Asset Acceptance Capital (AACC) 10-Q 2007 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2007

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 April 19, 2007, 34,698,625 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		15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		29
Item 4.	Controls and Procedures		29
PART II – Other Information
Item 1.	Legal Proceedings		29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 6.	Exhibits		30
Signatures			31
Exhibits:	10.1 2007 Annual Incentive Compensation Plan for Management
	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
Certification
Certification
Certification

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.

2

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Financial Position
(Unaudited)

	March 31, 2007			December 31, 2006
ASSETS
Cash	$	9,724,661		$	11,307,451
Purchased receivables, net		307,983,677			300,840,508
Property and equipment, net		12,233,421			12,708,611
Goodwill		14,323,071			14,323,071
Income taxes receivable		—			3,235,426
Other assets		7,929,013			8,167,755
Total assets	$	352,193,843		$	350,582,822
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accounts payable	$	3,772,846		$	3,666,042
Accrued liabilities		13,664,655			13,026,622
Line of credit		7,000,000			17,000,000
Income taxes payable		1,445,956			—
Deferred tax liability, net		60,830,004			60,632,218
Capital lease obligations		55,926			79,821
Total liabilities		86,769,387			94,404,703
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 shares — 37,250,389 and 37,225,275 at March 31, 2007 and December 31, 2006, respectively		372,504			372,253
Additional paid in capital		161,934,996			161,841,103
Retained earnings		144,095,753			134,244,500
Common stock in treasury; at cost, 2,551,764 and 2,505,160 shares at March 31, 2007 and December 31, 2006, respectively		(40,978,797	)		(40,279,737	)
Total stockholders’ equity		265,424,456			256,178,119
Total liabilities and stockholders’ equity	$	352,193,843		$	350,582,822

See accompanying notes.

3

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Income
(Unaudited)

	Three months ended March 31,
	2007			2006
Revenues
Purchased receivable revenues, net	$	66,782,034		$	67,264,780
Other revenues, net		523,993			116,205
Total revenues		67,306,027			67,380,985
Expenses
Salaries and benefits		22,448,455			23,325,502
Collections expense		23,069,940			18,814,848
Occupancy		2,339,385			2,174,856
Administrative		2,213,356			2,350,499
Restructuring charges		148,111			—
Depreciation and amortization		1,088,892			889,617
(Gain) loss on disposal of equipment		(5,415	)		145
Total operating expenses		51,302,724			47,555,467
Income from operations		16,003,303			19,825,518
Other income (expense)
Interest income		15,727			580,957
Interest expense		(263,818	)		(177,544	)
Other		12,209			(9,539	)
Income before income taxes		15,767,421			20,219,392
Income taxes		5,916,168			7,629,297
Net income	$	9,851,253		$	12,590,095
Weighted average number of shares:
Basic		34,718,820			37,213,179
Diluted		34,725,992			37,243,261
Earnings per common share outstanding:
Basic	$	0.28		$	0.34
Diluted	$	0.28		$	0.34

See accompanying notes.

4

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Cash Flows
(Unaudited)

	Three months ended March 31,
	2007			2006
Cash flows from operating activities
Net income	$	9,851,253		$	12,590,095
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,088,892			889,617
Deferred income taxes		197,786			1,042,794
Share-based compensation expense		94,144			204,755
Net impairment of purchased receivables		4,473,100			2,694,000
Non-cash revenue		(438,475	)		(503,347	)
(Gain) loss on disposal of equipment		(5,415	)		145
Changes in assets and liabilities:
Increase in accounts payable and other liabilities		744,837			4,854,096
Decrease in other assets		73,747			66,592
Increase in income taxes payable, net		4,681,382			5,100,000
Net cash provided by operating activities		20,761,251			26,938,747
Cash flows from investing activities
Investment in purchased receivables, net of buy backs		(36,214,485	)		(25,432,528	)
Principal collected on purchased receivables		25,036,691			19,934,425
Purchase of property and equipment		(454,785	)		(2,078,772	)
Proceeds from sale of property and equipment		11,493			—
Net cash used in investing activities		(11,621,086	)		(7,576,875	)
Cash flows from financing activities
Borrowings under line of credit		17,000,000			—
Repayment of line of credit		(27,000,000	)		—
Repayment of capital lease obligations		(23,895	)		(38,410	)
Purchase of treasury shares		(699,060	)		(302,406	)
Net cash used in financing activities		(10,722,955	)		(340,816	)
Net (decrease) increase in cash		(1,582,790	)		19,021,056
Cash at beginning of period		11,307,451			50,518,934
Cash at end of period	$	9,724,661		$	69,539,990
Supplemental disclosure of cash flow information
Cash paid for interest	$	208,083		$	132,239
Cash paid for income taxes		1,037,000			1,506,093
Non-cash investing and financing activities:
Capital lease obligations incurred		—			24,171

See accompanying notes.

5

ASSET ACCEPTANCE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

  Nature of Operations

     Asset Acceptance Capital Corp. and its subsidiaries (collectively referred to as the “Company”) are engaged in the purchase and collection of defaulted and charged-off accounts receivable portfolios. These receivables are acquired from consumer credit originators, primarily credit card issuers, consumer finance companies, healthcare providers, retail merchants, telecommunications and other utility providers as well as from resellers and other holders of consumer debt. The Company periodically sells receivables from these portfolios to unaffiliated companies.

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

     The accompanying unaudited financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, 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 March 31, 2007 and its results of operations for the three months ended March 31, 2007 and 2006 and cash flows for the three months ended March 31, 2007 and 2006, and all adjustments were of a normal recurring nature. The results of operations of the Company for the three months ended March 31, 2007 and 2006 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, 2006.

  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. 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

     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.

  Purchased Receivables Portfolios and Revenue Recognition

     Purchased receivables are receivables that have been charged-off as uncollectible by the originating organization and typically have been subject to previous collection efforts. The Company acquires the rights to the unrecovered balances owed by individual debtors through such purchases. The receivable portfolios are purchased at a substantial discount (generally more than 90%) from their face values and are initially recorded at the Company’s 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.

6

     The Company accounts for its investment in purchased receivables using the guidance provided by the Accounting Standards Executive Committee Statement of Position 03-3, “Accounting for Certain Loans of Debt Securities Acquired in a Transfer” (“SOP 03-3”). The provisions of SOP 03-3 were adopted by the Company effective January 2005 and apply to purchased receivables acquired after December 31, 2004. The provisions of SOP 03-3 that relate to decreases in expected cash flows amend previously followed guidance, the Accounting Standards Executive Committee Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans”, for consistent treatment and apply prospectively to purchased receivables acquired before January 1, 2005. The Company purchases pools of homogenous accounts receivable 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 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 will generally amortize 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 adjusted prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. If the revised cash flow estimates are less than the original estimates, the IRR remains unchanged and an impairment is recognized. If the cash flow estimates increase subsequent to recording an impairment, reversal of the previously recognized impairment is made prior to any increases to the IRR.

     The cost recovery method prescribed by SOP 03-3 is used when collections on a particular portfolio cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio. As of March 31, 2007, the Company had 21 unamortized pools on the cost recovery method with an aggregate carrying value of $7.8 million or about 2.5% of the total carrying value of all purchased receivables. The Company had 22 unamortized pools on the cost recovery method with an aggregate carrying value of $7.2 million, or about 2.4% of the total carrying value of all purchased receivables as of December 31, 2006.

     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.

7

     Periodically the Company will sell, on a non-recourse basis, all or a portion of a pool to third parties. The Company is an opportunistic seller and does not routinely review accounts as potential sales. 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 Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of SFAS 125”. 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 receivable portfolios for the three months ended March 31, 2007 and 2006 were as follows:

	Three months ended March 31,
	2007			2006
Beginning balance	$	300,840,508		$	248,990,772
Investment in purchased receivables, net of buybacks		36,214,485			26,032,528
Cash collections		(95,853,350	)		(89,389,858	)
Purchased receivable revenues		66,782,034			67,264,780
Ending balance	$	307,983,677		$	252,898,222

     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 months ended March 31, 2007 and 2006 were as follows:

	Three months ended March 31,
	2007			2006
Beginning balance	$	958,629,284		$	848,545,458
Revenue recognized on purchased receivables		(66,782,034	)		(67,264,780	)
Additions due to purchases during the period		63,553,108			54,694,181
Reclassifications from nonaccretable yield		20,306,279			51,697,410
Ending balance (1)	$	975,706,637		$	887,672,269

(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 28 for further information regarding these estimates.

     Cash collections for the three months ended March 31, 2007 and 2006 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 March 31,
	2007		2006
Revenues from fully amortized pools:
Pools that amortized before 60 months	$	5,273,827	$	8,531,014
Pools that are 60 months or older		11,698,801		6,787,986
Pools under full cost recovery		1,489,854		1,387,108
Total revenue from fully amortized pools	$	18,462,482	$	16,706,108

     During the three months ended March 31, 2007 and 2006, the Company recorded net impairments of $4.5 million and $2.7 million, respectively, related to its purchased receivables and allowance for receivable losses. 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 months ended March 31, 2007 and 2006 were as follows:

8

	Three months ended March 31,
	2007			2006
Beginning balance	$	39,714,055		$	22,285,355
Impairments		4,714,000			3,295,000
Reversal of impairments (1)		(240,900	)		(601,000	)
Deductions (2)		(362,000	)		—
Ending balance	$	43,825,155		$	24,979,355

(1)	The impairment reversals relate to impairment charges recognized during the fiscal years ended December 31, 2006 and 2005.
(2)	Deductions represent impairments on fully amortized purchased receivable portfolios that were written-off and cannot be reversed.

  Seasonality

     Collections within portfolios tend to be seasonally higher in the first and second quarters of the year due to consumers’ receipt of tax refunds and other factors. Conversely, collections within portfolios tend to be lower in the third and fourth quarters of the year due to consumers’ spending in connection with summer vacations, the holiday season and other factors. However, revenue recognized is relatively level due to the application of the interest method for revenue recognition. In addition, the Company’s operating results may be affected to a lesser extent by the timing of purchases of charged-off consumer receivables due to the initial costs associated with purchasing and integrating these receivables into the Company’s systems. Consequently, income and margins may fluctuate from quarter to quarter.

  Collections from Third Parties

     The Company regularly utilizes unaffiliated third parties, primarily attorneys and other contingent collection agencies, to collect certain account balances on behalf of the Company in exchange for a percentage of balances collected by the third party. The Company records the gross proceeds received by the unaffiliated third parties as cash collections. The Company includes the reimbursement of certain legal and other costs as cash collections. The Company records the percentage of the gross cash collections paid to the third parties as a component of collection expense. The percent of gross cash collections from such third party relationships were 23.9% and 23.0% for the three months ended March 31, 2007 and 2006, respectively.

  Accrued Liabilities

     As of March 31, 2007 and December 31, 2006, the total of accrued liabilities were $13,664,655 and $13,026,622, respectively. The details of the balances are identified in the following table.

	March 31, 2007		December 31, 2006
Accrued payroll, benefits and bonuses	$	8,621,425	$	8,408,244
Deferred rent		2,800,391		2,858,418
Accrued general and administrative expenses		1,660,494		1,394,762
Accrued restructuring charges		135,690		—
Other accrued expenses		446,655		365,198
Total accrued liabilities	$	13,664,655	$	13,026,622

  Concentration of Risk

     For the three months ended March 31, 2007 and 2006, the Company invested 71.6% and 84.9%, respectively, in purchased receivables from three sellers, with two sellers included in the top three in both of the three-month periods.

9

  Earnings Per Share

     Earnings per share reflect net income divided by the weighted-average number of shares outstanding. Diluted weighted average shares outstanding at March 31, 2007 and 2006 included 7,172 and 30,082 dilutive shares, respectively, related to outstanding stock options. There were 288,936 and 86,539 outstanding options that were not included within the diluted weighted-average shares as their option price exceeded the market price of the Company’s stock at March 31, 2007 and 2006, respectively.

  Reclassifications

     Certain amounts in the prior periods presented have been reclassified to conform to the current period financial statement presentation. These reclassifications have no effect on previously reported net income.

  Recently Issued Accounting Pronouncements

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

     Effective January 1, 2007, the Company adopted SFAS Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“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. The Company was not required to record any cumulative effect adjustment to retained earnings as a result of adopting FIN 48 and has no material unrecognized tax benefits at January 1, 2007. See Note 7, Income Taxes, for additional details.

  SFAS No. 157, “Fair Value Measurements”

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies where other accounting pronouncements require or permit fair value measurements; it does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact SFAS 157 will have on its financial statements.

2. Line of Credit

     The Company maintains a $100.0 million line of credit (the “Credit Agreement”) secured by a first priority lien on all of the Company’s assets that 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. Alternately, 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 an outstanding balance of $7.0 million and $17.0 million at March 31, 2007 and December 31, 2006, respectively. 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 line of Credit Agreement) cannot exceed 1.5 to 1.0;

• debt to total capitalization ratio (as defined in the line of 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 $204.6 million as of March 31, 2007.

         Management believes it is in compliance with all terms of its line of Credit Agreement as of March 31, 2007.

10

     On April 24, 2007, the Company announced a special cash dividend and share repurchase plan which includes a new credit facility; refer to Note 8, Subsequent Event – Special Cash Dividend and Share Repurchase.

3. Property and Equipment

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

	March 31, 2007			December 31, 2006
Computers and software	$	12,484,893		$	12,343,711
Furniture and fixtures		10,086,211			10,001,986
Leasehold improvements		2,054,509			2,051,391
Equipment under capital lease		307,001			321,783
Automobiles		51,709			47,404
Total property and equipment, cost		24,984,323			24,766,275
Less accumulated depreciation		(12,750,902	)		(12,057,664	)
Net property and equipment	$	12,233,421		$	12,708,611

4. Restructuring Charges and Change in Accounting Estimates

     The Company recognizes costs associated with exit or disposal activities in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). Examples of costs covered by SFAS 146 include employee termination benefits, contract termination costs and other costs to consolidate or close facilities and relocate employees.

     In order to eliminate excess office capacity and to become more efficient, on March 1, 2007, the Company announced plans to close its White Marsh, Maryland and Wixom, Michigan offices during 2007. In conjunction with these office closings, the Company expects to incur approximately $1.5 million in restructuring charges. Restructuring charges include one-time employee termination benefits of approximately $0.2 million, accelerated depreciation charges on furniture and equipment of approximately $0.6 million, contract termination costs of approximately $0.5 million for the remaining lease payments on the Wixom, Michigan office and other exit costs of approximately $0.2 million.

     The Company recorded restructuring charges of $148,111 for the three months ended March 31, 2007 as follows:

	March 31, 2007
One-time termination benefits	$	84,119
Long-lived assets charge		51,571
Other exit costs		12,421
Total restructuring charges	$	148,111

     These expenses are included in “restructuring charges” in the consolidated statements of income.

     The Company has recorded a restructuring liability as of March 31, 2007 of $135,690. Detailed information relating to the liability balance is outlined below:

	One-Time Termination Benefits		Long-Lived Assets Charge		Other Exit Costs			Total
Restructuring liability as of January 1, 2007	$	—	$	—	$	—		$	—
Costs incurred and charged to expense		84,119		51,571		12,421			148,111
Costs paid		—		—		(12,421	)		(12,421	)
Restructuring liability as of March 31, 2007	$	84,119	$	51,571	$	—		$	135,690

     The Company has changed the service life of certain long-lived assets that will be disposed of when the offices close. This change in estimate did not have a material impact on income from operations, net income or earnings per share for the three months ended March 31, 2007.

11

     The Company does not expect there to be a material affect on its future results of operations, liquidity, or capital resources as a result of this office consolidation effort. The Company plans to offer relocation benefits to certain Maryland employees and plans to replace most other Maryland revenue generating positions in its remaining call center locations or to third-party agencies. Additionally, the Company plans to offer positions to all the Wixom, Michigan associates in the Warren, Michigan headquarters.

5. 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, non-employee directors and consultants. No participant may be granted options during any one fiscal year to purchase more than 500,000 shares of common stock. The Company’s share-based compensation arrangements are described below.

  Stock Options

     Effective January 1, 2006, the Company began utilizing the Whaley Quadratic approximation model, an intrinsic value method, 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 option 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.

Options issue year:	2007	2006
Expected volatility	47.00%	46.00%
Expected dividends	0.00%	0.00%
Expected term	5 Years	5 Years
Risk-free rate	4.68%	4.55%-5.02%

     As of March 31, 2007, the Company had options outstanding for 328,027 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 market price of the Company’s stock at 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 three months ended March 31, 2007 includes $2,204 in administrative expenses for non-employee directors and $18,824 in salaries and benefits for employees. The related expense for the three months ended March 31, 2006 includes $178,395 in administrative expenses for non-employee directors and $26,360 in salaries and benefits for employees. The total tax benefit recognized in the consolidated statements of income was

12

$7,864 and $76,578 for the three months ended March 31, 2007 and 2006, respectively. The following summarizes all stock option related transactions from January 1, 2007 through March 31, 2007.

					Weighted-Average		Aggregate
	Options		Weighted-Average		Remaining		Intrinsic
	Outstanding		Exercise Price		Contractual Term		Value
January 1, 2007		327,726	$	18.95
Granted		301		15.56
Exercised		—		—
Forfeited or expired		—		—
Outstanding at March 31, 2007		328,027		18.95		8.17	$	30,350
Exercisable at March 31, 2007		290,527	$	19.02		8.04	$	21,150

     The weighted-average fair value of the options granted during the three months ended March 31, 2007 and 2006 were $7.32 and $8.06, respectively. No options were exercised during the three months ended March 31, 2007 and 2006.

     As of March 31, 2007, there was $266,439 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the stock incentive plan. That cost is expected to be recognized over a weighted-average period of 3.85 years.

  Deferred Stock Units

     As of March 31, 2007, the Company granted 1,809 deferred stock units (“DSUs”) of its common stock to non-employee directors under the 2004 stock incentive plan. Each DSU is equivalent to one share of common stock of the Company and becomes settled when the participant ceases to be a non-employee director or upon the occurrence of certain other events. In addition, the number of DSUs granted is increased by additional DSUs in an amount equal to the relationship of dividends declared to the value of the Company’s common stock. The value of each DSU is equal to the market price of the Company’s stock at the date of grant. DSUs granted to non-employee directors vest immediately.

     The fair value of the DSUs granted during the three months ended March 31, 2007 were expensed immediately to correspond with the vesting schedule. The related expense for the three months ended March 31, 2007 includes $28,148 in administrative expenses. There were no DSUs granted or outstanding during the three months ended March 31, 2006.

     The following summaries all DSU related transactions from January 1, 2007 through March 31, 2007.

			Weighted-Average
			Grant-Date
	DSUs		Fair Value
January 1, 2007		—	$	—
Granted		1,809		15.56
Balance at March 31, 2007		1,809	$	15.56

     As of March 31, 2007, there were no unrecognized costs related to nonvested share-based compensation arrangement granted with DSUs.

  Restricted Shares

     In April 2006, the Company granted 25,114 restricted shares as part of an employment agreement with PARC’s President. The value of the restricted shares was equal to the market price of the Company’s stock at the date of grant and the shares 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 three months ended March 31, 2007 includes $44,968 in salaries and benefits. There were no restricted shares granted or outstanding during the three months ended March 31, 2006.

13

     As of March 31, 2007, there was $359,747 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 2.00 years. There were no restricted shares vested as of March 31, 2007.

6. 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 March 31, 2007 and does not believe exposure to be material.

7. Income Taxes

     The Company records interest and penalties related to unrecognized tax benefits as income tax expense. Interest and penalties related to the Company’s uncertain tax positions at January 1, 2007 were not significant.

     The federal income tax returns of the Company for 2003, 2004, 2005, and 2006 are subject to examination by the IRS, generally for three years after they are filed. The significant state income tax returns of the Company are subject to examination by the state taxing authorities, for various periods generally up to four years after they are filed.

     The Company recorded an income tax provision of $5.9 million and $7.6 million for the three months ended March 31, 2007 and 2006, respectively. The provision for income tax expense reflects an effective income tax rate of 37.5% and 37.7% for the three months ended March 31, 2007 and 2006, respectively.

8. Subsequent Event – Special Cash Dividend and Share Repurchase

     On April 24, 2007, the Company announced a special cash dividend and share repurchase plan to return $150 million to its shareholders, subject to final approval from the board of directors. The Company plans to repurchase approximately $75 million of its shares. The remaining balance of the $150 million will be paid as a special one-time dividend following completion of the tender offer. The plan requires the recapitalization of the Company’s balance sheet and includes completion of a new credit facility. The recapitalization plan is expected to be completed by June 30, 2007.

     The Company has not yet commenced the tender offer. On the commencement date of the tender offer, an offer to purchase, a letter of transmittal and related documents will be filed with the Securities and Exchange Commission, will be mailed to shareholders of record and will also be made available for distribution to beneficial owners of shares of common stock. The solicitation of offers to buy the Company’s common stock will only be made pursuant to the offer to purchase, the letter of transmittal and related documents. When they are available, shareholders should read those materials carefully because they will contain important information, including the various terms of, and conditions to, the tender offer. When they are available, shareholders will be able to obtain the offer to purchase, the letter of transmittal and related documents without charge from the Securities and Exchange Commission’s website atwww.sec.gov or from the information agent that we select. Shareholders are urged to read carefully those materials when they become available prior to making any decisions with respect to the tender offer.

14

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.

     During the first quarter of 2007, we invested $36.6 million (net of buybacks) in charged-off consumer receivable portfolios, with an aggregate face value of $0.8 billion, or 4.74% of face value. We have seen prices for charged-off accounts receivable portfolios increase to relatively high levels over the past three to four years as a result of increased competition and our mix of asset types and account types acquired. The increase continued during the first quarter of 2007 as our percentage cost of face value increased to 4.74% from 3.63% for the three months ended March 31, 2007 and 2006, respectively. Management believes the increased average percentage cost in the first quarter of 2007 when compared to the first quarter of 2006 is related more to the quality (type and age) of the accounts purchased than an indication of overall pricing trends in the market. 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.

     The growth rate of cash collections for the three months ended March 31, 2007 slowed to a 7.2% increase compared to the prior year’s increase of 11.2%. However, the growth rate increased at a rate greater than the three prior quarters. The primary factor contributing to the slowdown in collection growth is the pace of purchase growth at face value, which has been relatively flat for the years 2002 through 2006.

     For the first quarter of 2007, cash collections were $95.9 million, a 7.2% increase over the prior year. Total revenues for the first quarter of 2007 were $67.3 million, a 0.1% decrease from the prior year. The total operating expenses for the first quarter of 2007 were $51.3 million, a 7.9% increase over the prior year. The increase in total operating expenses is primarily due to increased collections expense. Several categories of collections expense increased, including telephone and postage expenses, related to additional accounts acquired during the fourth quarter of 2006 and first quarter 2007. The increased collections expense was partially offset by a decrease in salaries and benefits expense due to a decrease in average overall employee headcount from the first quarter of 2006 to the first quarter of 2007. Net income was $9.9 million for the first quarter of 2007, compared to a net income of $12.6 million for the same period in 2006. Net income for the first quarter of 2007 and 2006 included net impairment charges of $4.5 million and $2.7 million, respectively. The net impairment charges reduced revenue and the carrying value of the purchased receivables.

     On March 1, 2007, the Company announced plans to close its White Marsh, Maryland and Wixom, Michigan offices during 2007. As part of this office consolidation effort, the Company recorded approximately $0.1 million in pre-tax restructuring charges for costs and expenses primarily related to employee one-time termination benefits and changes to the service life of certain long-lived assets . These costs are included in restructuring charges in the consolidated statements of income.

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

15

annual report on Form 10-K for the year ended December 31, 2006 in the section titled “Risk Factors” and elsewhere in this report. Please note that the protections afford us under the Private Securities Litigation Reform Act of 1995 will not apply to forward-looking statements that may be made in connection with our planned tender offer discussed at Note 8 to the consolidated financial statements on page 14, and Liquidity and Capital Resources on page 27.

     Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations. Factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include the following:

• our ability to purchase charged-off receivable portfolios on acceptable terms and in sufficient amounts;

• our ability to recover sufficient amounts on our charged-off receivable portfolios;

• our ability to hire and retain qualified personnel;

• a decrease in collections if bankruptcy filings increase or if bankruptcy laws or other debt collection laws change;

• a decrease in collections as a result of negative attention or news regarding the debt collection industry and debtor’s willingness to pay the debt we acquire;

• 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;

• 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 effectively manage excess capacity, reduce workforce or close remote call center locations;

• the temporary or permanent loss of our computer or telecommunications systems, as well as our ability to respond to changes in technology and increased competition;

• changes in our overall performance based upon significant macroeconomic conditions;

• our ability to substantiate our application of tax rules against examinations and challenges made by tax authorities; and

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

16

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 March 31,						Three Months Ended March 31,
	2007			2006			2007			2006
Revenues
Purchased receivable revenues, net		99.2	%		99.8	%		69.7	%		75.3	%
Other revenue, net		0.8			0.2			0.5			0.1
Total revenues		100.0			100.0			70.2			75.4
Expenses
Salaries and benefits		33.3			34.6			23.4			26.1
Collections expense		34.3			27.9			24.1			21.1
Occupancy		3.5			3.3			2.4			2.4
Administrative		3.3			3.5			2.3			2.6
Restructuring charges		0.2			—			0.1			—
Depreciation and amortization		1.6			1.3			1.1			1.0
(Gain) loss on disposal of equipment		(0.0	)		0.0			(0.0	)		0.0
Total operating expenses		76.2			70.6			53.4			53.2
Income from operations		23.8			29.4			16.8			22.2
Other income (expense)
Interest income		0.0			0.9			0.0			0.6
Interest expense		(0.4	)		(0.3	)		(0.3	)		(0.2	)
Other		0.0			(0.0	)		0.0			(0.0	)
Income before income taxes		23.4			30.0			16.5			22.6
Income taxes		8.8			11.3			6.2			8.5
Net income		14.6	%		18.7	%		10.3	%		14.1	%

  Three Months Ended March 31, 2007 Compared To Three Months Ended March 31, 2006

  Revenue

     Total revenues were $67.3 million for the three months ended March 31, 2007, a decrease of $0.1 million, or 0.1%, from total revenues of $67.4 million for the three months ended March 31, 2006. Purchased receivable revenues were $66.8 million for the three months ended March 31, 2007, a decrease of $0.5 million, or 0.7%, from the three months ended March 31, 2006 amount of $67.3 million. Purchased receivable revenues reflects net impairments recognized during the three months ended March 31, 2007 and 2006 of $4.5 million and $2.7 million, respectively. The decrease in revenues was primarily due to an increase in net impairments on purchased receivables and by lower average internal rates of return assigned to recent purchases. Cash collections on charged-off consumer receivables increased 7.2% to $95.9 million for the three months ended March 31, 2007 from $89.4 million for the same period in 2006. Cash collections for the three months ended March 31, 2007 and 2006 include collections from fully amortized portfolios of $18.5 million and $16.7 million, respectively, of which 100% were reported as revenue.

     During the three months ended March 31, 2007, we acquired charged-off consumer receivable portfolios with an aggregate face value of $0.8 billion at a cost of $36.6 million, or 4.74% of face value, net of buybacks. Included in these purchase totals were 15 portfolios with an aggregate face value of $56.2 million at a cost of $2.7 million, or 4.80% of face value, which were acquired through five forward flow contracts. Revenues on portfolios purchased from our top three sellers were $18.5 million and $17.5 million during the three months ended March 31, 2007 and 2006, respectively, with two sellers included in the top three in both three-month periods. During the three months ended March 31, 2006, we acquired charged-off consumer receivable portfolios with an aggregate face value of $0.7 billion at a cost of $26.3 million, or 3.63% of face value (adjusted for buybacks through March 31, 2007). Included in these purchase totals were three portfolios with an aggregated face value of $15.8 million at a cost of $0.5 million, or 2.85% of face value (adjusted for buybacks through March 31, 2007), which were acquired through one forward

17

flow contract. From period to period we may buy charged-off receivables of varying age, types and cost. As a result, the cost of our purchases, as a percent of face value, may fluctuate from one period to the next.

  Operating Expenses

     Total operating expenses were $51.3 million for the three months ended March 31, 2007, an increase of $3.7 million, or 7.9%, compared to total operating expenses of $47.6 million for the three months ended March 31, 2006. Total operating expenses were 53.4% of cash collections for the three months ended March 31, 2007, compared with 53.2% for the same period in 2006. The increase as a percent of cash collections was due to increases in collections expense, which is partially offset by a decrease in salaries and benefits. Operating expenses are traditionally measured in relation to revenues. However, we measure operating expenses in relation to cash collections. We believe this is appropriate because of varying amortization rates, which is the difference between cash collections and revenues recognized, from period to period, due to seasonality of collections and other factors that can distort the analysis of operating expenses when measured against revenues. Additionally, we believe that the majority of our operating expenses are variable in relation to cash collections.

     Salaries and Benefits.Salary and benefit expenses were $22.4 million for the three months ended March 31, 2007, a decrease of $0.9 million, or 3.8%, compared to salary and benefit expenses of $23.3 million for the three months ended March 31, 2006. Salary and benefit expenses were 23.4% of cash collections for the three months ended March 31, 2007, compared with 26.1% for the same period in 2006. Salary and benefit expenses decreased primarily due to the 14.3% decrease in average overall employee headcount from the three months ended March 31, 2007 compared to the same period in 2006.

     Collections Expense.Collections expense were $23.1 million for the three months ended March 31, 2007, an increase of $4.3 million, or 22.6%, compared to collections expense of $18.8 million for the three months ended March 31, 2006. Collections expense was 24.1% of cash collections during the three months ended March 31, 2007 compared with 21.1% for the same period in 2006. Collections expense increased as a percentage of cash collections primarily due to increases in telephone and postage expenses, as well as increased legal and third party collection expenses. The increases in the telephone and postage expenses were primarily due to an increase in the number of accounts owned and actively pursued resulting from the investment in portfolios during the fourth quarter of 2006 and first quarter of 2007. In addition, the increase in postage expense is due to collection strategies that focus on stimulating payments through letter campaigns. The increase in legal and third party collection expenses were primarily due to an increase in the number of accounts for which legal and forwarding activities have been initiated.

     Occupancy.Occupancy expense was $2.3 million for the three months ended March 31, 2007, an increase of $0.1 million, or 7.6%, over occupancy expense of $2.2 million for the three months ended March 31, 2006. Occupancy expense was 2.4% of cash collections for each of the three months ended March 31, 2007 and 2006, respectively.

     Administrative.Administrative expenses decreased to $2.2 million for the three months ended March 31, 2007, from $2.4 million for the three months ended March 31, 2006, reflecting a $0.2 million, or 5.8%, decrease. Administrative expenses were 2.3% of cash collections during the three months ended March 31, 2007 compared with 2.6% for the same period in 2006.

     Restructuring Charges.Restructuring charges were $0.1 million for the three months ended March 31, 2007 as a result of our plans to close our White Marsh, Maryland and Wixom, Michigan offices during 2007. As part of this office consolidation effort, we recorded approximately $0.1 million in pre-tax restructuring charges for costs and expenses primarily related to employee one-time termination benefits and changes to the service life of certain long-lived assets. These costs are included in restructuring charges in the consolidated statements of income.

     Depreciation and Amortization.Depreciation and amortization expense was $1.1 million for the three months ended March 31, 2007, an increase of $0.2 million or 22.4% over depreciation and amortization expense of $0.9 million for the three months ended March 31, 2006. Depreciation and amortization expense was 1.1% of cash collections during the three months ended March 31, 2007 compared with 1.0% for the same period in 2006.

18

Depreciation and amortization increased as a percentage of cash collections primarily due to depreciation for 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 $15,727 for the three months ended March 31, 2007, reflecting a decrease of $565,230 compared to $580,957 for the three months ended March 31, 2006. The decrease was due primarily to interest received related to a lower cash position over the prior year.

     Interest Expense.Interest expense was $0.3 million for the three months ended March 31, 2007, reflecting an increase of $0.1 million, or 48.6%, compared to interest expense of $0.2 million for the three months ended March 31, 2006. Interest expense was 0.3% of cash collections during the three months ended March 31, 2007 compared with 0.2% for the same period in 2006. The increase in interest expense was due to increased average borrowings during the three months ended March 31, 2007 compared to the same period in 2006. Interest expense also includes the amortization of capitalized bank fees of $56,944 and $54,982 for the three months ended March 31, 2007 and 2006, respectively.

     Income Taxes.Income tax expense of $5.9 million reflects a federal tax rate of 35.2% and a state tax rate of 2.3% (net of federal tax benefit) for the three months ended March 31, 2007. For the three months ended March 31, 2006, income tax expense was $7.6 million and reflected a federal tax rate of 35.3% and state tax rate of 2.4% (net of federal tax benefit including utilization of state net operating losses). The 0.1% decrease in the state rate was due to changing apportionment percentages among the various states. Income tax expense decreased $1.7 million, or 22.5% from income tax expense of $7.6 million for the three months ended March 31, 2006. The decrease in tax expense was due to a decrease in pre-tax financial statement income, which was $15.8 million for the three months ended March 31, 2007, compared to $20.2 million for the same period in 2006.

19

Supplemental Performance Data

  Portfolio Performance

     The following table summarizes our historical portfolio purchase price and cash collections on an annual vintage basis from January 1, 1997 through March 31, 2007.

											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)(4)		Collections		Purchase Price (2)
			(dollars in thousands)
1997		45	$	4,345	$	29,455	$	231	$	29,686		683	%
1998		61		16,411		81,475		3,153		84,628		516
1999		51		12,924		60,545		4,937		65,482		507
2000		49		20,592		119,260		16,467		135,727		659
2001		62		43,116		242,466		48,451		290,917		675
2002		94		72,114		300,671		102,228		402,899		559
2003		76		87,157		323,277		188,426		511,703		587
2004		106		86,260		171,305		190,805		362,110		420
2005		104		99,580		98,673		220,673		319,346		321
2006 (5)		154		142,959		59,263		409,509		468,772		328
2007 (6)		33		36,565		1,438		98,810		100,248		274
Total		835	$	622,023	$	1,487,828	$	1,283,690	$	2,771,518		446	%

(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 28 for further information regarding these estimates.
(4)	Estimated remaining collections refers to the sum of all future projected cash collections on our owned portfolios using a 120 month collection forecast from the date of purchase.
(5)	Includes 62 portfolios from the acquisition of PARC on April 28, 2006 that were allocated a purchase price value of $8.3 million.
(6)	Includes only three months of activity through March 31, 2007.

20

     The following table summarizes the remaining unamortized balances of our purchased receivables portfolios by year of purchase as of March 31, 2007.

					Unamortized
	Unamortized				Balance as a			Unamortized
	Balance as of		Purchase		Percentage of			Balance as a
Purchase Period	March 31, 2007		Price (1)		Purchase Price			Percentage of Total
	(dollars in thousands)
2002	$	7,686	$	72,114		10.7	%		2.5	%
2003		24,164		87,157		27.7			7.8
2004		45,551		86,260		52.8			14.8
2005		73,077		99,580		73.4			23.7
2006 (2)		120,743		142,959		84.5			39.3
2007 (3)		36,763		36,565		100.5			11.9
Total	$	307,984	$	524,635		58.7	%		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 62 portfolios from the acquisition of PARC on April 28, 2006 that were allocated a purchase price value of $8.3 million.
(3)	Includes only three months of activity through March 31, 2007.

     The following table summarizes the purchased receivable revenues and amortization rates by year of purchase for the three months ended March 31, 2007 and 2006, respectively.

	Three months ended March 31, 2007
Year of					Amortization			Weighted			Net		Zero Basis
Purchase	Collections		Revenue		Rate			Avg. Yield(1)			Impairments		Collections
2001 and prior	$	10,330,950	$	10,244,254		0.8	%		N/M	%	$	—	$	10,166,762
2002		12,016,761		7,943,214		33.9			26.01			216,800		4,554,522
2003		16,780,060		11,649,217		30.6			15.03			763,300		2,676,504
2004		14,034,358		9,179,365		34.6			7.64			1,931,000		768,617
2005		14,740,661		10,436,031		29.2			4.98			934,000		10,536
2006		26,513,052		16,379,887		38.2			4.41			628,000		285,541
2007		1,437,508		950,066		33.9			2.63			—		—
Totals	$	95,853,350	$	66,782,034		30.3			7.25		$	4,473,100	$	18,462,482

	Three months ended March 31, 2006
Year of					Amortization			Weighted			Net			Zero Basis
Purchase	Collections		Revenue		Rate			Avg. Yield(1)			Impairments			Collections
2001 and prior	$	14,410,828	$	12,669,200		12.1			N/M	%	$	(10,000	)	$	10,462,591
2002		16,082,438		12,078,566		24.9			15.13			108,000			2,767,420
2003		23,807,397		17,456,259		26.7			12.31			1,134,000			3,054,016
2004		18,245,705		12,616,974		30.8			6.57			339,000			422,081
2005		16,430,263		11,939,277		27.3			4.61			1,123,000			—
2006		413,227		504,504		(22.1	)		1.87			—			—
2007		N/A		N/A		N/A			N/A			N/A			N/A
Totals	$	89,389,858	$	67,264,780		24.8			8.67		$	2,694,000		$	16,706,108

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

21

  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

	Three months ended				Year ended
	March 31,				December 31,
Number of account representatives:	2007		2006(3)		2006(3)		2005(3)
One year or more (1)		600		560		573		510
Less than one year (2)		297		524		399		540
Total account representatives		897		1,084		972		1,050

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

Collection Averages by Experience

	Three months ended				Year ended
	March 31,				December 31,
Collection averages:	2007		2006(3)		2006(3)		2005(3)
One year or more (1)	$	60,294	$	52,302	$	193,951	$	199,734
Less than one year (2)		41,225		30,980		123,253		117,859
Overall average		53,988		41,995		164,932		157,661

(1)	Based on number of average traditional call center FTE account representatives and supervisors with one or more years of service.
(2)	Based on number of average traditional call center FTE account representatives and supervisors with less than one year of service, including new employees in training.
(3)	Excludes PARC’s FTE account representatives for periods prior to January 1, 2007.

     Collection averages tend to increase for the collection department as account representatives gain experience. The following table provides annualized collection department turnover data for traditional collections for the three months ended March 31, 2007 and 2006 as well as for the years ended December 31, 2006 and 2005:

Turnover by Experience

	Three months ended						Year ended
	March 31,						December 31,
	2007			2006(3)			2006(3)			2005(3)
Collection department turnover:
One year or more (1)		44.3	%		28.6	%		44.9	%		39.3	%
Less than one year (2)		116.6			98.3			107.4			117.8
Overall turnover		66.6			61.5			69.5			78.8

(1)	Based on number of traditional call center employees within the collection department with one or more years of service.
(2)	Based on number of traditional call center employees within the collection department with less than one year of service, including new employees in training.
(3)	Excludes traditional call center employees within PARC’s collection department for periods prior to January 1, 2007.

22

  Cash Collections

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

Historical Collections (1)

																							Three
																							Months
																							Ended
Purchase	Purchase		Year Ended December 31,																				March 31,
Period	Price (3)		1997		1998		1999		2000		2001		2002		2003		2004		2005		2006		2007
											(dollars in thousands)
Pre-1997			$	7,713	$	5,684	$	4,493	$	3,718	$	2,607	$	1,862	$	1,606	$	1,283	$	1,270	$	918	$	185
1997	$	4,345		1,682		4,919		5,573		5,017		3,563		2,681		1,784		1,526		1,342		1,090		223
1998		16,411		—		4,835		15,220		15,045		12,962		11,021		7,987		5,582		4,653		3,352		694
1999		12,924		—		—		3,761		11,331		10,862		9,750		8,278		6,675		5,022		3,935		810
2000		20,592		—		—		—		8,895		23,444		22,559		20,318		17,196		14,062		10,603		2,082
2001		43,116		—		—		—		—		17,630		50,327		50,967		45,713		39,865		30,472		6,337
2002		72,114		—		—		—		—		—		22,340		70,813		72,024		67,649		55,373		12,017
2003		87,157		—		—		—		—		—		—		36,067		94,564		94,234		79,423		16,780
2004		86,260		—		—		—		—		—		—		—		23,365		68,354		62,673		14,034
2005		99,580		—		—		—		—		—		—		—		—		23,459		60,280		14,741
2006 (2)		142,959		—		—		—		—		—		—		—		—		—		32,751		26,513
2007		36,565		—		—		—		—		—		—		—		—		—		—		1,437
Total			$	9,395	$	15,438	$	29,047	$	44,006	$	71,068	$	120,540	$	197,820	$	267,928	$	319,910	$	340,870	$	95,853

Cumulative Collections (1)

																							Total
																							Through
Purchase	Purchase		Total Through December 31,																				March 31,
Period	Price (3)		1997		1998		1999		2000		2001		2002		2003		2004		2005		2006		2007
											(dollars in thousands)
1997	$	4,345	$	1,682	$	6,601	$	12,174	$	17,191	$	20,754	$	23,435	$	25,219	$	26,745	$	28,087	$	29,177	$	29,400
1998		16,411		—		4,835		20,055		35,100		48,062		59,083		67,070		72,652		77,305		80,657		81,351
1999		12,924		—		—		3,761		15,092		25,954		35,704		43,982		50,657		55,679		59,614		60,424
2000		20,592		—		—		—		8,895		32,339		54,898		75,216		92,412		106,474		117,077		119,159
2001		43,116		—		—		—		—		17,630		67,957		118,924		164,637		204,502		234,974		241,311
2002		72,114		—		—		—		—		—		22,340		93,153		165,177		232,826		288,199		300,216
2003		87,157		—		—		—		—		—		—		36,067		130,631		224,865		304,288		321,068
2004		86,260		—		—		—		—		—		—		—		23,365		91,719		154,392		168,426
2005		99,580		—		—		—		—		—		—		—		—		23,459		83,739		98,480
2006 (2)		142,959		—		—		—		—		—		—		—		—		—		32,751		59,264
2007		36,565		—		—		—		—		—		—		—		—		—		—		1,437

Cumulative Collections as Percentage of Purchase Price (1)

																																	Total
																																	Through
Purchase	Purchase		Total Through December 31,																														March 31,
Period	Price (3)		1997			1998			1999			2000			2001			2002			2003			2004			2005			2006			2007
1997	$	4,345		39	%		152	%		280	%		396	%		478	%		539	%		580	%		616	%		646	%		672	%		677	%
1998		16,411		—			29			122			214			293			360			409			443			471			491			496
1999		12,924		—			—			29			117			201			276			340			392			431			461			468
2000		20,592		—			—			—			43			157			267			365			449			517			569			579
2001		43,116		—			—			—			—			41			158			276			382			474			545			560
2002		72,114		—			—			—			—			—			31			129			229			323			400			416
2003		87,157		—			—			—			—			—			—			41			150			258			349			368
2004		86,260		—			—			—			—			—			—			—			27			106			179			195
2005		99,580		—			—			—			—			—			—			—			—			24			84			99
2006 (2)		142,959		—			—			—			—			—			—			—			—			—			23			41
2007		36,565		—			—			—			—			—			—			—			—			—			—			4

(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.

23

  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 cash collections for years 2003 through March 31, 2007.

Cash Collections

Quarter	2003		2004		2005		2006		2007
First	$	44,017,730	$	65,196,055	$	80,397,640	$	89,389,858	$	95,853,350
Second		51,190,533		67,566,031		84,862,856		89,609,982		—
Third		48,622,829		66,825,822		78,159,364		80,914,791		—
Fourth		53,988,333		68,339,797		76,490,350		80,955,115		—
Total cash collections	$	197,819,425	$	267,927,705	$	319,910,210	$	340,869,746	$	95,853,350

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

	For the three months ended
	March 31,
	2006			2007
Traditional collections		50.9	%		49.4	%
Legal collections		36.8			37.4
Other collections		12.3			13.2
Total cash collections		100.0	%		100.0	%

24

     The following chart categorizes our purchased receivable portfolios acquired during January 1, 1997 through March 31, 2007 into major asset types, as of March 31, 2007.

	Face Value of
	Charged-off					No. of
Asset Type	Receivables (2)		%			Accounts		%
	(in thousands)
Visa®/MasterCard®/Discover®	$	13,422,881		48.4	%		6,568		25.8	%
Private Label Credit Cards		3,773,989		13.6			5,354		21.0
Telecommunications/Utility/Gas		2,645,183		9.5			6,728		26.5
Health Club		1,493,584		5.4			1,488		5.9
Auto Deficiency		1,392,169		5.0			247		1.0
Installment Loans		795,213		2.9			284		1.1
Wireless Telecommunications		721,268		2.6			1,730		6.8
Other (1)		3,502,493		12.6			3,020		11.9
Total	$	27,746,780		100.0	%		25,419		100.0	%

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

     The age of a charged-off consumer receivables portfolio, or the time since an account has been charged-off, is an important factor in determining the price at which we will offer to purchase a receivables portfolio. Generally, there is an inverse relationship between the age of a portfolio and the price at which we will purchase the portfolio. This relationship is due to the fact that older receivables are typically more difficult to collect. The accounts receivable management industry places receivables into the following categories depending on the number of collection agencies that have previously attempted to collect on the receivables and the age of the receivables:

• Fresh accounts are typically 120 to 270 days past due, have been charged-off by the credit originator and are either being sold prior to any post charged-off collection activity or are placed with a third party collector for the first time. These accounts typically sell for the highest purchase price.

• Primary accounts are typically 270 to 360 days past due, have been previously placed with one third party collector and typically receive a lower purchase price.

• Secondary and tertiary accounts are typically more than 360 days past due, have been placed with two or three third party collectors and receive even lower purchase prices.

     We specialize in the primary, secondary and tertiary markets, but we will purchase accounts at any point in the delinquency cycle. We deploy our capital within these markets based upon the relative values of the available debt portfolios.

25

     The following chart categorizes our purchased receivable portfolios acquired during January 1, 1997 through March 31, 2007 into major account types as of March 31, 2007.

	Face Value of
	Charged-off					No. of
Account Type	Receivables (2)		%			Accounts		%
	(in thousands)
Fresh	$	1,491,713		5.4	%		764		3.0	%
Primary		4,201,526		15.1			3,406		13.4
Secondary		4,982,663		18.0			5,516		21.7
Tertiary (1)		13,950,275		50.3			13,233		52.1
Other		3,120,603		11.2			2,500		9.8
Total	$	27,746,780		100.0	%		25,419		100.0	%

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

     We also review the geographic distribution of accounts within a portfolio because collection laws differ from state to state. The following chart illustrates our purchased receivables portfolios acquired during January 1, 1997 through March 31, 2007 based on geographic location of debtor, as of March 31, 2007.

	Face Value of
	Charged-off					No. of
Geographic Location	Receivables (3)(4)		%			Accounts		%
	(in thousands)
Texas (1)	$	4,079,394		14.7	%		3,831		15.1	%
California		3,192,319		11.5			3,213		12.5
Florida (1)		2,885,102		10.4			1,888		7.4
Michigan (1)		1,800,889		6.5			2,240		8.8
New York		1,607,473		5.8			1,135		4.5
Ohio (1)		1,385,106		5.0			1,654		6.6
Illinois (1)		1,199,502		4.3			1,483		5.7
Pennsylvania		903,454		3.3			755		3.0
North Carolina		813,230		2.9			587		2.3
Georgia		746,138		2.7			660		2.6
New Jersey		723,896		2.6			591		2.3
Arizona		595,241		2.1			523		2.1
Other (2)		7,815,036		28.2			6,859		27.1
Total	$	27,746,780		100.0	%		25,419		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)	Excluding the purchase of a single portfolio in June 2002 with a face value of $1.2 billion at a cost of $1.2 million (or 0.1% of face value) and consisting of approximately 3.8 million accounts.

Liquidity and Capital Resources

     Historically, our primary sources of cash have been from operations and bank borrowings. We have traditionally used cash for acquisitions of purchased receivables, repayment of bank borrowings, purchasing property and equipment and working capital to support growth. During the three months ended March 31, 2007, we had borrowings of $17.0 million against our line of credit for the funding of the investment in first quarter purchased receivables.

26

     On April 24, 2007, we announced a special cash dividend and share repurchase plan to return $150 million to our shareholders, subject to final approval from the board of directors. We plan to repurchase approximately $75 million of our shares. The remaining balance of the $150 million will be paid as a special one-time dividend following completion of the tender offer. The plan requires the recapitalization of our balance sheet and includes completion of a new credit facility. The recapitalization plan is expected to be completed by June 30, 2007 and would increase our outstanding long-term debt, decrease our stockholders’ equity balance and increase our interest expense associated with the new credit facility. A portion of cash flow generated from operations will also be used for interest payments and to repay debt.

  Borrowings

     We maintain a $100.0 million line of credit 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 March 31, 2007, 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 line of Credit Agreement) cannot exceed 1.5 to 1.0;

• debt to total capitalization ratio (as defined in the line of 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 $204.6 million as of March 31, 2007.

     There was $7.0 million outstanding on our line of credit at March 31, 2007.

  Cash Flows

     The majority of our purchases have been funded with internal cash flow. For the three months ended March 31, 2007, we invested $36.2 million in purchased receivables, net of buybacks with $17.0 million borrowings against our line of credit. Our cash balance has decreased from $11.3 million at December 31, 2006 to $9.7 million as of March 31, 2007.

     Our operating activities provided cash of $20.8 million and $26.9 million for the three months ended March 31, 2007and 2006, respectively. Cash provided by operating activities for the three months ended March 31, 2007 and 2006 was generated primarily from net income earned through cash collections as well as increases in income taxes payable, accounts payable and other liabilities due to the timing of payments as of March 31, 2007 compared to December 31, 2006.

     Investing activities used cash of $11.6 million and $7.6 million for the three months ended March 31, 2007 and 2006, respectively. Cash used for investing purposes in the first quarter of 2007 and 2006 was primarily due to acquisitions of purchased receivables, net of cash collections applied to principal.

     Financing activities used cash of $10.7 million and $0.3 million for the three months ended March 31, 2007 and 2006, respectively. Cash used by financing activities for the first quarter of 2007 was primarily due to repayments on our line of credit, net of borrowings. In addition, cash used by financing activities for the first quarter of 2007 and 2006 was due to the repurchase of 46,604 and 20,160 shares of common stock, respectively, as well as repayments on capital lease obligations. The Company exercised its right to buy its shares from former employees at $15.00 per share.

27

     We believe that cash generated from operations combined with borrowing available under our line of credit, will be sufficient to fund our operations for the next twelve months, although no assurance can be given in this regard. In the future, if we need additional capital for investment in purchased receivables, working capital or to grow our business or acquire other businesses, we may seek to sell additional equity or debt securities or we may seek to increase the availability under our line of credit.

Future Contractual Cash Obligations

     The following table summarizes our future contractual cash obligations as of March 31, 2007:

	Year Ending December 31,
	2007		2008 (3)		2009		2010		2011		Thereafter
Capital lease obligations (1)	$	39,075	$	18,634	$	—	$	—	$	—	$	—
Operating lease obligations (1)		5,033,244		5,767,019		4,894,699		3,946,520		3,739,779		14,364,097
Purchased receivables (2)		—		—		—		—		—		—
Line of credit (3)		—		7,000,000		—		—		—		—
Employment agreements		611,250		315,000		105,000		—		—		—
Total	$	5,683,569	$	13,100,653	$	4,999,699	$	3,946,520	$	3,739,779	$	14,364,097

(1)	Future minimum lease payments under capital lease obligations and operating lease obligations have not been reduced by the amount of our restructuring activities that relates to the leased equipment or facilities.
(2)	During 2007, we renewed three forward flow contracts, entered into one new forward flow contract as well as maintained two on-going forward flow contracts that commits us to purchase receivables for a fixed percentage of the face amount of the receivables. The four forward flow contracts have terms beyond March 31, 2007 with the last contract expiring in December 2007. The four forward flow contracts have estimated monthly purchases of approximately $1.5 million, depending upon circumstances, and the other two on-going forward flow contracts have estimated monthly purchases of approximately $13,800 over the next twelve months.
(3)	To the extent that a balance is outstanding on our line of credit, it would be due in May 2008.

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 Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”).

     We adopted the provisions of SOP 03-3 in January 2005 and apply SOP 03-3 to purchased receivables acquired after December 31, 2004. The provisions of SOP 03-3 that relate to decreases in expected cash flows amend previously followed guidance, the Accounting Standards Executive Committee Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans”, for consistent treatment and apply prospectively to purchased receivables acquired before January 1, 2005. We purchase pools of homogenous accounts receivable and record each pool at its acquisition cost. Pools purchased after 2004 may be aggregated into one or more static pools within each quarter, based on common risk characteristics. Risk characteristics of purchased receivables are assumed to be similar since purchased receivables are usually in the late stages of the post charged-off collection cycle. We therefore aggregate most pools purchased within each quarter. Pools purchased before 2005 may not be aggregated with other pool purchases. Each static pool, either aggregated or non-aggregated, retains its own identity and does not change over the remainder of its life. Each static pool is accounted for as a single unit for recognition of revenue, principal payments and impairments.

     Each static pool of receivables is statistically modeled to determine its projected cash flows based on historical cash collections for pools with similar characteristics. An internal rate of return (“IRR”) is calculated for each static pool of receivables based on the projected cash flows. The IRR is applied to the remaining balance of each static pool of accounts to determine the revenue recognized. Each static pool is analyzed at least quarterly to assess the

28

actual performance compared to the expected performance. To the extent there are differences in actual performance versus expected performance, the IRR is adjusted prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. Effective January 2005, under SOP 03-3, if the revised cash flow estimates are less than the original estimates, the IRR remains unchanged and an impairment is recognized. If cash flow estimates increase subsequent to recording an impairment, reversal of the previously recognized impairment is made prior to any increases to the IRR.

     Application of the interest method of accounting requires the use of estimates, primarily estimated remaining collections, to calculate a projected IRR for each pool. These estimates are primarily based on historical cash collections. If future cash collections are materially different in amount or timing than the remaining collections estimate, earnings could be affected, either positively or negatively. Higher collection amounts or cash collections that occur sooner than projected will have a favorable impact on yields and revenues. Lower collection amounts or cash collections that occur later than projected will have an unfavorable impact and 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. The average borrowings on the variable line of credit were $8.0 million for the three months ended March 31, 2007. Assuming a 200 basis point increase in interest rates on our variable rate debt, interest expense would have increased approximately $40,000 for the three months ended March 31, 2007. The estimated increase in interest expense is based on the portion of our variable interest debt. There were no borrowings on the variable line of credit for the three months ended March 31, 2006. 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.

     There have been no changes in our internal controls over financial reporting that occurred during our fiscal quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     In the ordinary course of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using both our in-house attorneys and our network of third party law firms, against consumers and are occasionally countersued by them in such actions. Also, consumers occasionally initiate litigation against us, in which they allege that we have violated a federal or state law in the process of collecting on their account. It is not unusual for us to be named in a class action lawsuit relating to these allegations, with these lawsuits routinely settling for immaterial amounts. We do not believe that these ordinary course matters, individually or in the aggregate, are material to our business or financial condition. However, there can be no assurance that a class action lawsuit would not, if decided against us, have a material and adverse effect on our financial condition.

     We are not a party to any material legal proceedings. However, we expect to continue to initiate collection lawsuits as a part of the ordinary course of our business (resulting occasionally in countersuits against us) and we may, from time to time, become a party to various other legal proceedings arising in the ordinary course of business.

29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  Company’s Repurchases of Its Common Stock

     The following table provides information about the Company’s common stock repurchase during the first quarter of 2007.

			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 (1)		Share		Plans or Programs		the Plans or Programs
January 1, 2007 – January 31, 2007		—	$	—		—		—
February 1, 2007 – February 28, 2007		46,604		15.00		—		—
March 1, 2007 – March 31, 2007		—		—		—		—
Total		46,604	$	15.00		—		—

(1) The Company exercised its right to repurchase its shares from former employees at $15.00 per share.

Item 6. Exhibits

Exhibit
Number			Description
	10.1		2007 Annual Incentive Compensation Plan for Management (Incorporated by reference to Exhibit 10.1 included with Current Report on Form 8-K filed on February 16, 2007)
	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

30

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on May 3, 2007.

	ASSET ACCEPTANCE CAPITAL CORP.
Date: May 3, 2007	By:	/s/ Nathaniel F. Bradley IV
		Nathaniel F. Bradley IV
		Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
Date: May 3, 2007	By:	/s/ Mark A. Redman
		Mark A. Redman
		Senior Vice President-Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

31