made in the report, other than statements of historical fact, are
forward-looking statements. You can identify these statements from our use of the words may,
should, could, potential, continue, plan, forecast, estimate, project, believe,
intent, anticipate, expect, target, is likely, will, or the negative of these terms,
and similar expressions. These statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements may include,
among other things:
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statements and assumptions relating to future growth, income, income per share and
other financial performance measures, as well as managements short-term and long-term
performance goals; |
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statements relating to the anticipated effects on results of operations or financial
condition from recent and expected developments or events; |
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statements relating to our business and growth strategies; and |
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any other statements or assumptions that are not historical facts. |
We believe that our expectations are based on reasonable assumptions. However, these
forward-looking statements involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or achievements, or industry results to
differ materially from our expectations of future results, performance or achievements expressed or
implied by these forward-looking statements. In addition, our past results of operations do not
necessarily indicate our future results. We discuss these and other uncertainties in Item 1A.
Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.
You should not place undue reliance on any forward-looking statements. These statements speak
only as of the date of this report. Except as otherwise required by applicable laws, we undertake
no obligation to publicly update or revise any forward-looking statements or the risk factors
described in this report, whether as a result of new information, future events, changed
circumstances or any other reason after the date of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have an exposure to interest rate risk relating to fixed maturity investments. Changes in
market interest rates directly impact the market value of the fixed maturity securities. Some fixed
income securities have call or prepayment options. This subjects us to reinvestment risk as issuers
may call their securities, which could result in us reinvesting the proceeds at lower interest
rates. We manage exposure to interest rate risks by adhering to specific guidelines in connection
with our investment portfolio. We invest primarily in municipal and corporate bonds and
collateralized mortgage obligations that have been rated A or better by Standard & Poors. At
December 31, 2007, 86.1% of our investment portfolio was invested in securities rated AA or
better by Standard & Poors and 97.3% in securities rated A or better by Standard & Poors. At
December 31, 2007, our exposure with regard to sub-prime mortgage securities was limited to $2.0
million in fixed maturities that were all rated A or better by Standard & Poors. We have not
recognized any other-than-temporary losses on our investment portfolio. We utilize the services of
a professional fixed income investment manager.
As of December 31, 2007, the impact of an immediate 100 basis point increase in market
interest rates on our fixed maturities portfolio would have resulted in an estimated decrease in
fair value of 4.0%, or approximately $7.5 million. As of the same date, the impact of an immediate
100 basis point decrease in market interest rates on our portfolio would have resulted in an
estimated increase in fair value of 3.7%, or approximately $6.9 million.
15
In connection with the Chicago acquisition, we entered into a new $30.0 million credit
facility that included a $25.0 million term loan facility and a $5.0 million revolving facility.
The credit facility was amended in September 2007 to, among other things, reduce the availability
under the revolving facility to $2.0 million. Although we have fixed the interest rate of the term
loan facility through an interest rate swap agreement, we have interest rate risk with respect to
any borrowings under the revolving facility, which bears interest at a floating rate of LIBOR plus
250 basis points. At December 31, 2007, there were no outstanding borrowings under the revolving
facility.
On June 15, 2007, our newly formed wholly-owned unconsolidated trust entity, First Acceptance
Statutory Trust I, used the proceeds from its sale of trust preferred securities to purchase $41.2
million of junior subordinated debentures. The debentures pay a fixed rate of 9.277% until July 30,
2012, after which the rate becomes variable (LIBOR plus 375 basis points).
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Companys chief executive officer and chief financial officer have reviewed and evaluated
the effectiveness of the Companys disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act) as of
December 31, 2007. Based on that evaluation, the Companys chief executive officer and chief
financial officer have concluded that the Companys disclosure controls and procedures effectively
ensure that information required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms.
Changes in Internal Control Over Financial Reporting
During the period covered by this report, there has been no change in the Companys internal
control over financial reporting that has materially affected or is reasonably likely to materially
affect the Companys internal control over financial reporting.
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PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Companys Annual Meeting of Stockholders held on November 7, 2007 (the Annual
Meeting), the following persons were elected to the Companys Board of Directors for a one-year
term:
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Votes For |
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Votes Withheld |
Rhodes R. Bobbitt |
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38,346,551 |
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190,000 |
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Harvey B. Cash |
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36,590,160 |
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1,946,391 |
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Donald J. Edwards |
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36,592,921 |
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1,943,630 |
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Gerald J. Ford |
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38,194,003 |
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342,548 |
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Stephen J. Harrison |
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38,255,444 |
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281,107 |
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Thomas M. Harrison, Jr. |
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38,197,344 |
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339,207 |
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Tom C. Nichols |
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38,344,530 |
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192,021 |
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Lyndon L. Olson, Jr. |
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38,349,112 |
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187,439 |
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William A. Shipp, Jr. |
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38,342,041 |
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194,510 |
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The following proposals were also considered and approved at the Annual Meeting by the vote
set forth below:
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Votes Withheld |
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and Broker |
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Votes For |
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Votes Against |
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Non-Votes |
Approval of an increase
in the number of shares
authorized for issuance
pursuant to the First
Acceptance Corporation
Employee Stock Purchase
Plan |
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32,942,765 |
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164,352 |
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5,429,434 |
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Ratification of the
appointment of Ernst &
Young LLP as our
independent auditors for
the fiscal year ending
June 30, 2008 |
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38,473,465 |
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47,544 |
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15,542 |
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Item 6. Exhibits
The following exhibits are attached to this report:
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10.1
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First Amendment to First Acceptance Corporation Employee Stock Purchase Plan. |
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31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a). |
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31.2
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a). |
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32.1
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Chief Executive Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2
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Chief Financial Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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FIRST ACCEPTANCE CORPORATION |
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February 8, 2008
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By:
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/s/ Kevin P. Cohn
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Kevin P. Cohn |
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Senior Vice President
and Chief Financial Officer |
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(Principal Financial
Officer and Principal Accounting Officer) |
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18