UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended March 31, 2008
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission file number: 000-50552
Asset Acceptance Capital Corp
.
(
Exact name of registrant as specified in its charter
)
|
|
|
Delaware
|
|
80-0076779
|
(
State or other jurisdiction of
incorporation or organization
)
|
|
(
I.R.S.Employer Identification No.
)
|
28405 Van Dyke Avenue
Warren, Michigan 48093
(
Address of principal executive offices
)
Registrants telephone number, including area code:
(586) 939-9600
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a small reporting company. See the definition of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer
o
|
|
Accelerated filer
þ
|
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
|
Smaller Reporting Company
o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
As of April 21, 2008, 30,568,041 shares of the Registrants common stock were outstanding.
ASSET ACCEPTANCE CAPITAL CORP.
Quarterly Report on Form 10-Q
TABLE OF CONTENTS
Quarterly Report on Form 10-Q
This Form 10-Q and all other Company filings with the Securities and Exchange Commission are also
accessible at no charge on the Companys website at
www.assetacceptance.com
as soon as
reasonably practicable after filing with the Commission.
2
PART I FINANCIAL INFORMATION
Item 1
. Consolidated Financial Statements
ASSET ACCEPTANCE CAPITAL CORP.
Consolidated Statements of Financial Position
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
12,753,915
|
|
|
$
|
10,474,479
|
|
Purchased receivables, net
|
|
|
330,127,109
|
|
|
|
346,198,900
|
|
Income taxes receivable
|
|
|
823,300
|
|
|
|
3,424,788
|
|
Property and equipment, net
|
|
|
12,478,908
|
|
|
|
11,006,658
|
|
Goodwill and other intangible assets
|
|
|
16,932,614
|
|
|
|
17,464,688
|
|
Other assets
|
|
|
6,116,672
|
|
|
|
6,083,211
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
379,232,518
|
|
|
$
|
394,652,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,678,460
|
|
|
$
|
3,377,068
|
|
Accrued liabilities
|
|
|
23,925,493
|
|
|
|
17,423,378
|
|
Notes payable
|
|
|
163,875,000
|
|
|
|
191,250,000
|
|
Deferred tax liability, net
|
|
|
60,474,878
|
|
|
|
60,164,784
|
|
Capital lease obligations
|
|
|
9,186
|
|
|
|
18,242
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
251,963,017
|
|
|
|
272,233,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares authorized; no
shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 100,000,000 shares authorized;
issued shares 33,119,597 at March 31, 2008 and December 31,
2007, respectively
|
|
|
331,196
|
|
|
|
331,196
|
|
Additional paid in capital
|
|
|
145,857,175
|
|
|
|
145,610,742
|
|
Retained earnings
|
|
|
26,242,942
|
|
|
|
19,465,118
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
(4,186,135
|
)
|
|
|
(2,012,127
|
)
|
Common stock in treasury; at cost, 2,551,556 shares at March 31,
2008 and December 31, 2007, respectively
|
|
|
(40,975,677
|
)
|
|
|
(40,975,677
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
127,269,501
|
|
|
|
122,419,252
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
379,232,518
|
|
|
$
|
394,652,724
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
ASSET ACCEPTANCE CAPITAL CORP.
Consolidated Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
Purchased receivable revenues, net
|
|
$
|
63,722,688
|
|
|
$
|
66,782,034
|
|
Gain on sale of purchased receivables
|
|
|
159,105
|
|
|
|
|
|
Other revenues, net
|
|
|
472,937
|
|
|
|
523,993
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
64,354,730
|
|
|
|
67,306,027
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
21,930,965
|
|
|
|
22,448,455
|
|
Collections expense
|
|
|
22,096,681
|
|
|
|
23,069,940
|
|
Occupancy
|
|
|
1,927,488
|
|
|
|
2,339,385
|
|
Administrative
|
|
|
2,668,152
|
|
|
|
2,213,356
|
|
Restructuring charges
|
|
|
|
|
|
|
148,111
|
|
Depreciation and amortization
|
|
|
1,027,804
|
|
|
|
1,088,892
|
|
Impairment of intangible assets
|
|
|
445,651
|
|
|
|
|
|
Loss (gain) on disposal of equipment
|
|
|
5,583
|
|
|
|
(5,415
|
)
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
50,102,324
|
|
|
|
51,302,724
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14,252,406
|
|
|
|
16,003,303
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
23,251
|
|
|
|
15,727
|
|
Interest expense
|
|
|
(3,344,597
|
)
|
|
|
(263,818
|
)
|
Other
|
|
|
17,983
|
|
|
|
12,209
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
10,949,043
|
|
|
|
15,767,421
|
|
Income taxes
|
|
|
4,171,219
|
|
|
|
5,916,168
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,777,824
|
|
|
$
|
9,851,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,553,019
|
|
|
|
34,718,820
|
|
Diluted
|
|
|
30,565,690
|
|
|
|
34,725,992
|
|
Earnings per common share outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.28
|
|
Diluted
|
|
$
|
0.22
|
|
|
$
|
0.28
|
|
See accompanying notes.
4
ASSET ACCEPTANCE CAPITAL CORP.
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,777,824
|
|
|
$
|
9,851,253
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,027,804
|
|
|
|
1,088,892
|
|
Deferred income taxes
|
|
|
1,510,293
|
|
|
|
197,786
|
|
Share-based compensation expense
|
|
|
246,433
|
|
|
|
94,144
|
|
Net impairment of purchased receivables
|
|
|
384,283
|
|
|
|
4,473,100
|
|
Non-cash revenue
|
|
|
(147,769
|
)
|
|
|
(438,475
|
)
|
Loss (gain) on disposal of equipment
|
|
|
5,583
|
|
|
|
(5,415
|
)
|
Gain on sale of purchased receivables
|
|
|
(159,105
|
)
|
|
|
|
|
Impairment of intangible assets
|
|
|
445,651
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in accounts payable and accrued liabilities
|
|
|
3,429,300
|
|
|
|
744,837
|
|
Decrease in other assets
|
|
|
536,083
|
|
|
|
73,747
|
|
Increase in income taxes
|
|
|
2,601,488
|
|
|
|
4,681,382
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
16,657,868
|
|
|
|
20,761,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Investment in purchased receivables, net of buy backs
|
|
|
(20,472,028
|
)
|
|
|
(36,214,485
|
)
|
Principal collected on purchased receivables
|
|
|
36,305,079
|
|
|
|
25,036,691
|
|
Proceeds from the sale of purchased receivables
|
|
|
161,331
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,415,950
|
)
|
|
|
(454,785
|
)
|
(Payments) proceeds from sale or disposal of property and equipment
|
|
|
(3,264
|
)
|
|
|
11,493
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
13,575,168
|
|
|
|
(11,621,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Borrowings under notes payable
|
|
|
|
|
|
|
17,000,000
|
|
Repayment of notes payable
|
|
|
(27,375,000
|
)
|
|
|
(27,000,000
|
)
|
Payment of credit facility charges
|
|
|
(569,544
|
)
|
|
|
|
|
Repayment of capital lease obligations
|
|
|
(9,056
|
)
|
|
|
(23,895
|
)
|
Purchase of treasury shares
|
|
|
|
|
|
|
(699,060
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(27,953,600
|
)
|
|
|
(10,722,955
|
)
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
2,279,436
|
|
|
|
(1,582,790
|
)
|
Cash at beginning of period
|
|
|
10,474,479
|
|
|
|
11,307,451
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
12,753,915
|
|
|
$
|
9,724,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3,434,253
|
|
|
$
|
208,083
|
|
Cash paid for income taxes
|
|
|
73,390
|
|
|
|
1,037,000
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Change in fair value of swap liability
|
|
|
3,374,207
|
|
|
|
|
|
Change in unrealized loss on cash flow hedge
|
|
|
(2,174,008
|
)
|
|
|
|
|
See accompanying notes.
5
ASSET ACCEPTANCE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations
Asset Acceptance Capital Corp. and its subsidiaries (collectively referred to as the
Company) are engaged in the purchase and collection of defaulted and charged-off accounts
receivable portfolios. These receivables are acquired from consumer credit originators, primarily
credit card issuers, consumer finance companies, healthcare providers, retail merchants,
telecommunications and other utility providers as well as from resellers and other holders of
consumer debt. The Company periodically sells receivables from these portfolios to unaffiliated
companies.
In addition, the Company finances the sales of consumer product retailers.
The accompanying unaudited financial statements of the Company have been prepared in
accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission
and, therefore, do not include all information and footnotes necessary for a fair presentation of
financial position, income and cash flows in conformity with U.S. generally accepted accounting
principles. In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary for a fair presentation of the Companys financial
position as of March 31, 2008 and its income for the three months ended March 31, 2008 and 2007 and
cash flows for the three months ended March 31, 2008 and 2007, and all adjustments were of a normal
recurring nature. The income of the Company for the three months ended March 31, 2008 and 2007 may
not be indicative of future results. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2007.
Reporting Entity
The consolidated financial statements include the accounts of Asset Acceptance Capital Corp.
consisting of direct and indirect subsidiaries AAC Investors, Inc., RBR Holding Corp., Asset
Acceptance Holdings, LLC, Asset Acceptance, LLC, Rx Acquisitions, LLC, Consumer Credit, LLC and
Premium Asset Recovery Corporation. All significant intercompany balances and transactions have
been eliminated in consolidation. The Company currently has two operating segments, one for
purchased receivables and one for finance contract receivables. The finance contract receivables
operating segment is not material and therefore is not disclosed separately from the purchased
receivables segment.
Purchased Receivables Portfolios and Revenue Recognition
Purchased receivables are receivables that have been charged-off as uncollectible by the
originating organization and typically have been subject to previous collection efforts. The
Company acquires the rights to the unrecovered balances owed by individual debtors through such
purchases. The receivable portfolios are purchased at a substantial discount (generally more than
90%) from their face values and are initially recorded at the Companys acquisition cost, which
equals fair value at the acquisition date. Financing for the purchases is primarily provided by the
Companys cash generated from operations and the Companys revolving credit facility.
The Company accounts for its investment in purchased receivables using the guidance provided
by the Accounting Standards Executive Committee Statement of Position 03-3, Accounting for Certain
Loans or Debt Securities Acquired in a Transfer (SOP 03-3). The provisions of SOP 03-3 were
adopted by the Company effective January 2005 and apply to purchased receivables acquired after
December 31, 2004. The provisions of SOP 03-3 that relate to decreases in expected cash flows amend
previously followed guidance, the Accounting Standards Executive Committee Practice Bulletin 6,
Amortization of Discounts on Certain Acquired Loans, for consistent treatment and apply
prospectively to purchased receivables acquired before January 1, 2005. The
6
Company purchases pools of homogenous accounts receivable. Pools purchased after 2004 may be
aggregated into one or more static pools within each quarter, based on common risk characteristics.
Risk characteristics of purchased receivables are generally considered to be similar since
purchased receivables are usually in the late stages of the post charged-off collection cycle. The
Company therefore aggregates most pools purchased within each quarter. Pools purchased before 2005
may not be aggregated with other pool purchases. Each static pool, either aggregated or
non-aggregated, retains its own identity and does not change over the remainder of its life. Each
static pool is accounted for as a single unit for recognition of revenue, principal payments and
impairments.
Collections on each static pool are allocated to revenue and principal reduction based on the
estimated internal rate of return (IRR). The IRR is the rate of return that each static pool
requires to amortize the cost or carrying value of the pool to zero over its estimated life. Each
pools IRR is determined by estimating future cash flows, which are based on historical collection
data for pools with similar characteristics. The actual life of each pool may vary, but will
generally amortize between 36 and 84 months depending on the expected collection period for each
static pool. Monthly cash flows greater than revenue recognized will reduce the carrying value of
each static pool and monthly cash flows lower than revenue recognized will increase the carrying
value of the static pool. Each pool is reviewed at least quarterly and compared to historical
trends to determine whether each static pool is performing as expected. This comparison is used to
determine future estimated cash flows. If the revised cash flow estimates are greater than the
original estimates, the IRR is adjusted prospectively to reflect the revised estimate of cash flows
over the remaining life of the static pool. If the revised cash flow estimates are less than the
original estimates, the IRR remains unchanged and an impairment is recognized. If the cash flow
estimates increase subsequent to recording an impairment, reversal of the previously recognized
impairment is made prior to any increases to the IRR.
The cost recovery method prescribed by SOP 03-3 is used when collections on a particular
portfolio cannot be reasonably predicted. When appropriate, the cost recovery method may be used
for pools that previously had a yield assigned to them. Under the cost recovery method, no revenue
is recognized until the Company has fully collected the cost of the portfolio. As of March 31,
2008, the Company had 67 unamortized pools on the cost recovery method, including all healthcare
pools, with an aggregate carrying value of $21.1 million or about 6.4% of the total carrying value
of all purchased receivables. The Company had 51 unamortized pools on the cost recovery method with
an aggregate carrying value of $26.9 million, or about 7.8% of the total carrying value of all
purchased receivables as of December 31, 2007.
The agreements to purchase receivables typically include general representations and
warranties from the sellers covering account holder death, bankruptcy, fraud and settled or paid
accounts prior to sale. These representations and warranties permit the return of certain
ineligible accounts from the Company back to the seller. The general time frame to return accounts
is within 90 to 240 days from the date of the purchase agreement. Proceeds from returns, also
referred to as buybacks, are applied against the carrying value of the static pool.
Periodically the Company will sell, on a non-recourse basis, all or a portion of a pool to
third parties. The Company does not have any significant continuing involvement with the sold pools
subsequent to sale. Proceeds of these sales are compared to the carrying value of the accounts and
a gain or loss is recognized on the difference between proceeds received and carrying value, in
accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities a replacement of SFAS 125, as amended. The agreements to sell
receivables typically include general representations and warranties. Any accounts returned to the
Company under these representations and warranties, and during the negotiated time frame, are
netted against any gains on sale of purchased receivables or if they exceed the total reported
gains for the period as a loss on sale of purchased receivables, which would be accrued for if
material to the consolidated financial statements.
7
Changes in purchased receivable portfolios for the three months ended March 31, 2008 and 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Beginning balance
|
|
$
|
346,198,900
|
|
|
$
|
300,840,508
|
|
Investment in purchased receivables, net of buybacks
|
|
|
20,472,028
|
|
|
|
36,214,485
|
|
Cost of sale of purchased receivables, net of returns
|
|
|
(2,226
|
)
|
|
|
|
|
Cash collections
|
|
|
(100,264,281
|
)
|
|
|
(95,853,350
|
)
|
Purchased receivable revenues
|
|
|
63,722,688
|
|
|
|
66,782,034
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
330,127,109
|
|
|
$
|
307,983,677
|
|
|
|
|
|
|
|
|
Accretable yield represents the amount of revenue the Company can expect over the remaining
life of the existing portfolios. Nonaccretable yield represents the difference between the
remaining expected cash flows and the total contractual obligation outstanding (face value) of the
purchased receivables. Changes in accretable yield for the three months ended March 31, 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Beginning balance (1)
|
|
$
|
559,605,071
|
|
|
$
|
417,690,314
|
|
Revenue recognized on purchased receivables
|
|
|
(63,722,688
|
)
|
|
|
(66,782,034
|
)
|
Additions due to purchases during the period
|
|
|
19,883,169
|
|
|
|
38,371,419
|
|
Reclassifications (to) from nonaccretable yield
|
|
|
(15,474,731
|
)
|
|
|
19,818,438
|
|
|
|
|
|
|
|
|
Ending balance (2)
|
|
$
|
500,290,821
|
|
|
$
|
409,098,137
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The balances are based on the estimated remaining collections, which refers to the sum of all
future projected cash collections on our owned portfolios. The January 1, 2008 beginning
balance reflects the extension of certain portfolios lives from 60 to 84 months during 2007.
|
|
(2)
|
|
Accretable yields are a function of estimated remaining cash flows and are based on
historical cash collections. Please refer to Forward-Looking
Statements on page 20 and
Critical Accounting Policies on page 33 for further information regarding these estimates.
|
Cash collections for the three months ended March 31, 2008 and 2007 include collections from
fully amortized pools of which 100% of the collections were reported as revenue. Components of
revenue from fully amortized pools were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues from fully amortized pools:
|
|
|
|
|
|
|
|
|
Amortizing before the end of their expected life
|
|
$
|
8,470,055
|
|
|
$
|
5,273,827
|
|
Amortizing after their expected life
|
|
|
12,605,435
|
|
|
|
11,698,801
|
|
Accounted under the cost recovery method
|
|
|
1,176,610
|
|
|
|
1,489,854
|
|
|
|
|
|
|
|
|
Total revenue from fully amortized pools
|
|
$
|
22,252,100
|
|
|
$
|
18,462,482
|
|
|
|
|
|
|
|
|
Changes in purchased receivables portfolios under the cost recovery method for the period
ended March 31, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2008 (1)
|
|
|
2007
|
|
Portfolios under the cost recovery method:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
26,991,102
|
|
|
$
|
7,246,315
|
|
Addition of portfolios
|
|
|
2,069,185
|
|
|
|
1,973,328
|
|
Buybacks, impairments and resales adjustments
|
|
|
(718,072
|
)
|
|
|
(792,099
|
)
|
Cash collections on all portfolios under the cost recovery method until
fully amortized
|
|
|
(7,262,064
|
)
|
|
|
(668,186
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
21,080,151
|
|
|
$
|
7,759,358
|
|
|
|
|
|
|
|
|
8
|
|
|
(1)
|
|
The ending balance includes the first quarter of 2005 aggregate and healthcare portfolios
on the cost recovery method. The carrying values of the first quarter of 2005 aggregate and
all healthcare portfolios were $9.2 million and $7.2 million, respectively, of the total
carrying value of purchased receivables as of March 31, 2008. The carrying values of the
first quarter of 2005 aggregate and all healthcare portfolios were $12.0 million and $8.4
million, respectively, of the total carrying value of purchased receivables as of December
31, 2007.
|
During the three months ended March 31, 2008 and 2007, the Company recorded net impairments of
$0.4 million and $4.5 million, respectively, related to its purchased receivables and valuation
allowance for purchased receivables. The net impairment charge reduced revenue and the allowance
reduced the carrying value of the purchased receivable portfolios. Changes in the allowance for
receivable losses for the three months ended March 31, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Beginning balance
|
|
$
|
62,091,755
|
|
|
$
|
39,714,055
|
|
Impairments
|
|
|
1,795,533
|
|
|
|
4,714,000
|
|
Reversal of impairments
|
|
|
(1,411,250
|
)
|
|
|
(240,900
|
)
|
Deductions (1)
|
|
|
(1,236,133
|
)
|
|
|
(362,000
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
61,239,905
|
|
|
$
|
43,825,155
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Deductions represent impairments on fully amortized purchased receivable portfolios that were
written-off and cannot be reversed.
|
Seasonality
Collections within portfolios tend to be seasonally higher in the first and second quarters of
the year due to consumers receipt of tax refunds and other factors. Conversely, collections within
portfolios tend to be lower in the third and fourth quarters of the year due to consumers spending
in connection with summer vacations, the holiday season and other factors. However, revenue
recognized is relatively level due to the application of the provisions prescribed by SOP 03-3. In
addition, the Companys operating results may be affected to a lesser extent by the timing of
purchases of charged-off consumer receivables due to the initial costs associated with purchasing
and loading these receivables into the Companys systems. Consequently, income and margins may
fluctuate from quarter to quarter.
Collections from Third Parties
The Company regularly utilizes unaffiliated third parties, primarily attorneys and other
contingent collection agencies, to collect certain account balances on behalf of the Company in
exchange for a percentage of balances collected by the third party. The Company records the gross
proceeds received by the unaffiliated third parties as cash collections. The Company includes the
reimbursement of certain legal and other costs as cash collections. The Company records the
percentage of the gross cash collections paid to the third parties as a component of collections
expense. The percent of gross cash collections from such third party relationships were 28.9% and
23.9% for the three months ended March 31, 2008 and 2007, respectively.
9
Accrued Liabilities
As of March 31, 2008 and December 31, 2007, the total of accrued liabilities was $23,925,493
and $17,423,378, respectively. The details of the balances are identified in the following table.
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
Accrued payroll, benefits and bonuses
|
|
$
|
8,833,969
|
|
|
$
|
7,271,593
|
|
Fair value of derivative instruments
|
|
|
6,500,210
|
|
|
|
3,126,003
|
|
Deferred rent
|
|
|
3,665,191
|
|
|
|
3,754,365
|
|
Accrued general and administrative expenses
|
|
|
2,496,414
|
|
|
|
2,003,463
|
|
Deferred credits (cash advance)
|
|
|
1,435,279
|
|
|
|
|
|
Accrued interest expense
|
|
|
747,438
|
|
|
|
974,900
|
|
Other accrued expenses
|
|
|
246,992
|
|
|
|
293,054
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
23,925,493
|
|
|
$
|
17,423,378
|
|
|
|
|
|
|
|
|
Concentration of Risk
For the three months ended March 31, 2008 and 2007, the Company invested 52.0% and 71.6%,
respectively, in purchased receivables from three sellers. The top three sellers were different in
each period.
Interest Expense
Interest expense included interest on the Companys credit facilities, unused facility fees
and amortization of capitalized bank fees. Interest expense of
$19,769, related to software developed for internal use, was capitalized in the first
quarter of 2008.
Earnings Per Share
Earnings per share reflect net income divided by the weighted-average number of shares
outstanding. Diluted weighted average shares outstanding at March 31, 2008 and 2007 included
12,671 and 7,172 dilutive shares, respectively, related to outstanding stock options, deferred
stock units, restricted shares and restricted share units (referred
to as "share-based awards"). There were
740,085 and 288,936
outstanding share-based awards that were not included within the diluted weighted-average shares as their
exercise price exceeded the market price of the Companys stock at March 31, 2008 and 2007,
respectively.
Goodwill and Other Intangible Assets
Intangible assets with finite lives arising from business combinations are amortized over
their estimated useful lives, ranging from five to seven years, using the straight-line and
double-declining methods. As prescribed by SFAS 142, Goodwill and Other Intangible Assets (SFAS
142), goodwill and trademark and trade names with indefinite lives are not amortized. Goodwill and
other intangible assets are reviewed annually to assess recoverability or more frequently if
impairment indicators are present, in accordance with SFAS 142. Impairment charges are recorded for
intangible assets when the estimated fair value is less than the carrying value of that asset.
During the first quarter of 2008, the Company decided to discontinue its medical contingent
collection business, which led to an impairment of $0.4 million
for the net carrying value of customer contracts and relationships
intangible assets. This impairment is recorded in Impairment of
intangible assets in the consolidated statements of income.
Comprehensive Income
Components of comprehensive income are changes in equity other than those resulting from
investments by owners and distributions to owners. Net income is the primary component of
comprehensive income. The Companys only component of comprehensive income other than net income is
the change in unrealized gain or loss on derivatives qualifying as cash flow hedges, net of income
taxes. The aggregate amount of such changes to equity that have not yet been recognized in net
income are reported in the equity portion of the accompanying consolidated statements of financial
position as accumulated other comprehensive loss, net of income taxes. The accumulated
10
other comprehensive income (loss), net of tax for the three months ended March 31, 2008 and
2007 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
March 31, 2007
|
|
Opening balance
|
|
$
|
(2,012,127
|
)
|
|
$
|
|
|
Change
|
|
|
(2,174,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(4,186,135
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
Reclassifications
Certain amounts in the prior periods presented have been reclassified to conform to the
current period financial statement presentation. These reclassifications have no effect on
previously reported net income.
Recently Issued Accounting Pronouncements
SFAS No. 141 (R), Business Combinations and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS 141(R)),
and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of
ARB No. 51, (SFAS 160). These pronouncements are required to be adopted concurrently and are
effective for business combination transactions for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. Early
adoption is prohibited, thus the provisions of these pronouncements will be effective for the
Company in fiscal year 2009. The Company has not completed its analysis of the potential impact of
SFAS 141(R) and SFAS 160 on its consolidated statements of financial position, income or cash
flows.
2. Recapitalization
On April 24, 2007, the Company announced a recapitalization plan (the Recapitalization Plan)
to return approximately $150.0 million to the Companys shareholders. Pursuant to the
Recapitalization Plan, on June 12, 2007, the Company completed a modified Dutch auction tender
offer, resulting in the repurchase of approximately 2.0 million of the Companys common shares for
an aggregate purchase price of $37.2 million, or $18.75 per share.
On June 28, 2007, under a repurchase agreement announced on April 24, 2007, the Company
purchased shares from (i) its largest shareholder, (ii) its Chairman, President and Chief Executive
Officer, and (iii) its Senior Vice President and Chief Financial Officer. These shareholders
elected not to tender any shares in the tender offer and the repurchase agreement allowed them to
maintain their pro rata beneficial ownership interest in the Company after giving effect to the
tender offer and purchases under the repurchase agreement. The Company repurchased 2.0 million
common shares from these shareholders for an aggregate price of $37.8 million, or $18.75 per share.
On June 18, 2007, the Companys Board of Directors declared a special one-time cash dividend
of $2.45 per share, or $74.9 million in aggregate, which was paid on July 31, 2007 to holders of
record on July 19, 2007.
In order to fund these transactions, the Company obtained a $150.0 million term loan through a
new credit agreement, (the New Credit Agreement) aggregating $250.0 million, which was funded on
June 12, 2007, and terminated its former credit agreement. Refer to Note 3, Notes Payable for
further information.
As a result of the payment of the special one-time cash dividend, the Company adjusted the
number of deferred stock units outstanding under the Companys 2004 stock incentive plan, as
amended, and also changed the exercise price and number of outstanding stock options issued under
the 2004 stock incentive plan, as amended, in order to avoid dilution to holders of the deferred
stock units and outstanding stock options. Refer to Note 6, Share-Based Compensation for further
information.
During the quarter ended June 30, 2007, the Company incurred approximately $1.1 million in
transaction costs associated with the Dutch auction tender offer and recorded these costs as a
reduction in stockholders equity.
11
In addition, the Company incurred approximately $2.3 million in fees, which were recorded as a
deferred financing cost and included in other assets in the consolidated statements of financial
position.
During the quarter ended March 31, 2008, the Company recorded interest expense of
approximately $3.2 million in connection with borrowings under the New Credit Agreement and
amortized approximately $0.1 million in deferred financing costs. During the quarter ended March
31, 2007, the Company recorded interest expense of approximately $0.2 in connection with borrowings
under the former credit agreement and amortized approximately $0.1 in deferred financing costs.
3. Notes Payable
The New Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a
syndicate of lenders named therein, that originated on June 5, 2007 was amended on March 10, 2008
(the Amended New Credit Agreement). Under the terms of the Amended New Credit Agreement, the
Company has a five-year $100 million revolving credit facility (the Revolving Credit Facility)
and a six-year $150 million term loan facility (the Term Loan Facility and, together with the
Revolving Credit Facility, the Amended New Credit Facilities). The Amended New Credit Facilities
bear interest at prime or up to 125 basis points over prime depending upon the Companys liquidity,
as defined in the Amended New Credit Agreement. Alternately, at the Companys discretion, the
Company may borrow by entering into one, two, three, six or twelve-month contracts based on the
London Inter Bank Offer Rate (LIBOR) at rates between 150 to 250 basis points over the respective
LIBOR rates, depending on the Companys liquidity. The Companys Revolving Credit Facility includes
an accordion loan feature that allows it to request a $25.0 million increase as well as sublimits
for $10.0 million of letters of credit and for $10.0 million of swingline loans. The Amended New
Credit Agreement is secured by a first priority lien on all of the Companys assets. The Amended
New Credit Agreement also contains certain covenants and restrictions that the Company must comply
with, which, as of March 31, 2008 were:
|
|
|
Leverage Ratio (as defined) cannot exceed (i) 1.25 to 1.0 at any time on or before June
29, 2009, (ii) 1.125 to 1.0 at any time on or after June 30, 2009 and on or before December
30, 2010 or (iii) 1.0 to 1.0 at any time thereafter;
|
|
|
|
|
Ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth cannot
exceed (i) 3.0 to 1.0 at any time on or before September 29, 2008, (ii) 2.75 to 1.0 at any
time on or after September 30, 2008 and on or before December 30, 2008, (iii) 2.5 to 1.0 at
any time on or after December 31, 2008 and on or before December 30, 2009, (iv) 2.25 to 1.0
at any time on or after December 31, 2009 and on or before December 30, 2010, (v) 2.0 to
1.0 at any time on or after December 31, 2010 and on or before December 30, 2011 or (vi)
1.5 to 1.0 to any time thereafter; and
|
|
|
|
|
Consolidated Tangible Net Worth must equal or exceed $80.0 million plus 50% of positive
consolidated net income for three consecutive fiscal quarters ending December 31, 2007 and
for each fiscal year ending thereafter, such amount to be added as of December 31, 2007 and
as of the end of each such fiscal year thereafter.
|
The Amended New Credit Agreement contains a provision that requires the Company to repay
Excess Cash Flow, as defined, to reduce the indebtedness outstanding under its Amended New Credit
Agreement. The repayment of the Companys Excess Cash Flow is effective with the issuance of our
annual audited consolidated financial statements for fiscal year 2008. The repayment provisions
are:
|
|
|
50% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was greater than
1.0 to 1.0 as of the end of such fiscal year;
|
|
|
|
|
25% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was less than or
equal to 1.0 to 1.0 but greater than 0.875 to 1.0 as of the end of such fiscal year; or
|
|
|
|
|
0% if the Leverage Ratio is less than or equal to 0.875 to 1.0 as of the end of such
fiscal year.
|
12
Commitment fees on the unused portion of the Revolving Credit Facility are paid quarterly, in
arrears, and are calculated as an amount equal to a margin of 0.25% to 0.50%, depending on the
Companys liquidity, on the average amount available on the Revolving Credit Facility.
The Amended New Credit Agreement requires the Company to effectively cap, collar or exchange
interest rates on a notional amount of at least 25% of the outstanding principal amount of the Term
Loan Facility. Refer to Note 4, Derivative Financial Instruments.
The Company had $163.9 million and $191.3 million principal balance outstanding on its Amended
New Credit Facilities at March 31, 2008 and December 31, 2007, respectively, of which $148.9
million and $149.3 million was part of the Term Loan Facility at March 31, 2008 and December 31,
2007, respectively, and $15.0 million and $42.0 million was part of the Revolving Credit Facility,
respectively. The Term Loan Facility requires quarterly repayments totaling $1.5 million annually
until March 2013 with the remaining balance due in June 2013.
The Company believes it is in compliance with all terms of the Amended New Credit Agreement as
of March 31, 2008.
4. Derivative Financial Instruments
The Company may periodically enter into derivative financial instruments, typically interest
rate swap agreements, to reduce its exposure to fluctuations in interest rates on variable-rate
debt and their impact on earnings and cash flows. The Company does not utilize derivative financial
instruments with a level of complexity or with a risk greater than the exposure to be managed nor
does it enter into or hold derivatives for trading or speculative purposes. The Company
periodically reviews the creditworthiness of the swap counterparty to assess the counterpartys
ability to honor its obligation.
Based on the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities as amended and interpreted, the Company records derivative financial instruments at
fair value. Refer to Note 9, Fair Value for additional information.
In September 2007, as required by the Companys Amended New Credit Agreement, the Company
entered into an amortizing interest rate swap agreement whereby, on a quarterly basis, it swaps
variable rates under its Term Loan Facility for fixed rates. At inception and for the first year,
the notional amount of the swap is $125 million. Every year thereafter, on the anniversary of the
swap agreement the notional amount will decrease by $25 million. This swap agreement expires on
September 13, 2012.
The Companys financial derivative instrument is designated and qualifies as a cash flow hedge
and the effective portion of the gain or loss on such hedge is reported as a component of other
comprehensive income in the consolidated financial statements. To the extent that the hedging
relationship is not effective, the ineffective portion of the change in fair value of the
derivative is recorded in other income (expense). For the three months ended March 31, 2008, the
ineffective portion of the change in fair value of the derivative recorded in earnings was $799.
Hedges that receive designated hedge accounting treatment are evaluated for effectiveness at the
time that they are designated as well as through the hedging period. As of March 31, 2008, the
Company does not have any fair value hedges.
The fair value of the Companys cash flow hedge has been recorded as a liability and is
included with accrued liabilities in the consolidated statements of financial position. The fair
value was $6,500,210 and $3,126,003 at March 31, 2008 and December 31, 2007, respectively. Changes
in fair value were recorded as an adjustment to other comprehensive income, net of tax, of
$4,186,135 and $2,012,127 at March 31, 2008 and December 31, 2007, respectively. Amounts in other
comprehensive income will be reclassified into earnings under certain situations; for example, if
the occurrence of the transaction is no longer probable or no longer qualifies for hedge
accounting. The Company does not expect to reclassify any amount currently included in other
comprehensive income into earnings within the next 12 months.
13
5. Property and Equipment
Property and equipment, having estimated useful lives ranging from three to ten years
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
Computers and software
|
|
$
|
15,184,362
|
|
|
$
|
12,838,395
|
|
Furniture and fixtures
|
|
|
10,121,378
|
|
|
|
10,074,927
|
|
Leasehold improvements
|
|
|
2,170,672
|
|
|
|
2,156,864
|
|
Equipment under capital lease
|
|
|
133,063
|
|
|
|
133,063
|
|
Automobiles
|
|
|
51,709
|
|
|
|
51,709
|
|
|
|
|
|
|
|
|
Total property and equipment, cost
|
|
|
27,661,184
|
|
|
|
25,254,958
|
|
Less accumulated depreciation
|
|
|
(15,182,276
|
)
|
|
|
(14,248,300
|
)
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
12,478,908
|
|
|
$
|
11,006,658
|
|
|
|
|
|
|
|
|
6. Share-Based Compensation
The Company adopted a stock incentive plan (the Stock Incentive Plan) during February 2004
that authorizes the use of stock options, stock appreciation rights, restricted stock grants and
units, performance share awards and annual incentive awards to eligible key associates,
non-associate directors and consultants. The Company has reserved 3,700,000 shares of common stock,
in addition to treasury shares, for issuance in conjunction with all options and other stock-based
awards to be granted under the plan. The purpose of the plan is (1) to promote the best interests
of the Company and its stockholders by encouraging associates and other participants to acquire an
ownership interest in the Company, thus aligning their interests with those of stockholders and (2)
to enhance the ability of the Company to attract and retain qualified associates, non-associate
directors and consultants. No participant may be granted options during any one fiscal year to
purchase more than 500,000 shares of common stock. The Company Records share-based compensation in
accordance with SFAS No. 123(R), Share-Based Payment, a revision of SFAS 123, Accounting for
Stock-Based Compensation.
The Company amended its Stock Incentive Plan in May 2007 to expand an anti-dilution provision
of the plan. The additional compensation expense resulting from the amendment to the Stock
Incentive Plan for the three months ended March 31, 2008 was $1,013, relating to nonvested
associate stock options.
As discussed in Note 2, Recapitalization the Company commenced a recapitalization
transaction, including declaration of a special one-time cash dividend, in the quarter ended June
30, 2007. The payment of the special one-time cash dividend resulted in an increase in the number
of deferred stock units outstanding and a change to the exercise price and number of outstanding
stock options under the anti-dilution provisions of the stock incentive plan. The methodology used
to adjust the awards was consistent with Internal Revenue Code Section 409A and 424 and the
proposed regulations promulgated thereunder, compliance with which was necessary to avoid adverse
tax issues for the holders of awards. Such methodology also results in the fair value of the
adjusted awards post-dividend to be equal to that of the unadjusted awards pre-dividend, with the
result that there is no additional compensation expense in accordance with accounting for
modifications to awards under SFAS 123(R).
Based on historical experience, the Company used an annual forfeiture rate of 15% for
associate grants. Grants made to non-associate directors were assumed to have no forfeiture rates
associated with them due to immediate vesting of grants to this group.
The Companys share-based compensation arrangements are described below.
Stock Options
The Company utilizes the Whaley Quadratic approximation model, an intrinsic value method, to
calculate the fair value of the stock awards on the date of grant using the assumptions noted in
the following table. In addition, changes to the subjective input assumptions can result in
different fair market value estimates. With regard to the Companys assumptions stated below, the
expected volatility is based on the historical volatility of the Companys stock and managements
estimate of the volatility over the contractual term of the options. The expected term of the
14
option is based on managements estimate of the period of time for which the options are
expected to be outstanding. The risk-free rate is derived from the five-year U.S. Treasury yield
curve on the date of grant.
|
|
|
|
|
|
|
Options issue year:
|
|
2008
|
|
2007
|
Expected volatility
|
|
|
|
|
|
45.30% - 46.92%
|
Expected dividends
|
|
|
|
|
|
0.00%
|
Expected term
|
|
|
|
|
|
5 Years
|
Risk-free rate
|
|
|
|
|
|
3.42% - 4.98%
|
As of March 31, 2008, the Company had options outstanding for 684,295 shares of its common
stock under the 2004 stock incentive plan. These options have been granted to key associates and
non-associate directors of the Company. Option awards are generally granted with an exercise price
equal to the market price of the Companys stock at the date of grant and have 10-year contractual
terms. The options granted to key associates generally vest between one and five years from the
grant date whereas the options granted to non-associate directors generally vest immediately. The
fair values of the stock options are expensed on a straight-line basis over the vesting period. The
related expense for the three months ended March 31, 2008 includes $51,170 in salaries and benefits
for associates. The related expense for the three months ended March 31, 2007 includes $2,204 in
administrative expenses for non-associate directors and $18,824 in salaries and benefits for
associates. The total tax benefit recognized in the consolidated statements of income was $19,496
and $7,864 for the three months ended March 31, 2008 and 2007, respectively. The following
summarizes all stock option related transactions from January 1, 2008 through March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value
|
|
January 1, 2008
|
|
|
691,599
|
|
|
$
|
14.03
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(7,304
|
)
|
|
|
20.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
684,295
|
|
|
|
13.96
|
|
|
|
8.14
|
|
|
$
|
71,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2008
|
|
|
428,434
|
|
|
$
|
16.34
|
|
|
|
7.46
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair value of the options granted during the three months ended March 31,
2007 was $7.32. No options were exercised during the three months ended March 31, 2008 and 2007.
As of March 31, 2008, there was $1,073,883 of total unrecognized compensation expense related
to nonvested stock options granted under the stock incentive plan. The unrecognized compensation
expense is comprised of $927,374 for options expected to vest and $146,509 for options not expected
to vest. The unrecognized compensation expense options expected to vest is expected to be
recognized over a weighted-average period of 3.40 years.
Deferred Stock Units
As of March 31, 2008, the Company had granted 12,171 deferred stock units (DSUs) to
non-associate directors under the Companys 2004 Stock Incentive Plan. DSUs represent our
obligation to deliver one share of common stock for each unit at a later date elected by the
Director, such as when the Directors service on the Board ends. DSUs have no vesting provisions
and are not subject to forfeiture. DSUs do not have voting rights but would receive common stock
dividend equivalents in the form of additional DSUs. The value of each DSU is equal to the market
price of the Companys stock at the date of grant.
The fair value of the DSUs granted during the three months ended March 31, 2008 were expensed
immediately to correspond with the vesting schedule. The related expense for the three months ended
March 31, 2008 and 2007 includes $31,259 and $28,148 in administrative expenses.
15
The following summarizes all DSU related transactions from January 1, 2008 through March 31,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
DSUs
|
|
|
Fair Value
|
|
January 1, 2008
|
|
|
8,965
|
|
|
$
|
13.44
|
|
Granted
|
|
|
3,206
|
|
|
|
9.75
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
|
12,171
|
|
|
$
|
12.47
|
|
|
|
|
|
|
|
|
As of March 31, 2008, there was no unrecognized expense related to nonvested DSUs.
Restricted Shares
The Company grants restricted shares and restricted share units (restricted shares and
restricted share units are referred to as RSUs) to key associates under the Stock Incentive Plan.
Each RSU is equal to one share of the Companys common stock. As of March 31, 2008, the Company had
RSUs outstanding for 289,010 shares of its common stock. The value of the RSUs is equal to the
market price of the Companys stock at the date of grant. The RSUs generally vest over two to four
years based upon service or performance conditions.
The fair value of the RSUs is expensed on a straight-line basis over the vesting period based
on the number of RSUs that are expected to vest. For RSUs with performance conditions, if goals are
not expected to be met, the compensation expense previously recognized is reversed. The related
expense for the three months ended March 31, 2008 and 2007 was $164,004 and $44,968, respectively,
included in salaries and benefits.
The following summarizes all nonvested RSU related transactions from January 1, 2008 through
March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant-Date
|
Nonvested RSUs
|
|
RSUs
|
|
Fair Value
|
Nonvested at January 1, 2008
|
|
|
290,760
|
|
|
$
|
11.12
|
|
Forfeited
|
|
|
(1,750
|
)
|
|
$
|
9.28
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2008
|
|
|
289,010
|
|
|
$
|
11.13
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008, there was $2,893,536 of total unrecognized expense related to nonvested
RSUs. The total unrecognized expense is comprised of $1,886,363 for RSUs expected to vest and
$1,007,173 for shares not expected to vest. The unrecognized compensation expense for RSUs
expected to vest is expected to be recognized over a period of 3.05 years. There were no RSUs
vested as of March 31, 2008.
7. Contingencies and Commitments
Litigation Contingencies
The Company is involved in certain legal matters that management considers incidental to its
business. The Company recognizes liabilities for contingencies and commitments when a loss is
probable and estimable. The company recognizes expense for defense costs when incurred.
Management has evaluated pending and threatened litigation against the Company as of March 31,
2008 and does not believe exposure to be material.
Other Contingencies
During the first quarter, the Company entered into an agreement with a third party collecting
on its behalf. Under this agreement, the Company will receive a total cash advance of $7.0 million,
in varying installments, through November 2009. The Company received the first installment of $1.5
million in the quarter ended March 31, 2008, and incurred approximately $0.1 million in court cost
expenses, which were offset against a portion of the cash advance. A liability equal to the unused
cash advance is included in accrued liabilities in the consolidated statements of financial
position.
16
The agreement contains performance conditions for both parties and the Company may be required
to refund a portion of the cash advance in certain situations.
8. Income Taxes
The Company recorded an income tax provision of $4.2 million and $5.9 million for the three
months ended March 31, 2008 and 2007, respectively. The provision for income tax expense reflects
an effective income tax rate of 38.1% and 37.5% for the three months ended March 31, 2008 and 2007,
respectively.
The Company records interest and penalties related to unrecognized tax benefits as income tax
expense. Interest and penalties related to the Companys uncertain tax positions at January 1, 2008
were not significant.
The federal income tax returns of the Company for 2004, 2005, 2006, and 2007 are subject to
examination by the IRS, generally for three years after the latter of their extended due date or
when they are filed. The significant state income tax returns of the Company are subject to
examination by the state taxing authorities, for various periods generally up to four years.
9. Fair Value
The Company partially adopted SFAS No. 157, Fair Value Measurements (SFAS 157) as of
January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS 157 applies where other accounting
pronouncements require or permit fair value measurements; it does not require any new fair value
measurements. According to FASB Staff Position No. FAS 157-2, the application of SFAS 157 to
certain non-financial assets and liabilities is deferred to fiscal years beginning after November
15, 2008. The Companys goodwill and other intangible assets are measured at fair value on a
recurring basis for impairment assessment. The deferral of SFAS 157 applies to these items.
The partial adoption of SFAS 157 did not have a material impact on the Companys consolidated
statements of financial position, income or cash flows. The Company has chosen not to adopt SFAS
No. 159, Fair Value Option.
The Company uses the following methods and assumptions to estimate the fair value of financial
instruments.
Interest Rate Swap Agreement
The fair value of the interest rate swap agreement represents the amount the Company would
receive or pay to terminate or otherwise settle the contract at the consolidated statements of
financial position date, taking into consideration current unearned gains and losses. The interest
rate swap agreement was valued using Level 2 inputs, which are inputs other than quoted prices that
are observable, either directly or indirectly. The fair value was determined using a market
approach, and is based on the three-month LIBOR curve for the remaining term of the swap agreement.
Refer to Note 4, Derivative Financial Instruments, for additional information about the fair
value of the interest rate swap.
The
partial adoption of SFAS 157 does not apply to the Companys purchased receivables or credit
facilities since these financial instruments are not recorded at fair
value. SFAS No. 107, Disclosures about Fair Value of Financial Instruments establishes the
disclosures about fair value for these financial instruments.
The Company uses the following methods and assumptions to estimate the fair value of financial
instruments.
Purchased Receivables
The Company initially records purchased receivables at cost, which is discounted from the
contractual receivable balance. The ending balance of the purchased receivables is reduced as cash
is received based upon the guidance of PB6 and SOP 03-3. The carrying value of receivables was
$330,127,109 and $346,198,900 at March 31, 2008 and December 31, 2007, respectively. The Company
computes fair value of these receivables by discounting the future
17
cash flows generated by its forecasting model using an adjusted weighted average cost of
capital, reflective of other market participants cost of capital. The fair value of the purchased
receivables approximated carrying value at both March 31, 2008 and December 31, 2007.
Credit Facilities
The Companys Amended New Credit Facilities had carrying amounts of $163,875,000 and
$191,250,000 as of March 31, 2008 and December 31, 2007, respectively. The Company computed the
approximate fair value of the Amended New Credit Facilities to be
$137,286,077 and $158,652,946 as of
March 31, 2008 and December 31, 2007, respectively. The fair value of the Companys Amended New
Credit Facilities is based on borrowing rates currently available to the Company and similar market
participants.
18
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Company Overview
We have been purchasing and collecting defaulted or charged-off accounts receivable portfolios
from consumer credit originators since the formation of our predecessor company in 1962.
Charged-off receivables are the unpaid obligations of individuals to credit originators, such as
credit card issuers, consumer finance companies, healthcare providers, retail merchants,
telecommunications and utility providers. Since these receivables are delinquent or past due, we
are able to purchase them at a substantial discount. We purchase and collect charged-off consumer
receivable portfolios for our own account as we believe this affords us the best opportunity to use
long-term strategies to maximize our profits.
The prices we paid for charged-off accounts receivable portfolios (paper) had steadily
increased from 2002 through mid 2007. During the latter half of 2007, the prices we paid for
comparable paper began to decline. This decline continued into the first quarter of 2008, but
prices remain at elevated levels compared to historical low prices that existed from 2000 to 2002.
We believe the primary reason for the continued decline in pricing is largely a result of the
liquidity crisis and the resulting expectation of a decline in the consumers ability to repay
their current obligations as well as their past due debts. Debt buyers cannot continue to pay the
same high prices if consumers ability to pay is reduced. The liquidity crisis stems from the
decline of housing values and the related increase in mortgage defaults. In addition, we believe
that some competitors are experiencing their own liquidity crises as their ability to fund
portfolio purchases has been reduced when compared to much of the time since our IPO in 2004.
We believe that increases in charge off rates being experienced by major credit card issuers is leading to an
increase in supply of receivables available for sale.
During the three months ended March 31, 2008, we invested $22.3 million (net of buybacks) in
charged-off consumer receivable portfolios, with an aggregate face value of $548.5 million, or
4.07% of face value. In the three months ended March 31, 2007, we invested $36.3 million (net of
buybacks through March 31, 2008) in paper, with an aggregate face amount of $765.1 million, or
4.74% of face value. Our debt purchasing metrics (dollars invested, face amount, average purchase
price, types of paper and sources of paper) may vary significantly from quarter to quarter.
Net income for the three months ended March 31, 2008 was $6.8 million, a decline of 31.2% from
$9.9 million for the three months ended March 31, 2007. Contributing to our decline in net income
was higher amortization of purchased receivables in determining purchased receivable revenues and
increased interest expense we incurred subsequent to the recapitalization transaction completed in
July 2007. Cash collections increased by $4.4 million or 4.6% to $100.3 million for the three
months ended March 31, 2008 compared to $95.9 million for the three months ended March 31, 2007.
Despite the $4.4 million increase in cash collections, purchased receivable revenues declined by
$3.1 million because amortization increased by $7.5 million. Amortization of purchased receivables,
the difference between cash collections and purchased receivable revenues, increased to 36.4% of
cash collections for the three months ended March 31, 2008 versus 30.3% in the three months ended
March 31, 2007. The increased purchased receivables amortization rate is a direct result of the
elevating pricing environment that we have experienced over the last
several years in addition to placing the first quarter of 2005
aggregate and all healthcare portfolios on the cost recovery method. As prices have
risen, our expected multiple of purchase price has come down. The lower multiple of purchase price
expected to be collected, generally results in a lower IRR to be assigned for revenue recognition
purposes. When lower yields are assigned, a larger proportion of our cash collections are treated
as purchased receivable amortization instead of purchase receivable revenues. Interest expense
increased by $3.0 million in the three months ended March 31, 2008 when compared to the three
months ended March 31, 2007. Average borrowings on our Amended New Credit Facilities in 2008 were
$173.5 million for the three months ended March 31, 2008, but only $8.0 million for the three
months ended March 31, 2007. The increased borrowings are primarily the result of the $150.0
million borrowed to fund the return of capital to shareholders in
June and July of 2007. Secondarily,
we also have borrowed to fund our purchase of paper since late 2006. As a result of these two
factors, interest expense increased by $3.0 million to $3.3 million in the three months ended March
31, 2008 compared to $0.3 million in the three months ended March 31, 2007.
Total operating expenses were $50.1 million for the three months ended March 31, 2008 a
decrease of $1.2 million from $51.3 million in the three months ended March 31, 2007. As a
percentage of cash collections, operating expenses were 50.0% and 53.4% for the three months ended
March 31, 2008 and 2007, respectively. Salaries and
19
benefits, collections expense and occupancy costs declined, compared to the three months ended
March 31, 2007, by $0.5 million, $1.0 million and $0.4 million, respectively. Administrative
expenses increased by $0.5 million to $2.7 million in the three months ended March 31, 2008
compared to $2.2 million in the three months ended March 31, 2007. Other operating expenses,
including depreciation and amortization, restructuring charges and impairment of intangible assets
increased by $0.2 million in the three months ended March 31, 2008 compared to March 31, 2007. The
reduced salaries and benefits costs reflect an increasing portion of our cash collections coming
from outside attorneys and agencies. Our collections from third parties relationships (attorneys
and collection agencies) have increased to 28.9% of total cash collections for the three months
ended March 31, 2008 from 23.9% for the three months ended March 31, 2007. Total forwarding fees
paid on cash collections from these third party relationships have increased to $8.4 million from
$6.6 million in the three months ended March 31, 2008 versus the three months ended March 31, 2007.
The remaining expenses included in collections expense declined by $2.8 million during the same
period. The $2.8 million decline in the three months ended March 31, 2008 primarily reflected
reduced mailing, data provider and legal costs. These savings were realized from a combination of
reduced in house collections, better expense management and the decision to temporarily defer some
legal expenses as we enhanced our predictive modeling capabilities and refined our ability to
forecast costs and resulting collections in the legal collection channel. Occupancy expenses
declined by $0.4 million in the three months ended March 31, 2008 versus the three months ended
March 31, 2007 resulting primarily from the consolidation of two call centers during 2007.
We partially adopted SFAS No. 157 as of January 1, 2008. According to FASB Staff Position No.
FAS 157-2, the application of SFAS 157 to certain non-financial assets and liabilities is deferred
to fiscal years beginning after November 15, 2008. Our goodwill and other intangible
assets are measured at fair value on a recurring basis for impairment assessment. The deferral of
SFAS 157 applies to these items. Adoption of SFAS 157 did not have a material impact on our
consolidated statements of financial position, income or cash flows. We have chosen not to adopt
SFAS No. 159, Fair Value Option.
Forward-Looking Statements
This report contains forward-looking statements that involve risks and uncertainties and that
are made in good faith pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements include, without limitation, statements about
future events or our future financial performance. In some cases, forward-looking statements can be
identified by terminology such as may, will, should, expect, anticipate, intend,
plan, believe, estimate, potential or continue, the negative of these terms or other
comparable terminology. These statements involve a number of risks and uncertainties. Actual events
or results may differ materially from any forward-looking statement as a result of various factors,
including those we discuss in our annual report on Form 10-K for the year ended December 31, 2007
in the section titled Risk Factors and elsewhere in this report.
Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Except as required by law, we undertake no obligation to update publicly any forward-looking
statements for any reason after the date of this report to conform these statements to actual
results or to changes in our expectations. Factors that could affect our results and cause them to
materially differ from those contained in the forward-looking statements include the following:
|
|
|
our ability to purchase charged-off receivable portfolios on acceptable terms and in
sufficient amounts;
|
|
|
|
|
our ability to recover sufficient amounts on our charged-off receivable portfolios;
|
|
|
|
|
our ability to hire and retain qualified personnel;
|
|
|
|
|
a decrease in collections if bankruptcy filings increase or if bankruptcy laws or other
debt collection laws change;
|
|
|
|
|
a decrease in collections as a result of negative attention or news regarding the debt
collection industry and debtors willingness to pay the debt we acquire;
|
20
|
|
|
our ability to make reasonable estimates of the timing and amount of future cash
receipts and values and assumptions underlying the calculation of the net impairment
charges for purposes of recording purchased receivable revenues in accordance with
Accounting Standards Executive Committee Statement of Position 03-3 as well as the
Accounting Standards Executive Committee Practice Bulletin 6;
|
|
|
|
|
our ability to acquire and to collect on charged-off receivable portfolios in industries
in which we have little or no experience;
|
|
|
|
|
our ability to maintain existing, and secure additional financing on acceptable terms;
|
|
|
|
|
the loss of any of our executive officers or other key personnel;
|
|
|
|
|
the costs, uncertainties and other effects of legal and administrative proceedings;
|
|
|
|
|
our ability to effectively manage excess capacity, reduce workforce or close remote call
center locations;
|
|
|
|
|
the temporary or permanent loss of our computer or telecommunications systems, as well
as our ability to respond to changes in technology and increased competition;
|
|
|
|
|
changes in our overall performance based upon significant macroeconomic conditions;
|
|
|
|
|
changes in interest rates could adversely affect earnings or cash flows;
|
|
|
|
|
our ability to substantiate our application of tax rules against examinations and
challenges made by tax authorities; and
|
|
|
|
|
other unanticipated events and conditions that may hinder our ability to compete.
|
21
Results of Operations
The following table sets forth selected consolidated statements of income data expressed as a
percentage of total revenues and as a percentage of cash collections for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Revenues
|
|
Percent of Cash Collections
|
|
|
Three Months Ended March 31,
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased receivable revenues, net
|
|
|
99.0
|
%
|
|
|
99.2
|
%
|
|
|
63.6
|
%
|
|
|
69.7
|
%
|
Gain on sale of purchased receivables
|
|
|
0.3
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
Other revenue, net
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
64.2
|
|
|
|
70.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
34.1
|
|
|
|
33.3
|
|
|
|
21.9
|
|
|
|
23.4
|
|
Collections expense
|
|
|
34.3
|
|
|
|
34.3
|
|
|
|
22.0
|
|
|
|
24.1
|
|
Occupancy
|
|
|
3.0
|
|
|
|
3.5
|
|
|
|
1.9
|
|
|
|
2.4
|
|
Administrative
|
|
|
4.1
|
|
|
|
3.3
|
|
|
|
2.7
|
|
|
|
2.3
|
|
Restructuring charges
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
0.1
|
|
Depreciation and amortization
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
1.0
|
|
|
|
1.1
|
|
Impairment of intangible assets
|
|
|
0.7
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
(Gain) loss on disposal of equipment
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
77.8
|
|
|
|
76.2
|
|
|
|
50.0
|
|
|
|
53.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
22.2
|
|
|
|
23.8
|
|
|
|
14.2
|
|
|
|
16.8
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Interest expense
|
|
|
(5.2
|
)
|
|
|
(0.4
|
)
|
|
|
(3.3
|
)
|
|
|
(0.3
|
)
|
Other
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
17.0
|
|
|
|
23.4
|
|
|
|
10.9
|
|
|
|
16.5
|
|
Income taxes
|
|
|
6.5
|
|
|
|
8.8
|
|
|
|
4.1
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
10.5
|
%
|
|
|
14.6
|
%
|
|
|
6.8
|
%
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 Compared To Three Months Ended March 31, 2007
Revenue
Total revenues were $64.4 million for the three months ended March 31, 2008, a decrease of
$2.9 million, or 4.4%, from total revenues of $67.3 million for the three months ended March 31,
2007. Purchased receivable revenues were $63.7 million for the three months ended March 31, 2008, a
decrease of $3.1 million, or 4.6%, from the three months ended March 31, 2007 amount of $66.8
million. Purchased receivable revenues reflect an amortization rate, or the difference between cash
collections and revenue, of 36.4%, an increase of 6.1%, from the amortization rate of 30.3% for the
three months ended March 31, 2007. The increased amortization rate is primarily due to lower
average internal rates of return assigned to recent years purchases as well as placing the first
quarter of 2005 aggregate and all healthcare portfolios on the cost recovery method. Purchased
receivable revenues reflect net impairments recognized during the three months ended March 31, 2008
and 2007 of $0.4 million and $4.5 million, respectively. Cash collections on charged-off consumer
receivables increased 4.6% to $100.3 million for the three months ended March 31, 2008 from $95.9
million for the same period in 2007. Cash collections for the three months ended March 31, 2008 and
2007 include collections from fully amortized portfolios of $22.3 million and $18.5 million,
respectively, of which 100% were reported as revenue.
During the three months ended March 31, 2008, we acquired charged-off consumer receivable
portfolios with an aggregate face value of $548.5 million at a cost of $22.3 million, or 4.07% of
face value, net of buybacks. Included in these purchase totals were 35 portfolios with an aggregate
face value of $206.8 million at a cost of $11.1 million, or 5.35% of face value, which were
acquired through 11 forward flow contracts. Revenues on portfolios purchased from our top three
sellers during vintage years 1997 through 2008 were $17.8 million and $18.5 million during the
three months ended March 31, 2008 and 2007, respectively, with the same sellers included in the top
three in both three-month periods. During the three months ended March 31, 2007, we acquired
charged-off consumer receivable
22
portfolios with an aggregate face value of $765.1 million at a cost of $36.3 million, or 4.74%
of face value (adjusted for buybacks through March 31, 2008). Included in these purchase totals
were 15 portfolios with an aggregated face value of $55.5 million at a cost of $2.7 million, or
4.80% of face value (adjusted for buybacks through March 31, 2008), which were acquired through
five forward flow contracts. From period to period we may buy charged-off receivables of varying
age, types and cost. As a result, the cost of our purchases, as a percent of face value, may
fluctuate from one period to the next.
Operating Expenses
Total operating expenses were $50.1 million for the three months ended March 31, 2008, a
decrease of $1.2 million, or 2.3%, compared to total operating expenses of $51.3 million for the
three months ended March 31, 2007. Total operating expenses were 50.0% of cash collections for the
three months ended March 31, 2008, compared with 53.4% for the same period in 2007. The decrease as
a percent of cash collections was due to decreases in collections expense, salaries and benefits
and occupancy, and was partially offset by an increase in administrative expense. Operating expenses
are traditionally measured in relation to revenues. However, we measure operating expenses in
relation to cash collections. We believe this is appropriate because of varying amortization rates,
which is the difference between cash collections and revenues recognized, from period to period,
due to seasonality of collections and other factors that can distort the analysis of operating
expenses when measured against revenues. Additionally, we believe that the majority of our
operating expenses are variable in relation to cash collections.
Salaries
and Benefits.
Salaries and benefits expense were $21.9 million for the three months
ended March 31, 2008, a decrease of $0.5 million, or 2.3%,
compared to salaries and benefits expense
of $22.4 million for the three months ended March 31, 2007.
Salaries and benefits expense were 21.9%
of cash collections for the three months ended March 31, 2008, compared with 23.4% for the same
period in 2007. Salaries and benefits expense decreased primarily because an increasing portion of
our cash collections came from outside attorneys and agencies for the three months ended March 31,
2008 compared to the same period in 2007. The decrease was partially offset by an increase in
equity compensation expense.
Since going public in 2004, we had granted equity compensation only to certain key associates
and non-associate directors. During 2007, we began issuing equity awards to a broader group of
management associates and expanded the use of performance conditions relating to some equity grants
for senior executives. We recognized $0.2 million and $0.1 million in salary and benefit expenses
for the quarter ended March 31, 2008 and 2007, respectively, as it related to stock-based
compensation awards granted to associates. As of March 31, 2008, there was $4.0 million of total
unrecognized compensation expense related to nonvested awards of which $1.2 million was expected to
vest over a weighted average period of 3.16 years. As of March 31, 2007, there was $0.7 million
total unrecognized compensation expense related to nonvested awards which was expected to vest over
a weighted average period of 2.90 years.
Collections Expense.
Collections expense was $22.1 million for the three months ended March
31, 2008, a decrease of $1.0 million, or 4.2%, compared to collections expense of $23.1 million for
the three months ended March 31, 2007. Collections expense was 22.0% of cash collections during the
three months ended March 31, 2008 compared with 24.1% for the same period in 2007. The collections
expense decreased primarily due to a $2.8 million decline in
mailing, data provider and legal costs. These
savings were realized from a combination of reduced in-house collections, better expense management
and the decision to temporarily defer some legal expenses as we enhanced our predictive modeling
capabilities and refined our ability to forecast costs and resulting collections in the legal
collection channel. This decrease was partially offset by increased forwarding fees of $1.8 million
paid on cash collections from third parties relationships (attorneys and collection agencies) as a
result of an increase in our collections from third parties relationships to 28.9% of total cash
collections for the three months ended March 31, 2008, from 23.9% for the three months ended March
31, 2007.
Occupancy.
Occupancy expense was $1.9 million for the three months ended March 31, 2008, a
decrease of $0.4 million, or 17.6%, compared to occupancy expense of $2.3 million for the three
months ended March 31, 2007. Occupancy expense was 1.9% of cash collections for the three months
ended March 31, 2008 compared with 2.4% for the same period in 2007. Occupancy expense decreased
primarily due to the consolidation of two call centers during 2007.
23
Administrative.
Administrative expenses increased to $2.7 million for the three months ended
March 31, 2008, from $2.2 million for the three months ended March 31, 2007, reflecting a $0.5
million, or 20.5%, increase. Administrative expenses were 2.7% of cash collections during the three
months ended March 31, 2008 compared with 2.3% for the same period in 2007. Administrative expenses
increased as a percentage of cash collections primarily due to additional fees incurred for outside
advisors and consultants.
Restructuring Charges.
There were no restructuring charges for the three months ended March
31, 2008. Pre-tax restructuring charges were $0.1 million for the three months ended March 31, 2007
as a result of our plans to close our White Marsh, Maryland and Wixom, Michigan offices during
2007. Charges were primarily related to associate one-time termination benefits and changes to the
service life of certain long-lived assets.
Depreciation and Amortization.
Depreciation and amortization expense was $1.0 million for the
three months ended March 31, 2008, a decrease of $0.1 million or 5.6% compared to depreciation and
amortization expense of $1.1 million for the three months ended March 31, 2007. Depreciation and
amortization expense was 1.0% of cash collections during the three months ended March 31, 2008
compared with 1.1% for the same period in 2007.
Impairment Intangible Assets.
Impairment of intangible assets was $0.4 million for the three
months ended March 31, 2008 as we decided to discontinue the medical contingent collection
business. As a result, we recognized an impairment charge of the net
carrying balance of intangible assets for
customer contracts and relationships associated with the contingent collection
business.
Interest Income.
Interest income was $23,251 for the three months ended March 31, 2008, an
increase of $7,524 compared to $15,727 for the three months ended March 31, 2007.
Interest Expense.
Interest expense was $3.3 million for the three months ended March 31, 2008,
an increase of $3.0 million compared to interest expense of $0.3 million for the three months ended
March 31, 2007. Interest expense was 3.3% of cash collections during the three months ended March
31, 2008 compared with 0.3% for the same period in 2007. The increase in interest expense was due
to increased average borrowings during the three months ended March 31, 2008 compared to the same
period in 2007. Average borrowings during the quarter ended March 31, 2008 reflect the new $150.0
million Term Loan Facility that was funded on June 12, 2007 to finance our recapitalization and
special one-time cash dividend. Interest expense also includes the amortization of capitalized bank
fees of $129,117 and $56,944 for the three months ended March 31, 2008 and 2007, respectively.
Income Taxes.
Income tax expense of $4.2 million reflects a federal tax rate of 35.2% and a
state tax rate of 2.9% (net of federal tax benefit) for the three months ended March 31, 2008. For
the three months ended March 31, 2007, income tax expense was $5.9 million and reflected a federal
tax rate of 35.2% and state tax rate of 2.3% (net of federal tax benefit). The 0.6% increase in the
state rate was due to changing apportionment percentages among the various states. Income tax
expense decreased $1.7 million, or 28.8% from income tax expense of $5.9 million for the three
months ended March 31, 2007. The decrease in tax expense was due to a decrease in pre-tax financial
statement income, which was $10.9 million for the three months ended March 31, 2008, compared to
$15.8 million for the same period in 2007.
24
Supplemental Performance Data
Portfolio Performance
The following table summarizes our historical portfolio purchase price and cash collections on
an annual vintage basis from January 1, 2002 through March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Total
|
|
|
Collections as a
|
|
|
|
Number of
|
|
|
Purchase
|
|
|
|
|
|
|
Remaining
|
|
|
Estimated
|
|
|
Percentage of
|
|
Purchase Period
|
|
Portfolios
|
|
|
Price (1)
|
|
|
Cash Collections
|
|
|
Collections (2,3,4)
|
|
|
Collections
|
|
|
Purchase Price
|
|
|
|
(dollars in thousands)
|
|
2002
|
|
|
94
|
|
|
$
|
72,256
|
|
|
$
|
335,378
|
|
|
$
|
7,598
|
|
|
$
|
342,976
|
|
|
|
475
|
%
|
2003
|
|
|
76
|
|
|
|
87,152
|
|
|
|
374,545
|
|
|
|
65,787
|
|
|
|
440,332
|
|
|
|
505
|
|
2004
|
|
|
106
|
|
|
|
86,552
|
|
|
|
212,079
|
|
|
|
81,418
|
|
|
|
293,497
|
|
|
|
339
|
|
2005
|
|
|
104
|
|
|
|
100,769
|
|
|
|
145,162
|
|
|
|
75,919
|
|
|
|
221,081
|
|
|
|
219
|
|
2006 (4)
|
|
|
154
|
|
|
|
142,269
|
|
|
|
159,168
|
|
|
|
251,726
|
|
|
|
410,894
|
|
|
|
289
|
|
2007
|
|
|
158
|
|
|
|
170,578
|
|
|
|
63,610
|
|
|
|
306,921
|
|
|
|
370,531
|
|
|
|
217
|
|
2008 (5)
|
|
|
47
|
|
|
|
22,325
|
|
|
|
1,350
|
|
|
|
41,049
|
|
|
|
42,399
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
739
|
|
|
$
|
681,901
|
|
|
$
|
1,291,292
|
|
|
$
|
830,418
|
|
|
$
|
2,121,710
|
|
|
|
311
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase
price refunded by a seller due to the return of non-compliant accounts (also referred to as
buybacks) less the purchase price for accounts that were sold at the time of purchase to
another debt purchaser.
|
|
(2)
|
|
Estimated remaining collections are based on historical cash collections. Please refer to
Forward-Looking Statements on page 20 and Critical Accounting
Policies on page 33 for further
information regarding these estimates.
|
|
(3)
|
|
Estimated remaining collections refers to the sum of all future projected cash collections on
our owned portfolios using up to an 84 month collection forecast from the date of purchase.
|
|
(4)
|
|
Includes 62 portfolios from the acquisition of PARC on April 28, 2006 that were allocated a
purchase price value of $8.3 million.
|
|
(5)
|
|
Includes only three months of activity through March 31, 2008.
|
The following table summarizes the remaining unamortized balances of our purchased receivables
portfolios by year of purchase as of March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
|
|
|
Unamortized
|
|
|
|
Unamortized
|
|
|
|
|
|
|
Balance as a
|
|
|
Balance as a
|
|
|
|
Balance as of
|
|
|
Purchase
|
|
|
Percentage of
|
|
|
Percentage of
|
|
Purchase Period
|
|
March 31, 2008
|
|
|
Price (1)
|
|
|
Purchase Price
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
2002
|
|
$
|
1,307
|
|
|
$
|
72,256
|
|
|
|
1.8
|
%
|
|
|
0.4
|
%
|
2003
|
|
|
9,217
|
|
|
|
87,152
|
|
|
|
10.6
|
|
|
|
2.8
|
|
2004
|
|
|
29,075
|
|
|
|
86,552
|
|
|
|
33.6
|
|
|
|
8.8
|
|
2005
|
|
|
45,660
|
|
|
|
100,769
|
|
|
|
45.3
|
|
|
|
13.8
|
|
2006 (2)
|
|
|
86,547
|
|
|
|
142,269
|
|
|
|
60.8
|
|
|
|
26.2
|
|
2007
|
|
|
137,031
|
|
|
|
170,578
|
|
|
|
80.3
|
|
|
|
41.5
|
|
2008 (3)
|
|
|
21,290
|
|
|
|
22,325
|
|
|
|
95.4
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
330,127
|
|
|
$
|
681,901
|
|
|
|
48.4
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase
price for accounts that were sold at the time of purchase to another debt purchaser.
|
|
(2)
|
|
Includes $8.3 million of portfolios acquired from the acquisition of PARC on April 28, 2006.
|
|
(3)
|
|
Includes only three months of activity through March 31, 2008.
|
25
The following table summarizes the purchased receivable revenues and amortization rates by
year of purchase for the three months ended March 31, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008
|
|
Year of
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Monthly
|
|
|
Net
|
|
|
Zero Basis
|
|
Purchase
|
|
Collections
|
|
|
Revenue
|
|
|
Rate
|
|
|
Yield (1)
|
|
|
Impairments
|
|
|
Collections
|
|
2002 and prior
|
|
$
|
14,575,197
|
|
|
$
|
14,187,683
|
|
|
|
2.7
|
%
|
|
|
N/M
|
%
|
|
$
|
(550,000
|
)
|
|
$
|
13,078,350
|
|
2003
|
|
|
11,897,021
|
|
|
|
10,145,297
|
|
|
|
14.7
|
|
|
|
31.89
|
|
|
|
(481,050
|
)
|
|
|
6,196,948
|
|
2004
|
|
|
9,594,231
|
|
|
|
6,579,328
|
|
|
|
31.4
|
|
|
|
7.11
|
|
|
|
1,050,347
|
|
|
|
931,339
|
|
2005
|
|
|
10,611,978
|
|
|
|
5,759,834
|
|
|
|
45.7
|
|
|
|
3.91
|
|
|
|
92,986
|
|
|
|
36,398
|
|
2006
|
|
|
24,887,906
|
|
|
|
15,533,913
|
|
|
|
37.6
|
|
|
|
5.56
|
|
|
|
92,000
|
|
|
|
1,964,255
|
|
2007
|
|
|
27,347,947
|
|
|
|
11,201,973
|
|
|
|
59.0
|
|
|
|
2.50
|
|
|
|
180,000
|
|
|
|
44,810
|
|
2008
|
|
|
1,350,001
|
|
|
|
314,660
|
|
|
|
76.7
|
|
|
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
100,264,281
|
|
|
$
|
63,722,688
|
|
|
|
36.4
|
|
|
|
6.20
|
|
|
$
|
384,283
|
|
|
$
|
22,252,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007
|
|
Year of
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Monthly
|
|
|
Net
|
|
|
Zero Basis
|
|
Purchase
|
|
Collections
|
|
|
Revenue
|
|
|
Rate
|
|
|
Yield (1)
|
|
|
Impairments
|
|
|
Collections
|
|
2001 and prior
|
|
$
|
10,330,950
|
|
|
$
|
10,244,254
|
|
|
|
0.8
|
%
|
|
|
N/M
|
%
|
|
$
|
|
|
|
$
|
10,166,762
|
|
2002
|
|
|
12,016,760
|
|
|
|
7,943,214
|
|
|
|
33.9
|
|
|
|
25.36
|
|
|
|
216,800
|
|
|
|
4,554,522
|
|
2003
|
|
|
16,780,060
|
|
|
|
11,649,217
|
|
|
|
30.6
|
|
|
|
14.11
|
|
|
|
763,300
|
|
|
|
2,676,504
|
|
2004
|
|
|
14,034,358
|
|
|
|
9,179,365
|
|
|
|
34.6
|
|
|
|
6.31
|
|
|
|
1,931,000
|
|
|
|
768,617
|
|
2005
|
|
|
14,740,661
|
|
|
|
10,436,030
|
|
|
|
29.2
|
|
|
|
4.57
|
|
|
|
934,000
|
|
|
|
10,536
|
|
2006
|
|
|
26,513,053
|
|
|
|
16,380,649
|
|
|
|
38.2
|
|
|
|
4.24
|
|
|
|
628,000
|
|
|
|
285,541
|
|
2007
|
|
|
1,437,508
|
|
|
|
949,305
|
|
|
|
34.0
|
|
|
|
1.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
95,853,350
|
|
|
$
|
66,782,034
|
|
|
|
30.3
|
|
|
|
7.14
|
|
|
$
|
4,473,100
|
|
|
$
|
18,462,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The monthly yield is the weighted-average yield determined by dividing purchased receivable
revenues recognized in the period by the average of the beginning monthly carrying values of the
purchased receivables for the period presented.
|
26
Account Representative Productivity
We measure traditional call center account representative productivity by two major
categories, those with less than one year of experience and those with one or more years of
experience. The following tables display our results.
Account Representatives by Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
March 31,
|
|
December 31,
|
|
|
2008
|
|
2007 (3)
|
|
2007 (3)
|
|
2006 (4)
|
Number of account representatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or more (1)
|
|
|
495
|
|
|
|
623
|
|
|
|
558
|
|
|
|
573
|
|
Less than one year (2)
|
|
|
406
|
|
|
|
298
|
|
|
|
356
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total account representatives
|
|
|
901
|
|
|
|
921
|
|
|
|
914
|
|
|
|
972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on number of average traditional call center Full Time Equivalent (FTE) account
representatives and supervisors with one or more years of service.
|
|
(2)
|
|
Based on number of average traditional call center FTE account representatives and
supervisors with less than one year of service, including new associates in training.
|
|
(3)
|
|
The number of account representatives have been reclassified
to make the 2007 disclosures comparable to the 2008 disclosures.
|
|
(4)
|
|
Excludes PARCs FTE account representatives for periods prior to January 1, 2007.
|
Collection Averages by Experience (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
March 31,
|
|
December 31,
|
|
|
2008
|
|
2007 (2)
|
|
2007 (2)
|
|
2006 (3)
|
Collection averages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall average
|
|
|
53,908
|
|
|
|
53,629
|
|
|
|
193,000
|
|
|
|
164,932
|
|
|
|
|
(1)
|
|
Overall collection averages are not available by account representatives.
|
|
(2)
|
|
The overall collection average has been reclassified to make
the 2007 disclosure comparable to the 2008 disclosure.
|
|
(3)
|
|
Excludes PARCs FTE account representatives for periods prior to January 1, 2007.
|
27
Cash Collections
The following tables provide further detailed vintage collection analysis on an annual and a
cumulative basis.
Historical Collections (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
Purchase
|
|
Purchase
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
Period
|
|
Price (3)
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-1998
|
|
|
|
|
|
$
|
10,603
|
|
|
$
|
10,066
|
|
|
$
|
8,734
|
|
|
$
|
6,170
|
|
|
$
|
4,544
|
|
|
$
|
3,390
|
|
|
$
|
2,808
|
|
|
$
|
2,612
|
|
|
$
|
2,008
|
|
|
$
|
1,586
|
|
|
$
|
321
|
|
1998
|
|
$
|
16,411
|
|
|
|
4,835
|
|
|
|
15,220
|
|
|
|
15,045
|
|
|
|
12,962
|
|
|
|
11,021
|
|
|
|
7,987
|
|
|
|
5,583
|
|
|
|
4,653
|
|
|
|
3,352
|
|
|
|
2,619
|
|
|
|
580
|
|
1999
|
|
|
12,924
|
|
|
|
|
|
|
|
3,761
|
|
|
|
11,331
|
|
|
|
10,862
|
|
|
|
9,750
|
|
|
|
8,278
|
|
|
|
6,675
|
|
|
|
5,022
|
|
|
|
3,935
|
|
|
|
2,949
|
|
|
|
607
|
|
2000
|
|
|
20,592
|
|
|
|
|
|
|
|
|
|
|
|
8,896
|
|
|
|
23,444
|
|
|
|
22,559
|
|
|
|
20,318
|
|
|
|
17,196
|
|
|
|
14,062
|
|
|
|
10,603
|
|
|
|
7,410
|
|
|
|
1,608
|
|
2001
|
|
|
43,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,630
|
|
|
|
50,327
|
|
|
|
50,967
|
|
|
|
45,713
|
|
|
|
39,865
|
|
|
|
30,472
|
|
|
|
21,714
|
|
|
|
4,119
|
|
2002
|
|
|
72,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,339
|
|
|
|
70,813
|
|
|
|
72,024
|
|
|
|
67,649
|
|
|
|
55,373
|
|
|
|
39,839
|
|
|
|
7,340
|
|
2003
|
|
|
87,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,067
|
|
|
|
94,564
|
|
|
|
94,234
|
|
|
|
79,423
|
|
|
|
58,359
|
|
|
|
11,897
|
|
2004
|
|
|
86,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,365
|
|
|
|
68,354
|
|
|
|
62,673
|
|
|
|
48,093
|
|
|
|
9,594
|
|
2005
|
|
|
100,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,459
|
|
|
|
60,280
|
|
|
|
50,811
|
|
|
|
10,612
|
|
2006 (2)
|
|
|
142,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,751
|
|
|
|
101,529
|
|
|
|
24,888
|
|
2007
|
|
|
170,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,269
|
|
|
|
27,348
|
|
2008
|
|
|
22,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
15,438
|
|
|
$
|
29,047
|
|
|
$
|
44,006
|
|
|
$
|
71,068
|
|
|
$
|
120,540
|
|
|
$
|
197,820
|
|
|
$
|
267,928
|
|
|
$
|
319,910
|
|
|
$
|
340,870
|
|
|
$
|
371,178
|
|
|
$
|
100,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Collections (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through
|
Purchase
|
|
Purchase
|
|
Total Through December 31,
|
|
March 31,
|
Period
|
|
Price (3)
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1998
|
|
$
|
16,411
|
|
|
$
|
4,835
|
|
|
$
|
20,055
|
|
|
$
|
35,100
|
|
|
$
|
48,062
|
|
|
$
|
59,083
|
|
|
$
|
67,070
|
|
|
$
|
72,653
|
|
|
$
|
77,306
|
|
|
$
|
80,658
|
|
|
$
|
83,277
|
|
|
$
|
83,857
|
|
1999
|
|
|
12,924
|
|
|
|
|
|
|
|
3,761
|
|
|
|
15,092
|
|
|
|
25,954
|
|
|
|
35,704
|
|
|
|
43,982
|
|
|
|
50,657
|
|
|
|
55,679
|
|
|
|
59,614
|
|
|
|
62,563
|
|
|
|
63,170
|
|
2000
|
|
|
20,592
|
|
|
|
|
|
|
|
|
|
|
|
8,896
|
|
|
|
32,340
|
|
|
|
54,899
|
|
|
|
75,217
|
|
|
|
92,413
|
|
|
|
106,475
|
|
|
|
117,078
|
|
|
|
124,488
|
|
|
|
126,096
|
|
2001
|
|
|
43,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,630
|
|
|
|
67,957
|
|
|
|
118,924
|
|
|
|
164,637
|
|
|
|
204,502
|
|
|
|
234,974
|
|
|
|
256,688
|
|
|
|
260,807
|
|
2002
|
|
|
72,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,339
|
|
|
|
93,152
|
|
|
|
165,176
|
|
|
|
232,825
|
|
|
|
288,198
|
|
|
|
328,037
|
|
|
|
335,377
|
|
2003
|
|
|
87,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,067
|
|
|
|
130,631
|
|
|
|
224,865
|
|
|
|
304,288
|
|
|
|
362,647
|
|
|
|
374,544
|
|
2004
|
|
|
86,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,365
|
|
|
|
91,719
|
|
|
|
154,392
|
|
|
|
202,485
|
|
|
|
212,079
|
|
2005
|
|
|
100,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,459
|
|
|
|
83,739
|
|
|
|
134,550
|
|
|
|
145,162
|
|
2006 (2)
|
|
|
142,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,751
|
|
|
|
134,280
|
|
|
|
159,168
|
|
2007
|
|
|
170,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,269
|
|
|
|
63,617
|
|
2008
|
|
|
22,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,350
|
|
Cumulative Collections as Percentage of Purchase Price (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through
|
Purchase
|
|
Purchase
|
|
Total Through December 31,
|
|
March 31,
|
Period
|
|
Price (3)
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
1998
|
|
$
|
16,411
|
|
|
|
29
|
%
|
|
|
122
|
%
|
|
|
214
|
%
|
|
|
293
|
%
|
|
|
360
|
%
|
|
|
409
|
%
|
|
|
443
|
%
|
|
|
471
|
%
|
|
|
491
|
%
|
|
|
507
|
%
|
|
|
511
|
%
|
1999
|
|
|
12,924
|
|
|
|
|
|
|
|
29
|
|
|
|
117
|
|
|
|
201
|
|
|
|
276
|
|
|
|
340
|
|
|
|
392
|
|
|
|
431
|
|
|
|
461
|
|
|
|
484
|
|
|
|
489
|
|
2000
|
|
|
20,592
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
157
|
|
|
|
267
|
|
|
|
365
|
|
|
|
449
|
|
|
|
517
|
|
|
|
569
|
|
|
|
605
|
|
|
|
612
|
|
2001
|
|
|
43,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
158
|
|
|
|
276
|
|
|
|
383
|
|
|
|
475
|
|
|
|
546
|
|
|
|
597
|
|
|
|
606
|
|
2002
|
|
|
72,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
129
|
|
|
|
229
|
|
|
|
322
|
|
|
|
399
|
|
|
|
454
|
|
|
|
464
|
|
2003
|
|
|
87,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
150
|
|
|
|
258
|
|
|
|
349
|
|
|
|
416
|
|
|
|
430
|
|
2004
|
|
|
86,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
106
|
|
|
|
178
|
|
|
|
234
|
|
|
|
245
|
|
2005
|
|
|
100,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
83
|
|
|
|
134
|
|
|
|
144
|
|
2006 (2)
|
|
|
142,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
94
|
|
|
|
112
|
|
2007
|
|
|
170,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
37
|
|
2008
|
|
|
22,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
(1)
|
|
Does not include proceeds from sales of any receivables.
|
|
(2)
|
|
Includes $8.3 million of portfolios acquired from the acquisition of PARC on April 28, 2006.
|
|
(3)
|
|
Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase
price for accounts that were sold at the time of purchase to another debt purchaser.
|
28
Seasonality
Our business depends on our ability to collect on our purchased portfolios of charged-off
consumer receivables. Collections within portfolios tend to be seasonally higher in the first and
second quarters of the year due to consumers receipt of tax refunds and other factors. Conversely,
collections within portfolios tend to be lower in the third and fourth quarters of the year due to
consumers spending in connection with summer vacations, the holiday season and other factors.
However, revenue recognized is relatively level due to the application of the provisions prescribed
by SOP 03-3. In addition, our operating results may be affected to a lesser extent by the timing of
purchases of charged-off consumer receivables due to the initial costs associated with purchasing
and integrating these receivables into our system. Consequently, income and margins may fluctuate
from quarter to quarter.
Below is a table that illustrates our quarterly cash collections from January 1, 2004 through
March 31, 2008.
Cash Collections
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
First
|
|
$
|
100,264,281
|
|
|
$
|
95,853,350
|
|
|
$
|
89,389,858
|
|
|
$
|
80,397,640
|
|
|
$
|
65,196,055
|
|
Second
|
|
|
|
|
|
|
95,432,021
|
|
|
|
89,609,982
|
|
|
|
84,862,856
|
|
|
|
67,566,031
|
|
Third
|
|
|
|
|
|
|
90,748,442
|
|
|
|
80,914,791
|
|
|
|
78,159,364
|
|
|
|
66,825,822
|
|
Fourth
|
|
|
|
|
|
|
89,144,650
|
|
|
|
80,955,115
|
|
|
|
76,490,350
|
|
|
|
68,339,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash collections
|
|
$
|
100,264,281
|
|
|
$
|
371,178,463
|
|
|
$
|
340,869,746
|
|
|
$
|
319,910,210
|
|
|
$
|
267,927,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below is a table that illustrates the cash collections and percentages by source of our total
cash collections:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007 (1)
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Traditional collections
|
|
$
|
47,528,939
|
|
|
|
47.4
|
%
|
|
$
|
48,324,060
|
|
|
|
50.4
|
%
|
Legal collections
|
|
|
38,177,527
|
|
|
|
38.1
|
|
|
|
35,875,548
|
|
|
|
37.4
|
|
Other collections
|
|
|
14,557,815
|
|
|
|
14.5
|
|
|
|
11,653,742
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash collections
|
|
$
|
100,264,281
|
|
|
|
100.0
|
%
|
|
$
|
95,853,350
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The cash collections have been reclassified to make the 2007
disclosures comparable to the 2008 disclosures.
|
The following chart categorizes our purchased receivable portfolios acquired from January 1,
1998 through March 31, 2008 into major asset types, as of March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged-off
|
|
|
|
|
|
|
No. of
|
|
|
|
|
Asset Type
|
|
Receivables (2)
|
|
|
%
|
|
|
Accounts
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
Visa®/MasterCard®/Discover®
|
|
$
|
15,714,433
|
|
|
|
48.3
|
%
|
|
|
7,452
|
|
|
|
25.1
|
%
|
Private Label Credit Cards
|
|
|
4,308,718
|
|
|
|
13.2
|
|
|
|
5,976
|
|
|
|
20.1
|
|
Telecommunications/Utility/Gas
|
|
|
2,946,363
|
|
|
|
9.0
|
|
|
|
7,699
|
|
|
|
26.0
|
|
Health Club
|
|
|
1,737,654
|
|
|
|
5.3
|
|
|
|
1,662
|
|
|
|
5.6
|
|
Auto Deficiency
|
|
|
1,355,983
|
|
|
|
4.2
|
|
|
|
241
|
|
|
|
0.8
|
|
Installment Loans
|
|
|
1,198,449
|
|
|
|
3.7
|
|
|
|
349
|
|
|
|
1.2
|
|
Wireless Telecommunications
|
|
|
719,229
|
|
|
|
2.2
|
|
|
|
1,727
|
|
|
|
5.8
|
|
Other (1)
|
|
|
4,577,802
|
|
|
|
14.1
|
|
|
|
4,566
|
|
|
|
15.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,558,631
|
|
|
|
100.0
|
%
|
|
|
29,672
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Other includes charged-off receivables of several debt types, including student loan,
mobile home deficiency and retail mail order. This excludes the purchase of a single portfolio
in June 2002 with a face value of $1.2 billion at a cost of $1.2 million (or 0.1% of face
value) and consisting of approximately 3.8 million accounts.
|
|
(2)
|
|
Face value of charged-off receivables represents the cumulative amount of purchases net of
buybacks. The amount is not adjusted for payments received, settlements or additional accrued
interest on any accounts in such portfolios after the date we purchased the applicable
portfolio.
|
29
The age of a charged-off consumer receivables portfolio, or the time since an account has been
charged-off, is an important factor in determining the price at which we will offer to purchase a
receivables portfolio. Generally, there is an inverse relationship between the age of a portfolio
and the price at which we will purchase the portfolio. This relationship is due to the fact that
older receivables are typically more difficult to collect. The accounts receivable management
industry places receivables into the following categories depending on the number of collection
agencies that have previously attempted to collect on the receivables and the age of the
receivables:
|
|
|
Fresh accounts are typically 120 to 270 days past due, have been charged-off by the
credit originator and are either being sold prior to any post charged-off collection
activity or are placed with a third party collector for the first time. These accounts
typically sell for the highest purchase price.
|
|
|
|
|
Primary accounts are typically 270 to 360 days past due, have been previously placed
with one third party collector and typically receive a lower purchase price.
|
|
|
|
|
Secondary and tertiary accounts are typically more than 360 days past due, have been
placed with two or three third party collectors and receive even lower purchase prices.
|
We specialize in the primary, secondary and tertiary markets, but we will purchase accounts at
any point in the delinquency cycle. We deploy our capital within these markets based upon the
relative values of the available debt portfolios.
The following chart categorizes our purchased receivable portfolios acquired from January 1,
1998 through March 31, 2008 into major account types as of March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged-off
|
|
|
|
|
|
|
No. of
|
|
|
|
|
Account Type
|
|
Receivables (2)
|
|
|
%
|
|
|
Accounts
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fresh
|
|
$
|
2,038,752
|
|
|
|
6.3
|
%
|
|
|
1,032
|
|
|
|
3.5
|
%
|
Primary
|
|
|
4,653,946
|
|
|
|
14.3
|
|
|
|
4,512
|
|
|
|
15.2
|
|
Secondary
|
|
|
6,509,166
|
|
|
|
20.0
|
|
|
|
6,548
|
|
|
|
22.1
|
|
Tertiary (1)
|
|
|
14,953,035
|
|
|
|
45.9
|
|
|
|
14,449
|
|
|
|
48.7
|
|
Other
|
|
|
4,403,732
|
|
|
|
13.5
|
|
|
|
3,131
|
|
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,558,631
|
|
|
|
100.0
|
%
|
|
|
29,672
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excluding the purchase of a single portfolio in June 2002 with a face value of $1.2 billion
at a cost of $1.2 million (or 0.1% of face value), and consisting of approximately 3.8 million
accounts.
|
|
(2)
|
|
Face value of charged-off receivables represents the cumulative amount of purchases net of
buybacks. The amount is not adjusted for payments received, settlements or additional accrued
interest on any accounts in such portfolios after the date we purchased the applicable
portfolio.
|
We also review the geographic distribution of accounts within a portfolio because collection
laws differ from state to state. The following chart illustrates our purchased receivables
portfolios acquired from January 1, 1998 through March 31, 2008 based on geographic location of
debtor, as of March 31, 2008.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged-off
|
|
|
|
|
|
|
No. of
|
|
|
|
|
Geographic Location
|
|
Receivables (3)(4)
|
|
|
%
|
|
|
Accounts
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas (1)
|
|
$
|
4,812,844
|
|
|
|
14.8
|
%
|
|
|
4,687
|
|
|
|
15.8
|
%
|
California
|
|
|
3,693,681
|
|
|
|
11.3
|
|
|
|
3,488
|
|
|
|
11.8
|
|
Florida (1)
|
|
|
3,314,961
|
|
|
|
10.2
|
|
|
|
2,180
|
|
|
|
7.3
|
|
New York
|
|
|
1,883,753
|
|
|
|
5.8
|
|
|
|
1,262
|
|
|
|
4.2
|
|
Michigan (1)
|
|
|
1,839,621
|
|
|
|
5.6
|
|
|
|
2,345
|
|
|
|
7.9
|
|
Ohio (1)
|
|
|
1,784,065
|
|
|
|
5.5
|
|
|
|
2,341
|
|
|
|
7.9
|
|
Illinois (1)
|
|
|
1,381,923
|
|
|
|
4.2
|
|
|
|
1,678
|
|
|
|
5.7
|
|
Pennsylvania
|
|
|
1,162,211
|
|
|
|
3.6
|
|
|
|
928
|
|
|
|
3.1
|
|
New Jersey (1)
|
|
|
1,031,919
|
|
|
|
3.2
|
|
|
|
856
|
|
|
|
2.9
|
|
North Carolina
|
|
|
962,326
|
|
|
|
3.0
|
|
|
|
677
|
|
|
|
2.3
|
|
Georgia
|
|
|
885,893
|
|
|
|
2.7
|
|
|
|
763
|
|
|
|
2.6
|
|
Arizona (1)
|
|
|
662,069
|
|
|
|
2.0
|
|
|
|
564
|
|
|
|
1.9
|
|
Other (2)
|
|
|
9,143,365
|
|
|
|
28.1
|
|
|
|
7,903
|
|
|
|
26.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,558,631
|
|
|
|
100.0
|
%
|
|
|
29,672
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Collection site(s) located in this state.
|
|
(2)
|
|
Each state included in Other represents under 2.0% individually of the face value of total
charged-off consumer receivables.
|
|
(3)
|
|
Face value of charged-off receivables represents the cumulative amount of purchases net of
buybacks. The amount is not adjusted for payments received, settlements or additional accrued
interest on any accounts in such portfolios after the date we purchased the applicable
portfolio.
|
|
(4)
|
|
Excluding the purchase of a single portfolio in June 2002 with a face value of $1.2 billion
at a cost of $1.2 million (or 0.1% of face value) and consisting of approximately 3.8 million
accounts.
|
Liquidity and Capital Resources
Historically, our primary sources of cash have been from operations and bank borrowings. We
have traditionally used cash for acquisitions of purchased receivables, repayment of bank
borrowings, purchased property and equipment and working capital. During the three months ended
March 31, 2008, we had repayments of $27.4 million to reduce our outstanding Revolving Credit
Facility and Term Loan Facility balances while having no borrowings against our Revolving Credit
Facility or our Term Loan Facility. In addition, we entered into a new agreement with a third party
collecting on our behalf. Under this agreement, we will receive a total cash advance of $7.0
million through November 2009. We received the first installment of $1.5 million in the quarter
ended March 31, 2008, and incurred approximately $0.1 million in court cost expenses, which were
offset with a portion of the cash advance. A liability equal to the unused cash advance is included
in accrued liabilities on the consolidated statements of financial position. The agreement contains
performance conditions for both parties and the Company would be required to refund a portion of
the cash advance in certain situations.
Borrowings
We maintain a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a
syndicate of lenders named therein, that originated on June 5, 2007 and was amended on March 10,
2008. Under the terms of the Amended New Credit Agreement, we have a five year $100 million
Revolving Credit Facility and a six year $150 million Term Loan Facility. The Amended New Credit
Facilities bear interest at prime or up to 125 basis points over prime depending upon our
liquidity, as defined in the Amended New Credit Agreement. Alternately, at our discretion, we may
borrow by entering into one, two, three, six or twelve-month LIBOR contracts at rates between 150
to 250 basis points over the respective LIBOR rates, depending on our liquidity. Our Revolving
Credit Facility includes an accordion loan feature that allows us to request a $25.0 million
increase as well as sublimits for $10.0 million of letters of credit and for $10.0 million of
swingline loans. The Amended New Credit Agreement is secured by a first priority lien on all of our
assets. The Amended New Credit Agreement also contains certain covenants and restrictions that we
must comply with, which, as of March 31, 2008 were:
31
|
|
|
Leverage Ratio (as defined) cannot exceed (i) 1.25 to 1.0 at any time on or before June
29, 2009, (ii) 1.125 to 1.0 at any time on or after June 30, 2009 and on or before December
30, 2010 or (iii) 1.0 to 1.0 at any time thereafter;
|
|
|
|
|
Ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth cannot
exceed (i) 3.0 to 1.0 at any time on or before September 29, 2008, (ii) 2.75 to 1.0 at any
time on or after September 30, 2008 and on or before December 30, 2008, (iii) 2.5 to 1.0 at
any time on or after December 31, 2008 and on or before December 30, 2009, (iv) 2.25 to 1.0
at any time on or after December 31, 2009 and on or before December 30, 2010, (v) 2.0 to
1.0 at any time on or after December 31, 2010 and on or before December 30, 2011 or (vi)
1.5 to 1.0 to any time thereafter; and
|
|
|
|
|
Consolidated Tangible Net Worth must equal or exceed $80.0 million plus 50% of positive
consolidated net income for three consecutive fiscal quarters ending December 31, 2007 and
for each fiscal year ending thereafter, such amount to be added as of December 31, 2007 and
as of the end of each such fiscal year thereafter.
|
The Amended New Credit Agreement contains a provision that requires us to repay Excess Cash
Flow, as defined, to reduce the indebtedness outstanding under our Amended New Credit Agreement.
The repayment of our Excess Cash Flow is effective with the issuance of our annual audited
consolidated financial statements for fiscal year 2008. The repayment provisions are:
|
|
|
50% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was greater than
1.0 to 1.0 as of the end of such fiscal year;
|
|
|
|
|
25% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was less than or
equal to 1.0 to 1.0 but greater than 0.875 to 1.0 as of the end of such fiscal year; or
|
|
|
|
|
0% if the Leverage Ratio is less than or equal to 0.875 to 1.0 as of the end of such
fiscal year.
|
Commitment fees on the unused portion of the Revolving Credit Facility are paid quarterly, in
arrears, and are calculated as an amount equal to a margin of 0.25% to 0.50%, depending on our
liquidity, on the average amount available on the Revolving Credit Facility.
The Amended New Credit Agreement requires us to effectively cap, collar or exchange interest
rates on a notional amount of at least 25% of the outstanding principal amount of the Term Loan.
We had $163.9 million principal balance outstanding on our Amended New Credit Facilities at
March 31, 2008. We have an interest rate swap agreement that hedges a portion of the interest rate
expense on the Term Loan Facility. We believe we are in compliance with all terms of the Amended
New Credit Agreement as of March 31, 2008.
Cash Flows
For the three months ended March 31, 2008, we invested $20.5 million in purchased receivables,
net of buybacks, funded with internal cash flow. Our cash balance has increased from $10.5 million
at December 31, 2007 to $12.8 million as of March 31, 2008.
Our
operating activities provided cash of $16.7 million and $20.8 million for the three months
ended March 31, 2008 and 2007, respectively. Cash provided by operating activities for the three
months ended March 31, 2008 and 2007 was generated primarily from net income earned through cash
collections as adjusted for the timing of payments in income taxes payable, accounts payable and
accrued liabilities as of March 31, 2008 compared to December 31, 2007.
Investing
activities provided cash of $13.6 million and used cash of $11.6 million for the
three months ended March 31, 2008 and 2007, respectively. Cash provided by investing activities was
primarily due to cash collections applied to principal, net of acquisitions of purchased
receivables, which was partially offset by purchases of property and
equipment. Cash used for investing purposes in the first
32
quarter of 2007 was primarily due to acquisitions of purchased receivables, net of cash
collections applied to principal.
Financing
activities used cash of $28.0 million and $10.7 million for the three months ended
March 31, 2008 and 2007, respectively. Cash used by financing activities for the first quarter of
2008 was primarily due to repayments on our Revolving Credit Facility and Term Loan Facility. In
addition, cash used by financing activities for the first quarter of 2008 was due to payment of
credit facility charges of $0.6 million associated with the amendment of the New Credit Agreement.
Furthermore, cash used by financing activities for the first quarter of 2007 was due to the
repurchase of 46,604 shares of common stock. The Company exercised its right to buy its shares from
former associates at $15.00 per share.
We believe that cash generated from operations combined with borrowing available under our
Amended New Credit Facilities, will be sufficient to fund our operations for the next twelve
months, although no assurance can be given in this regard. In the future, if we need additional
capital for investment in purchased receivables, working capital or to grow our business or acquire
other businesses, we may seek to sell additional equity or debt securities or we may seek to
increase the availability under our Revolving Credit Facility.
Future Contractual Cash Obligations
The following table summarizes our future contractual cash obligations as of March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
|
|
2008(3)
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
Capital lease obligations
|
|
$
|
9,186
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating lease obligations
|
|
|
4,130,351
|
|
|
|
5,041,677
|
|
|
|
4,081,043
|
|
|
|
3,824,311
|
|
|
|
3,511,471
|
|
|
|
10,852,626
|
|
Purchase agreement (1)
|
|
|
1,655,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased receivables (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000,000
|
|
|
|
|
|
Term loan (4)
|
|
|
1,125,000
|
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
|
|
141,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,920,320
|
|
|
$
|
6,541,677
|
|
|
$
|
5,581,043
|
|
|
$
|
5,324,311
|
|
|
$
|
20,011,471
|
|
|
$
|
152,602,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In 2007, we signed a new software agreement with BSI eSolutions, LLC and initiated a project
to install Cogent, a new collection platform. We have a contractual commitment to purchase
$1.7 million in additional software during 2008. In addition, we expect to spend approximately
$3.3 million over the next two years to fully implement this software. Costs will be
capitalized in accordance with the guidance in SOP 98-1 Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This project is funded with cash from
operations and borrowings on our Revolving Credit Facility.
|
|
(2)
|
|
During 2008, we renewed eight forward flow contracts as well as maintained two on-going
forward flow contracts that commit us to purchase receivables for a fixed percentage of the
face amount of the receivables. Eight forward flow contracts have terms beyond March 31, 2008
with the last contract expiring in December 2008. Eight forward flow contracts have estimated
monthly purchases of approximately $3.9 million, depending upon circumstances, and the other
two on-going forward flow contracts have estimated monthly purchases of approximately $12,300
over the next twelve months.
|
|
(3)
|
|
To the extent that a balance is outstanding on our Revolving Credit Facility, it would be due
in June 2012 or earlier as defined in the Amended New Credit Agreement.
|
|
(4)
|
|
To the extent that a balance is outstanding on our Term Loan Facility, it would be due in
June 2013.
|
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
Critical Accounting Policies
We utilize the interest method of accounting for our purchased receivables because we believe
that the amounts and timing of cash collections for our purchased receivables can be reasonably
estimated. This belief is predicated on our historical results and our knowledge of the industry.
The interest method is prescribed by the Accounting
33
Standards Executive Committee Statement of Position 03-3, Accounting for Certain Loans or
Debt Securities Acquired in a Transfer (SOP 03-3).
We adopted the provisions of SOP 03-3 in January 2005 and apply SOP 03-3 to purchased
receivables acquired after December 31, 2004. The provisions of SOP 03-3 that relate to decreases
in expected cash flows amend previously followed guidance, the Accounting Standards Executive
Committee Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans, for
consistent treatment and apply prospectively to purchased receivables acquired before January 1,
2005. We purchase pools of homogenous accounts receivable and record each pool at its acquisition
cost. Pools purchased after 2004 may be aggregated into one or more static pools within each
quarter, based on common risk characteristics. Risk characteristics of purchased receivables are
assumed to be similar since purchased receivables are usually in the late stages of the post
charged-off collection cycle. We therefore aggregate most pools purchased within each quarter.
Pools purchased before 2005 may not be aggregated with other pool purchases. Each static pool,
either aggregated or non-aggregated, retains its own identity and does not change over the
remainder of its life. Each static pool is accounted for as a single unit for recognition of
revenue, principal payments and impairments.
Each static pool of receivables is statistically modeled to determine its projected cash flows
based on historical cash collections for pools with similar characteristics. An internal rate of
return (IRR) is calculated for each static pool of receivables based on the projected cash flows.
The IRR is applied to the remaining balance of each static pool of accounts to determine the
revenue recognized. Each static pool is analyzed at least quarterly to assess the actual
performance compared to the expected performance. To the extent there are differences in actual
performance versus expected performance, the IRR is adjusted prospectively to reflect the revised
estimate of cash flows over the remaining life of the static pool. Effective January 2005, under
SOP 03-3, if the revised cash flow estimates are less than the original estimates, the IRR remains
unchanged and an impairment is recognized. If cash flow estimates increase subsequent to recording
an impairment, reversal of the previously recognized impairment is made prior to any increases to
the IRR.
The cost recovery method prescribed by SOP 03-3 is used when collections on a particular
portfolio cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized
until we have fully collected the cost of the portfolio.
Application of the interest method of accounting requires the use of estimates, primarily
estimated remaining collections, to calculate a projected IRR for each pool. These estimates are
primarily based on historical cash collections. If future cash collections are materially different
in amount or timing than the remaining collections estimate, earnings could be affected, either
positively or negatively. Higher collection amounts or cash collections that occur sooner than
projected will have a favorable impact on yields and revenues. Lower collection amounts or cash
collections that occur later than projected will have an unfavorable impact and may result in an
impairment being recorded.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk relates to the interest rate risk with our Amended New Credit
Facilities. We may periodically enter into interest rate swap agreements to modify the interest
rate exposure associated with our outstanding debt. The outstanding borrowings on our Amended New
Credit Facilities were $163.9 million and $191.3 million as of March 31, 2008 and December 31,
2007, respectively. In September 2007, we entered into an amortizing interest rate swap agreement
whereby, on a quarterly basis, we swap variable rates equal to three-month LIBOR for fixed rates on
the notional amount of $125 million. Every year thereafter, on the anniversary of the swap
agreement the notional amount will decrease by $25 million. The outstanding unhedged borrowings on
our Amended New Credit Facilities were $38.9 million as of March 31, 2008, consisting of $15.0
million outstanding on the Revolving Credit Facility and $23.9 million outstanding on the term loan
facility. Interest rates on unhedged borrowings may be based on the Prime rate or LIBOR, at our
discretion. Assuming a 200 basis point increase in interest rates, interest expense would have
increased approximately $0.3 million on the unhedged borrowings for the three months ended March
31, 2008.
The hedged borrowings on our Amended New Credit Facilities were $125.0 million at March 31,
2008. For the quarter ended March 31, 2008, the swap was determined to be highly effective in
hedging against fluctuations in
34
variable interest rates associated with the underlying debt. Interest rates have decreased
since we entered into our swap agreement, reducing the fair value and resulting in a liability
balance. Additional declines in interest rates will further reduce the fair value, while increasing
interest rates will increase the fair value. As of March 31, 2008, the Company does not have any
fair value hedges.
Interest rate fluctuations do not have a material impact on interest income.
Item 4.
Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon
that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures are effective to cause material information required to be
disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 to
be recorded, processed, summarized and reported within the time periods specified in the
Commissions rules and forms.
There have been no changes in our internal controls over financial reporting that occurred
during our fiscal quarter ended March 31, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of our business, we are involved in numerous legal proceedings. We
regularly initiate collection lawsuits, using both our in-house attorneys and our network of third
party law firms, against consumers and are occasionally countersued by them in such actions. Also,
consumers occasionally initiate litigation against us, in which they allege that we have violated a
federal or state law in the process of collecting on their account. It is not unusual for us to be
named in a class action lawsuit relating to these allegations, with these lawsuits routinely
settling for immaterial amounts. We do not believe that these ordinary course matters, individually
or in the aggregate, are material to our business or financial condition. However, there can be no
assurance that a class action lawsuit would not, if decided against us, have a material and adverse
effect on our financial condition.
We are not a party to any material legal proceedings. However, we expect to continue to
initiate collection lawsuits as a part of the ordinary course of our business (resulting
occasionally in countersuits against us) and we may, from time to time, become a party to various
other legal proceedings arising in the ordinary course of business.
Item 6. Exhibits
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
10.1
|
|
First Amendment to Credit Agreement dated as of June 5, 2007, between Asset
Acceptance Capital Corp. and JPMorgan Chase Bank, N.A. and other lenders
(Incorporated by reference to Exhibit 10.1 included in Current Report on Form
8-K filed on March 11, 2008)
|
|
|
|
10.2*
|
|
2008 Annual Incentive Compensation Plan for Management (Portions of this document have been omitted pursuant to a request for
confidential treatment)
|
|
|
|
31.1*
|
|
Rule 13a-14(a) Certification of Chief Executive Officer
|
|
|
|
31.2*
|
|
Rule 13a-14(a) Certification of Chief Financial Officer
|
|
|
|
32.1*
|
|
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
|
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized on May 1, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSET ACCEPTANCE CAPITAL CORP.
|
|
|
|
|
|
|
|
|
|
Date: May 1, 2008
|
|
By:
|
|
/s/ Nathaniel F. Bradley IV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nathaniel F. Bradley IV
|
|
|
|
|
|
|
Chairman of the Board, President and
|
|
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
Date: May 1, 2008
|
|
By:
|
|
/s/ Mark A. Redman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark A. Redman
|
|
|
|
|
|
|
Senior Vice President-Finance and
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
(Principal Financial and Accounting Officer)
|
|
|
36
Asset Acceptance Capital Corp. (MM) (NASDAQ:AACC)
Historical Stock Chart
From Aug 2024 to Sep 2024
Asset Acceptance Capital Corp. (MM) (NASDAQ:AACC)
Historical Stock Chart
From Sep 2023 to Sep 2024