UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2006

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

For the transition period from ___ to ___

First Acceptance Corporation

(Exact name of registrant as specified in its charter)

Delaware		75-1328153
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3813 Green Hills Village Drive
Nashville, Tennessee		37215
(Address of principal executive offices)		(Zip Code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of May 5, 2006, there were outstanding 47,525,134 shares of the registrant’s common stock, par value $0.01 per share.

 

 

FIRST ACCEPTANCE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2006

INDEX

		Page
PART I — FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Condensed Consolidated Balance Sheets March 31, 2006 and June 30, 2005			1
Condensed Consolidated Statements of Income Three Months and Nine Months Ended March 31, 2006 and 2005			2
Condensed Consolidated Statements of Stockholders’ Equity Nine Months Ended March 31, 2006 and 2005			3
Condensed Consolidated Statements of Cash Flows Nine Months Ended March 31, 2006 and 2005			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3. Quantitative and Qualitative Disclosures About Market Risk			17
Item 4. Controls and Procedures			18
PART II — OTHER INFORMATION			19
Item 6. Exhibits			19
SIGNATURES			20
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

		March 31,
		2006				June 30,
		(Unaudited)				2005
ASSETS
Fixed maturities, available-for-sale at market value (amortized cost: $107,421 and $73,832)		$	105,131			$	74,840
Investment in mutual fund, at market value			241				10,920
Cash and cash equivalents			46,514				24,762
Fiduciary funds – restricted			341				935
Premiums and fees receivable from policyholders and agents			65,813				42,908
Reinsurance recoverables			2,094				4,490
Deferred tax asset			41,936				48,106
Other assets			7,163				4,863
Property and equipment, net			2,659				1,962
Foreclosed real estate held for sale			87				961
Deferred acquisition costs			5,407				3,271
Goodwill			136,268				107,837
Identifiable intangible assets			6,092				4,867
TOTAL		$	419,746			$	330,722
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loss and loss adjustment expense reserves		$	57,622			$	42,897
Unearned premiums			77,988				47,752
Deferred fee income			2,174				2,272
Amounts due to insurance companies			341				935
Notes payable to banks			30,000				—
Payable for securities			1,436				—
Other liabilities			10,464				8,537
Total liabilities			180,025				102,393
Stockholders’ equity:
Common stock, $.01 par value, 75,000 shares authorized; 47,525 and 47,455 shares issued and outstanding			475				475
Preferred stock, $.01 par value, 10,000 shares authorized			—				—
Additional paid-in capital			458,865				457,905
Accumulated other comprehensive income (loss):
Net unrealized appreciation (depreciation) on investments			(2,290	)			655
Accumulated deficit			(217,329	)			(230,706	)
Total stockholders’ equity			239,721				228,329
TOTAL		$	419,746			$	330,722

See notes to condensed consolidated financial statements.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2006				2005				2006				2005
Revenues:
Premiums earned		$	55,147			$	37,979			$	142,717			$	90,735
Commissions and fees			7,311				6,290				20,340				19,283
Transaction service fee			3,100				—				3,100				—
Ceding commissions from reinsurer			—				—				—				3,603
Gains on sales of foreclosed real estate			2,817				—				3,638				755
Investment income			1,646				1,106				3,961				2,455
Other gains			47				20				51				191
Total revenues			70,068				45,395				173,807				117,022
Expenses:
Losses and loss adjustment expenses			38,374				25,130				97,303				58,877
Insurance operating expenses			21,046				12,176				52,774				34,115
Other operating expenses			742				715				1,964				1,983
Stock-based compensation			72				84				418				236
Depreciation			225				243				604				829
Amortization of identifiable intangible assets			121				199				175				769
Interest expense			457				69				457				208
Total expenses			61,037				38,616				153,695				97,017
Income before income taxes			9,031				6,779				20,112				20,005
Income tax expense			3,167				2,374				6,735				7,050
Net income		$	5,864			$	4,405			$	13,377			$	12,955
Basic net income per share		$	0.12			$	0.09			$	0.28			$	0.28
Diluted net income per share		$	0.12			$	0.09			$	0.27			$	0.27
Weighted average basic shares			47,510				47,444				47,474				46,926
Weighted average diluted shares			49,570				49,350				49,541				48,834

See notes to condensed consolidated financial statements.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

														Accumulated
										Additional				other												Total
		Common Stock								paid-in				comprehensive				Accumulated				Treasury				stockholders’
		Shares				Amount				capital				income (loss)				deficit				stock				equity
Balances at July 1, 2004			46,535			$	465			$	450,658			$	(35	)		$	(256,862	)			—			$	194,226
Net income			—				—				—				—				12,955				—				12,955
Other comprehensive loss – change in unrealized depreciation on investments			—				—				—				(264	)			—				—				(264	)
Comprehensive income																											12,691
Issuance of contingent shares related to acquisition			750				8				6,712				—				—				—				6,720
Stock-based compensation			3				—				236				—				—				—				236
Purchase of treasury stock, at cost			—				—				—				—				—				(639	)			(639	)
Retirement of treasury stock, at cost			(90	)			(1	)			(638	)			—				—				639				—
Exercise of stock options			246				2				738				—				—				—				740
Balances at March 31, 2005			47,444			$	474			$	457,706			$	(299	)		$	(243,907	)		$	—			$	213,974

														Accumulated
										Additional				other												Total
		Common stock								paid-in				comprehensive				Accumulated				Treasury				stockholders’
		Shares				Amount				capital				income (loss)				deficit				stock				equity
Balances at July 1, 2005			47,455			$	475			$	457,905			$	655			$	(230,706	)		$	—			$	228,329
Net income			—				—				—				—				13,377				—				13,377
Other comprehensive loss – change in unrealized appreciation (depreciation) on investments			—				—				—				(2,945	)			—				—				(2,945	)
Comprehensive income																											10,432
Stock-based compensation			2				—				418				—				—				—				418
Issuance of shares under Employee Stock Purchase Plan			13				—				121				—				—				—				121
Exercise of stock options			55				—				421				—				—				—				421
Balances at March 31, 2006			47,525			$	475			$	458,865			$	(2,290	)		$	(217,329	)		$	—			$	239,721

See notes to condensed consolidated financial statements.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

		Nine Months Ended
		March 31,
		2006				2005
Cash flows from operating activities:
Net income		$	13,377			$	12,955
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			779				1,598
Stock-based compensation			418				236
Amortization of premium on fixed maturities			386				242
Deferred income taxes			6,523				6,440
Gains on sales of foreclosed real estate			(3,638	)			(755	)
Other gains			(51	)			(191	)
Change in:
Fiduciary funds – restricted			594				(127	)
Premiums and fees receivable from policyholders and agents			(22,905	)			(16,016	)
Reinsurance recoverables			2,396				4,891
Prepaid reinsurance premiums			—				12,384
Other assets			(2,300	)			(240	)
Deferred acquisition costs			(2,136	)			(3,289	)
Loss and loss adjustment expense reserves			14,725				8,560
Unearned premiums			30,236				17,373
Deferred fee income			(98	)			72
Amounts due to reinsurers			—				(11,899	)
Amounts due to insurance companies			(594	)			127
Other liabilities			1,927				(353	)
Net cash provided by operating activities			39,639				32,008
Cash flows from investing activities:
Proceeds from sales of foreclosed real estate			4,512				1,203
Addition to foreclosed real estate			—				(300	)
Proceeds from sale of property and equipment			—				666
Acquisitions of property and equipment			(1,301	)			(660	)
Purchases of fixed maturities, available-for-sale			(49,778	)			(36,517	)
Maturities and paydowns of fixed maturities, available-for-sale			6,065				3,494
Sales of fixed maturities, available-for-sale			9,789				3,000
Sales (purchases) of investment in mutual fund, net			10,679				(10,785	)
Net increase in receivable/payable for securities			1,436				3,854
Business acquired through asset purchase			(29,831	)			(4,000	)
Net cash used in investing activities			(48,429	)			(40,045	)
Cash flows from financing activities:
Proceeds from borrowing			30,000				—
Net proceeds from issuance of common stock			121				—
Purchase of treasury stock			—				(639	)
Exercise of stock options			421				740
Payments on borrowings			—				(750	)
Net cash provided by (used in) financing activities			30,542				(649	)
Net increase (decrease) in cash and cash equivalents			21,752				(8,686	)
Cash and cash equivalents, beginning of period			24,762				38,352
Cash and cash equivalents, end of period		$	46,514			$	29,666

See notes to condensed consolidated financial statements.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

1. General

     First Acceptance Corporation (the “Company”) is a retailer, servicer and underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. As of March 31, 2006, the Company wrote non-standard personal automobile insurance in 12 states and was licensed as an insurer in 12 additional states. The Company writes business through two insurance company subsidiaries, First Acceptance Insurance Company, Inc. (formerly known as USAuto Insurance Company, Inc.) and Village Auto Insurance Company, Inc.

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 nine months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending June 30, 2006. These unaudited consolidated financial statements and the notes thereto should be read in conjunction with the Company’s audited financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005.

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

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

3. Net Income Per Share

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

		Three Months Ended								Nine Months ended
		March 31,								March 31,
		2006				2005				2006				2005
Net income		$	5,864			$	4,405			$	13,377			$	12,955
Weighted average basic shares			47,510				47,444				47,474				46,926
Effect of dilutive securities — options			2,060				1,906				2,067				1,908
Weighted average dilutive shares			49,570				49,350				49,541				48,834
Basic net income per share		$	0.12			$	0.09			$	0.28			$	0.28
Diluted net income per share		$	0.12			$	0.09			$	0.27			$	0.27

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

4. Stock-Based Compensation

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

The Company has issued stock options to employees under its 2002 Long Term Incentive Plan (the “Plan”). During the nine months ended March 31, 2006, cash of $421 was received from the exercise of options to purchase 55 shares and there were no options issued or forfeited. At March 31, 2006, there were 3,982 shares remaining available for issuance under the Plan and options outstanding were as follows:

Options to purchase 3,731 shares at $3.00 per share issued to former employees that are all fully vested and exercisable. These options expire on July 9, 2012 (3,726 shares) and on June 30, 2013 (5 shares).

Options to purchase 200 shares at $6.64 per share issued to USAuto Holdings, Inc. (“USAuto”) executives as a closing condition to the USAuto acquisition that vest monthly over a five-year period (77 exercisable at March 31, 2006). These options expire on April 30, 2014.

Options to purchase 150 shares at $8.13 per share issued to employees that vest equally in five annual installments (30 exercisable at March 31, 2006). These options expire on October 27, 2014.

     Compensation expense related to stock options is calculated under the fair value method and is recorded on a straight-line basis over the vesting period. Fair value of the options was estimated at the grant dates using the Black-Sholes option pricing model, which includes the following assumptions: risk-free interest rate based on the ten-year U.S. Treasury Note rate; expected option life of ten years; expected volatility of 36% to 38%; and no expected dividends. Compensation expense related to stock options was $418 for the nine months ended March 31, 2006, which included $142 related to the full vesting of existing options upon the resignation of a former employee. Total unamortized compensation cost related to non-vested awards at March 31, 2006 was $963, of which $455 will be amortized through April 2009 and $508 will be amortized through October 2009.

     Stock-based compensation for the nine months ended March 31, 2006 also includes $25 related to shares issued to directors that were recorded based on the closing market price on the date of issuance and $13 related to shares issued under the Company’s Employee Stock Purchase Plan.

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

5. Business Acquired

     In order to gain a presence in the market, on January 12, 2006, the Company acquired certain assets (principally the trade names, customer lists and relationships and the lease rights to 72 retail locations) of two non-standard automobile insurance agencies under common control in Chicago, Illinois for $30,000 in cash plus $162 in acquisition expenses. The purchase price was financed through a newly executed credit agreement (see note 6). Up to $4,000 in additional consideration must also be paid to the agencies if certain financial targets relating to the acquired business for the twelve months ending January 31, 2007 are reached. As a result of this acquisition, the Company is now writing business through First Acceptance Insurance Company, Inc. from these locations. The Company is also receiving a monthly fee from the agencies through December 31, 2006 totaling $5,000 ($3,100 for the three months ended March 31, 2006) as compensation for servicing the run-off of business previously written by the agencies through other insurance companies. The fee is being paid and earned in accordance with the estimated runoff of the number of policies being serviced.

     The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of obtaining third-party valuations of certain intangible assets; thus, the allocation of the purchase price is subject to refinement.

Net tangible assets		$	331
Identifiable intangible assets			1,400
Goodwill			28,431
Total assets acquired		$	30,162

     Of the $1,400 in acquired identifiable intangible assets, $1,100 was assigned to trademark and trade names that is not subject to amortization. The remaining $300 of acquired identifiable intangible assets relates to the value of customer lists and relationships and is being amortized in proportion to anticipated policy expirations. Amortization for the three months ended March 31, 2006 was $110.

     Pro forma financial information has not been presented for this acquisition since the nature of the revenue-producing activity of this business has changed from a retail insurance agency to the underwriting results of an insurance company. The results of the operations of the business acquired are included in the Company’s statement of income beginning on January 12, 2006, the date of acquisition.

6. Notes Payable to Banks

     In connection with the acquisition of the non-standard automobile insurance agencies, on January 12, 2006, the Company entered into, and borrowed under, a credit agreement with two banks consisting of a $5,000 revolving facility and a $25,000 term loan facility, both maturing on June 30, 2010. Both facilities bear interest at LIBOR plus 175 basis points per annum (6.35% at March 31, 2006). The Company entered into an interest rate swap agreement on January 17, 2006 that effectively fixed the interest rate on the term loan facility at 6.63% through June 30, 2010. The term loan facility is due in equal quarterly installments of $1,388, plus interest, beginning April 28, 2006 and ending on April 30, 2010 with a final payment of $1,404 due on June 30, 2010. Both facilities are secured by the common stock and certain assets of selected subsidiaries. The credit agreement contains certain financial covenants. At March 31, 2006, the Company was in compliance with all such covenants except for a covenant regarding net premiums written to surplus for which a waiver has been obtained. The maturities of the notes payable as of March 31, 2006 are as follows:

Years Ending June 30,		Amount
2006		$	1,388
2007			5,552
2008			5,552
2009			5,552
2010			11,956
		$	30,000

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

7. Segment Information

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

     The following tables present selected financial data by business segment:

						Real Estate
		Insurance				and				Consolidated
Three Months Ended March 31, 2006		Operations				Corporate				Total
Revenues:
Premiums earned		$	55,147			$	—			$	55,147
Commissions and fees			7,311				—				7,311
Transaction service fee			3,100				—				3,100
Gains on sales of foreclosed real estate			—				2,817				2,817
Investment income			1,271				375				1,646
Other gains			47				—				47
Total revenues			66,876				3,192				70,068
Expenses:
Losses and loss adjustment expenses			38,374				—				38,374
Operating expenses			21,046				742				21,788
Stock-based compensation			—				72				72
Depreciation and amortization			346				—				346
Interest expense			—				457				457
Total expenses			59,766				1,271				61,037
Income before income taxes		$	7,110			$	1,921			$	9,031

Nine Months Ended March 31, 2006
Revenues:
Premiums earned		$	142,717			$	—			$	142,717
Commissions and fees			20,340				—				20,340
Transaction service fee			3,100				—				3,100
Gains on sales of foreclosed real estate			—				3,638				3,638
Investment income			3,262				699				3,961
Other gains			51				—				51
Total revenues			169,470				4,337				173,807
Expenses:
Losses and loss adjustment expenses			97,303				—				97,303
Operating expenses			52,774				1,964				54,738
Stock-based compensation			—				418				418
Depreciation and amortization			779				—				779
Interest expense			—				457				457
Total expenses			150,856				2,839				153,695
Income before income taxes		$	18,614			$	1,498			$	20,112
Total assets at March 31, 2006		$	231,546			$	188,200			$	419,746

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

						Real Estate
		Insurance				and				Consolidated
Three Months Ended March 31, 2005		Operations				Corporate				Total
Revenues:
Premiums earned		$	37,979			$	—			$	37,979
Commissions and fees			6,290				—				6,290
Investment income			676				430				1,106
Other			20				—				20
Total revenues			44,965				430				45,395
Expenses:
Losses and loss adjustment expenses			25,130				—				25,130
Operating expenses			12,176				715				12,891
Stock-based compensation			—				84				84
Depreciation and amortization			442				—				442
Interest expense			—				69				69
Total expenses			37,748				868				38,616
Income (loss) before income taxes		$	7,217			$	(438	)		$	6,779
Nine Months Ended March 31, 2005
Revenues:
Premiums earned		$	90,735			$	—			$	90,735
Commissions and fees			19,283				—				19,283
Ceding commissions from reinsurer			3,603				—				3,603
Gains on sales of foreclosed real estate			—				755				755
Investment income			1,531				924				2,455
Other			191				—				191
Total revenues			115,343				1,679				117,022
Expenses:
Losses and loss adjustment expenses			58,877				—				58,877
Operating expenses			34,115				1,983				36,098
Stock-based compensation			—				236				236
Depreciation and amortization			1,598				—				1,598
Interest expense			—				208				208
Total expenses			94,590				2,427				97,017
Income (loss) before income taxes		$	20,753			$	(748	)		$	20,005
Total assets at March 31, 2005		$	157,376			$	165,383			$	322,759

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this report.

General

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

     Prior to our April 30, 2004 acquisition of USAuto Holdings, Inc. (“USAuto”), we were engaged in pursuing opportunities to acquire one or more operating companies. In addition, we marketed for sale a portfolio of foreclosed real estate. We will continue to market the remaining real estate held (consisting of two tracts of land in San Antonio, Texas) and will attempt to sell it on a basis that provides us with the best economic return. We do not anticipate making any new investments in real estate.

     As of May 1, 2006, we leased and operated 450 retail locations, staffed by employee-agents, including 72 operating locations in Chicago, Illinois acquired on January 12, 2006. Our employee-agents exclusively sell insurance products either underwritten or serviced by us. As of March 31, 2006, we wrote non-standard personal automobile insurance in 12 states. We are currently licensed as an insurer in 12 additional states.

     The following table shows the changes in the number of our retail locations for the periods presented. Retail location counts are based upon the date that a location commenced writing business. We had previously reported this information based upon the date that a location was leased and first incurred operating expenses. Count information for all prior periods presented has been restated to conform to the current period’s method of presentation. Under the prior basis of presentation, we would have reported a total of 463 locations leased at March 31, 2006.

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2006				2005				2006				2005
Retail locations — beginning of period			351				162				248				133
Opened			28				31				132				61
Acquired			72				15				72				15
Closed			(4	)			—				(5	)			(1	)
Retail locations — end of period			447				208				447				208

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

																		Change in Locations
																		During the Three Months
		Retail Locations as of								Retail Locations as of								Ended
		March 31,								December 31,								March 31,
		2006				2005				2005				2004				2006				2005
Alabama			25				24				25				23				—				1
Florida			40				14				35				1				5				13
Georgia			63				62				63				60				—				2
Illinois			86				3				15				1				71				2
Indiana			25				21				26				11				(1	)			10
Mississippi			8				8				8				6				—				2
Missouri			20				14				19				14				1				—
Ohio			30				28				30				27				—				1
Pennsylvania			20				—				18				—				2				—
South Carolina			12				—				4				—				8				—
Tennessee			20				20				20				19				—				1
Texas			98				14				88				—				10				14
Total			447				208				351				162				96				46

																		Change in Locations
																		During the Nine Months
		Retail Locations as of								Retail Locations as of								Ended
		March 31,								June 30,								March 31,
		2006				2005				2005				2004				2006				2005
Alabama			25				24				25				21				—				3
Florida			40				14				20				—				20				14
Georgia			63				62				62				54				1				8
Illinois			86				3				5				—				81				3
Indiana			25				21				21				4				4				17
Mississippi			8				8				8				5				—				3
Missouri			20				14				14				10				6				4
Ohio			30				28				29				23				1				5
Pennsylvania			20				—				7				—				13				—
South Carolina			12				—				—				—				12				—
Tennessee			20				20				20				16				—				4
Texas			98				14				37				—				61				14
Total			447				208				248				133				199				75

Consolidated Results of Operations

Overview

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

		Three Months Ended March 31,								Nine Months Ended March 31,
Insurance Operations		2006				2005				2006				2005
		(in thousands)
Revenues:
Premiums earned		$	55,147			$	37,979			$	142,717			$	90,735
Commissions and fees			7,311				6,290				20,340				19,283
Transaction service fee			3,100				—				3,100				—
Ceding commissions from reinsurer			—				—				—				3,603
Investment income			1,271				676				3,262				1,531
Other gains			47				20				51				191
Total revenues			66,876				44,965				169,470				115,343
Expenses:
Losses and loss adjustments expenses			38,374				25,130				97,303				58,877
Operating expenses			21,046				12,176				52,774				34,115
Depreciation and amortization			346				442				779				1,598
Total expenses			59,766				37,748				150,856				94,590
Income before income taxes		$	7,110			$	7,217			$	18,614			$	20,753
		Three Months Ended March 31,								Nine Months Ended March 31,
Real Estate and Corporate		2006				2005				2006				2005
		(in thousands)
Revenues:
Gains on sales of foreclosed real estate		$	2,817			$	—			$	3,638			$	755
Investment income			375				430				699				924
Total revenues			3,192				430				4,337				1,679
Expenses:
Operating expenses			742				715				1,964				1,983
Stock-based compensation			72				84				418				236
Interest expense			457				69				457				208
Total expenses			1,271				868				2,839				2,427
Income (loss) before income taxes		$	1,921			$	(438	)		$	1,498			$	(748	)

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

	•		premiums earned (which includes policy and renewal fees) from (i) sales of policies issued by our insurance company subsidiaries, net of the portion of those premiums that have been ceded to reinsurers, and (ii) the sales of policies issued by our managing general agency (“MGA”) subsidiaries that are assumed 100% by our insurance company subsidiaries through quota-share reinsurance;
	•		fee income, which includes installment billing fees on policies written as well as fees for other ancillary services (principally a motor club product);
	•		a transaction service fee for servicing the run-off business previously written by the Chicago agencies whose business we acquired (for the period from January 12, 2006 through December 31, 2006);
	•		commission income paid by our reinsurer to us for ceded premiums (ceasing with the September 1, 2004 non-renewal of our quota-share reinsurance); and
	•		investment income earned on the invested assets of the insurance company subsidiaries.