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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2004

or

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

For the transition period from __________ to __________

Commission File Number: 001-12117

First Acceptance Corporation
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction
of incorporation or organization)
  75-1328153
(I.R.S. Employer
Identification No.)
     
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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

As of February 11, 2005, there were outstanding 46,691,438 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, 2004

INDEX

         
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 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

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PART I  -  FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
                 
    December 31,        
    2004     June 30,  
    (Unaudited)     2004  
ASSETS
               
 
               
Fixed maturities, available-for-sale at market value (amortized cost: $50,394 and $33,298)
  $ 50,841     $ 33,243  
Investment in mutual fund, at market value
    10,393        
Cash and cash equivalents
    30,716       38,352  
Fiduciary funds  -  restricted
    1,830       1,851  
Premiums and fees receivable from policyholders and agents
    30,834       32,076  
Reinsurance recoverables
    10,848       12,297  
Prepaid reinsurance premiums
          12,384  
Deferred tax asset
    41,115       45,493  
Other assets
    3,608       3,545  
Property and equipment
    1,761       2,404  
Foreclosed real estate held for sale
    961       1,108  
Deferred acquisition costs
    2,214        
Goodwill
    104,024       97,304  
Identifiable intangible assets
    5,040       5,610  
 
           
 
TOTAL
  $ 294,185     $ 285,667  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Loss and loss adjustment expense reserves
  $ 35,243     $ 30,434  
Unearned premiums
    34,530       33,433  
Deferred fee income
    2,344       2,590  
Amounts due to reinsurers
          11,899  
Amounts due to insurance companies
    1,830       1,851  
Note payable to financial institution
    3,500       4,000  
Deferred ceding commissions, net
          300  
Federal income taxes payable
          1,032  
Other liabilities
    6,683       5,902  
Liability for contingent shares
    6,720        
 
           
Total liabilities
    90,850       91,441  
 
           
 
               
Stockholders’ equity:
               
Common stock, $.01 par value, 75,000 shares authorized; 46,781 and 46,535 shares issued; 46,691 and 46,535 shares outstanding
    467       465  
Preferred stock, $.01 par value, 10,000 shares authorized
           
Additional paid-in capital
    451,528       450,658  
Accumulated other comprehensive income/(loss):
               
Net unrealized appreciation/(depreciation) on investments
    290       (35 )
Accumulated deficit
    (248,311 )     (256,862 )
Treasury stock, 90 shares, at cost
    (639 )      
 
           
Total stockholders’ equity
    203,335       194,226  
 
           
 
TOTAL
  $ 294,185     $ 285,667  
 
           

See notes to consolidated financial statements.

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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2004     2003     2004     2003  
Revenues:
                               
Premiums earned
  $ 31,071     $     $ 52,756     $  
Commissions and fees
    6,321             12,993        
Ceding commissions from reinsurer
    1,666             3,603        
Gains on sales of foreclosed real estate
    755       99       755       1,409  
Investment income
    741       202       1,350       441  
Gain on sale of property and equipment
    171             171        
 
                       
Total revenues
    40,725       301       71,628       1,850  
 
                       
 
                               
Expenses:
                               
Losses and loss adjustment expenses
    20,317             33,747        
Insurance operating expenses
    11,533             21,939        
Other operating expenses
    899       949       1,267       1,509  
Stock-based compensation
    91       94       152       196  
Depreciation
    298       13       587       20  
Amortization of identifiable intangible assets
    190             570        
Interest expense
    69             139        
 
                       
Total expenses
    33,397       1,056       58,401       1,725  
 
                       
 
                               
Income (loss) before income taxes
    7,328       (755 )     13,227       125  
Income tax expense
    2,641             4,676        
 
                       
Net income (loss)
  $ 4,687     $ (755 )   $ 8,551     $ 125  
 
                       
 
                               
Basic net income (loss) per share
  $ 0.10     $ (0.04 )   $ 0.18     $ 0.01  
 
                       
 
                               
Diluted net income (loss) per share
  $ 0.10     $ (0.04 )   $ 0.18     $ 0.01  
 
                       
 
                               
Weighted average basic shares
    46,686       20,589       46,672       20,589  
 
                       
 
                               
Weighted average diluted shares
    48,519       20,589       48,514       21,211  
 
                       

See notes to consolidated financial statements.

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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
Six Months Ended December 31, 2004
                                                         
                            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  
 
                                         

See notes to consolidated financial statements.

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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
                 
    Six Months Ended  
    December 31,  
    2004     2003  
Cash flows from operating activities:
               
Net income
  $ 8,551     $ 125  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Depreciation and amortization
    1,157       20  
Amortization of stock-based compensation
    132       196  
Amortization of premium on fixed maturities
    167        
Deferred income taxes
    4,202        
Gains on sales of foreclosed real estate
    (755 )     (1,409 )
Gain on sale of property and equipment
    (171 )      
Change in:
               
Fiduciary funds  -  restricted
    21        
Premiums and fees receivable from policyholders and agents
    1,242        
Reinsurance recoverables
    1,449        
Prepaid reinsurance premiums
    12,384        
Other assets
    (63 )     (1,344 )
Deferred acquisition costs, net
    (2,514 )      
Loss and loss adjustment expense reserves
    4,809        
Unearned premiums
    1,097        
Deferred fee income
    (246 )      
Amounts due to reinsurers
    (11,899 )      
Amounts due to insurance companies
    (21 )      
Federal income taxes payable
    (1,032 )      
Other liabilities
    781       993  
 
           
Net cash provided by (used in) operating activities
    19,291       (1,419 )
 
           
 
               
Cash flows from investing activities:
               
Proceeds from sales of foreclosed real estate
    1,203       1,738  
Addition to foreclosed real estate
    (300 )      
Proceeds from sale of property and equipment
    625        
Acquisitions of property and equipment
    (399 )     (55 )
Purchases of fixed maturities, available-for-sale
    (18,608 )      
Maturities and paydowns of fixed maturities, available-for-sale
    1,344        
Purchases of investment in mutual fund
    (10,393 )      
 
           
Net cash (used in) provided by investing activities
    (26,528 )     1,683  
 
           
 
               
Cash flows from financing activities:
               
Purchase of treasury stock
    (639 )      
Exercise of stock options
    740        
Payments on borrowings
    (500 )      
 
           
Net cash used in financing activities
    (399 )      
 
           
 
               
Net (decrease) increase in cash and cash equivalents
    (7,636 )     264  
Cash and cash equivalents, beginning of period
    38,352       56,847  
 
           
Cash and cash equivalents, end of period
  $ 30,716     $ 57,111  
 
           

See notes to consolidated financial statements.

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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(Unaudited)

1. General

     First Acceptance Corporation (the “Company”) is a retailer, servicer and underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. The Company currently writes non-standard personal automobile insurance principally in Georgia, Tennessee and Alabama. Business is also written in 6 additional states and the Company is licensed as an insurer in 14 additional states. Business is written through two insurance company subsidiaries, USAuto Insurance Company, Inc. and Village Insurance Company, Inc. In Alabama, the Company assumes business through reinsurance contracts with unaffiliated insurance companies, since neither of the Company’s insurance company subsidiaries is currently licensed there. Incidental run-off operations are also conducted by the Company as a managing general agency whereby premiums are written on behalf of other 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 three and six months ended December 31, 2004 are not necessarily indicative of the results that may be expected for the year ending June 30, 2005. 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, 2004.

     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’s presentation.

3. Income Taxes

     There was no income tax expense recorded for the three and six months ended December 31, 2003 as a result of net operating losses available to offset federal taxable income for which a full valuation allowance had been established. The valuation allowance was adjusted in connection with the April 30, 2004 acquisition of USAuto Holdings, Inc. (“USAuto”). For the three and six months ended December 31, 2004, there was no change in the deferred tax asset valuation allowance. For the six months ended December 31, 2004, substantially all of the Company’s current income tax expense has been offset by its tax net operating loss carryforwards which has resulted in a reduction in the deferred tax asset.

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

4. Net Income (Loss) per Share

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

                                 
    Three Months Ended     Six Months ended  
    December 31,     December 31,  
    2004     2003     2004     2003  
Net income (loss)
  $ 4,687     $ (755 )   $ 8,551     $ 125  
 
                       
 
                               
Weighted average common basic shares
    46,686       20,589       46,672       20,589  
Effect of dilutive securities — options
    1,833             1,842       622  
 
                       
Weighted average common dilutive shares
    48,519       20,589       48,514       21,211  
 
                       
 
                               
Basic net income (loss) per share
  $ 0.10     $ (0.04 )   $ 0.18     $ 0.01  
 
                       
 
                               
Diluted net income (loss) per share
  $ 0.10     $ (0.04 )   $ 0.18     $ 0.01  
 
                       

     Weighted average common diluted shares for the three months ended December 31, 2003 excludes incremental shares from assumed conversion of stock options of 622 due to the net loss incurred for the quarter.

5. Stock-Based Compensation

     Effective July 1, 2003, the Company adopted the prospective method provisions of SFAS No. 148 in accounting for employee stock options. Compensation expense is calculated under the fair value method and is recorded on a straight-line basis over the vesting period.

     Prior to July 1, 2003, the Company applied APB No. 25 in accounting for employee stock options. Under APB No. 25, the difference between the aggregate market value and exercise price of the securities underlying the stock options at grant date, or intrinsic value, is recorded as compensation expense on a straight-line basis over the vesting period. If the employee stock options had been accounted for under SFAS No. 123, the fair value of the stock options would have been recorded as compensation expense on a straight-line basis over the vesting period. The following table, as prescribed by SFAS No. 148, illustrates the effect on net income (loss) and net income (loss) per share for the three and six months ended December 31, 2003 if the Company had applied the fair value recognition provisions of SFAS No. 123 to all stock-based compensation. There is no effect for the three and six months ended December 31, 2004 since all stock options issued under APB No. 25 were fully vested prior to July 1, 2004.

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

                 
    Three Months Ended     Six Months Ended  
    December 31, 2003     December 31, 2003  
Net income (loss) before income taxes, as reported
  $ (755 )   $ 125  
Add: Stock-based compensation expense included in reported net income (loss)
    94       196  
Deduct: Stock-based compensation expense determined under fair value based method for all awards
    (241 )     (482 )
 
           
Net loss before income taxes, pro forma
    (902 )     (161 )
Income tax expense, pro forma
           
 
           
Net loss, pro forma
  $ (902 )   $ (161 )
 
           
 
               
Net income (loss) per share:
               
Basic, as reported
  $ (0.04 )   $ 0.01  
Basic, pro forma
  $ (0.04 )   $ (0.01 )
Diluted, as reported
  $ (0.04 )   $ 0.01  
Diluted, pro forma
  $ (0.04 )   $ (0.01 )

6. Reinsurance

     Effective September 1, 2004, the Company elected to not renew its 50% quota-share reinsurance treaty. As part of such non-renewal, an election was also made to “cut-off” the reinsurance as of the non-renewal date. Therefore, on such date, the reinsurer returned the ceded unearned premium (prepaid reinsurance premiums) to the Company, and the reinsurer is not liable for any losses incurred after the non-renewal date.

7. Subsequent Event

     Effective January 1, 2005, the Company acquired the assets (principally the book of business and retail locations) of a non-standard automobile insurance agency in Texas for $4,000 in cash. As a result, the Company is now writing business through 15 company-owned retail locations in Texas.

8. Business Combination

     Pursuant to the terms of the acquisition of USAuto, the Company has accrued a liability for contingent shares valued at $6,720 relating to an additional 750 shares to be issued based upon the attainment of certain financial targets as of December 31, 2004. Such amount has been recorded as additional goodwill related to the acquisition.

     The following pro forma consolidated statements of income have been derived by the application of pro forma adjustments to the Company’s historical consolidated statements of income. The pro forma consolidated statements of income for the three and six months ended December 31, 2003 give effect to the acquisition of USAuto and related transactions as if they had been consummated on July 1, 2003. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with these pro forma consolidated statements of income.

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

                                 
            USAuto              
            Historical              
Pro forma Statement of Income   Company     Three Months Ended     Pro forma     Company  
Three Months Ended December 31, 2003   Historical     December 31, 2003     Adjustments     Pro forma  
Revenues:
                               
Premiums earned
  $     $ 12,323     $     $ 12,323  
Commissions and fees
          5,984             5,984  
Ceding commissions from reinsurer
          2,356             2,356  
Gains on sales of foreclosed real estate
    99                   99  
Investment income
    202       239       (89 ) (a)     352  
Net realized gains on sales of investments
          21             21  
 
                       
Total revenues
    301       20,923       (89 )     21,135  
 
                       
Expenses:
                               
Losses and loss adjustment expenses
          8,737       (49 ) (b)     8,688  
Insurance operating expenses
          10,236       (167 ) (c)     10,069  
Other operating expenses
    949             (230 ) (d)     719  
Stock-based compensation
    94             (94 ) (e)      
Depreciation and amortization
    13       302       285    (f)     600  
Interest expense
          92             92  
 
                       
Total expenses
    1,056       19,367       (255 )     20,168  
 
                       
 
                               
Income (loss) before income taxes
    (755 )     1,556       166       967  
Income tax expense
          (86 )     253    (g)     167  
 
                       
Net income (loss)
  $ (755 )   $ 1,642     $ (87 )   $ 800  
 
                       
 
                               
Basic net income (loss) per share
  $ (0.04 )                   $ 0.02  
Diluted net income (loss) per share
  $ (0.04 )                   $ 0.02  
 
                               
Weighted average basic shares
    20,589                       46,399  (h)
Weighted average diluted shares
    20,589                       47,965  (h)

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

                                 
            USAuto              
            Historical              
Pro forma Statement of Income   Company     Six Months Ended     Pro forma     Company  
Six Months Ended December 31, 2003   Historical     December 31, 2003     Adjustments     Pro forma  
Revenues:
                               
Premiums earned
  $     $ 24,468     $     $ 24,468  
Commissions and fees
          13,772             13,772  
Ceding commissions from reinsurer
          5,183             5,183  
Gains on sales of foreclosed real estate
    1,409                   1,409  
Investment income
    441       472       (177 ) (a)     736  
Net realized gains on sales of investments
          22             22  
 
                       
Total revenues
    1,850       43,917       (177 )     45,590  
 
                       
Expenses:
                               
Losses and loss adjustment expenses
          17,186       (222 ) (b)     16,964  
Insurance operating expenses
          20,232       (300 ) (c)     19,932  
Other operating expenses
    1,509             (422 ) (d)     1,087  
Stock-based compensation
    196             (196 ) (e)      
Depreciation and amortization
    20       553       822    (f)     1,395  
Interest expense
          162             162  
 
                       
Total expenses
    1,725       38,133       (318 )     39,540  
 
                       
 
                               
Income before income taxes
    125       5,784       141       6,050  
Income tax expense
          474       1,676    (g)     2,150  
 
                       
Net income
  $ 125     $ 5,310     $ (1,535 )   $ 3,900  
 
                       
 
                               
Basic net income per share
  $ 0.01                     $ 0.08  
Diluted net income per share
  $ 0.01                     $ 0.08  
 
                               
Weighted average basic shares
    20,589                       46,399  (h)
Weighted average diluted shares
    21,211                       47,965  (h)

     Notes to pro forma consolidated statements of income:


(a)   To eliminate investment income that would not have been earned if the acquisition had been completed on July 1, 2003.
 
(b)   To record accretion of the fair value adjustment to loss and loss adjustment expense reserves.
 
(c)   To record net increase in salary expense reflecting new employment agreements with USAuto executives effective with the acquisition and to eliminate loan guarantee fees that are no longer required following the acquisition.
 
(d)   To eliminate compensation expense of Company employees terminated pursuant to the terms of the acquisition agreement effective upon closing of acquisition and to include the expense of a new advisory agreement.
 
(e)   To eliminate stock-based compensation expense of Company employees terminated pursuant to the terms of the acquisition agreement effective upon closing of the acquisition.
 
(f)   To amortize identifiable intangible assets resulting from the acquisition and to eliminate depreciation on assets disposed of as part of Company employee severance cost as result of the acquisition.
 
(g)   To record additional income tax expense as result of (1) the change in tax status of certain USAuto subsidiary companies from S corporation to C corporation, (2) expected utilization of available NOL carryforwards and (3) the tax-effect of deductible pro forma adjustments.
 
(h)   Includes the dilutive effect of stock options issued to Company employees as result of the acquisition as if such options had been issued on July 1, 2003.

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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

     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 will continue to market the remaining real estate held (consisting of six tracts of land in San Antonio, Texas) and will attempt to sell it on a basis that provides us with the best economic return. New investments in real estate are not anticipated, although a $0.3 million tract of land adjacent to one of our properties was acquired in December 2004 to enhance the marketability of the owned parcel.

     As a result of the USAuto acquisition, we are now 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 and, in most instances, who are required by law to buy a minimum amount of automobile insurance.

     Effective January 1, 2005, we acquired the assets (principally the book of business and retail locations) of a non-standard automobile insurance agency in Texas for $4.0 million in cash. As of January 31, 2005, including the Texas acquisition, we owned and operated 197 retail locations, staffed by employee-agents. Our employee-agents exclusively sell insurance products either underwritten or serviced by us. Effective January 1, 2005, we write non-standard personal automobile insurance in 10 states and we are also licensed as an insurer in 14 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,  
    2004     2003     2004     2003  
Retail locations:
                               
Beginning of period
    154       112       138       108  
Locations opened
    24       9       40       13  
 
                       
End of period
    178       121       178       121  
 
                       

     Our consolidated financial statements vary in important respects from our historical consolidated financial statements due to the acquisition of USAuto. The three and six months ended December 31, 2003 reflect the results from our previous acquisition activities and real estate operations, while the three and six months ended December 31, 2004 reflect primarily the results from our insurance operations.

     Our results for the three and six months ended December 31, 2003 included expenses that have been discontinued as a result of the acquisition of USAuto. These expenses principally consisted of compensation to employees who were terminated in connection with the acquisition. However, the current periods include (as will future periods) the cost of an advisory services agreement with an entity controlled by Donald J. Edwards, our former Chief Executive Officer. These items have been incorporated into the presentation of pro forma operating results for the three and six months ended December 31, 2003, which assume that the acquisition of USAuto occurred on July 1, 2003. See note 8 to the consolidated financial statements.

Consolidated Results of Operations

Overview

     The three and six months ended December 31, 2004 reflect the results of our insurance operations, while the three and six months ended December 31, 2003 reflect the results of our acquisition activities and real estate operations. In addition to the actual results, we discuss pro forma operating results for the three and six months ended December 31, 2003 that assume that the USAuto acquisition occurred on July 1, 2003. We also separately

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discuss both the results of the insurance operations and the real estate and corporate activities. Segment information is summarized below on both an actual and pro forma basis for the periods presented.

                                                 
    Three Months Ended December 31,     Six Months Ended December 31,  
    Actual     Pro forma     Actual     Pro forma  
    2004     2003     2003     2004     2003     2003  
Insurance Operations   (in thousands)  
Revenues:
                                               
Premiums earned
  $ 31,071     $     $ 12,323     $ 52,756     $     $ 24,468  
Commissions and fees
    6,321             5,984       12,993             13,772  
Ceding commissions from reinsurer
    1,666             2,356       3,603             5,183  
Investment income
    500             239       855             472  
Other
    171             21       171             22  
 
                                   
Total revenues
    39,729             20,923       70,378             43,917  
 
                                   
 
                                               
Expenses:
                                               
Losses and loss adjustments expenses
    20,317             8,688       33,747             16,964  
Operating expenses
    11,533             10,069       21,939             19,932  
Depreciation and amortization
    488             600       1,157             1,395  
 
                                   
Total expenses
    32,338             19,357       56,843             38,291  
 
                                   
 
                                               
Income before income taxes
  $ 7,391     $     $ 1,566     $ 13,535     $     $ 5,626  
 
                                   
                                                 
    Three Months Ended December 31,     Six Months Ended December 31,  
    Actual     Pro forma     Actual     Pro forma  
    2004     2003     2003     2004     2003     2003  
Real Estate And Corporate   (in thousands)  
Revenues:
                                               
Gains on sales of foreclosed real estate
  $ 755     $ 99     $ 99     $ 755     $ 1,409     $ 1,409  
Investment income
    241       202       113       495       441       264  
 
                                   
Total revenues
    996       301       212       1,250       1,850       1,673  
 
                                   
 
                                               
Expenses:
                                               
Operating expenses
    899       949       719       1,267       1,509       1,087  
Stock-based compensation
    91       94             152       196        
Depreciation
          13                   20        
Interest expense
    69             92       139             162  
 
                                   
Total expenses
    1,059       1,056       811       1,558       1,725       1,249  
 
                                   
 
(Loss) income before income taxes
  $ (63 )   $ (755 )   $ (599 )   $ (308 )   $ 125     $ 424  
 
                                   

     Our insurance operations derive revenues from selling, servicing and underwriting non-standard personal automobile insurance policies in nine states. We conduct our underwriting operations through two insurance company subsidiaries, USAuto Insurance Company, Inc. and Village Auto Insurance Company, Inc. Our insurance operations revenues are primarily from:

    •   premiums earned from sales of policies issued by the insurance company subsidiaries, net of the portion of those premiums that have been ceded to reinsurers;
 
    •   fee income, which includes policy and 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 (up until the September 1, 2004 non-renewal of our quota-share reinsurance); and
 
    •   investment income earned on the invested assets of the insurance company subsidiaries.

To a lesser extent, we are also winding down operations in which our managing general agency subsidiaries (MGA subsidiaries) receive commissions for selling and servicing policies on behalf of third-party insurance companies.

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     The following table presents gross premiums earned by state for the insurance operations separately for policies written by the insurance company subsidiaries and for policies issued by the MGA subsidiaries on behalf of other insurance companies, on both an actual and a pro forma basis for the periods presented. We believe this table illustrates the total gross premiums serviced by us and under our control.

                                                 
    Three Months Ended December 31,     Six Months Ended December 31,  
    Actual     Pro forma     Actual     Pro forma  
    2004     2003     2003     2004     2003     2003  
    (in thousands)  
Insurance company subsidiaries:
                                               
Georgia
  $ 16,651     $     $ 12,120     $ 32,637     $     $ 24,461  
Tennessee
    6,406             6,160       12,807             12,331  
Ohio
    2,417             1,293       4,434             2,353  
Mississippi
    1,013             857       1,974             1,805  
Missouri
    940             702       1,830             1,404  
Indiana
    335                   468              
Illinois
    10                   10              
Florida
    1                   1              
 
                                   
Total gross premiums earned
  $ 27,773     $     $ 21,132     $ 54,161     $     $ 42,354  
 
                                   
 
                                               
MGA subsidiaries:
                                               
Alabama
  $ 6,278     $     $ 5,516     $ 12,587     $     $ 11,384  
Georgia
    665             3,395       1,584             7,902  
 
                                   
Total gross premiums earned
  $ 6,943     $     $ 8,911     $ 14,171     $     $ 19,286  
 
                                   

     The following table presents the change in the total number of policies in force for the insurance operations separately for business written by the insurance company subsidiaries and for policies issued by the MGA subsidiaries on behalf of other insurance companies for the periods presented.

                                 
    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2004     2003     2004     2003  
Insurance company subsidiaries:
                               
Policies in force – beginning of period
    71,771       58,506       69,061       59,186  
Increase (decrease) during period.
    2,439       (2,267 )     5,149       (2,947 )
 
                       
Policies in force – end of period.
    74,210       56,239       74,210       56,239  
 
                       
 
                               
MGA subsidiaries:
                               
Policies in force – beginning of period
    21,114       24,607       22,324       27,828  
Decrease during period
    (1,051 )     (2,414 )     (2,261 )     (5,635 )
 
                       
Policies in force – end of period.
    20,063       22,193       20,063       22,193  
 
                       

     The following table presents net premiums earned by state for the insurance operations on both an actual and a pro forma basis for the periods presented. This table represents the net underwriting risk retained by us after considering the effects of reinsurance. Note that the Alabama premiums shown are assumed by us through a quota share reinsurance contract, which was increased from 15% to 50%, effective February 1, 2004.

                                                 
    Three Months Ended December 31,     Six Months Ended December 31,  
    Actual     Pro forma     Actual     Pro forma  
    2004     2003     2003     2004     2003     2003  
    (in thousands)  
Georgia
  $ 16,651     $     $ 6,662     $ 27,883     $     $ 13,320  
Tennessee
    6,406             3,167       10,750             6,295  
Alabama
    3,298             998       6,582             1,969  
Ohio
    2,417             679       3,810             1,220  
Mississippi
    1,013             458       1,696             958  
Missouri
    940             359       1,556             706  
Indiana
    335                   468              
Illinois
    10                   10              
Florida
    1                   1              
 
                                   
Total net premiums earned
  $ 31,071     $     $ 12,323     $ 52,756     $     $ 24,468  
 
                                   

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     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, net of ceded reinsurance.

     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 on a net basis as a percentage of net premiums earned. Insurance operating expenses are reduced by fee income from insureds and ceding commissions received from our reinsurer as compensation for the costs we incur in servicing this business on their behalf.

     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 on both an actual and a pro forma basis for the periods presented.

                                                 
    Three Months Ended December 31,     Six Months Ended December 31,  
    Actual     Pro forma     Actual     Pro forma  
    2004     2003     2003     2004     2003     2003  
Loss and loss adjustment expense
    65.4 %           70.5 %     64.0 %           69.3 %
Expense
    14.2 %           16.8 %     14.0 %           13.5 %
 
                                   
 
    79.6 %           87.3 %     78.0 %           82.8 %
 
                                   

     The invested assets of the insurance operations are generally highly liquid and consist substantially of readily marketable, investment grade, municipal bonds. At December 31, 2004, approximately 43% of our fixed maturities portfolio was tax-exempt. This percentage has reduced and will continue to reduce over time as we move to a taxable portfolio. Most securities held are issued by political subdivisions in the states of Georgia and Tennessee as these type of investments enable our insurance company subsidiaries to obtain premium tax credits. Investment income is composed 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 based upon changes in interest rates and changes in the credit quality of securities held.

     The non-standard personal automobile insurance industry is somewhat cyclical in nature. In the past, the industry has been characterized by periods of price competition and excess capacity followed by periods of high premium rates and shortages of underwriting capacity. If new competitors enter this market, existing competitors may attempt to increase market share by lowering rates. Such conditions could lead to reduced prices, which would have a negative impact on our revenues and profitability. However, we believe that during 2002 and 2003, the underwriting results in the personal automobile insurance industry improved as a result of favorable pricing and competitive conditions that allowed for broad increases in rate levels by insurers, while rates and premium levels for non-standard automobile insurance stabilized during 2004.

Three and Six Months Ended December 31, 2004 Compared With Three and Six Months Ended December 31, 2003

Actual Consolidated Results

     Net income for the three months ended December 31, 2004 was $4.7 million versus a loss of $0.8 million for the three months ended December 31, 2003 and net income for the six months ended December 31, 2004 was $8.6 million versus $0.1 million for the six months ended December 31, 2003. The prior fiscal year’s results reflect only real estate operations and the costs associated with acquisition opportunities, while the current fiscal year’s results reflects insurance operating results.

     Net income per share on both a basic and a diluted basis for the three months ended December 31, 2004 was $0.10 as compared to a loss of $0.04 for the three months ended December 31, 2003 and net income per share on both a basic and a diluted basis for the six months ended December 31, 2004 was $0.18 as compared to $0.01 for the six months ended December 31, 2003. No tax expense was recognized for the three and six month periods ended

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December 31, 2003, as a result of net operating losses available to offset federal taxable income for which a full valuation allowance had been established.

Pro forma Consolidated Results

     On a pro forma basis, net income was $0.8 million for the three months ended December 31, 2003 and $3.9 million for the six months ended December 31, 2003. Pro forma net income per share on both a basic and a diluted basis was $0.02 for the three months ended December 31, 2003 and $0.08 for the six months ended December 31, 2003.

Actual Results – Insurance Operations

     For the three months ended December 31, 2004, the insurance operations recorded income before income taxes of $7.4 million. The combined ratio for this period was 79.6%, which was comprised of a loss and loss adjustment expense ratio of 65.4% and an expense ratio of 14.2%.

     For the six months ended December 31, 2004, the insurance operations recorded income before income taxes of $13.5 million. The combined ratio for this period was 78.0%, which was comprised of a loss and loss adjustment expense ratio of 64.0% and an expense ratio of 14.0%.

Pro forma Results – Insurance Operations

     On a pro forma basis, income before income taxes for the three months ended December 31, 2003 was $1.6 million compared to the actual income before income taxes of $7.4 million for the three months ended December 31, 2004. On a pro forma basis, income before income taxes for the six months ended December 31, 2003 was $5.6 million compared to the actual income before income taxes of $13.5 million for the six months ended December 31, 2004.

     Net premiums earned increased 153% and 116% to $31.1 million and $52.8 million, respectively, for the three and six month periods ended December 31, 2004 from $12.3 million and $24.5 million, respectively, on a pro forma basis for the same periods last year. This increase is primarily the result of electing to not renew our 50% quota share reinsurance commencing September 1, 2004. As a result, the three months ended December 31, 2004 reflect no quota share reinsurance. Such reinsurance was in effect for one month in the six months ended December 31, 2004 and for all of the six months ended December 31, 2003.

     In addition to the above factor, net premiums earned also increased as we continued to write more of our insurance business in Georgia through our insurance company subsidiaries rather than through our managing general agency operations for other insurance companies and effective February 1, 2004 we increased our assumed reinsurance percentage from 15% to 50% for our Alabama business, which is written through other insurance companies. Overall, the number of insured policies in force at December 31, 2004 increased 32% over the same date in 2003.

     Likewise, as a result of shifting the insurance underwriting to our insurance company subsidiaries, commissions and fees declined as a percentage of net premiums earned over these same periods and, as a result of not renewing the quota share reinsurance, ceding commissions from our reinsurer also decreased. The three months ended December 31, 2004, however, include an additional ceding commission of $1.7 million which has been recorded based upon the favorable loss experience during the last contract year of the quota share reinsurance program which was non-renewed effective September 1, 2004.

     During the three months ended December 31, 2004, the number of sales offices (or “stores”) increased by 24, increasing to 178 at December 31, 2004. During the same period last year, we opened 9 stores. During the six months ended December 31, 2004, the number of stores increased by 40 compared with 13 during the same period last year.

     Investment income increased primarily as a result of the increase in invested assets as a result of our growth. We expect investment income to continue to increase as we shift the investment portfolio from tax-exempt to taxable investments. The weighted average investment yield for the fixed maturities portfolio was 3.69% at December 31,

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2004 with a duration of 4.1 years. The yield for the comparable Lehman Brothers municipal bond indices at December 31, 2004 was 3.57%.

     The loss and loss adjustment expense ratio improved to 65.4% and 64.0%, respectively, for the three and six month periods ended December 31, 2004 from 70.5% and 69.3%, respectively, on a pro forma basis for the same periods in fiscal 2004. The loss ratio for the three months ended December 31, 2004 increased slightly as a result of not renewing the quota share reinsurance. This occurred since the previously-reinsured business carried a slightly higher loss ratio than our retained business did since our net loss ratio was favorably impacted by the fact that we received 100% of the policy fees which are a component of net premiums earned.

     Insurance operating expenses increased 14% and 10%, respectively, to $11.5 million and $21.9 million, respectively, for the three and six month periods ended December 31, 2004 from $10.1 million and $ 19.9 million on a pro forma basis for the same periods in fiscal 2004. These increases are primarily due to expenses that vary along with the increase in net premiums earned.

     The expense ratio decreased from 16.8% for the three months ended December 31, 2003 to 14.2% for the three months ended December 31, 2004, primarily due to the additional ceding commission of $1.7 million. This favorable impact however was partially offset by declining fee income from ancillary products (which reduces expenses in calculating the expense ratio), and the fact that this fee income was spread over a larger base of net premiums earned. The expense ratio increased from 13.5% for the six months ended December 31, 2003 to 14.0% for the six months ended December 31, 2004 as a result of these same factors

     Overall, the combined ratio improved to 79.6% and 78.0%, respectively, for the three and six month periods ended December 31, 2004 from 87.3% and 82.8%, respectively, on a pro forma basis for the same periods last year.

     In addition, during the three months ended December 31, 2004, we recognized a $0.2 million gain on the sale of property and equipment as a result of the sale of an aircraft previously used in the insurance operations.

Actual Results – Real Estate and Corporate

     Loss before income taxes for the three months ended December 31, 2004 was $0.1 million versus loss before income taxes of $0.8 million for the three months ended December 31, 2003. Loss before income taxes for the six months ended December 31, 2004 was $0.3 million versus income before income taxes of $0.1 million for the six months ended December 31, 2003. For the three months ended December 31, 2004 a gain on sale of foreclosed real estate of $0.8 million was recognized versus a gain of $0.1 million in the same period in fiscal 2004. Gains on sales of real estate represents proceeds received from the sale of foreclosed real estate in excess of carrying value, less selling costs.

     Investment income was $0.2 million and $0.5 million, respectively, for the three and six month periods ended December 31, 2004, compared to $0.2 million and $0.4 million, respectively, for the same periods in fiscal 2004. The decrease in available cash equivalents as a result of the USAuto acquisition was offset by a higher return earned during the current periods on our investment in mutual fund.

     Other operating expenses decreased for the three months ended December 31, 2004, primarily as a result of the elimination of the cost of former employees who were terminated as a result of the USAuto acquisition. The reduction in costs was partially offset by additional costs associated with being an operating public company.

Pro forma Results – Real Estate and Corporate

     On a pro forma basis, loss before taxes for the three months ended December 31, 2003 was $0.6 million and income before taxes for the six months ended December 31, 2003 was $0.4 million.. These results exclude compensation of terminated employees and reflect only the real estate operations and costs related to acquisition opportunities. The results also reflect interest expense on USAuto’s note payable.

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Liquidity and Capital Resources

     Prior to the USAuto acquisition, our historical funding requirements were for operating expenses, including legal, audit and consulting expenses incurred in connection with the evaluation of potential acquisition candidates and other strategic opportunities. Our historical primary sources of funding for operating expenses were proceeds from the sales of foreclosed real estate and investment income on cash and cash equivalents and cash on hand.

     Since the completion of the USAuto acquisition, our liquidity and capital resources have become more reflective of those of a fully-integrated retailer, servicer and underwriter of non-standard personal automobile insurance. Primary sources of funds are premiums, commission and fee income and investment income. Funds are used to pay claims and operating expenses, pay interest and principal under the terms of our loan agreement and purchase investments.

     Operating activities for the six months ended December 31, 2004 provided $19.3 million of cash compared to $1.4 million used in the same period in fiscal 2004. The increase is the direct result of the inclusion of insurance operations in the current period.

     Net cash used by investing activities for the three months ended December 31, 2004 was $26.5 million as compared to $1.7 million provided in the same period in fiscal 2004. The fiscal 2005 period reflects the additions to our investment portfolio, while the fiscal 2004 period results include proceeds from the sales of foreclosed real estate.

     During the six months ended December 31, 2004, we increased the statutory capital and surplus of the insurance company subsidiaries by $5.0 million to support additional premium writings. At December 31, 2004, we had $19.8 million available in unrestricted cash and investments outside of the insurance company subsidiaries. However, $4.0 million of these available funds were used in January 2005 in connection with the acquisition of the assets of a non-standard automobile agency in Texas.

     The note payable to a financial institution at December 31, 2004 consisted of a term loan with an unpaid balance of $3.5 million that bears interest at LIBOR plus 366 basis points. The note is payable in scheduled quarterly installments through June 30, 2007 and is secured by the common stock and certain assets of USAuto’s direct wholly-owned subsidiaries. The term loan contains certain financial covenants and requires USAuto to maintain certain financial ratios. At December 31, 2004, USAuto was in compliance with all provisions of the loan agreement, including the financial covenants and ratios, except for the 2003 Risk Based Capital ratio for which a waiver had been obtained and the 2004 Risk Based Capital ratio which has not been determined.

     As a result of the USAuto acquisition, we are now part of an insurance holding company system with substantially all of our operations conducted by our insurance company subsidiaries. Accordingly, the holding company will only receive cash from operating activities as a result of investment income and the ultimate liquidation of our foreclosed real estate held for sale. Cash could be made available through loans from financial institutions, the sale of common stock, and dividends from our insurance company subsidiaries. In addition, as a result of our tax net operating loss carryforwards, taxable income generated by the insurance company subsidiaries will provide cash to the holding company through an intercompany tax allocation agreement through which the insurance company subsidiaries will reimburse the holding company for current tax benefits utilized through recognition of the net operating loss carryforwards.

     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 the insurance company subsidiaries have sufficient financial resources available to support their net premium writings in both the short-term and the reasonably foreseeable future.

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     We believe that existing cash and investment balances, when combined with anticipated cash flows generated from operations, will be adequate to meet our expected liquidity needs in both the short term and the reasonably foreseeable future. Our growth strategy includes possible acquisitions. Any acquisitions or other 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 or that any such financing would not negatively impact our results of operations.

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:

  •   statements and assumptions relating to future growth, income, income per share and other financial performance measures, as well as management’s short-term and long-term performance goals;
 
  •   statements relating to the anticipated effects on results of operations or financial condition from recent and expected developments or events;
 
  •   statements relating to our business and growth strategies; and
 
  •   any other statements or assumptions that are not historical facts.

     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 the “Business ¯ Risk Factors” section of the Annual Report on Form 10-K for the year ended June 30, 2004, filed with the Securities and Exchange Commission on September 28, 2004.

     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 our 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 bonds that have been rated “A” or better by Standard & Poors. At December 31, 2004, 98.2% of the portfolio was invested in securities rated “AA” or better by Standard & Poors, and 100% was invested in securities rated “A” or better by Standard & Poors. We have not recognized any other than temporary losses on the investment portfolio. We also utilize the services of a professional fixed income investment manager.

     As of December 31, 2004, 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 4.7%, or approximately $2.4 million. Conversely, as of the same date, the impact of an immediate 100 basis point decrease in market interest rates on our fixed maturities portfolio would have resulted in an estimated increase in fair value of 4.3%, or approximately $2.2 million.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     The Company’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company’s 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, 2004. Based on that evaluation, the Company’s chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures effectively and timely provide them with material information relating to the Company and its consolidated subsidiaries required to be disclosed in the reports the Company files under the Exchange Act.

Changes in Internal Control Over Financial Reporting

     During the period covered by this report, there has been no change in the Company’s internal control over financial reporting that has materially affected or its reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

     At the Company’s Annual Meeting of Stockholders held on October 28, 2004, the following persons were elected to the Company’s Board of Directors for a one-year term:

                 
    Votes For     Votes Withheld  
Gene H. Bishop
    45,618,585       168,218  
Rhodes R. Bobbitt
    45,730,244       56,559  
Harvey B. Cash
    45,653,653       133,150  
Donald J. Edwards
    45,760,739       26,024  
Gerald J. Ford
    45,763,481       23,322  
Stephen J. Harrison
    45,763,544       23,259  
Thomas M. Harrison, Jr.
    45,763,544       23,259  
Lyndon L. Olson, Jr.
    45,763,081       23,722  
William A. Shipp, Jr.
    45,729,781       57,022  

     The following other proposals were also considered and approved at the Annual Meeting by the votes set forth below:

                         
                    Votes Withheld  
    Votes For     Votes Against     and Broker Non-Votes  
Approval of the First Acceptance Corporation
                       
Employee Stock Purchase Plan
    36,738,762       147,817       8,900,224  
Ratification of the appointment of KPMG LLP as the
                       
Company’s independent auditors for fiscal 2005
    45,738,989       46,385       1,429  

Item 6. Exhibits

The following exhibits are attached to this report:

31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
 
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
 
32.1   Chief Executive Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2   Chief Financial Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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.

             
    FIRST ACCEPTANCE CORPORATION  
 
           
February 14, 2005
  By:   /s/ Stephen J. Harrison    
     
      Stephen J. Harrison    
      Chief Executive Officer    
 
           
February 14, 2005
  By:   /s/ Charles D. Hamilton, Jr.    
     
      Charles D. Hamilton, Jr.    
      Chief Financial Officer    

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INDEX TO EXHIBITS

         
Exhibit   Description    
 
31.1
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a).    
 
       
31.2
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a).    
 
       
32.1
  Chief Executive Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    
 
       
32.2
  Chief Financial Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    

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