FORM 10-K

10-K 1 d283895d10k.htm FORM 10-K FORM 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011 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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock, $0.01 par value		The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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 þ
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 Act). Yes ¨ No þ

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant on June 30, 2011 (based on the June 30, 2011 closing sales price of $4.04 of the registrant’s Common Stock, as reported on The NASDAQ Global Select Market on such date) was $64,052,996.

Number of shares outstanding of the registrant’s Common Stock, $0.01 par value, at February 16, 2012:

30,684,552 shares of Common Stock, $0.01 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 2012 Annual Meeting of Stockholders to be held on May 10, 2012 are incorporated by reference into Part III of this Report.

ASSET ACCEPTANCE CAPITAL CORP.

Annual Report on Form 10-K

TABLE OF CONTENTS


		Page
	PART I
Item 1.	Business		3
Item 1A.	Risk Factors		13
Item 1B.	Unresolved Staff Comments		22
Item 2.	Properties		22
Item 3.	Legal Proceedings		22
Item 4.	Mine Safety Disclosures		22
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		23
Item 6.	Selected Financial Data		24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		53
Item 8.	Financial Statements and Supplementary Data		53
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		53
Item 9A.	Controls and Procedures		54
Item 9B.	Other Information		54
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance		54
Item 11.	Executive Compensation		56
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		56
Item 13.	Certain Relationships and Related Transactions, and Director Independence		57
Item 14.	Principal Accounting Fees and Services		57
	PART IV
Item 15.	Exhibits, Financial Statement Schedules		58
Signatures			61
Index to Consolidated Financial Statements			F-1

Annual Report on Form 10-K

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.

PART I

Item 1.

Business

General

We have been purchasing and collecting defaulted or charged-off accounts receivable portfolios from consumer credit originators since 1962. Charged-off receivables are the unpaid obligations of individuals to credit originators, such as credit card issuers, consumer finance companies, retail merchants, telecommunications and other utility providers. Since these receivables are delinquent or past due, we are able to purchase them at a substantial discount. We purchase and pursue collections on 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 collections. From January 1, 2002 through December 31, 2011, we purchased 1,234 consumer debt portfolios, with an original charged-off face value of $44.6 billion for an aggregate purchase price of $1.2 billion, or 2.76% of face value, net of buybacks.

When considering whether to purchase a portfolio, we conduct a quantitative and qualitative analysis to appropriately price the debt. This analysis includes the use of our proprietary pricing and collection probability model and draws upon our extensive experience in the industry. We have developed experience across a wide range of asset types at various stages of delinquency, having made purchases across more than 20 different asset types from over 150 different debt sellers since 2002. The delinquency stage refers to the date the debt was charged-off and the number of agencies that previously attempted to collect the debt. We selectively deploy our capital in the fresh, primary, secondary and tertiary delinquency stages, defined as:

•

fresh accounts are typically 120 to 180 days past due, have been charged-off by the credit originator and are being sold prior to any post charged-off collection activity. These accounts typically sell for the highest purchase price;

•

primary accounts are typically 180 to 360 days past due, have usually been previously placed with one third party collector and typically receive a lower purchase price; and

•

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

We have a long-standing history in the industry, have built relationships with debt sellers and provide post-sale service. Unlike some third party collection agencies that do not own the debt and attempt collections for a period of only six to twelve months, we generally take a long-term approach to the collection effort as we are the owners of the debt. We apply an approach that encourages cooperation with the debtors to make a lump sum payment in full or to formulate a repayment plan, thereby converting debtors into paying customers. In addition, for debtors who we believe have the ability to repay their debt but do not do so voluntarily, we may proceed with legal remedies to obtain collections. Our long-term approach allows us to invest in various collection management and analysis tools that may be too costly for short-term oriented collection agencies. In many cases, we continue to receive collections on individual portfolios for more than ten years from the date of purchase.

In addition, we finance the sales of consumer product retailers through our Consumer Credit, LLC subsidiary and license our collection software through our Legal Recovery Solutions, LLC (“LRS”) subsidiary.

History

Our business originated in 1962 for the purpose of purchasing and collecting charged-off accounts receivable and became a publicly traded company in February 2004.

On April 28, 2006, the Company completed a stock purchase transaction of 100% of the outstanding shares of Premium Asset Recovery Corporation (“PARC”) to expand its existing healthcare receivable portfolio collection activities. During 2010, the Company committed to exit healthcare accounts receivable purchase and collection activities, and, on December 15, 2010, dissolved our PARC subsidiary.

In July 2010, the Company formed LRS as a new wholly-owned subsidiary. On July 21, 2010, LRS completed an acquisition of substantially all of the assets of BSI eSolutions, LLC (“BSI”), which was a software technology company providing products and services to the debt collection industry, including the collection software we were implementing to replace our legacy system. LRS continues to provide services and license the software to other entities. The results of operations for LRS since the acquisition have not been material.

The diagram below depicts our organizational structure, including our principle operating subsidiaries:

LOGO

As used in this Annual Report, all references to us mean Asset Acceptance Capital Corp. (“AACC”), a Delaware corporation, and all wholly-owned subsidiaries (referred to in our financial statements as the “Company”).

Purchasing

Typically, we purchase portfolios in response to a request to bid received from a prospective seller. Our portfolio acquisitions team cultivates relationships with known and prospective sellers. We have purchased portfolios from over 150 different debt sellers since 2002, including many of the largest consumer lenders in the United States. While we have no policy limiting purchases from a single debt seller, we purchase from a diverse set of sellers and base purchasing decisions on constantly changing economic and competitive conditions as opposed to long-term relationships with any particular seller. Depending on market conditions and opportunities presented by certain sellers, we may enter into forward flow contracts. Forward flow contracts commit a seller to sell charged-off receivables to us for a fixed percentage of the face value over a specified time period, which typically ranges between three and twelve months. Forward flow contracts may be attractive to us because the account demographics are similar from month-to-month, which provides us with operational predictability and consistency.

We purchase our portfolios through a variety of sources, including consumer credit originators, private brokers and debt resellers. Debt resellers are debt purchasers that sell accounts at some point in time after purchase. Generally, portfolios are purchased either competitively, through a mix of sealed bids or on-line auctions, or through privately-negotiated transactions between the credit originator or other holders of consumer debt and us.

Each potential acquisition begins with a quantitative and qualitative analysis of the portfolio. In the initial stages of this due diligence process, we review basic data on the portfolio’s accounts. This data typically includes the account number, the consumer’s name, address, social security number, phone numbers, outstanding balance, date of charge-off, date of last payment and date of account origination, to the extent debt sellers provide this data. We analyze this information and cross reference it with data on our existing accounts, focusing on certain key metrics, such as the state of the debtor’s last known residence, type of debt, balance ranges, time remaining on the credit bureaus, time remaining within the statute of limitations, and debtor prior payment history with us. In addition, we generally obtain certain qualitative factors relating to the portfolio from the sellers, primarily related to their origination and collection practices.

As part of our due diligence, we evaluate each portfolio to develop a bid range utilizing our proprietary pricing model. This analytically driven model considers certain characteristics of the prospective portfolio, historical analysis of similar portfolios, estimated potential recoveries and estimated collection expenses. In addition, we also consult with our collections management to help ascertain collectability and potential collection and legal strategies.

Once we have compiled and analyzed available data, we consider market conditions and determine an appropriate bid price or bid range. The recommended bid price or bid range, along with a summary of our due diligence, is submitted to our investment committee for approval. After approval, and acceptance of our offer by the seller, a purchase agreement is negotiated. Buyback provisions are generally incorporated into the purchase agreement for bankrupt, fraudulent, paid prior or deceased accounts and, typically, the credit originator either agrees to repurchase these accounts or replace them with acceptable accounts within certain time frames, generally within 90 to 180 days. Upon execution of the purchase agreement, we receive title to the accounts and the transaction is funded.

The following table categorizes our purchased receivables portfolios acquired from January 1, 2002 through December 31, 2011 by major asset type:


($ and accounts in thousands) Asset Type	Face Value of Charged-off Receivables(1)		%			No. of Accounts		%
General Purpose Credit Cards	$	23,473,120		52.7	%		8,868		26.9	%
Private Label Credit Cards		6,565,214		14.7			7,739		23.4
Telecommunications/Utility/Gas		3,116,527		7.0			7,907		24.0
Installment Loans		2,709,238		6.1			437		1.3
Healthcare		2,463,853		5.5			4,098		12.4
Health Club		1,365,396		3.1			1,057		3.2
Auto Deficiency		595,301		1.3			105		0.3
Other(2)		4,262,956		9.6			2,794		8.5

Total	$	44,551,605		100.0	%		33,005		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 resales, 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.

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 are important factors in determining the price at which we will offer to purchase a portfolio. 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 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 value of the available debt portfolios.

The following table categorizes our purchased receivables portfolios acquired from January 1, 2002 through December 31, 2011 by delinquency stage:


($ and accounts in thousands) Delinquency Stage	Face Value of Charged-off Receivables(1)		%			No. of Accounts		%
Fresh	$	2,821,501		6.3	%		1,510		4.6	%
Primary		5,101,042		11.4			4,846		14.7
Secondary		11,877,417		26.7			9,135		27.7
Tertiary		24,751,645		55.6			17,514		53.0

Total	$	44,551,605		100.0	%		33,005		100.0	%

(1)

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.

The following table illustrates our purchased receivables portfolios acquired from January 1, 2002 through December 31, 2011 based on geographic location of the debtor at the time of the purchase:


($ and accounts in thousands) Geographic Location	Face Value of Charged-off Receivables(1)		%			No. of Accounts		%
Texas	$	5,952,351		13.4	%		5,231		15.9	%
California		5,879,223		13.2			3,848		11.7
Florida		4,686,495		10.5			2,424		7.3
New York		2,738,461		6.1			1,467		4.5
Michigan		2,165,428		4.9			2,416		7.3
Ohio		1,791,584		4.0			2,108		6.4
Illinois		1,727,678		3.9			1,722		5.2
Pennsylvania		1,560,609		3.5			1,037		3.1
New Jersey		1,480,861		3.3			1,188		3.6
North Carolina		1,318,170		3.0			774		2.4
Georgia		1,248,506		2.8			903		2.7
Arizona		942,508		2.1			631		1.9
Other(2)		13,059,731		29.3			9,256		28.0

Total	$	44,551,605		100.0	%		33,005		100.0	%

(1)

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

Collection Operations

Our collection operations seek to maximize the recovery of our purchased receivables in a cost-effective manner. We have organized our collection operations into two channels; call center collections and legal collections. Within each of these channels we have specialized teams that handle certain types of collection activities and we utilize third parties to supplement internal capacity or expertise. We also utilize a network of data providers to periodically obtain updated account information to facilitate our collection activities.

Once a portfolio is purchased, we send notification letters to the debtors and analyze portfolio data to develop an effective collection strategy. This analysis includes a series of data preparation and information acquisition steps intended to ensure the accuracy of account information and help determine our collection efforts. Accounts are sorted and prioritized based on account type, status, balance size and various other demographics, as well as external collectability indicators. We segment inventory between our call center and legal collections channels, as well as our third party network, based on portfolio characteristics and analytics we use to manage capacity and overall inventory, allowing us to deploy unique collection strategies to each segment.

Call Center Collections Channel

Our call center account representatives handle substantially all collection activity related to the accounts they service. These activities include calling debtors manually and using our automated outbound dialer, inbound call management, providing required debtor notifications, skip tracing or debtor location efforts and negotiating settlements or payment plans. We utilize a standard call model that allows our account representatives to manage communications with debtors effectively. These activities are tracked and measured on an individual account representative basis and regular coaching and call monitoring occurs to improve performance and ensure compliance with regulatory requirements and internal procedures. Our performance-based model is driven by a bonus program that allows account representatives to increase their compensation based on their achievement of collection goals.

When initial telephone contact is made with a debtor, our account representatives are trained to go through a series of questions in an effort to ensure proper identification of the debtor, provide required disclosures, obtain accurate location and financial information, understand the reason the debtor may have defaulted on the account, assess the debtor’s willingness to pay and gather other relevant information that may be helpful in securing payment. If full payment is not available, the account representative will attempt to negotiate a settlement or arrange a payment plan. In an effort to maximize recoveries, we maintain settlement guidelines that account representatives, supervisors and managers must follow. Exceptions are handled by management on an account-by-account basis. If the debtor is unable to pay the balance in full or settle within allowed guidelines, monthly installment plans are encouraged in order to have the debtor resume a regular payment habit. Our experience has shown that debtors often respond favorably to this approach, which can result in settlement in full in the future.

We also utilize lettering strategies that correlate with our collector-initiated activities. Our lettering strategies are based on our analytics and often contain settlement offers to maximize collections in a cost efficient manner.

We periodically undertake skip tracing procedures to locate debtors. Skip tracing efforts are performed individually at the account representative level and in a batch process by third party information providers. The information received is either manually or systematically validated and is used in our efforts to locate debtors. Using these methods, we periodically refresh and supply updated account information to our account representatives to increase contact with the appropriate parties. The updated account information is stored within the collection platform and facilitates account segmentation and inventory modeling activities. Account segmentation and inventory modeling allow us to tailor our collection efforts based on a variety of account characteristics.

In addition to our internal call center collections operations, we have developed an extensive network of third party collection agencies to service accounts that exceed our internal capacity or that have specific skills we believe will yield a better outcome than working the accounts internally. For example, we may consider outsourcing small balance or aged segments of accounts while our account representatives focus on other populations of accounts. These third parties include both domestic and off-shore agencies, including an agency in India which we engaged to collect on our behalf utilizing our collection platform. These varying collection channels allow us to pursue what we believe is the most effective collection strategy for each account while managing capacity.

Legal Collections Channel

We analyze purchased accounts to identify those eligible for our legal process at both the time of purchase and throughout the collection cycle. Accounts are analyzed using a proprietary suit selection model to determine whether we believe the debtor has the ability but not the willingness to pay. Our suit selection model considers various attributes including the applicable statute of limitations, credit score, employment status and the state in which the debtor resides, together with other proprietary factors we believe help us assess the debtors’ ability to satisfy their obligations. Once accounts are selected, we transfer them into our legal collections channel.

Once in the legal collections channel, we generally attempt to contact the debtors in an effort to resolve the debt through settlement or payment plans. If we are unable to resolve the accounts and we believe that the debtor has the ability to pay, we may pursue legal action through our network of third party law firms. This process generally involves pursuing a legal judgment against the debtor. Once a judgment is obtained, our legal network utilizes various collection strategies to secure payment. If we ultimately determine the accounts are not eligible for suit, or if we are unable to secure a judgment, we transfer the accounts to our call center collections channel.

Our legal forwarding department consists of account representatives, support staff and associates monitoring activities with third party law firms who perform legal activities. We have engaged a preferred, third party law firm to perform the legal recovery function in 12 key states (including nine states previously serviced with in-house collection attorneys). We also work with a network of independent law firms throughout the country who collect for us on a contingent fee basis.

Our legal collections channel also includes our bankruptcy and probate departments. The bankruptcy department files proofs of claims for receivables that are included in consumer bankruptcies filed under Chapter 7 (resulting in liquidation and discharge of a debtor’s debts) and Chapter 13 (resulting in repayment plans based on the financial wherewithal of the debtor) of the U.S. Bankruptcy Code. The probate department and our network of third party law firms submit claims against estates involving deceased debtors having assets that may become available to us through a probate claim.

We have designed our legal policies and procedures to maintain compliance with debt collection standards and applicable state and federal laws while pursuing available legal options. We monitor our associates and our third party law firms for compliance with those requirements.

Seasonality

Refer to Part II. Item 7, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality” for the effect of seasonality on our business.

Competition

have substantially greater numbers of associates, more financial resources, more favorable operating structures and may experience lower account representative turnover rates than we do. Furthermore, some of our competitors may obtain alternative sources of financing, the proceeds from which may be used to fund expansion and to increase their number of charged-off portfolio purchases. Barriers to entry into the consumer debt collection industry are low. Companies with greater financial resources may elect at a future date to enter the consumer debt collection business. Furthermore, current debt sellers may change strategies and cease selling debt portfolios in the future.

Competitive pressures affect the availability and pricing of receivable portfolios, as well as the availability and cost of qualified account representatives. In addition, some of our competitors may have entered into forward flow contracts under which consumer credit originators have agreed to transfer a steady flow of charged-off receivables to them in the future, which may restrict those credit originators from selling receivables to other purchasers and limit the supply of receivables available to us.

We face bidding competition in our acquisition of charged-off consumer receivables. We believe successful bids are predominantly awarded based on price, but also are awarded based on service and relationships with the individual debt sellers, and the debt buyer’s ability to fund the deal. Some of our competitors may require increasing amounts of charged-off receivables to fund their operations, which could lead to increased competition for portfolios and higher prices. In addition, there has been consolidation of issuers of credit cards in recent years, which have been a principal source of our receivable purchases. This consolidation has decreased the number of sellers in the market and could eventually give the remaining sellers increasing market strength on the price and terms of the sale of charged-off accounts.

Technology Platform

We believe that information technology is critical to our success. Our key systems have been purchased from outside vendors and, with our input, have been tailored to meet our particular business needs. During 2010, we acquired the assets of BSI, the vendor that developed our collection application, including the software source code. We believe this acquisition allows us to further enhance features and functionality of our collection software and improve productivity in an efficient and cost effective manner. We maintain a full-time staff of technology professionals who monitor and maintain our information technology and communications structure. We utilize a centralized data center model, which leverages economies of scale in providing distributed computing capabilities.

The collection software in use today enables us to:

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automate the loading of accounts in order to expedite collecting after purchase;

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segment the accounts to optimize collection strategies;

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interface with third party letter production and mailing vendors, credit reporting services and information service providers to effectively communicate with debtors and obtain efficiencies in our operations;

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integrate with our automated dialer to increase the number of contacts with our debtors;

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integrate the scrub processes for data cleansing;

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automate workflow standards to maximize system data output and user productivity;

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connect to a document imaging system to allow our associates, with appropriate responsibilities, to view scanned account documents from their workstations;

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automate management of third party networks;

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limit an associate’s ability to work outside of Company guidelines;

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query the appropriate database for any purpose which may be used for collection, compliance, reporting or other business matters;

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establish parameters to comply with federal and state laws; and

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provide comprehensive data feeds to our business intelligence application.

In order to minimize the potential impact of a disaster or other interruption of data or telephone communications that are critical to our business, we have:

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a diesel generator sufficient in size to power our entire Warren, Michigan headquarters, including our centralized systems;

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a back-up server sufficient in size to handle our collection platform located in a separate data center;

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replication of data from the primary system to the backup system;

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an ability to have inbound phone calls rerouted to other offices;

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fire suppression systems in our primary and back-up data centers;

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redundant data paths to each of our call center offices and data centers; and

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daily back-up of all of our critical applications with the tapes transported offsite to a secure data storage facility.

In addition, we have dialer systems for incoming and outgoing calls that include call recording technology. We continuously review emerging technologies and will upgrade or replace our systems as needed to remain competitive.

Regulation and Legal Compliance—Collection Activities

We have a robust Compliance Department under the oversight of our Office of the General Counsel. Our Compliance Department assists with training our staff in relevant areas including extensive training on the Fair Debt Collection Practices Act and other relevant laws and regulations. Our Office of the General Counsel distributes guidelines and procedures for collection personnel to follow when communicating with customers, customers’ agents, attorneys and other parties during our collection efforts. They are also responsible for approving all written communications to debtors. In addition, our Office of the General Counsel regularly researches, and provides collections personnel and our training department with summaries and updates of changes in federal and state statutes and relevant case law so that they are aware of, and maintain compliance with, changing laws and judicial decisions. Our collection platform allows for integration of these guidelines and procedures which helps ensure associate compliance.

Federal, state and local statutes establish specific guidelines and procedures, which debt collection account representatives must follow when collecting on consumer accounts. It is our policy to comply with the provisions of all applicable federal, state and local laws in all of our collection activities, and, therefore, we have established comprehensive procedures for compliance. Failure to comply with these laws could lead to fines, lawsuits and disruption of our collection activities that could have a material adverse effect on us.

Our recent settlement of an FTC investigation into our debt collection practices, as discussed below under the caption “Legal Proceedings,” imposes additional disclosure and other obligations in connection with our collection of consumer debt. We have incorporated these additional obligations into our standard operating practices and procedures.

Federal, state and local consumer protection, privacy and related laws and regulations extensively regulate the relationship between debt collectors and debtors. Significant federal laws and regulations applicable to our business as a debt collection company include the following:

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Fair Debt Collection Practices Act (“FDCPA”). This act imposes obligations and restrictions on the practices of consumer debt collectors, including specific restrictions regarding communications with debtors, including the time, place and manner of the communications. This act also gives consumers certain rights, including the right to dispute the validity of their obligations;

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Fair Credit Reporting Act/Fair and Accurate Credit Transaction Act of 2003. The Fair Credit Reporting Act (“FCRA”) and its amendment entitled the Fair and Accurate Credit Transaction Act of 2003 (“FACT Act”) place requirements on credit information furnishers regarding verification of the accuracy of information furnished to credit reporting agencies and requires such information furnishers to investigate consumer disputes concerning the accuracy of such information. The FACT Act also requires certain conduct in the cases of identity theft or unauthorized use of a credit card and direct disputes to the creditor. We furnish information concerning our accounts to the three major credit-reporting agencies, and it is our practice to correctly report this information and to investigate credit-reporting disputes in a timely fashion;

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Dodd-Frank Wall Street Reform and Consumer Protection Act. This act authorized the creation of the Consumer Financial Protection Bureau (“CFPB”). The CFPB will have authority to regulate and examine the Company. While the CFPB will have wide ranging authority over the Company it is not yet possible to know what its specific impact will be. The CFPB recently proposed a rule that would authorize it to supervise the Company’s subsidiary, Asset Acceptance, LLC, as a larger participant in the market for consumer debt collections;

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The Financial Privacy Rule. Promulgated under the Gramm-Leach-Bliley Act, this rule requires that financial institutions, including collection agencies, develop policies to protect the privacy of consumers’ private financial information and provide notices to consumers advising them of their privacy policies. It also requires that if private personal information concerning a consumer is shared with another unrelated institution, the consumer must be given an opportunity to opt out of having such information shared. Since we do not share consumer information with non-related entities, except as required by law, or except as allowed by the rule in connection with our collection efforts, our consumers are not entitled to any opt out rights under this rule. Both this rule and the Safeguards Rule described below are enforced by the Federal Trade Commission, which has retained exclusive jurisdiction over enforcement of them. Consumers do not have a private cause of action for violations of the Gramm-Leach-Bliley Act;

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The Safeguards Rule. Also promulgated under the Gramm-Leach-Bliley Act, this rule specifies that we must safeguard financial information of consumers and have a written security plan setting forth information technology safeguards and the ongoing monitoring of the storage and safeguarding of electronic information;

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NACHA—The Electronic Payments Association. This association regulates the use of the Automated Clearing House (“ACH”) system to make electronic funds transfers. All ACH transactions must comply with Federal Reserve Regulation E and the rules of the association. This association and Regulation E give the consumer, among other things, certain privacy rights with respect to the transactions, the right to stop payments on a pre-approved fund transfer, and the right to receive certain documentation of the transaction;

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Telephone Consumer Protection Act. In the process of collecting on accounts, we use automated dialers to place calls to consumers. This act and similar state laws place certain restrictions on users of automated dialing equipment who place telephone calls to consumers; and

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U.S. Bankruptcy Code. In order to prevent any collection activity with bankrupt debtors by creditors and collection agencies, the U.S. Bankruptcy Code provides for an automatic stay, which prohibits certain contact with consumers after the filing of bankruptcy petitions.

Additionally, there are state and local statutes and regulations comparable to the above federal laws and other state and local-specific licensing requirements which affect our operations. State laws may also limit interest rates and fees, methods of collections, as well as the time frame in which judicial actions may be initiated to enforce the collection of consumer accounts. Court rulings in various jurisdictions also may impact our ability to collect.

Although we are not generally a credit originator, the following laws, which apply typically to credit originators, may occasionally affect our operations because our receivables were originated through credit transactions:

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Truth in Lending Act;

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Fair Credit Billing Act;

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Equal Credit Opportunity Act;

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Retail Installment Sales Act; and

•

Credit Card Accountability Responsibility and Disclosure Act of 2009.

Federal laws which regulate credit originators require, among other things, that credit card issuers disclose to consumers the interest rates, fees, grace periods and balance calculation methods associated with their credit card accounts. Consumers are entitled under current laws to have payments and credits applied to their accounts promptly, to receive prescribed notices, and to require billing errors to be resolved promptly. Some laws prohibit discriminatory practices in connection with the extension of credit. Federal statutes further provide that, in some cases, consumers cannot be held liable for, or their liability is limited with respect to, charges to the credit card account that were a result of an unauthorized use of the credit card. These laws, among others may limit our ability to recover amounts due on an account, whether or not we committed any wrongful act or omission in connection with the account. If the credit originator fails to comply with applicable statutes, rules and regulations, it could create claims and rights for consumers that could reduce or eliminate their obligations to repay the account, and have a possible material adverse effect on us. Accordingly, when we acquire charged-off consumer receivables, we typically require credit originators to represent and warrant that the receivables were originated and serviced in compliance with applicable laws, and indemnify us against certain losses that may result from their failure to comply with applicable statutes, rules and regulations relating to the receivables before they are sold to us.

There are federal and state statutes concerning identity theft or unauthorized use of a credit card. Some of these provisions place restrictions on our ability to report information concerning receivables, which may be subject to identity theft or unauthorized use of a credit card, to consumer credit reporting agencies. Additional consumer protection and privacy protection laws may be enacted that would impose additional requirements on the recovery of consumer credit card or installment accounts. Any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to collect on our charged-off consumer receivable portfolios. In addition, our failure to comply with these requirements could adversely affect our ability to recover the receivables and increase our costs.

It is possible that some of the receivables we have purchased were originated as a result of identity theft or unauthorized use. In such cases, we would not be able to recover the amount of the receivables. As a purchaser of charged-off consumer receivables, we may acquire receivables subject to legitimate defenses on the part of the consumer. Most of our account purchase contracts allow us to return to the credit originators (within an agreed upon amount of time) certain accounts that may not be collectible at the time of purchase, due to these and other circumstances. Upon return, the credit originators or debt sellers are required to replace the receivables with similar receivables or repurchase the receivables. These provisions limit, to some extent, our losses on such accounts.

Associates

As of December 31, 2011, we employed 1,128 associates, including 1,090 associates on a full-time basis and 38 associates on a part-time basis.

Training

We have a comprehensive training program, primarily targeted at new account representatives. Our program emphasizes quality in collection activities, including compliance with laws and regulations, and contains a structured call model that is used to enhance communication skills and collection activities. We have updated our training program to include the obligations imposed on us by our recent settlement of the FTC investigation into our debt collection practices, as discussed below under the caption “Legal Proceedings.” Our training includes a blended learning approach, including classroom, interactive activities, computer-based training, e-learning and on-the-job training.

New call center collection account representatives are required to complete an eight-week training program. The program is divided into two four-week modules. The initial four-week module has weekly objectives using various learning activities, call certifications and tests. The first week includes federal, state and local collection laws (with particular emphasis on the FDCPA and the FACT Act), core Company policies and procedures and structured learning of our collection software. The second week includes training on our call model and effective call management techniques. During weeks three and four, new hires form a collection team and make supervised collection calls. Instruction and guidance is shared with new associates to improve productivity. Training includes discussion of challenges faced by associates while making collection calls. Based on those discussions, interactive activities are used to enhance collection and organization skills.

The second four-week training module starts the transition of the new hire collection team to the collection floor, where they are assigned collection and productivity goals and work under the direction of a transition supervisor. This team of new hires continues to enhance their knowledge of federal, state and local collection laws, the call model and policies and procedures. The team is closely monitored during this time and evaluated based on set criteria, which is used as part of the training process.

New legal collection account representatives are required to complete a two-week training program. The first week is the same for legal account representatives as is for non-legal collection account representatives. The second week of training focuses on our legal processes and procedures, collection software and job shadowing. After completing base level training, their training continues with their assigned leader who provides on-the-job monitoring and additional instruction on standard operating procedures for their department.

All account representatives are required to attend annual FDCPA/Compliance training and are tested on their knowledge of the FDCPA and other applicable laws. Account representatives who are not achieving our minimum standards are required to complete a FDCPA review session and are then retested. In addition, ongoing monitoring of our collection activities and changes in applicable laws and regulations helps to ensure compliance.

Item 1A.

Risk Factors

This Report includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain forward-looking statements. All statements regarding our expected financial position, strategies and growth prospects and general economic conditions we expect to exist in the future are forward-looking statements. The words “anticipates,” “believes,” “feels,” “expects,” “estimates,” “seeks,” “strives,” “plans,” “intends,” “outlook,” “forecast,” “position,” “target,” “mission,” “assume,” “achievable,” “potential,” “strategy,” “goal,” “aspiration,” “outcome,” “continue,” “remain,” “maintain,” “trend,” “objective,” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions, as they relate to us or our management, are intended to identify forward-looking statements.

We caution that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date the statement is made and we do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

The risk factors contained below could cause actual results to differ materially from forward-looking statements, and future results could differ materially from historical performance.

Failure to comply with government regulation could result in the suspension or termination of our ability to conduct business and the imposition of financial penalties or cause other significant expenditures.

The collections industry is regulated under various federal and state laws and regulations. Many states and several cities require that we be licensed as a debt collection company. The Federal Trade Commission, state Attorneys General and other regulatory bodies have the ability to investigate consumer complaints against debt collection companies and to recommend enforcement actions and seek monetary penalties. Failure to comply with applicable laws and regulations could result in significant penalties or the suspension or termination of our ability to conduct collection operations, which could materially adversely affect us. Our recent settlement of the FTC investigation into our debt collection practices does not preclude other investigations or actions by various state agencies or attorneys general that could result in additional fines or sanctions which could materially adversely affect us.

Our ability to recover on our charged-off consumer receivables may be limited under federal, state and local laws.

Federal and state consumer protection, privacy and related laws and regulations extensively regulate the relationship between debt collectors and debtors. Federal and state laws may limit our ability to recover on our charged-off consumer receivables regardless of any act or omission on our part. Some laws and regulations applicable to credit card issuers may preclude us from collecting on charged-off consumer receivables we purchase if the credit card issuer previously failed to comply with applicable law in generating or servicing those receivables. Additional consumer protection and privacy protection laws may be enacted that would impose additional or more stringent requirements on the enforcement of and collection on consumer receivables.

New federal, state or local laws or regulations, such as regulations adopted by the Consumer Financial Protection Bureau under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, or changes in the ways these rules or laws are interpreted or enforced, could limit our activities in the future or significantly increase the cost of regulatory compliance. The Consumer Financial Protection Bureau recently proposed a rule that would authorize it to supervise our subsidiary, Asset Acceptance, LLC, as a larger participant in the market for consumer debt collection, which may increase our cost of regulatory compliance or require changes in the way we conduct business. Any new laws, such as the Credit CARD Act of 2009 that limits fees and interest charges on credit card holders, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to collect on our charged-off consumer receivable portfolios and may have a material adverse effect on our business and results of operations. In addition, federal and state governmental bodies are considering, and may consider in the future, other legislative proposals that would regulate the collection of consumer receivables. The FTC has proposed amendments to the Fair Debt Collection Practices Act that, if enacted, may adversely affect our business and results of operations. Although we cannot predict if or how any future legislation would impact our business, our failure to comply with any current or future laws or regulations applicable to us could limit our ability to collect on our charged-off consumer receivable portfolios, which could reduce our profitability and harm our business.

In addition to the possibility of new laws being enacted, it is possible that regulators and litigants may attempt to extend debtors’ rights beyond the current interpretations placed on existing statutes. These attempts could cause us to (i) expend significant financial and human resources in either litigating these new

interpretations, or (ii) alter our existing methods of conducting business to comply with these interpretations, either of which could reduce our profitability and harm our business.

If we are not able to purchase charged-off consumer receivables at appropriate prices or in sufficient amounts, the resulting decrease in our inventory of purchased portfolios of receivables could adversely affect our ability to generate cash collections and income.

If we are unable to purchase charged-off consumer receivables from credit originators in sufficient face value amounts at appropriate prices, our business may be harmed. The availability of portfolios of consumer receivables at prices which generate an appropriate return on our investment depends on a number of factors, both within and outside of our control, including:

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our ability to borrow to fund purchases;

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the absence of significant contraction in the levels of credit being extended by credit originators;

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the absence of significant contraction in the levels of consumer obligations;

•

charge-off rates;

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continued growth in the number of industries selling charged-off consumer receivable portfolios;

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continued sales of charged-off consumer receivable portfolios by credit originators;

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debt sellers’ willingness to sell portfolios to us;

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our ability to operate at a cost that permits us to be competitive in bidding for charged-off consumer receivable portfolios; and

•

competitive factors affecting potential purchasers and credit originators of charged-off receivables, including the number of firms engaged in the collection business and the capitalization of those firms, as well as new entrants seeking returns, that may cause an increase in the price we are willing to pay for portfolios of charged-off consumer receivables or cause us to overpay.

In addition, we believe that credit originators and debt sellers are utilizing more sophisticated collection methodologies that result in lower quality portfolios available for purchase, which may render the portfolios available for sale less collectible.

Because of the length of time involved in collecting charged-off consumer receivables on acquired portfolios and the volatility in the timing of our collections, we may not be able to identify trends and make changes in our purchasing or collection strategies in a timely manner.

We face intense competition that could impair our ability to achieve our goals.

The consumer debt collection industry is highly competitive and fragmented. We compete with a wide range of other purchasers of charged-off consumer receivables, third party collection agencies, other financial service companies and credit originators and other owners of debt that manage their own charged-off consumer receivables. Some of these companies may have substantially greater numbers of associates, more financial resources and may experience lower account representative turnover rates than we do. Furthermore, some of our competitors may obtain alternative sources of financing, the proceeds from which may be used to fund expansion and to increase their number of charged-off portfolio purchases. Barriers to entry into the consumer debt collection industry are low. Companies with greater financial resources than we have may elect at a future date to enter the consumer debt collection business. Competitive pressures affect the availability and pricing of receivable portfolios as well as the availability and cost of qualified debt collection account representatives. In addition, some of our competitors have signed forward flow contracts under which consumer credit originators have agreed to transfer a steady flow of charged-off receivables to them in the future, which could restrict those credit originators from selling receivables to us.

We face bidding competition in our acquisition of charged-off consumer receivable portfolios. We believe successful bids generally are awarded based predominantly on price and to a lesser extent based on service and relationships with debt sellers. Some of our current competitors, and possible new competitors, may have more effective pricing and collection models, more efficient operating structures, greater adaptability to changing market needs and more established relationships in our industry than we have. Moreover, our competitors may elect to pay prices for portfolios that we determine are not reasonable and, in that event, our volume of portfolio purchases may be diminished. There can be no assurance that our existing or potential sources will continue to sell their charged-off consumer receivables at recent levels or at all, or that we will continue to offer competitive bids for charged-off consumer receivable portfolios. In addition, there continues to be a consolidation of issuers of credit cards, which have been a principal source of our receivable purchases. This consolidation has decreased the number of sellers in the market and, consequently, could over time, give the remaining sellers increasing market strength in the price and terms of the sale of charged-off credit card accounts and could cause us to accept lower returns on our investment in that paper than we have historically achieved.

If we are unable to develop and expand our business or adapt to changing market needs as well as our current or future competitors, we may experience reduced access to portfolios of charged-off consumer receivables in sufficient face value amounts at appropriate prices. As a result, we may experience reduced profitability which, in turn, may impair our ability to achieve our goals.

Instability in the financial markets, economic weakness or recession may affect our access to capital, our ability to purchase and collect receivables and our operating results.

Our success depends on our continued ability to purchase and collect charged-off consumer receivables. An elevated unemployment rate, increased inflation levels, depressed residential real estate values, tight availability of credit for consumers and other economic factors could negatively affect consumers’ ability to pay debts. We have experienced the impact of these economic factors on our collections in recent years. Continued depression or further declines in real estate values, high levels of unemployment and continuing credit and liquidity concerns could further reduce our ability to collect on our purchased consumer receivable portfolios and would adversely affect their value. Financial pressure on the distressed consumer may lead to regulatory restrictions on our collections and increased litigation filed against us.

In addition, instability in the financial markets may reduce our access to capital, which could lead to constraints on our ability to purchase receivables and support our operations. We may be unable to predict the likely duration or severity of any adverse economic conditions and the effects they may have on our business, financial condition, results of operations, and cash flows.

Our access to capital through our credit agreement is critical to our ability to continue to grow. If our available credit is materially reduced or the credit agreement is terminated and we are unable to replace it on favorable terms or at all, our ability to purchase charged-off receivables and our results of operations may be materially and adversely affected.

We believe that access to capital through our credit agreement has been critical to our ability to maintain our operations. Our inability to obtain financing and capital as needed or on terms acceptable to us would limit our ability to acquire additional receivable portfolios and to operate our business. In our continuing effort to maintain adequate access to funds to facilitate operations, we entered into an amended and restated credit agreement in 2011 which replaced our previous credit agreement. Under the amended and restated credit agreement, we have a $95.5 million revolving line of credit that expires November 14, 2016 and a $175.0 million term loan facility that matures on November 14, 2017. If our available credit is materially reduced or the credit agreement is terminated as a result of noncompliance with a covenant or other event of default, and if we are unable to replace it on relatively favorable terms or at all, our ability to purchase charged-off receivables to generate collections and cash flow would be limited and our results of operations may be materially and adversely affected.

All of our receivable portfolios are pledged to secure amounts owed to our lenders under our credit agreement. In addition, our credit agreement imposes a number of restrictive covenants on how we operate our business. These include financial covenants. As of December 31, 2011, we had the ability to borrow an additional $75.9 million on our revolving line of credit under the most restrictive of these financial covenants. Our ability to meet these financial covenants is predicated on our ability to continue to generate collections, revenues and other financial results at levels sufficient to satisfy the requirements of our credit agreement. Failure to satisfy any one of these covenants could result in all or any of the following consequences, each of which could have a material adverse effect on our ability to conduct business:

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acceleration of outstanding indebtedness;

•

our inability to continue to purchase charged-off receivables needed to operate our business; or

•

our inability to secure alternative financing on favorable terms, if at all.

In addition, our credit agreement contains limitations and restrictions as to our ability to seek additional credit from other lenders, and requires that a portion of proceeds from issuance of our stock, or sales of assets be used to pay down our term loan facility.

A significant portion of our collections depend on our success in individual lawsuits brought against consumers and our ability to collect on judgments in our favor.

We generate a significant portion of our revenue by collecting on judgments that are granted by courts in lawsuits filed against debtors. A decrease in the willingness of courts to grant such judgments, a change in the requirements for filing such cases or obtaining such judgments, or a decrease in our ability to collect on such judgments could have a material and adverse effect on our results of operations. The FTC has issued a report encouraging states to impose specific, greater restrictions on litigation to collect consumer debt. As we increase our use of our legal channel for collections, our short-term margins may decrease as a result of an increase in upfront court costs and costs related to counter claims. We may not be able to collect on certain aged accounts because of applicable statutes of limitations. We may be unable to obtain account documents for some of the accounts we purchase which may negatively impact our ability to collect those accounts. Courts in some jurisdictions require that a copy of the account statements or applications be attached to the pleadings in order to obtain a judgment against the account debtors. If we are unable to produce account documents, these courts will deny our claims. We may be subject to adverse effects of regulatory changes that we cannot predict.

A significant portion of our collections are obtained from third parties.

We are dependent on third parties, primarily attorneys and other contingent collection agencies, to service our receivables. Significant changes in our relationships with these third parties or significant increases in costs associated with these third parties could adversely impact our financial position, results of operations and cash flows.

We are subject to ongoing risks of litigation, including individual and class actions under consumer credit, collections, and other laws.

We operate in an extremely litigious industry and currently are, and may in the future, be named as defendants in litigation, including individual and class actions under consumer credit, collections, and other laws.

A significant portion of our portfolio purchases during any period may be concentrated with a small number of sellers.

We expect that a specific percentage of our portfolio purchases for any given fiscal year may be concentrated with a few large sellers, some of which also may involve forward flow arrangements. The consolidation of major banks in recent years has resulted in fewer sellers of charged-off consumer receivables.

We cannot be certain that any of our significant sellers will continue to sell charged-off receivables to us on terms or in quantities acceptable to us, or that we would be able to replace such purchases with purchases from other sellers.

A significant decrease in the volume of purchases from any of our principal sellers would force us to seek alternative sources of charged-off receivables. We may be unable to find alternative sources from which to purchase charged-off receivables, and even if we could successfully replace such purchases, the search could take time, the receivables could be of lower quality, cost more, or both, any of which could materially adversely affect our financial performance.

Our operations could suffer from telecommunications or technology downtime or from not responding to changes in technology.

Our success depends in large part on sophisticated telecommunications and computer systems. The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty or operating malfunction (including outside influences such as computer viruses), could disrupt our operations. In the normal course of our business, we must record and process significant amounts of data quickly and accurately. Any failure of our information systems or software and their backup systems would interrupt our operations and harm our business. Computer and telecommunications technologies evolve rapidly. We may not be successful in anticipating, managing or adapting technological changes on a timely basis, which could reduce our profitability or disrupt our operations and harm our business. In addition, we rely significantly on various outside vendors for the software used in our operations. Our business would be disrupted and financial performance may be harmed if they were to cease operations or significantly reduce their support to us.

We are subject to examinations and challenges by tax authorities.

Our industry is relatively new and unique and, as a result, there are not well-defined laws, regulations or case law for us to follow that match our particular facts and circumstances for some tax positions. Therefore, certain tax positions we take are based on industry practice, tax advice and drawing similarities of our facts and circumstances to those in case law relating to other industries. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base and apportionment. Challenges made by tax authorities to our application of tax rules may result in adjustments to the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions, as well as inconsistent positions between different jurisdictions on similar matters. If any such challenges are made and are not resolved in our favor, they could have an adverse effect on our financial condition and results of operations.

We are dependent on our management team and key associates for the adoption and implementation of our strategies and the loss of their services could have a material adverse effect on our business.

Our future success depends on the continued ability to recruit, hire, retain and motivate highly skilled management and associates. The continued growth and success of our business is particularly dependent upon the continued services of our Chief Executive Officer and other executive officers. The loss of the services of one or more of our executive officers or other key associates could disrupt our operations and impair our ability to continue to acquire or collect on portfolios of charged-off consumer receivables and to manage our business. We do not maintain key person life insurance policies for our executive officers or key associates.

We generally account for purchased receivable revenues using the interest method of accounting in accordance with generally accepted accounting principles, which requires making reasonable estimates of the timing and amount of future cash collections. If the timing is delayed or the actual amount recovered by us is materially lower than our estimates, it could cause us to recognize impairments and negatively impact our earnings.

The estimates used in the interest method of revenue recognition (“Interest Method”) to calculate the projected internal rate of return (“IRR”) on our portfolios are primarily based on historical cash collections and

payer dynamics. If actual future cash collections are materially different in amount or timing than the remaining collections estimate, earnings could be affected, either positively or negatively. Higher collection amounts or cash collections that occur sooner than projected will have a favorable impact to revenue in the form of yield increases or impairment reversals. Lower collection amounts or cash collections that occur later than projected will have an unfavorable impact and may result in an impairment of the purchased receivable balance. Impairments cause reduced earnings and volatility in earnings which could have the effect of depressing the price per share of our common stock, reducing our consolidated tangible net worth and putting pressure on the financial covenants in our credit facilities. Refer to “Critical Accounting Policies—Revenue Recognition” on page 50 for further information regarding the Interest Method and estimates.

We may not be able to collect sufficient amounts on our charged-off consumer receivables, which would adversely affect our results of operations, our ability to satisfy debt obligations, our purchase of new portfolios and our future growth.

Our business consists of acquiring and collecting receivables that consumers have failed to pay and that the credit originator has deemed uncollectible and has charged-off. The credit originators or other debt sellers generally have attempted to recover on their charged-off consumer receivables before we purchase such receivables, often using a combination of in-house recovery and third party collection efforts. Because there generally have been multiple efforts to collect on these portfolios of charged-off consumer receivables before we attempt to collect on them, our attempts to collect may not be successful. Therefore, we may not collect a sufficient amount to cover our investment associated with purchasing the charged-off consumer receivable portfolios and the costs of running our business, which would adversely affect our results of operations. In addition, if cash flows from operations are less than anticipated, our ability to satisfy our debt obligations, purchase new portfolios and maintain profitability may be materially and adversely affected.

There can be no assurance that our success in generating collections in the past will be indicative of our ability to be successful in generating collections in the future.

We are highly dependent on revenues generated from our purchased receivable collection activities. Entry into new markets or other attempts to diversify our business model may not be successful.

Substantially all our operating revenues are generated from collections on charged-off purchased receivables. Although we use multiple collection approaches, changing economic factors or collection laws, for example, may impact our ability to collect regardless of the collection approach we pursue. Although management may seek opportunities to diversify, we may not be successful.

The recognition of impairment charges on goodwill would adversely impact our financial position and results of operations.

We are required to perform an impairment test on our goodwill annually or at any time when events occur which could affect the fair value of this asset. Our determination of whether an impairment has occurred is based on a comparison of the asset’s fair value with its book value. Several factors are considered when calculating fair value, some of which involve significant management estimates. Significant and unanticipated changes in circumstances, such as adverse changes in business climate, declining expectations of cash flows or operating results, adverse actions by regulators, unanticipated competition, or changes in technology or markets, could require an impairment in a future period that could substantially affect our reported earnings and reduce our consolidated net worth and shareholders’ equity.

We experience high turnover rates for our account representatives. We may not be able to hire and retain enough sufficiently trained account representatives to support our operations.

Our ability to collect on new and existing portfolios and to acquire new portfolios is substantially dependent on our ability to hire and retain qualified associates. The consumer accounts receivables management industry is

labor intensive and, similar to other companies in our industry, we experience a high rate of associate turnover. Based on our experience, account representatives who have been with us for more than one year are generally more productive than account representatives who have been with us for less than one year. We compete for qualified associates with companies in our industry and in other industries. Our operations require that we continually hire, train and, in particular, retain account representatives. In addition, we believe the level of training we provide to our associates makes them attractive to other collection companies, which may attempt to recruit them. A higher turnover rate among our account representatives will increase our recruiting and training costs, may require us to increase associate compensation levels and will limit the number of experienced collection associates available to service our charged-off consumer receivables. If this were to occur, we may not be able to service our charged-off consumer receivables effectively, which could reduce our ability to operate profitably.

Significant increases in interest rates could adversely impact our financial position, results of operations and cash flows.

Borrowings under our credit agreement bear interest at variable rates, with a floor of 150 basis points on London Inter Bank Offer Rate (“LIBOR”) denominated borrowings under our term loan facility. Although a portion of our outstanding borrowings have a fixed rate of interest as a result of an interest rate swap agreement, the interest rates for the majority of our borrowings are not fixed. In the future, we may amend or replace our credit agreement, which could significantly impact the rates of interest we pay. As a result, fluctuations in interest rates may adversely impact our financial position, results of operations and cash flows.

We may acquire charged-off receivable portfolios in industries in which we may have little or no experience. If we do not successfully collect on these portfolios, revenue may decline and our results of operations may be materially and adversely affected.

We may acquire portfolios of charged-off consumer receivables in industries in which we have limited experience, some which may have specific regulatory restrictions with which we have no experience. Our limited experience in these industries may impair our ability to effectively and efficiently collect on these portfolios. Furthermore, we need to develop appropriate pricing models for these markets, and there is no assurance that we will do so effectively. When pricing charged-off consumer receivables for industries in which we have limited experience, we attempt to adjust our models for expected or known differences from our traditional models. However, our pricing models are primarily based on historical data for industries in which we do have experience. This may cause us to overpay for these portfolios, and consequently, our profitability may suffer as a result of these portfolio acquisitions.

Negative attention and news regarding the debt collection industry and individual debt collectors may have a negative impact on a debtor’s willingness to pay the debt we acquire.

The following factors may cause consumers to be more reluctant to pay their debts or to pursue legal actions against us:

•

annually the FTC submits a report to Congress, which summarizes the complaints it has received regarding debt collection practices. The report contains the total number of complaints filed, the percentage of increases or decreases from the previous year in addition to an outline of key types of complaints;

•

print and television media publish stories about the debt collection industry which cite specific examples of abusive collection practices. These stories are also published on websites, which can lead to the rapid dissemination of the story adding to the level of exposure to negative publicity about our industry;

•

the Internet has websites where consumers list their concerns about the activities of debt collectors and seek guidance from other website posters on how to handle various situations; and

•

advertisements by “anti-collections” attorneys and credit counseling centers are becoming more common and add to the negative attention given to our industry.

As a result of this negative publicity, debtors may be more reluctant to pay their debts or could pursue legal action against us regardless of whether those actions are warranted. These actions could impact our ability to collect on the receivables we acquire and impact our ability to operate profitably.

Our operating results and cash collections may vary from quarter to quarter.

Our business depends on the ability to collect on our 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 are seasonally higher during the first and second quarters of the year due to expenses necessary to process the increase in cash collections. Operating expenses also may fluctuate from quarter to quarter depending on our investment in court costs through our legal collection channel. However, revenue recognized is relatively level due to our 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 purchasing and integrating these receivables into our collection platform. Consequently, income and margins may fluctuate from quarter to quarter.

If our computer systems or third-party computer systems containing consumer information are compromised, we may be subject to liability and damage to our reputation.

Our computer systems, and systems of our third-party network, contain confidential consumer information. Any compromise of the security of these computer systems that results in the disclosure of personally identifiable customer information could damage our reputation, expose us to litigation, increase regulatory scrutiny and require us to incur significant technical, legal and other expenses.

Our collections may decrease if bankruptcy filings increase or if bankruptcy laws change.

During times of economic recession, the amount of charged-off consumer receivables generally increases, which contributes to an increase in the number of personal bankruptcy filings. Under certain bankruptcy filings, a debtor’s assets are sold to repay creditors, but since the charged-off consumer receivables we are attempting to collect are generally unsecured or secured on a second or third priority basis, we often would not be able to collect on those receivables. Our collections may decline with an increase in bankruptcy filings or if the bankruptcy laws change in a manner adverse to our business, in which case, our financial condition and results of operations could be materially adversely affected.

Our common stock trades at a relatively low average daily volume. Consequently, sales of our common stock by one or more of our larger shareholders could depress the price of our common stock.

The majority of our shares of common stock are held by relatively few shareholders. As of February 3, 2012, our directors, executive officers and beneficial owners of 5% or more of our common stock controlled approximately 79.2% in total of our outstanding shares. A sale of shares of the Company’s common stock by any of our significant holders may have the effect of depressing the price per share of our common stock because of the relatively low trading volume of our shares.

We have anti-takeover provisions, any of which may discourage takeover attempts and could reduce the market price of our common stock.

Provisions of our Certificate of Incorporation and Bylaws and Delaware law could have the effect of discouraging takeover attempts which certain shareholders might deem to be in their interest. For example, our

board of directors is divided into three classes and each class is elected for a three-year term. This provision could make it more difficult for our shareholders to remove members of our board of directors and may also make it more difficult for a third party to acquire us, even if the acquisition would be beneficial to shareholders.

Item 1B.

Unresolved Staff Comments

We do not have any unresolved staff comments.

Item 2.

Properties

The following table provides information relating to our operating facilities:


Location	Approximate Square Footage		Lease Expiration Date	Use
Warren, Michigan		200,000	May 31, 2016	Principal executive offices, administrative departments and call center, with collections and legal channel support

Riverview, Florida		40,390	May 31, 2016	Call center, with collections and legal channel support

Tempe, Arizona		24,960	May 31, 2015	Call center

Sparks, Maryland		5,100	August 31, 2012	Software development and support

Prior to December 31, 2011, we announced the closing of the call center collection operations in our San Antonio, Texas office, effective January 6, 2012. Refer to Note 9, “Restructuring Charges” in the accompanying financial statements for additional information related to our office closures. We intend to sublease or settle this lease prior to its normal termination on November 30, 2014. We also exited four small legal collection offices as we shifted from using in-house attorneys to using a preferred third party law firm for certain legal channel collections. We believe our existing facilities are sufficient to meet our current needs and that suitable additional or alternative space will be available on a commercially reasonable basis.

Item 3.

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. Also, consumers occasionally initiate litigation against us, in which they allege that we have violated a federal or state law in the process of collecting on their account. It is not unusual for us to be named in a class action lawsuit relating to these allegations, with these lawsuits routinely settling for immaterial amounts. We do not believe that these ordinary course matters, individually or in the aggregate, are material to our business or financial condition. However, there can be no assurance that a class action lawsuit would not, if decided against us, have a material adverse effect on our financial condition.

On January 30, 2012, we announced a settlement of the FTC’s investigation of our debt collection practices with the filing of a consent decree in the United States District Court for the Middle District of Florida. The consent decree ended an FTC investigation that began in February 2006 under the Federal Trade Commission Act, Fair Debt Collection Practices Act and Fair Credit Reporting Act. As part of the consent decree, we agreed to undertake industry-leading consumer protection practices, including, among other things, furnishing additional disclosures when collecting debt past the statute of limitations. We also agreed to pay a civil penalty of $2.5 million. We do not expect our compliance with the consent decree to have a material adverse effect on our business.

Item 4.

Mine Safety Disclosures

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is quoted on The NASDAQ Global Select Market under the symbol “AACC”. The following table sets forth the high and low closing sales prices for our common stock, as reported by The NASDAQ Global Select Market, for the periods indicated:


	2011				2010
	High		Low		High		Low
Fourth Quarter	$	4.32	$	2.80	$	6.35	$	4.77
Third Quarter		5.46		3.26		5.44		3.55
Second Quarter		5.97		3.13		8.16		4.12
First Quarter		7.21		5.26		7.41		5.14

On February 16, 2012, the last reported sale price of our common stock on The NASDAQ Global Select Market was $4.45 per share. As of that date, there were 34 record holders of our common stock.

We have not paid regular dividends on our common stock. Our Board of Directors will determine whether to pay any dividends in the future. This determination may depend on a variety of factors that our Board of Directors considers relevant, including our financial condition, results of operations, contractual restrictions, capital requirements and business prospects. In addition, our credit agreement limits the aggregate amount of dividends and other restricted payments to $15.0 million plus 50% of Consolidated Net Income for the period after December 31, 2011, as defined in the credit agreement, provided that we are able to borrow at least $15.0 million under the credit agreement before and after the payment. Our former credit agreement contained a similar requirement.

The information contained in the Equity Compensation table under “Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this report is incorporated herein by reference.

We did not sell any equity securities during 2011 that were not registered under the Securities Act.

Stock Performance Graph

The following graph compares the cumulative total return of our common stock from December 31, 2006 through December 31, 2011 against the NASDAQ Composite-Total Returns Index and the Morningstar Credit Services Index, which is our industry index. The graph assumes that $100 was invested in our common stock on December 31, 2006, as well as in each of the indices, and dividends, if any, were reinvested.

LOGO


Total Return Date	AACC		NASDAQ Composite- Total Returns		Morningstar Credit Services
12/31/2006	$	100.00	$	100.00	$	100.00
12/31/2007		72.03		110.66		72.02
12/31/2008		35.36		66.41		48.87
12/31/2009		46.91		96.54		76.99
12/31/2010		41.03		114.06		74.25
12/31/2011		27.05		113.16		98.43

Item 6.

Selected Financial Data

The following selected consolidated statements of financial position data as of December 31, 2007, 2008, 2009, 2010 and 2011 and related selected consolidated statements of operations data for each of the years then ended have been derived from our consolidated financial statements, which have been audited by Ernst & Young LLP (2007) and Grant Thornton, LLP (2008-2011), both independent registered public accounting firms. The data should be read in connection with the accompanying consolidated financial statements, related notes and other information included herein.

For more detailed information about our corporate history, see “Item 1. Business—History”.


	Years Ended December 31,
	2011			2010			2009			2008			2007
	($ in thousands, except per share and dividend data)
STATEMENT OF OPERATIONS DATA:
Revenues
Purchased receivable revenues, net	$	216,920		$	195,794		$	171,275		$	232,901		$	245,692
Gain on sale of purchased receivables		—			1,212			399			165			840
Other revenues, net		1,156			1,394			813			1,146			1,466

Total revenues		218,076			198,400			172,487			234,212			247,998

Expenses
Salaries and benefits		67,476			72,389			77,666			83,348			82,917
Collections expense		98,705			99,298			89,095			89,459			99,387
Occupancy		5,722			6,730			7,588			7,727			9,138
Administrative		9,025			9,818			8,694			10,511			10,529
Depreciation and amortization		4,166			4,666			4,107			3,955			4,275
Restructuring charges		75			4,225			—			—			906
Impairment of assets		—			—			1,168			616			267
(Gain) loss on disposal of equipment and other assets		(4	)		214			355			222			137

Total operating expenses		185,165			197,340			188,673			195,838			207,556

Income (loss) from operations		32,911			1,060			(16,186	)		38,374			40,442
Other income (expense)
Interest expense		(11,760	)		(11,204	)		(10,169	)		(13,024	)		(8,146	)
Interest income		—			8			34			32			471
Loss on extinguishment of debt		(1,111	)		—			—			—			—
Other		(32	)		68			130			22			151

Income (loss) before income taxes		20,008			(10,068	)		(26,191	)		25,404			32,918
Income tax expense (benefit)		7,983			(8,452	)		(9,757	)		9,681			12,512

Net income (loss)	$	12,025		$	(1,616	)	$	(16,434	)	$	15,723		$	20,406

Net income (loss) per share basic	$	0.39		$	(0.05	)	$	(0.54	)	$	0.51		$	0.63
Net income (loss) per share diluted	$	0.39		$	(0.05	)	$	(0.54	)	$	0.51		$	0.63
Weighted-average shares basic		30,763			30,693			30,634			30,566			32,517
Weighted-average shares diluted		30,834			30,693			30,634			30,592			32,604
Dividends per common share	$	—		$	—		$	—		$	—		$	2.45

	December 31,
	2011			2010			2009			2008			2007
	($ in thousands)
FINANCIAL POSITION DATA:
Cash	$	6,991		$	5,636		$	4,935		$	6,043		$	10,474
Purchased receivables, net		348,711			321,318			319,772			361,809			346,199
Total assets		396,040			363,774			366,416			408,171			395,409
Deferred tax liability, net		60,474			52,864			57,525			64,470			60,165
Total debt, including capital lease obligations		172,344			157,462			160,301			181,550			191,268
Total stockholders’ equity		137,981			123,903			123,097			136,628			122,419

	Years Ended December 31,
	2011			2010			2009			2008			2007
	($ in thousands)
OPERATING AND OTHER FINANCIAL DATA:
Cash collections	$	349,998		$	328,818		$	334,031		$	369,578		$	371,178
Operating expenses to cash collections		52.9	%		60.0	%		56.5	%		53.0	%		55.9	%
Acquisitions of purchased receivables, at cost(1)	$	160,939		$	135,957		$	120,887		$	153,478		$	169,298
Acquisitions of purchased receivables, at face value	$	5,329,440		$	3,782,610		$	4,415,106		$	3,759,299		$	5,196,805
Acquisitions of purchased receivables cost as a percentage of face value		3.02	%		3.59	%		2.74	%		4.08	%		3.26	%

(1)	Amount of purchased receivables at cost refers to the cash paid to a seller to acquire a portfolio less buybacks.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions, such as statements of our plans, objectives, expectations and intentions. Our actual results may differ materially from those discussed here. Factors that could cause or contribute to the differences include those discussed in “Item 1A. Risk Factors”, as well as those discussed elsewhere in this Annual Report. The references in this Annual Report to the U.S. Federal Reserve Board are to the Federal Reserve Statistical Release, dated February 7, 2012, and the Federal Reserve Consumer Credit Historical Data website (www.federalreserve.gov/releases/g19/hist/) or the Federal Reserve Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks website (www.federalreserve.gov/releases/chargeoff/).

Company Overview

We have been purchasing and collecting charged-off accounts receivable portfolios (“paper”) from consumer credit originators since 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. Over the last ten years, we purchased 1,234 consumer debt portfolios, with an original charged-off face value of $44.6 billion for an aggregate purchase price of $1.2 billion, or 2.76% 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 collections.

Macro-economic factors have impacted our results of operations both positively and negatively in recent years. Factors such as reduced availability of credit for consumers, a depressed housing market, elevated unemployment rates and other factors have had a negative impact on us by making it more difficult to collect from consumers on the paper we have acquired. We have observed recent positive trends in some of these indicators. For example, the average unemployment rate of 9.0% for 2011 is lower than the average unemployment rate for both 2009 and 2010. Conversely, 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 from certain credit originators. These factors contributed to the higher pricing we experienced during 2011, and are likely to impact pricing of paper in 2012. We expect macro-economic trends to continue to impact portfolio acquisition and collection results.

Higher prices for paper are likely to continue in the near term, which will put additional pressure on our ability to be profitable. One of our measures of our ability to be profitable is cost as a percent of collections of charged-off receivables, referred to as cost to collect. We have been reviewing our operating model in recent years, including our facilities, and making changes in order to reduce our cost to collect. Recent changes are described in more detail below. Those actions allowed us to reduce our cost to collect to 52.9% in 2011 from 56.5% in 2009. However, some of our competitors have significantly lower levels of costs as a percent of collections, which may allow them to offer higher amounts for purchasing paper. We expect to continue to review our operations and collection activities to identify additional opportunities to reduce our cost structure in order to remain competitive.

Our levels of purchasing showed year-over-year growth in both 2011 and 2010. During 2011, we purchased 18.4% more paper than in 2010 with a higher percentage of older paper than the previous year. During 2010, we purchased 12.5% more paper than in 2009. These increased levels of purchases contributed to increased collections in 2011. We saw an increase in pricing of paper in 2011, primarily in the newer stages of delinquency. We deploy our capital within the stages of delinquency based upon availability and our perception of the relative value of the available debt.

We executed an amended and restated credit agreement in the fourth quarter of 2011 which replaced our previous credit facilities that would have expired beginning in June 2012. Although the rates of interest in the new agreement are higher than in our prior agreement, the financial covenants are more favorable and we believe the refinancing will allow us to continue to purchase paper at or above prior levels without disruption to our operating plans.

Collections during 2011 increased 6.4% as compared to 2010 and each fiscal quarter of 2011 showed year-over-year growth. Improved collection results were driven by higher levels of purchasing in 2011 and 2010, as collections on portfolios are typically highest six to 18 months after purchase. Collections were also positively impacted by a combination of improved analytical tools used to create customized collection strategies and continued improvement in the utilization of our proprietary collection platform, which led to an increase in collector productivity. We grew collections for the year even though we closed three collection offices in 2010 and have not been purchasing or collecting healthcare receivables since the third quarter of 2010.

Purchased receivable revenues for 2011 were significantly higher than last year. This increase in revenue is primarily related to higher collections driven by improved collection strategies and analytics, higher average carrying balances of purchased receivables, increases in net impairment reversals and greater zero basis collections (collections on fully amortized portfolios). During 2011, we exceeded collection forecasts for certain portfolios allowing us to recognize yield increases and reverse certain previously recorded impairments. If collections continue to exceed our expectations, we may further increase yields or reverse additional impairments. However, if collections do not continue to meet expectations, we may be required to record impairments. The increase in revenue from zero basis collections directly impacted purchased receivable revenues, as collections on fully amortized pools are recognized as revenue in the period collected. Fully amortized portfolios are generally at least five years old, and become more difficult to collect as they continue to age.

In January 2012 we settled the FTC’s investigation into our debt collection practices, which has resulted in some changes to our practices and procedures in collecting consumer debt. Refer to “Legal Proceedings” for additional information of the FTC investigation.

In addition to the items discussed above, our results of operations are influenced by certain industry and economic trends, including:

•

Levels of outstanding consumer credit—According to the U.S. Federal Reserve Board, the amount of outstanding revolving and non-revolving consumer credit was $2.5 trillion in December 2011, which is consistent with the level of outstanding consumer credit in recent years. The level of consumer debt obligations indicates potential future charge-offs and availability of paper. Tightening credit standards or other factors in the future may result in lower consumer credit outstanding.

•

Charge-off rates—According to the U.S. Federal Reserve Board, the charge-off rate, the rate at which accounts are charged-off measured as a percentage of total outstanding consumer credit, decreased during 2011. In addition, the average charge-off rate for 2011 was lower than the average charge-off rate for 2010. If other factors remain constant, lower charge-off rates could result in fewer accounts available for purchase in the market, and may result in higher pricing.

•

Supply and pricing environment for purchased receivables—The supply and pricing of purchased receivables available in the market is influenced by the levels of outstanding consumer credit, charge-off rates and competition among buyers, among other factors. In general, prices increased in 2011 for paper in all stages of delinquency, with the most significant change in the fresh and primary segments.

•

Impact of macro-economic factors—Macro-economic factors affect consumers’ ability to satisfy outstanding debt. The residential real estate market in the United States began to experience a significant downturn in the second half of 2007 and real estate values generally remained depressed

during 2011. The unemployment rate and the number of individual bankruptcy filings showed improvement during 2011, but remained elevated compared to historical levels, leaving individual consumers with fewer resources available to satisfy their debts and contributed to a continuing challenging collection environment.

Operating expenses during 2011 were favorable compared to 2010, primarily as a result of actions we took in 2010 to restructure our operations. The following is a summary of those actions:

•

Exited the purchase and collection of healthcare receivables—During 2010, we exited the healthcare accounts receivable purchase and collection activities conducted by our former PARC subsidiary and sold substantially all of our healthcare receivables to a third party. Because of the sale, we will forego future collections on these accounts. The historical impact of these collections was as follows:


	Twelve Months Ended December 31,
($ in thousands)	2011		2010
Collections from non-healthcare receivables	$	349,998.3	$	325,361.2
Collections from healthcare receivables		—		3,457.3

Total collections	$	349,998.3	$	328,818.5

•

Closed collection offices—In connection with ceasing the purchase and collection of healthcare receivables, we closed our Deerfield Beach office and dissolved our PARC subsidiary. In addition, we closed our Chicago and Cleveland call center collection operations and shifted their inventory of receivables to other collection channels. These office closures significantly reduced our account representative headcount and our call center footprint, removed redundancy and simplified our infrastructure needs.

•

Terminated third party agency relationship—We incurred a charge of $5.3 million in 2010 resulting from the termination for performance of a relationship with a third party service provider (“Third Party Charge”). The charge related to a cash payment to reimburse the third party for court costs incurred on our behalf that they would otherwise have recovered through commissions in subsequent periods.

•

Acquisition—In July of 2010, we completed the purchase of substantially all of the assets of BSI eSolutions, LLC (“BSI”), a software vendor, including the collection software it developed, which we had been implementing to replace our legacy collection platform. We made the acquisition to protect our investment in the software acquired and to enhance our ability to successfully complete implementation. In addition, we believe this acquisition allows us to further enhance our collection platform in an efficient and cost effective manner.

In 2011 we completed the follow action:

•

Announced the closure of our San Antonio office—We closed our San Antonio call center collection operation in January 2012 and shifted its inventory of receivables to other collection channels. In conjunction with closing this office, we incurred restructuring charges of $0.3 million during the fourth quarter of 2011 and anticipate $0.4 million in the first half of 2012. We expect this restructuring action to improve future annual Adjusted EBITDA by approximately $2.5 million per year.

We continually review our business and operations and look for opportunities to become more efficient.

Results of Operations

The following table sets forth selected 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
	Years Ended December 31,									Years Ended December 31,
	2011			2010			2009			2011			2010			2009
Revenues
Purchased receivable revenues		99.5	%		98.7	%		99.3	%		62.0	%		59.5	%		51.3	%
Gain on sale of purchased receivables		0.0			0.6			0.2			0.0			0.4			0.1
Other revenues		0.5			0.7			0.5			0.3			0.4			0.2

Total revenues		100.0			100.0			100.0			62.3			60.3			51.6

Expenses
Salaries and benefits		31.0			36.5			45.0			19.3			22.0			23.3
Collections expense		45.3			50.0			51.7			28.2			30.2			26.7
Occupancy		2.6			3.4			4.4			1.6			2.0			2.3
Administrative		4.1			5.0			5.0			2.6			3.0			2.6
Depreciation and amortization		1.9			2.4			2.4			1.2			1.4			1.2
Restructuring charges		0.0			2.1			0.0			0.0			1.3			0.0
Impairment of assets		0.0			0.0			0.7			0.0			0.0			0.3
Loss on disposal of equipment and other assets		0.0			0.1			0.2			0.0			0.1			0.1

Total operating expense		84.9			99.5			109.4			52.9			60.0			56.5

Income (loss) from operations		15.1			0.5			(9.4	)		9.4			0.3			(4.9	)
Other income (expense)
Interest expense		(5.4	)		(5.6	)		(5.9	)		(3.4	)		(3.4	)		(3.0	)
Interest income		0.0			0.0			0.0			0.0			0.0			0.0
Loss on extinguishment of debt		(0.5	)		0.0			0.0			(0.3	)		0.0			0.0
Other		0.0			0.0			0.1			0.0			0.0			0.0

Income (loss) before income taxes		9.2			(5.1	)		(15.2	)		5.7			(3.1	)		(7.9	)
Income tax expense (benefit)		3.7			(4.3	)		(5.7	)		2.3			(2.6	)		(3.0	)

Net income (loss)		5.5	%		(0.8	)%		(9.5	)%		3.4	%		(0.5	)%		(4.9	)%

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

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 is the difference between cash collections and amortization of purchased receivables.

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


	Years Ended December 31,												Percentage of Cash Collections Years Ended December 31,
($ in millions)	2011			2010			Change			Percentage Change			2011			2010
Cash collections	$	350.0		$	328.8		$	21.2			6.4	%		100.0	%		100.0	%
Purchased receivable amortization		(133.1	)		(133.0	)		(0.1	)		0.0			(38.0	)		(40.5	)

Purchased receivable revenues	$	216.9		$	195.8		$	21.1			10.8	%		62.0	%		59.5	%

The 6.4% increase in cash collections for the year ended December 31, 2011 was a result of a combination of higher levels of recent purchasing, improved use of analytical tools and continued improvement in the utilization of our proprietary collection platform, which provided efficiencies that helped improve collector productivity, particularly in our legal collections channel. Refer to the “Cash Collections” tables on page 44 for additional information on collections by channel. Although the overall collection environment remained challenging, we saw some improvement in general macro-economic factors, which improved debtor’s ability to repay their obligations. Compared to prior year results, investment in purchased receivables increased by 18.4% in 2011 and 12.5% in 2010. Generally, collections are strongest on portfolios six to 18 months after purchase, therefore, these increases have had a positive impact on current collections. Cash collections included collections from fully amortized portfolios, or zero basis collections, of $50.7 million and $49.4 million for 2011 and 2010, respectively, of which 100% was reported as revenue. The increase in these collections was a result of shifts in our work strategy and other initiatives.

The amortization rate of 38.0% for the year ended December 31, 2011 was 250 basis points lower than the amortization rate of 40.5% for the same period of 2010. The decline in the amortization rate was a result of higher weighted-average yields, higher net impairment reversals and higher zero basis collections. During 2011, we increased yields on multiple portfolios from the 2006 through 2010 vintages, which results in a higher percentage of cash collections being applied to purchased receivable revenue and less to amortization. Increases in assigned yields are generally a result of increases in expected future collections. We recognized net impairment reversals of $6.2 million during the year compared to net impairment reversals of $2.3 million in 2010. These impairment reversals were also a result of increased expectations for future collections on certain portfolios from the 2005 through 2010 vintages. The increase in zero basis collections in 2011 also reduced the amortization rate since those collections are recorded as revenue in the period collected. Refer to “Supplemental Performance Data” on Pages 40 and 41 for a summary of purchased receivable revenues and amortization rates by year of purchase and an analysis of the components of collections and amortization.

Revenues on portfolios purchased from our top three sellers were $85.4 million and $78.0 million during 2011 and 2010, respectively. The top three sellers were the same in both twelve-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. From period to period, we may buy charged-off receivables of varying age, type and demographics. As a result, the cost of our purchases, as a percent of face value, may fluctuate from one period to the next. Total purchases consisted of the following:


	Years Ended December 31,
($ in millions, net of buybacks)	2011			2010			Change		Percent
Acquisitions of purchased receivables, at cost	$	160.9		$	136.0		$	24.9		18.4	%
Acquisitions of purchased receivables, at face value	$	5,329.4		$	3,782.6		$	1,546.8		40.9	%
Percentage of face value		3.02	%		3.59	%
Percentage of forward flow purchases, at cost of total purchasing		32.6	%		46.0	%
Percentage of forward flow purchases, at face value of total purchasing		23.0	%		35.0	%

Our investment in purchased receivables increased in 2011 compared to the prior year, which was consistent with our strategy to increase purchasing levels over those in 2010. The face value of purchased receivables increased by a greater percentage than the amount paid as a result of a lower average cost of purchases in 2011 because we purchased a higher percentage of older paper during the year. For instance, we purchased less than 25% of paper in the fresh and primary stages of delinquency in 2011 compared to over 40% in 2010. Fresh and

primary paper generally have a higher purchase price than paper in the other stages of delinquency. As a result of fluctuations in the mix of purchases of receivables, the costs 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 seller to sell charged-off receivables to us for a fixed percentage of the face value over a specified time period. Purchases from forward flows in 2011 included 99 portfolios from 25 forward flow contracts. Purchases from forward flows in 2010 included 87 portfolios from 17 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.

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 year to year. 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:


	Years Ended December 31,										Percentage of Cash Collections Years Ended December 31,
($ in millions)	2011		2010		Change			Percentage Change			2011			2010
Salaries and benefits	$	67.5	$	72.4	$	(4.9	)		(6.8	)%		19.3	%		22.0	%
Collections expense		98.7		99.3		(0.6	)		(0.6	)		28.2			30.2
Occupancy		5.7		6.7		(1.0	)		(15.0	)		1.6			2.0
Administrative		9.0		9.8		(0.8	)		(8.1	)		2.6			3.0
Restructuring and impairment of assets		0.1		4.2		(4.1	)		(98.2	)		—			1.3
Other		4.2		4.9		(0.7	)		(14.7	)		1.2			1.5

Total operating expenses	$	185.2	$	197.3	$	(12.1	)		(6.2	)%		52.9	%		60.0	%

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


	Years Ended December 31,										Percentage of Cash Collections Years Ended December 31,
($ in millions)	2011		2010		Change			Percentage Change			2011			2010
Compensation—revenue generating	$	37.1	$	44.5	$	(7.4	)		(16.6	)%		10.6	%		13.5	%
Compensation—administrative		18.1		15.4		2.7			17.6			5.2			4.7
Benefits and other		12.3		12.5		(0.2	)		(1.7	)		3.5			3.8

Total salaries and benefits	$	67.5	$	72.4	$	(4.9	)		(6.8	)%		19.3	%		22.0	%

Compensation for our revenue generating departments was lower in 2011 due to lower average headcount of in-house account representatives. We significantly reduced headcount for our collection operations starting in the second half of 2010 in connection with our restructuring actions to close three collection offices. During 2011, we had an average of 659 in-house account representatives, including supervisors, compared to an average of 879 in 2010. Higher compensation for our administrative departments in 2011 was a result of the addition of new associates from the BSI acquisition in July 2010 and higher performance-based incentive compensation for

management. Benefits and other expenses related to compensation were slightly lower in 2011, primarily as a result of a decline in the number of associates, offset in part by higher expenses for Company contributions to our 401(k) plan, which were reinstated in the third quarter of 2011, and our self-insured medical programs.

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


	Years Ended December 31,										Percentage of Cash Collections Years Ended December 31,
($ in millions)	2011		2010		Change			Percentage Change			2011			2010
Forwarding fees	$	45.7	$	40.8	$	4.9			12.0	%		13.1	%		12.4	%
Court and process server costs		29.1		31.7		(2.6	)		(8.0	)		8.3			9.6
Lettering campaigns and telecommunications costs		14.8		15.5		(0.7	)		(4.5	)		4.2			4.7
Data provider costs		5.0		6.1		(1.1	)		(18.0	)		1.4			1.9
Other		4.1		5.2		(1.1	)		(21.8	)		1.2			1.6

Total collections expense	$	98.7	$	99.3	$	(0.6	)		(0.6	)%		28.2	%		30.2	%

Forwarding fees include fees paid to third parties to collect on our behalf, including our agency firm in India. These fees increased in 2011 compared to 2010 as a result of an increase in accounts placed with third party agencies and higher cash collections generated by third parties, primarily in our non-legal channel. Collections from third party relationships were $152.8 million and $117.9 million, or 43.6% and 35.9% of cash collections, for 2011 and 2010, 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.

Court costs related to our legal collections decreased year over year primarily as a result of a charge of $5.3 million in 2010 resulting from the termination for performance of a relationship with a third party service provider. Excluding this charge, court costs increased in 2011 compared to 2010 as a result of higher legal activity driven by higher purchasing in 2011 and an increase in the number of accounts in the legal collection channel. The legal collection model requires an up-front investment in court costs and other fees, which we expense as incurred. There generally is a considerable delay before we generate collections on the accounts in the legal process. This delay can cause a change in court costs that is disproportionate to the change in legal collections.

As a result of our improved analytical capabilities and continuous review of operational strategies, we were able to more effectively utilize variable collection activities, such as dialing, lettering campaigns and use of data provider services, 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. We were also able to favorably renegotiate the terms of certain telecommunications contracts, which helped reduce volume related expenses. Other collection expenses were lower in 2011 compared to 2010 as a result of actions taken to reduce technical and software support costs.

Occupancy. Occupancy expenses declined to $5.7 million in 2011 from $6.7 million in 2010, primarily as a result of the restructuring actions to close our Deerfield Beach, Chicago and Cleveland collection offices during the second half of 2010. We continue to review our capacity to ensure we are utilizing all of our space effectively.

Administrative. Administrative expenses decreased to $9.0 million in 2011 from $9.8 million for 2010. The decrease was primarily related to reductions in legal fees related to the FTC investigation and consulting fees. Total FTC charges were $1.7 million and $2.0 million in 2011 and 2010, respectively. Each year included $1.25 million of charges for an estimated civil penalty as part of the consent decree settlement.

Restructuring and Impairment of Assets. Restructuring charges were $0.1 million in 2011 compared to $4.2 million in 2010. Charges during 2011 were related to closing our San Antonio, Texas collection office. Charges during 2010 were related to closing three collection offices and exiting healthcare receivable purchase and collection activities.

Interest Expense. Interest expense was $11.8 million for 2011, an increase of $0.6 million compared to $11.2 million during 2010. During the fourth quarter of 2011, we entered into a new amended and restated 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. In addition, the increase in interest expense was due to an increase in average borrowings, which were $167.4 million during 2011 compared to $160.8 million in 2010. 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. Refer to “Liquidity and Capital Resources” for additional information.

Loss on extinguishment of debt. Loss on extinguishment of debt was $1.1 million in 2011. The loss related to the write-off of the unamortized portion of deferred financing costs related to our prior term loan.

Income Taxes. We recognized income tax expense of $8.0 million for 2011 and a tax benefit of $8.5 million for 2010. The current year tax expense reflects a federal tax rate of 37.4% and a state tax rate of 2.5% (net of federal tax effect). For 2010, the federal tax rate was 81.0% and state tax rate was 2.9% (net of federal tax effect).

The 2011 rate differed from the expected federal statutory rate of 35% primarily due to the additional accrual for the FTC non-deductible civil penalty of $1.25 million. The 2010 rate differed from the expected federal statutory rate of 35% primarily due to our decision to dissolve PARC, which resulted in (i) a benefit of $5.2 million related to a worthless stock deduction to be claimed for our disposition of PARC, (ii) a benefit of $2.2 million related to the write-off of intercompany advances to PARC, (iii) an expense of $0.3 million related to the write-off of intangible assets associated with PARC, and (iv) an expense of $1.8 million related to the write-off of PARC’s prior net operating losses that will no longer be recognizable in future periods.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue

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


	Years Ended December 31,												Percentage of Cash Collections Years Ended December 31,
($ in millions)	2010			2009			Change			Percentage Change			2010			2009
Cash collections	$	328.8		$	334.0		$	(5.2	)		(1.6	)%		100.0	%		100.0	%
Purchased receivable amortization		(133.0	)		(162.7	)		29.7			18.3			(40.5	)		(48.7	)

Purchased receivable revenues	$	195.8		$	171.3		$	24.5			14.3	%		59.5	%		51.3	%

The amortization rate of 40.5% for the year ended December 31, 2010 was 820 basis points lower than the amortization rate of 48.7% for the same period of 2009. The improvement in the amortization rate was primarily

a result of net impairments of $49.5 million recorded in 2009. The impairments were a result of significant declines in expectations for future collections on certain portfolios, particularly in the 2004 to 2007 vintage years. By contrast, results for 2010 included net impairment reversals of $2.3 million. Even though amortization as a percent of collections was more favorable in 2010 compared to the prior year, revenues, absent the effect of impairments, were lower as a result of a decrease in collections on fully amortized portfolios, a lower average carrying value of purchased receivables as a result of the impairments recognized in the fourth quarter of 2009, and lower average IRRs on recent purchases. Refer to “Supplemental Performance Data” on Page 40 and 41 for a summary of purchased receivable revenues and amortization rates by year of purchase and an analysis of the components of collections and amortization.

We believe that macro-economic factors affecting consumers’ liquidity and their ability to repay their obligations, and the low levels of purchasing in 2009 contributed to lower cash collections in 2010 compared to 2009. Macro-economic factors reducing consumers’ ability to pay included the average unemployment rate over the twelve-month period, which increased from 9.3% in December 2009 to 9.6% in December 2010, a depressed housing market and a continued tight credit environment for consumers, among other factors. In addition, during 2009, we invested 21.2% less in purchased receivables than we did in 2008. Generally, collections are strongest on portfolios six months to 18 months after purchase, therefore, that reduction in purchasing had a negative impact on collections in 2010, primarily during the first half of the year. Cash collections include collections from fully amortized portfolios of $49.4 million and $63.2 million for 2010 and 2009, respectively, of which 100% were reported as revenue. These fully amortized portfolios are generally at least five years old, and become more difficult to collect as they continue to age.

Revenues on portfolios purchased from our top three sellers were $78.0 million and $55.2 million during 2010 and 2009, respectively. The top three sellers were the same in both twelve-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. From period to period, we may buy charged-off receivables of varying age, types and demographics. As a result, the cost of our purchases, as a percent of face value, may fluctuate from one period to the next. Total purchases consisted of the following:


	Years Ended December 31,
($ in millions, net of buybacks)	2010			2009			Change			Percent
Acquisitions of purchased receivables, at cost	$	136.0		$	120.9		$	15.1			12.5	%
Acquisitions of purchased receivables, at face value	$	3,782.6		$	4,415.1		$	(632.5	)		(14.3	)%
Percentage of face value		3.59	%		2.74	%

Our investment in purchased receivables increased in 2010 compared to the prior year, which was consistent with our strategy to increase purchasing levels over those in 2009. We purchased 41.8% of paper in the fresh and primary stages of delinquency in 2010 compared to 15.5% during 2009. Fresh and primary papers generally have a higher purchase price than paper in the other stages of delinquency. As a result of fluctuations in the mix of purchases of receivables, the costs 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.

Investments under Forward Flow Contracts

Forward flow contracts commit a debt seller to sell charged-off receivables to us, and commit us to purchase receivables for a fixed percentage of the face value. Forward flow contracts may be attractive to us because they provide operational advantages from the consistent amount and type of accounts acquired. Forward flow purchases consisted of the following:


	Years Ended December 31,
($ in millions, net of buybacks)	2010			2009			Change			Percent
Forward flow purchases, at cost	$	62.6		$	59.4		$	3.2			5.2	%
Forward flow purchases, at face value	$	1,325.3		$	1,827.1		$	(501.8	)		(27.5	)%
Percentage of face value		4.72	%		3.25	%
Percentage of forward flow purchases, at cost of total purchasing		46.0	%		49.2	%
Percentage of forward flow purchases, at face value of total purchasing		35.0	%		41.4	%

Investments in forward flow contracts were higher in 2010 than in the same period in 2009, but represented a smaller percentage of total purchases because of an increase in other types of purchasing. Through 2009, investments in forward flows made up a majority of our purchasing, which was consistent with our intent to lower total purchasing levels but maintain our fixed agreements with certain sellers. The increase in the average cost of these purchases in 2010 compared to 2009 was primarily a result of increased purchases of more recently charged-off receivables. Fresh and primary paper represented 79.5% of our forward flow purchases in 2010 compared to 16.6% in 2009. Purchases from forward flows in 2010 included 87 portfolios from 17 forward flow contracts. Purchases from forward flows in 2009 included 80 portfolios from 12 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 year to year. Amortization rates vary due to seasonality of collections, impairments and other factors and can distort the analysis of operating expenses when measured against revenues. Additionally, we believe that the majority of our operating expenses are variable in relation to cash collections.

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


	Years Ended December 31,										Percentage of Cash Collections Years Ended December 31,
($ in millions)	2010		2009		Change			Percentage Change			2010			2009
Salaries and benefits	$	72.4	$	77.7	$	(5.3	)		(6.8	)%		22.0	%		23.3	%
Collections expense		99.3		89.1		10.2			11.5			30.2			26.7
Occupancy		6.7		7.6		(0.9	)		(11.3	)		2.0			2.3
Administrative		9.8		8.7		1.1			12.9			3.0			2.6
Restructuring and impairment of assets		4.2		1.2		3.0			261.8			1.3			0.3
Other		4.9		4.4		0.5			9.4			1.5			1.3

Total operating expenses	$	197.3	$	188.7	$	8.6			4.6	%		60.0	%		56.5	%

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


	Years Ended December 31,										Percentage of Cash Collections Years Ended December 31,
($ in millions)	2010		2009		Change			Percentage Change			2010			2009
Compensation—revenue generating	$	44.5	$	47.3	$	(2.8	)		(5.8	)%		13.5	%		14.2	%
Compensation—administrative		15.4		15.4		—			0.1			4.7			4.6
Benefits and other		12.5		15.0		(2.5	)		(16.8	)		3.8			4.5

Total salaries and benefits	$	72.4	$	77.7	$	(5.3	)		(6.8	)%		22.0	%		23.3	%

Compensation for our revenue generating departments was lower in 2010 due to lower average headcount of in-house account representatives, partially offset by increased incentive compensation. Benefits were favorable to the prior year due to the suspension of the Company matching component of our 401(k) plan and favorable healthcare benefit expenses, in part a result of increased associate contributions for these benefits.

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


	Years Ended December 31,										Percentage of Cash Collections Years Ended December 31,
($ in millions)	2010		2009		Change			Percentage Change			2010			2009
Forwarding fees	$	40.8	$	37.5	$	3.3			8.8	%		12.4	%		11.2	%
Court and process server costs		31.7		22.8		8.9			39.0			9.6			6.8
Lettering campaigns and telecommunications costs		15.5		17.6		(2.1	)		(11.9	)		4.7			5.3
Data provider costs		6.1		5.8		0.3			5.2			1.9			1.7
Other		5.2		5.4		(0.2	)		(3.7	)		1.6			1.7

Total collections expense	$	99.3	$	89.1	$	10.2			11.5	%		30.2	%		26.7	%

Forwarding fees include fees paid to third parties to collect on our behalf including our agency firm in India. These fees increased in 2010 compared to 2009 because of higher cash collections generated by third parties, primarily driven by continued increases in non-legal work allocated to our agency firm in India. Collections from such third party relationships were $117.9 million and $109.9 million, or 35.9% and 32.9% of cash collections, for 2010 and 2009, respectively. Rates paid to forwarding agencies vary based on the age and type of paper that we outsource. Rates also vary based on the mix of work performed by our agency firm in India, which is generally at a lower rate than on collections we outsource domestically.

Court costs increased year over year as we increased legal activity, and also because of increases in court filing fees in certain jurisdictions. Our legal collection model requires an up-front investment in court costs and other fees before any collections are generated, and there may be considerable delay before we generate collections on the accounts in the legal process. This delay can cause a change in court costs that is disproportionate to the change in legal collections. In addition, we incurred a charge of $5.3 million resulting from the termination for performance of a relationship with a third party service provider. The charge relates to a cash settlement payment to reimburse the third party for court costs incurred on our behalf that the third party would otherwise have recovered through commissions in future periods.

During 2010, we became more selective in our variable collection activities, such as telecommunications, lettering campaigns and use of data provider services, resulting in reductions in the related expenses. Generally, these costs are higher in the first six months after purchase of a portfolio as we ramp up collection activities.

Occupancy. Occupancy expenses declined to $6.7 million in 2010 from $7.6 million in 2009, primarily as a result of closing our Deerfield Beach and Chicago collection offices during the year. In addition, during 2009, we entered into two new lease agreements to replace our facilities in San Antonio and Phoenix (now located nearby in Tempe). The new lease agreements in San Antonio and Tempe are for less space than the prior agreements, which resulted in reduced occupancy expense during 2010.

Administrative. Administrative expenses increased to $9.8 million in 2010 from $8.7 million for 2009. The increase is primarily related to defense charges for the FTC investigation, including an accrual for estimated settlement of $1.25 million, partially offset by a reduction in outside consulting fees.

Restructuring and Impairment of Assets. Restructuring charges were $4.2 million for 2010 and included charges related to exiting our healthcare receivable purchase and collection activities and closing three collection offices. The charges included employee termination benefits of $1.7 million, contract termination costs of $1.2 million for remaining lease payments, write-off of intangible assets of $0.8 million and other exit costs, including the write-off of furniture and equipment, of $0.5 million.

We recognized an impairment charge of $1.2 million in the third quarter of 2009 related to trademark and trade names associated with our healthcare collection activities. After the additional write-off of $0.8 million in 2010, there was no longer a carrying value of trademark and trade names in our consolidated statements of financial position.

Interest Expense. Interest expense was $11.2 million for 2010, an increase of $1.0 million compared to interest expense of $10.2 million for 2009. During the second quarter of 2010 and the fourth quarter of 2009, we amended our credit agreement, which resulted in additional deferred financing costs that will be amortized over the remaining term of the credit agreement. The increase in interest expense was due primarily to higher amortization of these deferred financing costs of $0.6 million. In addition, the increase in interest expense was due to an increase in average borrowings, which were $160.8 million during 2010 compared to $153.0 million in 2009. The amendments to our credit agreement included an increase in average interest rates and changes to the financial covenants. As a result, interest expense will be higher in future periods than it would have been under the terms of the agreement prior to amendment. Refer to “Liquidity and Capital Resources” for additional information.

Income Taxes. We recognized income tax benefits of $8.5 million and $9.8 million for 2010 and 2009, respectively. The current year tax benefit reflects a federal tax rate of 81.0% and a state tax rate of 2.9% (net of federal tax effect). For 2009, the federal tax rate was 34.2% and state tax rate was 3.1% (net of federal tax effect).

The 2010 rate differed from the expected federal statutory rate of 35% primarily due to our decision to dissolve PARC, which resulted in (i) a benefit of $5.2 million related to a worthless stock deduction to be claimed for our disposition of PARC, (ii) a benefit of $2.2 million related to the write-off of intercompany advances to PARC, (iii) an expense of $0.3 million related to the write-off of intangible assets associated with PARC, and (iv) an expense of $1.8 million related to the write-off of PARC’s prior net operating losses that will no longer be recognizable in future periods.

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 level 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 December 31, 2011:


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
	($ in thousands)
2004		106	$	86,536	$	280,454	$	184	$	280,638		324	%
2005		104		100,746		219,045		6,656		225,701		224
2006		154		142,227		329,120		28,889		358,009		252
2007		158		169,298		285,039		48,660		333,699		197
2008		164		153,478		235,603		81,310		316,913		206
2009		123		120,887		178,218		148,691		326,909		270
2010		122		135,956		110,299		178,005		288,304		212
2011		133		160,939		40,462		334,546		375,008		233

Total		1,064	$	1,070,067	$	1,678,240	$	826,941	$	2,505,181		234	%

(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 are based in part on historical cash collections. Please refer to forward-looking statements within Item 1A. “Risk Factors” on page 13 and “Critical Accounting Policies” on page 50 for further information regarding these estimates.

(3)

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

The following table summarizes our quarterly portfolio purchases since January 1, 2009:


($ in thousands)
Quarter of Purchase	Number of Portfolios		Purchase Price(1)		Face Value
Q1 2009		31	$	21,746	$	736,632
Q2 2009		22		19,622		715,804
Q3 2009		33		36,903		1,584,750
Q4 2009		37		42,616		1,377,920
Q1 2010		28		29,609		818,400
Q2 2010		41		48,420		1,494,859
Q3 2010		34		41,143		1,172,119
Q4 2010		19		16,785		297,232
Q1 2011		37		46,374		1,227,703
Q2 2011		39		49,382		1,600,261
Q3 2011		31		38,419		1,320,253
Q4 2011		26		26,764		1,181,223

Total		378	$	417,783	$	13,527,156

(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 December 31, 2011:


($ 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
2004	$	184	$	86,536		0.2	%		0.1	%
2005		2,199		100,746		2.2			0.6
2006		8,809		142,227		6.2			2.5
2007		21,278		169,298		12.6			6.1
2008		31,481		153,478		20.5			9.0
2009		46,680		120,887		38.6			13.4
2010		85,994		135,956		63.3			24.7
2011		152,086		160,939		94.5			43.6

Total	$	348,711	$	1,070,067		32.6	%		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.

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


	Year ended December 31, 2011
Year of Purchase	Collections		Revenue		Amortization Rate(1)			Monthly Yield(2)			Net Impairments (Reversals)			Zero Basis Collections
2006 and prior	$	79,506,740	$	65,073,002		N/M			N/M		$	(8,344,400	)	$	43,649,643
2007		36,610,606		17,261,410		52.9	%		4.65	%		(170,000	)		1,037,961
2008		47,668,069		25,465,249		46.6			5.02			—			5,965,147
2009		69,121,427		38,523,502		44.3			5.28			2,304,000			36,428
2010		76,629,430		38,987,433		49.1			3.09			—			—
2011		40,462,024		31,609,322		21.9			3.25			—			—

Totals	$	349,998,296	$	216,919,918		38.0	%		5.34	%	$	(6,210,400	)	$	50,689,179


	Year ended December 31, 2010
Year of Purchase	Collections		Revenue		Amortization Rate(1)			Monthly Yield(2)			Net Impairments (Reversals)			Zero Basis Collections
2005 and prior	$	66,351,793	$	53,860,550		N/M			N/M		$	(1,852,856	)	$	41,245,515
2006		35,935,075		20,699,103		42.4	%		6.88	%		(588,054	)		4,132,956
2007		49,142,614		25,669,601		47.8			4.08			105,467			2,375,440
2008		62,549,786		29,168,202		53.4			3.42			—			849,701
2009		81,170,136		45,049,351		44.5			3.91			—			825,894
2010		33,669,086		21,346,794		36.6			2.73			—			—

Totals	$	328,818,490	$	195,793,601		40.5	%		5.05	%	$	(2,335,443	)	$	49,429,506


	Year ended December 31, 2009
Year of Purchase	Collections		Revenue		Amortization Rate(1)			Monthly Yield(2)			Net Impairments (Reversals)		Zero Basis Collections
2004 and prior	$	76,818,620	$	59,351,726		N/M			N/M		$	9,916,500	$	51,005,995
2005		22,725,619		2,276,130		90.0	%		0.88	%		11,770,000		1,968,651
2006		53,239,336		19,573,500		63.2			3.00			19,855,000		6,523,756
2007		69,890,696		31,214,488		55.3			3.05			6,994,000		3,204,897
2008		83,430,138		38,422,017		53.9			2.91			969,254		332,543
2009		27,926,188		20,437,420		26.8			3.98			—		124,996

Totals	$	334,030,597	$	171,275,281		48.7	%		4.27	%	$	49,504,754	$	63,160,838

(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.

Core Amortization

The table below shows 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 prior years:

•

Total amortization was higher while the amortization rate declined for 2011 compared to prior years. The decline in the amortization rate was the result of higher net impairment reversals and higher zero basis collections. The increase in total amortization was primarily a result of higher average portfolio balances and 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, we may increase assigned yields;

•

amortization of receivables balances for 2011 increased compared to prior years as a result of higher average balances of purchased receivables and higher collections on amortizing pools;

•

net impairments are recorded as additional amortization, and increase the amortization rate, while net reversals have the opposite effect. Higher net impairment reversals during 2011 reduced total amortization compared to prior years; and

•

higher zero basis collections in 2011 compared to 2010 reduced the amortization rate because 100% of these collections are recorded as revenue and do not contribute towards portfolio amortization.


	Years Ended December 31,
($ in millions)	2011			2010			2009
Cash collections:
Collections on amortizing pools	$	299.3		$	279.4		$	270.8
Zero basis collections		50.7			49.4			63.2

Total collections	$	350.0		$	328.8		$	334.0

Amortization:
Amortization of receivables balances	$	137.3		$	133.5		$	105.9
Impairments		2.8			1.1			50.3
Reversals of impairments		(9.0	)		(3.5	)		(0.8	)
Cost recovery amortization		2.0			1.9			7.3

Total amortization	$	133.1		$	133.0		$	162.7

Purchased receivable revenues, net	$	216.9		$	195.8		$	171.3

Amortization rate		38.0	%		40.5	%		48.7	%
Core amortization rate(1)		44.5	%		47.6	%		60.1	%

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

Account Representative Tenure and Productivity

We measure traditional 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


	Years Ended December 31,
	2011		2010		2009
One year or more(1)		369		514		587
Less than one year(2)		290		365		422

Total		659		879		1,009

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

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

Off-Shore Account Representatives(1)

Years Ended December 31,

2011

2010

2009(2)

Number of account representatives

250

227

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

(2)	Includes activity beginning in November 2009 averaged over the 12-month period.

The following table displays our account representative productivity:

Overall Account Representative Collection Averages


	Years Ended December 31,
	2011		2010		2009(1)
Overall collection averages	$	176,779	$	164,206	$	156,391

(1)	Amounts for 2009 were adjusted to remove supervisors from the collection average which is consistent with the current presentation. Supervisors do not have collection goals; therefore, we believe this presentation better represents our collection averages.

In-house account representative average collections per FTE increased during 2011 by 7.7% as compared to 2010. Account representative productivity improved as a result of increased purchasing during 2011 over 2010 and 2010 over 2009, coupled with more effective training programs, better utilization of our standardized collection methodology, targeted lettering and dialing strategies and improved analytical models and tools, including improved channel management strategies. In-house account representative average collections per FTE increased in 2010 by 5.0% as compared to 2009, as a result of the increase in purchasing in 2010 coupled with more effective training programs and better utilization of our standardized collection methodology.

Cash Collections

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

Historical Collections(1)


($ in thousands)
Year of Purchase	Purchase Price(2)		Years Ended December 31,
Year of Purchase	Purchase Price(2)		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
2002	$	72,255		22,339			70,813			72,024			67,649			55,373			39,839			24,529			15,957			11,367			9,536
2003		87,146		—			36,067			94,564			94,234			79,423			58,359			38,408			23,842			15,774			12,440
2004		86,536		—			—			23,365			68,354			62,673			48,093			32,276			21,082			13,731			10,881
2005		100,746		—			—			—			23,459			60,280			50,811			35,638			22,726			14,703			11,428
2006		142,227		—			—			—			—			32,751			101,529			79,953			53,239			35,994			25,654
2007		169,298		—			—			—			—			—			36,269			93,183			69,891			49,085			36,611
2008		153,478		—			—			—			—			—			—			41,957			83,430			62,548			47,668
2009		120,887		—			—			—			—			—			—			—			27,926			81,170			69,121
2010		135,956		—			—			—			—			—			—			—			—			33,669			76,629
2011		160,939		—			—			—			—			—			—			—			—			—			40,462

Total			$	120,540		$	197,820		$	267,928		$	319,910		$	340,870		$	371,178		$	369,578		$	334,031		$	328,818		$	349,998


Cumulative Collections(1)
($ in thousands)
Year of Purchase	Purchase Price(2)		Total Through December 31,
Year of Purchase	Purchase Price(2)		2002			2003			2004			2005			2006			2007			2008			2009			2010			2011
2002	$	72,255	$	22,339		$	93,152		$	165,176		$	232,825		$	288,198		$	328,037		$	352,566		$	368,523		$	379,890		$	389,426
2003		87,146		—			36,067			130,631			224,865			304,288			362,647			401,055			424,897			440,671			453,111
2004		86,536		—			—			23,365			91,719			154,392			202,485			234,761			255,843			269,574			280,455
2005		100,746		—			—			—			23,459			83,739			134,550			170,188			192,914			207,617			219,045
2006		142,227		—			—			—			—			32,751			134,280			214,233			267,472			303,466			329,120
2007		169,298		—			—			—			—			—			36,269			129,452			199,343			248,428			285,039
2008		153,478		—			—			—			—			—			—			41,957			125,387			187,935			235,603
2009		120,887		—			—			—			—			—			—			—			27,926			109,096			178,217
2010		135,956		—			—			—			—			—			—			—			—			33,669			110,298
2011		160,939		—			—			—			—			—			—			—			—			—			40,462

Cumulative Collections as Percentage of Purchase Price(1)
Year of Purchase	Purchase Price(2)		Total Through December 31,
Year of Purchase	Purchase Price(2)		2002			2003			2004			2005			2006			2007			2008			2009			2010			2011
2002	$	72,255		31	%		129	%		229	%		322	%		399	%		454	%		488	%		510	%		526	%		539	%
2003		87,146		—			41			150			258			349			416			460			488			506			520
2004		86,536		—			—			27			106			178			234			271			296			312			324
2005		100,746		—			—			—			23			83			134			169			191			206			217
2006		142,227		—			—			—			—			23			94			151			188			213			231
2007		169,298		—			—			—			—			—			21			76			118			147			168
2008		153,478		—			—			—			—			—			—			27			82			122			154
2009		120,887		—			—			—			—			—			—			—			23			90			147
2010		135,956		—			—			—			—			—			—			—			—			25			81
2011		160,939		—			—			—			—			—			—			—			—			—			25

(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.

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 are seasonally higher during the first and second quarters of the year due to expenses necessary to process the increase in cash collections. Operating expenses also may fluctuate from quarter to quarter depending on our investment in court costs through our legal collection channel. 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	2011					2010					2009					2008					2007
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
First	$	91,284,934		26.1	%	$	89,215,330		27.1	%	$	94,116,937		28.2	%	$	100,264,281		27.1	%	$	95,853,350		25.8	%
Second		89,171,558		25.5			84,214,073		25.6			87,293,577		26.1			95,192,743		25.8			95,432,021		25.7
Third		87,437,890		25.0			78,860,926		24.0			77,832,357		23.3			90,775,528		24.6			90,748,442		24.5
Fourth		82,103,914		23.4			76,528,161		23.3			74,787,726		22.4			83,345,578		22.5			89,144,650		24.0

Total cash collections	$	349,998,296		100.0	%	$	328,818,490		100.0	%	$	334,030,597		100.0	%	$	369,578,130		100.0	%	$	371,178,463		100.0	%

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:


	Years ended December 31,
	2011					2010					2009					2008					2007(1)
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
Call center collections	$	192,907,463		55.1	%	$	181,415,069		55.2	%	$	180,469,613		54.0	%	$	205,536,988		55.6	%	$	208,500,875		56.2	%
Legal collections		157,090,833		44.9			147,403,421		44.8			153,560,984		46.0			164,041,142		44.4			162,677,588		43.8

Total cash collections	$	349,998,296		100.0	%	$	328,818,490		100.0	%	$	334,030,597		100.0	%	$	369,578,130		100.0	%	$	371,178,463		100.0	%

(1)	Certain cash collections have been reclassified to conform to the current period presentation.

The average collection payment size grew 12.2% to $174 during 2011. This increase reflects the net impact of a 12.7% increase in the size of average call center collection payments and an increase of 11.5% in the size of average legal payments when compared to 2010. The increase in call center payment size was a result of continued improvement in targeted collections strategies which we began to implement in 2010. The overall increase in the size of payments from the legal channel was due to continued improvements in our dialing and lettering strategies, increases in average garnishment payments and efficiencies provided by utilization of our proprietary collection platform.

The average payment size of collections grew 4.5% to $155 during 2010. This increase reflects the net impact of an 11.0% increase in the size of average call center collection payments and a decrease of 3.1% in the

size of average legal payments when compared to 2009. The increase in call center payment size was a result of collections on paper with higher average balances coupled with a more effective training program, better utilization of our standardized collection methodology, and more targeted lettering and dialing strategies. The overall decrease in the size of payments from the legal channel was influenced by improvements in our dialing and lettering strategies offset by negative trends in our ability to garnish assets.

Liquidity and Capital Resources

Historically, our primary sources of cash have been from operations and bank borrowings. We have traditionally used cash for acquisitions of purchased receivables, repayment of bank borrowings, purchasing property and equipment and working capital to support growth. 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 entered into an amended and restated 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 $95.5 million revolving credit facility which expires in November 2016 (the “Revolving Credit Facility”), which may be limited by financial covenants, and a six-year $175.0 million 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 prior agreement allowed for a $100.0 million revolving credit facility and a $150.0 million term loan facility expiring in June 2012 and 2013, respectively.

We incurred $5.5 million in deferred financing costs and $11.4 million of original issue discount related to the Term Loan Facility as a result of entering into the new Credit Agreement. We also incurred deferred financing costs of $0.8 million and $1.8 million during the years ended December 31, 2010 and 2009, respectively, to amend the former credit agreement. We expensed the unamortized portion of deferred financing costs related to the former term loan of $1.1 million during the year ended December 31, 2011, which is included in “Loss on extinguishment of debt”, in the accompanying consolidated statements of operations.

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%.

The Credit Agreement includes an accordion loan feature that allows us to request an aggregate $75.0 million increase in the Revolving Credit Facility and/or the Term Loan Facility. The Credit Facilities also include sublimits for $10.0 million of letters of credit and for $10.0 million of swingline loans (which bear interest at the bank’s alternative rate, which was 4.25% at December 31, 2011). 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 December 31, 2011 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. At December 31, 2011, total available borrowings on the Revolving Credit Facility were $87.3 million; however, capacity to borrow under the terms of the financial covenants was limited to approximately $75.9 million. The limitation is based on the Leverage Ratio, which was the most restrictive financial covenant at December 31, 2011. 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 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. We made Excess Cash Flow payments on the former term loan facility of $9.0 million and $2.4 million in March 2010 and 2009, respectively, based on the provisions of the former credit agreement.

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


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

(1)	Includes three quarterly principal payments with the remaining balance due on the maturity date.

Voluntary prepayments are permitted on the Term Loan Facility subject, in some cases, to certain breakfunding fees. If a voluntary prepayment is made on or prior to November 14, 2012, we must pay a premium of 2.0% of the amount prepaid, 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 prepaid. 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 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. This requirement is effective 90 days after the effective date of the new Credit Agreement. Refer to Note 5 of the consolidated financial statements, “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:


	December 31,
	2011			2010
Term Loan Facility	$	175,000,000		$	133,359,956
Revolving Credit Facility		8,200,000			23,900,000
Original issue discount on Term Loan		(11,077,130	)		—

Total Notes Payable	$	172,122,870		$	157,259,956

Weighted average interest rate on total outstanding borrowings		8.56	%		5.30	%
Weighted average interest rate on revolving credit facility		4.57	%		3.88	%

Total outstanding borrowings in 2011, net of the original issue discount on the Term Loan Facility, increased by $25.9 million. The increase resulted from borrowings of $16.9 million in order to fund upfront fees related to the new Credit Facilities and borrowings to fund higher portfolio purchases during the year. The increase in interest rates and fee amortization resulting from the amended and restated Credit Agreement will have the effect of increasing interest expense by approximately $10.0 million in 2012, if our borrowing levels remain consistent.

We were in compliance with all covenants of the Credit Agreement as of December 31, 2011.

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 year ended December 31, 2011, we invested $160.5 million in purchased receivables primarily by using internal cash flow. Our cash balance increased from $5.6 million at December 31, 2010 to $7.0 million as of December 31, 2011. We also made net borrowings on our Credit Facilities of $25.9 million during 2011. At December 31, 2011, we had the ability to increase the borrowings on our Revolving Credit Facility by approximately $75.9 million.

Our operating activities provided cash of $19.4 million, $7.9 million and $31.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. Cash provided by operating activities is generated primarily from operating income earned through cash collections as adjusted for non-cash items and the timing of payments of income taxes, timing of payments for accounts payable and changes to accrued liabilities. 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. Cash provided by operations increased as a result of lower operating expenses and higher deferred income taxes. We recorded net impairment reversals of $6.2 million and $2.3 million for the years ended December 31, 2011 and 2010, respectively, which resulted in negative non-cash adjustments to net income when determining cash flow from operating activities. In 2009, we recorded $49.5 million of net impairment charges, which was a positiv