Asset Acceptance Capital 10Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2006


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

For the transition period from to

Commission file number:000-50552

Asset Acceptance Capital Corp.

(Exact name of registrant as specified in its charter)


Delaware		80-0076779
(State or other jurisdiction of		(I.R.S.Employer Identification No.)
incorporation or organization)

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.

Yesþ Noo

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

Large accelerated filero Accelerated filerþ Non-accelerated filero

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

Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 26, 2006, 35,344,449 shares of the Registrant’s common stock were outstanding.

ASSET ACCEPTANCE CAPITAL CORP.

Quarterly Report on Form 10-Q

TABLE OF CONTENTS


		Page
PART I – Financial Information
Item 1.	Consolidated Financial Statements (unaudited)		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		28
Item 4.	Controls and Procedures		28
PART II – Other Information
Item 1.	Legal Proceedings		28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 6.	Exhibits		29
Signatures			30
Exhibits:	10.1 Joinder Agreement, Dated August 14, 2006 by and among Asset Acceptance, LLC, Consumer Credit, LLC, Rx Acquisitions, LLC, Premium Asset Recovery Corporation and JPMorgan Chase Bank, N.A.
	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 atwww.assetacceptance.com as soon as reasonably practicable after filing with the Commission.

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Financial Position
(Unaudited)


	September 30, 2006			December 31, 2005
ASSETS
Cash and cash equivalents	$	32,731,143		$	50,518,934
Investments		14,935,010			—
Purchased receivables, net		259,425,087			248,990,772
Property and equipment, net		13,373,050			10,747,627
Goodwill		14,323,071			6,339,574
Other assets		8,656,186			7,344,948

Total assets	$	343,443,547		$	323,941,855


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deferred tax liability, net	$	58,824,545		$	58,583,604
Accounts payable and other liabilities		17,825,889			14,639,774
Income taxes payable		36,006			1,071,179
Capital lease obligations		106,374			186,944

Total liabilities		76,792,814			74,481,501


Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $0.01 par value, 100,000,000 shares authorized; issued and outstanding shares —37,225,275 at September 30, 2006 and December 31, 2005		372,253			372,253
Additional paid in capital		161,733,695			160,361,599
Retained earnings		124,436,261			88,726,502
Common stock in treasury; at cost, 1,313,145 shares at September 30, 2006		(19,891,476	)		—

Total stockholders’ equity		266,650,733			249,460,354

Total liabilities and stockholders’ equity	$	343,443,547		$	323,941,855

See accompanying notes.

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Income
(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2006			2005			2006			2005
Revenues
Purchased receivable revenues, net	$	59,691,484		$	63,899,194		$	190,899,586		$	198,466,124
Gain (loss) on sale of purchased receivables		400,323			(151	)		2,726,658			(25,982	)
Other revenues, net		(921,662	)		117,503			(293,922	)		414,207

Total revenues		59,170,145			64,016,546			193,332,322			198,854,349

Expenses
Salaries and benefits		19,357,233			19,574,631			63,241,247			57,188,114
Collections expense		19,381,522			17,831,613			58,572,652			55,119,103
Occupancy		2,288,531			2,087,299			6,718,019			6,229,148
Administrative		778,363			1,885,207			6,094,553			5,487,853
Depreciation and amortization		1,115,587			831,396			3,061,371			2,517,506
Loss on disposal of equipment		1,131			14,862			6,653			15,340

Total operating expenses		42,922,367			42,225,008			137,694,495			126,557,064

Income from operations		16,247,778			21,791,538			55,637,827			72,297,285
Other income (expense)
Interest income		614,687			430,407			1,818,868			657,941
Interest expense		(108,627	)		(135,282	)		(477,733	)		(416,954	)
Other		168,162			4,378			(17,392	)		(2,984	)

Income before income taxes		16,922,000			22,091,041			56,961,570			72,535,288
Income taxes		6,221,182			8,384,460			21,251,811			27,366,133

Net income	$	10,700,818		$	13,706,581		$	35,709,759		$	45,169,155


Weighted average number of shares:
Basic		36,858,417			37,225,275			37,094,454			37,225,275
Diluted		36,891,693			37,305,950			37,125,710			37,271,255
Earnings per common share outstanding:
Basic	$	0.29		$	0.37		$	0.96		$	1.21
Diluted	$	0.29		$	0.37		$	0.96		$	1.21

See accompanying notes.

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Cash Flows
(Unaudited)


	Nine months ended September 30,
	2006			2005
Cash flows from operating activities
Net income	$	35,709,759		$	45,169,155
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,061,371			2,517,506
Deferred income taxes		(1,670,943	)		19,036,201
Share-based compensation expense		1,313,746			688,110
Net impairment of purchased receivables		14,431,200			6,994,000
Non-cash revenue		(1,042,846	)		(3,612,261	)
Loss on disposal of equipment		6,653			15,340
(Gain) loss on sale of purchased receivables		(2,726,658	)		25,982
Changes in assets and liabilities, net of effects from purchase of PARC:
Increase (decrease) in accounts payable and other liabilities		2,310,283			(500,059	)
Decrease in other assets		3,411,654			664,906
Increase (decrease) in income taxes payable		(869,382	)		3,201,737

Net cash provided by operating activities		53,934,837			74,200,617


Cash flows from investing activities
Proceeds from (repurchase of) the sale of purchased receivables		3,143,882			(29,776	)
Investment in purchased receivables, net of buybacks		(71,572,821	)		(75,681,304	)
Principal collected on purchased receivables		55,626,691			41,571,996
Purchase of investment securities		(14,935,010	)		—
Payment for purchase of PARC, net of cash acquired		(14,675,912	)		—
Purchase of property and equipment		(5,114,932	)		(1,892,577	)
Proceeds from the sale of property and equipment		157,347			—

Net cash used in investing activities		(47,370,755	)		(36,031,661	)


Cash flows from financing activities
Borrowings under line of credit		—			10,500,000
Repayment of line of credit		—			(10,500,000	)
Repayment of capital lease obligations		(105,367	)		(120,497	)
Repayment of bank and other secured debt assumed from PARC		(4,413,380	)		—
Purchase of treasury shares		(20,116,476	)		—
Proceeds received for treasury shares		283,350			—

Net cash used in financing activities		(24,351,873	)		(120,497	)

Net increase (decrease) in cash and cash equivalents		(17,787,791	)		38,048,459
Cash and cash equivalents at beginning of period		50,518,934			14,204,579

Cash and cash equivalents at end of period	$	32,731,143		$	52,253,038


Supplemental disclosure of cash flow information
Cash paid for interest	$	227,678		$	256,985
Cash paid for income taxes	$	23,780,241		$	4,984,181
Non-cash investing and financing activities:
Capital lease obligations incurred	$	24,797		$	93,483

Assumption of liabilities in conjunction with purchase of PARC:
Fair value of assets acquired less cash acquired	$	20,311,217		$	—
Cash paid for capital stock less cash acquired		(14,675,912	)		—

Net liabilities assumed	$	5,635,305		$	—

See accompanying notes.

ASSET ACCEPTANCE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. 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. As part of the collection process, the Company occasionally sells receivables from these portfolios to unaffiliated companies.

In addition, the Company finances the sales of consumer product retailers located primarily in Michigan and Ohio as well as services receivables on a contingent fee basis.

The accompanying unaudited consolidated 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, results of operations 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 September 30, 2006 and its results of operations for the three and nine month periods ended September 30, 2006 and 2005 and cash flows for the nine month periods ended September 30, 2006 and 2005, and all adjustments were of a normal recurring nature. The results of operations of the Company for the three and nine month periods ended September 30, 2006 and 2005 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 filed for the year ended December 31, 2005.

Reporting Entity

On April 28, 2006, the Company entered into an agreement to purchase 100% of the outstanding shares of Premium Asset Recovery Corporation (“PARC”) and its wholly-owned subsidiary, Outcoll Services, Inc. (“Outcoll”). As a result, 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, Rx Acquisitions, LLC, Consumer Credit, LLC and PARC (since the date of acquisition). All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

Cash and cash equivalents are defined as short-term, highly liquid investments with original maturities of three months or less. The Company maintains cash balances with high quality financial institutions. Management periodically evaluates the creditworthiness of such institutions. Cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation.

Investments

The Company accounts for its investments under the guidance of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards, SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company typically invests in debt securities, which it classifies as available-for-sale securities and are recorded in the consolidated financial statements at market value with changes in market value included in other comprehensive income. At September 30, 2006, the Company had available-for-sale

securities with a fair market and carrying value of $14.9 million. There has been no change in the fair market value and the carrying value from the initial purchase. At September 30, 2005, the Company did not have any investments. In the event the Company’s investments experience an other than temporary impairment, such impairment is recognized in the consolidated statements of income.

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 greater than 90%) from their face values and are initially recorded at the Company’s cost to acquire the portfolio. Financing for the purchases is primarily provided by the Company’s cash generated from operations and the Company’s line of credit.

The Company accounts for its investment in purchased receivables using the guidance provided by the Accounting Standards Executive Committee Statement of Position 03-3 (“SOP 03-3”), “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” and the Accounting Standards Executive Committee Practice Bulletin 6 (“PB 6”), “Amortization of Discounts on Certain Acquired Loans”. 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 PB 6 for consistent treatment and apply prospectively to purchased receivables acquired before January 1, 2005. The Company purchases pools of homogenous accounts receivable and records 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. 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. Based on historical cash collections, each pool is generally given an expected life of 60 months with the exception of healthcare pools, which are generally given a life of 36 months. The actual life of each pool may vary, but each pool generally amortizes between 50 and 60 months with the exception of healthcare pools, which generally amortize between 30 and 40 months. 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 each static pool 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 generally adjusted prospectively to reflect higher estimates of cash flows over the remaining life of the static pool. If the revised cash flows estimates are less than the original estimates, generally the IRR remains unchanged and an impairment may be 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 methods prescribed by SOP 03-3 and PB 6 are used when collections on a particular portfolio cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio. As of September 30, 2006, the Company had 20 unamortized pools on the cost recovery method with an aggregate carrying value of $4.3 million or about 1.7% of the total carrying value of all purchased receivables. The Company had 19 unamortized pools on the cost recovery method with an aggregate carrying value of $3.8 million, or about 1.5% of the total carrying value of all purchased receivables as of December 31, 2005.

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. The representation and warranty period permits the return of certain accounts from the Company back to the seller. The general time frame to return accounts is within 60 to 240 days. Returns 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 generally 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 SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of SFAS 125”. 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”.

Changes in purchased receivables portfolios for the three and nine months ended September 30, 2006 and 2005 were as follows:


	Three months ended September 30,						Nine months ended September 30,
	2006			2005			2006			2005
Beginning balance	$	253,600,100		$	233,953,247		$	248,990,772		$	216,479,676
Investment in purchased receivables, net of buybacks		27,041,314			27,517,945			71,572,821			75,681,304
Investment in purchased receivables acquired from PARC on April 28, 2006 (1)		—			—			8,293,763			—
Cost of sale of purchased receivables, net of returns		6,980			16			(417,224	)		3,794
Cash collections		(80,914,791	)		(78,159,364	)		(259,914,631	)		(243,419,860	)
Purchased receivable revenues		59,691,484			63,899,194			190,899,586			198,466,124

Ending balance	$	259,425,087		$	247,211,038		$	259,425,087		$	247,211,038


(1)		Preliminary valuation pending the completed valuation study.

Accretable yield represents the amount of revenue the Company can expect over the remaining life of the existing portfolios. Nonaccretable yield represents the difference between the remaining expected cash flows and the total contractual obligation outstanding (face value) of the purchased receivables. Changes in accretable yield for the three and nine months ended September 30, 2006 and 2005 were as follows:


	Three months ended September 30,						Nine months ended September 30,
	2006			2005			2006			2005
Beginning balance	$	893,894,752		$	845,668,596		$	848,545,458		$	792,755,605
Revenue recognized on purchased receivables		(59,691,484	)		(63,899,194	)		(190,899,586	)		(198,466,124	)
Additions due to purchases during the period		53,405,147			70,411,085			165,442,854			176,856,717
Reclassifications from nonaccretable yield		(7,721,665	)		9,651,864			56,798,024			90,686,153

Ending balance (1)	$	879,886,750		$	861,832,351		$	879,886,750		$	861,832,351



(1) Accretable yields are a function of estimated remaining cash flows and are based on historical cash collections. Please refer to Forward-Looking Statements on page 15 and Critical Accounting Policies on page 27 for further information regarding these estimates.

Cash collections for the three months and nine months ended September 30, 2006 and 2005 include collections from fully amortized pools of which 100% of the collections were reported as revenue. Components of revenue from fully amortized pools were as follows:

	Three months ended September 30,						Nine months ended September 30,
Revenue from fully amortized pools:	2006			2005			2006			2005
Pools that amortized before 60 months	$	6,624,934		$	8,312,947		$	20,318,786		$	22,779,854
Pools that are 60 months or older		8,064,652			4,543,583			25,796,762			15,044,442
Pools under full cost recovery		1,139,683			1,135,232			3,616,616			3,254,546

Total revenue from fully amortized pools	$	15,829,269		$	13,991,762		$	49,732,164		$	41,078,842

During the three and nine months ended September 30, 2006, the Company recorded net impairments of $6.3 million and $14.4 million, respectively, related to its purchased receivables and allowance for receivable losses. Also, the Company recorded net impairments of $4.6 million and $7.0 million during the three and nine months ended September 30, 2005, respectively. The net impairments charge reduced revenue and the allowance reduced the carrying value of the purchased receivable portfolios. Changes in the allowance for receivable losses for the three and nine months ended September 30, 2006 and 2005 were as follows:


	Three months ended September 30,						Nine months ended September 30,
	2006			2005			2006			2005
Beginning balance	$	30,407,355		$	2,398,000		$	22,285,355		$	—
Impairments		6,867,300			5,112,000			17,062,300			7,510,000
Reversal of impairments (1)		(587,600	)		(516,000	)		(2,631,100	)		(516,000	)
Deductions (2)		(46,100	)		—			(75,600	)		—

Ending balance	$	36,640,955		$	6,994,000		$	36,640,955		$	6,994,000


(1)		Impairment reversals for the three and nine months ended September 30, 2006 and 2005 relate to impairment charges recognized during the fiscal year ended December 31, 2005 and first quarter of 2006.

(2)		Deductions represent impairments on fully amortized purchased receivable portfolios that were written-off and cannot be reversed.

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 collection expense. The percent of gross cash collections contributed by such third party relationships was 24.0% and 23.6% for the three months ended September 30, 2006 and 2005, respectively, and 23.3% and 22.0% for the nine months ended September 30, 2006 and 2005, respectively.

Earnings Per Share

Earnings per share reflect net income divided by the weighted average number of shares outstanding. Diluted weighted average shares outstanding at September 30, 2006 and 2005 included 31,256 and 45,980 dilutive shares, respectively, related to outstanding stock options. There were 192,063 outstanding options that were antidilutive at September 30, 2006 and no outstanding options that were antidilutive at September 30, 2005.

Recently Issued Accounting Pronouncements

SFAS Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”

In June 2006, the FASB issued SFAS Interpretation No. 48 — an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. FIN 48 also provides guidance regarding subsequent derecognition of a tax position, classification, interest and penalties, accounting in interim periods, disclosure, and transition method. FIN 48 is effective for the fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact, if any, that the adoption of SFAS Interpretation No. 48 may have on the Company’s consolidated financial position, results of operations or cash flows.

Reclassifications

Certain amounts in the prior periods presented have been reclassified to conform to the current period financial statement presentation.

2. Line of Credit

The Company maintains a $100.0 million line of credit secured by a first priority lien on all of the Company’s assets. The Credit Agreement expires in May 2008 and bears interest at prime or 25 basis points over prime depending upon the Company’s liquidity as defined in the Credit Agreement. Alternatively, at the Company’s discretion, the Company may borrow by entering into 30, 60 or 90-day LIBOR contracts at rates between 150 to 250 basis points over the respective LIBOR rates, depending on the Company’s liquidity. The Company’s line of credit includes an accordion loan feature that allows the Company to request a $20.0 million increase in the credit facility. Additionally, the Company pays an annual commitment fee of between 0.25% and 0.50% on the unused portion of the line of credit, depending on the Company’s liquidity. There was no outstanding balance at September 30, 2006 and December 31, 2005. The line of credit facility has certain covenants and restrictions with which the Company must comply, including:

	•		funds borrowed can be used to purchase portfolios of charged-off receivables and for general corporate purposes;

	•		leverage ratio (as defined in the Credit Agreement) cannot exceed 1.5 to 1.0;

	•		debt to total capitalization ratio (as defined in the Credit Agreement) cannot exceed 1.25 to 1.0; and

	•		tangible net worth must exceed $145.0 million plus 50% of net income after September 30, 2004 which required a balance of $194.8 million as of September 30, 2006.

Management believes it is in compliance with all terms of its Credit Agreement as of September 30, 2006.

In accordance with the Credit Agreement, the Company obtained approval from the lender for the PARC acquisition.

3. Property and Equipment

Property and equipment, having estimated useful lives ranging from three to ten years consisted of the following:


	September 30, 2006			December 31, 2005
Computers and software	$	12,451,460		$	8,984,055
Furniture and fixtures		10,026,120			9,158,973
Leasehold improvements		2,036,415			2,017,496
Equipment under capital lease		401,288			485,299
Automobiles		47,404			136,525

Total property and equipment, cost		24,962,687			20,782,348
Less accumulated depreciation		(11,589,637	)		(10,034,721	)

Net property and equipment	$	13,373,050		$	10,747,627

4. Acquisition of PARC

On April 28, 2006, the Company completed a stock purchase agreement with PARC and its wholly-owned subsidiary, Outcoll Services, Inc. Under the terms of the agreement, the Company acquired 100% of the outstanding shares of PARC for $16.2 million. In addition, the Company entered into four non-compete agreements and two employment agreements with key individuals. From the date of acquisition, the results of operations from PARC have been included in the Company’s consolidated financial statements.

The following is a preliminary allocation of the purchase price to the assets acquired and liabilities assumed of PARC:


Assets acquired:
Cash	$	1,568,688
Investments in purchased receivables		8,293,763
Non-compete agreements		1,400,000
Customer relationships and contracts		830,000
Trademark and trade name		1,980,000
Other assets		1,223,957
Goodwill		7,983,497
Liabilities assumed:
Bank and other secured debt		(4,413,380	)
Other liabilities		(2,621,925	)

Total purchase price including acquisition costs		16,244,600
Less: cash acquired		(1,568,688	)

Total cash paid for capital stock, less cash acquired	$	14,675,912

The final allocation of the purchase price is pending the completion of the valuation study of the assets acquired that could change the preliminary purchase price allocation depending on the outcome.

PARC, based in Deerfield Beach, FL, purchases and collects charged-off consumer healthcare debt. As a result of the acquisition, the Company expects to expand its business and increase its productivity in these fields.

5. Intangible Assets Related to PARC Acquisition

The Company acquired certain tangible and intangible assets with the purchase of PARC on April 28, 2006. Intangible assets purchased included customer contracts and relationships, non-compete agreements, trademarks and goodwill. In accordance with SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company is amortizing definititive lived intangible assets over five to seven years. In addition goodwill and trademarks are not amortized as they are considered to have an indefinite life. The Company reviews goodwill at least annually for impairment, in accordance with SFAS 142, and both of the indefinite and definitive lived intangible assets are reviewed at least annually for impairment, in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

6. Share-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” a revision of SFAS 123, “Accounting for Stock-Based Compensation,” using the modified prospective application. The adoption of SFAS 123(R) requires all stock-based compensation awards granted to employees to be recognized in the consolidated financial statements at fair value, similar to that prescribed under SFAS 123. Adoption of the SFAS 123(R) provisions did not have a material impact on our consolidated financial position, results of operations or cash flows.

The Company adopted a stock incentive plan during February 2004 that authorizes the use of stock options, stock appreciation rights, restricted stock grants and units, performance share awards and annual incentive awards to eligible key employees, non-employee directors and consultants. The Company has reserved 3,700,000 shares of common stock, in addition to treasury shares, for issuance in conjunction with all options and other stock-based awards to be granted under the plan. The purpose of the plan is (1) to promote the best interests of the Company and its stockholders by encouraging employees and other participants to acquire an ownership interest in the Company, thus aligning their interests with those of stockholders and (2) to enhance the ability of the Company to attract and retain qualified employees, consultants and non-employee directors. No participant may be granted stock based awards in any one fiscal year to purchase more than 500,000 shares of common stock in aggregate.

Effective January 1, 2006, the Company began utilizing the Whaley Quadratic approximation model to calculate the fair value of the stock awards on the date of grant using the assumptions noted in the following table. The fair value of the stock awards calculated by the Whaley Quadratic approximation model is not significantly different

from the Black-Scholes model utilized in prior years. The Whaley Quadratic model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options. In addition, changes to the subjective input assumptions can result in materially different fair market value estimates. With regard to the Company’s assumptions stated below, the expected volatility is based on the historical volatility of the Company’s stock and management’s estimate of the volatility over the contractual term of the options. The expected term of the option is based on management’s estimate of the period of time for which the options are expected to be outstanding. The risk-free rate is derived from the five-year U.S. Treasury yield curve on the date of grant.


	Nine months			Twelve months
	ended September 30,			ended December 31,
Options issue year:	2006			2005
Expected volatility		46.00%			46.00%
Expected dividends		0.00%			0.00%
Expected term	5 Years			5 Years
Risk-free rate		4.55%-5.02	%		3.82%-4.39	%

Stock Options

As of September 30, 2006, the Company had options outstanding for 323,523 shares of its common stock under the 2004 stock incentive plan. These options have been granted to key employees and non-employee directors of the Company. Option awards are generally granted with an exercise price equal to the closing market price of the Company’s stock on the date of grant and have 10-year contractual terms. The options granted to key employees generally vest between one and five years from the grant date whereas the options granted to non-employee directors generally vest immediately. The fair values of the stock options are expensed on a straight-line basis over the vesting period. The related expense for the nine months ended September 30, 2006 includes $1,194,091 in administrative expenses for non-employee directors and $44,708 in salaries and benefits for employees. The related expense for the nine months ended September 30, 2005 includes $495,182 in administrative expenses for non-employee directors and $192,928 in salaries and benefits for employees. The total tax benefit recognized in the consolidated statements of income was $463,311 and $255,977 for the nine months ended September 30, 2006 and 2005, respectively. The following summarizes all stock option related transactions from January 1, 2006 through September 30, 2006:


						Weighted-Average
	Options			Weighted-Average		Remaining		Aggregate Intrinsic
	Outstanding			Exercise Price		Contractual Term		Value
January 1, 2006		251,049		$	19.37
Granted		112,474			18.08
Exercised		(15,000	)		18.89
Forfeited or expired		(25,000	)		18.89

Outstanding at September 30, 2006		323,523			18.98		8.65	$	83,468

Exercisable at September 30, 2006		271,023		$	19.11		8.53	$	58,668

The weighted-average fair value of the options granted during the nine months ended September 30, 2006 and 2005 were $8.46 and $9.94, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2006 was $30,000. No options were exercised during 2005.

As of September 30, 2006, there was $316,753 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted with stock options. That cost is expected to be recognized over a weighted-average period of 4.17 years.

Cash received from options exercised during the nine months ended September 30, 2006 was $283,350 and the actual tax benefit realized for the tax deductions was $11,220 for the nine months ended September 30, 2006.

Restricted Shares

In April 2006, the Company agreed to grant 25,114 restricted shares as part of an employment agreement with PARC’s President. The value of the restricted shares are equal to the market price of the Company’s stock at the date of grant and contingently vest over approximately three years based upon certain performance goals.

The fair value of the restricted shares is expensed on a straight-line basis over the vesting period and assumes that performance goals will be achieved. If such goals are not met, the compensation cost previously recognized will be reversed. The related expense for the nine months ended September 30, 2006 includes $74,947 in salaries and benefits. There were no restricted shares granted or outstanding during 2005.

As of September 30, 2006, there was $449,684 of total unrecognized compensation cost related to nonvested share-based compensation arrangement granted with restricted shares. That cost is expected to be recognized over a period of 2.50 years. There were no restricted shares vested as of September 30, 2006.

7. Litigation Contingencies

The Company is involved in certain legal matters that management considers incidental to its business. Management has evaluated pending and threatened litigation against the Company as of September 30, 2006 and does not believe such exposure to be material.

8. Income Taxes

The Company recorded an income tax provision of $21.3 million and $27.4 million for the nine months ended September 30, 2006 and 2005, respectively. The provision for income tax expense reflects an effective income tax rate of 37.3% and 37.7% for the nine months ended September 30, 2006 and 2005, respectively.

9. Purchase Concentrations

For the three and nine months ended September 30, 2006, the Company invested 65.4% and 71.8%, respectively, of its purchased receivables from three sellers. For the three and nine months ended September 30, 2005, the Company invested 39.4% and 28.8%, respectively, of its purchased receivables from three sellers. The three sellers in 2006 were not the same entities as in 2005.

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.

On April 28, 2006, we entered into a stock purchase agreement with PARC and its wholly-owned subsidiary, Outcoll Services, Inc. Under the terms of the agreement, the Company acquired 100% of the outstanding shares of PARC for $16.2 million, including four non-compete agreements. Additionally, we have two employment agreements with key individuals.

On June 22, 2006, we approved a stock repurchase program of up to 2.5 million shares, or approximately 6.7% of the total outstanding common stock. During the third quarter of 2006, we repurchased 1,307,985 shares for $19.8 million with an average purchase price of $15.15 per share.

The growth rate of cash collections for the three month period ended September 30, 2006 slowed to a 3.5% increase over the prior year’s increase of 17.0%. The slow down of growth in cash collections is the result of relatively level purchasing volumes (at face) since 2002 and lower returns expected on many purchases made since 2004 due to an increasingly competitive purchasing environment over that time frame. We are committed to purchasing receivables when we believe we can achieve acceptable returns as opposed to purchasing receivables to maintain growth in cash collections and revenues.

For the three months ended September 30, 2006, legal cash collections constituted 41.6% of total cash collections compared to 37.2% for the three months ended September 30, 2005. Legal collections continue to increase as a percentage of total collections. We believe this trend is a result of an increase in the volume of suits initiated over the last couple of years.

The growth rate of cash collections for the nine months ended September 30, 2006 slowed to a 6.8% increase compared to the prior year’s increase of 22.0%. For the nine months ended September 30, 2006, cash collections were $259.9 million. Revenues for the first nine months of 2006 were $193.3 million, a 2.8% decrease from the prior year. Net income was $35.7 million for the first nine months of 2006, compared to a net income of $45.2 million for the same period in 2005. Net income for the first nine months of 2006 and 2005 included net impairment charges of $14.4 million and $7.0 million, respectively. The net impairment charges reduced purchased receivables revenue and the carrying value of the purchased receivables.

For the nine months ended September 30, 2006, we invested $73.4 million in charged-off consumer receivable portfolios, with an aggregate face value of $2.0 billion, or 3.59% of face value (excluding the $8.3 million receivable portfolio acquired in the stock purchase of PARC). We have seen prices for charged-off accounts receivable portfolios increase to relatively high levels over the past 24 to 36 months. We cannot give any assurances about future prices either overall or within account or asset types. We are determined to remain disciplined and purchase portfolios only when we believe we can achieve acceptable returns.

We regularly utilize unaffiliated third parties, primarily attorneys and other collection agencies, to collect certain account balances on our behalf. The percent of gross collections from such third parties has increased from 22.0% for the nine months ended September 30, 2005 to 24.0% for the nine months ended September 30, 2006. The increase is primarily due to increased legal activity in states where we are not located, as well as a slight increase in the use of third party collection agencies.

Forward-Looking Statements

This report contains forward-looking statements that involve risks and uncertainties. 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, 2005 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;

	•		our ability to make reasonable estimates of the timing and amount of future cash receipts 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;

	•		changes in, or failure to comply with, governmental regulations, including our ability to maintain compliance with Section 404 of the Sarbanes-Oxley Act and the costs related to compliance;

	•		our ability to successfully integrate PARC into our business operations;

	•		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;

	•		the costs, uncertainties and other effects of legal and administrative proceedings;

	•		our ability to successfully expand our businesses and train and integrate new account representatives;

	•		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; and

	•		other unanticipated events and conditions that may hinder our ability to compete.

Results of Operations

The following table sets forth selected statement 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						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2006			2005			2006			2005			2006			2005			2006			2005
Revenues
Purchased receivable revenues		100.9	%		99.8	%		98.7	%		99.8	%		73.8	%		81.8	%		73.5	%		81.5	%
Gain (loss) on sales of purchased receivables		0.7			0.0			1.4			(0.0	)		0.5			0.0			1.0			(0.0	)
Other revenues		(1.6	)		0.2			(0.1	)		0.2			(1.2	)		0.1			(0.1	)		0.2

Total revenues		100.0			100.0			100.0			100.0			73.1			81.9			74.4			81.7

Expenses
Salaries and benefits		32.7			30.6			32.7			28.8			23.9			25.0			24.3			23.5
Collections expense		32.7			27.9			30.3			27.7			23.9			22.8			22.5			22.6
Occupancy		3.9			3.3			3.5			3.1			2.8			2.7			2.6			2.6
Administrative		1.3			2.9			3.1			2.7			1.0			2.4			2.4			2.3
Depreciation and amortization		1.9			1.3			1.6			1.3			1.4			1.1			1.2			1.0
Loss on disposal of equipment		0.0			0.0			0.0			0.0			0.0			0.0			0.0			0.0

Total operating expenses		72.5			66.0			71.2			63.6			53.0			54.0			53.0			52.0

Income from operations		27.5			34.0			28.8			36.4			20.1			27.9			21.4			29.7
Other income (expense)
Interest income		1.0			0.7			0.9			0.3			0.7			0.5			0.7			0.3
Interest expense		(0.2	)		(0.2	)		(0.2	)		(0.2	)		(0.1	)		(0.2	)		(0.2	)		(0.2	)
Other		0.3			0.0			(0.0	)		(0.0	)		0.2			0.0			(0.0	)		(0.0	)

Income before income taxes		28.6			34.5			29.5			36.5			20.9			28.2			21.9			29.8
Income taxes		10.5			13.1			11.0			13.8			7.7			10.7			8.2			11.2

Net Income		18.1	%		21.4	%		18.5	%		22.7	%		13.2	%		17.5	%		13.7	%		18.6	%

Three Months Ended September 30, 2006 Compared To Three Months Ended September 30, 2005

Revenue

Total revenues were $59.2 million for the three months ended September 30, 2006, a decrease of $4.8 million, or 7.6%, from total revenues of $64.0 million for the three months ended September 30, 2005. Purchased receivable revenues were $59.7 million for the three months ended September 30, 2006, a decrease of $4.2 million, or 6.6%, from the three months ended September 30, 2005 amount of $63.9 million. Purchased receivable revenues reflect net impairments recognized during the three months ended September 30, 2006 and 2005 of $6.3 million and $4.6 million, respectively. The decrease in purchased receivable revenues was primarily due to an increase in net impairments on purchased receivables and by lower average internal rates of return expected from recent purchases. In addition, total revenue reflects a recognized gain on sale of purchased receivables during the three months ended September 30, 2006 of $0.4 million as a result of a pilot program. Furthermore, total revenue reflects an additional $1.3 million of estimated allowance and charge-offs related to a dealer finance contract portfolio purchased during the fourth quarter of 2005. Cash collections on charged-off consumer receivables increased 3.5% to $80.9 million for the three months ended September 30, 2006 from $78.2 million for the same period in 2005. Cash collections for the three months ended September 30, 2006 and 2005 include collections from fully amortized portfolios of $15.8 million and $14.0 million, respectively, of which 100% were reported as revenue.

During the three months ended September 30, 2006, we acquired charged-off consumer receivable portfolios with an aggregate face value of $779.5 million at a cost of $27.6 million, or 3.54% of face value, net of buybacks. Included in these purchase totals were nine portfolios with an aggregate face value of $31.3 million at a cost of $0.8 million, or 2.64% of face value, which were acquired through three forward flow contracts. Revenues from our top three sellers for the quarter were $7.8 million and $3.8 million for the three months ended September 30, 2006 and 2005, respectively. During the three months ended September 30, 2005, we acquired charged-off consumer receivable portfolios with an aggregate face value of $1.1 billion at a cost of $27.2 million, or 2.49% of face value

(adjusted for buybacks through September 30, 2006). Included in these purchase totals were nine portfolios with an aggregate face value of $74.5 million at a cost of $2.7 million, or 3.65% of face value (adjusted for buybacks through September 30, 2006), which were acquired through three forward flow contracts. From period to period, we may buy charged-off receivables of varying age, type and cost. As a result, the cost of our purchases, as a percent of face value, may fluctuate from one period to the next.

Operating Expenses

Total operating expenses were $42.9 million for the three months ended September 30, 2006, an increase of $0.7 million, or 1.7%, compared to total operating expenses of $42.2 million for the three months ended September 30, 2005. Total operating expenses were 72.5% of total revenues and 53.0% of cash collections for the three months ended September 30, 2006, compared with 66.0% and 54.0%, respectively, for the same period in 2005. The increase in operating expenses as a percent of total revenues was due to an increase in collections expenses, which was partially offset by decreases in salaries and benefits and administrative expenses.

Salaries and Benefits.Salary and benefit expenses were $19.4 million for the three months ended September 30, 2006, a decrease of $0.2 million, or 1.1%, compared to salary and benefit expenses of $19.6 million for the three months ended September 30, 2005. Salary and benefit expenses were 32.7% of total revenue and 23.9% of cash collections for the three months ended September 30, 2006, compared with 30.6% and 25.0%, respectively, for the same period in 2005. Salary and benefit expenses decreased primarily as a result of a decrease in average overall employee headcount for the three months ended September 30, 2006 compared to the same period in 2005 as well as a result in a reduction in incentive compensation associated with the traditional cash collections.

Collections Expense.Collections expense increased to $19.4 million for the three months ended September 30, 2006, reflecting an increase of $1.6 million, or 8.7%, over collections expense of $17.8 million for the three months ended September 30, 2005. Collections expense increased to 23.9% of cash collections for the three months ended September 30, 2006 from 22.8% of cash collections for the three months ended September 30, 2005. The increase was primarily due to an increase in legal expenses, which was partially offset by a reduction in information acquisition expenses. These increases in legal expenses were due to an increase in the number of accounts for which legal action has been initiated. The decrease in the information acquisition expenses was primarily due to changes in our strategy.

Occupancy.Occupancy expense was $2.3 million for the three months ended September 30, 2006, an increase of $0.2 million, or 9.6%, over occupancy expense of $2.1 million for the three months ended September 30, 2005.

Administrative.Administrative expenses decreased to $0.8 million for the three months ended September 30, 2006, from $1.9 million for the three months ended September 30, 2005, reflecting a $1.1 million, or 58.7%, decrease. During the three months ended December 2005, we made an accrual for potential property tax assessments. During the three months ended September 30, 2006, we determined that we would not be paying $1.0 million of accrued property taxes and therefore we reversed the expenses.

Depreciation and Amortization.Depreciation and amortization expense was $1.1 million for the three months ended September 30, 2006, an increase of $0.3 million or 34.2% over depreciation and amortization expense of $0.8 million for the three months ended September 30, 2005. The increase is primarily related to depreciation for the capitalization of new telecommunications equipment purchased during 2006 as well as the amortization of intangible assets acquired as a result of the acquisition of PARC on April 28, 2006.

Interest Income.Interest income was $0.6 million for the three months ended September 30, 2006, reflecting an increase of $0.2 million compared to $0.4 million for the three months ended September 30, 2005.

Interest Expense.Interest expense was $0.1 million in each of the three months ended September 30, 2006 and 2005. Interest expense also includes the amortization of capitalized loan costs of $54,982 in the three month periods ended September 30, 2006 and 2005.

Income Taxes.Income tax expense of $6.2 million reflected a federal tax rate of 34.6% and a state tax rate of 2.2% (net of federal tax benefit including utilization of state net operating losses) for the three months ended

September 30, 2006. For the three months ended September 30, 2005, income tax expense was $8.4 million and reflected a federal tax rate of 34.7% and state tax rate of 3.2% (net of federal tax benefit including utilization of state net operating losses). The 1.0% decrease in the state rate was due to changes in apportionment percentages as well as rate changes among the various states. Income tax expense decreased $2.2 million, or 25.8% from income tax expense of $8.4 million for the three months ended September 30, 2005. The decrease in income tax expense was due to a decrease in pre-tax financial statement income, which was $16.9 million for the three months ended September 30, 2006, compared to $22.1 million for the same period in 2005.

Nine Months Ended September 30, 2006 Compared To Nine Months Ended September 30, 2005

Revenue

Total revenues were $193.3 million for the nine months ended September 30, 2006, a decrease of $5.6 million, or 2.8%, from total revenues of $198.9 million for the nine months ended September 30, 2005. Purchased receivable revenues were $190.9 million for the nine months ended September 30, 2006, a decrease of $7.6 million, or 3.8%, from the nine months ended September 30, 2005 amount of $198.5 million. Purchased receivable revenues reflect net impairments recognized during the nine months ended September 30, 2006 and 2005 of $14.4 million and $7.0 million, respectively. The decrease in purchased receivable revenues was primarily due to an increase in net impairments on purchased receivables and lower average internal rates of return expected from recent purchases. In addition, total revenue reflects a recognized gain on sale of purchased receivables during the nine months ended September 30, 2006 of $2.7 million. Furthermore, total revenue reflects an additional $1.4 million of estimated allowance and charge-offs related to a dealer finance contract portfolio purchased during the fourth quarter 2005. Cash collections on charged-off consumer receivables increased 6.8% to $259.9 million for the nine months ended September 30, 2006 from $243.4 million for the same period in 2005. Cash collections for the nine months ended September 30, 2006 and 2005 include collections from fully amortized portfolios of $49.7 million and $41.1 million, respectively, of which 100% were reported as revenue.

During the nine months ended September 30, 2006, we acquired charged-off consumer receivable portfolios with an aggregate face value of $2.0 billion at a cost of $73.4 million, or 3.59% of face value, net of buybacks. Included in these purchase totals were 17 portfolios with an aggregate face value of $66.4 million at a cost of $1.8 million, or 2.72% of face value, which were acquired through three forward flow contracts. Revenues from our top three sellers for the first nine months were $20.5 million and $21.7 million for the nine months ended September 30, 2006 and 2005, respectively. Additionally, the Company acquired portfolios from the acquisition of PARC on April 28, 2006 that were preliminarily allocated a purchase price value of $8.3 million. During the nine months ended September 30, 2005, we acquired charged-off consumer receivable portfolios with an aggregate face value of $3.2 billion at a cost of $75.7 million, or 2.34% of face value (adjusted for buybacks through September 30, 2006). Included in these purchase totals were 28 portfolios with an aggregate face value of $240.5 million at a cost of $8.8 million, or 3.64% of face value (adjusted for buybacks through September 30, 2006), which were acquired through four forward flow contracts. From period to period we may buy charged-off receivables of varying age, type and cost. As a result, the cost of our purchases, as a percent of face value, may fluctuate from one period to the next.

Operating Expenses

Total operating expenses were $137.7 million for the nine months ended September 30, 2006, an increase of $11.1 million, or 8.8%, compared to total operating expenses of $126.6 million for the nine months ended September 30, 2005. Total operating expenses were 71.2% of total revenues and 53.0% of cash collections for the nine months ended September 30, 2006, compared with 63.6% and 52.0%, respectively, for the same period in 2005. The increase in operating expenses as a percent of total revenues and cash collections was due to increases in salaries and benefits and to a lesser extent collections and administrative expenses.

Salaries and Benefits.Salary and benefit expenses were $63.2 million for the nine months ended September 30, 2006, an increase of $6.0 million, or 10.6%, compared to salary and benefit expenses of $57.2 million for the nine months ended September 30, 2005. Salary and benefit expenses were 32.7% of total revenue and 24.3% of cash collections for the nine months ended September 30, 2006, compared with 28.8% and 23.5%, respectively, for the same period in 2005. Salaries and benefit expenses increased as a percentage of revenue due to higher legal salaries expense related to the number of accounts for which legal cash collections were received. In addition, the Company

made necessary employee additions to strengthen accounting and finance, information technology, marketing and human resources departments and experienced higher expenses due to the acquisition of PARC on April 28, 2006.

Collections Expense.Collections expense increased to $58.6 million for the nine months ended September 30, 2006, reflecting an increase of $3.5 million, or 6.3%, over collections expense of $55.1 million for the nine months ended September 30, 2005. The increase was primarily due to an increase in legal expenses, which was partially offset by a reduction in collection letters expense and information acquisition expenses. The increase in legal expense was due to an increase in the number of accounts for which legal action has been initiated as well as an increase in legal forwarding fees due to higher legal activity outsourced to third-party law firms collecting on our behalf on a contingent fee basis. Collections expense decreased to 22.5% of cash collections for the nine months ended September 30, 2006 from 22.6% of cash collections for the nine months ended September 30, 2005.

Occupancy.Occupancy expense was $6.7 million for the nine months ended September 30, 2006, an increase of $0.5 million, or 7.8%, over occupancy expense of $6.2 million for the nine months ended September 30, 2005.

Administrative.Administrative expenses increased to $6.1 million for the nine months ended September 30, 2006, from $5.5 million for the nine months ended September 30, 2005, reflecting a $0.6 million, or 11.1%, increase. The increase in administrative expenses was principally a result of the additional contract labor and consultants required for testing the internal controls for compliance with Section 404 of Sarbanes-Oxley and reduced vesting period for the non-employee directors annual stock option awards. During the three months ended September 30, 2006, we determined that we would not be paying $1.0 million of accrued property taxes and therefore we reversed the expenses. In addition, administrative expenses during the nine months ended September 30, 2005 included secondary offering costs of $0.5 million.

Depreciation and Amortization.Depreciation and amortization expense was $3.1 million for the nine months ended September 30, 2006, an increase of $0.6 million or 21.6% over depreciation and amortization expense of $2.5 million for the nine months ended September 30, 2005. The increase is primarily related to depreciation for the capitalization of new telecommunications equipment purchased during 2006 as well as the amortization of intangible assets acquired as a result of the acquisition of PARC on April 28, 2006.

Interest Income.Interest income was $1.8 million for the nine months ended September 30, 2006, reflecting an increase of $1.1 million compared to $0.7 million for the nine months ended September 30, 2005. The increase was due primarily to interest received related to our increased interest rates for the nine months ended September 30, 2006 compared to the prior year as well as the increased average cash and investment position during the nine months ended September 30, 2006 versus 2005.

Interest Expense.Interest expense was $0.5 million for the nine months ended September 30, 2006, reflecting an increase of $0.1 million, or 14.6%, compared to interest expense of $0.4 million for the nine months ended September 30, 2005. Interest expense also includes the amortization of capitalized loan costs of $0.2 million in the nine month periods ended September 30, 2006 and 2005.

Income Taxes.Income tax expense of $21.3 million reflects a federal tax rate of 34.9% and a state tax rate of 2.4% (net of federal tax benefit including utilization of state net operating losses) for the nine months ended September 30, 2006. For the nine months ended September 30, 2005, income tax expense was $27.4 million and reflected a federal tax rate of 34.9% and state tax rate of 2.8% (net of federal tax benefit including utilization of state net operating losses). The 0.4% decrease in the state rate was due to changes in apportionment percentages as well as rate changes among the various states. Income tax expense decreased $6.1 million, or 22.3% from income tax expense of $27.4 million for the nine months ended September 30, 2005. The decrease in income tax expense was due to a decrease in pre-tax financial statement income, which was $57.0 million for the nine months ended September 30, 2006, compared to $72.5 million for the same period in 2005.

Supplemental Performance Data

Portfolio Performance

The following table summarizes our historical portfolio purchase price and cash collections on an annual vintage basis since 1995 through September 30, 2006.


												Total Estimated
						Cash Collections		Estimated		Total		Collections as a
	Number of		Purchase			Including Cash		Remaining		Estimated		Percentage of
Purchase Period	Portfolios		Price (1)			Sales (2)		Collections(3)		Collections		Purchase Price (2)
					(dollars in thousands)
1995		53	$	1,518		$	8,003	$	—	$	8,003		527	%
1996		46		3,844			17,596		19		17,615		458
1997		45		4,345			29,082		615		29,697		683
1998		61		16,411			80,505		4,591		85,096		519
1999		51		12,925			59,026		6,433		65,459		506
2000		49		20,593			115,360		20,420		135,780		659
2001		62		43,127			229,413		58,363		287,776		667
2002		94		72,262			276,561		123,044		399,605		553
2003		76		87,160			287,704		226,937		514,641		590
2004		106		86,686			140,810		230,334		371,144		428
2005		104		100,885			70,008		230,562		300,570		298
2006 (4, 5)		123		81,688			18,768		237,994		256,762		314

Total		870	$	531,444		$	1,332,836	$	1,139,312	$	2,472,148		465	%


(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 defined as buybacks) less the purchase price for accounts that were sold at the time of purchase to another debt purchaser.

(2)		For purposes of this table, cash collections include selected cash sales, which were entered into subsequent to purchase. Cash sales, however, exclude the sales of portfolios, which occurred at the time of purchase.

(3)		Estimated remaining collections are based on historical cash collections. Please refer to Forward-Looking Statements on page 15 and Critical Accounting policies on page 27 for further information regarding these estimates.

(4)		Includes only nine months of activity through September 30, 2006.

(5)		Includes 62 portfolios from the acquisition of PARC on April 28, 2006 that were preliminarily allocated a purchase price value of $8.3 million.

The following table summarizes the remaining unamortized balances of our purchased receivable portfolios by year of purchase as of September 30, 2006.


						Unamortized			Unamortized
	Unamortized					Balance as a			Balance as a
	Balance as of			Purchase		Percentage of			Percentage of
Purchase Period	September 30, 2006			Price (1)		Purchase Price			Total
			(dollars in thousands)
2000	$	33		$	20,593		0.2	%		0.0	%
2001		796			43,127		1.8			0.3
2002		15,377			72,262		21.3			5.9
2003		32,506			87,160		37.3			12.5
2004		53,563			86,686		61.8			20.7
2005		81,692			100,885		81.0			31.5
2006 (2)		75,458			85,576		88.2			29.1

Total	$	259,425		$	496,289		52.3	%		100.0	%


(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 defined as buybacks) less the purchase price for accounts that were sold at the time of purchase to another debt purchaser.

(2)		Includes only nine months of activity through September 30, 2006.

Account Representative Productivity and Turnover

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 (1)


	Three months ended				Nine months ended				Year ended
	September 30,				September 30,				December 31,
Number of account representatives:	2006		2005		2006		2005		2005		2004
One year or more (2)		570		509		568		510		510		471
Less than one year (3)		366		558		437		530		540		437

Total account representatives		936		1,067		1,005		1,040		1,050		908


(1)		This excludes Full Time Equivalent (“FTE”) account representatives from PARC from the date of acquisition through September 30, 2006.

(2)		Based on number of average traditional call center FTE account representatives with one or more years of service.

(3)		Based on number of average traditional call center FTE account representatives with less than one year of service, including new employees in training.

Collection Averages by Experience (1)


	Three months ended				Nine months ended				Year ended
	September 30,				September 30,				December 31,
Collection averages:	2006		2005		2006		2005		2005		2004
One year or more (2)	$	44,576	$	46,519	$	146,452	$	154,073	$	199,734	$	195,426
Less than one year (3)		27,988		27,264		92,202		92,589		117,859		139,891
Overall average		38,082		36,453		122,854		122,713		157,661		168,708


(1)		This excludes collections and FTE account representatives from PARC from the date of acquisition through September 30, 2006.

(2)		Based on number of traditional call center FTE account representatives with one or more years of service.

(3)		Based on number of traditional call center FTE account representatives with less than one year of service, including employees in training.

We believe that there is an adverse relationship between account representative productivity and account representative turnover. Collection averages tend to increase for account representatives as they gain experience. The following table provides annualized account representative turnover data for traditional collections for the three and nine months ended September 30, 2006 and 2005 as well as for the years ended December 31, 2005 and 2004:

Turnover by Experience (1)


	Three months ended						Nine months ended						Year ended
	September 30,						September 30,						December 31,
Account representatives turnover:	2006			2005			2006			2005			2005			2004
One year or more (2)		50.6	%		48.8	%		44.8	%		45.1	%		39.3	%		38.4	%
Less than one year (3)		112.5			146.0			105.0			126.5			117.8			103.3
Overall turnover		73.8			97.9			70.0			85.7			78.8			69.0


(1)		This excludes FTE account representatives from PARC from the date of acquisition through September 30, 2006.

(2)		Based on number of traditional call center FTE account representatives with one or more years of service.

(3)		Based on number of traditional call center FTE account representatives with less than one year of service, including new employees in training.

Cash Collections

The following tables provide further detailed vintage collection analysis on an annual and a cumulative basis.

Historical Collections (1)


																																				Nine Months
																																				Ended
Purchase	Purchase		Year Ended December 31,																																	September 30,
Period	Price(3)		1995			1996			1997			1998			1999			2000			2001			2002			2003			2004			2005			2006
(dollars in thousands)
Pre-1995			$	4,303		$	3,218		$	2,290		$	1,481		$	1,106		$	912		$	695		$	478		$	511		$	369		$	375		$	214
1995		1,518		388			1,566			1,659			1,118			786			708			472			343			278			227			212			129
1996		3,844		—			827			3,764			3,085			2,601			2,098			1,440			1,041			816			687			683			400
1997		4,345		—			—			1,682			4,919			5,573			5,017			3,563			2,681			1,785			1,526			1,342			885
1998		16,411		—			—			—			4,835			15,220			15,045			12,962			11,021			7,987			5,582			4,653			2,621
1999		12,925		—			—			—			—			3,761			11,331			10,862			9,750			8,278			6,675			5,022			3,099
2000		20,593		—			—			—			—			—			8,895			23,444			22,559			20,318			17,196			14,062			8,409
2001		43,127		—			—			—			—			—			—			17,630			50,327			50,967			45,713			39,865			23,838
2002		72,262		—			—			—			—			—			—			—			22,340			70,813			72,024			67,649			43,238
2003		87,160		—			—			—			—			—			—			—			—			36,067			94,564			94,234			62,673
2004		86,686		—			—			—			—			—			—			—			—			—			23,365			68,354			49,091
2005		100,885		—			—			—			—			—			—			—			—			—			—			23,459			46,549
2006 (2)		81,688		—			—			—			—			—			—			—			—			—			—			—			18,769

Total			$	4,691		$	5,611		$	9,395		$	15,438		$	29,047		$	44,006		$	71,068		$	120,540		$	197,820		$	267,928		$	319,910		$	259,915

Cumulative Collections (1)

																																				Total
																																				Through
Purchase	Purchase		Total Through December 31,																																	September 30,
Period	Price(3)		1995			1996			1997			1998			1999			2000			2001			2002			2003			2004			2005			2006
(dollars in thousands)
1995	$	1,518	$	388		$	1,954		$	3,613		$	4,731		$	5,517		$	6,225		$	6,697		$	7,040		$	7,318		$	7,545		$	7,757		$	7,886
1996		3,844		—			827			4,591			7,676			10,277			12,375			13,815			14,856			15,672			16,359			17,042			17,442
1997		4,345		—			—			1,682			6,601			12,174			17,191			20,754			23,435			25,220			26,746			28,088			28,973
1998		16,411		—			—			—			4,835			20,055			35,100			48,062			59,083			67,070			72,652			77,305			79,926
1999		12,925		—			—			—			—			3,761			15,092			25,954			35,704			43,982			50,657			55,679			58,778
2000		20,593		—			—			—			—			—			8,895			32,339			54,898			75,216			92,412			106,474			114,883
2001		43,127		—			—			—			—			—			—			17,630			67,957			118,924			164,637			204,502			228,340
2002		72,262		—			—			—			—			—			—			—			22,340			93,153			165,177			232,826			276,064
2003		87,160		—			—			—			—			—			—			—			—			36,067			130,631			224,865			287,538
2004		86,686		—			—			—			—			—			—			—			—			—			23,365			91,719			140,810
2005		100,885		—			—			—			—			—			—			—			—			—			—			23,459			70,008
2006 (2)		81,688		—			—			—			—			—			—			—			—			—			—			—			18,769
Cumulative Collections as Percentage of Purchase Price (1)

																																				Total
																																				Through
Purchase	Purchase		Total Through December 31,																																	September 30,
Period	Price(3)		1995			1996			1997			1998			1999			2000			2001			2002			2003			2004			2005			2006
1995	$	1,518		26	%		129	%		238	%		312	%		363	%		410	%		441	%		464	%		482	%		497	%		511	%		519	%
1996		3,844		—			22			119			200			267			322			359			386			408			426			443			454
1997		4,345		—			—			39			152			280			396			478			539			580			616			646			667
1998		16,411		—			—			—			29			122			214			293			360			409			443			471			487
1999		12,925		—			—			—			—			29			117			201			276			340			392			431			455
2000		20,593		—			—			—			—			—			43			157			267			365			449			517			558
2001		43,127		—			—			—			—			—			—			41			158			276			382			474			529
2002		72,262		—			—			—			—			—			—			—			31			129			229			322			382
2003		87,160		—			—			—			—			—			—			—			—			41			150			258			330
2004		86,686		—			—			—			—			—			—			—			—			—			27			106			162
2005		100,885		—			—			—			—			—			—			—			—			—			—			23			69
2006 (2)		81,688		—			—			—			—			—			—			—			—			—			—			—			23


(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 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.

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 interest method for revenue recognition. 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 chart that illustrates our quarterly collections for 2002 through September 30, 2006.

Quarterly Cash Collections

Cash Collections


Quarter	2002		2003		2004		2005		2006
First	$	27,297,721	$	44,017,730	$	65,196,055	$	80,397,640	$	89,389,858
Second		30,475,078		51,190,533		67,566,031		84,862,856		89,609,982
Third		29,337,914		48,622,829		66,825,822		78,159,364		80,914,791
Fourth		33,429,419		53,988,333		68,339,797		76,490,350		—

Total cash collections	$	120,540,132	$	197,819,425	$	267,927,705	$	319,910,210	$	259,914,631

Below is a table that illustrates the percentages by source of our total collections:


	Three months ended September 30,						Nine months ended September 30,
	2006			2005			2006			2005
Traditional collections		46.0	%		49.7	%		48.4	%		52.5	%
Legal collections		41.6			37.2			39.2			35.3
Other collections		12.4			13.1			12.4			12.2

Total cash collections		100.0	%		100.0	%		100.0	%		100.0	%

Legal collections continue to increase as a percentage of total collections as traditional call center collections decline. We believe this trend is a result of an increase in the volume of suits initiated over the last couple of years. Additionally, growth in traditional call center collections has slowed significantly while legal collections have continued to grow, albeit at a slower pace in 2006 than in 2005 or 2004.

The following chart categorizes our purchased receivables portfolios acquired during January 1, 1995 through September 30, 2006 and into major asset types, as of September 30, 2006:


	Face Value of
	Charged-off					No. of
Asset Type	Receivables (2)(3)		%			Accounts (3)		%
	(in thousands)
Visa®/MasterCard®/Discover®	$	11,328,691		45.8	%		4,817		19.9	%
Private Label Credit Cards		3,393,477		13.7			4,878		20.2
Telecommunications/Utility/Gas		2,218,729		9.0			5,447		22.5
Health Club		1,435,375		5.8			1,454		6.0
Auto Deficiency		1,387,245		5.6			248		1.0
Wireless Telecommunications		721,770		2.9			1,731		7.2
Installment Loans		634,989		2.6			213		0.9
Other (1)		3,604,729		14.6			5,403		22.3

Total	$	24,725,005		100.0	%		24,191		100.0	%


(1)		“Other” includes charged-off receivables of several debt types, including student loan, mobile home deficiency and retail mail order. This includes 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.

(3)		This excludes the face value of charged-off receivables and the number of accounts acquired through PARC either from the acquisition of PARC on April 28, 2006 or from the purchases by PARC from the date of acquisition through September 30, 2006.

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 value 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 charge-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. 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 during January 1, 1995 through September 30, 2006 into major account types as of September 30, 2006:


	Face Value of
	Charged-off					No. of
Account Type	Receivables (2)(3)		%			Accounts (3)		%
	(in thousands)
Fresh	$	1,362,504		5.5	%		776		3.2	%
Primary		3,942,894		16.0			3,096		12.8
Secondary		4,326,443		17.5			4,806		19.9
Tertiary (1)		13,557,323		54.8			14,657		60.6
Other		1,535,841		6.2			856		3.5

Total	$	24,725,005		100.0	%		24,191		100.0	%


(1)		This includes 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.

(3)		This excludes the face value of charged-off receivables and the number of accounts acquired through PARC either from the acquisition of PARC on April 28, 2006 or from the purchases by PARC from the date of acquisition through September 30, 2006.

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 receivable portfolios acquired during January 1, 1995 through September 30, 2006 based on geographic location of debtor, as of September 30, 2006:


	Face Value of
	Charged-off					No. of
Geographic Location	Receivables (3)(4)		%			Accounts (4)		%
	(in thousands)
Texas (1)	$	3,420,442		13.8	%		2,905		12.0	%
California		2,822,172		11.4			3,002		12.4
Florida (1)		2,518,334		10.2			1,689		7.0
Michigan (1)		1,889,597		7.6			2,330		9.6
New York		1,507,416		6.1			1,231		5.1
Ohio (1)	��	1,301,578		5.3			1,486		6.1
Illinois (1)		1,091,279		4.4			1,374		5.7
Pennsylvania		754,720		3.1			633		2.6
North Carolina		723,085		2.9			561		2.3
Georgia		635,241		2.6			548		2.3
Other (2)		8,061,141		32.6			8,432		34.9

Total	$	24,725,005		100.0	%		24,191		100.0	%


(1)		Collection site 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)		This excludes the face value of charged-off receivables and the number of accounts acquired through PARC either from the acquisition of PARC on April 28, 2006 or from the purchases by PARC from the date of acquisition through September 30, 2006.

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, purchasing property and equipment and working capital to support growth. However, during the third quarter of 2006, we repurchased 1,307,985 shares for $19.8 million. In addition, during the second quarter of 2006, we acquired 100% of the outstanding shares of PARC for $16.2 million.

Stock Repurchase Program

During June 2006, we approved a stock repurchase program of up to 2.5 million shares, or approximately 6.7% of the total outstanding common stock. During the third quarter of 2006, we repurchased 1,307,985 shares for $19.8 million with an average purchase price of $15.15 per share. Of the total shares repurchased, 95,902 of the shares repurchased for $1.5 million in September 2006 did not settle until October 2006 and will be reported as an investing cash outflow in the fourth quarter of 2006.

Borrowings

We maintain a $100.0 million line of credit (the “Credit Agreement”) secured by a first priority lien on all of our assets. The Credit Agreement expires in May 2008 and bears interest at prime or 25 basis points over prime depending upon our liquidity, as defined in the Credit Agreement. Alternately, at our discretion, we may borrow by entering into 30, 60 or 90-day LIBOR contracts at rates between 150 to 250 basis points over the respective LIBOR rates, depending on our liquidity. Our line of credit includes an accordion loan feature that allows us to request a $20.0 million increase in the credit facility. The line of credit has certain covenants and restrictions that we must comply with, which, as of September 30, 2006, we believe we were in compliance with, including:

	•		funds borrowed can be used to purchase portfolios of charged-off receivables and for general corporate purposes;

	•		leverage ratio (as defined in the Credit Agreement) cannot exceed 1.5 to 1.0;

	•		debt to total capitalization ratio (as defined in the Credit Agreement) cannot exceed 1.25 to 1.0; and

	•		tangible net worth must exceed $145.0 million plus 50% of net income after September 30, 2004 which required a balance of $194.8 million as of September 30, 2006.

There was no outstanding balance on our line of credit at September 30, 2006.

In accordance with the Credit Agreement, we obtained approval from the lender prior to the PARC acquisition.

Cash Flows

The majority of our purchases have been funded with internal cash flow. For the nine months ended September 30, 2006, we invested $71.6 million in purchased receivables, net of buybacks with no borrowings against our line of credit. Our cash balance has decreased from $50.5 million at December 31, 2005 to $32.7 million as of September 30, 2006.

Our operating activities provided cash of $53.9 million and $74.2 million for the nine months ended September 30, 2006 and 2005, respectively. Cash provided by operating activities for the nine months ended September 30, 2006 and 2005 was generated primarily from net income earned through cash collections.

Investing activities used cash of $47.4 million and $36.0 million for the nine months ended September 30, 2006 and 2005, respectively. Cash used for investing purposes in the nine months ended September 30, 2006 and 2005 was primarily due to acquisitions of purchased receivables, net of cash collections applied to principal, as well as purchases of property and equipment. In 2006, we incurred a cash payment of $14.7 million for the acquisition of PARC and used cash to purchase investments of $14.9 million.

Financing activities used cash of $24.4 million and $0.1 million for the nine months ended September 30, 2006 and 2005, respectively. Cash used by financing activities for the first nine months of 2006 was primarily due to the $19.8 million repurchase of 1,307,985 shares in accordance with the stock repurchase program as well as the $4.4 million repayment of PARC’s loan balances on the date of acquisition. Cash used by financing activities in the first nine months of 2005 was due to repayments on capital lease obligations.

We believe that cash generated from operations combined with borrowing available under our line of credit, should be sufficient to fund our operations for the next 12 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 line of credit.

Future Contractual Cash Obligations

The following table summarizes our future contractual cash obligations as of September 30, 2006:


	Year Ending December 31,
	2006		2007		2008(2)		2009		2010		Thereafter
Capital lease obligations	$	27,638	$	63,802	$	18,634	$	—	$	—	$	—
Operating lease obligations		1,665,431		6,609,432		5,665,026		4,834,186		3,946,520		18,103,876
Purchased receivables (1)		—		—		—		—		—		—
Line of credit (2)		—		—		—		—		—		—
Employment agreements		203,750		315,000		315,000		105,000		—		—

Total	$	1,896,819	$	6,988,234	$	5,998,660	$	4,939,186	$	3,946,520	$	18,103,876


(1)		During the nine months ended September 30, 2006, we renewed one forward flow contract and acquired two on-going forward flow contracts that commit us to purchase receivables for a fixed percentage of the face amount of the receivables. The one renewed forward flow contract expires in November 2006 and has estimated monthly purchases of approximately $200,000, depending upon circumstances and the other two on-going forward flow contracts call for monthly purchases of approximately $14,600 over the next twelve months.

(2)		To the extent that a balance is outstanding on our line of credit, it would be due in May 2008. There was no outstanding balance on our line of credit as of September 30, 2006.

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 Standards Executive Committee Practice Bulletin 6 (“PB 6”), “Amortization of Discounts on Certain Acquired Loans” as well as the Accounting Standards Executive Committee Statement of Position 03-3 (“SOP 03-3”), “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”.

The provisions of SOP 03-3 were adopted by us in 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 PB 6 for consistent treatment and apply prospectively to receivables acquired before January 1, 2005. Purchased receivables acquired before January 1, 2005 will continue to be accounted for under PB 6, as amended, for provisions related to decreases in expected cash flows.

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 revised cash flow estimates are less than the original estimates, the IRR will remain 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.

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 cash collections will have a favorable impact on reversal of impairments, yields and

revenues. Lower collection amounts or cash collections that occur later than projected cash collections will have an unfavorable impact and 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 variable line of credit. There were no borrowings on the variable line of credit for the nine months ended September 30, 2006. The average borrowings on the variable line of credit were $0.2 million for the nine months ended September 30, 2005. Assuming a 200 basis point increase in interest rates on our variable rate debt, interest expense would have increased approximately $3,000 for the nine months ended September 30, 2005. The estimated increase in interest expense is based on the portion of our variable interest debt. Interest rate fluctuations do not have a material impact on interest income from cash equivalents or available-for-sale investments.

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. We have made material changes in our internal controls during the third quarter of 2006 as a result of implementing a new general ledger application as of September 1, 2006. Except as previously described, there were no other changes in our internal controls over financial reporting 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. As of October 26, 2006, we are named in one class action lawsuit in which an underlying class has been certified. Additionally, as of October 26, 2006, we were named in other class action lawsuits in which the underlying classes have not been certified. 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about the Company’s common stock repurchases during the third quarter of 2006.


			Average		Total Number of		Maximum Number of
	Total Number		Price		Shares Purchased as Part		Shares that May Yet
	of Shares		Paid per		of Publicly Announced		Be Purchased Under
Period	Purchased		Share		Plans or Programs		the Plans or Programs
July		—	$	—		—		2,500,000
August		551,631	$	15.38		551,631		1,948,369
September		756,354	$	14.98		756,354		1,192,015

Total		1,307,985	$	15.15		1,307,985

Item 6. Exhibits


Exhibit
Number		Description
10.1*		Joinder Agreement, Dated August 14, 2006 by and among Asset Acceptance, LLC, Consumer Credit, LLC, Rx Acquisitions, LLC, Premium Asset Recovery Corporation and JPMorgan Chase Bank, N.A.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ASSET ACCEPTANCE CAPITAL CORP.
Date: November 3, 2006	By:	/s/ Nathaniel F. Bradley IV
		Nathaniel F. Bradley IV
		Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)


Date: November 3, 2006	By:	/s/ Mark A. Redman
		Mark A. Redman
		Vice President – Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

Exhibit Index


Exhibit
Number		Description
10.1*		Joinder Agreement, Dated August 14, 2006 by and among Asset Acceptance, LLC, Consumer Credit, LLC, Rx Acquisitions, LLC, Premium Asset Recovery Corporation and JPMorgan Chase Bank, N.A.

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Asset Acceptance Capital (AACC) Inactive 10-Q2006 Q3 Quarterly report

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