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Article by DailyStocks_admin    (03-20-08 05:04 AM)

Filed with the SEC from Mar 06 to Mar 12:

Asset Acceptance Capital (AACC) David Nierenberg's D3 Family Funds reported ownership of 2,280,609 shares (6.9%), after buying them from Jan. 24 to March 7 at $8.39 to $10.38 a share.

BUSINESS OVERVIEW

General

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. From January 1, 1998 through December 31, 2007, we have purchased 853 consumer debt portfolios, with an original charged-off face value of $32.1 billion for an aggregate purchase price of $746.0 million, or 2.32% of face value, net of buybacks.

When considering whether to purchase a portfolio, we conduct a quantitative and qualitative analysis of the portfolio to appropriately price the debt. This analysis includes the use of our proprietary pricing and collection probability model and draws upon our extensive experience in the industry. We have developed experience across a wide range of asset types at various stages of delinquency, having made purchases across more than 25 different asset types from over 160 different debt sellers since 2000. We selectively deploy our capital in the fresh, primary, secondary, tertiary and post-tertiary and beyond delinquency stages where typically the accounts are delinquent and have been charged off and immediately sold or have been placed with between one and four collection agencies who have already attempted to collect on the accounts included in the portfolios we acquired. We have a long-standing history in the industry, relationships with debt sellers, consistency of performance and attention to post-sale service.

Unlike some third party collection agencies that typically attempt to collect the debt only for a period of six to twelve months, we generally take a long-term approach, to the collection effort as we are the owners of the debt. We apply an approach that encourages cooperation with the debtors to make a lump sum settlement payment in full or to formulate a repayment plan. For those debtors who we believe have the ability to repay the debt, we may proceed with legal remedies to obtain our collections. Through our strategy of holding the debt for the long-term, we have established a methodology of converting debtors into paying customers. In addition, our approach allows us to invest in various collection management and analysis tools that may be too costly for short-term oriented collection agencies, as well as to pursue legal collection strategies as appropriate. In many cases, we continue to receive collections on individual portfolios for ten years from the date of purchase.

Reorganization

On February 4, 2004, immediately prior to the commencement of our initial public offering, all of the shares of capital stock of AAC Investors, Inc. and RBR Holding Corp., which held 60% and 40%, respectively, of the equity membership interests in Asset Acceptance Holdings, LLC, were contributed to Asset Acceptance Capital Corp. in exchange for shares of common stock of Asset Acceptance Capital Corp. The total number of shares issued to the stockholders of AAC Investors, Inc. and RBR Holding Corp. in such exchange was 28,448,449 with 16,004,017 shares and 12,444,432 shares issued to the stockholders of AAC Investors, Inc. and the stockholders of RBR Holding Corp., respectively. As a result of this reorganization, Asset Acceptance Holdings, LLC and its subsidiaries became indirect wholly-owned subsidiaries of Asset Acceptance Capital Corp. The foregoing is referred to herein as the “Reorganization”.


Subsidiary Merger

On December 31, 2004, Financial Credit, LLC and CFC Financial, LLC were merged with and into Asset Acceptance, LLC, with the result that, by operation of law, all assets of Financial Credit, LLC and CFC Financial, LLC were vested in Asset Acceptance, LLC and all obligations of Financial Credit, LLC and CFC Financial, LLC were assumed by Asset Acceptance, LLC. Subsequent to the merger, all ownership interests in Asset Acceptance, LLC continue to be owned by Asset Acceptance Holdings, LLC.

Current Structure; Acquisition

On April 28, 2006, Asset Acceptance Holdings, LLC completed a stock purchase transaction of Premium Asset Recovery Corporation (“PARC”). Under the terms of the agreement, Asset Acceptance Holdings, LLC acquired 100% of the outstanding shares of PARC.

Currently, Asset Acceptance, LLC purchases and holds portfolios in all asset types except for healthcare. PARC purchases and collects on portfolios primarily in healthcare.

Purchasing

Typically, we purchase our portfolios in response to a request to bid received via e-mail or telephonically from a prospective seller. In addition to these requests, we have developed a marketing and acquisitions team that contacts and cultivates relationships with known and prospective sellers of portfolios in our core markets and in new asset type markets. We have purchased portfolios from over 160 different debt sellers since 2000, including many of the largest consumer lenders in the United States. While we have no policy limiting purchases from a single debt seller, we purchase from a diverse set of debt sellers and our purchasing decisions are based upon constantly changing economic and competitive conditions as opposed to long-term relationships with particular debt sellers. We maintain and enter into forward flow contracts that commit a debt seller to sell a steady flow of charged-off receivables to us and commit us to purchase receivables for a fixed percentage of the face value. We have entered into such contracts in the past and may do so in the future depending on market conditions.

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

Each potential acquisition begins with a quantitative and qualitative analysis of the portfolio. In the initial stages of the due diligence process, we typically review basic data on the portfolio’s accounts. This data typically includes the account number, the consumer’s name, address, social security number, phone numbers, outstanding balance, date of charge-off, last payment and account origination to the extent the debt sellers provide this data. We analyze this information and summarize it based on certain key metrics, such as, but not limited to, state of debtor’s last known residence, type of debt and age of the receivable. In addition, we request the seller to provide answers to a questionnaire designed to help us understand important qualitative factors relating to the portfolio.

As part of our due diligence, we evaluate the portfolio utilizing our proprietary pricing model. This model uses certain characteristics of the portfolio, historical analysis of similar portfolios, potential portfolio recoveries and collection expense estimates and the resulting estimated collection and legal expenses to formulate a bid range. In those circumstances where the type or pricing of the portfolio is unusual, we consult with industry experts and our collections management to help ascertain collectibility, potential collection strategies and our ability to integrate the new portfolio into our collection platform.

Once we have compiled and analyzed available data, we consider market conditions and determine an appropriate bid price or bid range. The recommended bid price or bid range, along with a summary of our due diligence, is submitted to our investment committee and, for purchases in excess of a certain dollar threshold, to members of our audit committee or their designee for review and approval. After appropriate approvals and acceptance of our offer by the seller of the portfolio, a purchase agreement is negotiated. Buyback provisions are generally incorporated into the purchase agreement for bankrupt, fraudulent, paid prior or deceased accounts and, typically, the credit originator either agrees to repurchase these accounts or replace them with acceptable replacement accounts within certain time frames, generally within 90 to 240 days. Upon execution of the agreement, the transaction is funded and we receive title to the accounts purchased.

The following chart categorizes our purchased receivables portfolios acquired from January 1, 1998 through December 31, 2007 into the major asset types, as of December 31, 2007.

Collection Operations

Our collection operations seek to maximize the recovery of our purchased charged-off receivables in a cost-effective manner. We have organized our collection process into a number of specialized departments which include collection, legal collection and other collection departments.

Generally, our efforts begin in our collection department and, if warranted, move to our legal collection department. If the receivable account involves a bankrupt debtor or a deceased debtor, our bankruptcy or probate recovery departments will review and manage the account. If it is determined that the collection account should be outsourced to a third party collection agency, our agency forwarding department handles the matter. Finally, we utilize a network of data providers to increase recovery rates and promote account representative efficiency in all of our departments.

Collection Department

Once a portfolio is purchased, we perform a review in order to formulate and apply what we believe to be an effective collection strategy. This review includes a series of data preparation and information acquisition steps to provide the necessary account data to begin collection efforts. Portfolio accounts are assigned, sorted and prioritized based on product type, account status, various internal and external collectibility predictors, account demographics, balance sizes and other attributes.

We train our account representatives to be full service account representatives who handle substantially all collection activity related to their accounts, including manual and automated dialer outbound calling activity, inbound call management, skip tracing or debtor location efforts, referrals to pursue legal action and settlement and payment plan negotiation. Our performance-based collection model is driven by a bonus program that allows account representatives to earn bonuses based on their personal achievement of collection goals. In addition, we monitor our account representatives for compliance with the federal and state debt collection laws.

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

If an account representative is unable to establish contact with a debtor, the account representative undertakes skip tracing procedures to locate, initiate contact with and collect from the debtor. Skip tracing efforts are performed at the account representative level and by third party information providers in a batch process. Each account representative has access to internal and external information databases that interface with our collection system. In addition, we have several information providers from whom we acquire information that is either systematically or manually validated and used in our efforts to locate debtors. Using these methods, we periodically refresh and supply updated account information to our account representatives to increase contact with debtors.

Legal Collection Department

In the event collection has not been obtained through our collection department and the opportunity for legal action is verified, we pursue a legal judgment against the debtor. In addition to the accounts identified for legal action by our account representatives, we identify accounts on which to pursue legal action using a batch process based on predetermined criteria. Our in-house legal collection department is comprised of collection attorneys, non-attorney legal account representatives, support staff and skip tracers, while our legal forwarding department is comprised of account representatives, attorney representatives and support staff.

For accounts in states where we have a local presence, and in some cases, adjacent states, to the extent we have capacity we prefer to pursue an in-house legal strategy as it provides us with a greater ability to manage the process. We currently have in-house capability in nine states. In each of these states, we have designed our legal policies and procedures to maintain compliance with state and federal laws while pursuing available legal opportunities. We will pursue selective expansion into different geographic regions if analysis indicates it is favorable to do so.

Our legal forwarding department is organized to address the legal recovery function for accounts principally located in states where we do not have a local or, in some cases, adjacent presence, to handle excess capacity, or for accounts that we believe can be better served by a third party law firm. To that end, we have developed a nationwide network of independent law firms in all 50 states, as well as the District of Columbia, who work for us on a contingent fee basis. The legal forwarding department actively manages and monitors this network.

Once a judgment is obtained, our legal department pursues voluntary and involuntary collection strategies to secure payment.

Other Collection Departments

Although we collect the largest portion of our charged-off receivable portfolios through our internal collection operations, in some cases we believe it can be more effective and cost-efficient to outsource collections. For example, we may consider outsourcing relatively small balance accounts so that our account representatives can focus on larger balance accounts and we may outsource collections as a way to balance staffing levels. We have developed a network of third party collection agencies to service accounts when we believe outsourcing is an appropriate strategy.

Our bankruptcy and probate recovery departments handle bankruptcy and estate probate processing and collections. The bankruptcy department files proofs of claims for recoveries on receivables which are included in consumer bankruptcies filed under Chapter 7 (resulting in liquidation and discharge of a debtor’s debts) and Chapter 13 (resulting in repayment plans based on the financial wherewithal of the debtor) of the U.S. Bankruptcy Code. The probate recovery department submits claims against estates involving deceased debtors having assets that may become available to us through a probate claim. During 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (referred to as the “Act”) was enacted which made significant changes in the treatment of consumer filers for bankruptcy protection. The impact of this Act on the number of bankruptcy filings, on a prospective basis, and the collectibility of consumer debt did not have a material impact on our consolidated statements of financial position, income or cash flows.

Competition

The consumer debt collection industry is highly competitive and fragmented. We compete with a wide range of other purchasers of charged-off consumer receivables, third party collection agencies, other financial service companies and credit originators that manage their own consumer receivables. Some of these companies may have substantially greater numbers of associates and financial resources and may experience lower associate turnover rates than we do. We believe that increasing amounts of capital have been invested in the debt collection industry, which has led to increases in prices for portfolios of charged-off accounts receivables over the last several years and to a reduction in the number of portfolios of charged-off accounts receivables available for purchase. In addition, companies with greater financial resources may elect at a future date to enter the consumer debt collection business. Furthermore, current debt sellers may change strategies and cease selling debt portfolios in the future.

CEO BACKGROUND

Mr. Bradley is the Chairman of the Board of Directors, President and Chief Executive Officer of Asset Acceptance Capital Corp. He joined our predecessor, Lee Acceptance Company, in 1979 and co-founded Asset Acceptance Corp. in 1994. Mr. Bradley served as Vice President of our predecessor from 1982 until 1994 and was promoted to President of Asset Acceptance Corp. in 1994. He was named our Chief Executive Officer in June 2003. He was named Chairman of the Board in February 2006.

Mr. Ignaczak joined Quad-C Management, Inc. in 1992 and has, since May 1993, been a Partner with Quad-C Management, Inc. in Charlottesville, Virginia. Prior to 1992, Mr. Ignaczak was an Associate with the Merchant Banking Group at Merrill Lynch and a member of the Mergers and Acquisitions department of Drexel, Burnham, Lambert Inc. He was named our Independent Presiding Director in February 2006.

Mr. Jacobs formed WIJ & Associates in 2002 as President. From May, 2000 until 2002, Mr. Jacobs served as the Chief Financial Officer and Director of NewPower Holdings Inc., a provider of energy and related services. In June 2002, NewPower Holdings Inc. and its subsidiaries filed voluntary petitions with the U.S. Bankruptcy Court for the Northern District of Georgia seeking reorganization under Chapter 11 of the U.S. Bankruptcy Code, with the confirmation of reorganization occurring in October 2003. Prior to May 2000, Mr. Jacobs served as Senior Executive Vice President of MasterCard International. Mr. Jacobs is a Director of Investment Technology Group, Inc. (NYSE: ITG), and Global Payments, Inc. (NYSE: GPN).

Mr. Daniels has been a Partner with Quad-C Management, Inc., a private equity firm based in Charlottesville, Virginia, since its formation in November 1989. Prior to November 1989, Mr. Daniels served as Vice Chairman and Director of W.R. Grace & Co., as Chairman, President and Chief Executive Officer of Western Publishing Company, Inc. and as Senior Vice President for Corporate Development of Mattel, Inc.

Since 1997, Dr. Pickard has served as the Chief Executive Officer of Global Auto Alliance. Dr. Pickard also serves as the Chief Executive Officer of VITEC, LLC, Global Automotive Alliance LLC, Grupo Antolin-Wayne. Dr. Pickard also serves as a part time instructor for the University of Michigan School of Business. Since 1991, Dr. Pickard has served as a member of the advisory board for LaSalle Bank Midwest N.A., Troy, Michigan, and its predecessor institutions.

In 1991 Ms. Adams joined World Color Press, Inc. as Vice President and General Counsel and remained with World Color Press, Inc. in a number of capacities until 1999, when she left World Color Press as Vice Chairman, Chief Legal and Administrative Officer and Secretary. Prior to joining World Color Press, Inc., Ms. Adams was an associate with the law firm of Latham & Watkins.

Since 1973, Dr. Haider has been a Professor of Management at Northwestern University’s Kellogg School of Management first as an Assistant, then Associate and Professor of Management since 1990. Dr. Haider began his academic career in 1971 as an Assistant Professor at Columbia University. Dr. Haider serves on the Board of Directors of La Salle National Bank, N.A., Chicago, Illinois, and Fender Musical Instruments, Scottsdale, Arizona.

Since May 2005, Mr. Lockhart has been a Partner in Diamond Castle Holdings, LLC, an independent private equity investment fund based in New York, New York. From February 2003 until May 2005, Mr. Lockhart was a Venture Partner for Oak Investment Partners, a private equity investment firm. From February 2000 until February 2003, Mr. Lockhart served as the President and Chief Executive Officer of NewPower Holdings Inc., a provider of energy and related services. In June 2002, NewPower Holdings Inc. and its subsidiaries filed voluntary petitions with the U.S. Bankruptcy Court for the Northern District of Georgia seeking reorganization under Chapter 11 of the U.S. Bankruptcy Code, with the confirmation of the related plan of reorganization occurring in October 2003. Prior to joining NewPower Holdings Inc. in February 2000, Mr. Lockhart served at AT&T Corporation as President of Consumer Services from July 1999 until February 2000 and as President and Chief Marketing Officer from February 1999 until June 1999. From April 1997 until October 1998, Mr. Lockhart served as President, Global Retail, of Bank of America Corporation, a financial services firm, and from March 1994 until April 1997, he served as President and Chief Executive Officer of MasterCard International, Inc., a credit card company. Mr. Lockhart is a member of the American Institute of Certified Public Accountants. Mr. Lockhart also serves as a Director of RadioShack Corporation (NYSE: RSH), IMS Health, Inc. NYSE: RX) and Huron Consulting Group, Inc. (NASDAQ: HURN).

COMPENSATION

2006 Executive Compensation Components:

Base Salaries:

Over the last few years we have generally increased the base salaries of our executive officers, recognizing, in particular, the Company’s substantial growth from 1998 to 2004 when we became a public company with our February 2004 initial public offering.

Set forth below is a more detailed discussion of the actions we took with respect to the 2006 base salaries for our Named Executive Officers:

n We increased the base salary of our Chief Executive Officer from $340,000 to $375,000 in March 2006 when he became Chairman of our Board of Directors. We believed this to be an appropriate base salary, given his substantial ownership of Company stock and the fact that he had been only recently appointed Chairman.


n The Cook report we obtained in January 2005, which included Chief Financial Officer compensation data, highlighted the fact that the base salary of our Chief Financial Officer was well below market for his position. Given his strong role and presence at our Company through the period of its substantial growth – including a private equity investment in 2002 to permit continued growth, our initial public offering in 2004, and the complexity and responsibilities associated with this new role in a publicly-traded company – we determined to increase his compensation, including his base salary, over a period of several years. We increased his base salary from $175,000 to $200,000 for 2005 and again to $250,000 for 2006.


n Similarly, in light of significantly increased responsibility due to the extraordinary growth of the Company, we increased the base salary of our Vice President – Operations from $120,800 in 2004 to $139,000 in January 2005 and again to $160,000 at mid-year 2005, and to $184,000 for 2006. For the same reason, we increased the base salary of our Vice President – Marketing & Acquisitions from $100,000 in 2004 to $115,000 in January 2005 and again to $150,000 at mid-year 2005, and to $172,500 for 2006.


n Our Vice President – Human Resources began employment with us on January 1, 2006. Her base salary of $175,000 for 2006 reflects the importance of that position in our organization, which is labor intensive, and represented a competitive level of compensation for a senior human resources executive with Ms. Hatmaker’s experience. Our success in collections is dependent to a considerable extent on our ability to retain and develop skilled account representatives, and our ability to develop the managerial skills of their supervisors.

We again increased the annual base salaries of our Named Executive Officers effective January 1, 2007, to $410,000 for our Chief Executive Officer, $275,000 for our Chief Financial Officer, $193,200 for our Vice President – Operations, $190,000 for our Vice President – Marketing & Acquisitions and $189,000 for our Vice President – Human Resources.

Annual Cash Incentive Compensation:

We believe that the most important indicator of our annual performance is cash collections less operating expenses, other than non-cash operating expenses such as depreciation and amortization. We refer to this metric as “adjusted EBITDA”. Our 2006 Annual Incentive Compensation Plan for the Named Executive Officers and other management premised the opportunity for our executive officers to earn annual cash incentive compensation on a formula
based upon adjusted EBITDA. However, our Compensation Committee also has the discretion to pay our executive officers bonuses apart from whether we meet financial goals. We believe that the exercise of this discretion can be important to address circumstances such as those we encountered in 2006.

We established adjusted EBITDA target goals for the 2006 Annual Incentive Compensation Plan based on our expectations about the liquidation rates of the portfolios we have purchased as well as anticipated collections from current year portfolio purchases, and anticipated operating expenses for the year.

For 2006, we set the adjusted EBITDA target goal at $178,077,625, our budgeted target for the year, with the minimum goal set at $169,173,744, or 95% of the target goal, and the maximum goal set at $195,885,388, or 110% of the target goal. Fifty percent of each of our executive officer’s annual incentive opportunity for 2006 was based on the achievement of the financial objective and fifty percent was based on the achievement of personal objectives, with no bonus payable under the Plan unless the Company achieved the minimum adjusted EBITDA goal. No incentive compensation is available to an executive officer who violates our Code of Business Conduct.

Personal objectives were jointly established by the executive officer and his or her immediate supervisor, with approval by the Compensation Committee, and varied by individual depending on the breadth and nature of the executive officer’s responsibilities. Where an executive officer has responsibility for a particular aspect of our business, such as our Vice President – Operations or Vice President – Marketing & Acquisitions, those goals were heavily weighted toward the performance of those aspects of our business. For example, the 2006 goals for our Vice President – Operations included, among others, collection targets and improved account representative productivity. Where the executive officer had broader corporate responsibility, such as our Chief Executive Officer, Chief Financial Officer or Vice President – Human Resources, the goals were tailored to his or her particular objectives for the year. For example, the 2006 goals for our Vice President-Human Resources included, among others, developing a management recruiting program and evaluating and reducing employee turnover.

The Company did not meet the minimum threshold adjusted EBITDA goal for purposes of paying incentive compensation under the 2006 Annual Incentive Compensation Plan for Management. Influenced by the pre-2005 rapid growth metrics of our industry and the Company, we had set overly aggressive financial goals for 2006 and, since no incentive compensation would be paid under the Plan unless 95% of the target adjusted EBITDA goal was achieved, the Plan did not leave much room for missing the overly aggressive financial target that had been established for the year. As a consequence our Compensation Committee considered payment of a discretionary bonus to our executive officers for 2006 performance, taking into account (1) the aggressive projections of collections on prior year portfolio purchases reflected in the 2006 Plan’s adjusted EBITDA target, (2) the requirement that the minimum adjusted EBITDA target must be achieved for the payment of a bonus, regardless of whether the personal objectives were achieved, (3) the fact that the Company’s performance in the fourth quarter of 2006 compared favorably to the fourth quarter of 2005, (4) the fact that the Company experienced sequential quarterly improvements during 2006 in several operating metrics, (5) the fact that 2006 operating expenses (other than non-cash expenses such as depreciation and amortization) were maintained as an appropriate percentage of collections and (6) the fact that our executive officers made significant improvements in executing our strategy during 2006. The Committee also considered that the Company had not paid executive officers a bonus for 2005 and believed that paying a discretionary bonus for 2006 would be important for retention, motivation and to reward the achievement of individual goals critical to the execution of our strategy.

Based on these considerations, without giving any particular weight to any of them, the Compensation Committee determined to pay our executive officers a discretionary bonus for 2006 to reward the achievement of personal goals. In each instance, the discretionary bonus was less than the bonus that would have been paid had the Company met its target adjusted EBITDA goal for the year.

MANAGEMENT DISCUSSION FROM LATEST 10K

Company Overview

We have been purchasing and collecting defaulted or charged-off accounts receivable portfolios from consumer credit originators since the formation of our predecessor company in 1962. Charged-off receivables are the unpaid obligations of individuals to credit originators, such as credit card issuers, consumer finance companies, healthcare providers, retail merchants, telecommunications and utility providers. Since these receivables are delinquent or past due, we are able to purchase them at a substantial discount. We purchase and collect charged-off consumer receivable portfolios for our own account as we believe this affords us the best opportunity to use long-term strategies to maximize our profits.

During the twelve months ended December 31, 2007, we invested $172.4 million (net of buybacks) in charged-off consumer receivable portfolios, with an aggregate face value of $5.3 billion, or 3.27% of face value. On average, prices we pay for charged-off accounts receivable portfolios have remained elevated compared to historical pricing levels as a result of increased competition. The higher prices we have paid for portfolios of charged-off accounts receivable have led to us assigning lower average internal rates of return to recent purchases. We believe that pricing began to moderate and decline slightly late into the latter half of 2007; however, we cannot give any assurances about future prices either overall or within account or asset types. We are determined to remain disciplined and purchase portfolios only when we believe we can achieve acceptable returns.

For the twelve months ended December 31, 2007, cash collections were $371.2 million, an 8.9% increase over the prior year period. Total revenues for the twelve months ended were $248.0 million, a 2.7% decrease from the prior year period. The total operating expenses for the twelve months ended December 31, 2007 was $207.6 million, a 13.3% increase over the prior year period. The increase in total operating expenses is primarily due to increased collections expense. Collections expense was $99.4 million, a 25.2% increase over the prior year period. Collections expense increased as a percentage of cash collections to 26.8% for the twelve months ended December 31, 2007 versus 23.3% in the same period for 2006. Several categories of collections expense increased, including court costs, telephone, letters and mailing costs and information acquisition expenses, related to an increase in the number of accounts under management and changes to collection strategies. Also, contingent fees paid to third parties increased primarily as a result of increased collections by other collection agencies collecting on our behalf. During 2007, we instituted an expanded and accelerated legal collection strategy. This strategy has placed emphasis on the legal channel earlier in the collection process. Court costs have increased as more suits are filed. We are currently exploring alternatives that will allow us to better match the court cost expenses with the associated cash collections. Net income was $20.4 million for the twelve months ended December 31, 2007, compared to a net income of $45.5 million for the same period in 2006. Net income for the twelve months ended December 31, 2007 and 2006 included net impairment charges of $24.4 million and $17.9 million, respectively. The net impairment charges reduced revenue and the carrying value of the purchased receivables.

During the year ended December 31, 2007, we completed a comprehensive review of our methods of forecasting future cash collections and believe we have improved our statistical forecasting model. In addition to the improved collections forecast approach, based on our review, we have chosen to extend the lives on many portfolios acquired in 2003 and later, up to 84 months. The improved collections forecast and the extension of 2003 and later portfolio lives were accounted for as a change in accounting estimate in accordance with SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3,” (“SFAS No. 154”). The revised collection forecasts and extension of portfolio lives contributed to a net impairment of $0.9 million and $14.8 million for the three and twelve months ended December 31, 2007, respectively. Yields on certain portfolios were adjusted upwards as a result of the extension of portfolio lives, however this adjustment did not have a material impact on revenue for the three and twelve months ended December 31, 2007.

On April 24, 2007, we announced a recapitalization plan to return $150.0 million to our shareholders through share repurchases and a special one-time cash dividend. During the second quarter of 2007, we repurchased 4.0 million shares for $75.0 million with an average purchase price of $18.75 per share. Furthermore, our 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. The special one-time cash dividend of $74.9 million completed the $150.0 million recapitalization.

To fund the return of capital to shareholders, we entered into a new credit agreement (the “New Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders named therein to provide a $100 million revolving credit facility (the “Revolving Credit Facility”) and a $150.0 million term loan facility (the “Term Loan Facility”). The Term Loan Facility was funded on June 12, 2007 and was partially utilized to fund share repurchases during June 2007. The remainder of the Term Loan Facility borrowings was used to pay the July 31, 2007 special one-time cash dividend.

Subsequent to the completion of the recapitalization plan, our interest expense will be significantly higher as a result of the borrowings incurred. We incurred interest expense of $3.4 million in the quarter ended December 31, 2007, and expect interest expense to remain at this level as a result of borrowings under the Term Loan Facility. Interest expense could change as a result of fluctuations in interest rates or increased borrowings under the Revolving Credit Facility. 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 London Interbank Offered Rate (“LIBOR”), for fixed rates, on the notional amount of $125 million. For the year ended December 31, 2007, the swap was determined to be effective in hedging against fluctuations in the fair value of the underlying debt. As of December 31, 2007, the value of the swap had declined by $3.1 million since entering into the swap and is reflected as a liability in our consolidated statements of financial position.

During 2007, we closed our White Marsh, Maryland and Wixom, Michigan offices. As part of this office consolidation, we recorded approximately $0.9 million in pre-tax restructuring charges for costs primarily related to associate one-time termination benefits, contract termination costs for the remaining lease payments on the Wixom, Michigan office and other exit costs. There was not a significant impact to the total number of associates because we transferred existing staff to, or increased staffing in other call center locations. We expect our annual occupancy expenses to be lower than they would have been if we had kept these two offices open by approximately $1.5 million beginning in 2008.

Industry Overview

The accounts receivable management industry is growing, driven by a number of industry trends, including:


• Increasing levels of consumer debt obligations — According to the U.S. Federal Reserve Board, the consumer credit industry increased from $133.7 billion of consumer debt obligations in 1970 to $2.5 trillion of consumer debt obligations in November 2007, a compound annual growth rate of 8.24%. According to the Kaulkin Ginsberg report, the amount of outstanding revolving and non-revolving consumer credit has increased at a compound annual growth rate of 6.4% from $1.3 trillion in June 1997 to $2.5 trillion in June 2007.

• Increasing charge-offs of the underlying receivables — According to Kaulkin Ginsberg index for the third quarter of 2007, beginning in the third quarter of 2007, the pricing began to moderate from elevated pricing levels exhibited in the debt purchasing markets in recent years. In addition, the charge-off rate and the amount of outstanding consumer credit both increased in the third quarter of 2007, indicating a favorable supply environment for debt purchasers. However, the unemployment rate and the number of individual bankruptcy filings also rose in the third quarter of 2007, indicating a more challenging collection environment as debtors have less resources available to satisfy their debt.

• Increasing types of credit originators accessing the debt sale market — According to the Kaulkin Ginsberg report, credit card companies and consumer finance companies continue to offer the largest share of the portfolios for sale. Telecommunications, utilities and healthcare companies have increased their presence in the debt purchase market in recent years.

Historically, credit originators have sought to limit credit losses either through using internal collection efforts with their own associates or outsourcing collection activities to third party collectors. Credit originators that outsource the collection of charged-off receivables have typically remained committed to third party providers as a result of the perceived economic benefit of outsourcing and the resources required to establish the infrastructure required to support in-house collection efforts. The credit originator can pursue an outsourced solution by either selling its charged-off receivables for immediate cash proceeds or by placing charged-off receivables with a third party collector on a contingent fee basis while retaining ownership of the receivables.

In the event that a credit originator sells receivables to a debt purchaser such as us, the credit originator receives immediate cash proceeds and eliminates the costs and risks associated with internal recovery operations. The purchase price for these charged-off receivables are generally discounted more than 90% from their face values, depending on the amount the purchaser anticipates it can recover and the anticipated effort required to recover that amount. Credit originators, as well as other holders of consumer debt, utilize a variety of processes to sell receivables, including the following:


• competitive bids for specified portfolios through a sealed bid or, in some cases, an on-line process;

• privately-negotiated transactions between the credit originator or other holder of consumer debt and a purchaser; and

• forward flow contracts, which commit a debt seller to sell, and a purchaser to acquire, a steady flow of charged-off consumer receivables periodically over a specified period of time, usually no less than three months, for a fixed percentage of the face value of the receivables.

We believe a debt purchaser’s ability to successfully collect payments on charged-off receivables, despite previous collection efforts by the credit originator or third party collection agencies, is driven by several factors, including the purchaser’s ability to:


• pursue collections over multi-year periods;

• tailor repayment plans based on a consumer’s ability to pay; and

• utilize experience and resources, including litigation.

Results of Operations

Year Ended December 31, 2007 Compared To Year Ended December 31, 2006

Revenue

Total revenues were $248.0 million for the year ended December 31, 2007, a decrease of $6.9 million, or 2.7%, from total revenues of $254.9 million for the year ended December 31, 2006. Purchased receivable revenues were $245.7 million for the year ended December 31, 2007, a decrease of $6.0 million, or 2.4%, from the year ended December 31, 2006 amount of $251.7 million. Purchased receivable revenues reflect an amortization rate, or the difference between cash collections and revenue, of 33.8%, an increase of 7.6%, from the amortization rate of 26.2% for the year ended December 31, 2007. The increased amortization rate is partially attributable to the net impairments of $24.4 million, an increase of $6.5 million, from net impairments of $17.9 million during the years ended December 31, 2007 and 2006, respectively. The increased amortization rate is also due to lower average internal rates of return assigned to recent years’ purchases. In addition, total revenues reflect a recognized gain on sale of purchased receivables during the year ended December 31, 2007 of $0.8 million compared to a $3.0 million gain during the year ended December 31, 2006. Cash collections on charged-off consumer receivables increased 8.9% to $371.2 million for the year ended December 31, 2007 from $340.9 million for the same period in 2006.

Cash collections for the year ended December 31, 2007 and 2006 include collections from fully amortized portfolios of $82.4 million and $66.1 million, respectively, of which 100% were reported as revenue.

During the year ended December 31, 2007, we acquired charged-off consumer receivables portfolios with an aggregate face value of $5.3 billion at a cost of $172.4 million, or 3.27% of face value, net of buybacks. Included in these purchase totals were 79 portfolios with an aggregate face value of $460.0 million at a cost of $24.7 million, or 5.37% of face value, net of buybacks, which were acquired through nine forward flow contracts. Revenues on portfolios purchased from our top three sellers were $70.1 million and $63.4 million for the years ended December 31, 2007 and 2006, respectively. During the year ended December 31, 2006, we acquired charged-off consumer receivables portfolios with an aggregate face value of $4.5 billion at a cost of $134.0 million, or 2.97% of face value (adjusted for buybacks through 2007). Additionally, the Company acquired portfolios as a result of the acquisition of PARC on April 28, 2006 that were allocated a purchase price value of $8.3 million. Included in these purchase totals were 28 portfolios with an aggregate face value of $101.8 million at a cost of $3.1 million, or 3.04% of face value (adjusted for buybacks through 2007), which were acquired through four forward contracts. Included in the 2006 totals are portfolios acquired as a result of the acquisition of PARC on April 28, 2006 that were allocated a purchase price value of $8.3 million. From period to period, we may buy paper of varying age, type and cost. As a result, the costs of our purchases, as a percent of face value, may fluctuate from one period to the next.

Operating Expenses

Total operating expenses were $207.6 million for the year ended December 31, 2007, an increase of $24.4 million, or 13.3%, compared to total operating expenses of $183.2 million for the year ended December 31, 2006. Total operating expenses were 55.9% of cash collections for the year ended December 31, 2007, compared with 53.7% for the same period in 2006. The increase as a percent of cash collections was primarily due to an increase in collections 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 operating expenses are variable in relation to cash collections.

Salaries and Benefits. Salary and benefit expenses were $82.9 million for the year ended December 31, 2007, an increase of $0.6 million, or 0.8%, compared to salary and benefit expenses of $82.3 million for the year ended December 31, 2006. Salary and benefit expenses were 22.3% of cash collections during 2007 compared with 24.1%, for the same period in 2006. Salary and benefit expenses decreased as a percentage of cash collections primarily due to a decrease in average overall associate headcount and increased productivity per full-time equivalent associate, which is partially offset by increased incentive compensation associated with the increased productivity for the twelve months ended December 31, 2007 compared to the same period in 2006.

We adopted FAS 123(R) on January 1, 2006. Adoption did not have a material impact to our consolidated financial statements. Since going public in 2004, we had only granted stock options 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 $0.3 million and $0.1 million in salaries and benefits for the year ended December 31, 2007 and 2006, respectively, as it related to stock-based compensation awards granted to associates. As of December 31, 2007, there was $4.3 million of total unrecognized compensation expense related to nonvested awards of which $3.0 million was expected to vest over a weighted average period of 3.37 years. As of December 31, 2006, there was $0.7 million total unrecognized compensation expense related to nonvested awards of which $0.3 million was expected to vest over a weighted average period of 4.08 years.

Collections Expense. Collections expense increased to $99.4 million for the year ended December 31, 2007, reflecting an increase of $20.0 million, or 25.2%, over collections expense of $79.4 million for the year ended December 31, 2006. Collections expense was 26.8% of cash collections during 2007 compared with 23.3% for the same period in 2006. Collections expense increased as a percentage of cash collections primarily due to an increase in court costs, contingent fees paid to third parties collecting on our behalf, letter and mailing costs, telephone and information acquisition expenses. The increase of $8.5 million in the court costs and third party collection expenses were primarily due to changes in our collection strategies as well as an increase in the number of accounts for which legal and forwarding activities have been initiated. The increase of $4.8 million in contingent fees paid is due to higher contingent collections. The increase of $1.6 million in telephone was primarily due to changes in collection strategies. The increase of $1.8 million in letters and mailing and information acquisition is primarily due to the increased number of accounts as a result of purchasing in late 2006 and during 2007. During 2007, we instituted an expanded and accelerated legal collection strategy. This strategy has placed emphasis on the legal channel earlier in the collection process. Court costs have increased as more suits are filed. We are currently exploring alternatives that will allow us to better match the court cost expenses with the associated cash collections.

Occupancy. Occupancy expense was $9.1 million for the year ended December 31, 2007, an increase of $0.1 million, or 1.9%, over occupancy expense of $9.0 million for the year ended December 31, 2006. Occupancy expense was 2.5% of cash collections during 2007 compared with 2.6% for the same period in 2006. During 2007 we closed our White Marsh, MD and Wixom, MI offices. We expect our annual occupancy expenses to be lower than they would have been if we had kept these two offices open by approximately $1.5 million beginning in 2008.

Administrative. Administrative expenses increased to $10.5 million for the year ended December 31, 2007, from $8.4 million for the year ended December 31, 2006, reflecting a $2.2 million, or 25.7%, increase. Administrative expenses were 2.8% of cash collections during 2007 compared with 2.5% for the same period in 2006. Administrative expenses increased as a percentage of cash collections primarily due to the one-time property tax reversal for the year ended December 31, 2006. During 2006, we determined that we would not be paying a previously probable accrual of property taxes for $1.0 million and therefore we reversed the related expenses.

Restructuring Charges. Restructuring charges were $0.9 million for the year ended December 31, 2007 as a result of the sale of our White Marsh, Maryland office and for closing the Wixom, Michigan office during 2007. Expenses were primarily related to associate one-time termination benefits, contract termination costs for the remaining lease payments on the Wixom, Michigan office and other exit costs, which were partially offset by $0.3 million proceeds received from the sale of the tangible assets located in the White Marsh, Maryland office.

Depreciation and Amortization. Depreciation and amortization expense was $4.3 million for the year ended December 31, 2007, an increase of $0.1 million or 2.3% over depreciation and amortization expense of $4.2 million for the year ended December 31, 2006. Depreciation and amortization expense was 1.2% of cash collections during 2007 compared with 1.2% for the same period in 2006.

Impairment of Intangible Assets. Impairment of intangible assets was $0.3 million for the year ended December 31, 2007 as one associate was released from his non-compete and employment agreements during the year. As a result, we recognized an impairment charge for the remaining balance of the non-compete agreement at December 31, 2007. There was no impairment of intangible assets for the year ended December 31, 2006.

Interest Income. Interest income was $0.5 million during 2007, reflecting a decrease of $1.6 million compared to $2.0 million interest income for the year ended December 31, 2006. Interest income was 0.1% as a percentage of cash collections during 2007 compared with 0.6% for the same period in 2006. Interest income decreased as a percentage of cash collections primarily due to lower cash balances compared to the prior year. We expect interest income to be immaterial until the Term Loan Facility is paid off.

Interest Expense. Interest expense during 2007 was $8.1 million reflecting an increase of $7.5 million compared to $0.6 million for the year ended December 31, 2006. The increase in interest expense was due to increased average borrowings during the twelve months ended December 31, 2007 compared to the same period in 2006. Average borrowings for the year ended December 31, 2007 reflect the borrowings under our new $150.0 million Term Loan Facility to finance our recapitalization and special one-time cash dividend. Interest expense also includes the amortization of capitalized bank fees of $0.6 million and $0.2 million for the years ended December 31, 2007 and 2006, respectively. Included in the amortization of the capitalized bank fees for the year ended December 31, 2007 is $0.3 million relating to the former credit agreement that was terminated on June 12, 2007, which includes the $0.2 million write-off of deferred financing fees associated with the extinguished former credit agreement.

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 outstanding on our Term Loan Facility. This interest rate swap 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 earnings. For the year ended December 31, 2007, the ineffective portion of the change in fair value of the derivative recorded in earnings was not material. We had no derivative instruments as of December 31, 2006.

Income Taxes. Income taxes of $12.5 million reflect a federal tax rate of 35.0% and a state tax rate of 3.0% (net of federal tax benefit) for the year ended December 31, 2007. For the year ended December 31, 2006, the federal tax rate was 35.3% and the state tax rate was 2.4% (net of federal tax benefit). The 0.6% increase in the state rate was due to changes in state laws. Income tax expense decreased $15.0 million, or 54.6% from income tax expense of $27.5 million for the year ended December 31, 2006. The decrease in income tax expense was due to a decrease in pre-tax financial statement income, which was $32.9 million for the year ended December 31, 2007 compared to $73.1 million for the same period in 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Three Months Ended September 30, 2007 Compared To Three Months Ended September 30, 2006
Revenue
Total revenues were $52.6 million for the three months ended September 30, 2007, a decrease of $6.6 million, or 11.1%, from total revenues of $59.2 million for the three months ended September 30, 2006. Purchased receivable revenues were $52.0 million for the three months ended September 30, 2007, a decrease of $7.7 million, or 12.8%, from the three months ended September 30, 2006 amount of $59.7 million. Purchased receivable revenues reflect net impairments recognized during the three months ended September 30, 2007 and 2006 of $13.8 million and $6.3 million, respectively. Total revenue reflects a recognized gain on sale of purchased receivables during the three months ended September 30, 2007 and 2006 of $0.3 million and $0.4 million, respectively. The decrease in purchased receivable revenues was primarily due to net impairments, which increased by $7.5 million versus 2006 to $13.8 million and by lower average internal rates of return assigned to recent purchases. Refer to the summarization tables on page 27 within the “Portfolio Performance” section, under the heading “Supplemental Performance Data”. Cash collections on charged-off consumer receivables increased 12.2% to $90.7 million for the three months ended September 30, 2007 from $80.9 million for the same period in 2006. Cash collections for the three months ended September 30, 2007 and 2006 include collections from fully amortized portfolios of $21.3 million and $15.8 million, respectively, of which 100% were reported as revenue.
During the three months ended September 30, 2007, we acquired charged-off consumer receivable portfolios with an aggregate face value of $1.9 billion at a cost of $35.3 million, or 1.90% of face value, net of buybacks. Included in these purchase totals were 21 portfolios with an aggregate face value of $109.4 million at a cost of $5.5 million, or 5.0% of face value, which were acquired through eight forward flow contracts. Revenues on portfolios purchased from our top three sellers were $16.9 million and $7.8 million during the three months ended September 30, 2007 and 2006, respectively, with one seller included in the top three in both three-month periods. During the three months ended September 30, 2006, we acquired charged-off consumer receivable portfolios with an aggregate face value of $767.0 million at a cost of $27.1 million, or 3.54% of face value (adjusted for buybacks through September 30, 2007). Included in these purchase totals were nine portfolios with an aggregate face value of $31.1 million at a cost of $0.8 million, or 2.64% of face value (adjusted for buybacks through September 30, 2007), which were acquired through three 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 $52.2 million for the three months ended September 30, 2007, an increase of $9.3 million, or 21.6%, compared to total operating expenses of $42.9 million for the three months ended September 30, 2006. Total operating expenses were 57.4% of cash collections for the three months ended September 30, 2007, compared with 53.0% for the same period in 2006. The increase as a percent of cash collections is due to increases in collections expense, administrative expenses and restructuring charges and is partially offset by decreases in salaries and benefits. Operating expenses are traditionally measured in relation to revenues. However, we measure operating expenses in relation to cash collections. We believe this is appropriate because of varying amortization rates, which is the difference between cash collections and revenues recognized, from period to period, due to seasonality of collections and other factors that can distort the analysis of operating expenses when measured against revenues. Additionally, we believe that the majority of our operating expenses are variable in relation to cash collections.
Salaries and Benefits. Salary and benefit expenses were $20.0 million for the three months ended September 30, 2007, an increase of $0.7 million, or 3.6%, compared to salary and benefit expenses of $19.4 million for the three months ended September 30, 2006. Salary and benefit expenses were 22.1% of cash collections for the three months ended September 30, 2007, compared with 23.9% for the same period in 2006. Salary and benefit expenses decreased as a percentage of cash collections primarily due to a decrease in average overall employee headcount and increased productivity per full-time equivalent employee for the three months ended September 30, 2007 compared to the same period in 2006, which is partially offset by increased incentive compensation associated with traditional cash collections.
Collections Expense. Collections expense increased to $26.2 million for the three months ended September 30, 2007, an increase of $6.8 million, or 35.3%, over collections expense of $19.4 million for the three months ended September 30, 2006. Collections expense was 28.9% of cash collections during the three months ended September 30, 2007 compared with 23.9% for the same period in 2006. Collections expense increased as a percentage of cash collections primarily due to increases in court costs, contingent fees paid to third parties collecting on our behalf and telephone expenses. The increases in the court costs and third party collection expenses were primarily due to changes in our collection strategies as well as an increase in the number of accounts for which legal and forwarding activities have been initiated. The increase in contingent fees paid is due to higher contingent collections. The increase in telephone expenses was primarily due to change in our collection strategies.
Occupancy. Occupancy expense was $2.4 million for the three months ended September 30, 2007, an increase of $0.1 million compared to $2.3 million for the three months ended September 30, 2006. Occupancy expense was 2.6% and 2.8% of cash collections during the three months ended September 30, 2007 and 2006, respectively.
Administrative. Administrative expenses increased to $2.4 million for the three months ended September 30, 2007, from $0.8 million for the three months ended September 30, 2006, reflecting a $1.6 million increase. Administrative expenses were 2.6% of cash collections during the three months ended September 30, 2007 compared with 1.0% for the same period in 2006. Administrative expenses for the quarter ended September 30, 2007 include $0.5 million for higher consulting fees. During the three months ended September 30, 2006, we determined that we would not be paying a previously probable accrual of property taxes for $1.0 million and therefore we reversed the related expenses. Factoring out the property taxes reversal, administrative expenses would have been 2.2% of cash collections for the three months ended September 30, 2006.
Restructuring Charges. Restructuring charges were $0.1 million for the three months ended September 30, 2007 as a result of the sale of our White Marsh, Maryland office and our plans to close the Wixom, Michigan office during 2007. Expenses of $0.4 million were primarily related to employee one-time termination benefits and changes to the service life of certain long-lived assets, which is partially offset by $0.3 million proceeds received from the sale of the tangible assets located in the White Marsh, Maryland office.
Depreciation and Amortization. Depreciation and amortization expense was $1.1 million for each of the three months ended September 30, 2007 and 2006, respectively. Depreciation and amortization expense was 1.1% of cash collections during the three months ended September 30, 2007 compared with 1.4% for the same period in 2006.
Interest Income. Interest income was $0.2 million for the three months ended September 30, 2007, reflecting a decrease of $0.4 million compared to $0.6 million for the three months ended September 30, 2006. The decrease was due primarily to lower cash balances compared to the prior year.

Interest Expense. Interest expense was $3.4 million for the three months ended September 30, 2007, reflecting an increase of $3.3 million compared to interest expense of $0.1 million for the three months ended September 30, 2006. Interest expense was 3.7% of cash collections during the three months ended September 30, 2007 compared with 0.1% for the same period in 2006. The increase in interest expense was due to increased average borrowings during the three months ended September 30, 2007 compared to the same period in 2006. Average borrowings during the quarter ended September 30, 2007 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 $0.1 million and less than $0.1 million for the three months ended September 30, 2007 and 2006, respectively.
Income Taxes . Income tax benefit of $1.0 million reflects a federal tax rate of 36.0% and a state tax rate of 2.4% (net of federal tax benefit) for the three months ended September 30, 2007. For the three months ended September 30, 2006, income tax expense was $6.2 million and reflected a federal tax rate of 34.6% and state tax rate of 2.2% (net of federal tax benefit including utilization of state net operating losses). The 0.2% increase in the state rate was due to changing apportionment percentages among the various states and due to the new Michigan Business Tax (“MBT”). Income tax expense decreased $7.2 million from income tax expense of $6.2 million for the three months ended September 30, 2006. The decrease in tax expense was due to a decrease in pre-tax financial statement income, which was a pre-tax financial statement loss of $2.7 million for the three months ended September 30, 2007, compared to a pre-tax financial statement income of $16.9 million for the same period in 2006.

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