The Thugs of Asset Acceptance

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


     We have been purchasing and collecting defaulted or charged-off accounts receivable portfolios from consumer credit originators since the formation of our predecessor company in 1962.

 Charged-off receivables are the unpaid obligations of individuals to credit originators, such as credit card issuers, consumer finance companies, healthcare providers, retail merchants, telecommunications and utility providers.

Since these receivables are delinquent or past due, we are able to purchase them at a substantial discount.

We purchase and collect charged-off consumer receivable portfolios for our own account as we believe this affords us the best opportunity to use long-term strategies to maximize our profits.

SL: So the mutants admit that they are not collecting to recover debt owed but they are
operate to maximize theri profit.

Debt and profit are mutually excursive!


Trying to recover what's legally owed vs. how much more can be  extorted for profit as different as
a chicken and ostrich.

     The prices we paid for charged-off accounts receivable portfolios (paper) had steadily increased from 2002 through mid 2007.

SL: No shit, mutants, that means extortion is getting harder nowadays.

During the latter half of 2007, the prices we paid for comparable paper began to decline. This decline continued into the first quarter of 2008, but prices remain at elevated levels compared to historical low prices that existed from 2000 to 2002.

We believe the primary reason for the continued decline in pricing is largely a result of the liquidity crisis and the resulting expectation of a decline in the consumers’ ability to repay their current obligations as well as their past due debts.

Debt buyers cannot continue to pay the same high prices if consumers ability to pay is reduced. The liquidity crisis stems from the decline of housing values and the related increase in mortgage defaults. In addition, we believe that some competitors are experiencing their own liquidity crises as their ability to fund portfolio purchases has been reduced when compared to much of the time since our IPO in 2004. We believe that increases in charge off rates being experienced by major credit card issuers is leading to an increase in supply of receivables available for sale.
     During the three months ended March 31, 2008, we invested $22.3 million (net of buybacks) in charged-off consumer receivable portfolios, with an aggregate face value of $548.5 million, or 4.07% of face value. In the three months ended March 31, 2007, we invested $36.3 million (net of buybacks through March 31, 2008) in paper, with an aggregate face amount of $765.1 million, or 4.74% of face value. Our debt purchasing metrics (dollars invested, face amount, average purchase price, types of paper and sources of paper) may vary significantly from quarter to quarter.
     Net income for the three months ended March 31, 2008 was $6.8 million, a decline of 31.2% from $9.9 million for the three months ended March 31, 2007. Contributing to our decline in net income was higher amortization of purchased receivables in determining purchased receivable revenues and increased interest expense we incurred subsequent to the recapitalization transaction completed in July 2007. Cash collections increased by $4.4 million or 4.6% to $100.3 million for the three months ended March 31, 2008 compared to $95.9 million for the three months ended March 31, 2007. Despite the $4.4 million increase in cash collections, purchased receivable revenues declined by $3.1 million because amortization increased by $7.5 million. Amortization of purchased receivables, the difference between cash collections and purchased receivable revenues, increased to 36.4% of cash collections for the three months ended March 31, 2008 versus 30.3% in the three months ended March 31, 2007. The increased purchased receivables amortization rate is a direct result of the elevating pricing environment that we have experienced over the last several years in addition to placing the first quarter of 2005 aggregate and all healthcare portfolios on the cost recovery method. As prices have risen, our expected multiple of purchase price has come down. The lower multiple of purchase price expected to be collected, generally results in a lower IRR to be assigned for revenue recognition purposes. When lower yields are assigned, a larger proportion of our cash collections are treated as purchased receivable amortization instead of purchase receivable revenues. Interest expense increased by $3.0 million in the three months ended March 31, 2008 when compared to the three months ended March 31, 2007. Average borrowings on our Amended New Credit Facilities in 2008 were $173.5 million for the three months ended March 31, 2008, but only $8.0 million for the three months ended March 31, 2007. The increased borrowings are primarily the result of the $150.0 million borrowed to fund the return of capital to shareholders in June and July of 2007. Secondarily, we also have borrowed to fund our purchase of paper since late 2006. As a result of these two factors, interest expense increased by $3.0 million to $3.3 million in the three months ended March 31, 2008 compared to $0.3 million in the three months ended March 31, 2007.
     Total operating expenses were $50.1 million for the three months ended March 31, 2008 a decrease of $1.2 million from $51.3 million in the three months ended March 31, 2007. As a percentage of cash collections, operating expenses were 50.0% and 53.4% for the three months ended March 31, 2008 and 2007, respectively. Salaries and
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benefits, collections expense and occupancy costs declined, compared to the three months ended March 31, 2007, by $0.5 million, $1.0 million and $0.4 million, respectively. Administrative expenses increased by $0.5 million to $2.7 million in the three months ended March 31, 2008 compared to $2.2 million in the three months ended March 31, 2007. Other operating expenses, including depreciation and amortization, restructuring charges and impairment of intangible assets increased by $0.2 million in the three months ended March 31, 2008 compared to March 31, 2007. The reduced salaries and benefits costs reflect an increasing portion of our cash collections coming from outside attorneys and agencies. Our collections from third parties relationships (attorneys and collection agencies) have increased to 28.9% of total cash collections for the three months ended March 31, 2008 from 23.9% for the three months ended March 31, 2007. Total forwarding fees paid on cash collections from these third party relationships have increased to $8.4 million from $6.6 million in the three months ended March 31, 2008 versus the three months ended March 31, 2007. The remaining expenses included in collections expense declined by $2.8 million during the same period. The $2.8 million decline in the three months ended March 31, 2008 primarily reflected reduced mailing, data provider and legal costs. These savings were realized from a combination of reduced in house collections, better expense management and the decision to temporarily defer some legal expenses as we enhanced our predictive modeling capabilities and refined our ability to forecast costs and resulting collections in the legal collection channel. Occupancy expenses declined by $0.4 million in the three months ended March 31, 2008 versus the three months ended March 31, 2007 resulting primarily from the consolidation of two call centers during 2007.
     We partially adopted SFAS No. 157 as of January 1, 2008. According to FASB Staff Position No. FAS 157-2, the application of SFAS 157 to certain non-financial assets and liabilities is deferred to fiscal years beginning after November 15, 2008. Our goodwill and other intangible assets are measured at fair value on a recurring basis for impairment assessment. The deferral of SFAS 157 applies to these items. Adoption of SFAS 157 did not have a material impact on our consolidated statements of financial position, income or cash flows. We have chosen not to adopt SFAS No. 159, “Fair Value Option”.
Forward-Looking Statements
     This report contains forward-looking statements that involve risks and uncertainties and that are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements about future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “potential” or “continue”, the negative of these terms or other comparable terminology. These statements involve a number of risks and uncertainties. Actual events or results may differ materially from any forward-looking statement as a result of various factors, including those we discuss in our annual report on Form 10-K for the year ended December 31, 2007 in the section titled “Risk Factors” and elsewhere in this report.
     Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations. Factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include the following:
   •     our ability to purchase charged-off receivable portfolios on acceptable terms and in sufficient amounts; 
   
   •     our ability to recover sufficient amounts on our charged-off receivable portfolios; 
   
   •     our ability to hire and retain qualified personnel; 
   
   •     a decrease in collections if bankruptcy filings increase or if bankruptcy laws or other debt collection laws change; 
   
   •     a decrease in collections as a result of negative attention or news regarding the debt collection industry and debtor’s willingness to pay the debt we acquire; 

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   •     our ability to make reasonable estimates of the timing and amount of future cash receipts and values and assumptions underlying the calculation of the net impairment charges for purposes of recording purchased receivable revenues in accordance with Accounting Standards Executive Committee Statement of Position 03-3 as well as the Accounting Standards Executive Committee Practice Bulletin 6; 
   
   •     our ability to acquire and to collect on charged-off receivable portfolios in industries in which we have little or no experience; 
   
   •     our ability to maintain existing, and secure additional financing on acceptable terms; 
   
   •     the loss of any of our executive officers or other key personnel; 

SL: In Iraq, by any chance?

   
   •     the costs, uncertainties and other effects of legal and administrative proceedings; 
   
   •     our ability to effectively manage excess capacity, reduce workforce or close remote call center locations; 
   
   •     the temporary or permanent loss of our computer or telecommunications systems, as well as our ability to respond to changes in technology and increased competition; 
   
   •     changes in our overall performance based upon significant macroeconomic conditions; 
   
   •     changes in interest rates could adversely affect earnings or cash flows; 
   
   •     our ability to substantiate our application of tax rules against examinations and challenges made by tax authorities; and 
   
   •     other unanticipated events and conditions that may hinder our ability to compete. 

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Results of Operations
     The following table sets forth selected consolidated statements of income data expressed as a percentage of total revenues and as a percentage of cash collections for the periods indicated.
                                                   
      Percent of Total Revenues     Percent of Cash Collections 
      Three Months Ended March 31,     Three Months Ended March 31, 
      2008     2007     2008     2007 
Revenues                                                 
Purchased receivable revenues, net        99.0  %        99.2  %        63.6  %        69.7  % 
Gain on sale of purchased receivables        0.3           —           0.1           —     
Other revenue, net        0.7           0.8           0.5           0.5     
                                                   
Total revenues        100.0           100.0           64.2           70.2     
                                                   
Expenses                                                 
Salaries and benefits        34.1           33.3           21.9           23.4     
Collections expense        34.3           34.3           22.0           24.1     
Occupancy        3.0           3.5           1.9           2.4     
Administrative        4.1           3.3           2.7           2.3     
Restructuring charges        —           0.2           —           0.1     
Depreciation and amortization        1.6           1.6           1.0           1.1     
Impairment of intangible assets        0.7           —           0.5           —     
(Gain) loss on disposal of equipment        (0.0  )        (0.0  )        (0.0  )        (0.0  ) 
                                                   
Total operating expenses        77.8           76.2           50.0           53.4     
                                                   
Income from operations        22.2           23.8           14.2           16.8     
Other income (expense)                                                 
Interest income        0.0           0.0           0.0           0.0     
Interest expense        (5.2  )        (0.4  )        (3.3  )        (0.3  ) 
Other        0.0           0.0           0.0           0.0     
                                                   
Income before income taxes        17.0           23.4           10.9           16.5     
Income taxes        6.5           8.8           4.1           6.2     
                                                   
Net income        10.5  %        14.6  %        6.8  %        10.3  % 
                                                   

      Three Months Ended March 31, 2008 Compared To Three Months Ended March 31, 2007
      Revenue
     Total revenues were $64.4 million for the three months ended March 31, 2008, a decrease of $2.9 million, or 4.4%, from total revenues of $67.3 million for the three months ended March 31, 2007. Purchased receivable revenues were $63.7 million for the three months ended March 31, 2008, a decrease of $3.1 million, or 4.6%, from the three months ended March 31, 2007 amount of $66.8 million. Purchased receivable revenues reflect an amortization rate, or the difference between cash collections and revenue, of 36.4%, an increase of 6.1%, from the amortization rate of 30.3% for the three months ended March 31, 2007. The increased amortization rate is primarily due to lower average internal rates of return assigned to recent years’ purchases as well as placing the first quarter of 2005 aggregate and all healthcare portfolios on the cost recovery method. Purchased receivable revenues reflect net impairments recognized during the three months ended March 31, 2008 and 2007 of $0.4 million and $4.5 million, respectively. Cash collections on charged-off consumer receivables increased 4.6% to $100.3 million for the three months ended March 31, 2008 from $95.9 million for the same period in 2007. Cash collections for the three months ended March 31, 2008 and 2007 include collections from fully amortized portfolios of $22.3 million and $18.5 million, respectively, of which 100% were reported as revenue.
     During the three months ended March 31, 2008, we acquired charged-off consumer receivable portfolios with an aggregate face value of $548.5 million at a cost of $22.3 million, or 4.07% of face value, net of buybacks. Included in these purchase totals were 35 portfolios with an aggregate face value of $206.8 million at a cost of $11.1 million, or 5.35% of face value, which were acquired through 11 forward flow contracts. Revenues on portfolios purchased from our top three sellers during vintage years 1997 through 2008 were $17.8 million and $18.5 million during the three months ended March 31, 2008 and 2007, respectively, with the same sellers included in the top three in both three-month periods. During the three months ended March 31, 2007, we acquired charged-off consumer receivable
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portfolios with an aggregate face value of $765.1 million at a cost of $36.3 million, or 4.74% of face value (adjusted for buybacks through March 31, 2008). Included in these purchase totals were 15 portfolios with an aggregated face value of $55.5 million at a cost of $2.7 million, or 4.80% of face value (adjusted for buybacks through March 31, 2008), which were acquired through five forward flow contracts. From period to period we may buy charged-off receivables of varying age, types and cost. As a result, the cost of our purchases, as a percent of face value, may fluctuate from one period to the next.

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      Operating Expenses
     Total operating expenses were $50.1 million for the three months ended March 31, 2008, a decrease of $1.2 million, or 2.3%, compared to total operating expenses of $51.3 million for the three months ended March 31, 2007. Total operating expenses were 50.0% of cash collections for the three months ended March 31, 2008, compared with 53.4% for the same period in 2007. The decrease as a percent of cash collections was due to decreases in collections expense, salaries and benefits and occupancy, and was partially offset by an increase in administrative expense. Operating expenses are traditionally measured in relation to revenues. However, we measure operating expenses in relation to cash collections. We believe this is appropriate because of varying amortization rates, which is the difference between cash collections and revenues recognized, from period to period, due to seasonality of collections and other factors that can distort the analysis of operating expenses when measured against revenues. Additionally, we believe that the majority of our operating expenses are variable in relation to cash collections.
      Salaries and Benefits. Salaries and benefits expense were $21.9 million for the three months ended March 31, 2008, a decrease of $0.5 million, or 2.3%, compared to salaries and benefits expense of $22.4 million for the three months ended March 31, 2007. Salaries and benefits expense were 21.9% of cash collections for the three months ended March 31, 2008, compared with 23.4% for the same period in 2007. Salaries and benefits expense decreased primarily because an increasing portion of our cash collections came from outside attorneys and agencies for the three months ended March 31, 2008 compared to the same period in 2007. The decrease was partially offset by an increase in equity compensation expense.
     Since going public in 2004, we had granted equity compensation only to certain key associates and non-associate directors. During 2007, we began issuing equity awards to a broader group of management associates and expanded the use of performance conditions relating to some equity grants for senior executives. We recognized $0.2 million and $0.1 million in salary and benefit expenses for the quarter ended March 31, 2008 and 2007, respectively, as it related to stock-based compensation awards granted to associates. As of March 31, 2008, there was $4.0 million of total unrecognized compensation expense related to nonvested awards of which $1.2 million was expected to vest over a weighted average period of 3.16 years. As of March 31, 2007, there was $0.7 million total unrecognized compensation expense related to nonvested awards which was expected to vest over a weighted average period of 2.90 years.


      Collections Expense. Collections expense was $22.1 million for the three months ended March 31, 2008, a decrease of $1.0 million, or 4.2%, compared to collections expense of $23.1 million for the three months ended March 31, 2007. Collections expense was 22.0% of cash collections during the three months ended March 31, 2008 compared with 24.1% for the same period in 2007. The collections expense decreased primarily due to a $2.8 million decline in mailing, data provider and legal costs. These savings were realized from a combination of reduced in-house collections, better expense management and the decision to temporarily defer some legal expenses as we enhanced our predictive modeling capabilities and refined our ability to forecast costs and resulting collections in the legal collection channel. This decrease was partially offset by increased forwarding fees of $1.8 million paid on cash collections from third parties relationships (attorneys and collection agencies) as a result of an increase in our collections from third parties relationships to 28.9% of total cash collections for the three months ended March 31, 2008, from 23.9% for the three months ended March 31, 2007.
      Occupancy. Occupancy expense was $1.9 million for the three months ended March 31, 2008, a decrease of $0.4 million, or 17.6%, compared to occupancy expense of $2.3 million for the three months ended March 31, 2007. Occupancy expense was 1.9% of cash collections for the three months ended March 31, 2008 compared with 2.4% for the same period in 2007. Occupancy expense decreased primarily due to the consolidation of two call centers during 2007.
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      Administrative. Administrative expenses increased to $2.7 million for the three months ended March 31, 2008, from $2.2 million for the three months ended March 31, 2007, reflecting a $0.5 million, or 20.5%, increase. Administrative expenses were 2.7% of cash collections during the three months ended March 31, 2008 compared with 2.3% for the same period in 2007. Administrative expenses increased as a percentage of cash collections primarily due to additional fees incurred for outside advisors and consultants.
      Restructuring Charges. There were no restructuring charges for the three months ended March 31, 2008. Pre-tax restructuring charges were $0.1 million for the three months ended March 31, 2007 as a result of our plans to close our White Marsh, Maryland and Wixom, Michigan offices during 2007. Charges were primarily related to associate one-time termination benefits and changes to the service life of certain long-lived assets.
      Depreciation and Amortization. Depreciation and amortization expense was $1.0 million for the three months ended March 31, 2008, a decrease of $0.1 million or 5.6% compared to depreciation and amortization expense of $1.1 million for the three months ended March 31, 2007. Depreciation and amortization expense was 1.0% of cash collections during the three months ended March 31, 2008 compared with 1.1% for the same period in 2007.
      Impairment Intangible Assets. Impairment of intangible assets was $0.4 million for the three months ended March 31, 2008 as we decided to discontinue the medical contingent collection business. As a result, we recognized an impairment charge of the net carrying balance of intangible assets for customer contracts and relationships associated with the contingent collection business.
      Interest Income. Interest income was $23,251 for the three months ended March 31, 2008, an increase of $7,524 compared to $15,727 for the three months ended March 31, 2007.
      Interest Expense. Interest expense was $3.3 million for the three months ended March 31, 2008, an increase of $3.0 million compared to interest expense of $0.3 million for the three months ended March 31, 2007. Interest expense was 3.3% of cash collections during the three months ended March 31, 2008 compared with 0.3% for the same period in 2007. The increase in interest expense was due to increased average borrowings during the three months ended March 31, 2008 compared to the same period in 2007. Average borrowings during the quarter ended March 31, 2008 reflect the new $150.0 million Term Loan Facility that was funded on June 12, 2007 to finance our recapitalization and special one-time cash dividend. Interest expense also includes the amortization of capitalized bank fees of $129,117 and $56,944 for the three months ended March 31, 2008 and 2007, respectively.
      Income Taxes. Income tax expense of $4.2 million reflects a federal tax rate of 35.2% and a state tax rate of 2.9% (net of federal tax benefit) for the three months ended March 31, 2008. For the three months ended March 31, 2007, income tax expense was $5.9 million and reflected a federal tax rate of 35.2% and state tax rate of 2.3% (net of federal tax benefit). The 0.6% increase in the state rate was due to changing apportionment percentages among the various states. Income tax expense decreased $1.7 million, or 28.8% from income tax expense of $5.9 million for the three months ended March 31, 2007. The decrease in tax expense was due to a decrease in pre-tax financial statement income, which was $10.9 million for the three months ended March 31, 2008, compared to $15.8 million for the same period in 2007.
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Supplemental Performance Data
Portfolio Performance
     The following table summarizes our historical portfolio purchase price and cash collections on an annual vintage basis from January 1, 2002 through March 31, 2008.
                                                                           
                                                                  Total Estimated     
                                          Estimated        Total        Collections as a     
      Number of        Purchase                    Remaining        Estimated        Percentage of     
Purchase Period     Portfolios        Price (1)        Cash Collections        Collections (2,3,4)        Collections        Purchase Price     
      (dollars in thousands)     
2002        94        $  72,256        $  335,378        $  7,598        $  342,976           475  % 
2003        76           87,152           374,545           65,787           440,332           505     
2004        106           86,552           212,079           81,418           293,497           339     
2005        104           100,769           145,162           75,919           221,081           219     
2006 (4)        154           142,269           159,168           251,726           410,894           289     
2007        158           170,578           63,610           306,921           370,531           217     
2008 (5)        47           22,325           1,350           41,049           42,399           190     
                                                           
Total        739        $  681,901        $  1,291,292        $  830,418        $  2,121,710           311  % 
                                                           

 
   
(1)     Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase price refunded by a seller due to the return of non-compliant accounts (also referred to as buybacks) less the purchase price for accounts that were sold at the time of purchase to another debt purchaser. 
   
(2)     Estimated remaining collections are based on historical cash collections. Please refer to Forward-Looking Statements on page 20 and Critical Accounting Policies on page 33 for further information regarding these estimates. 
   
(3)     Estimated remaining collections refers to the sum of all future projected cash collections on our owned portfolios using up to an 84 month collection forecast from the date of purchase. 
   
(4)     Includes 62 portfolios from the acquisition of PARC on April 28, 2006 that were allocated a purchase price value of $8.3 million. 
   
(5)     Includes only three months of activity through March 31, 2008. 

     The following table summarizes the remaining unamortized balances of our purchased receivables portfolios by year of purchase as of March 31, 2008.
                                                   
                              Unamortized        Unamortized     
      Unamortized                    Balance as a        Balance as a     
      Balance as of        Purchase        Percentage of        Percentage of     
Purchase Period     March 31, 2008        Price (1)        Purchase Price        Total     
      (dollars in thousands)     
2002     $  1,307        $  72,256           1.8  %        0.4  % 
2003        9,217           87,152           10.6           2.8     
2004        29,075           86,552           33.6           8.8     
2005        45,660           100,769           45.3           13.8     
2006 (2)        86,547           142,269           60.8           26.2     
2007        137,031           170,578           80.3           41.5     
2008 (3)        21,290           22,325           95.4           6.5     
                                         
Total     $  330,127        $  681,901           48.4  %        100.0  % 
                                         

 
   
(1)     Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase price for accounts that were sold at the time of purchase to another debt purchaser. 
   
(2)     Includes $8.3 million of portfolios acquired from the acquisition of PARC on April 28, 2006. 
   
(3)     Includes only three months of activity through March 31, 2008. 

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Table of Contents

     The following table summarizes the purchased receivable revenues and amortization rates by year of purchase for the three months ended March 31, 2008 and 2007, respectively.
                                                                           
      Three months ended March 31, 2008     
Year of                             Amortization        Monthly        Net        Zero Basis     
Purchase     Collections        Revenue        Rate        Yield (1)        Impairments        Collections     
2002 and prior     $  14,575,197        $  14,187,683           2.7  %        N/M  %     $  (550,000  )     $  13,078,350     
2003        11,897,021           10,145,297           14.7           31.89           (481,050  )        6,196,948     
2004        9,594,231           6,579,328           31.4           7.11           1,050,347           931,339     
2005        10,611,978           5,759,834           45.7           3.91           92,986           36,398     
2006        24,887,906           15,533,913           37.6           5.56           92,000           1,964,255     
2007        27,347,947           11,201,973           59.0           2.50           180,000           44,810     
2008        1,350,001           314,660           76.7           1.38           —           —     
                                                               
Totals     $  100,264,281        $  63,722,688           36.4           6.20        $  384,283        $  22,252,100     
                                                               

                                                                           
      Three months ended March 31, 2007     
Year of                             Amortization        Monthly        Net        Zero Basis     
Purchase     Collections        Revenue        Rate        Yield (1)        Impairments        Collections     
2001 and prior     $  10,330,950        $  10,244,254           0.8  %        N/M  %     $  —        $  10,166,762     
2002        12,016,760           7,943,214           33.9           25.36           216,800           4,554,522     
2003        16,780,060           11,649,217           30.6           14.11           763,300           2,676,504     
2004        14,034,358           9,179,365           34.6           6.31           1,931,000           768,617     
2005        14,740,661           10,436,030           29.2           4.57           934,000           10,536     
2006        26,513,053           16,380,649           38.2           4.24           628,000           285,541     
2007        1,437,508           949,305           34.0           1.55           —           —     
                                                               
Totals     $  95,853,350        $  66,782,034           30.3           7.14        $  4,473,100        $  18,462,482     
                                                               

 
   
(1)     The monthly yield is the weighted-average yield determined by dividing purchased receivable revenues recognized in the period by the average of the beginning monthly carrying values of the purchased receivables for the period presented. 

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Table of Contents

Account Representative Productivity
     We measure traditional call center account representative productivity by two major categories, those with less than one year of experience and those with one or more years of experience. The following tables display our results.
Account Representatives by Experience
                                                   
      Three months ended     Year ended 
      March 31,     December 31, 
      2008     2007 (3)     2007 (3)     2006 (4) 
Number of account representatives:                                                 
One year or more (1)        495           623           558           573     
Less than one year (2)        406           298           356           399     
                                                   
Total account representatives        901           921           914           972     
                                                   

 
   
(1)     Based on number of average traditional call center Full Time Equivalent (“FTE”) account representatives and supervisors with one or more years of service. 
   
(2)     Based on number of average traditional call center FTE account representatives and supervisors with less than one year of service, including new associates in training. 
   
(3)     The number of account representatives have been reclassified to make the 2007 disclosures comparable to the 2008 disclosures. 
   
(4)     Excludes PARC’s FTE account representatives for periods prior to January 1, 2007. 

Collection Averages by Experience (1)
                                                   
      Three months ended     Year ended 
      March 31,     December 31, 
      2008     2007 (2)     2007 (2)     2006 (3) 
Collection averages:                                                 
Overall average        53,908           53,629           193,000           164,932     

 
   
(1)     Overall collection averages are not available by account representatives. 
   
(2)     The overall collection average has been reclassified to make the 2007 disclosure comparable to the 2008 disclosure. 
   
(3)     Excludes PARC’s FTE account representatives for periods prior to January 1, 2007. 

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Table of Contents

      Cash Collections
     The following tables provide further detailed vintage collection analysis on an annual and a cumulative basis.
Historical Collections (1)
                                                                                                                                                   
                                                                                                                                          Three     
                                                                                                                                          Months     
                                                                                                                                          Ended     
Purchase     Purchase        Year Ended December 31,        March 31,     
Period     Price (3)        1998        1999        2000        2001        2002        2003        2004        2005        2006        2007        2008     
                                                                  (dollars in thousands)                                                     
Pre-1998                 $  10,603        $  10,066        $  8,734        $  6,170        $  4,544        $  3,390        $  2,808        $  2,612        $  2,008        $  1,586        $  321     
1998     $  16,411           4,835           15,220           15,045           12,962           11,021           7,987           5,583           4,653           3,352           2,619           580     
1999        12,924           —           3,761           11,331           10,862           9,750           8,278           6,675           5,022           3,935           2,949           607     
2000        20,592           —           —           8,896           23,444           22,559           20,318           17,196           14,062           10,603           7,410           1,608     
2001        43,030           —           —           —           17,630           50,327           50,967           45,713           39,865           30,472           21,714           4,119     
2002        72,256           —           —           —           —           22,339           70,813           72,024           67,649           55,373           39,839           7,340     
2003        87,152           —           —           —           —           —           36,067           94,564           94,234           79,423           58,359           11,897     
2004        86,552           —           —           —           —           —           —           23,365           68,354           62,673           48,093           9,594     
2005        100,769           —           —           —           —           —           —           —           23,459           60,280           50,811           10,612     
2006 (2)        142,269           —           —           —           —           —           —           —           —           32,751           101,529           24,888     
2007        170,578           —           —           —           —           —           —           —           —           —           36,269           27,348     
2008        22,325           —           —           —           —           —           —           —           —           —           —           1,350     
                                                                                                                 
Total                 $  15,438        $  29,047        $  44,006        $  71,068        $  120,540        $  197,820        $  267,928        $  319,910        $  340,870        $  371,178        $  100,264     
                                                                                                                 

Cumulative Collections (1)
                                                                                                                                                   
                                                                                                                                          Total 
                                                                                                                                          Through 
Purchase     Purchase     Total Through December 31,     March 31, 
Period     Price (3)     1998     1999     2000     2001     2002     2003     2004     2005     2006     2007     2008 
                                                      (dollars in thousands)                                                             
1998     $  16,411        $  4,835        $  20,055        $  35,100        $  48,062        $  59,083        $  67,070        $  72,653        $  77,306        $  80,658        $  83,277        $  83,857     
1999        12,924           —           3,761           15,092           25,954           35,704           43,982           50,657           55,679           59,614           62,563           63,170     
2000        20,592           —           —           8,896           32,340           54,899           75,217           92,413           106,475           117,078           124,488           126,096     
2001        43,030           —           —           —           17,630           67,957           118,924           164,637           204,502           234,974           256,688           260,807     
2002        72,256           —           —           —           —           22,339           93,152           165,176           232,825           288,198           328,037           335,377     
2003        87,152           —           —           —           —           —           36,067           130,631           224,865           304,288           362,647           374,544     
2004        86,552           —           —           —           —           —           —           23,365           91,719           154,392           202,485           212,079     
2005        100,769           —           —           —           —           —           —           —           23,459           83,739           134,550           145,162     
2006 (2)        142,269           —           —           —           —           —           —           —           —           32,751           134,280           159,168     
2007        170,578           —           —           —           —           —           —           —           —           —           36,269           63,617     
2008        22,325           —           —           —           —           —           —           —           —           —           —           1,350     

Cumulative Collections as Percentage of Purchase Price (1)
                                                                                                                                                   
                                                                                                                                          Total 
                                                                                                                                          Through 
Purchase     Purchase     Total Through December 31,     March 31, 
Period     Price (3)     1998     1999     2000     2001     2002     2003     2004     2005     2006     2007     2008 
1998     $  16,411           29  %        122  %        214  %        293  %        360  %        409  %        443  %        471  %        491  %        507  %        511  % 
1999        12,924           —           29           117           201           276           340           392           431           461           484           489     
2000        20,592           —           —           43           157           267           365           449           517           569           605           612     
2001        43,030           —           —           —           41           158           276           383           475           546           597           606     
2002        72,256           —           —           —           —           31           129           229           322           399           454           464     
2003        87,152           —           —           —           —           —           41           150           258           349           416           430     
2004        86,552           —           —           —           —           —           —           27           106           178           234           245     
2005        100,769           —           —           —           —           —           —           —           23           83           134           144     
2006 (2)        142,269           —           —           —           —           —           —           —           —           23           94           112     
2007        170,578           —           —           —           —           —           —           —           —           —           21           37     
2008        22,325           —           —           —           —           —           —           —           —           —           —           6     

 
 

[Sharing Lights]

 
(1)     Does not include proceeds from sales of any receivables.
 
   
(2)     Includes $8.3 million of portfolios acquired from the acquisition of PARC on April 28, 2006. 
   
(3)     Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase price for accounts that were sold at the time of purchase to another debt purchaser. 

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Table of Contents

Seasonality
     Our business depends on our ability to collect on our purchased portfolios of charged-off consumer receivables. Collections within portfolios tend to be seasonally higher in the first and second quarters of the year due to consumers’ receipt of tax refunds and other factors. Conversely, collections within portfolios tend to be lower in the third and fourth quarters of the year due to consumers’ spending in connection with summer vacations, the holiday season and other factors. However, revenue recognized is relatively level due to the application of the provisions prescribed by SOP 03-3. In addition, our operating results may be affected to a lesser extent by the timing of purchases of charged-off consumer receivables due to the initial costs associated with purchasing and integrating these receivables into our system. Consequently, income and margins may fluctuate from quarter to quarter.
     Below is a table that illustrates our quarterly cash collections from January 1, 2004 through March 31, 2008.
Cash Collections
                                                               
Quarter     2008        2007        2006        2005        2004     
First     $  100,264,281        $  95,853,350        $  89,389,858        $  80,397,640        $  65,196,055     
Second        —           95,432,021           89,609,982           84,862,856           67,566,031     
Third        —           90,748,442           80,914,791           78,159,364           66,825,822     
Fourth        —           89,144,650           80,955,115           76,490,350           68,339,797     
                                               
Total cash collections     $  100,264,281        $  371,178,463        $  340,869,746        $  319,910,210        $  267,927,705     
                                               

     Below is a table that illustrates the cash collections and percentages by source of our total cash collections:
                                                   
      For the three months ended     
      March 31,     
      2008        2007 (1)     
      $        %        $        %     
Traditional collections     $  47,528,939           47.4  %     $  48,324,060           50.4  % 
Legal collections        38,177,527           38.1           35,875,548           37.4     
Other collections        14,557,815           14.5           11,653,742           12.2     
                                       
Total cash collections     $  100,264,281           100.0  %     $  95,853,350           100.0  % 
                                       

 
   
(1)     The cash collections have been reclassified to make the 2007 disclosures comparable to the 2008 disclosures. 

     The following chart categorizes our purchased receivable portfolios acquired from January 1, 1998 through March 31, 2008 into major asset types, as of March 31, 2008.
                                                   
      Face Value of                                   
      Charged-off                    No. of             
Asset Type     Receivables (2)        %        Accounts        %     
      (in thousands)       
Visa®/MasterCard®/Discover®     $  15,714,433           48.3  %        7,452           25.1  % 
Private Label Credit Cards        4,308,718           13.2           5,976           20.1     
Telecommunications/Utility/Gas        2,946,363           9.0           7,699           26.0     
Health Club        1,737,654           5.3           1,662           5.6     
Auto Deficiency        1,355,983           4.2           241           0.8     
Installment Loans        1,198,449           3.7           349           1.2     
Wireless Telecommunications        719,229           2.2           1,727           5.8     
Other (1)        4,577,802           14.1           4,566           15.4     
                                       
Total     $  32,558,631           100.0  %        29,672           100.0  % 
                                       

 
   
(1)     “Other” includes charged-off receivables of several debt types, including student loan, mobile home deficiency and retail mail order. This excludes the purchase of a single portfolio in June 2002 with a face value of $1.2 billion at a cost of $1.2 million (or 0.1% of face value) and consisting of approximately 3.8 million accounts. 
   
(2)     Face value of charged-off receivables represents the cumulative amount of purchases net of buybacks. The amount is not adjusted for payments received, settlements or additional accrued interest on any accounts in such portfolios after the date we purchased the applicable portfolio. 

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    The age of a charged-off consumer receivables portfolio, or the time since an account has been charged-off, is an important factor in determining the price at which we will offer to purchase a receivables portfolio.


 Generally, there is an inverse relationship between the age of a portfolio and the price at which we will purchase the portfolio.


This relationship is due to the fact that older receivables are typically more difficult to collect. The accounts receivable management industry places receivables into the following categories depending on the number of collection agencies that have previously attempted to collect on the receivables and the age of the receivables:


   •     Fresh accounts are typically 120 to 270 days past due, have been charged-off by the credit originator and are either being sold prior to any post charged-off collection activity or are placed with a third party collector for the first time. These accounts typically sell for the highest purchase price. 
   
   •     Primary accounts are typically 270 to 360 days past due, have been previously placed with one third party collector and typically receive a lower purchase price. 
   
   •     Secondary and tertiary accounts are typically more than 360 days past due, have been placed with two or three third party collectors and receive even lower purchase prices. 

     We specialize in the primary, secondary and tertiary markets, but we will purchase accounts at any point in the delinquency cycle.

SL: Only voulchers eat any garbage.

We deploy our capital within these markets based upon the relative values of the available debt portfolios.
     The following chart categorizes our purchased receivable portfolios acquired from January 1, 1998 through March 31, 2008 into major account types as of March 31, 2008.
                                                   
      Face Value of                                   
      Charged-off                    No. of             
Account Type     Receivables (2)        %        Accounts        %     
      (in thousands)                                         
Fresh     $  2,038,752           6.3  %        1,032           3.5  % 
Primary        4,653,946           14.3           4,512           15.2     
Secondary        6,509,166           20.0           6,548           22.1     
Tertiary (1)        14,953,035           45.9           14,449           48.7     
Other        4,403,732           13.5           3,131           10.5     
                                       
Total     $  32,558,631           100.0  %        29,672           100.0  % 
                                       

 
   
(1)     Excluding the purchase of a single portfolio in June 2002 with a face value of $1.2 billion at a cost of $1.2 million (or 0.1% of face value), and consisting of approximately 3.8 million accounts. 
   
(2)     Face value of charged-off receivables represents the cumulative amount of purchases net of buybacks. The amount is not adjusted for payments received, settlements or additional accrued interest on any accounts in such portfolios after the date we purchased the applicable portfolio. 

     We also review the geographic distribution of accounts within a portfolio because collection laws differ from state to state. The following chart illustrates our purchased receivables portfolios acquired from January 1, 1998 through March 31, 2008 based on geographic location of debtor, as of March 31, 2008.
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      Face Value of                                   
      Charged-off                    No. of             
Geographic Location     Receivables (3)(4)        %        Accounts        %     
      (in thousands)                                         
Texas (1)     $  4,812,844           14.8  %        4,687           15.8  % 
California        3,693,681           11.3           3,488           11.8     
Florida (1)        3,314,961           10.2           2,180           7.3     
New York        1,883,753           5.8           1,262           4.2     
Michigan (1)        1,839,621           5.6           2,345           7.9     
Ohio (1)        1,784,065           5.5           2,341           7.9     
Illinois (1)        1,381,923           4.2           1,678           5.7     
Pennsylvania        1,162,211           3.6           928           3.1     
New Jersey (1)        1,031,919           3.2           856           2.9     
North Carolina        962,326           3.0           677           2.3     
Georgia        885,893           2.7           763           2.6     
Arizona (1)        662,069           2.0           564           1.9     
Other (2)        9,143,365           28.1           7,903           26.6     
                                       
Total     $  32,558,631           100.0  %        29,672           100.0  % 
                                       

 
   
(1)     Collection site(s) located in this state. 
   
(2)     Each state included in “Other” represents under 2.0% individually of the face value of total charged-off consumer receivables. 
   
(3)     Face value of charged-off receivables represents the cumulative amount of purchases net of buybacks. The amount is not adjusted for payments received, settlements or additional accrued interest on any accounts in such portfolios after the date we purchased the applicable portfolio. 
   
(4)     Excluding the purchase of a single portfolio in June 2002 with a face value of $1.2 billion at a cost of $1.2 million (or 0.1% of face value) and consisting of approximately 3.8 million accounts. 

Liquidity and Capital Resources
     Historically, our primary sources of cash have been from operations and bank borrowings.


We have traditionally used cash for acquisitions of purchased receivables, repayment of bank borrowings, purchased property and equipment and working capital. During the three months ended March 31, 2008, we had repayments of $27.4 million to reduce our outstanding Revolving Credit Facility and Term Loan Facility balances while having no borrowings against our Revolving Credit Facility or our Term Loan Facility. In addition, we entered into a new agreement with a third party collecting on our behalf. Under this agreement, we will receive a total cash advance of $7.0 million through November 2009. We received the first installment of $1.5 million in the quarter ended March 31, 2008, and incurred approximately $0.1 million in court cost expenses, which were offset with a portion of the cash advance. A liability equal to the unused cash advance is included in accrued liabilities on the consolidated statements of financial position. The agreement contains performance conditions for both parties and the Company would be required to refund a portion of the cash advance in certain situations.


      Borrowings
     We maintain a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders named therein, that originated on June 5, 2007 and was amended on March 10, 2008.


Under the terms of the Amended New Credit Agreement, we have a five year $100 million Revolving Credit Facility and a six year $150 million Term Loan Facility. The Amended New Credit Facilities bear interest at prime or up to 125 basis points over prime depending upon our liquidity, as defined in the Amended New Credit Agreement. Alternately, at our discretion, we may borrow by entering into one, two, three, six or twelve-month LIBOR contracts at rates between 150 to 250 basis points over the respective LIBOR rates, depending on our liquidity. Our Revolving Credit Facility includes an accordion loan feature that allows us to request a $25.0 million increase as well as sublimits for $10.0 million of letters of credit and for $10.0 million of swingline loans. The Amended New Credit Agreement is secured by a first priority lien on all of our assets. The Amended New Credit Agreement also contains certain covenants and restrictions that we must comply with, which, as of March 31, 2008 were:
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   •     Leverage Ratio (as defined) cannot exceed (i) 1.25 to 1.0 at any time on or before June 29, 2009, (ii) 1.125 to 1.0 at any time on or after June 30, 2009 and on or before December 30, 2010 or (iii) 1.0 to 1.0 at any time thereafter; 
   
   •     Ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth cannot exceed (i) 3.0 to 1.0 at any time on or before September 29, 2008, (ii) 2.75 to 1.0 at any time on or after September 30, 2008 and on or before December 30, 2008, (iii) 2.5 to 1.0 at any time on or after December 31, 2008 and on or before December 30, 2009, (iv) 2.25 to 1.0 at any time on or after December 31, 2009 and on or before December 30, 2010, (v) 2.0 to 1.0 at any time on or after December 31, 2010 and on or before December 30, 2011 or (vi) 1.5 to 1.0 to any time thereafter; and 
   
   •     Consolidated Tangible Net Worth must equal or exceed $80.0 million plus 50% of positive consolidated net income for three consecutive fiscal quarters ending December 31, 2007 and for each fiscal year ending thereafter, such amount to be added as of December 31, 2007 and as of the end of each such fiscal year thereafter. 

     The Amended New Credit Agreement contains a provision that requires us to repay Excess Cash Flow, as defined, to reduce the indebtedness outstanding under our Amended New Credit Agreement. The repayment of our Excess Cash Flow is effective with the issuance of our annual audited consolidated financial statements for fiscal year 2008. The repayment provisions are:
   •     50% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was greater than 1.0 to 1.0 as of the end of such fiscal year; 
   
   •     25% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was less than or equal to 1.0 to 1.0 but greater than 0.875 to 1.0 as of the end of such fiscal year; or 
   
   •     0% if the Leverage Ratio is less than or equal to 0.875 to 1.0 as of the end of such fiscal year. 

     Commitment fees on the unused portion of the Revolving Credit Facility are paid quarterly, in arrears, and are calculated as an amount equal to a margin of 0.25% to 0.50%, depending on our liquidity, on the average amount available on the Revolving Credit Facility.
     The Amended New Credit Agreement requires us to effectively cap, collar or exchange interest rates on a notional amount of at least 25% of the outstanding principal amount of the Term Loan.
     We had $163.9 million principal balance outstanding on our Amended New Credit Facilities at March 31, 2008. We have an interest rate swap agreement that hedges a portion of the interest rate expense on the Term Loan Facility. We believe we are in compliance with all terms of the Amended New Credit Agreement as of March 31, 2008.
      Cash Flows
     For the three months ended March 31, 2008, we invested $20.5 million in purchased receivables, net of buybacks, funded with internal cash flow. Our cash balance has increased from $10.5 million at December 31, 2007 to $12.8 million as of March 31, 2008.
     Our operating activities provided cash of $16.7 million and $20.8 million for the three months ended March 31, 2008 and 2007, respectively. Cash provided by operating activities for the three months ended March 31, 2008 and 2007 was generated primarily from net income earned through cash collections as adjusted for the timing of payments in income taxes payable, accounts payable and accrued liabilities as of March 31, 2008 compared to December 31, 2007.
     Investing activities provided cash of $13.6 million and used cash of $11.6 million for the three months ended March 31, 2008 and 2007, respectively. Cash provided by investing activities was primarily due to cash collections applied to principal, net of acquisitions of purchased receivables, which was partially offset by purchases of property and equipment. Cash used for investing purposes in the first
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quarter of 2007 was primarily due to acquisitions of purchased receivables, net of cash collections applied to principal.
     Financing activities used cash of $28.0 million and $10.7 million for the three months ended March 31, 2008 and 2007, respectively. Cash used by financing activities for the first quarter of 2008 was primarily due to repayments on our Revolving Credit Facility and Term Loan Facility. In addition, cash used by financing activities for the first quarter of 2008 was due to payment of credit facility charges of $0.6 million associated with the amendment of the New Credit Agreement. Furthermore, cash used by financing activities for the first quarter of 2007 was due to the repurchase of 46,604 shares of common stock. The Company exercised its right to buy its shares from former associates at $15.00 per share.
     We believe that cash generated from operations combined with borrowing available under our Amended New Credit Facilities, will be sufficient to fund our operations for the next twelve months, although no assurance can be given in this regard. In the future, if we need additional capital for investment in purchased receivables, working capital or to grow our business or acquire other businesses, we may seek to sell additional equity or debt securities or we may seek to increase the availability under our Revolving Credit Facility.
Future Contractual Cash Obligations
     The following table summarizes our future contractual cash obligations as of March 31, 2008:
                                                                           
      Year Ending December 31,             
      2008(3)        2009        2010        2011        2012        Thereafter     
Capital lease obligations     $  9,186        $  —        $  —        $  —        $  —        $  —     
Operating lease obligations        4,130,351           5,041,677           4,081,043           3,824,311           3,511,471           10,852,626     
Purchase agreement (1)        1,655,783           —           —           —           —           —     
Purchased receivables (2)        —           —           —           —           —           —     
Revolving credit (3)        —           —           —           —           15,000,000           —     
Term loan (4)        1,125,000           1,500,000           1,500,000           1,500,000           1,500,000           141,750,000     
                                                         
Total     $  6,920,320        $  6,541,677        $  5,581,043        $  5,324,311        $  20,011,471        $  152,602,626     
                                                         

 
 

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(1)     In 2007, we signed a new software agreement with BSI eSolutions, LLC and initiated a project to install Cogent, a new collection platform. We have a contractual commitment to purchase $1.7 million in additional software during 2008. In addition, we expect to spend approximately $3.3 million over the next two years to fully implement this software. Costs will be capitalized in accordance with the guidance in SOP 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. This project is funded with cash from operations and borrowings on our Revolving Credit Facility. 
   
(2)     During 2008, we renewed eight forward flow contracts as well as maintained two on-going forward flow contracts that commit us to purchase receivables for a fixed percentage of the face amount of the receivables. Eight forward flow contracts have terms beyond March 31, 2008 with the last contract expiring in December 2008. Eight forward flow contracts have estimated monthly purchases of approximately $3.9 million, depending upon circumstances, and the other two on-going forward flow contracts have estimated monthly purchases of approximately $12,300 over the next twelve months. 
   
(3)     To the extent that a balance is outstanding on our Revolving Credit Facility, it would be due in June 2012 or earlier as defined in the Amended New Credit Agreement. 
   
(4)     To the extent that a balance is outstanding on our Term Loan Facility, it would be due in June 2013. 

Off-Balance Sheet Arrangements
     We currently do not have any off-balance sheet arrangements.
Critical Accounting Policies
     We utilize the interest method of accounting for our purchased receivables because we believe that the amounts and timing of cash collections for our purchased receivables can be reasonably estimated. This belief is predicated on our historical results and our knowledge of the industry. The interest method is prescribed by the Accounting
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Standards Executive Committee Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”).
     We adopted the provisions of SOP 03-3 in January 2005 and apply SOP 03-3 to purchased receivables acquired after December 31, 2004. The provisions of SOP 03-3 that relate to decreases in expected cash flows amend previously followed guidance, the Accounting Standards Executive Committee Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans”, for consistent treatment and apply prospectively to purchased receivables acquired before January 1, 2005. We purchase pools of homogenous accounts receivable and record each pool at its acquisition cost. Pools purchased after 2004 may be aggregated into one or more static pools within each quarter, based on common risk characteristics. Risk characteristics of purchased receivables are assumed to be similar since purchased receivables are usually in the late stages of the post charged-off collection cycle. We therefore aggregate most pools purchased within each quarter. Pools purchased before 2005 may not be aggregated with other pool purchases. Each static pool, either aggregated or non-aggregated, retains its own identity and does not change over the remainder of its life. Each static pool is accounted for as a single unit for recognition of revenue, principal payments and impairments.
     Each static pool of receivables is statistically modeled to determine its projected cash flows based on historical cash collections for pools with similar characteristics. An internal rate of return (“IRR”) is calculated for each static pool of receivables based on the projected cash flows. The IRR is applied to the remaining balance of each static pool of accounts to determine the revenue recognized. Each static pool is analyzed at least quarterly to assess the actual performance compared to the expected performance. To the extent there are differences in actual performance versus expected performance, the IRR is adjusted prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. Effective January 2005, under SOP 03-3, if the revised cash flow estimates are less than the original estimates, the IRR remains unchanged and an impairment is recognized. If cash flow estimates increase subsequent to recording an impairment, reversal of the previously recognized impairment is made prior to any increases to the IRR.
     The cost recovery method prescribed by SOP 03-3 is used when collections on a particular portfolio cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until we have fully collected the cost of the portfolio.
     Application of the interest method of accounting requires the use of estimates, primarily estimated remaining collections, to calculate a projected IRR for each pool. These estimates are primarily based on historical cash collections. If future cash collections are materially different in amount or timing than the remaining collections estimate, earnings could be affected, either positively or negatively. Higher collection amounts or cash collections that occur sooner than projected will have a favorable impact on yields and revenues. Lower collection amounts or cash collections that occur later than projected will have an unfavorable impact and may result in an impairment being recorded.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
     Our exposure to market risk relates to the interest rate risk with our Amended New Credit Facilities. We may periodically enter into interest rate swap agreements to modify the interest rate exposure associated with our outstanding debt. The outstanding borrowings on our Amended New Credit Facilities were $163.9 million and $191.3 million as of March 31, 2008 and December 31, 2007, respectively. In September 2007, we entered into an amortizing interest rate swap agreement whereby, on a quarterly basis, we swap variable rates equal to three-month LIBOR for fixed rates on the notional amount of $125 million. Every year thereafter, on the anniversary of the swap agreement the notional amount will decrease by $25 million. The outstanding unhedged borrowings on our Amended New Credit Facilities were $38.9 million as of March 31, 2008, consisting of $15.0 million outstanding on the Revolving Credit Facility and $23.9 million outstanding on the term loan facility. Interest rates on unhedged borrowings may be based on the Prime rate or LIBOR, at our discretion. Assuming a 200 basis point increase in interest rates, interest expense would have increased approximately $0.3 million on the unhedged borrowings for the three months ended March 31, 2008.
     The hedged borrowings on our Amended New Credit Facilities were $125.0 million at March 31, 2008. For the quarter ended March 31, 2008, the swap was determined to be highly effective in hedging against fluctuations in
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variable interest rates associated with the underlying debt. Interest rates have decreased since we entered into our swap agreement, reducing the fair value and resulting in a liability balance. Additional declines in interest rates will further reduce the fair value, while increasing interest rates will increase the fair value. As of March 31, 2008, the Company does not have any fair value hedges.
     Interest rate fluctuations do not have a material impact on interest income.
Item 4. Controls and Procedures
     As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to cause material information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
     There have been no changes in our internal controls over financial reporting that occurred during our fiscal quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
     In the ordinary course of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using both our in-house attorneys and our network of third party law firms, against consumers and are occasionally countersued by them in such actions. Also, consumers occasionally initiate litigation against us, in which they allege that we have violated a federal or state law in the process of collecting on their account. It is not unusual for us to be named in a class action lawsuit relating to these allegations, with these lawsuits routinely settling for immaterial amounts. We do not believe that these ordinary course matters, individually or in the aggregate, are material to our business or financial condition. However, there can be no assurance that a class action lawsuit would not, if decided against us, have a material and adverse effect on our financial condition.
     We are not a party to any material legal proceedings. However, we expect to continue to initiate collection lawsuits as a part of the ordinary course of our business (resulting occasionally in countersuits against us) and we may, from time to time, become a party to various other legal proceedings arising in the ordinary course of business.
Item 6. Exhibits
         
Exhibit       
Number     Description 
10.1     First Amendment to Credit Agreement dated as of June 5, 2007, between Asset Acceptance Capital Corp. and JPMorgan Chase Bank, N.A. and other lenders (Incorporated by reference to Exhibit 10.1 included in Current Report on Form 8-K filed on March 11, 2008) 
         
10.2*     2008 Annual Incentive Compensation Plan for Management (Portions of this document have been omitted pursuant to a request for confidential treatment) 
         
31.1*     Rule 13a-14(a) Certification of Chief Executive Officer 
         
31.2*     Rule 13a-14(a) Certification of Chief Financial Officer 
         
32.1*     Section 1350 Certification of Chief Executive Officer and Chief Financial Officer 

 
   
*     Filed herewith 

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Table of Contents

SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) 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 on May 1, 2008.
                     
                     
      ASSET ACCEPTANCE CAPITAL CORP.       
                     
Date: May 1, 2008     By:     /s/ Nathaniel F. Bradley IV       
                     
            Nathaniel F. Bradley IV       
            Chairman of the Board, President and       
            Chief Executive Officer       
            (Principal Executive Officer)       
                     
Date: May 1, 2008     By:     /s/ Mark A. Redman       
                     
            Mark A. Redman       
            Senior Vice President-Finance and       
            Chief Financial Officer       
            (Principal Financial and Accounting Officer)        

36


 

Exhibit 10.2
Confidential
Asset Acceptance Capital Corp.
2008 Annual Incentive Compensation Plan for Management
General
     Each year the Compensation Committee (the “Committee”) of the Board of Directors of Asset Acceptance Capital Corp. (the “Company”) establishes an annual incentive compensation plan (the “Plan”) for key executives and certain other management level associates (the “Plan Participant(s)”) of the Company.
     The Plan will establish for each Plan Participant a bonus target (the “Bonus Target”) equal to a specified percentage of Base Salary (as defined below). The Bonus Target will be set by the Committee at a level consistent with each associate’s responsibilities. As used in this Plan, “Base Salary” shall be the Plan Participant’s base compensation (excluding incentive and any other taxable compensation) paid during 2008. For individuals who become Plan Participants during 2008, Base Salary shall be the base compensation (excluding incentive and any other taxable compensation) paid in 2008 beginning on the date the individual first becomes eligible to participate in the Plan.
     The Plan will be comprised of two parts: (a) Financial Objectives; and (b) Personal Objectives. Bonus amounts will be computed separately for achievement of Financial Objectives and Personal Objectives, as set forth below under the captions “Financial Objectives” and “Personal Objectives”, respectively. The bonus earned shall be the sum of the bonus calculated under the Financial Objectives portion of the Plan and the bonus calculated under the Personal Objectives portion of the Plan. Payments under the Plan will be made after receipt and approval by the Audit Committee of the annual audited financial statements of the Company for the year ending December 31, 2008. A Plan Participant will not be considered to have earned a bonus unless the Plan Participant is employed by the Company on the date the Audit Committee approves the annual audited financial statements for 2008.
     Payments shall be made no later than 2-1/2 months after the end of the fiscal year to which the bonus amount relates (or such later time as is allowed in accordance with Treasury Regulation 1.409A-3(d)) in order to preserve the exemption from Section 409A of the Internal Revenue Code.
     The Compensation Committee recognizes the need of the Plan Participants to conduct themselves in compliance with the Code of Business Conduct. In addition to the non-financial consequences contained in the Code of Business Conduct, any violation of the Code of Business Conduct shall result in complete forfeiture of any bonus which would otherwise be earned under this Plan.
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Financial Objectives
     The bonus earned under the Financial Objective portion of the Plan shall be 50% of the Target Bonus at achievement of the 2008 Financial Objective Goal, as defined below.
     The financial performance of the Company will be measured by Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), after accrual of all incentive compensation plan payments. EBITDA will be determined in a manner consistent with the definition of EBITDA contained in Exhibit 1.
     For the fiscal year ending December 31, 2008, the financial objective goal will be set at $ XXX,XXX,XXX* (the “2008 Financial Objective Goal”), which equals XXX* percent of fiscal 2007 actual EBITDA. The minimum goal will be set at $ XXX,XXX,XXX* (the “Minimum Goal”), which equals XXX* percent of fiscal 2007 EBITDA. The maximum goal will be set at $XXX,XXX,XXX* (the “Maximum Goal”), which equals XXX* percent of fiscal 2007 EBITDA.
     If the 2008 actual EBITDA achieved equals the Minimum Goal, the bonus earned under the Financial Objective portion of the Plan shall be 25 percent of the Target Bonus. If the actual EBITDA for 2008 is equal to or greater than the Maximum Goal, the bonus earned under the Financial Objectives portion of the Plan will be 100% of the Target Bonus. For actual EBITDA achieved greater than the Minimum Goal and less than the Maximum Goal, the percentage of the Target Bonus shall be pro-rated consistent with the following examples. Example 1). If actual 2008 EBITDA achieved is XXX* percent of 2007’s EBITDA, the bonus earned under the Financial Objectives portion would be 37.5 percent of the Target Bonus. Example 2). If the actual 2008 EBITDA achieved is XXX* percent of 2007’s EBITDA, the payout would be 80 percent of the Target Bonus.
Personal Performance Objectives
     Each Plan Participant may earn up to a maximum of 50% of his or her Target Bonus based on the achievement of Personal Objectives.
     Personal Objectives should be measurable goals jointly developed by the Plan Participant and his/her immediate supervisor (subject to approval by the Chairman, President and Chief Executive Officer or his designee(s), and for certain participants, the Committee). The percentage earned under Personal Performance will be calculated based on a rating from 0 to 4, whole numbers only, of completion of each assigned objective, recognizing the determination of such percentage completion is in part subjective. If there is any disagreement as to the scoring of each assigned objective, the determination of the Chairman, President and Chief Executive Officer or his designee(s) shall be final and binding.
 
   
*     Portions of this exhibit have been omitted pursuant to Asset Acceptance’s request to the Secretary of the Securities and Exchange Commission for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. 

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     No Plan Participant will be eligible to earn any part of his or her bonus based on the achievement of Personal Objectives unless 2008 EBITDA achieved by the Company equals or exceeds the 2007 EBITDA achieved by the Company of $171,397,083.
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Exhibit 1
      EBITDA : The net income (loss) of the Company plus interest expense-net, income taxes, depreciation and amortization (including amortization of purchased receivables). The determination of EBITDA, for purposes of this Plan, shall be made by the Committee in accordance with generally accepted accounting principles in effect in the United States, applied on a consistent basis (“GAAP”); provided , however , that EBITDA shall be adjusted for this purpose (A) to exclude net gains and losses on the disposal of assets and other non-operating income or expense items; (B) to exclude EBITDA generated from acquisitions of new businesses or companies during the year (an acquisition of a new office would not be deemed to be a material acquisition); and (C) for other items in the discretion of the Committee. EBITDA will be determined after accrual for all bonuses, including bonuses to be paid under this and all other Company annual incentive compensation plans.
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Exhibit 31.1
CERTIFICATION
I, Nathaniel F. Bradley IV, certify that:
1.     I have reviewed this quarterly report on Form 10-Q of Asset Acceptance Capital Corp.; 
   
2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 
   
3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 
   
4.     The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d-15(f)) for the registrant and have: 

   (a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 
   
   (b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 
   
   (c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 
   
   (d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 

5.     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): 

   (a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and 
   
   (b)     Any fraud, whether or not material, that involves management or other associates who have a significant role in the registrant’s internal control over financial reporting. 

               
         
Date: May 1, 2008        /s/ Nathaniel F. Bradley IV       
   Nathaniel F. Bradley IV     
   Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)     
   

 


 

Exhibit 31.2
CERTIFICATION
I, Mark A. Redman, certify that:
1.     I have reviewed this quarterly report on Form 10-Q of Asset Acceptance Capital Corp.; 

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 

4.     The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d-15(f)) for the registrant and have: 

   (a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 
   
   (b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 
   
   (c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 
   
   (d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 

5.     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): 

   (a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and 
   
   (b)     Any fraud, whether or not material, that involves management or other associates who have a significant role in the registrant’s internal control over financial reporting. 

               
         
Date: May 1, 2008        /s/ Mark A. Redman       
   Mark A. Redman     
   Senior Vice President-Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)     
   

 


 

Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the quarterly report of Asset Acceptance Capital Corp. (the “Company”) on Form 10-Q for the period ending March 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Nathaniel F. Bradley IV, Chairman of the Board, President and Chief Executive Officer of the Company, and Mark A. Redman, Senior Vice President-Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(a)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 
   
(b)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 

               
               
           /s/ Nathaniel F. Bradley IV       
               
      Nathaniel F. Bradley IV       
      Chairman of the Board, President and       
      Chief Executive Officer        
      May 1, 2008       
               
           /s/ Mark A. Redman       
               
      Mark A. Redman       
      Senior Vice President-Finance and       
      Chief Financial Officer       
      May 1, 2008       

 

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Line by line - as ASSET is revealing its, own fraud.


Shall we begin?


Current filing:


http://www.sec.gov/Archives/edgar/data/1264707/000119312508167893/d10q.htm

Tables are skipped since they get displaced; thus, refer to the attached file, hereto.

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10-Q 1 d10q.htm FORM 10-Q  Table of Contents   

 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549  
 FORM 10-Q    (Mark One)  

x[/font
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [/left]

 For the quarterly period ended June 30, 2008    

¨
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: 000-50552    


ASSET ACCEPTANCE CAPITAL CORP.
(Exact name of registrant as specified in its charter)    

Delaware
80-0076779
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 28405 Van Dyke Avenue Warren, Michigan 48093 (Address of principal executive offices) Registrant’s telephone number, including area code: (586) 939-9600    

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  x    No  ¨ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  

Large accelerated filer  ¨
Accelerated filer  x
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
Smaller reporting company  ¨
 Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 25, 2008, 30,542,927 shares of the Registrant’s common stock were outstanding.        

  Table of Contents ASSET ACCEPTANCE CAPITAL CORP. Quarterly Report on Form 10-Q
TABLE OF CONTENTS  
PagePART I – Financial Information Item 1.Consolidated Financial Statements (unaudited)
3Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations [
18Item 3.[\Quantitative and Qualitative Disclosures about Market Risk
35Item 4.Controls and Procedures
36
PART II – Other Information Item 1.
Legal Proceedings 36
Item 4.
Submission of Matters to a Vote of Security Holders
36Item 6.Exhibits
37Signatures
38
Exhibits:



10.1    First Amendment to the Lease Agreement dated as of April 11, 2008, between Asset Acceptance, LLC and Northpoint Atrium Office Building, Ltd. (Incorporated by reference to Exhibit 10.1 included in the Current Report on Form 8-K filed on May 6, 2008)
 31.1    Rule 13a-14(a) Certification of Chief Executive Officer 31.2    Rule 13a-14(a) Certification of Chief Financial Officer 32.1    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
Quarterly Report on Form 10-Q This Form 10-Q and all other Company filings with the Securities and Exchange Commission are also accessible at no charge on the Company’s website at www.assetacceptance.com as soon as reasonably practicable after filing with the Commission.

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ASSET ACCEPTANCE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Nature of Operations

Asset Acceptance Capital Corp. and its subsidiaries (collectively referred to as the “Company”) are engaged in the purchase and collection of defaulted and charged-off accounts receivable portfolios.

These receivables are acquired from consumer credit originators, primarily credit card issuers, consumer finance companies, healthcare providers, retail merchants, telecommunications and other utility providers as well as from resellers and other holders of consumer debt.

The Company periodically sells receivables from these portfolios to unaffiliated companies.

In addition, the Company finances the sales of consumer product retailers.

The accompanying unaudited financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, income and cash flows in conformity with U.S. generally accepted accounting principles.

 In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the Company’s financial position as of June 30, 2008 and its income for the three and six months ended June 30, 2008 and 2007 and cash flows for the six months ended June 30, 2008 and 2007, and all adjustments were of a normal recurring nature.


The income of the Company for the three and six months ended June 30, 2008 and 2007 may not be indicative of future results. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Reporting Entity

The consolidated financial statements include the accounts of Asset Acceptance Capital Corp. consisting of direct and indirect subsidiaries AAC Investors, Inc., RBR Holding Corp., Asset Acceptance Holdings, LLC, Asset Acceptance, LLC, Consumer Credit, LLC and Premium Asset Recovery Corporation. Rx Acquisitions, LLC was merged into an affiliate company during the three months ended June 30, 2008.

All significant intercompany balances and transactions have been eliminated in consolidation.

The Company currently has two operating segments, one for purchased receivables and one for finance contract receivables.


The finance contract receivables operating segment is not material and therefore is not disclosed separately from the purchased receivables segment.

Purchased Receivables Portfolios and Revenue Recognition

Purchased receivables are receivables that have been charged-off as uncollectible by the originating organization and typically have been subject to previous collection efforts.

The Company acquires the rights to the unrecovered balances owed by individual debtors through such purchases.


The receivable portfolios are purchased at a substantial discount (generally more than 90%) from their face values and are initially recorded at the Company’s acquisition cost, which equals fair value at the acquisition date. Financing for the purchases is primarily provided by the Company’s cash generated from operations and the Company’s revolving credit facility.

The Company accounts for its investment in purchased receivables using the guidance provided by the Accounting Standards Executive Committee Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”). The provisions of SOP 03-3 were adopted by the Company effective January 2005 and apply to purchased receivables acquired after December 31, 2004. The provisions of SOP 03-3 that relate to decreases in expected cash flows amend previously followed guidance, the Accounting Standards Executive Committee Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans”, for consistent treatment and apply prospectively to purchased receivables acquired before January 1, 2005.

The Company purchases pools of homogenous accounts receivable.

Pools purchased after 2004 may be aggregated into one or more static pools within each quarter, based on common risk characteristics.

Risk characteristics of purchased receivables are generally considered to be similar since purchased receivables are usually in the late stages of the post charged-off collection cycle. The Company therefore aggregates most pools purchased within each quarter. Pools purchased before 2005 may not be aggregated with other pool purchases.

Each static pool, either aggregated or non-aggregated, retains its own identity and does not change over the remainder of its life. Each static pool is accounted for as a single unit for recognition of revenue, principal payments and impairments.

Collections on each static pool are allocated to revenue and principal reduction based on the estimated internal rate of return (“IRR”).

The IRR is the rate of return that each static pool requires to amortize the cost or carrying value of the pool to zero over its estimated life. Each pool’s IRR is determined by estimating future cash flows, which are based on historical collection data for pools with similar characteristics.

The actual life of each pool may vary, but pools generally amortize between 36 and 84 months depending on the expected collection period. Monthly cash flows greater than revenue recognized will reduce the carrying value of each static pool and monthly cash flows lower than revenue recognized will increase the carrying value of the static pool.

Each pool is reviewed at least quarterly and compared to historical trends to determine whether it is performing as expected. This comparison is used to determine future estimated cash flows. If the revised cash flow estimates are greater than the original estimates, the IRR is adjusted prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. If the revised cash flow estimates are less than the original estimates, the IRR remains unchanged and an impairment is recognized. If the cash flow estimates increase subsequent to recording an impairment, reversal of the previously recognized impairment is made prior to any increases to the IRR.

The cost recovery method prescribed by SOP 03-3 is used when collections on a particular portfolio cannot be reasonably predicted.

When appropriate, the cost recovery method may be used for pools that previously had a yield assigned to them. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio.

As of June 30, 2008, the Company had 75 unamortized pools on the cost recovery method, including all healthcare pools, with an aggregate carrying value of $17,845,691 or about 5.0% of the total carrying value of all purchased receivables.

The Company had 51 unamortized pools on the cost recovery method with an aggregate carrying value of $26,939,749, or about 7.8% of the total carrying value of all purchased receivables as of December 31, 2007.

The agreements to purchase receivables typically include general representations and warranties from the sellers covering account holder death, bankruptcy, fraud and settled or paid accounts prior to sale.

These representations and warranties permit the return of certain ineligible accounts from the Company back to the seller.

The general time frame to return accounts is within 90 to 240 days from the date of the purchase agreement.

Proceeds from returns, also referred to as buybacks, are applied against the carrying value of the static pool.

Periodically the Company will sell, on a non-recourse basis, all or a portion of a pool to third parties.


The Company does not have any significant continuing involvement with the sold pools subsequent to sale. Proceeds of these sales are compared to the carrying value of the accounts and a gain or loss is recognized on the difference between proceeds received and carrying value, in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of SFAS 125”, as amended.

The agreements to sell receivables typically include general representations and warranties. Any accounts returned to the Company under these representations and warranties, and during the negotiated time frame, are netted against any “gains on sale of purchased receivables” or if they exceed the total reported gains for the period as a “loss on sale of purchased receivables”, which would be accrued for if material to the consolidated financial statements.

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Seasonality

Collections within portfolios tend to be seasonally higher in the first and second quarters of the year due to consumers’ receipt of tax refunds and other factors. Conversely, collections within portfolios tend to be lower in the third and fourth quarters of the year due to consumers’ spending in connection with summer vacations, the holiday season and other factors.

However, revenue recognized is relatively level, excluding the impact of impairments, due to the application of the provisions prescribed by SOP 03-3. In addition, the Company’s operating results may be affected to a lesser extent by the timing of purchases of charged-off consumer receivables due to the initial costs associated with purchasing and loading these receivables into the Company’s systems.

Consequently, income and margins may fluctuate from quarter to quarter.

Collections from Third Parties

The Company regularly utilizes unaffiliated third parties, primarily attorneys and other contingent collection agencies, to collect certain account balances on behalf of the Company in exchange for a percentage of balances collected by the third party.


 The Company records the gross proceeds received by the unaffiliated third parties as cash collections.

The Company includes the reimbursement of certain legal and other costs as cash collections.

The Company records the percentage of the gross cash collections paid to the third parties as a component of collections expense.

The percent of gross cash collections from such third party relationships were 29.0% and 24.9% for the three months ended June 30, 2008 and 2007, respectively, and 28.9% and 24.4% for the six months ended June 30, 2008 and 2007, respectively.

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Interest Expense

Interest expense included interest on the Company’s credit facilities, unused facility fees and amortization of capitalized bank fees. Interest expense of $20,501 and $40,270 related to software development for internal use was capitalized in the three and six months ended June 2008, respectively. There was no interest expense related to software development for internal use capitalized in the three and six months ended June 2007.

Earnings Per Share

Earnings per share reflect net income divided by the weighted-average number of shares outstanding. Diluted weighted-average shares outstanding at June 30, 2008 and 2007 included 29,029 and 10,360 dilutive shares, respectively, related to outstanding options, deferred stock units, restricted shares and restricted share units (the “Share-Based Awards”). There were 677,991 and 354,499 outstanding Share-Based Awards that were not included within the diluted weighted-average shares as their fair value exceeded the market price of the Company’s stock at June 30, 2008 and 2007, respectively. As such, they were anti-dilutive.

Goodwill and Other Intangible Assets

Intangible assets with finite lives arising from business combinations are amortized over their estimated useful lives, ranging from five to seven years, using the straight-line and double-declining methods. As prescribed by SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill and trademark and trade names with indefinite lives are not amortized. Goodwill and other intangible assets are reviewed annually to assess recoverability or more frequently if impairment indicators are present, in accordance with SFAS 142.

Impairment charges are recorded for intangible assets when the estimated fair value is less than the carrying value of that asset. During the six months ended June 30, 2008, the Company decided to no longer service medical receivables on a contingent fee basis. As a result, the Company recognized an impairment charge of $445,651, the net carrying value of intangible assets for customer contracts and relationships associated with the contingent collection business. This impairment is recorded in “Impairment of intangible assets” in the consolidated statements of income.


Comprehensive Income

Components of comprehensive income are changes in equity other than those resulting from investments by owners and distributions to owners. Net income is the primary component of comprehensive income. The Company’s only component of comprehensive income other than net income is the change in unrealized gain or loss on derivatives qualifying as cash flow hedges, net of income taxes. The aggregate amount of such changes to equity that have not yet been recognized in net income are reported in the equity portion of the accompanying consolidated statements of financial position as accumulated other comprehensive loss, net of income taxes.

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2. Recapitalization

On April 24, 2007, the Company announced a recapitalization plan (the “Recapitalization Plan”) to return $150,000,000 to the Company’s shareholders.

Pursuant to the Recapitalization Plan, on June 12, 2007, the Company completed a modified “Dutch auction” tender offer, resulting in the repurchase of approximately 1,982,250 of the Company’s common shares for an aggregate purchase price of $37,167,188, or $18.75 per share.

On June 28, 2007, under a repurchase agreement announced on April 24, 2007, the Company purchased shares from (i) its largest shareholder, (ii) its Chairman, President and Chief Executive Officer, and (iii) its Senior Vice President and Chief Financial Officer.


These shareholders elected not to tender any shares in the tender offer and the repurchase agreement allowed them to maintain their pro rata beneficial ownership interest in the Company after giving effect to the tender offer and purchases under the repurchase agreement.

The Company repurchased 2,017,750 common shares from these shareholders for an aggregate price of $37,832,813, or $18.75 per share.

On June 18, 2007, the Company’s Board of Directors declared a special one-time cash dividend of $2.45 per share, or $74,891,700 in aggregate, which was paid on July 31, 2007 to holders of record on July 19, 2007.

In order to fund these transactions, the Company obtained a $150,000,000 term loan through a new credit agreement, (the “New Credit Agreement”) aggregating $250,000,000, which was funded on June 12, 2007, and terminated its former credit agreement. Refer to Note 3, “Notes Payable” for further information.

As a result of the payment of the special one-time cash dividend, the Company adjusted the number of deferred stock units, as well as the exercise price and number of outstanding stock options issued under the 2004 stock incentive plan, as amended, in order to avoid dilution to holders of the deferred stock units and outstanding stock options. Refer to Note 6, “Share-Based Compensation” for further information.

During the quarter ended June 30, 2007, the Company incurred $1,100,085 in transaction costs associated with the Dutch auction tender offer and recorded these costs as a reduction in stockholders’ equity. In addition, the Company incurred $2,315,710 in fees, which were recorded as a deferred financing cost and included in other assets in the consolidated statements of financial position.

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During the three and six months ended June 30, 2008, the Company recorded interest expense of $3,114,541 and $6,349,592, respectively, in connection with borrowings under the New Credit Agreement.


In addition, the Company amortized $155,817 and $284,935 in deferred financing costs for the three and six months ended June 30, 2008, respectively. During the three and six months ended June 30, 2007, the Company recorded interest expense of $825,791 and $1,031,444, respectively, in connection with borrowings under the former credit agreement and New Credit Agreement. The Company also amortized $305,488 and $362,432 in deferred financing costs for the three and six months ended June 30, 2007, respectively.

3. Notes Payable

The New Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders named therein, that originated on June 5, 2007 was amended on March 10, 2008 (the “Amended New Credit Agreement”).

Under the terms of the Amended New Credit Agreement, the Company has a five-year $100,000,000 revolving credit facility (the “Revolving Credit Facility”) and a six-year $150,000,000 term loan facility (the “Term Loan Facility” and, together with the Revolving Credit Facility, the “Amended New Credit Facilities”). The Amended New Credit Facilities bear interest at prime or up to 125 basis points over prime depending upon the Company’s liquidity, as defined in the Amended New Credit Agreement. Alternately, at the Company’s discretion, the Company may borrow by entering into one, two, three, six or twelve-month contracts based on the London Inter Bank Offer Rate (“LIBOR”) at rates between 150 to 250 basis points over the respective LIBOR rates, depending on the Company’s liquidity.

The Company’s Revolving Credit Facility includes an accordion loan feature that allows it to request a $25,000,000 increase as well as sublimits for $10,000,000 of letters of credit and for $10,000,000 of swingline loans.

The Amended New Credit Agreement is secured by a first priority lien on all of the Company’s assets.

The Amended New Credit Agreement also contains certain covenants and restrictions that the Company must comply with, which, as of June 30, 2008 were:

 

  •   Leverage Ratio (as defined) cannot exceed (i) 1.25 to 1.0 at any time on or before June 29, 2009, (ii) 1.125 to 1.0 at any time on or after June 30, 2009 and on or before December 30, 2010 or (iii) 1.0 to 1.0 at any time thereafter;
 

 

  •   Ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth cannot exceed (i) 3.0 to 1.0 at any time on or before September 29, 2008, (ii) 2.75 to 1.0 at any time on or after September 30, 2008 and on or before December 30, 2008, (iii) 2.5 to 1.0 at any time on or after December 31, 2008 and on or before December 30, 2009, (iv) 2.25 to 1.0 at any time on or after December 31, 2009 and on or before December 30, 2010, (v) 2.0 to 1.0 at any time on or after December 31, 2010 and on or before December 30, 2011 or (vi) 1.5 to 1.0 to any time thereafter; and
 

 

  •   Consolidated Tangible Net Worth must equal or exceed $80,000,000 plus 50% of positive consolidated net income for three consecutive fiscal quarters ending December 31, 2007 and for each fiscal year ending thereafter, such amount to be added as of December 31, 2007 and as of the end of each such fiscal year thereafter.
 

The Amended New Credit Agreement contains a provision that requires the Company to repay Excess Cash Flow, as defined, to reduce the indebtedness outstanding under its Amended New Credit Agreement. The annual repayment of the Company’s Excess Cash Flow is effective with the issuance of our audited consolidated financial statements for fiscal year 2008. The repayment provisions are:

 

  •   50% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was greater than 1.0 to 1.0 as of the end of such fiscal year;
 

 

  •   25% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was less than or equal to 1.0 to 1.0 but greater than 0.875 to 1.0 as of the end of such fiscal year; or
 

 

  •   0% if the Leverage Ratio is less than or equal to 0.875 to 1.0 as of the end of such fiscal year.
 

Commitment fees on the unused portion of the Revolving Credit Facility are paid quarterly, in arrears, and are calculated as an amount equal to a margin of 0.25% to 0.50%, depending on the Company’s liquidity, on the average amount available on the Revolving Credit Facility.

The Amended New Credit Agreement requires the Company to effectively cap, collar or exchange interest rates on a notional amount of at least 25% of the outstanding principal amount of the Term Loan Facility. Refer to Note 4, “Derivative Financial Instruments” for additional information.


The Company had $189,500,000 and $191,250,000 principal balance outstanding on its Amended New Credit Facilities at June 30, 2008 and December 31, 2007, respectively, of which $148,500,000 and $149,250,000 was part of the Term Loan Facility at June 30, 2008 and December 31, 2007, respectively, and $41,000,000 and $42,000,000 was part of the Revolving Credit Facility, respectively. The Term Loan Facility requires quarterly repayments totaling $1,500,000 annually until March 2013 with the remaining balance due in June 2013.

The Company believes it is in compliance with all terms of the Amended New Credit Agreement as of June 30, 2008.

 

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Derivative Financial Instruments

The Company may periodically enter into derivative financial instruments, typically interest rate swap agreements, to reduce its exposure to fluctuations in interest rates on variable-rate debt and their impact on earnings and cash flows.

The Company does not utilize derivative financial instruments with a level of complexity or with a risk greater than the exposure to be managed nor does it enter into or hold derivatives for trading or speculative purposes. The Company periodically reviews the creditworthiness of the swap counterparty to assess the counterparty’s ability to honor its obligation.

Based on the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended and interpreted, the Company records derivative financial instruments at fair value. Refer to Note 9, “Fair Value” for additional information.

In September 2007, the Company entered into an amortizing interest rate swap agreement whereby, on a quarterly basis, it swaps variable rates under its Term Loan Facility for fixed rates. At inception and for the first year, the notional amount of the swap is $125,000,000. Every year thereafter, on the anniversary of the swap agreement the notional amount will decrease by $25,000,000. This swap agreement expires on September 13, 2012.

The Company’s financial derivative instrument is designated and qualifies as a cash flow hedge, and the effective portion of the gain or loss on such hedge is reported as a component of other comprehensive income in the consolidated financial statements. To the extent that the hedging relationship is not effective, the ineffective portion of the change in fair value of the derivative is recorded in other income (expense). For the three and six months ended June 30, 2008, the ineffective portion of the change in fair value of the derivative recorded in earnings was $610 and $1,409, respectively.

Hedges that receive designated hedge accounting treatment are evaluated for effectiveness at the time that they are designated as well as through the hedging period. As of June 30, 2008, the Company does not have any fair value hedges.

The fair value of the Company’s cash flow hedge has been recorded as a liability and is included with accrued liabilities in the consolidated statements of financial position. The fair value of the liability was $3,213,422 and $3,126,003 at June 30, 2008 and December 31, 2007, respectively. Changes in fair value were recorded as an adjustment to other comprehensive income, net of tax, of $2,069,444 and $2,012,127 at June 30, 2008 and December 31, 2007, respectively. Amounts in other comprehensive income will be reclassified into earnings under certain situations; for example, if the occurrence of the transaction is no longer probable or no longer qualifies for hedge accounting. The Company does not expect to reclassify any amount currently included in other comprehensive income into earnings within the next 12 months.

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7. Contingencies and Commitments

Litigation Contingencies

The Company is involved in certain legal matters that management considers incidental to its business.

The Company recognizes liabilities for contingencies and commitments when a loss is probable and estimable. The company recognizes expense for defense costs when incurred.

Management has evaluated pending and threatened litigation against the Company as of June 30, 2008 and does not believe its exposure to be material.

Other Contingencies

During the first quarter of 2008, the Company entered into an agreement with a third party collecting on its behalf.

Under this agreement, the Company will receive a total cash advance of $7,000,000, in varying installments, through November 2009.

The Company received $2,500,000 through June 30, 2008, and incurred $2,352,711 in court cost expenses, which were offset against a portion of the cash advance. A liability equal to the unused cash advance is included in accrued liabilities in the consolidated statements of financial position.

The agreement contains performance conditions for both parties and the Company may be required to refund a portion of the cash advance in certain situations.

8. Income Taxes

The Company recorded an income tax provision of $1,435,067 and $4,999,412 for the three months ended June 30, 2008 and 2007, respectively, and $5,606,286 and $10,915,580 for the six months ended June 30, 2008 and 2007, respectively. The provision for income tax expense reflects an effective income tax rate of 40.3% and 37.7% for the three months ended June 30, 2008 and 2007, respectively, and 38.6% and 37.6% for the six months ended June 30, 2008 and 2007, respectively.

The Company records interest and penalties related to unrecognized tax benefits as income tax expense. Interest and penalties related to the Company’s uncertain tax positions at June 30, 2008 were not significant.

The federal income tax returns of the Company for 2004, 2005, 2006, and 2007 are subject to examination by the IRS, generally for three years after the latter of their extended due date or when they are filed. The significant state income tax returns of the Company are subject to examination by the state taxing authorities, for various periods generally up to four years.

9. Fair Value

The Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) as of January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies where other accounting pronouncements require or permit fair value measurements; it does not require any new fair value measurements. According to FASB Staff Position No. FAS 157-2, the application of SFAS 157 to certain non-financial assets and liabilities is deferred to fiscal years beginning after November 15, 2008. The Company’s goodwill and other indefinite-lived intangible assets are measured at fair value on a recurring basis for impairment assessment. The deferral of SFAS 157 applies to these items.

The adoption of SFAS 157 did not have a material impact on the Company’s consolidated statements of financial position, income or cash flows. The Company has chosen not to adopt SFAS No. 159, “Fair Value Option” (“SFAS 159”). SFAS 159 allows entities to choose to measure eligible financial instruments and certain other items at fair value, that are not otherwise required to be measured at fair value.

As required under SFAS 157, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

  Level 1  – Valuation is based upon quoted prices for identical instruments traded in active markets. 

 

  Level 2  – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. 

 

  Level 3  – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. 

The Company uses the following methods and assumptions to estimate the fair value of financial instruments.

Interest Rate Swap Agreement

The fair value of the interest rate swap agreement represents the amount the Company would receive or pay to terminate or otherwise settle the contract at the consolidated statements of financial position date, taking into consideration current unearned gains and losses. The interest rate swap agreement was valued using Level 2 inputs, which are inputs other than quoted prices that are observable, either directly or indirectly. The fair value was determined using a market approach, and is based on the three-month LIBOR curve for the remaining term of the swap agreement. Refer to Note 4, “Derivative Financial Instruments”, for additional information about the fair value of the interest rate swap.

Purchased Receivables

The Company initially records purchased receivables at cost, which is discounted from the contractual receivable balance.

The ending balance of the purchased receivables is reduced as cash is received based upon the guidance of PB6 and SOP 03-3. The carrying value of receivables was $355,647,646 and $346,198,900 at June 30, 2008 and December 31, 2007, respectively. The Company computes fair value of these receivables by discounting the future cash flows generated by its forecasting model using an adjusted weighted average cost of capital, reflective of other market participants cost of capital. The fair value of the purchased receivables approximated carrying value at both June 30, 2008 and December 31, 2007.

Credit Facilities

         The Company’s Amended New Credit Facilities had carrying amounts of $189,500,000 and $191,250,000 as of June 30, 2008 and December 31, 2007, respectively. The Company computed the approximate fair value of the Amended New Credit Facilities to be $159,661,383 and $158,652,946 as of June 30, 2008 and December 31, 2007, respectively. The fair value of the Company’s Amended New Credit Facilities is based on borrowing rates currently available to the Company and similar market participants.