Asset Acceptance Capital (AACC) 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2012

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

For the transition period from              to             

Commission file number: 000-50552

ASSET ACCEPTANCE CAPITAL CORP.

(Exact name of registrant as specified in its charter)

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

28405 Van Dyke Avenue

Warren, Michigan 48093

(Address of principal executive offices)

Registrant’s telephone number, including area code:

(586) 939-9600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

As of October 18, 2012, 30,770,092 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.	Financial Statements (unaudited)		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		47
Item 4.	Controls and Procedures		47
	PART II – Other Information
Item 1.	Legal Proceedings		47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 6.	Exhibits		48
Signatures			49

Quarterly Report on Form 10-Q

We file reports with the Securities and Exchange Commission (“SEC”), which we make available on our website,www.assetacceptance.com, free of charge. These reports include Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports, each of which is provided on our website as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Financial Position

	September 30, 2012			December 31, 2011
	(Unaudited)
ASSETS
Cash	$	13,585,816		$	6,990,757
Purchased receivables, net		344,497,047			348,710,787
Income taxes receivable		604,670			354,241
Property and equipment, net		12,076,571			14,488,659
Goodwill		14,323,071			14,323,071
Other assets		10,867,028			11,172,804
Total assets	$	395,954,203		$	396,040,319
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accounts payable	$	3,096,373		$	3,296,905
Accrued liabilities		18,103,252			20,018,561
Income taxes payable		716,885			1,925,761
Notes payable		159,125,247			172,122,870
Capital lease obligations		37,657			221,420
Deferred tax liability, net		65,327,152			60,474,041
Total liabilities		246,406,566			258,059,558
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 — 33,437,571 and 33,334,281 at September 30, 2012 and December 31, 2011, respectively		334,376			333,343
Additional paid in capital		151,469,966			150,449,620
Retained earnings		39,843,193			29,162,645
Accumulated other comprehensive loss, net of tax		(578,239	)		(532,592	)
Common stock in treasury; at cost, 2,667,479 and 2,649,729 shares at September 30, 2012 and December 31, 2011, respectively		(41,521,659	)		(41,432,255	)
Total stockholders’ equity		149,547,637			137,980,761
Total liabilities and stockholders’ equity	$	395,954,203		$	396,040,319

See accompanying notes.

3

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues
Purchased receivable revenues, net	$	54,433,740		$	56,294,567		$	174,495,762		$	160,756,730
Gain on sale of purchased receivables		—			—			7,727			—
Other revenues, net		261,055			318,965			734,274			943,210
Total revenues		54,694,795			56,613,532			175,237,763			161,699,940
Expenses
Salaries and benefits		14,389,078			16,943,855			45,881,833			51,702,960
Collections expense		28,922,617			26,089,521			84,782,927			73,828,877
Occupancy		1,466,425			1,465,568			4,287,620			4,302,259
Administrative		2,333,977			3,155,217			6,519,031			7,190,614
Depreciation and amortization		1,166,107			944,118			3,655,785			2,994,633
Restructuring charges		284,842			—			358,467			—
Gain on disposal of equipment and other assets		—			(92,075	)		(174,451	)		(86,182	)
Total operating expenses		48,563,046			48,506,204			145,311,212			139,933,161
Income from operations		6,131,749			8,107,328			29,926,551			21,766,779
Other income (expense)
Interest expense		(5,137,234	)		(2,631,787	)		(15,832,845	)		(7,932,278	)
Interest income		139			152			22,885			283
Other		673			476			33,579			(1,640	)
Income before income taxes		995,327			5,476,169			14,150,170			13,833,144
Income tax (benefit) expense		(539,974	)		2,405,567			3,469,622			6,018,137
Net income	$	1,535,301		$	3,070,602		$	10,680,548		$	7,815,007
Weighted-average number of shares:
Basic		30,924,121			30,781,016			30,871,237			30,752,965
Diluted		31,179,325			30,843,313			31,038,925			30,834,889
Earnings per common share outstanding:
Basic	$	0.05		$	0.10		$	0.35		$	0.25
Diluted	$	0.05		$	0.10		$	0.34		$	0.25

See accompanying notes.

4

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net income	$	1,535,301		$	3,070,602		$	10,680,548		$	7,815,007
Other comprehensive income (loss):
Unrealized gain (loss) on cash flow hedging:
Unrealized (loss) gain arising during period		(143,362	)		69,528			(969,535	)		(60,359	)
Less: reclassification adjustment for loss included in net income		310,265			544,663			1,008,677			1,714,648
Net unrealized gain on cash flow hedging		166,903			614,191			39,142			1,654,289
Other comprehensive gain, before tax		166,903			614,191			39,142			1,654,289
Income tax expense related to other comprehensive income		(80,879	)		(219,716	)		(84,789	)		(613,976	)
Other comprehensive income (loss), net of tax		86,024			394,475			(45,647	)		1,040,313
Comprehensive income	$	1,621,325		$	3,465,077		$	10,634,901		$	8,855,320

See accompanying notes.

5

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities
Net income	$	10,680,548		$	7,815,007
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,655,785			2,994,633
Amortization of deferred financing costs and debt discount		2,667,453			1,062,123
Amortization of de-designated hedge		116,696			—
Deferred income taxes		4,768,322			5,783,570
Share-based compensation expense		1,021,379			1,073,241
Net impairment reversals of purchased receivables		(9,378,000	)		(3,651,900	)
Non-cash revenue		(6,184	)		(129	)
Gain on disposal of equipment and other assets		(174,451	)		(86,182	)
Gain on sale of purchased receivables		(7,727	)		—
Changes in assets and liabilities:
Increase in other assets		(593,331	)		(862,185	)
Decrease in accounts payable and other accrued liabilities		(2,096,402	)		(5,452,798	)
(Increase) decrease in net income taxes payable		(1,459,305	)		3,068,923
Net cash provided by operating activities		9,194,783			11,744,303
Cash flows from investing activities
Investments in purchased receivables, net of buybacks		(103,548,645	)		(133,906,306	)
Principal collected on purchased receivables		117,058,538			110,789,681
Purchases of property and equipment		(1,518,315	)		(2,491,159	)
Proceeds from sale of property and equipment		352,076			99,000
Proceeds from sale of purchased receivables		95,758			—
Net cash provided by (used in) investing activities		12,439,412			(25,508,784	)
Cash flows from financing activities
Repayments of term loan facility		(6,562,500	)		(1,125,000	)
Net borrowings on revolving credit facility		(8,200,000	)		17,500,000
Payments of deferred financing costs		(3,469	)		(260,878	)
Payments on capital lease obligations		(183,763	)		(65,247	)
Purchases of treasury shares		(89,404	)		(106,565	)
Net cash (used in) provided by financing activities		(15,039,136	)		15,942,310
Net increase in cash		6,595,059			2,177,829
Cash at beginning of period		6,990,757			5,635,503
Cash at end of period	$	13,585,816		$	7,813,332
Supplemental disclosure of cash flow information
Cash paid for interest, net of capitalized interest	$	13,282,699		$	6,909,686
Net cash paid (received) for income taxes		160,606			(2,817,694	)
Non-cash investing and financing activities:
Change in fair value of interest rate swap liabilities		(77,554	)		1,654,289
Change in unrealized loss on cash flow hedge, net of tax		45,647			(1,040,313	)

See accompanying notes.

6

ASSET ACCEPTANCE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Nature of Operations

Asset Acceptance Capital Corp. (a Delaware corporation) 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 including private label card issuers, consumer finance companies, telecommunications and other utility providers, resellers and other holders of consumer debt. The Company may periodically sell receivables from these portfolios to unaffiliated parties.

In addition, the Company finances the sales of consumer product retailers, referred to as finance contract receivables, and licenses a proprietary collection software application referred to as licensed software. During the three months ended September 30, 2012, the Company also began pursuing fee-based legal collections on behalf of third parties.

The accompanying unaudited interim 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 (“SEC”) 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 accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the Company’s financial position as of September 30, 2012 and its results of operations, comprehensive income and cash flows for the three and nine months ended September 30, 2012 and 2011. All adjustments were of a normal recurring nature. The results of operations and comprehensive income of the Company for the three and nine months ended September 30, 2012 and 2011 may not be indicative of future results. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Reporting Entity

The accompanying consolidated financial statements include the accounts of Asset Acceptance Capital Corp. (“AACC”) and all wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company currently has three operating segments, one for purchased receivables, one for finance contract receivables and one for licensed software. The finance contract receivables and licensed software operating segments are not material and therefore are not disclosed separately from the purchased receivables segment.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items related to such estimates include the timing and amount of future cash collections on purchased receivables, deferred tax assets, goodwill and share-based compensation. Actual results could differ from those estimates making it reasonably possible that a significant change in these estimates could occur within one year.

Goodwill

Goodwill is not amortized, instead, it is reviewed annually to assess recoverability or more frequently if impairment indicators are present. Refer to Note 8, “Fair Value”, for additional information about the fair value of goodwill.

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Accrued Liabilities

The details of accrued liabilities were as follows:

	September 30, 2012		December 31, 2011
Accrued general and administrative expenses (1)	$	7,611,144	$	6,882,437
Accrued payroll, benefits and bonuses		6,094,308		8,334,908
Deferred rent		2,044,943		2,376,936
Fair value of derivative instruments		903,499		825,945
Accrued interest expense		757,783		897,975
Accrued restructuring charges (2)		299,658		279,538
Deferred revenue		186,810		172,376
Other accrued expenses		205,107		248,446
Total accrued liabilities	$	18,103,252	$	20,018,561

(1) Accrued general and administrative expenses included $2,500,000 related to a litigation contingency as of December 31, 2011, for which funding occurred in February 2012.

(2) Accrued restructuring charges are related to closing certain collection offices. Refer to Note 9, “Restructuring Charges”, for additional information.

Revenue Recognition

The Company accounts for its investment in purchased receivables using the guidance provided in Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“Interest Method”). Refer to Note 3, “Purchased Receivables and Revenue Recognition”, for additional discussion of the Company’s method of accounting for purchased receivables and recognizing revenue.

Concentrations of Risk

For the three and nine months ended September 30, 2012, the Company invested 74.9% and 58.4% (net of buybacks), respectively, in purchased receivables from its top three sellers. For the three and nine months ended September 30, 2011, the Company invested 58.0% and 58.3% (net of buybacks through September 30, 2012), respectively, in purchased receivables from its top three sellers. One seller is included in the top three in both of the three-month periods. No sellers were included in the top three during the nine-month periods for both years.

Seasonality

Collections 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 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. Operating expenses may fluctuate from quarter to quarter depending on the Company’s investment in court costs through the legal collection channel, the timing of purchases of charged-off receivables and other factors. However, revenue recognized is relatively level, excluding the impact of impairments or impairment reversals, due to the application of the Interest Method of revenue recognition. In addition, the Company’s operating results may be affected, to a lesser extent, by the timing of purchases of portfolios of charged-off consumer receivables due to the initial costs associated with initiating collection activities and integrating these receivables into the Company’s collection platform. Consequently, income and margins may fluctuate from quarter to quarter.

Collections by 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 the balance collected or for a fixed fee. The Company generally receives net proceeds and records gross cash collections received by third parties. The Company records fees paid to third parties, and the reimbursement of certain legal and other costs, as a component of collections expense. In June 2011, the Company began shifting certain legal in-house collection activities to a third party preferred partner, which resulted in increased third party collections. The percent of gross cash collections by third parties was 67.6% and 46.7% for the three months ended September 30, 2012 and 2011, respectively, and 64.8% and 43.1% for the nine months ended September 30, 2012 and 2011, respectively.

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Interest Expense

Interest expense includes interest on the Company’s credit facilities, unused facility fees, the ineffective portion of the change in fair value of the Company’s derivative financial instruments (refer to Note 5, “Derivative Financial Instruments and Risk Management”), interest payments made on interest rate swaps, amortization of deferred financing costs and amortization of original issue discount.

The components of interest expense were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Interest	$	4,257,867	$	2,277,748	$	13,165,392	$	6,870,155
Amortization of original issue discount		580,846		—		1,764,877		—
Amortization of deferred financing costs		298,521		354,039		902,576		1,062,123
Total interest expense	$	5,137,234	$	2,631,787	$	15,832,845	$	7,932,278

Earnings Per Share

Earnings per share reflect net income divided by the weighted-average number of shares outstanding. The following table provides a reconciliation between basic and diluted weighted-average shares outstanding:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Basic weighted-average shares outstanding		30,924,121		30,781,016		30,871,237		30,752,965
Dilutive weighted-average shares (1)		255,204		62,297		167,688		81,924
Diluted weighted-average shares outstanding		31,179,325		30,843,313		31,038,925		30,834,889

(1) Includes the dilutive effect of outstanding stock options, deferred stock units and restricted shares (collectively the “Share-Based Awards”). Share-Based Awards that are contingent upon the attainment of performance goals are not included in dilutive weighted-average shares until the performance goals have been achieved.

There were 743,938 and 1,128,569 outstanding Share-Based Awards that were not included in the diluted weighted-average shares as their fair value or exercise price exceeded the market price of the Company’s common stock at September 30, 2012 and 2011, respectively, and therefore were considered anti-dilutive.

Comprehensive Income

Comprehensive income includes changes in equity other than those resulting from investments by owners and distributions to owners. Net income is the primary component of comprehensive income. Currently, the Company’s only component of comprehensive income other than net income is the change in unrealized gain or loss, including the amortization of previous losses, on derivative instruments qualifying as cash flow hedges, net of tax. The aggregate amount of changes to equity that have not yet been recognized in net income are reported in the equity portion of the accompanying consolidated statements of financial position as “Accumulated other comprehensive loss, net of tax”.

Fair Value of Financial Instruments

The fair value of financial instruments is estimated using available market information and other valuation methods. Refer to Note 8, “Fair Value” for more information.

3. Purchased Receivables and Revenue Recognition

Purchased receivables are receivables that have been charged-off as uncollectible by the originating organization and many times have been subject to previous collection efforts. The Company acquires pools of homogenous accounts, which are the rights to the unrecovered balances owed by individual debtors, through such purchases. The receivable portfolios are

9

purchased at a substantial discount (generally more than 90%) from their face values due to a deterioration of credit quality since origination and are initially recorded at the Company’s acquisition cost, which equals fair value at the acquisition date. Financing for purchasing is provided by cash generated from operations and from borrowings on the Company’s revolving credit facility.

The Company accounts for its investment in purchased receivables using the Interest Method when the Company has reasonable expectations of the timing and amount of cash flows expected to be collected. Accounts purchased may be aggregated into one or more static pools within each quarter, based on a similar risk rating and one or more predominant risk characteristics. The risk rating, which is provided by a third party, is similar for all accounts since the Company’s purchased receivables have all been charged-off by the credit originator. Accounts typically have one or more other predominant risk characteristics. The Company therefore aggregates most accounts purchased within each quarter. Each static pool of accounts 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 revenue recognition.

Collections on each static pool are allocated to revenue and principal reduction based on an 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. Estimated future cash flows may also be impacted by internal or external factors. Internal factors include (a) revisions to initial and post-acquisition recovery scoring and modeling estimates, (b) operational strategies, and (c) changes in productivity related to turnover and tenure of the Company's collection staff. External factors include (a) new laws or regulations relating to collection efforts or new interpretations of existing laws or regulations and (b) the overall condition of the economy.

The actual life of each pool may vary, but will generally range between 36 and 84 months depending on the expected collection period. Monthly cash flows greater than revenue recognized will reduce the carrying value of each static pool. Monthly cash flows lower than revenue recognized will increase the carrying value of each static pool. Each static pool is reviewed at least quarterly and compared to historical trends and operational data to determine whether it is performing as expected. This review is used to determine future estimated cash flows. If revised cash flow estimates are greater than original estimates, the IRR is increased prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. If revised cash flow estimates are less than original estimates, the IRR remains unchanged and an impairment is recognized. If cash flow estimates increase in periods subsequent to recording an impairment, reversal of the previously recognized impairment is made prior to any increases to the IRR.

Agreements to purchase receivables typically include general representations and warranties from the sellers covering the accuracy of seller provided information regarding the receivables, the origination and servicing of the receivables in compliance with applicable consumer protection laws and regulations, free and clear title to the receivables, obligor death, bankruptcy, fraud and settled or paid receivables prior to sale. The agreements typically permit the return of certain receivables from the Company back to the seller. The general time frame to return receivables is within 90 to 180 days from the date of the purchase agreement. Proceeds from returns, also referred to as buybacks, are applied against the carrying value of the static pool.

The cost recovery method is used when collections on a particular portfolio cannot be reasonably predicted. When appropriate, the cost recovery method may be used for pools that previously had an IRR assigned to them. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio. There were no unamortized pools on the cost recovery method as of September 30, 2012. As of December 31, 2011, the Company had six unamortized pools on the cost recovery method with an aggregate carrying value of $215,036.

Although not its usual business practice, the Company may periodically sell, on a non-recourse basis, all or a portion of a pool to unaffiliated parties. The Company does not have any significant continuing involvement with those accounts subsequent to sale. Proceeds of these sales are compared to the carrying value of the accounts and a gain or loss is recognized on the difference between proceeds received and the carrying value, which is included in “Gain on sale of purchased receivables” in the accompanying consolidated statements of operations. The agreements to sell receivables typically include general representations and warranties.

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Changes in purchased receivables portfolios were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Beginning balance, net	$	355,355,820		$	340,935,454		$	348,710,787		$	321,318,255
Investment in purchased receivables, net of buybacks		23,875,734			38,294,778			103,548,645			133,906,306
Cost of sale of purchased receivables sold		—			—			(88,031	)		—
Cash collections		(89,168,247	)		(87,437,890	)		(282,170,116	)		(267,894,382	)
Purchased receivable revenues, net		54,433,740			56,294,567			174,495,762			160,756,730
Ending balance, net	$	344,497,047		$	348,086,909		$	344,497,047		$	348,086,909

Accretable yield represents the amount of revenue the Company expects over the remaining life of existing portfolios. Nonaccretable yield represents the difference between the remaining expected cash flows and the total contractual obligation outstanding, or face value, of purchased receivables. Changes in accretable yield were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Beginning balance (1)	$	496,104,645		$	459,858,029		$	478,230,548		$	427,464,854
Revenue recognized on purchased receivables, net		(54,433,740	)		(56,294,567	)		(174,495,762	)		(160,756,730	)
Additions due to purchases		29,916,643			38,370,211			126,516,389			163,223,278
Reclassifications from nonaccretable yield		2,660,783			20,468,205			43,997,156			32,470,476
Ending balance (1)	$	474,248,331		$	462,401,878		$	474,248,331		$	462,401,878

(1) Accretable yield is a function of estimated remaining cash flows based on expected work effort and historical collections. Refer to Forward-Looking Statements on page 22 and Critical Accounting Policies on page 44 for further information regarding these estimates.

Changes in purchased receivables portfolios under the cost recovery method were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Beginning balance	$	16,796		$	278,780		$	215,036		$	962,461
Reclassifications from amortizing pools		—			306,587			—			1,145,543
Buybacks, impairments and resale adjustments		—			(213	)		(2,244	)		(446	)
Cash collections prior to becoming fully amortized		(16,796	)		(325,392	)		(212,792	)		(1,847,796	)
Ending balance	$	—		$	259,762		$	—		$	259,762

During the three and nine months ended September 30, 2012, the Company recorded net impairment reversals of purchased receivables of $485,800 and $9,378,000, respectively. During the three and nine months ended September 30, 2011, the Company recorded net impairment reversals of $2,733,100 and $3,651,900, respectively. Net impairment reversals increased revenue and the carrying value of purchased receivable portfolios in the period in which they were recorded. Impairments are accounted for as a valuation allowance against the carrying value of purchased receivables and may be reversed in future periods, which reduce the valuation allowance.

Changes in the purchased receivables valuation allowance were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Beginning balance	$	46,543,700		$	71,753,600		$	55,914,400		$	87,323,300
Impairments		1,717,000			—			3,427,000			2,838,900
Reversal of impairments		(2,202,800	)		(2,733,100	)		(12,805,000	)		(6,490,800	)
Deductions (1)		(8,017,200	)		(6,314,900	)		(8,495,700	)		(20,965,800	)
Ending balance	$	38,040,700		$	62,705,600		$	38,040,700		$	62,705,600

(1) Deductions represent valuation allowances on purchased receivable portfolios that became fully amortized during the period; therefore, the balance is removed from the valuation allowance since it can no longer be reversed.

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4. Notes Payable

The Company maintains a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders named therein, effective November 14, 2011 (the “Credit Agreement”). Under the terms of the Credit Agreement, the Company has a five-year $95,500,000 revolving credit facility which expires in November 2016 (the “Revolving Credit Facility”), which may be limited by financial covenants, and a six-year $175,000,000 term loan facility which expires in November 2017 (the “Term Loan Facility” and together with the Revolving Credit Facility, the “Credit Facilities”). The Credit Agreement replaced a similar credit agreement with JPMorgan Chase Bank, N.A. entered into during June 2007.

The Credit Facilities bear interest at a rate per annum equal to, at the Company’s option, either:

• a base rate equal to the higher of (a) the Federal Funds Rate plus 0.5%, and (b) the prime commercial lending rate as set forth by the administrative agent’s prime rate, plus an applicable margin which (1) for the Revolving Credit Facility, will range from 3.0% to 3.5% per annum based on the Leverage Ratio (as defined), and (2) for the Term Loan Facility is 6.25%; or

• a LIBOR rate, not to be less than 1.5% for the Term Loan Facility, plus an applicable margin which (1) for the Revolving Credit Facility, will range from 4.0% to 4.5% per annum based on the Leverage Ratio, and (2) for the Term Loan Facility is 7.25%.

The Credit Agreement includes an accordion loan feature that allows the Company to request an aggregate $75,000,000 increase in the Revolving Credit Facility and/or the Term Loan Facility. The Credit Facilities also include sublimits for $10,000,000 of letters of credit and for $10,000,000 of swingline loans (which bear interest at the bank’s alternative rate, which was 4.25% at September 30, 2012). The Credit Agreement is secured by substantially all of the Company’s assets. The Credit Agreement also contains certain covenants and restrictions that the Company must comply with, which as of September 30, 2012 were:

• Leverage Ratio (as defined) cannot exceed 1.5 to 1.0 at any time; and

• Ratio of Consolidated Total Liabilities (as defined) to Consolidated Tangible Net Worth (as defined) cannot exceed (i) 2.5 to 1.0 at any time prior to June 30, 2014, or (ii) 2.25 to 1.0 at any time thereafter; and

• Ratio of Cash Collections (as defined) to Estimated Quarterly Collections (as defined) must equal or exceed 0.80 to 1.0 for any fiscal quarter, and if not achieved, must then equal or exceed 0.85 to 1.0 for the following fiscal quarter for any period of two consecutive fiscal quarters.

The financial covenants may restrict the Company’s ability to borrow against the Revolving Credit Facility. However, at September 30, 2012, the Company was able to access the entire $95,500,000 of available borrowings on the Revolving Credit Facility based on the financial covenants. Borrowing capacity may be reduced under this ratio in the future if there are significant declines in cash collections or increases in operating expenses that are not offset by a reduction in outstanding borrowings. The Credit Facility also includes a borrowing base limit of 25% of estimated remaining collections less the outstanding principal balance on the Term Loan Facility, calculated on a monthly basis, which will also limit the Company’s ability to borrow.

The Credit Agreement contains a provision that requires the Company to repay Excess Cash Flow (as defined) to reduce the indebtedness outstanding under the Term Loan Facility. The Excess Cash Flow repayment provisions are:

• 75% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was greater than 1.25 to 1.0 as of the end of such fiscal year;

• 50% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was less than or equal to 1.25 to 1.0 but greater than 1.0 to 1.0 as of the end of such fiscal year; or

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

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The Company was not required to make an Excess Cash Flow payment based on the results of operations for the years ended December 31, 2011 and 2010.

The Term Loan Facility requires quarterly repayments over the term of the agreement, with any remaining principal balance due on the maturity date. The following table details the required remaining repayment amounts:

Years Ending December 31,	Amount
2012 (1)	$	2,187,500
2013		8,750,000
2014		14,000,000
2015		22,748,000
2016		22,748,000
2017 (2)		98,004,000

(1) Amount includes one remaining quarterly principal payment for 2012. Required principal payments of $2,187,500 were made during each quarter of 2012.

(2) Includes three quarterly principal payments and the remaining balance due on the maturity date.

Voluntary prepayments are permitted on the Term Loan Facility subject to certain fees. If a voluntary prepayment is made on or prior to November 14, 2012, the Company must pay a prepayment premium of 2.0% of the amount paid, and if such prepayment is made after November 14, 2012 but on or before November 14, 2013, the Company must pay a prepayment premium of 1.0% of the amount paid. There are no premiums for voluntary prepayments made after November 14, 2013.

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

The Credit Agreement requires the Company to effectively cap, collar or exchange interest rates on a notional amount of at least 25% of the outstanding principal amount of the Term Loan Facility. Refer to Note 5, “Derivative Financial Instruments and Risk Management” for additional information on the Company’s derivative financial instruments that satisfy this requirement.

Outstanding borrowings on notes payable were as follows:

	September 30,			December 31,
	2012			2011
Term Loan Facility	$	168,437,500		$	175,000,000
Revolving Credit Facility		—			8,200,000
Original issue discount on Term Loan		(9,312,253	)		(11,077,130	)
Total Notes Payable	$	159,125,247		$	172,122,870
Weighted average interest rate on total outstanding borrowings		8.75	%		8.56	%
Weighted average interest rate on revolving credit facility		—			4.57	%

The Company was in compliance with all covenants of the Credit Agreement as of September 30, 2012.

5. Derivative Financial Instruments and Risk Management

Risk Management

The Company may periodically enter into derivative financial instruments, typically interest rate swap agreements, to reduce its exposure to fluctuations in interest rates on variable-rate debt and their impact on earnings and cash flows. The Company does not utilize derivative financial instruments with a level of complexity or with a risk greater than the exposure to be managed nor does it enter into or hold derivatives for trading or speculative purposes. The Company periodically reviews the creditworthiness of each swap counterparty to assess the counterparty’s ability to honor its obligations. Counterparty default would further expose the Company to fluctuations in variable interest rates.

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The Company records derivative financial instruments at fair value. Refer to Note 8, “Fair Value” for additional information.

Derivative Financial Instruments

Derivative instruments that receive designated hedge accounting treatment are evaluated for effectiveness at the time they are designated as well as throughout the hedging period. Changes in fair value are recorded as an adjustment to Accumulated Other Comprehensive Income (“AOCI”), net of tax. Amounts in AOCI are reclassified into earnings under certain situations; for example, if the occurrence of the transaction is no longer probable or no longer qualifies for hedge accounting. In these situations, all or a portion of the transaction would be ineffective.

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

Prior to entering into the new Credit Agreement in 2011, the swap was designated and qualified as a cash flow hedge. The effective portion of the change in fair value was reported as a component of AOCI in the accompanying consolidated financial statements. The ineffective portion of the change in fair value of the derivative was recorded in interest expense. Upon entering into the new Credit Agreement, the swap was de-designated as a cash flow hedge because it was no longer expected to be highly effective in mitigating changes in variable interest rates. Accordingly, the amount recognized in AOCI prior to de-designation was reclassified into earnings on a straight-line basis over the remaining term of the agreement. Losses of $277,247 and $942,641, net of tax of $120,603 and $410,049, were amortized to “Interest expense” and “Income tax expense”, respectively, in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2012. In addition, subsequent to the de-designation as a cash flow hedge, changes in fair value of the swap were recognized in earnings during the period in which they occurred.

On January 13, 2012, the Company entered into a new amortizing interest rate swap agreement effective March 13, 2012. On a quarterly basis, the Company will swap variable rates equal to three-month LIBOR, subject to a 1.5% floor, for fixed rates. The notional amount of the new swap was initially set at $19,000,000. In September 2012, when the original swap agreement expired, the notional amount of the new swap increased to $43,000,000 and subsequently will amortize in proportion to the principal payments on the Term Loan Facility through March 2017, when the notional amount will be $26,000,000. The Company’s new derivative instrument is designated and qualifies as a cash flow hedge.

The following table summarizes the fair value of derivative instruments:

	September 30, 2012			December 31, 2011
	Financial Position Location	Fair Value		Financial Position Location	Fair Value
Interest rate swap instruments
Derivatives qualifying as hedging instruments	Accrued liabilities	$	903,499	Accrued liabilities	$	—
Derivatives not qualifying as hedging instruments	Accrued liabilities		—	Accrued liabilities		825,945
Total interest rate swap instruments		$	903,499		$	825,945

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The following tables summarize the impact of derivatives designated as hedging instruments:

Derivative	Amount of Gain or (Loss) Recognized in AOCI (Effective Portion)						Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)						Location of Gain or (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	Three Months Ended September 30,							Three Months Ended September 30,							Three Months  Ended September 30,
	2012			2011				2012			2011				2012		2011
Interest rate swap	$	(143,362	)	$	69,528		Interest expense	$	(310,265	)	$	(544,663	)	Interest Expense	$	—	$	(6,821	)
Total	$	(143,362	)	$	69,528		Total	$	(310,265	)	$	(544,663	)	Total	$	—	$	(6,821	)
Derivative	Amount of Gain or (Loss) Recognized in AOCI (Effective Portion)						Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)						Location of Gain or (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	Nine Months Ended September 30,							Nine Months Ended September 30,							Nine Months Ended September 30,
	2012			2011				2012			2011				2012		2011
Interest rate swap	$	(969,535	)	$	(60,359	)	Interest expense	$	(1,008,677	)	$	(1,714,648	)	Interest Expense	$	—	$	(6,694	)
Total	$	(969,535	)	$	(60,359	)	Total	$	(1,008,677	)	$	(1,714,648	)	Total	$	—	$	(6,694	)

As of September 30, 2012, the Company did not have any fair value hedges.

6. Share-Based Compensation

Plan Descriptions

On May 10, 2012, shareholders of the Company approved the 2012 Stock Incentive Plan (“2012 Plan”) that provides for awards of stock options, stock appreciation rights, restricted stock grants and units, performance share awards and annual incentive awards to eligible key associates, directors and consultants, subject to certain annual grant limitations. The Company reserved 3,300,000 shares of common stock for issuance in conjunction with share-based awards to be granted under the plan of which 3,216,728 shares remained available as of September 30, 2012. The purpose of the 2012 Plan is (a) promote the best interests of the Company and its shareholders by encouraging employees, consultants and directors of the Company to acquire an ownership interest in the Company by granting stock-based awards, aligning their interests with those of shareholders, as well as cash-based awards, and (b) enhance the ability of the Company to attract, motivate and retain qualified employees and directors.

The 2012 Plan replaced a similar stock incentive plan adopted in 2004 (“2004 Plan”). The 2004 Plan also provided for awards of stock options, stock appreciation rights, restricted stock grants and units, performance share awards and annual incentive awards to eligible key associates, directors and consultants. There were awards for 1,630,344 shares under the 2004 Plan outstanding at September 30, 2012. Those awards are subject to the terms and conditions of each grant and may vest, expire or be forefeited based on the achievement of time-based or service-based conditions. No additional awards will be made under the 2004 Plan.

Based on historical experience, the Company uses an annual forfeiture rate of 5% and 9% for stock options and restricted share units, respectively, for grants awarded to associates. Grants made to non-associate directors generally vest when the director terminates his or her board service, are expensed when granted, and therefore have no forfeitures.

Share-based compensation expense and related tax benefits were as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012		2011
Share-based compensation expense	$	180,334		$	289,581	$	1,021,379	$	1,073,241
Tax benefits		(6,113	)		127,849		250,238		466,860

The Company’s share-based compensation arrangements are described below.

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Stock Options

Effective January 1, 2012, the Company began utilizing the Black-Scholes model to calculate the fair value of stock option awards on the date of grant using the assumptions noted in the following table. The fair value of stock option awards calculated by the Black-Scholes model is not significantly different from the Whaley Quadratic approximation model used in prior years. 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 options are 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 U.S. Treasury yield curve on the date of grant. Changes to the input assumptions can result in different fair market value estimates.

The following table summarizes the assumptions used to determine the fair value of stock options granted:

Options issue year:	2012	2011
Expected volatility	63.99%	59.90%-63.99%
Expected dividends	0.00%	0.00%
Expected term	4 Years	4 Years
Risk-free rate	0.67%	1.89%-2.25%

As of September 30, 2012, the Company had options outstanding for 1,228,371 shares of its common stock under the stock incentive plans. These options have been granted to key associates and non-associate 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 contractual terms ranging from seven to ten years. Options granted to key associates generally vest between one and five years from the grant date, whereas options granted to non-associate directors generally vest immediately. The fair value of stock options is expensed on a straight-line basis over the vesting period.

Stock option compensation expense was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Salaries and benefits (1)	$	53,192	$	80,742	$	190,897	$	293,835
Administrative expenses (2)		—		—		—		79,232
Total	$	53,192	$	80,742	$	190,897	$	373,067

(1) Salaries and benefits include amounts for associates.

(2) Administrative expenses include amounts for non-associate directors.

The following table summarizes all stock option transactions from January 1, 2012 through September 30, 2012:

	Options Outstanding			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
						(In years)
Beginning balance		1,139,438		$	10.39
Granted		104,883			4.40
Forfeited or expired		(15,950	)		5.99
Outstanding at September 30, 2012		1,228,371			9.94		4.17	$	1,425,741
Exercisable at September 30, 2012		966,660		$	11.31		3.85	$	744,018

The weighted-average grant date fair value of the options granted during the nine months ended September 30, 2012 and 2011 was $2.13 and $2.49, respectively. No options were exercised during 2012 and 2011.

As of September 30, 2012, there was $478,415 of total unrecognized compensation expense related to nonvested stock options, which consisted of $443,849 for options expected to vest and $34,566 for options not expected to vest. Unrecognized compensation expense for options expected to vest is expected to be recognized over a weighted-average period of 2.48 years.

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Restricted Share Units and Deferred Stock Units

During the nine months ended September 30, 2012, the Company granted 201,215 restricted share units and 14,064 deferred stock units (collectively referred to as “RSUs”) to key associates and non-associate directors under the stock incentive plans. Each RSU is equal to one share of the Company’s common stock. RSUs do not have voting rights but would receive common stock dividend equivalents in the form of additional RSUs. The value of RSUs was equal to the market price of the Company’s stock at the date of grant.

RSUs granted to associates generally vest over one to four years, based upon service or performance conditions. RSUs granted to non-associate directors generally vest when the director terminates his or her board service. As of September 30, 2012, 73,675 of RSUs previously granted to associates will vest contingent on the attainment of performance conditions. When associates’ RSUs vest, associates have the option of selling a portion of vested shares to the Company in order to cover payroll tax obligations. The Company expects to repurchase approximately 36,000 shares for RSUs that are expected to vest during the next twelve months.

The fair value of RSUs granted to associates is expensed on a straight-line basis over the vesting period based on the number of RSUs expected to vest. For RSUs with performance conditions, if those conditions are not expected to be met, the compensation expense previously recognized is reversed. The fair value of RSUs granted to non-associate directors is generally expensed immediately.

Compensation expense for RSUs, net of reversals, was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Salaries and benefits (1)	$	99,233	$	190,095	$	367,574	$	584,586
Administrative expenses (2)		27,909		18,744		462,908		115,588
Total	$	127,142	$	208,839	$	830,482	$	700,174

(1) Salaries and benefits include amounts for associates.

(2) Administrative expenses include amounts for non-associate directors.

The Company generally issues shares of common stock for RSUs as they vest. The following table summarizes all RSU related transactions from January 1, 2012 through September 30, 2012:

Nonvested RSUs	RSUs			Weighted-Average Grant-Date Fair Value
Beginning balance		403,714		$	5.96
Granted		215,279			5.01
Vested and issued		(103,290	)		5.81
Forfeited		(30,458	)		5.04
Ending balance		485,245		$	5.70

As of September 30, 2012, there was $1,307,577 of total unrecognized compensation expense related to RSUs, which consisted of $1,129,712 for RSUs expected to vest and $177,865 for RSUs not expected to vest. Unrecognized compensation expense for RSUs expected to vest is expected to be recognized over a weighted-average period of 2.24 years. As of September 30, 2012, there were 152,313 RSUs, included as part of total outstanding nonvested RSUs in the table above, awarded to non-associate directors for which shares are expected to be issued when the director terminates his or her board service.

7. Contingencies

Litigation Contingencies

The Company is involved in certain legal matters that management considers incidental to its business. The Company recognizes liabilities for contingencies and commitments when a loss is probable and estimable. The Company recognizes expense for defense costs when incurred. The Company does not expect these routine legal matters, either individually or in the aggregate, to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

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8. Fair Value

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

Level 1	–	Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2	–	Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3	–	Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.

The following table provides additional information about the estimated fair value of financial instruments:

			Fair Value Measurements at Reporting Date Using
	Total Recorded Fair Value at September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Derivatives qualifying as hedging instruments	$	903,499		—	$	903,499		—

Disclosure of the estimated fair value of financial instruments often requires the use of estimates. The fair value of the interest rate swap represents the amount the Company would pay to terminate or otherwise settle the contract at the financial position date, taking into consideration current unearned gains and losses. Fair value was determined using a market approach, and is based on the three-month LIBOR curve for the remaining term of the swap agreement. Refer to Note 5, “Derivative Financial Instruments and Risk Management”, for additional information about the fair value of the interest rate swap.

Goodwill

Goodwill is assessed annually for impairment using fair value measurement techniques. Goodwill impairment, if applicable, is determined using a two-step test. The first step of the impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds its book value, goodwill is considered not impaired and the second step of the test is unnecessary. If the book value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit’s goodwill with the book value. If the book value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Events that could in the future result in impairment include, but are not limited to, sharply declining cash collections or a significant negative shift in the risk inherent in the reporting unit.

The estimate of fair value of the Company’s goodwill is determined using various valuation techniques including market capitalization, which is a Level 1 input, and an analysis of discounted cash flows, which includes Level 3 inputs. A discounted cash flow analysis requires various judgmental assumptions including assumptions about future cash collections, revenues, growth rates and discount rates. The Company bases these assumptions on its budget and long-term plans. Discount rate assumptions are based on an assessment of the risk inherent in the reporting unit.

At the time of the latest annual goodwill impairment test, November 1, 2011, market capitalization was substantially lower than book value. As a result, the Company performed an impairment analysis to assess the fair value of the goodwill

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of the Company’s single reporting unit. The Company prepared a discounted cash flow analysis, which resulted in fair value in excess of book value. The Company also prepared a market analysis to substantiate the value derived from the discounted cash flow analysis, which also resulted in fair value in excess of book value. The results of the fair value calculations indicated goodwill was not impaired. In addition, the Company believes that a reasonable potential buyer would offer a control premium for the business that would adequately cover the difference between the market valuation and book value. The Company performed a calculation of an implied control premium of the business, which supported the difference between the market valuation and book value. Based on the fair value calculations and the control premium reconciliation, the Company believes there was no impairment of goodwill as of November 1, 2011.

During certain periods of the first quarter of 2012, the market capitalization of the Company was also less than book value. However, the Company did not consider those periods to be triggering events requiring additional impairment testing considering the gap between book value and market value relative to the gap in those values at the time goodwill testing was performed in 2011. The Company does not believe, based on the results of testing at November 1, 2011 and an analysis of events subsequent to that testing, that additional impairment testing was required to be performed during the nine months ended September 30, 2012.

The following disclosures pertain to the fair value of certain assets and liabilities, which are not measured at fair value in the accompanying consolidated financial statements.

Purchased Receivables

The Company’s purchased receivables had carrying values of $344,497,047 and $348,710,787 at September 30, 2012 and December 31, 2011, respectively. The Company computes the fair value of purchased receivables by discounting total estimated future cash flows net of expected collection costs using a weighted-average cost of capital. The fair value of purchased receivables was approximately $425,000,000 at both September 30, 2012 and December 31, 2011.

Credit Facilities

The Company’s Credit Facilities had carrying values of $159,125,247 and $172,122,870 as of September 30, 2012 and December 31, 2011, respectively, which was net of original issue discount on the Term Loan Facility.

The following table summarizes the carrying value and estimated fair value of the Credit Facilities:

	September 30,		December 31,
	2012		2011
Term Loan Facility carrying value (1)	$	168,437,500	$	175,000,000
Term Loan Facility estimated fair value (1,2)		169,700,781		167,125,000
Revolving Credit Facility carrying value (3)		—		8,200,000

(1) The carrying value and estimated fair value of the Term Loan Facility excludes the unamortized balance of the original issue discount.

(2) The Company computes the fair value of its Term Loan Facility based on quoted market prices.

(3) The fair value of the outstanding balance of the Revolving Credit Facility approximated carrying value.

9. Restructuring Charges

On November 1, 2011 and September 10, 2012, the Company announced plans to close its call center operations in the San Antonio, Texas and Tempe, Arizona offices, respectively. The Company recognized restructuring charges for these actions of $284,842 and $358,467 during the three and nine months ended September 30, 2012, respectively. In 2011, the Company recognized $279,538 related to closing the San Antonio office.

The charges for closing these offices during the three and nine months ended September 30, 2012 included contract termination costs for operating leases, employee termination benefits and write-off of furniture and equipment.

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The components of restructuring charges were as follows:

	Three Months Ended September 30, 2012		Nine Months Ended September 30, 2012
Operating lease charges	$	—	$	84,908
Employee termination benefits		71,621		71,621
Write-off of furniture and equipment		213,221		201,938
Total restructuring charges	$	284,842	$	358,467

The reserve for restructuring charges as of September 30, 2012 and December 31, 2011 was $299,658 and $279,538, respectively. The changes in the reserve were as follows:

	Employee Termination Benefits			Contract Termination Costs			Fixed Assets and Other			Total
Restructuring liability as of January 1, 2012	$	176,098		$	—		$	103,440		$	279,538
Costs incurred and charged to expense		71,621			84,908			201,938			358,467
Payments		(184,958	)		(49,616	)		(103,773	)		(338,347	)
Adjustments		8,860			(8,860	)		—			—
Restructuring liability as of September 30, 2012	$	71,621		$	26,432		$	201,605		$	299,658

The actions to close the San Antonio office were substantially complete by June 30, 2012, and the actions to close the Tempe office are expected to be complete by December 31, 2012. There were no restructuring charges for the three and nine months ended September 30, 2011.

10. Income Taxes

The Company recorded income tax benefit of $539,974 and income tax expense of $2,405,567 for the three months ended September 30, 2012 and 2011, respectively, and income tax expense of $3,469,622 and $6,018,137 for the nine months ended September 30, 2012 and 2011, respectively. At September 30, 2012, the estimated annualized effective income tax rate was 24.5%. The Company calculates an estimated annual effective rate on ordinary income excluding unusual or infrequently occurring items (“discrete items”) which are recognized as they occur. During the three months ended September 30, 2012, the Company recognized benefits from discrete items primarily related to prior year state income tax refunds.

As of September 30, 2012, the Company had a gross unrecognized tax benefit of $680,092 that, if recognized, would result in a net tax benefit of approximately $442,000, which would have a positive impact on net income and the effective tax rate. During the three and nine months ended September 30, 2012, there were no material changes to the unrecognized tax benefit. Since January 1, 2009, the Company has accrued interest of approximately $181,000, which is classified as income tax expense in the accompanying consolidated financial statements.

The federal income tax returns of the Company for the years 2008 through 2011 are subject to examination by the IRS, generally for three years after the latter of their extended due date or when they are filed. The state income tax returns of the Company are subject to examination by the state taxing authorities, for various periods generally up to four years. The Company is currently under examination by the IRS for tax years 2008 through 2010.

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

Company Overview

We have been purchasing and collecting charged-off accounts receivable portfolios (“paper”) 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 including private label card issuers, consumer finance companies, telecommunications and utility providers. Since these receivables are delinquent or past due, we purchase them at a substantial discount. Since January 1, 2002, we have purchased 1,305 consumer debt portfolios, with an original charged-off face value of $48.2 billion for an aggregate purchase price of $1.3 billion, or 2.77% of face value, net of buybacks. 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.

Macro-economic factors in the U.S. influence our operations positively and negatively. Factors such as reduced availability of credit for consumers, a depressed housing market, elevated unemployment rates, increased gasoline prices and other factors have a negative impact on us by making it more difficult to collect from consumers on the paper we acquire. Macro-economic factors also impact the availability of charged-off debt in the market and the prices at which it is available. While the supply of paper increased and prices dropped during 2009 and 2010, we have recently observed increased competition for available paper as well as a reduction in the supply of paper. These factors contributed to the higher pricing we experienced during 2011 and the first nine months of 2012. We expect macro-economic trends, supply of paper and competitive factors to continue to impact portfolio acquisition and collection results.

Our investment in purchased receivables of $23.9 million in the third quarter of 2012 was 37.5% lower than the same period of 2011. Lower purchasing was driven by higher prices and increased competition in the market for available paper. We only purchase paper when we believe we can achieve an acceptable return and do not pursue purchases when we believe the expected collections and related returns do not support the purchase price. While we expect a continuation of recently observed trends of higher pricing through the remainder of 2012, we expect to be able to purchase paper in sufficient quantities to support our business.

Collections have been positively impacted by an increase in collector productivity due to customized collection strategies by account type, improved channel management and an increase in legal collections as a result of our recent increased investment in this channel. As a result of these factors, cash collections of $89.2 million for the third quarter were $1.8 million, or 2.0%, higher than the same period in 2011. Although collections were higher, they did not achieve the same level of year over year growth as we saw in the first half of 2012. Third quarter collections growth was slowed by lower levels of purchasing in the second half of 2011 and early 2012 since collections are typically highest six to 18 months from the purchase date. In addition, while we expect an increase in investment in the legal channel to have a positive impact on collections over time, there is typically a delay in collections while the legal process is initiated.

Purchased receivable revenues of $54.4 million were 3.3% lower during the third quarter of 2012 compared to the same period in 2011. This decrease in revenue was primarily related to lower collections on fully amortized portfolios and lower net purchased receivable impairment reversals. Net impairment reversals in the third quarter of 2012 were $0.5 million, compared to net reversals of $2.7 million in the third quarter of 2011. Lower impairment reversals were driven by an impairment in the third quarter of $1.7 million to a portfolio from 2011. Certain portfolios in the 2006 to 2011 vintages continued to perform above expectations. This led us to increase yields on seven portfolios during the third quarter of 2012.

Operating expenses during the third quarter were up slightly compared to the same period of 2011, but were favorable as a percentage of cash collections at 54.5%, compared to 55.5% last year. The increase in operating expenses compared to prior year was driven by additional expenditures for up-front legal costs as a result of out decision to increase investment in the legal collection channel, restructuring charges due to closing the Tempe, Arizona office and additional expense related to the reinstatement of our
401(k) match in the third quarter of 2011. Investments in costs related to legal collections were $10.2 million during the third quarter of 2012, compared to $8.3 million in the same period of 2011. This increase in up-front legal costs had a negative impact on cost to collect for 2012. The increased investment in legal channel collections were partially offset by efficiencies gained through continued implementation of operational strategies and salaries and benefits savings as a result of office closings.

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In addition, third quarter 2011 operating expenses were unfavorably impacted by an additional accrual of $1.25 million for the FTC settlement, which was finalized in the first quarter of 2012.

Adjusted EBITDA for the third quarter of 2012 was $42.5 million, an increase of $0.8 million from the same period of 2011 as a result of higher collections, partially offset by higher operating expenses due to the increased investment in up-front legal costs discussed above. In addition, FTC related charges from the prior year were excluded from the calculation of Adjusted EBITDA. Although Adjusted EBITDA is not calculated in accordance with accounting principles generally accepted in the United States of America, it is used by analysts, investors and management as a measure of our performance. Refer to Adjusted EBITDA on page 43 for a reconciliation of net income to Adjusted EBITDA.

Forward-Looking Statements

This report contains forward-looking statements that involve risks and uncertainties and that are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements about future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “potential” or “continue”, the negative of these terms or other comparable terminology. These statements involve a number of risks and uncertainties. Actual events or results may differ materially from any forward-looking statement as a result of various factors, including those we discuss in our annual report on Form 10-K for the year ended December 31, 2011 in the section titled “Risk Factors” and elsewhere in this report.

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

• failure to comply with government regulation;

• increased costs or a decrease in collections if changes in the way we conduct business or additional costs to conduct business result from supervision and regulation by the Consumer Financial Protection Bureau or unknown ramifications from the Dodd-Frank Wall Street Reform and Consumer Protection Act;

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

• instability in the financial markets and continued economic weakness or recession impacting our ability to acquire and collect on charged-off receivable portfolios and our operating results;

• our ability to maintain existing, and to secure additional financing on acceptable terms;

• changes in relationships with third parties collecting on our behalf;

• intense competition on bids for portfolio purchases that could impair our ability to achieve our goals;

• ongoing risks of litigation in our litigious industry, including individual and class actions under consumer credit, collections and other laws;

• concentration of a significant portion of our portfolio purchases during any period with a small number of sellers;

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

• our ability to collect sufficient amounts from our purchases of charged-off receivable portfolios;

• our ability to diversify beyond collecting on our purchased receivables portfolios into ancillary lines of business;

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

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• our ability to respond to technology downtime and changes in technology to remain competitive;

• our ability to make reasonable estimates of the timing and amount of future cash receipts and assumptions underlying the calculation of the net impairment charges or IRR increases for purposes of recording purchased receivable revenues;

• the costs, uncertainties and other effects of legal and administrative proceedings impacting our ability to collect on judgments in our favor;

• our ability to successfully hire, train, integrate into our collections operations and retain in-house account representatives; and

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

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Results of Operations

The following table sets forth selected consolidated statement of operations 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 September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011			2012			2011			2012			2011
Revenues
Purchased receivable revenues, net		99.5	%		99.4	%		99.6	%		99.4	%		61.0	%		64.4	%		61.8	%		60.0	%
Gain on sale of purchased receivables		0.0			0.0			0.0			0.0			0.0			0.0			0.0			0.0
Other revenues, net		0.5			0.6			0.4			0.6			0.3			0.4			0.3			0.4
Total revenues		100.0			100.0			100.0			100.0			61.3			64.8			62.1			60.4
Expenses
Salaries and benefits		26.3			29.9			26.2			32.0			16.2			19.4			16.3			19.3
Collections expense		52.9			46.1			48.4			45.7			32.4			29.8			30.1			27.5
Occupancy		2.7			2.6			2.4			2.7			1.7			1.7			1.5			1.6
Administrative		4.3			5.6			3.7			4.4			2.6			3.6			2.3			2.7
Depreciation and amortization		2.1			1.7			2.1			1.8			1.3			1.1			1.3			1.1
Restructuring charges		0.5			0.0			0.2			0.0			0.3			0.0			0.1			0.0
Gain on disposal of equipment and other assets		0.0			(0.2	)		(0.1	)		(0.1	)		0.0			(0.1	)		(0.1	)		0.0
Total operating expenses		88.8			85.7			82.9			86.5			54.5			55.5			51.5			52.2
Income from operations		11.2			14.3			17.1			13.5			6.8			9.3			10.6			8.2
Other income (expense)
Interest expense		(9.4	)		(4.6	)		(9.0	)		(4.9	)		(5.7	)		(3.0	)		(5.6	)		(3.0	)
Interest income		0.0			0.0			0.0			0.0			0.0			0.0			0.0			0.0
Other		0.0			0.0			0.0			0.0			0.0			0.0			0.0			0.0
Income before income taxes		1.8			9.7			8.1			8.6			1.1			6.3			5.0			5.2
Income tax (benefit) expense		(1.0	)		4.3			2.0			3.8			(0.6	)		2.8			1.2			2.3
Net income		2.8	%		5.4	%		6.1	%		4.8	%		1.7	%		3.5	%		3.8	%		2.9	%

Three Months Ended September 30, 2012 Compared To Three Months Ended September 30, 2011

Revenue

We generate substantially all of our revenue from our main line of business, the purchase and collection of charged-off consumer receivables. We refer to revenue generated from this line of business as purchased receivable revenues. Purchased receivable revenues are the difference between cash collections and amortization of purchased receivables.

The following table summarizes our purchased receivable revenues including cash collections and amortization:

	Three Months Ended September 30,												Percentage of Cash  Collections Three Months Ended September 30,
($ in millions)	2012			2011			Change			Percentage Change			2012			2011
Cash collections	$	89.2		$	87.4		$	1.8			2.0	%		100.0	%		100.0	%
Purchased receivable amortization		(34.8	)		(31.1	)		(3.7	)		(11.5	)		(39.0	)		(35.6	)
Purchased receivable revenues, net	$	54.4		$	56.3		$	(1.9	)		(3.3	)%		61.0	%		64.4	%

The 2.0% increase in cash collections during the third quarter of 2012 was primarily the result of improvements in account representative productivity, enhanced analytics used to customize collection strategies by account type and increased investment in the legal collections channel. Account representative productivity improved as a result of additional improvements in inventory and channel management strategies, which led to a reduction in the number of in-house associates. The year over year increase in total collections was driven by a $5.8 million, or 14.8%, increase in legal channel collections, partially offset by collections which were $4.1 million, or 8.5%, lower in the call center channel. Although total collections were higher, they did not achieve the same level of year over year growth as we saw in the first two quarters of 2012. Third quarter collections growth was slowed by lower levels of purchasing in the second half of 2011 and early 2012 since collections are typically highest six to 18 months from the purchase date. In addition, while we expect an increase in investment in the legal channel to have a positive impact on collections over time, there is typically a delay in collections while the legal process is initiated.

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The amortization rate of 39.0% for the three months ended September 30, 2012 was 340 basis points higher than the amortization rate of 35.6% for the same period of 2011. The increase in the amortization rate for the quarter was a result of lower weighted-average yields on new purchases, lower net purchased receivable impairment reversals and lower zero basis collections compared to the prior year. Lower net impairment reversals impacted weighted-average yields in the third quarter of 2012. Net impairment reversals in the third quarter of 2012 were $0.5 million, compared to net reversals of $2.7 million in the third quarter of 2011. Current quarter net impairment reversals were primarily a result of increased expectations for future collections on certain portfolios from the 2005, 2006 and 2007 vintages, and resulted in $2.2 million of impairment reversals, which were partially offset by a $1.7 million impairment to a portfolio in the 2011 vintage. During the third quarter, we increased assigned yields on seven portfolios from the 2006 to 2011 vintages, which results in a higher percentage of cash collections being applied to purchased receivable revenue and less to amortization. Refer to “Supplemental Performance Data” on Page 34 for a summary of purchased receivable revenues and amortization rates by year of purchase and an analysis of the components of collections and amortization on Page 35. Cash collections included collections from fully amortized portfolios of $10.9 million and $12.6 million for the third quarter of 2012 and 2011, respectively, of which 100% were reported as revenue. Collections from fully amortized portfolios decline over time absent any new portfolios that become fully amortized.

Revenues on portfolios purchased from our top three sellers were $18.7 million and $22.3 million during the quarter ended September 30, 2012 and 2011, respectively. All of the top three sellers were the same in both periods.

Investments in Purchased Receivables

We generate revenue from our investments in portfolios of charged-off consumer accounts receivable. Ongoing investments in purchased receivables are critical to continued generation of revenues. The time since charge off, paper types, and other account characteristics of our purchased receivables vary from period to period. As a result, the cost of our purchases, as a percent of face value, may fluctuate from one period to the next. In addition, the amount of paper we purchase in a period may be limited by market factors beyond our control, most importantly, the price, volume and mix of paper offered for sale in a period. Total purchases consisted of the following:

	Three Months Ended September 30,
($ in millions, net of buybacks)	2012			2011			Change			Percentage Change
Acquisitions of purchased receivables, at cost	$	23.9		$	38.3		$	(14.4	)		(37.5	%)
Acquisitions of purchased receivables, at face value	$	766.2		$	1,317.1		$	(550.9	)		(41.8	%)
Percentage of face value		3.13	%		2.91	%
Percentage of forward flow purchases, at cost of total purchasing		27.3	%		36.0	%
Percentage of forward flow purchases, at face value of total purchasing		24.6	%		26.4	%

Our investment in purchased receivables decreased in the third quarter of 2012 as compared to the same period of 2011 because less paper was available at attractive pricing, and we saw increased competition for the paper that was available. The increase in the average cost of purchases this quarter compared to the third quarter of 2011 was a result of higher prices for certain asset types and from certain sellers, and is indicative of generally higher prices in the market. As a result of fluctuations in the mix of purchases of receivables, the cost of our purchases, as a percent of face value, fluctuate from one period to the next and are not always indicative of our estimates of total return. Included in third quarter results is a purchase of $8.2 million, funded during the second quarter, that was not included in second quarter purchasing results or disclosure of estimated remaining collections, because we did not obtain title to the paper until July.

Forward flow contracts commit a debt seller to sell a steady flow of charged-off receivables to us for a fixed percentage of the face value over a specified time period. Purchases from forward flows in the third quarter of 2012 included 10 portfolios from six forward flow contracts. Purchases from forward flows in the third quarter of 2011 included 24 portfolios from 11 forward flow contracts. We bid on forward flow contracts based on their availability in the market and our evaluation of the relative value of the accounts. As a result, our investment in purchased receivables through these agreements fluctuates from period to period.

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Operating Expenses

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 amortization rates, the difference between cash collections and revenues recognized, vary from period to period. Amortization rates vary due to seasonality of collections, impairments, impairment reversals and other factors and can distort the analysis of operating expenses when measured against revenues. Additionally, we believe a substantial portion of our operating expenses are variable in relation to cash collections.

The following table summarizes the significant components of our operating expenses:

	Three Months Ended September 30,										Percentage of Cash  Collections Three Months Ended September 30,
($ in millions)	2012		2011		Change			Percentage Change			2012			2011
Salaries and benefits	$	14.4	$	16.9	$	(2.5	)		(15.1	)%		16.2	%		19.4	%
Collections expense		28.9		26.1		2.8			10.9			32.4			29.8
Occupancy		1.5		1.5		—			0.1			1.7			1.7
Administrative		2.3		3.2		(0.9	)		(26.0	)		2.6			3.6
Restructuring charges		0.3		—		0.3			—			0.3			—
Other		1.2		0.8		0.4			36.9			1.3			1.0
Total operating expenses	$	48.6	$	48.5	$	0.1			0.1	%		54.5	%		55.5	%

Salaries and Benefits.The following table summarizes the significant components of our salaries and benefits expense:

	Three Months Ended September 30,										Percentage of Cash  Collections Three Months Ended September 30,
($ in millions)	2012		2011		Change			Percentage Change			2012			2011
Compensation - revenue generating	$	7.7	$	9.0	$	(1.3	)		(14.7	)%		8.6	%		10.3	%
Compensation - administrative		4.3		4.5		(0.2	)		(3.6	)		4.8			5.1
Benefits and other		2.4		3.4		(1.0	)		(31.0	)		2.8			4.0
Total salaries and benefits	$	14.4	$	16.9	$	(2.5	)		(15.1	)%		16.2	%		19.4	%

Compensation for our revenue generating departments was lower in the third quarter of 2012 due to lower average headcount for in-house account representatives. We reduced headcount for our collection operations as a result of the closure of the San Antonio collection office in January. We also reduced headcount in our legal channel compared to the prior year in connection with our shift to a preferred third party relationship, which also had the effect of increasing agency fees included in collections expense. In addition, we continued to utilize and refine our analytics and inventory management to shift inventory between internal and third party collection channels, both onshore and offshore, which has allowed us to more efficiently utilize our personnel resources and reduce headcount. During the third quarter of 2012, we had an average of 449 in-house account representatives, including supervisors, compared to 648 in the same period of 2011. Lower expenses for benefits and other compensation were primarily related to lower expenses for our self-insured employee medical plan.

Collections Expense.The following table summarizes the significant components of collections expense:

	Three Months Ended September 30,										Percentage of Cash  Collections Three Months Ended September 30,
($ in millions)	2012		2011		Change			Percentage Change			2012			2011
Forwarding fees	$	13.5	$	11.8	$	1.7			14.2	%		15.3	%		13.5	%
Court and process server costs		10.2		8.6		1.6			18.6			11.5			9.9
Lettering campaign and telecommunications costs		2.7		3.7		(1.0	)		(25.7	)		3.0			4.2
Data provider costs		1.4		1.2		0.2			15.0			1.4			1.4
Other		1.1		0.8		0.3			41.8			1.2			0.8
Total collections expense	$	28.9	$	26.1	$	2.8			10.9	%		32.4	%		29.8	%

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Forwarding fees include fees paid to third parties to collect on our behalf, including our agency firm in India. These fees increased in the third quarter of 2012 compared to the same period in 2011 as a result of an increase in accounts placed with third party agencies and higher cash collections generated by third parties in both our legal and call center collection channels. Collections from third party relationships were $60.2 million and $40.9 million, or 67.6% and 46.7% of cash collections, for the third quarter of 2012 and 2011, respectively. Fees paid to agencies are typically a percentage of collections generated, with rates that vary based on the age and type of paper that we outsource. Our agency firm in India is paid a fixed rate per representative, along with certain performance incentives, so overall forwarding rates will vary based on the relative performance of this firm. During the second half of 2011, we began shifting from using in-house attorneys to using our preferred third party law firm for certain legal channel collections. The collections by our preferred third party law firm contributed to higher third party collections and forwarding fees in the third quarter of 2012. We expect agency fees and related collections to remain higher in future periods than in the past as a result of increased volume placed with third parties. These fees will be offset by lower compensation and benefits related to in-house collection associates.

Court and process server costs increased in the third quarter of 2012 from the same period in 2011 as a result of an increase in the number of accounts selected for legal action. In early 2012, we performed an analysis of our inventory of accounts using a newly developed legal suit selection model. The model identified accounts eligible for suit that were not already in our legal collection channel. During the second and third quarters, we began placing a selection of those accounts in our legal channel and initiating suit. This increase in volume drove the 19% increase in these costs because the legal collection model requires an up-front investment in court costs and other fees, which we expense as incurred. There generally is a delay between incurring these costs and generating collections on the accounts in the legal process, which can cause a change in court costs that is disproportionate to the change in legal collections. Even though third quarter 2012 expense and profitability were negatively impacted by these investments, we believe the overall return on investment is higher in the legal collection channel than in the call center channel.

As a result of our continuous review of operational strategies and our analytical work to identify favorable collection opportunities, we were able to lower variable collection expenses, such as dialing and lettering campaigns, resulting in reductions in the related expenses. Generally, these costs are higher in the first six months after purchase of a portfolio as we initiate collection activities. Increasing the number of accounts placed with third party agencies also decreases our direct lettering and telecommunication costs.

Administrative. Administrative expense decreased to $2.3 million in 2012 from $3.2 million in 2011. The decrease was primarily related to a charge during the third quarter of 2011 of $1.25 million to increase the settlement accrual for the FTC matter, partially offset by an increase in outside consulting fees in the third quarter of 2012.

Restructuring Charges.Restructuring charges of $0.3 million in the third quarter of 2012 were related to the recently announced closing of our Tempe, Arizona collection office.

Interest Expense. Interest expense was $5.1 million for the third quarter of 2012, an increase of $2.5 million compared to $2.6 million in the third quarter of 2011. During the fourth quarter of 2011, we entered into a new credit agreement, which resulted in higher interest and additional deferred financing costs, including an original issue discount of $11.4 million that is being amortized over the remaining term of the credit agreement. We recognized expense of $0.6 million for the amortization of the original issue discount during the third quarter of 2012. As a result of entering into the new credit agreement, interest expense, including amortization of deferred financing costs and amortization of the original issue discount, will be higher in future periods than it would have been under the terms of the former credit agreement. In addition, the increase in interest expense was due to an increase in average borrowings, which were $180.0 million during the third quarter of 2012 compared to $170.9 million in the same period of 2011. Refer to “Liquidity and Capital Resources” for additional information.

Income Taxes. We recognized an income tax benefit of $0.5 million and income tax expense of $2.4 million for the third quarter of 2012 and 2011, respectively. The third quarter 2012 tax benefit reflects a negative effective tax rate of 54.3%, which was due to a decrease in the forecasted annual effective rate from 30.5% at the end of the second quarter to 24.5%. The decrease in rate is due to recognized benefits from discrete items primarily related to prior year state income tax refunds. Refer to “Income Taxes” on Page 31 for additional discussion of the forecasted annual effective rate. For the third quarter of 2011, the effective tax rate was 43.9%. The difference in income tax expense was also driven by a decrease in pre-tax income, which was $1.0 million for 2012 compared to $5.5 million for the same period of 2011.

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Nine Months Ended September 30, 2012 Compared To Nine Months Ended September 30, 2011

Revenue

We generate substantially all of our revenue from our main line of business, the purchase and collection of charged-off consumer receivables. We refer to revenue generated from this line of business as purchased receivable revenues. Purchased receivable revenues are the difference between cash collections and amortization of purchased receivables.

The following table summarizes our purchased receivable revenues including cash collections and amortization:

	Nine Months Ended September 30,												Percentage of Cash  Collections Nine Months Ended September 30,
($ in millions)	2012			2011			Change			Percentage Change			2012			2011
Cash collections	$	282.2		$	267.9		$	14.3			5.3	%		100.0	%		100.0	%
Purchased receivable amortization		(107.7	)		(107.1	)		(0.6	)		(0.5	)		(38.2	)		(40.0	)
Purchased receivable revenues, net	$	174.5		$	160.8		$	13.7			8.5	%		61.8	%		60.0	%

The 5.3% increase in cash collections during the first nine months of 2012 was a result of improvements in account representative productivity, enhanced analytics used to customize collection strategies by account type and increased investment in the legal collections channel. Account representative productivity improved as a result of additional improvements in inventory and channel management strategies, which led to a reduction in the number of in-house associates. The year over year increase in total collections was driven by increases of $10.9 million, or 9.1%, and $3.3 million, or 2.3%, in legal and call center channel collections, respectively. Year to date collections are also higher because we invested 18.2% more in purchased receivables for all of 2011 than we did in 2010, and we also increased purchasing in the first half of 2012 compared to the second half of 2011 by 23.1%. Generally, collections are strongest on portfolios six months to 18 months after purchase and, therefore, these increases have a positive impact on current year collections.

The amortization rate of 38.2% for the nine months ended September 30, 2012 was 180 basis points lower than the amortization rate of 40.0% for the same period of 2011. The decline in the amortization rate for 2012 was primarily a result of higher net purchased receivable impairment reversals. Higher net impairment reversals impacted weighted-average yields in the first nine months of 2012. Net impairment reversals in 2012 were $9.4 million, compared to net reversals of $3.7 million in 2011. Impairment reversals were recorded in the 2005, 2006, 2007 and 2009 vintage years, and were partially offset by a $3.4 million impairment to a portfolio in the 2011 vintage. In addition, during the first nine months of the year, we increased assigned yields on 14 portfolios from the 2006 to 2011 vintages. Refer to “Supplemental Performance Data” on Page 34 for a summary of purchased receivable revenues and amortization rates by year of purchase (“vintage”) and an analysis of the components of collections and amortization on Page 35. Cash collections included collections from fully amortized portfolios of $35.8 million and $38.9 million for the first nine months of 2012 and 2011, respectively, of which 100% were reported as revenue. Collections from fully amortized portfolios decline over time absent any new portfolios that become fully amortized.

Revenues on portfolios purchased from our top three sellers were $63.9 million and $64.5 million during the nine months ended September 30, 2012 and 2011, respectively. Two of the top three sellers were the same in both nine-month periods.

Investments in Purchased Receivables

We generate revenue from our investments in portfolios of charged-off consumer accounts receivable. Ongoing investments in purchased receivables are critical to continued generation of revenues. The time since charge off, paper types, and other account characteristics of our purchased receivables vary from period to period. As a result, the cost of our purchases, as a percent of face value, may fluctuate from one period to the next. In addition, the amount of paper we purchase in a period may be limited by market factors beyond our control, most importantly, the price, volume and mix of paper offered for sale in a period.

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Total purchases consisted of the following:

	Nine Months Ended September 30,
($ in millions, net of buybacks)	2012			2011			Change			Percentage Change
Acquisitions of purchased receivables, at cost	$	104.0		$	133.9		$	(29.9	)		(22.3	%)
Acquisitions of purchased receivables, at face value	$	3,651.0		$	4,140.9		$	(489.9	)		(11.8	%)
Percentage of face value		2.85	%		3.23	%
Percentage of forward flow purchases, at cost of total purchasing		26.2	%		36.0	%
Percentage of forward flow purchases, at face value of total purchasing		22.0	%		27.8	%

Our investment in purchased receivables declined in the first nine months of 2012 as compared to the same period in 2011 as a result of lower purchasing in the first and third quarters because less paper was available at attractive pricing and we saw increased competition for the paper that was available. The decrease in the average cost of purchases compared to the first nine months of 2011 was a result of purchasing a higher percentage of older paper during 2012. For instance, purchases of tertiary paper in the first nine months of 2012 represented the majority of total purchases, whereas, purchases of tertiary paper were less than half of total purchases in the first nine months of 2011. As a result of these fluctuations in the mix of purchases of receivables, the cost of our purchases, as a percent of face value, fluctuate from one period to the next and are not always indicative of our estimates of total return.

Forward flow contracts commit a debt seller to sell a steady flow of charged-off receivables to us for a fixed percentage of the face value over a specified time period. Purchases from forward flows in the first nine months of 2012 included 49 portfolios from 11 forward flow contracts. Purchases from forward flows in 2011 included 81 portfolios from 22 forward flow contracts.

Operating Expenses

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 amortization rates, the difference between cash collections and revenues recognized, vary from period to period. Amortization rates vary due to seasonality of collections, impairments, impairment reversals and other factors and can distort the analysis of operating expenses when measured against revenues. Additionally, we believe a substantial portion of our operating expenses are variable in relation to cash collections.

The following table summarizes the significant components of our operating expenses:

	Nine Months Ended September 30,										Percentage of Cash  Collections Nine Months Ended September 30,
($ in millions)	2012		2011		Change			Percentage Change			2012			2011
Salaries and benefits	$	45.9	$	51.7	$	(5.8	)		(11.3	)%		16.3	%		19.3	%
Collections expense		84.8		73.8		11.0			14.8			30.1			27.5
Occupancy		4.3		4.3		—			(0.3	)		1.5			1.6
Administrative		6.5		7.2		(0.7	)		(9.3	)		2.3			2.7
Restructuring charges		0.4		—		0.4			—			0.1			—
Other		3.4		2.9		0.5			19.7			1.2			1.1
Total operating expenses	$	145.3	$	139.9	$	5.4			3.8	%		51.5	%		52.2	%

Salaries and Benefits.The following table summarizes the significant components of our salaries and benefits expense:

	Nine Months Ended September 30,										Percentage of Cash  Collections Nine Months Ended September 30,
($ in millions)	2012		2011		Change			Percentage Change			2012			2011
Compensation - revenue generating	$	24.1	$	28.4	$	(4.3	)		(15.2	)%		8.6	%		10.6	%
Compensation - administrative		13.3		13.5		(0.2	)		(1.5	)		4.7			5.1
Benefits and other		8.5		9.8		(1.3	)		(13.3	)		3.0			3.6
Total salaries and benefits	$	45.9	$	51.7	$	(5.8	)		(11.3	)%		16.3	%		19.3	%

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Compensation for our revenue generating departments was lower in the first nine months of 2012 due to lower average headcount for in-house account representatives. We reduced headcount for our collection operations as a result of the closures of the San Antonio collection office in January. We also reduced headcount in our legal channel in connection with our shift to a preferred third party relationship, which had the effect of increasing agency fees included in collections expense. In addition, we continued to utilize and refine our analytics and inventory management to shift inventory between internal and third party collection channels, both onshore and offshore, which has allowed us to more efficiently utilize our personnel resources and reduce headcount. During the first nine months of 2012, we had an average of 484 in-house account representatives, including supervisors, compared to 682 in the same period of 2011. Lower expenses for benefits and other compensation were the result of lower utilization of our self-insured medical programs and lower payroll taxes, offset in part by higher expenses related to the reinstatement of Company contributions for our 401(k) plan in the third quarter of 2011.

Collections Expense.The following table summarizes the significant components of collections expense:

	Nine Months Ended September 30,										Percentage of Cash  Collections Nine Months Ended September 30,
($ in millions)	2012		2011		Change			Percentage Change			2012			2011
Forwarding fees	$	42.0	$	33.8	$	8.2			24.2	%		14.9	%		12.6	%
Court and process server costs		26.0		21.9		4.1			18.7			9.2			8.2
Lettering campaign and telecommunications costs		9.3		11.3		(2.0	)		(17.9	)		3.3			4.2
Data provider costs		3.9		3.7		0.2			5.7			1.4			1.4
Other		3.6		3.1		0.5			15.8			1.3			1.1
Total collections expense	$	84.8	$	73.8	$	11.0			14.8	%		30.1	%		27.5	%

Forwarding fees include fees paid to third parties to collect on our behalf, including our agency firm in India. These fees increased in the first nine months of 2012 compared to the same period in 2011 as a result of an increase in accounts placed with third party agencies and higher cash collections generated by third parties in both our legal and call center collection channels. Collections from third party relationships were $182.8 million and $115.4 million, or 64.8% and 43.1% of cash collections, for 2012 and 2011, respectively. Fees paid to agencies are typically a percentage of collections generated, with rates that vary based on the age and type of paper that we outsource. Our agency firm in India is paid a fixed rate per representative, along with certain performance incentives, so overall forwarding rates will vary based on the relative performance of this firm. During the second half of 2011, we began shifting from using in-house attorneys to using our preferred third party law firm for certain legal channel collections. The collections by our preferred third party law firm contributed to higher third party collections and forwarding fees in the first nine months of 2012. We expect fees and related collections to remain higher in future periods than in the past as a result of increased volume placed with third parties. These fees will be offset by lower compensation and benefits related to in-house collection associates.

Court and process server costs increased in the first nine months of 2012 from the same period in 2011 as a result of higher legal activity driven by higher purchasing in recent periods and an increase in the number of accounts selected for legal action. In early 2012, we performed an analysis of our inventory of accounts using a newly developed legal suit selection model. The model identified accounts eligible for suit that were not already in our legal collection channel. During the second and third quarters, we began placing a selection of those accounts in our legal channel and initiating suit. This increase in volume helped drive the 19% increase in these costs because the legal collection model requires an up-front investment in court costs and other fees, which we expense as incurred. There generally is a delay between incurring these costs and generating collections on the accounts in the legal process, which can cause a change in court costs that is disproportionate to the change in legal collections. Even though 2012 expense and profitability were negatively impacted by these investments, we believe the overall return on investment is higher in the legal collection channel than in the call center channel.

As a result of our continuous review of operational strategies and our analytical work to identify favorable collection opportunities, we were able to lower variable collection expenses, such as dialing and lettering campaigns, resulting in reductions in the related expenses. Generally, these costs are higher in the first six months after purchase of a portfolio as we initiate collection activities. Increasing the number of accounts placed with third party agencies also decreases out direct lettering and telecommunication costs.

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Administrative. Administrative expense decreased to $6.5 million in 2012 from $7.2 million in 2011. The decrease was related to a charge during the third quarter of 2011 of $1.25 million to increase the settlement accrual for the FTC matter, partially offset by an increase in outside consulting fees in 2012.

Restructuring Charges.Restructuring charges of $0.4 million in 2012 were related to the closing of our San Antonio, Texas collection office in the fourth quarter of 2011 and the recently announced closing of our Tempe, Arizona collection office in the third quarter of 2012.

Interest Expense. Interest expense was $15.8 million for 2012, an increase of $7.9 million compared to $7.9 million in the first nine months of 2011. During the fourth quarter of 2011, we entered into a new credit agreement, which resulted in higher interest and additional deferred financing costs, including an original issue discount of $11.4 million that will be amortized over the remaining term of the credit agreement. We recognized expense of $1.8 million for the amortization of the original issue discount during 2012. As a result of entering into the new credit agreement, interest expense, including amortization of deferred financing costs and amortization of the original issue discount, will be higher in future periods than it would have been under the terms of the former credit agreement. In addition, the increase in interest expense was due to an increase in average borrowings, which were $176.1 million during 2012 compared to $164.8 million in 2011. Refer to “Liquidity and Capital Resources” for additional information.

Income Taxes.We recognized income tax expense of $3.5 million and $6.0 million for 2012 and 2011, respectively. The 2012 tax expense reflects a forecasted annualized effective tax rate of 24.5%, which includes discrete tax benefits of 11.5%. For the first nine months of 2011, the effective tax rate was 43.5%. The 1900 basis point decrease was primarily due to the recognition of the benefit of state refund claims, a change in the mix of income between states and increased tax credits.

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Supplemental Performance Data

The following tables and analysis show select data related to our purchased receivables portfolios including purchase price, account volume and mix, historical collections, cumulative and estimated remaining collections, productivity and certain other data that we believe is important to understanding our business. Total estimated collections as a percentage of purchase price provides a view of how acquired portfolios are expected to perform in relation to initial purchase price. This percentage reflects how well we expect our paper to perform, regardless of the underlying mix. Also included is a summary of our purchased receivable revenues by year of purchase, which provides additional vintage detail of collections, net impairments or reversals and zero basis collections.

The primary factor in determining purchased receivable revenue is the IRR assigned to the carrying value of portfolios. When carrying balances go down or assigned IRRs are lower than historical levels, revenue will generally be lower. When carrying balances increase or assigned IRRs go up, revenue will generally be higher. Purchased receivable revenue also depends on the amount of impairments or impairment reversals recognized. When collections fall short of expectations or future expectations decline, impairments may be recognized in order to write-down a portfolio's balance to reflect lower estimated total collections. When collections exceed expectations or the future forecast improves, we may reverse previously recognized impairments or increase assigned IRRs when there are no previous impairments to reverse. Zero basis collections are collections on portfolios that no longer have a carrying balance and therefore do not generate revenue by applying an assigned IRR. Collections on these portfolios are recognized as purchased receivables revenue in the period collected.

Portfolio Performance

The following table summarizes our historical portfolio purchase price and cash collections on an annual vintage basis by year of purchase as of September 30, 2012:

($ in thousands) Year of Purchase	Number  of Portfolios		Purchase Price (1)		Cash Collections		Estimated Remaining Collections  (2,3)		Total Estimated Collections		Total Estimated Collections as a Percentage of Purchase Price
2005		104	$	100,746	$	225,521	$	462	$	225,983		224	%
2006		154		142,225		343,708		12,980		356,688		251
2007		158		169,197		305,937		32,881		338,818		200
2008		164		153,452		264,125		58,252		322,377		210
2009		123		120,874		221,825		118,542		340,367		282
2010		122		135,895		161,182		141,553		302,735		223
2011		133		160,614		113,632		238,374		352,006		219
2012 (4)		72		103,993		19,475		215,701		235,176		226
Total		1,030	$	1,086,996	$	1,655,405	$	818,745	$	2,474,150		228	%

(1) Purchase price refers to the cash paid to a seller to acquire a portfolio less buybacks and the purchase price for accounts that were sold at the time of purchase to another debt purchaser.

(2) Estimated Remaining Collections (“ERC”) are based in part on historical cash collections. Refer to Forward-Looking Statements on page 22 and Critical Accounting Policies on page 44 for further information regarding these estimates.

(3) ERC refers to the sum of all future projected cash collections on our owned portfolios using up to an 84 month collection forecast from the date of purchase. ERC for pools on the cost recovery method for revenue recognition purposes are equal to the carrying value. There are no ERC for pools on the cost recovery method that are fully amortized.

(4) Includes nine months of activity through September 30, 2012.

ERC were $851,460 million for the quarter ended June 30, 2012 and $810,489 million for the quarter ended September 30, 2011. ERC and total Estimated Collections as a Percentage of Purchase Price by vintage may fluctuate from quarter to quarter. Some factors that contribute to quarterly fluctuations include the level of purchasing in the current year relative to current year collections, as well as changes in work effort strategies and the movement of accounts between collection channels.

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The following table summarizes our quarterly portfolio purchasing since January 1, 2010:

($ in thousands) Quarter of Purchase	Number  of Portfolios		Purchase Price (1)		Face Value
Q1 2010		28	$	29,605	$	818,255
Q2 2010		41		48,392		1,493,804
Q3 2010		34		41,132		1,171,910
Q4 2010		19		16,767		296,948
Q1 2011		37		46,300		1,225,356
Q2 2011		39		49,295		1,598,396
Q3 2011		31		38,282		1,317,139
Q4 2011		26		26,737		1,180,406
Q1 2012		27		21,166		804,064
Q2 2012		28		58,882		2,080,724
Q3 2012		17		23,945		766,170
Total		327	$	400,503	$	12,753,172

(1) Purchase price refers to the cash paid to a seller to acquire a portfolio less buybacks and the purchase price of accounts that were sold at the time of purchase to another debt purchaser.

The following table summarizes the remaining unamortized balances of our purchased receivables portfolios by year of purchase as of September 30, 2012:

($ in thousands) Year of Purchase	Unamortized Balance		Purchase Price (1)		Unamortized Balance as a Percentage of Purchase Price			Unamortized Balance as a Percentage of Total
2005	$	550	$	100,746		0.5	%		0.2	%
2006		6,327		142,225		4.4			1.8
2007		14,718		169,197		8.7			4.3
2008		21,133		153,452		13.8			6.1
2009		32,384		120,874		26.8			9.4
2010		60,364		135,895		44.4			17.5
2011		113,147		160,614		70.4			32.9
2012 (2)		95,874		103,993		92.2			27.8
Total	$	344,497	$	1,086,996		31.7	%		100.0	%

(1) Purchase price refers to the cash paid to a seller to acquire a portfolio less buybacks and the purchase price of accounts that were sold at the time of purchase to another debt purchaser.

(2) Includes nine months of activity through September 30, 2012.

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The following table summarizes purchased receivable revenues and amortization rates by year of purchase:

	Three Months Ended September 30, 2012
Year of Purchase	Collections		Revenue		Amortization Rate (1)			Monthly Yield (2)			Net Impairments (Reversals)			Zero Basis Collections
2006 and prior	$	13,002,016	$	11,848,325		N/M			N/M		$	(1,584,800	)	$	8,726,718
2007		5,968,564		4,167,287		30.2	%		8.62	%		(618,000	)		1,271,044
2008		8,135,013		5,207,535		36.0			7.51			—			882,334
2009		12,589,633		8,163,725		35.2			7.71			—			38,364
2010		15,003,601		7,797,744		48.0			3.99			—			—
2011		22,769,691		9,824,350		56.9			2.70			1,717,000			—
2012		11,699,729		7,424,774		36.5			2.89			—			—
Totals	$	89,168,247	$	54,433,740		39.0	%		5.11	%	$	(485,800	)	$	10,918,460

	Three Months Ended September 30, 2011
Year of Purchase	Collections		Revenue		Amortization Rate (1)			Monthly Yield (2)			Net Impairments (Reversals)			Zero Basis Collections
2005 and prior	$	12,851,763	$	12,121,177		N/M			N/M		$	(1,228,100	)	$	10,282,392
2006		6,458,530		4,176,153		35.3	%		11.27	%		(1,155,000	)		634,018
2007		8,804,890		4,353,546		50.6			5.14			(350,000	)		250,263
2008		11,593,862		6,374,200		45.0			5.45			—			1,448,771
2009		16,156,896		9,550,306		40.9			5.67			—			11,734
2010		18,249,572		9,280,467		49.1			3.11			—			—
2011		13,322,377		10,438,718		21.6			3.26			—			—
Totals	$	87,437,890	$	56,294,567		35.6	%		5.42	%	$	(2,733,100	)	$	12,627,178

	Nine Months Ended September 30, 2012
Year of Purchase	Collections		Revenue		Amortization Rate (1)			Monthly Yield (2)			Net Impairments (Reversals)			Zero Basis Collections
2006 and prior	$	45,613,202	$	41,303,484		N/M			N/M		$	(6,889,600	)	$	28,805,984
2007		20,898,497		14,438,725		30.9	%		8.92	%		(3,611,400	)		3,419,320
2008		28,521,507		18,199,860		36.2			7.65			—			3,419,482
2009		43,607,885		29,325,416		32.8			8.12			(2,304,000	)		149,997
2010		50,883,808		25,316,350		50.2			3.81			—			—
2011		73,170,271		34,555,839		52.8			2.85			3,427,000			—
2012		19,474,946		11,356,088		41.7			2.95			—			—
Totals	$	282,170,116	$	174,495,762		38.2	%		5.61	%	$	(9,378,000	)	$	35,794,783

	Nine Months Ended September 30, 2011
Year of Purchase	Collections		Revenue		Amortization Rate (1)			Monthly Yield (2)			Net Impairments (Reversals)			Zero Basis Collections
2005 and prior	$	41,869,974	$	37,104,776		N/M			N/M		$	(3,367,100	)	$	31,083,506
2006		20,279,215		12,713,065		37.3	%		9.61	%		(2,705,800	)		2,109,765
2007		29,072,113		13,449,001		53.7			4.49			117,000			863,639
2008		37,871,244		19,602,641		48.2			4.84			—			4,812,507
2009		54,729,671		29,209,017		46.6			5.04			2,304,000			11,734
2010		60,288,455		30,236,967		49.8			3.06			—			—
2011		23,783,710		18,441,263		22.5			3.30			—			—
Totals	$	267,894,382	$	160,756,730		40.0	%		5.33	%	$	(3,651,900	)	$	38,881,151

(1) “N/M” indicates that the calculated percentage is not meaningful.

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

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Core Amortization

The table below shows the components of revenue from purchased receivables, the amortization rate and the core amortization rate. We use the core amortization rate to monitor performance of pools with remaining balances, and to determine if impairments, impairment reversals, or yield increases should be recorded. Core amortization trends may identify over or under performance compared to forecasts for pools with remaining balances.

The following factors contributed to the change in amortization rates from the prior year:

• total amortization and the amortization rate increased for the third quarter of 2012 compared to 2011. For the first nine months of 2012 compared to the same period in 2011, total amortization increased while the amortization rate decreased. The increase in the amortization rate for the third quarter was due to lower zero basis collections and net impairment reversals in 2012, while the decrease in the rate during the first nine months of 2012 compared to 2011 was primarily the result of higher net impairment reversals and higher total collections. Portfolio balances that amortize too slowly in relation to current or expected collections may lead to impairments. If portfolio balances amortize too quickly and we expect collections to continue to exceed expectations, previously recognized impairments may be reversed, or if there are no impairments to reverse, assigned yields may increase;

• amortization of receivable balances for each period of 2012 increased compared to 2011 as a result of higher collections on amortizing pools;

• net impairment reversals are recorded as a reduction to amortization and decrease the amortization rate, while net impairments have the opposite effect. Higher net impairment reversals for the first nine months of 2012 decreased total amortization compared to the same period in 2011, while lower net impairment reversals for the third quarter of 2012 had the opposite effect; and

• declining zero basis collections in the third quarter and first nine months of 2012 compared to the same periods in 2011 increased the amortization rate because 100% of these collections are recorded as revenue and do not contribute towards portfolio amortization.

($ in millions)	Three Months  Ended September 30,						Nine Months  Ended September 30,
	2012			2011			2012			2011
Cash collections:
Collections on amortizing pools	$	78.3		$	74.8		$	246.4		$	229.0
Zero basis collections		10.9			12.6			35.8			38.9
Total collections	$	89.2		$	87.4		$	282.2		$	267.9
Amortization:
Amortization of receivables balances	$	35.3		$	33.5		$	116.9		$	109.0
Reversals of impairments		(2.2	)		(2.7	)		(12.8	)		(6.5	)
Impairments		1.7			—			3.4			2.8
Cost recovery amortization		—			0.3			0.2			1.8
Total amortization	$	34.8		$	31.1		$	107.7		$	107.1
Purchased receivable revenues, net	$	54.4		$	56.3		$	174.5		$	160.8
Amortization rate		39.0	%		35.6	%		38.2	%		40.0	%
Core amortization rate (1)		44.4	%		41.6	%		43.7	%		46.8	%

(1) The core amortization rate is calculated as total amortization divided by collections on amortizing portfolios.

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Account Representative Tenure and Productivity

We measure in-house call center account representative tenure by two major categories, those with less than one year of experience and those with one or more years of experience. The following table displays the experience of our account representatives:

In-House Account Representatives, including Supervisors, by Experience

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
One year or more (1)		267		348		278		383
Less than one year (2)		182		300		205		299
Total		449		648		483		682

(1) Based on number of average in-house call center Full Time Equivalent (“FTE”) account representatives and supervisors with one or more years of service.

(2) Based on number of average in-house call center FTE account representatives and supervisors with less than one year of service, including new associates in training.

Off-Shore Account Representatives (1)

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
Number of account representatives		225		250		225		250

(1) Based on number of average off-shore account representatives staffed by a third party agency measured on a per seat basis.

The following table displays our account representative productivity:

Overall Account Representative Collection Averages

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Overall collection averages	$	47,593	$	42,135	$	158,914	$	134,237

In-house account representative average collections per FTE increased for the three and nine months ended September 30, 2012 by 13.0% and 18.4%, respectively, compared to the same periods of 2011. Account representative productivity improved as a result of additional improvements in inventory and channel management strategies, which led to a reduction in the number of in-house FTE, continued utilization of our training programs, refinement of our standardized collection methodology, targeted lettering and dialing strategies, skip tracing efforts and improved analytical models and tools.

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Cash Collections

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

Historical Collections (1)

($ in thousands) Year of Purchase	Purchase Price (2)		Years Ended December 31,																				Nine Months Ended September 30, 2012
			2002		2003		2004		2005		2006		2007		2008		2009		2010		2011
Pre-2002			$	98,201	$	90,940	$	77,975	$	66,214	$	50,370	$	36,278	$	23,634	$	15,938	$	10,777	$	9,568	$	5,860
2002	$	72,254		22,339		70,813		72,024		67,649		55,373		39,839		24,529		15,957		11,367		9,536		5,546
2003		87,145		—		36,067		94,564		94,234		79,423		58,359		38,408		23,842		15,774		12,440		7,084
2004		86,535		—		—		23,365		68,354		62,673		48,093		32,276		21,082		13,731		10,881		6,059
2005		100,746		—		—		—		23,459		60,280		50,811		35,638		22,726		14,703		11,428		6,476
2006		142,225		—		—		—		—		32,751		101,529		79,953		53,239		35,994		25,654		14,588
2007		169,197		—		—		—		—		—		36,269		93,183		69,891		49,085		36,611		20,898
2008		153,452		—		—		—		—		—		—		41,957		83,430		62,548		47,668		28,522
2009		120,874		—		—		—		—		—		—		—		27,926		81,170		69,121		43,608
2010		135,895		—		—		—		—		—		—		—		—		33,669		76,629		50,884
2011		160,614		—		—		—		—		—		—		—		—		—		40,462		73,170
2012		103,993		—		—		—		—		—		—		—		—		—		—		19,475
Total			$	120,540	$	197,820	$	267,928	$	319,910	$	340,870	$	371,178	$	369,578	$	334,031	$	328,818	$	349,998	$	282,170

Cumulative Collections (1)

($ in thousands) Year of Purchase	Purchase Price (2)		Total Through December 31,																				Total Through September 30, 2012
			2002		2003		2004		2005		2006		2007		2008		2009		2010		2011
2002	$	72,254	$	22,339	$	93,152	$	165,176	$	232,825	$	288,198	$	328,037	$	352,566	$	368,523	$	379,890	$	389,426	$	394,972
2003		87,145		—		36,067		130,631		224,865		304,288		362,647		401,055		424,897		440,671		453,111		460,195
2004		86,535		—		—		23,365		91,719		154,392		202,485		234,761		255,843		269,574		280,455		286,514
2005		100,746		—		—		—		23,459		83,739		134,550		170,188		192,914		207,617		219,045		225,521
2006		142,225		—		—		—		—		32,751		134,280		214,233		267,472		303,466		329,120		343,708
2007		169,197		—		—		—		—		—		36,269		129,452		199,343		248,428		285,039		305,937
2008		153,452		—		—		—		—		—		—		41,957		125,387		187,935		235,603		264,125
2009		120,874		—		—		—		—		—		—		—		27,926		109,096		178,217		221,825
2010		135,895		—		—		—		—		—		—		—		—		33,669		110,298		161,182
2011		160,614		—		—		—		—		—		—		—		—		—		40,462		113,632
2012		103,993		—		—		—		—		—		—		—		—		—		—		19,475

Cumulative Collections as Percentage of Purchase Price (1)

Year of Purchase	Purchase Price (2)		Total Through December 31,																														Total Through September 30, 2012
			2002			2003			2004			2005			2006			2007			2008			2009			2010			2011
2002	$	72,254		31	%		129	%		229	%		322	%		399	%		454	%		488	%		510	%		526	%		539	%		547	%
2003		87,145		—			41			150			258			349			416			460			488			506			520			528
2004		86,535		—			—			27			106			178			234			271			296			312			324			331
2005		100,746		—			—			—			23			83			134			169			191			206			217			224
2006		142,225		—			—			—			—			23			94			151			188			213			231			242
2007		169,197		—			—			—			—			—			21			76			118			147			168			181
2008		153,452		—			—			—			—			—			—			27			82			122			154			172
2009		120,874		—			—			—			—			—			—			—			23			90			147			184
2010		135,895		—			—			—			—			—			—			—			—			25			81			119
2011		160,614		—			—			—			—			—			—			—			—			—			25			71
2012		103,993		—			—			—			—			—			—			—			—			—			—			19

(1) Does not include proceeds from sales of receivables.

(2) Purchase price refers to the cash paid to a seller to acquire a portfolio less buybacks and the purchase price for accounts that were sold at the time of purchase to another debt purchaser.

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Seasonality

The success of our business depends on our ability to collect on our purchased portfolios of charged-off consumer receivables. Collections 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 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. Operating expenses may fluctuate from quarter to quarter depending on our investment in court costs through our legal collection channel, the timing of purchases of charged-off receivables and other factors. However, revenue recognized is relatively level, excluding the impact of impairments, due to the application of the Interest Method of revenue recognition. In addition, our operating results may be affected to a lesser extent by the timing of purchases of portfolios of charged-off consumer receivables due to the initial costs associated with initiating collection activities and integrating these receivables into our collection platform. Consequently, income and margins may fluctuate from quarter to quarter.

The following table summarizes our quarterly cash collections:

Cash Collections

Quarter	2012					2011					2010					2009					2008
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
First	$	101,132,875		N/M	%	$	91,284,934		26.1	%	$	89,215,330		27.1	%	$	94,116,937		28.2	%	$	100,264,281		27.1	%
Second		91,868,994		N/M			89,171,558		25.5			84,214,073		25.6			87,293,577		26.1			95,192,743		25.8
Third		89,168,247		N/M			87,437,890		25.0			78,860,926		24.0			77,832,357		23.3			90,775,528		24.6
Fourth		—		—			82,103,914		23.4			76,528,161		23.3			74,787,726		22.4			83,345,578		22.5
Total cash collections	$	282,170,116		100.0	%	$	349,998,296		100.0	%	$	328,818,490		100.0	%	$	334,030,597		100.0	%	$	369,578,130		100.0	%

(1) “N/M” indicates that the calculated percentage for quarterly purchases is not meaningful.

We segregate our collection operations into two primary channels, call center collections and legal collections. Our call center collections include our in-house call center operations and third party collection agencies, including an agency in India. Our legal collections include our call centers, legal support staff, bankruptcy and probate teams and our legal forwarding network. The following table illustrates cash collections and percentages by source:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2012					2011					2012					2011
	Amount		%			Amount		%			Amount		%			Amount		%
Call center collections	$	44,101,878		49.5	%	$	48,177,986		55.1	%	$	151,579,602		53.7	%	$	148,241,162		55.3	%
Legal collections		45,066,369		50.5			39,259,904		44.9			130,590,514		46.3			119,653,220		44.7
Total cash collections	$	89,168,247		100.0	%	$	87,437,890		100.0	%	$	282,170,116		100.0	%	$	267,894,382		100.0	%

Collections and the percent of collections from our legal channel increased during the third quarter of 2012 compared to the same period of 2011, primarily as a result of an increase in the number of accounts placed in that channel. The average collection payment size increased 5.2% for the third quarter of 2012 when compared to the same period in 2011. This increase reflects the net impact of 1.4% and 8.6% increases in the size of average call center collection payments and legal payments, respectively. The overall increase in the size of payments from the legal channel reflects improvements in performance from our third party collection channel and positive trends in collections from bankruptcy claims.

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The following table categorizes our purchased receivables portfolios acquired from January 1, 2002 through September 30, 2012 by major asset type:

($ and accounts in thousands) Asset Type	Face Value of Charged-off Receivables (1)		%			No. of Accounts		%
General Purpose Credit Cards	$	26,334,669		54.7	%		9,514		29.2	%
Private Label Credit Cards		6,831,635		14.2			8,092		24.8
Telecommunications/Utility/Gas		3,115,363		6.5			7,956		24.4
Installment Loans		2,945,590		6.1			485		1.5
Healthcare		2,463,710		5.1			2,496		7.7
Health Club		1,365,241		2.8			1,069		3.3
Auto Deficiency		603,498		1.3			106		0.3
Other (2)		4,472,141		9.3			2,855		8.8
Total	$	48,131,847		100.0	%		32,573		100.0	%

(1) Face value of charged-off receivables represents the cumulative amount of purchases net of buybacks. The amounts in this table are not adjusted for resale, payments received, settlements or additional accrued interest that occur after purchase. This table also 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), consisting of approximately 3.8 million accounts, which would have been included in “Other”.

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

When determining the price at which we offer to purchase a portfolio, we review certain important factors, including but not limited to: the age of a charged-off consumer receivables portfolio; the time since an account has been charged-off by the credit originator; and the number of times a portfolio has been placed with third parties for collection purposes. Generally, there is an inverse relationship between the age of a portfolio and the price at which we will purchase it, due to the fact that older receivables are typically more difficult to collect, and generally closer to the expiration of credit bureau reporting and the statute of limitations for legal actions. The consumer debt collection industry generally places receivables into the fresh, primary, secondary or tertiary categories depending on the age and number of third parties that have previously attempted to collect on the receivables. We will purchase accounts at any point in the delinquency cycle. We deploy our capital within these delinquency stages based upon availability and the relative values of the available debt portfolios.

The following table categorizes our purchased receivables portfolios acquired from January 1, 2002 through September 30, 2012 by delinquency stage:

($ and accounts in thousands) Delinquency Stage	Face Value of Charged-off Receivables (1)		%			No. of Accounts		%
Fresh	$	2,868,498		6.0	%		1,525		4.7	%
Primary		4,949,443		10.3			4,235		13.0
Secondary		12,000,152		24.9			9,439		29.0
Tertiary		28,313,754		58.8			17,374		53.3
Total	$	48,131,847		100.0	%		32,573		100.0	%

(1) Face value of charged-off receivables represents the cumulative amount of purchases net of buybacks. The amounts in this table are not adjusted for resale, payments received, settlements or additional accrued interest that occur after purchase. This table also 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), consisting of approximately 3.8 million accounts, which would have been included in “Tertiary”.

We also review the geographic distribution of accounts within a portfolio because collection laws differ from state to state and therefore may impact cost and collectability. In addition, economic factors vary regionally and are factored into our purchasing analysis.

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The following table illustrates our purchased receivables portfolios acquired from January 1, 2002 through September 30, 2012 based on geographic location of the debtor at the time of purchase:

($ and accounts in thousands) Geographic Location	Face Value of Charged-off Receivables (1)		%			No. of Accounts		%
California	$	6,621,141		13.8	%		3,985		12.2	%
Texas		6,283,391		13.1			5,311		16.3
Florida		5,241,817		10.9			2,531		7.8
New York		2,908,440		6.0			1,514		4.6
Michigan		2,235,953		4.6			2,433		7.5
Ohio		1,871,730		3.9			2,079		6.4
Illinois		1,830,496		3.8			1,744		5.3
Pennsylvania		1,664,972		3.5			1,063		3.3
New Jersey		1,542,951		3.2			1,205		3.7
North Carolina		1,401,610		2.9			798		2.4
Georgia		1,347,807		2.8			931		2.9
Arizona		1,032,096		2.1			651		2.0
Other (2)		14,149,443		29.4			8,328		25.6
Total	$	48,131,847		100.0	%		32,573		100.0	%

(1) Face value of charged-off receivables represents the cumulative amount of purchases net of buybacks. The amounts in this table are not adjusted for resale, payments received, settlements or additional accrued interest that occur after purchase. This table also 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), consisting of approximately 3.8 million accounts.

(2) Each state included in “Other” represents less than 2.0% of the face value of total charged-off receivables.

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

Borrowings

We maintain a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders named therein, effective November 14, 2011 (the “Credit Agreement”). Under the terms of the Credit Agreement, we have a five-year $95,500,000 revolving credit facility which expires in November 2016 (the “Revolving Credit Facility”), which may be limited by financial covenants, and a six-year $175,000,000 term loan facility which expires in November 2017 (the “Term Loan Facility” and together with the Revolving Credit Facility, the “Credit Facilities”). The Credit Agreement replaced a similar credit agreement with JPMorgan Chase Bank, N.A. entered into during June 2007.

The Credit Facilities bear interest at a rate per annum equal to, at our option, either:

• a base rate equal to the higher of (a) the Federal Funds Rate plus 0.5%, and (b) the prime commercial lending rate as set forth by the administrative agent’s prime rate, plus an applicable margin which (1) for the Revolving Credit Facility, will range from 3.0% to 3.5% per annum based on the Leverage Ratio (as defined), and (2) for the Term Loan Facility is 6.25%; or

• a LIBOR rate, not to be less than 1.5% for the Term Loan Facility, plus an applicable margin which (1) for the Revolving Credit Facility, will range from 4.0% to 4.5% per annum based on the Leverage Ratio, and (2) for the Term Loan Facility is 7.25%.

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The Credit Agreement includes an accordion loan feature that allows us to request an aggregate $75,000,000 increase in the Revolving Credit Facility and/or the Term Loan Facility. The Credit Facilities also include sublimits for $10,000,000 of letters of credit and for $10,000,000 of swingline loans (which bear interest at the bank’s alternative rate, which was 4.25% at September 30, 2012). The Credit Agreement is secured by substantially all of our assets. The Credit Agreement also contains certain covenants and restrictions that we must comply with, which as of September 30, 2012 were:

• Leverage Ratio (as defined) cannot exceed 1.5 to 1.0 at any time; and

• Ratio of Consolidated Total Liabilities (as defined) to Consolidated Tangible Net Worth (as defined) cannot exceed (i) 2.5 to 1.0 at any time prior to June 30, 2014, or (ii) 2.25 to 1.0 at any time thereafter; and

• Ratio of Cash Collections (as defined) to Estimated Quarterly Collections (as defined) must equal or exceed 0.80 to 1.0 for any fiscal quarter, and if not achieved, must then equal or exceed 0.85 to 1.0 for the following fiscal quarter for any period of two consecutive fiscal quarters.

The financial covenants may restrict our ability to borrow against the Revolving Credit Facility. However, at September 30, 2012, we were able to access the entire $95,500,000 of available borrowings on the Revolving Credit Facility based on the financial covenants. Borrowing capacity may be reduced under this ratio in the future if there are significant declines in cash collections or increases in operating expenses that are not offset by a reduction in outstanding borrowings. The Credit Facility also includes a borrowing base limit of 25% of estimated remaining collections less the outstanding principal balance on the Term Loan Facility, calculated on a monthly basis, which will also limit our ability to borrow.

The Credit Agreement contains a provision that requires us to repay Excess Cash Flow (as defined) to reduce the indebtedness outstanding under the Term Loan Facility. The Excess Cash Flow repayment provisions are:

• 75% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was greater than 1.25 to 1.0 as of the end of such fiscal year;

• 50% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was less than or equal to 1.25 to 1.0 but greater than 1.0 to 1.0 as of the end of such fiscal year; or

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

We were not required to make an Excess Cash Flow payment based on the results of operations for the years ended December 31, 2011 and 2010.

The Term Loan Facility requires quarterly repayments over the term of the agreement, with any remaining principal balance due on the maturity date. The following table details the required remaining repayment amounts:

Years Ending December 31,	Amount
2012 (1)	$	2,187,500
2013		8,750,000
2014		14,000,000
2015		22,748,000
2016		22,748,000
2017 (2)		98,004,000

(1) Amount includes one remaining quarterly principal payment for 2012. Three principal payments of $2,187,500 each were made during March, June and September 2012.

(2) Includes three quarterly principal payments and the remaining balance due on the maturity date.

Voluntary prepayments are permitted on the Term Loan Facility subject to certain fees. If a voluntary prepayment is made on or prior to November 14, 2012, we must pay a prepayment premium of 2.0% of the amount paid, and if such prepayment is made after November 14, 2012 but on or before November 14, 2013, we must pay a prepayment premium of 1.0% of the amount paid. There are no premiums for voluntary prepayments made after November 14, 2013.

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

The Credit Agreement requires us to effectively cap, collar or exchange interest rates on a notional amount of at least 25% of the outstanding principal amount of the Term Loan Facility. Refer to Note 5, “Derivative Financial Instruments and Risk Management” for additional information on our derivative financial instruments that satisfy this requirement.

Outstanding borrowings on notes payable were as follows:

	September 30,			December 31,
	2012			2011
Term Loan Facility	$	168,437,500		$	175,000,000
Revolving Credit Facility		—			8,200,000
Original issue discount on Term Loan		(9,312,253	)		(11,077,130	)
Total Notes Payable	$	159,125,247		$	172,122,870
Weighted average interest rate on total outstanding borrowings		8.75	%		8.56	%
Weighted average interest rate on revolving credit facility		—			4.57	%

We were in compliance with all covenants of the Credit Agreement as of September 30, 2012.

Cash Flows

The majority of our cash flow requirements are for purchases of receivables and payment of operating expenses. Historically, these items have been funded with internal cash flow and with borrowings against our Revolving Credit Facility. For the nine months ended September 30, 2012, we invested $103.5 million in purchased receivables, net of buybacks, which was $30.4 million lower than the same period of 2011. These purchases were primarily funded by collections.

Our operating activities provided cash of $9.2 million and $11.7 million for the nine months ended September 30, 2012 and 2011, respectively. Cash provided by operating activities for these periods was generated primarily from operating income earned through cash collections as adjusted for non-cash items and the timing of payments of accounts payable, accrued liabilities and other assets. Cash provided by operations was negatively impacted in the first nine months of 2012 by the funding of a $2.5 million settlement for the FTC investigation, which was accrued at December 31, 2011. In addition, the funding of a $5.3 million contract settlement fee accrued at December 31, 2010 negatively impacted cash provided by operations in 2011. We rely on cash generated from our operating activities and from the principal collected on our purchased receivables, included as a component of investing activities, to allow us to fund operations and re-invest in purchased receivables. Declines in cash collections, if not offset by reductions in operating expenses, will decrease cash provided by operating activities in future periods.

Investing activities provided cash of $12.4 million and used cash of $25.5 million for the nine months ended September 30, 2012 and 2011, respectively. The change in investing cash flows was primarily the result of a $30.4 million decrease in investment in purchased receivable portfolios during the first nine months of 2012 compared to the same period of 2011. This decrease was offset, in part, by higher principal collected on purchased receivables, which is a function of higher cash collections.

Financing activities used cash of $15.0 million and provided cash of $15.9 million for the nine months ended September 30, 2012 and 2011, respectively. The decrease in cash provided by financing activities in 2012 was driven by net repayments on our Credit Facilities of $14.8 million in the first nine months of 2012 compared to net borrowings of $16.4 million in the same period of the prior year. Cash provided by financing activities may increase in future periods to the extent we use net borrowings to fund purchases of paper or operations.

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Adjusted EBITDA

We define Adjusted Earnings Before Interest Taxes Depreciation and Amortization (“Adjusted EBITDA”) as net income or loss plus (a) the provision for income taxes, (b) interest expense, (c) depreciation and amortization, (d) share-based compensation, (e) gain or loss on sale of assets, net, (f) non-cash restructuring charges and impairment of assets, (g) purchased receivables amortization, (h) loss on extinguishment of debt, and (i) in accordance with our Credit Facilities, certain FTC related charges and cash restructuring charges (not to exceed $2.25 million for any period of four consecutive fiscal quarters). Adjusted EBITDA is not a measure of liquidity calculated in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and should not be considered an alternative to, or more meaningful than, net income prepared on a U.S. GAAP basis. Adjusted EBITDA does not purport to represent cash flow provided by, or used in, operating activities as defined by U.S. GAAP, which is presented in our statements of cash flows. In addition, Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies.

We believe Adjusted EBITDA is useful to an investor in evaluating our operating performance for the following reasons:

• Adjusted EBITDA is widely used by investors to measure a company's operating performance without regard to items such as interest income, taxes, depreciation and amortization including purchased receivables amortization, and share-based compensation, which can vary substantially from company to company depending upon accounting methods and the book value of assets, capital structure and the method by which assets were acquired; and

• analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies in our industry.

Our management uses Adjusted EBITDA:

• for planning purposes, including in the preparation of our internal annual operating budget and periodic forecasts;

• in communications with the Board of Directors, stockholders, analysts and investors concerning our financial performance;

• as a significant factor in determining bonuses under management’s annual incentive compensation program; and

• as a measure of operating performance for the financial covenants in our Credit Agreement, because it provides information related to our ability to provide cash flows for investments in purchased receivables, capital expenditures, acquisitions and working capital requirements.

The following table reconciles net income, the most directly comparable U.S. GAAP measure, to Adjusted EBITDA:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011(1)			2012			2011(1)
Net income	$	1,535,301		$	3,070,602		$	10,680,548		$	7,815,007
Adjustments:
Income tax expense		(539,974	)		2,405,567			3,469,622			6,018,137
Interest expense		5,137,234			2,631,787			15,832,845			7,932,278
Depreciation and amortization		1,166,107			944,118			3,655,785			2,994,633
Share-based compensation		180,334			289,581			1,021,379			1,073,241
Purchased receivables amortization		34,734,507			31,143,323			107,674,354			107,137,652
(Gain) on sale of assets, net		—			(92,075	)		(182,178	)		(86,182	)
Non-cash restructuring charges		206,386			—			195,103			—
Cash restructuring charges		78,456			—			163,364			—
FTC related charges		—			1,354,633			7,898			1,597,560
Adjusted EBITDA	$	42,498,351		$	41,747,536		$	142,518,720		$	134,482,326

(1) Adjusted EBITDA as reported for 2011 has been restated to be consistent with the current presentation. The definition of Adjusted EBITDA was updated during 2011 in order to be consistent with a similar definition used in our Credit Agreement. The restatement increased the amounts previously disclosed by $152 and $283 for the three and nine months ended September 30, 2011. We believe the revised definition of Adjusted EBITDA better matches the uses as described above.

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Collections, other revenues and operating expenses, net of the adjustment items, are the primary drivers of Adjusted EBITDA. During the third quarter of 2012, Adjusted EBITDA was $0.8 million higher than the same period of 2011. The net increase was a result of an increase in cash collections of $1.7 million offset by an increase in applicable operating expenses of $0.9 million. During the first nine months of 2012, Adjusted EBITDA was $8.0 million higher than in the same period of 2011. The net increase was a result of an increase in cash collections of $14.3 million offset in part by an increase in applicable operating expenses of $6.1 million. The primary driver of the increase in operating expenses in each period is the incremental investment in court and process server costs. The investment in these legal channel costs increased to $10.2 million in the third quarter of 2012 from $8.3 million in the same period of 2011. For the first nine months of 2012, these costs increased to $25.7 million from $21.5 million in the same period of 2011.

Future Contractual Cash Obligations

The following table summarizes our future contractual cash obligations as of September 30, 2012:

	Years Ending December 31,
	2012		2013		2014		2015		2016		Thereafter
Operating lease obligations	$	1,246,323	$	4,994,038	$	5,035,689	$	4,052,681	$	1,555,114	$	—
Capital lease obligations		18,805		23,242		—		—		—		—
Purchase obligations		2,662,358		5,191,898		341,648		19,560		1,630		—
Forward flow obligations (1)		6,859,400		—		—		—		—		—
Revolving credit (2)		—		—		—		—		—		—
Term loan (3)		2,187,500		8,750,000		14,000,000		22,748,000		22,748,000		98,004,000
Contractual interest on derivative instruments		236,954		928,256		872,242		782,317		663,023		141,700
Total (4)	$	13,211,340	$	19,887,434	$	20,249,579	$	27,602,558	$	24,967,767	$	98,145,700

(1) We have four forward flow contracts that have terms beyond September 30, 2012 with the last contract expiring in December 2012.

(2) To the extent that a balance is outstanding on our Revolving Credit Facility, it would be due in November 2016 or earlier as defined in the Credit Agreement.

(3) To the extent that a balance is outstanding on our Term Loan Facility, it would be due in November 2017. The variable interest is not included within the amount outstanding as of September 30, 2012.

(4) We have a liability of $0.7 million relating to uncertain tax positions, which has been excluded from the table above because the amount and fiscal year of the payment cannot be reliably estimated.

Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements.

Critical Accounting Policies

Revenue Recognition

We generally account for our revenues from collections on purchased receivables by using the Interest Method in accordance with U.S. GAAP, which requires making reasonable estimates of the timing and amount of future cash collections. Application of the Interest Method requires the use of estimates, primarily estimated remaining collections, to calculate a projected IRR for each pool. These estimates are based on historical cash collections, anticipated work effort and payer dynamics. If future cash collections are materially different in amount or timing from the remaining collections estimate, earnings could be affected, either positively or negatively. The estimates of remaining collections are sensitive to the inputs used and the performance of each pool. Performance is dependent on macro-economic factors and the specific demographic makeup of the debtors in each pool. Higher collection amounts or cash collections that occur sooner than projected will have a favorable impact on revenue by allowing us to reverse previously recognized impairments or increase yields. Lower collection amounts or cash collections that occur later than projected will have an unfavorable impact and may result in impairments of receivables balances. Impairments of purchased receivables put pressure on certain financial covenants in our Credit Facilities.

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We use the cost recovery method when collections on a particular portfolio cannot be reasonably predicted. The cost recovery method may be used for pools that previously had an IRR assigned. Under the cost recovery method, no revenue is recognized until we have fully collected the pool’s balance.

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 a similar risk rating and one or more predominant risk characteristics. The risk rating, which is provided by a third party, is similar for all accounts since our purchased receivables have all been charged-off by the credit originator. Accounts typically have one or more other predominant risk characteristics. We therefore aggregate most pools purchased within each quarter. Each static pool of accounts, 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 revenue recognition.

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 IRR is calculated for each static pool of receivables based on projected cash flows. The IRR is applied to the remaining balance of each static pool to determine the revenue recognized. Each static pool is analyzed at least quarterly to assess actual performance compared to expected performance. This review includes an assessment of the actual results of cash collections, the work effort used and expected to be used in future periods, the components of the static pool including the type of paper, the average age of purchased receivables, certain demographics and other factors that help us understand how a pool may perform in future periods. Generally, to the extent the differences in actual performance versus expected performance are favorable and the results of the review of pool demographics are also favorable, the IRR is adjusted prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. If the review of actual performance results in revised cash flow estimates that are less than the original estimates, and if the results of the review lead us to believe the decline in performance is not temporary, the IRR remains unchanged and an impairment is recognized. If cash flow estimates increase in periods subsequent to recording an impairment, reversal of the previously recognized impairment is made prior to any increases to the IRR.

These periodic reviews, and any adjustments or impairments, are discussed with our Audit Committee.

Goodwill

We periodically review the carrying value of goodwill to determine whether impairment exists. U.S. GAAP requires goodwill and certain intangible assets not subject to amortization be assessed annually for impairment using fair value measurement techniques.

Goodwill impairment, if applicable, is determined using a two-step test. The first step of the test is used to identify potential impairment by comparing the fair value of a reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds its book value, goodwill is considered not impaired and the second step of the test is unnecessary. If the book value of the reporting unit exceeds its fair value, the second step of the test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit’s goodwill with the book value. If the book value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Events that could, in the future, result in impairment include, but are not limited to, sharply declining cash collections or a significant negative shift in the risk inherent in the reporting unit.

Market capitalization was lower than book value at the time of the most recent annual goodwill impairment test on November 1, 2011. As a result, we performed a step one analysis to assess the fair value of our single reporting unit. The estimate of fair value of our goodwill reporting unit, the purchased receivables operating segment, is determined using various valuation techniques including market capitalization, which is a Level 1 input, and an analysis of discounted cash flows, which includes Level 3 inputs. We performed a discounted cash flow analysis, as of the testing date, which resulted

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in fair value in excess of book value by 6.7%, which indicated goodwill was not impaired. A discounted cash flow analysis requires various judgmental assumptions including assumptions about future cash collections, revenues, cash flows, growth rates and discount rates, which we base on our budget and long-term plans. Discount rate assumptions are based on an assessment of the risk inherent in the reporting unit, which we calculated to be 18.5%. A discount rate of 17.5% was used in a similar discounted cash flow analysis performed during interim periods in 2011. The increase in the discount rate in the latest test was a result of an increase in the equity market risk premium used, offset in part by a decrease in the expected risk-free rate. A 50 basis point increase in the discount rate, or a decrease in cash flow of approximately $1.2 million in each year of the analysis would have resulted in an excess of book value over fair value.

In order to corroborate the discounted cash flow results, we also prepared a market analysis to calculate the fair value of our reporting unit. This market analysis took into consideration the fair value of our assets and liabilities utilizing our own assessment, and publicly available industry information on sale multiples. This analysis also resulted in fair value in excess of book value and in excess of the results of the discounted cash flow analysis, which provided additional step one support that goodwill was not impaired. In addition, we believe that a reasonable potential buyer would offer a control premium for our business that would adequately cover the difference between our market valuation and book value. We performed a calculation of an implied control premium of our business, which supported the difference between the market valuation and book value. Based on the fair value calculations and the control premium reconciliation, we believe there was no impairment of goodwill as of November 1, 2011. During the first nine months of 2012, we performed reviews to identify triggering events that would imply goodwill may be impaired. No events were noted that would require goodwill impairment testing.

The assessment of the fair value of goodwill will change in future periods based on a mix of the results of operations, changes in forecasted profitability and cash flows, assumptions used in our fair value models and other market factors that may change the risk inherent in the reporting unit, most importantly factors impacting our cost of equity and the regulatory environment. We will continue to monitor these factors and related changes, which may require us to prepare an interim analysis in addition to the required annual assessment. At September 30, 2012, the carrying value of goodwill was $14.3 million. If there is an impairment in future periods, all or a portion of the carrying value of goodwill would be recorded as an impairment of assets in the consolidated statements of operations. This charge would be a non-cash event, and as such, would not have a material impact on our business, operations or ability to borrow on our Credit Facilities. In addition, the non-cash charge would not impact the covenants in our Credit Facilities or other contractual commitments.

Income Taxes

We record a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be reversed.

We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax assets. In the event that all or part of the deferred tax assets are determined not to be realizable in the future, a valuation allowance would be established and charged to earnings in the period such determination is made. If we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings in the period such determination is made. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial position. We account for uncertain tax positions using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

Recently Issued Accounting Pronouncements

There were no recently issued accounting pronouncements which required disclosure.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk relates to the interest rate risk with our Credit Facilities. Accordingly, we may periodically enter into interest rate swap agreements for non-trading purposes to modify the interest rate exposure associated with our outstanding debt. The outstanding borrowings on our Credit Facilities, not including the unamortized original issue discount on the Term Loan Facility, were $168.4 million and $183.2 million as of September 30, 2012 and December 31, 2011, respectively. In September 2007, we entered into an amortizing interest rate swap agreement whereby, on a quarterly basis, we swapped variable rates equal to three-month LIBOR for fixed rates on an original notional amount of $125.0 million. Every year thereafter, on the anniversary of the swap agreement the notional amount decreased by $25.0 million. On January 13, 2012, we entered into a second amortizing interest rate swap agreement that became effective on March 13, 2012. On a quarterly basis, we will swap variable rates equal to three-month LIBOR, subject to a 1.5% floor, for fixed rates. The notional amount of the new swap was initially set at $19.0 million. In September 2012, when the original swap agreement expired, the notional amount of the second swap increased to $43.0 million and, subsequently, will amortize in proportion to the required principle payments on the Term Loan Facility through March 2017 when the notional amount will be $26.0 million.

The outstanding unhedged borrowings on our Credit Facilities were $125.4 million as of September 30, 2012. Interest rates on unhedged borrowings may be based on the prime rate or LIBOR at our discretion; however, LIBOR based borrowings are subject to a 1.5% floor. Assuming a 200 basis point increase in interest rates on the unhedged borrowings, interest expense would have increased by approximately $1.0 million and $1.7 million for the nine months ended September 30, 2012 and 2011, respectively.

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 at the reasonable assurance level 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 the three months ended September 30, 2012 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 business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits against consumers and are occasionally countersued by them in such actions. In addition, 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 adverse effect on our financial condition.

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

Company’s Repurchases of Its Common Stock

The Company had no common stock repurchases during the third quarter of 2012.We did not sell any equity securities during the third quarter of 2012 that were not registered under the Securities Act.

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Item 6. Exhibits

Exhibit Number	Description
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
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

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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 October 30, 2012.

	ASSET ACCEPTANCE CAPITAL CORP.
Date: October 30, 2012	By:	/s/ RION B. NEEDS
		Rion B. Needs
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: October 30, 2012	By:	/s/ REID E. SIMPSON
		Reid E. Simpson
		Senior Vice President – Finance and
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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