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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q (Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2004o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission file number: 000-50552 ASSET ACCEPTANCE CAPITAL CORP.  Delaware
    
    80-0076779(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 6985 Miller Road
Warren, Michigan 48092
(Address of principal executive offices) Registrants telephone number, including area code: (586) 939-9600 Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  x     No  o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  o     No  x Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. As of July 20, 2004, 37,225,275 shares of the Registrants common stock
were outstanding.




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TABLE OF CONTENTS PagePart I Financial Information
    
    
    3Item 1. Consolidated Financial Statements (unaudited)
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26Part II Other Information
    
    
    26Item 1. Legal Proceedings
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27Item 6. Exhibits and Reports on Form 8-K
    
    
    27Signatures
    
    
    28Rule 13a-14(a) Certification of Chief Executive OfficerRule 13a-14(a) Certification of Chief Financial OfficerSection 1350 Certification of Chief Executive Officer and Chief Financial Officer
  10-Q Report This Form 10-Q and all other Company filings with the Securities and Exchange
Commission are also accessible at no charge on the Companys website at
www.assetacceptance.com as soon as reasonably practicable after filing with the
Commission. 2




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements ASSET ACCEPTANCE CAPITAL CORP.
Consolidated Statements of Financial Position June 30, 2004
    
    December 31, 2003(unaudited)ASSETSCash
    
    $
    9,189,083
    
    
    $
    5,498,836Purchased receivables
    
    
    197,503,693
    
    
    
    183,719,667Finance contract receivables, net
    
    
    725,216
    
    
    
    642,530Property and equipment, net
    
    
    7,600,245
    
    
    
    7,970,570Goodwill
    
    
    6,339,574
    
    
    
    6,339,574Other assets
    
    
    3,368,748
    
    
    
    2,938,999Total assets
    
    $
    224,726,559
    
    
    $
    207,110,176LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Line of credit
    
    $
    17,600,000
    
    
    $
    72,950,000Notes payable  related party
    
    
    
    
    
    
    39,560,110Deferred tax liability
    
    
    26,499,934
    
    
    
    11,905,768Accounts payable and other liabilities
    
    
    8,686,307
    
    
    
    8,092,844Capital lease obligations
    
    
    284,945
    
    
    
    218,765Total liabilities
    
    
    53,071,186
    
    
    
    132,727,487Stockholders 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 and outstanding shares  37,225,275 at June 30, 2004
and 28,448,449 at December 31, 2003
    
    
    372,253
    
    
    
    284,484Additional paid in capital
    
    
    159,151,555
    
    
    
    36,385,000Retained earnings
    
    
    12,131,565
    
    
    
    37,713,205Total equity
    
    
    171,655,373
    
    
    
    74,382,689Total liabilities and equity
    
    $
    224,726,559
    
    
    $
    207,110,176
 See accompanying notes. 3




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ASSET ACCEPTANCE CAPITAL CORP.
Consolidated Statements of Income Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003(unaudited)
    
    (unaudited)
    
    (unaudited)RevenuesPurchased receivable revenues
    
    $
    51,352,846
    
    
    $
    37,816,717
    
    
    $
    100,939,620
    
    
    $
    72,430,910Finance contract revenues
    
    
    153,776
    
    
    
    174,320
    
    
    
    314,633
    
    
    
    315,526Total revenues
    
    
    51,506,622
    
    
    
    37,991,037
    
    
    
    101,254,253
    
    
    
    72,746,436ExpensesSalaries and benefits
    
    
    16,465,210
    
    
    
    13,022,371
    
    
    
    77,883,356
    
    
    
    24,382,344Collections expense
    
    
    12,773,687
    
    
    
    10,111,271
    
    
    
    25,079,210
    
    
    
    19,266,213Occupancy
    
    
    1,419,857
    
    
    
    1,014,231
    
    
    
    2,818,152
    
    
    
    1,967,138Administrative
    
    
    1,361,671
    
    
    
    855,054
    
    
    
    2,641,342
    
    
    
    1,736,844Depreciation
    
    
    736,747
    
    
    
    594,853
    
    
    
    1,463,587
    
    
    
    1,237,531Loss on disposal of equipment
    
    
    16,380
    
    
    
    2,122
    
    
    
    42,906
    
    
    
    2,714Total operating expense
    
    
    32,773,552
    
    
    
    25,599,902
    
    
    
    109,928,553
    
    
    
    48,592,784Income (loss) from operations
    
    
    18,733,070
    
    
    
    12,391,135
    
    
    
    (8,674,300
    )
    
    
    24,153,652Net interest expense
    
    
    335,703
    
    
    
    1,757,736
    
    
    
    1,329,944
    
    
    
    3,589,395Other income
    
    
    (174
    )
    
    
    (111,294
    )
    
    
    (24,958
    )
    
    
    (180,898
    )Income (loss) before income taxes
    
    
    18,397,541
    
    
    
    10,744,693
    
    
    
    (9,979,286
    )
    
    
    20,745,155Income taxes
    
    
    6,820,181
    
    
    
    2,192,531
    
    
    
    14,602,354
    
    
    
    4,217,137Net income (loss)
    
    $
    11,577,360
    
    
    $
    8,552,162
    
    
    $
    (24,581,640
    )
    
    $
    16,528,018Pro forma income tax expense (benefit)
    
    
    
    
    
    $
    3,997,455
    
    
    $
    (3,712,295
    )
    
    $
    7,718,027Pro forma net income (loss)
    
    
    
    
    
    $
    6,747,238
    
    
    $
    (6,266,991
    )
    
    $
    13,027,128Weighted average number of shares :Basic
    
    
    37,225,275
    
    
    
    28,448,449
    
    
    
    35,537,424
    
    
    
    28,448,449Diluted
    
    
    37,235,470
    
    
    
    28,448,449
    
    
    
    35,537,424
    
    
    
    28,448,449Earnings per common share outstanding:Basic
    
    $
    0.31
    
    
    $
    0.30
    
    
    $
    (0.69
    )
    
    $
    0.58Diluted
    
    $
    0.31
    
    
    $
    0.30
    
    
    $
    (0.69
    )
    
    $
    0.58Proforma earnings per common share
outstanding:Basic
    
    
    
    
    
    $
    0.24
    
    
    $
    (0.18
    )
    
    $
    0.46Diluted
    
    
    
    
    
    $
    0.24
    
    
    $
    (0.18
    )
    
    $
    0.46
 See accompanying notes. 4




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ASSET ACCEPTANCE CAPITAL CORP.
Consolidated Statements of Cash Flows Six months ended June 30,2004
    
    2003(unaudited)Cash flows from operating activitiesNet income (loss)
    
    $
    (24,581,640
    )
    
    $
    16,528,018Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    1,463,587
    
    
    
    1,237,531Deferred income taxes
    
    
    14,594,166
    
    
    
    4,217,137Share-based compensation expense
    
    
    26,726,917
    
    
    
    Loss on disposal of equipment
    
    
    42,906
    
    
    
    2,714Provision for losses on finance contracts
    
    
    70,623
    
    
    
    71,971Changes in assets and liabilities:(Increase) decrease in other assets
    
    
    (547,992
    )
    
    
    135,144Increase in accounts payable and other liabilities
    
    
    425,705
    
    
    
    3,223,016Net cash provided by operating activities
    
    
    18,194,272
    
    
    
    25,415,531Cash flows from investing activitiesInvestment in purchased receivables, net of buybacks
    
    
    (45,438,734
    )
    
    
    (36,905,668
    )Principal collected on purchased receivables
    
    
    31,822,466
    
    
    
    22,777,352Investment in finance contracts
    
    
    (413,909
    )
    
    
    (509,838
    )Principal collected on finance contracts
    
    
    260,601
    
    
    
    268,389Proceeds from sale of fixed assets
    
    
    
    
    
    
    1,956Purchase of fixed assets
    
    
    (884,633
    )
    
    
    (1,084,923
    )Net cash used in investing activities
    
    
    (14,654,209
    )
    
    
    (15,452,732
    )Cash flows from financing activitiesBorrowings under line of credit
    
    
    41,320,000
    
    
    
    22,900,000Repayment of line of credit
    
    
    (96,670,000
    )
    
    
    (29,200,000
    )Borrowings from related party
    
    
    
    
    
    
    1,779,363Repayments to related party
    
    
    (39,560,110
    )
    
    
    Repayment of capital lease obligations
    
    
    (67,112
    )
    
    
    (37,575
    )Dividends and distributions paid
    
    
    (1,000,000
    )
    
    
    (182,600
    )Additional assets contributed
    
    
    50,406
    
    
    
    Proceeds from initial public offering, net of costs
    
    
    96,077,000
    
    
    
    Net cash provided by (used in) financing activities
    
    
    150,184
    
    
    
    (4,740,812
    )Net increase in cash
    
    
    3,690,247
    
    
    
    5,221,987Cash at beginning of period
    
    
    5,498,836
    
    
    
    2,280,861Cash at end of period
    
    $
    9,189,083
    
    
    $
    7,502,848Supplemental disclosure of cash flow informationCash paid for interest
    
    $
    1,217,810
    
    
    $
    1,516,463Cash paid for income taxes
    
    
    93,584
    
    
    
    Non-cash investing and financing activities:Capital lease obligations incurred
    
    
    133,292
    
    
    
    73,652
 See accompanying notes. 5




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ASSET ACCEPTANCE CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Reporting Entity Asset Acceptance Capital Corp. (the Company) commenced an initial public
offering (IPO) of common stock on February 5, 2004. On February 4, 2004, a
reorganization was completed in which all of the shares of capital stock of AAC
Investors, Inc. and RBR Holding Corp. were contributed to Asset Acceptance
Capital Corp. in exchange for all of the outstanding shares of common stock of
Asset Acceptance Capital Corp. AAC Investors, Inc. and RBR Holding Corp. held
a 60% and 40% ownership interest in Asset Acceptance Holdings LLC,
respectively. The resulting consolidated entity includes Asset Acceptance
Capital Corp., AAC Investors, Inc., RBR Holding Corp. and Asset Acceptance
Holdings LLC and subsidiaries. Prior to this reorganization, Asset Acceptance
Capital Corp. did not conduct any business and did not have any assets or
liabilities, except as related to the IPO. This reorganization was recorded at
cost. All periods presented have been restated to reflect this reorganization. AAC Investors, Inc. was formed in September 2002 for the purpose of
acquiring an interest in Asset Acceptance Holdings LLC and subsidiaries.
Effective at the close of business on September 30, 2002, AAC Investors, Inc.
completed the acquisition of 60% of Asset Acceptance Holdings LLC. We have presented pro forma income taxes and pro forma net income assuming
the consolidated entity had been a C corporation for all periods presented. Tax
rates used for pro forma income taxes are equal to the rates that would have
been in effect had we been required to report tax expense in such years. The consolidated financial statements of the Company include Asset
Acceptance Capital Corp., AAC Investors, Inc., RBR Holding Corp., and Asset
Acceptance Holdings LLC and its wholly-owned subsidiaries, Asset Acceptance,
LLC, Financial Credit, LLC, CFC Financial, LLC, Rx Acquisitions, LLC (formerly
known as Med-Fi Acceptance, LLC), and Consumer Credit, LLC. The accompanying
unaudited financial statements of the Company have been prepared in accordance
with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange
Commission and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with accounting principles generally accepted in
the United States. In the opinion of the Company, however, the accompanying
unaudited consolidated financial statements contain all adjustments necessary
for a fair statement of the Companys financial position as of June 30, 2004
and its results of operations for the three and six month periods ended June
30, 2004 and 2003 and cash flows for the six month periods ended June 30, 2004
and 2003. The results of operations of the Company for the three and six month
periods ended June 30, 2004 and 2003 may not be indicative of future results.
These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Companys Annual Report on Form 10-K filed for the year ended December 31,
2003. Nature of Operations The Company is a leading purchaser and collector of charged-off consumer
receivables in the United States. These receivables are acquired from consumer
credit originators, primarily credit card issuers, consumer finance companies,
retail merchants and telecommunications and other utility providers as well as
from resellers and other holders of consumer debt. As part of the collection
process, the Company occasionally sells receivables from these portfolios to
unaffiliated companies. The Company also finances the sales of consumer product retailers located
primarily in Michigan and Florida. 6




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Purchased Receivables Portfolios and Revenue Recognition Purchased receivables are receivables which 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
receivables portfolios are purchased at a substantial discount (usually
discounted 95% to 98%) from their face amounts and are initially recorded at
the Companys cost to acquire the portfolio. Financing for the purchases is
primarily provided by the Companys lines of credit and cash from operations. The Company accounts for its investment in purchased receivables using the
guidance provided by the Accounting Standards Executive Committee Practice
Bulletin 6, Amortization of Discounts on Certain Acquired Loans. The Company
purchases pools of homogenous accounts receivable (static pool) and records
each pool at its acquisition cost. Each static pool retains its own identity
and does not change. Each pool is accounted for as a single unit for
recognition of revenue, principal payments and impairment. Collections on each
static pool are allocated to revenue and principal reduction based on the
estimated internal rate of return (IRR). The IRR is the rate of return that
each static pool requires to amortize the cost or carrying value of the pool to
zero over its estimated life. Each pools IRR is determined by estimating
future cash flows, which are based on historical collection data for pools with
similar characteristics (paper type). Based on historical cash collections,
each pool is given an expected life of 60 months. The actual life of each pool
may vary, but each pool generally amortizes between 50 and 60 months. Monthly
cash flows greater than revenue recognized will reduce the carrying value of
each static pool and monthly cash flows lower than revenue recognized will
increase the carrying value of the static pool. Each pool is reviewed monthly
and compared to historical cash flows, by paper type, to determine whether each
pool is performing as expected. If a pool is not performing as expected, the
IRR is adjusted either up or down so that the carrying value of the pool
amortizes close to its expected life. The cost recovery method prescribed by Practice Bulletin 6 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. As of June 30, 2004, the Company had 51 pools on the cost
recovery method with an aggregate carrying value of $3.5 million or less than
1.8% of the total carrying value of all purchased receivables. In the event that cash collected would be inadequate to amortize the
carrying value, an impairment charge would be taken with a corresponding
write-off of the receivable balance. Accordingly, a reserve for impairment is
not maintained for purchased receivables. The agreements to purchase receivables typically include general
representations and warranties from the sellers covering account holder death,
bankruptcy, age of account and settled or disputed accounts prior to sale. The
representation and warranty period permits the return of certain accounts from
the Company back to the seller. The general time frame to return accounts is
within 60 to 365 days. Returns 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 generally compared to the carrying value of the accounts; a
gain or loss is recognized on the difference between proceeds received and
carrying value. 7




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Changes in purchased receivables portfolios for the three months ended
June 30, 2004 and 2003 and the six months ended June 30, 2004 and 2003 were as
follows: Three Months ended June 30,
    
    Six Months ended June 30,2004
    
    2003
    
    2004
    
    2003Beginning balance
    
    $
    180,236,262
    
    
    $
    146,812,304
    
    
    $
    183,719,667
    
    
    $
    133,336,581Investment in purchased
receivables, net of buybacks
    
    
    33,480,616
    
    
    
    14,026,408
    
    
    
    45,606,492
    
    
    
    36,905,668Cash collections
    
    
    (67,566,031
    )
    
    
    (51,190,532
    )
    
    
    (132,762,086
    )
    
    
    (95,208,262
    )Purchased receivable revenues
    
    
    51,352,846
    
    
    
    37,816,717
    
    
    
    100,939,620
    
    
    
    72,430,910Ending balance
    
    $
    197,503,693
    
    
    $
    147,464,897
    
    
    $
    197,503,693
    
    
    $
    147,464,897
 Finance Contract Receivables Finance contract revenues are recognized based on the accretion of the
discount at which these contracts are financed over their respective terms.
Unearned discounts on finance contract receivables were approximately $444,000
and $417,000 at June 30, 2004 and December 31, 2003, respectively. The fair
value of finance contract receivables does not materially differ from their
book value. Interest is recognized over the life of the contract. An allowance
for doubtful accounts is established for estimated losses on accounts for which
collection has been delayed or is in doubt. The allowance for doubtful
accounts, which is netted against finance contract receivables on the
consolidated statements of financial position, was approximately $87,000 and
$106,000 at June 30, 2004 and December 31, 2003, respectively. 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 collections paid to the third parties as a
component of collection expense. The percent of gross collections from such
third party relationships were 21% and 16% for the three months ended June 30,
2004 and 2003, and 20% and 16% for the six months ended June 30, 2004 and 2003,
respectively. Initial Public Offering The Company received net proceeds of $96.1 million from the
IPO of 7,000,000 shares of common stock which were used to eliminate the
related party debt of $40.0 million, reduce the line of credit by $37.7 million
and pay withholding taxes on behalf of the share appreciation rights holders in
the amount of $18.4 million. Share Appreciation Rights Compensation Charge As previously announced in the Companys Registration Statement on Form
S-1 and the Companys Annual Report on Form 10-K for the year ended December
31, 2003 and further described on Form 10-Q for the three months
ended March 31, 2004, the Company recognized a compensation charge (including
related payroll taxes) of $45.7 million ($28.7 million net of income taxes)
during the first quarter of 2004 for its share appreciation rights plan. The
share appreciation rights plan, adopted by Asset Acceptance Holdings LLC during
2002, granted participants the right to share in the appreciation of the value
of Asset Acceptance Holdings LLC. The benefit earned was based on certain
financial objectives and vested 100% upon completion of the IPO. There were
1,200,638 share appreciation rights outstanding at the time of the IPO. Deferred Tax Charge As previously announced in the Companys Registration Statement on Form
S-1 and the Companys Annual Report on Form 10-K for the year ended December
31, 2003 and further described on Form 8




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10-Q for the three months ended March 31, 2004, the Company
recognized a deferred tax charge of $19.3 million during the first quarter of
2004 related to deferred taxes of RBR Holding Corp. RBR Holding Corp. was
previously taxed as an S corporation under the Internal Revenue Code. The
shareholders of RBR Holding Corp. included their respective shares of taxable
income or loss in their individual tax returns and therefore no income tax
expense was recognized on the financial statements of the Company. As a result
of the reorganization completed on February 4, 2004, RBR Holding Corp. became a
wholly-owned subsidiary of Asset Acceptance Capital Corp. and could no longer
be taxed as an S corporation. The provision for deferred income taxes results
from temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities using enacted tax rates. 2. Related-Party Transactions On October 1, 2002, the Company borrowed $35.0 million from its
shareholders. Interest on the notes of 10% per annum, compounded on June 30 and
December 31 of each year, and matured September 30, 2007 or upon the sale of
substantially all assets of the Company or the sale of additional equity of the
Company. The Company recognized $433,536 and $1,779,364 of interest expense on
these notes for the six months ended June 30, 2004 and 2003, respectively. The
Company owed the related parties $39,560,110 as of December 31, 2003. These notes
were paid in full during February 2004. 3. Line of Credit The Company has a $100.0 million line of credit with a syndicate of
commercial lenders which originated on September 30, 2002 and was amended most
recently on February 11, 2004. The line of credit is collateralized by all
assets of the Company and expires May 31, 2007. Interest is at prime, or
depending on the Companys liquidity, at 25 basis points over prime, or
alternatively, at rates between 200 and 275 basis points over the 30, 60, or 90
day LIBOR rate. The outstanding balance was $17,600,000 and $72,950,000 at
June 30, 2004 and December 31, 2003, respectively. The line of credit facility
has certain covenants and restrictions with which the Company must comply,
including:  
    
    Funds borrowed can be used to purchase portfolios of charged-off
receivables and for general corporate purposes.
    
    Leverage ratio (as defined in the line of credit agreement) cannot
exceed 1.5 to 1.0.
    
    Debt to total capitalization ratio (as defined in the line of credit
agreement) cannot exceed 1.25 to 1.0. The Companys management believes it is in compliance with all terms of
its line of credit agreement as of June 30, 2004. 4. Property and Equipment Property and equipment, having estimated useful lives ranging from three
to ten years consisted of the following: June 30,
    
    December 31,2004
    
    2003Computers and software
    
    $
    7,133,184
    
    
    $
    6,641,311Furniture and fixtures
    
    
    5,611,908
    
    
    
    5,284,614Leasehold improvements
    
    
    676,341
    
    
    
    689,043Equipment under capital lease
    
    
    457,483
    
    
    
    397,908Automobiles
    
    
    133,325
    
    
    
    133,325Total property and equipment, cost
    
    
    14,012,241
    
    
    
    13,146,201Less accumulated depreciation
    
    
    (6,411,996
    )
    
    
    (5,175,631
    )Net property and equipment
    
    $
    7,600,245
    
    
    $
    7,970,570
 9




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5. Stock Based Compensation Effective January 1, 2004, the Company adopted the fair value recognition
provisions of FAS 123, Accounting for Stock-Based Compensation, prospectively
to all employee awards granted, modified, or settled after January 1, 2004. The Company adopted a stock incentive plan during February 2004 which
authorizes the use of stock options, stock appreciation rights, restricted
stock grants and units, performance share awards and annual incentive awards to
key employees, primarily management. The Company has reserved 3,700,000 shares
of common stock 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 shareholders by
encouraging employees to acquire an ownership interest in the Company, thus
identifying their interests with those of shareholders and (2) to enhance the
ability of the Company to attract and retain qualified employees, consultants
and non-employee directors. No participant may be granted options during any
one fiscal year to purchase more than 500,000 shares of Common Stock. Stock Options As of June 30, 2004, the Company had issued options to purchase 78,850
shares of its common stock under the plan. These options have been granted to
non-employee directors of the Company. Options granted under the Stock
Incentive Plan generally vest 50% after one year from the grant date and 100%
after two years from the grant date, however where directors accept options in
lieu of cash compensation, the options vest immediately. The related expense
of $74,520 for the six months ended June 30, 2004 is included in administrative
expenses. The following summarizes all stock option related transactions from
January 1, 2004 through June 30, 2004. WeightedAverageOptions
    
    ExerciseOutstanding
    
    PriceJanuary 1, 2004
    
    
    
    
    
    
    Granted
    
    
    78,850
    
    
    $
    16.55Cancelled
    
    
    
    
    
    
    June 30, 2004
    
    
    78,850
    
    
    $
    16.55
 The following options information is as of June 30, 2004: Weighted-Fair
    
    
    
    
    
    Average
    
    Weighted-
    
    
    
    
    
    Weighted-Value of
    
    
    
    
    
    Remaining
    
    Average
    
    
    
    
    
    AverageOption
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseExercise Price
    
    Granted
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$15.00
    
    $
    4.84
    
    
    
    45,000
    
    
    
    9.60
    
    
    $
    15.00
    
    
    
    
    
    
    $
    15.00$18.50
    
    $
    5.90
    
    
    
    30,000
    
    
    
    9.67
    
    
    $
    18.50
    
    
    
    
    
    
    $
    18.50$19.48
    
    $
    6.57
    
    
    
    3,850
    
    
    
    9.88
    
    
    $
    19.48
    
    
    
    3,850
    
    
    $
    19.48Total
    
    
    
    
    
    
    78,850
    
    
    
    9.64
    
    
    $
    16.55
    
    
    
    3,850
    
    
    $
    19.48
 The Company utilizes the Black-Scholes option-pricing model to calculate
the value of the stock options when granted. This model was developed to
estimate the fair value of traded options, which have different characteristics
than employee stock options. In addition, changes to the subjective input
assumptions can result in materially different fair market value estimates.
The Black-Scholes model may not necessarily provide a reliable single measure
of the fair value of employee stock options. The fair value of each option was
based on the following assumptions: 10




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##### Table of Contents



Options issue year:
    
    2004Weighted average fair value of options granted
    
    $5.33Expected Volatility
    
    30.00%Risk-free interest rate
    
    2.98%-3.93%Expected dividend yield
    
    0.00%Expected life
    
    5 Years
 Share Appreciation Rights In 2002, Asset Acceptance Holdings LLC adopted a share appreciation rights
plan for certain key employees. The purpose of the plan was to further the
long-term stability and financial success of the Company, as participants in
the plan had the potential to share in the appreciation of the value of Asset
Acceptance Holdings LLC. Benefits were earned by participants based on certain
financial objectives. In connection with the consummation of the Companys IPO in February 2004,
the Company exercised its right to vest 100% of the share appreciation rights
held by the participants in the plan which resulted in payment of $18.4 million
dollars for the applicable withholding taxes due by the participants and the
issuance of 1,776,826 unregistered shares of the Companys common stock to the
participants. As a result, the Company recognized a compensation charge
including employer payroll taxes of $45.7 million ($28.7 million net of tax)
during the first quarter of 2004 for its share appreciation rights plan. 6. Litigation Contingencies The Company is involved in certain legal matters that management considers
incidental to its business. Management has evaluated pending and threatened
litigation against the Company as of June 30, 2004 and does not believe
exposure to be material. 7. Income Taxes Income taxes for the six months ended June 30, 2004 included: (1) a
deferred tax charge of $19.3 million resulting from RBR Holding Corp. losing
its S corporation tax status after becoming a wholly-owned subsidiary of Asset
Acceptance Capital Corp. during the first quarter of 2004 and (2) a tax benefit
of $17.0 million from the vesting of 1,200,638 share appreciation rights
related to Asset Acceptance Holdings LLCs 2002 share appreciation rights plan. Income taxes for the six months ended June 30, 2004 (excluding the
deferred tax charge related to RBR Holding Corp. and the tax benefit related to
the vesting of the share appreciation rights) reflected income tax expense on
only 60% of pretax income for the period January 1, 2004 through February 4,
2004, as RBR Holding Corp. (40% owner of Asset Acceptance Holdings LLC)
was taxed as a S corporation under the Internal Revenue Code and therefore
taxable income was included on the shareholders individual tax returns.
Income taxes during the period February 5, 2004 through June 30, 2004 reflected
income tax expense on 100% of pretax income as RBR Holding Corp. became a
wholly-owned subsidiary of Asset Acceptance Capital Corp. as part of the
reorganization that occurred on February 4, 2004 related to the IPO. Income
taxes for the six month period ended June 30, 2003 of $4.2 million reflected
income tax expense on only 60% of pretax income as RBR Holding Corp. was taxed
as an S corporation under the Internal Revenue Code and therefore taxable
income was included on the shareholders individual tax returns. 11




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##### Table of Contents



Components of income tax expense are set forth below: Three months ended,
    
    Six months ended,June 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003Income taxes consist of:State actual
    
    $
    (3,371
    )
    
    $
    
    
    
    $
    8,187
    
    
    $
    Federal deferred  net
    
    
    6,419,865
    
    
    
    2,079,290
    
    
    
    13,799,301
    
    
    
    3,980,854State deferred  net
    
    
    403,687
    
    
    
    113,241
    
    
    
    794,866
    
    
    
    236,283Total
    
    $
    6,820,181
    
    
    $
    2,192,531
    
    
    $
    14,602,354
    
    
    $
    4,217,137
 Tax expense differs from the application of statutory rates to pretax
income. The reconciliation of income tax expense and the statutory rates is
set forth below: Three months ended,
    
    Six months ended,June 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003Federal taxes at statutory rate
    
    $
    6,419,865
    
    
    $
    3,623,449
    
    
    $
    (3,491,660
    )
    
    $
    7,055,393S corporation benefit  federal
    
    
    
    
    
    
    (1,544,159
    )
    
    
    (825,193
    )
    
    
    (3,074,539
    )S corporation benefit  state
    
    
    
    
    
    
    (102,746
    )
    
    
    (51,869
    )
    
    
    (198,941
    )Deferred tax charge  federal
    
    
    
    
    
    
    
    
    
    
    18,116,154
    
    
    
    Deferred tax charge  state
    
    
    
    
    
    
    
    
    
    
    1,190,490
    
    
    
    State income taxes, net of federal tax
benefit
    
    
    400,316
    
    
    
    215,987
    
    
    
    (335,568
    )
    
    
    435,224Effective income taxes
    
    $
    6,820,181
    
    
    $
    2,192,531
    
    
    $
    14,602,354
    
    
    $
    4,217,137
 12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements Certain statements made in this Report could be construed to be
forward-looking statements within the meaning given in the Securities Exchange
Act of 1934. 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. In addition, we, or persons acting on our behalf, may
from time to time publish or communicate other items that could also be
construed to be forward looking statements. Statements of this sort are or
will be based on our estimates, assumptions and projections, and are subject to
risks and uncertainties, including those specifically listed below that could
cause actual results to differ materially from those included in the forward
looking statements. 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 maintain existing, and secure additional financing on acceptable terms;  
    
    our ability to recover sufficient amounts on our charged-off receivable portfolios;  
    
    our ability to make accurate estimates of the timing and amount of
future cash receipts for purposes of recording purchased receivable
revenues in accordance with Accounting Standards Executive Committee
Practice Bulletin 6 (PB6);  
    
    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;  
    
    changes in, or failure to comply with, governmental regulations;  
    
    the costs, uncertainties and other effects of legal and administrative proceedings;  
    
    our ability to respond to changes in technology and increased competition; and  
    
    other unanticipated events and conditions that may hinder our ability to compete. 13




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##### Table of Contents



Significant Events During the Six Months Ended June 30, 2004 Reorganization and Initial Public Offering We completed a reorganization on February 4, 2004 and commenced an initial
public offering (IPO) of common stock on February 5, 2004. The
reorganization was completed pursuant to which all of the shares of capital
stock of AAC Investors, Inc. and RBR Holding Corp., which hold 60% and 40% of
the ownership interests in Asset Acceptance Holdings LLC, respectively, were
contributed to Asset Acceptance Capital Corp. in exchange for all of the
outstanding shares of common stock of Asset Acceptance Capital Corp. The
resulting consolidated entity includes Asset Acceptance Capital Corp., AAC
Investors, Inc., RBR Holding Corp. and Asset Acceptance Holdings LLC and its
subsidiaries. Prior to this reorganization, Asset Acceptance Capital Corp. did
not conduct any business and did not have any assets or liabilities, except as
related to the IPO. We received net proceeds of $96.1 million from the IPO of 7,000,000 shares
of common stock which were used to eliminate related party debt of $40.0
million, reduce the line of credit by $37.7 million and pay withholding taxes
on behalf of share appreciation rights (SAR) holders in the amount of $18.4
million. Share Appreciation Rights Compensation Charge We recognized a compensation charge of $45.0 million and $0.7 million of
related payroll taxes ($28.7 million net of income taxes) during the first
quarter of 2004 for the vesting of share appreciation rights. The share
appreciation rights plan, adopted by Asset Acceptance Holdings LLC during 2002,
granted participants the right to share in the appreciation of the value of
Asset Acceptance Holdings LLC. The benefit earned was based on certain
financial objectives and vested 100% upon completion of the IPO. There were
1,200,638 share appreciation rights outstanding at the time of the IPO. Deferred Tax Charge We recognized a deferred tax charge of $19.3 million during the first
quarter of 2004 related to deferred taxes of RBR Holding Corp. Prior to the
reorganization completed on February 4, 2004, RBR Holding Corp. was taxed as an
S corporation under the Internal Revenue Code and the shareholders of RBR
Holding Corp. included their respective shares of taxable income or loss in
their individual tax returns. As a result of the reorganization, RBR Holding
Corp. became a wholly-owned subsidiary of Asset Acceptance Capital Corp. and
could no longer be taxed as an S corporation. Deferred income taxes were
recognized in the first quarter of 2004 for the cumulative effect of all prior
periods that RBR Holding Corp. was an S corporation. 14




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##### Table of Contents



Results of Operations The following table sets forth selected statement of income data expressed
as a percentage of total revenues for the periods indicated. Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003RevenuesPurchased receivable revenues
    
    
    99.7
    %
    
    
    99.5
    %
    
    
    99.7
    %
    
    
    99.6
    %Finance contract revenues
    
    
    0.3
    
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.4Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0ExpensesSalaries and benefits
    
    
    32.0
    
    
    
    34.3
    
    
    
    76.9
    
    
    
    33.5Collections expense
    
    
    24.8
    
    
    
    26.6
    
    
    
    24.8
    
    
    
    26.5Occupancy
    
    
    2.8
    
    
    
    2.7
    
    
    
    2.8
    
    
    
    2.7Administrative
    
    
    2.6
    
    
    
    2.2
    
    
    
    2.6
    
    
    
    2.4Depreciation
    
    
    1.4
    
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.7Loss on disposal of equipment
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total operating expense
    
    
    63.6
    
    
    
    67.4
    
    
    
    108.6
    
    
    
    66.8Income (Loss) from operations
    
    
    36.4
    
    
    
    32.6
    
    
    
    (8.6
    )
    
    
    33.2Net interest expense
    
    
    0.7
    
    
    
    4.6
    
    
    
    1.3
    
    
    
    4.9Other expense (income)
    
    
    0.0
    
    
    
    (0.3
    )
    
    
    0.0
    
    
    
    (0.2
    )Income (Loss) before income taxes
    
    
    35.7
    
    
    
    28.3
    
    
    
    (9.9
    )
    
    
    28.5Income taxes
    
    
    13.2
    
    
    
    5.8
    
    
    
    14.4
    
    
    
    5.8Net income (loss)
    
    
    22.5
    %
    
    
    22.5
    %
    
    
    (24.3
    )%
    
    
    22.7
    %Pro forma income tax expense (benefit) (1)
    
    
    
    
    
    
    10.5
    %
    
    
    (3.7
    )%
    
    
    10.6
    %Pro forma net income (loss) (1)
    
    
    
    
    
    
    17.8
    %
    
    
    (6.2
    )%
    
    
    17.9
    %
   (1)
    
    For comparison purposes we have presented pro forma net income which is
net income adjusted for pro forma income taxes assuming all entities had
been a C corporation for all periods presented. Three Months Ended June 30, 2004 Compared To Three Months Ended June 30, 2003 Revenue Total revenues were $51.5 million for the three months ended June 30,
2004, an increase of $13.5 million or 35.6% over total revenues of $38.0
million for the three months ended June 30, 2003. Purchased receivable revenues
were $51.4 million for the three months ended June 30, 2004, an increase of
$13.6 million or 35.8% over the three months ended June 30, 2003 amount of
$37.8 million. The increase was due primarily to an increase in cash
collections on charged-off consumer receivables to $67.6 million from $51.2
million, an increase of 32.0%. The increase in collections was primarily due to
an increased number of consumer receivables portfolios, the refinement and
application of various collection strategies, and improvements in collector
efficiency. During the three months ended June 30, 2004, we acquired
charged-off consumer receivables portfolios with an aggregate face value amount
of $2.0 billion at a cost of $33.8 million. Included in these purchase totals
were eight portfolios acquired through three forward flow contracts with an
aggregate face value of $55.3 million at a cost of $1.6 million. Forward flow
contracts commit a debt seller to sell us receivable portfolios over a
specified period of time in the future. During the 15




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##### Table of Contents



three months ended June 30, 2003, we acquired charged-off consumer
receivables portfolios with an aggregate face value of $551.4 million at a cost
of $14.5 million. Operating Expenses Total operating expenses were $32.8 million for the three months ended
June 30, 2004, an increase of $7.2 million or 28.0% compared to total operating
expenses of $25.6 million for the three months ended June 30, 2003. Total
operating expenses were 48.5% of cash collections for the three months ended
June 30, 2004 compared with 50.0% for the same period in 2003. The improvement
in operating expenses as a percent of cash collections was primarily due to
strong collections, resulting from increased collector efficiency, along with
the application of successful collection strategies. Salaries and Benefits.Salary and benefit expenses were $16.5 million for
the three months ended June 30, 2004, an increase of $3.5 million or 26.4%
compared to salary and benefit expenses of $13.0 million for the three months
ended June 30, 2003. The increase was primarily due to an increase in total
employees which grew to 1,608 at June 30, 2004 from 1,392 at June 30, 2003,
primarily in response to the growth in the number of portfolios of charged-off
consumer receivables owned by the Company. As a percentage of cash collections,
salary and benefit expenses decreased to 24.4% of cash collections for the
three months ended June 30, 2004 from 25.4% of cash collections for the same
period in 2003. The decrease as a percent of cash collections was primarily
due to increased collector efficiency. Traditional call center collections per
employee increased to $41,554 for the three months ended June 30, 2004 compared
to $39,453 for the same period in 2003. The average headcount for this class
of employees increased to 917 in the second quarter of 2004 from 803 in the
same period of 2003 calculated on a full-time equivalent basis. Collections Expense.Collections expense increased to $12.8 million for
the three months ended June 30, 2004 reflecting an increase of $2.7 million or
26.3% over $10.1 million for the three months ended June 30, 2003. The increase
was primarily attributable to the increased number of accounts on which we were
collecting. Collections expense decreased to 18.9% of cash collections for the
three months ended June 30, 2004 from 19.8% of cash collections for the three
months ended June 30, 2003. This decrease was primarily due to decreases in
amounts spent for postage and letters, credit reports and legal expenses as we
continuously improve and refine our collection strategies. Occupancy.Occupancy expense was $1.4 million for the three months ended
June 30, 2004, an increase of $0.4 million or 40.0% over occupancy expense of
$1.0 million for the three months ended June 30, 2003. The increase was
primarily attributable to the relocation of our Florida office to Riverview,
Florida in January 2004, the relocation of our Phoenix, Arizona office and the
addition of our Chicago, Illinois office in September 2003. Administrative.Administrative expenses increased to $1.4 million for the
three months ended June 30, 2004 from $0.9 million for the three months ended
June 30, 2003, reflecting a $0.5 million or 59.2% increase. The increase in
administrative expenses was principally a result of the increased number of
accounts being processed as well as additional expenses related to being an SEC
registrant. Depreciation.Depreciation expense was $0.7 million for the three months
ended June 30, 2004, an increase of $0.1 million or 23.9% over depreciation
expense of $0.6 million for the three months ended June 30, 2003. The increase
was due to capital expenditures during 2004 and 2003, which were required to
support the increased number of accounts serviced by us, and the purchase of
furniture and technology equipment in our new and expanded facilities. Net Interest Expense Net interest expense was $0.3 million for the three months ended June 30,
2004, a decrease of $1.5 million or 80.9% compared to net interest expense of
$1.8 million for the three months ended June 30, 2003. During February 2004,
the Company paid in full a related party debt of $40.0 million which resulted
in a reduction in interest expense of $0.9 million during the three months
ended June 30, 2004 from the same period the prior year. In addition, average
borrowings on our line of credit decreased to $17.1 million 16




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##### Table of Contents



for the three months ended June 30, 2004 from $65.3 million for the same
period in 2003. The reduction in our average borrowings was due to payment of
$37.7 million of debt from the proceeds of the IPO. Net interest expense
included the amortization of capitalized bank fees of $71,256 and $75,180 for
the three months ended June 30, 2004 and 2003, respectively. Income Taxes Income tax expense was $6.8 million for the three months ended June 30,
2004, an increase of $4.6 million or 211.1% over income tax expense of $2.2
million for the three months ended June 30, 2003. The increase is primarily
due to increased income and taxes related to RBR Holding Corp. For the three
months ended June 30, 2004 taxes were incurred on 100% of pretax income of RBR
Holding Corp., which became a wholly-owned subsidiary of Asset Acceptance
Capital Corp. on February 4, 2004, as part of the reorganization related to our
IPO. Income taxes for the three month period ended June 30, 2003 reflected
income tax expense on only 60% of pretax income, as RBR Holding Corp. was taxed
as an S corporation under the Internal Revenue Code and therefore taxable
income was included on the shareholders individual tax returns. Six Months Ended June 30, 2004 Compared To Six Months Ended June 30, 2003 Revenue Total revenues were $101.3 million for the six months ended June 30, 2004,
an increase of $28.6 million or 39.2% over total revenues of $72.7 million for
the six months ended June 30, 2003. Purchased receivable revenues were $100.9
million for the six months ended June 30, 2004, an increase of $28.5 million or
39.4% over the six months ended June 30, 2003 amount of $72.4 million. The
increase was due primarily to an increase in cash collections on charged-off
consumer receivables to $132.8 million from $95.2 million, an increase of
39.4%. The increase in collections was primarily due to an increased number of
consumer receivables portfolios, the refinement and application of various
collection strategies, and improvements in collector efficiency. During the six
months ended June 30, 2004, we acquired charged-off consumer receivables
portfolios with an aggregate face value amount of $2.6 billion at a cost of
$46.2 million. Included in these purchase totals were ten portfolios with an
aggregate face value of $135.9 million at a cost of $4.0 million acquired
through three forward flow contracts. During the six months ended June 30,
2003, we acquired charged-off consumer receivables portfolios with an aggregate
face value of $1.4 billion at a cost of $37.6 million. Operating Expenses Total operating expenses were $109.9 million for the six months ended June
30, 2004, an increase of $61.3 million or 126.2% compared to total operating
expenses of $48.6 million for the six months ended June 30, 2003. Total
operating expenses were 82.8% of cash collections for the six months ended June
30, 2004 compared with 51.0% for the same period in 2003. Operating expenses
include a $45.0 million compensation charge and a $0.7 million payroll tax
charge related to the vesting of the outstanding share appreciation rights.
Excluding the share appreciation rights and related payroll tax charge, total
operating expenses were $64.2 million for the six months ended June 30, 2004,
an increase of $15.6 million or 32.2% over the prior year. Excluding the share
appreciation rights charge and related payroll taxes, operating expenses
decreased to 48.4% of cash collections for the six months ended June 30, 2004
from 51.0% of cash collections for the same six month period in 2003. The
improvement in operating expenses as a percent of cash collections was
primarily due to strong collections, resulting from increased collector
efficiency, along with the application of successful collection strategies. Salaries and Benefits.Salary and benefit expenses were $77.9 million for
the six months ended June 30, 2004, an increase of $53.5 million or 219.4%
compared to salary and benefit expenses of $24.4 million for the six months
ended June 30, 2003. Salary and benefit expenses increased primarily due to a
$45.7 million charge related to the vesting of the outstanding share
appreciation rights and related payroll taxes. 17




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##### Table of Contents



Excluding the share appreciation rights charge and related payroll taxes,
salary and benefit expenses were $32.2 million for the six months ended June
30, 2004, an increase of $7.8 million or 32.1% compared to 2003. The increase
over the prior year was primarily due to an increase in total employees which
grew to 1,608 at June 30, 2004 from 1,392 at June 30, 2003, primarily in
response to the growth in the number of portfolios of charged-off consumer
receivables owned by us. As a percentage of cash collections, salary and
benefit expenses, excluding the $45.7 million share appreciation rights charge,
decreased to 24.3% of cash collections for the six months ended June 30, 2004
from 25.6% of cash collections for the same period in 2003. The decrease as a
percent of cash collections was primarily due to increased collector
efficiency. Traditional call center collections per employee increased to
$88,505 for the six months ended June 30, 2004 compared to $81,448 for the same
period in 2003. Average headcount for this class of employees increased to 890
for the first six months of 2004 from 746 during the same period of 2003
calculated on a full-time equivalent basis. Collections Expense.Collections expense increased to $25.1 million for
the six months ended June 30, 2004 reflecting an increase of $5.8 million or
30.2% over $19.3 million for the six months ended June 30, 2003. The increase
was primarily attributable to the increased number of accounts on which we were
collecting. Collections expense decreased to 18.9% of cash collections for the
six months ended June 30, 2004 from 20.2% of cash collections for the six
months ended June 30, 2003. This decrease was primarily due to decreases in
amounts spent for postage and letters and credit reports as we continuously
improve and refine our collection strategies. Occupancy.Occupancy expense was $2.8 million for the six months ended
June 30, 2004, an increase of $0.8 million or 43.3% over occupancy expense of
$2.0 million for the six months ended June 30, 2003. The increase was primarily
attributable to the relocation of our Florida office to Riverview, Florida in
January 2004, the relocation of our Phoenix, Arizona office and the addition of
our Chicago, Illinois office in September 2003. Administrative.Administrative expenses increased to $2.6 million for the
six months ended June 30, 2004 from $1.7 million for the six months ended June
30, 2003, reflecting a $0.9 million or 52.1% increase. The increase in
administrative expenses was principally a result of the increased number of
accounts being processed as well as additional expenses related to being an SEC
registrant. Depreciation.Depreciation expense was $1.5 million for the six months
ended June 30, 2004, an increase of $0.3 million or 18.3% over depreciation
expense of $1.2 million for the six months ended June 30, 2003. The increase
was due to capital expenditures during 2004 and 2003, which were required to
support the increased number of accounts serviced by us, and the purchase of
furniture and technology equipment in our new and expanded facilities. Net Interest Expense Net interest expense was $1.3 million for the six months ended June 30,
2004 reflecting a decrease of $2.3 million or 62.9% compared to net interest
expense of $3.6 million for the six months ended June 30, 2003. During February
2004, the company paid in full a related party debt of $40.0 million which
resulted in a reduction in interest expense of $1.3 million during the six
months ended June 30, 2004 from the same period the prior year. Additionally,
the decrease in interest expense was due to lower average borrowings on our line
of credit, which decreased to $29.8 million for the six months ended June 30,
2004 from $66.6 million for the same period in 2003. The reduction in our
average borrowings was due to payment of $37.7 million of debt from the
proceeds of the IPO. Net interest expense included the amortization of
capitalized bank fees of $141,163 and $150,360 for the six months ended June
30, 2004 and 2003, respectively. Income Taxes Income taxes of $14.6 million for the six months ended June 30, 2004
included (1) a deferred tax charge of $19.3 million resulting from RBR Holding
Corp. losing its S corporation tax status after becoming a wholly-owned
subsidiary of Asset Acceptance Capital Corp. during the first quarter of 2004 18




---



##### Table of Contents



and (2) a tax benefit of $17.0 million from the vesting of 1,200,638 share
appreciation rights related to Asset Acceptance Holdings LLCs 2002 share
appreciation rights plan. Income taxes for the six months ended June 30, 2004 (excluding the
deferred tax charge related to RBR Holding Corp. and the vesting of the share
appreciation rights) reflected income tax expense on only 60% of pretax income
for the period January 1, 2004 through February 4, 2004, as RBR Holding Corp.
(40% owner of Asset Acceptance Holdings LLC) was taxed as a S
corporation under the Internal Revenue Code and therefore taxable income was
included on the shareholders individual tax returns. Income taxes during the
period February 5, 2004 through June 30, 2004 reflected income tax expense on
100% of pretax income as RBR Holding Corp. became a wholly-owned subsidiary of
Asset Acceptance Capital Corp. as part of the reorganization that occurred on
February 4, 2004 related to our IPO. Income taxes for the six month period
ended June 30, 2003 of $4.2 million reflected income tax expense on only 60% of
pretax income as RBR Holding Corp. was taxed as an S corporation under the
Internal Revenue Code and therefore taxable income was included on the
shareholders individual tax returns. Supplemental Performance Data Portfolio Performance The following table summarizes our historical portfolio purchase price and
cash collections on an annual vintage basis since 1990 through June 30, 2004. Cash Collections
    
    Collections as aNumber of
    
    Purchase
    
    Including Cash
    
    Percentage ofPurchase Period
    
    Portfolios
    
    Price(1)
    
    Sales(2)
    
    Purchase Price(2)(Dollars in thousands)1990
    
    
    9
    
    
    $
    638
    
    
    $
    3,089
    
    
    
    484
    %1991
    
    
    12
    
    
    
    280
    
    
    
    1,444
    
    
    
    5161992
    
    
    29
    
    
    
    309
    
    
    
    2,838
    
    
    
    9181993
    
    
    30
    
    
    
    790
    
    
    
    7,723
    
    
    
    9781994
    
    
    36
    
    
    
    1,427
    
    
    
    6,722
    
    
    
    4711995
    
    
    53
    
    
    
    1,519
    
    
    
    7,559
    
    
    
    4981996
    
    
    46
    
    
    
    3,844
    
    
    
    16,199
    
    
    
    4211997
    
    
    45
    
    
    
    4,345
    
    
    
    26,122
    
    
    
    6011998
    
    
    61
    
    
    
    16,412
    
    
    
    70,716
    
    
    
    4311999
    
    
    51
    
    
    
    12,926
    
    
    
    47,822
    
    
    
    3702000
    
    
    49
    
    
    
    20,599
    
    
    
    84,986
    
    
    
    4132001
    
    
    62
    
    
    
    43,138
    
    
    
    144,569
    
    
    
    3352002
    
    
    94
    
    
    
    72,380
    
    
    
    130,799
    
    
    
    1812003
    
    
    76
    
    
    
    89,039
    
    
    
    84,770
    
    
    
    952004 (3)
    
    
    53
    
    
    
    46,199
    
    
    
    4,609
    
    
    
    10
   (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)
    
    For purposes of this table, cash collections include selected cash sales
which were entered into subsequent to purchase. Cash sales, however,
exclude the sales of portfolios which occurred at the time of purchase.(3)
    
    Includes only six months of activity through June 30, 2004. 19




---



##### Table of Contents



Cash Collections The following tables provide further detailed vintage collection analysis
on an annual and a cumulative basis. Historical Collections (1) Year Ended December 31,
    
    SixMonthsendedPurchase
    
    Purchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 30,Period
    
    Price (2)
    
    1993
    
    1994
    
    1995
    
    1996
    
    1997
    
    1998
    
    1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2004(Dollars in thousands)Pre-1993
    
    
    
    
    
    $
    1,394
    
    
    $
    1,156
    
    
    $
    910
    
    
    $
    766
    
    
    $
    517
    
    
    $
    354
    
    
    $
    276
    
    
    $
    244
    
    
    $
    201
    
    
    $
    127
    
    
    $
    148
    
    
    $
    731993
    
    $
    790
    
    
    
    526
    
    
    
    1,911
    
    
    
    1,630
    
    
    
    1,022
    
    
    
    768
    
    
    
    480
    
    
    
    373
    
    
    
    311
    
    
    
    236
    
    
    
    175
    
    
    
    175
    
    
    
    651994
    
    
    1,427
    
    
    
    
    
    
    
    345
    
    
    
    1,763
    
    
    
    1,430
    
    
    
    1,005
    
    
    
    647
    
    
    
    457
    
    
    
    357
    
    
    
    258
    
    
    
    176
    
    
    
    188
    
    
    
    621995
    
    
    1,519
    
    
    
    
    
    
    
    
    
    
    
    388
    
    
    
    1,566
    
    
    
    1,659
    
    
    
    1,118
    
    
    
    786
    
    
    
    708
    
    
    
    472
    
    
    
    343
    
    
    
    278
    
    
    
    1241996
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    827
    
    
    
    3,764
    
    
    
    3,085
    
    
    
    2,601
    
    
    
    2,098
    
    
    
    1,440
    
    
    
    1,041
    
    
    
    816
    
    
    
    3731997
    
    
    4,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,682
    
    
    
    4,919
    
    
    
    5,573
    
    
    
    5,017
    
    
    
    3,563
    
    
    
    2,681
    
    
    
    1,784
    
    
    
    7931998
    
    
    16,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,835
    
    
    
    15,220
    
    
    
    15,045
    
    
    
    12,962
    
    
    
    11,021
    
    
    
    7,987
    
    
    
    3,0691999
    
    
    12,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,761
    
    
    
    11,331
    
    
    
    10,862
    
    
    
    9,750
    
    
    
    8,278
    
    
    
    3,5942000
    
    
    20,599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,895
    
    
    
    23,444
    
    
    
    22,559
    
    
    
    20,318
    
    
    
    9,3062001
    
    
    43,138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,630
    
    
    
    50,327
    
    
    
    50,967
    
    
    
    24,7612002
    
    
    72,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,340
    
    
    
    70,813
    
    
    
    37,2302003
    
    
    89,039
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,067
    
    
    
    48,7032004
    
    
    46,199
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,609Total
    
    
    
    
    
    $
    1,920
    
    
    $
    3,412
    
    
    $
    4,691
    
    
    $
    5,611
    
    
    $
    9,395
    
    
    $
    15,438
    
    
    $
    29,047
    
    
    $
    44,006
    
    
    $
    71,068
    
    
    $
    120,540
    
    
    $
    197,819
    
    
    $
    132,762
 Cumulative Collections (1) Total Through December 31,
    
    TotalthroughPurchase
    
    Purchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 30,Period
    
    Price (2)
    
    1993
    
    1994
    
    1995
    
    1996
    
    1997
    
    1998
    
    1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2004(Dollars in thousands)1993
    
    $
    790
    
    
    $
    526
    
    
    $
    2,437
    
    
    $
    4,067
    
    
    $
    5,089
    
    
    $
    5,857
    
    
    $
    6,337
    
    
    $
    6,710
    
    
    $
    7,021
    
    
    $
    7,257
    
    
    $
    7,432
    
    
    $
    7,607
    
    
    $
    7,6721994
    
    
    1,427
    
    
    
    
    
    
    
    345
    
    
    
    2,108
    
    
    
    3,538
    
    
    
    4,543
    
    
    
    5,190
    
    
    
    5,647
    
    
    
    6,004
    
    
    
    6,262
    
    
    
    6,438
    
    
    
    6,626
    
    
    
    6,6881995
    
    
    1,519
    
    
    
    
    
    
    
    
    
    
    
    388
    
    
    
    1,954
    
    
    
    3,613
    
    
    
    4,731
    
    
    
    5,517
    
    
    
    6,225
    
    
    
    6,697
    
    
    
    7,040
    
    
    
    7,318
    
    
    
    7,4421996
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    827
    
    
    
    4,591
    
    
    
    7,676
    
    
    
    10,277
    
    
    
    12,375
    
    
    
    13,815
    
    
    
    14,856
    
    
    
    15,672
    
    
    
    16,0451997
    
    
    4,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,682
    
    
    
    6,601
    
    
    
    12,174
    
    
    
    17,191
    
    
    
    20,754
    
    
    
    23,435
    
    
    
    25,219
    
    
    
    26,0121998
    
    
    16,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,835
    
    
    
    20,055
    
    
    
    35,100
    
    
    
    48,062
    
    
    
    59,083
    
    
    
    67,070
    
    
    
    70,1391999
    
    
    12,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,761
    
    
    
    15,092
    
    
    
    25,954
    
    
    
    35,704
    
    
    
    43,982
    
    
    
    47,5762000
    
    
    20,599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,895
    
    
    
    32,339
    
    
    
    54,898
    
    
    
    75,216
    
    
    
    84,5222001
    
    
    43,138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,630
    
    
    
    67,957
    
    
    
    118,924
    
    
    
    143,6852002
    
    
    72,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,340
    
    
    
    93,153
    
    
    
    130,3832003
    
    
    89,039
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,067
    
    
    
    84,7702004
    
    
    46,199
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,609
 Cumulative Collections as Percentage of Purchase Price (1) Total Through December 31,
    
    TotalthroughPurchase
    
    Purchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 30,Period
    
    Price (2)
    
    1993
    
    1994
    
    1995
    
    1996
    
    1997
    
    1998
    
    1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    20041993
    
    $
    790
    
    
    
    67
    %
    
    
    308
    %
    
    
    515
    %
    
    
    644
    %
    
    
    741
    %
    
    
    802
    %
    
    
    849
    %
    
    
    889
    %
    
    
    919
    %
    
    
    941
    %
    
    
    963
    %
    
    
    971
    %1994
    
    
    1,427
    
    
    
    
    
    
    
    24
    
    
    
    148
    
    
    
    248
    
    
    
    318
    
    
    
    364
    
    
    
    396
    
    
    
    421
    
    
    
    439
    
    
    
    451
    
    
    
    464
    
    
    
    4691995
    
    
    1,519
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    129
    
    
    
    238
    
    
    
    311
    
    
    
    363
    
    
    
    410
    
    
    
    441
    
    
    
    463
    
    
    
    482
    
    
    
    4901996
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    119
    
    
    
    200
    
    
    
    267
    
    
    
    322
    
    
    
    359
    
    
    
    386
    
    
    
    408
    
    
    
    4171997
    
    
    4,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    152
    
    
    
    280
    
    
    
    396
    
    
    
    478
    
    
    
    539
    
    
    
    580
    
    
    
    5991998
    
    
    16,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    122
    
    
    
    214
    
    
    
    293
    
    
    
    360
    
    
    
    409
    
    
    
    4271999
    
    
    12,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    117
    
    
    
    201
    
    
    
    276
    
    
    
    340
    
    
    
    3682000
    
    
    20,599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    157
    
    
    
    266
    
    
    
    365
    
    
    
    4102001
    
    
    43,138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    158
    
    
    
    276
    
    
    
    3332002
    
    
    72,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    129
    
    
    
    1802003
    
    
    89,039
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    952004
    
    
    46,199
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
   (1)
    
    Does not include proceeds from sales of any receivables.(2)
    
    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. 20




---



##### Table of Contents



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. Our historical growth in purchased portfolios and in
our resultant quarterly cash collections has helped to minimize the effect of
seasonal cash collections. Operating expenses are seasonally higher during the
first and second quarters of the year due to expenses necessary to process the
increase in cash collections. However, revenue recognized is relatively level
due to the application of the interest method for revenue recognition. In
addition, our operating results may be affected to a lesser extent by the
timing of purchases of portfolios 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 quarter to
quarter. Below is a chart that illustrates our quarterly collections for years 2000
through June 2004. (QUARTERLY CASH COLLECTIONS BAR GRAPH) Cash CollectionsQuarter
    
    2000
    
    2001
    
    2002
    
    2003
    
    2004First
    
    $
    10,095,735
    
    
    $
    15,592,577
    
    
    $
    27,297,721
    
    
    $
    44,017,730
    
    
    $
    65,196,055Second
    
    
    10,669,184
    
    
    
    17,661,537
    
    
    
    30,475,078
    
    
    
    51,190,533
    
    
    
    67,566,031Third
    
    
    11,076,359
    
    
    
    17,766,800
    
    
    
    29,337,914
    
    
    
    48,622,829
    
    
    
    Fourth
    
    
    12,164,526
    
    
    
    20,046,733
    
    
    
    33,429,419
    
    
    
    53,988,333
    
    
    
    
 The following chart categorizes our purchased receivables portfolios, as
of June 30, 2004, into the major asset types represented: Face Value ofCharged-off
    
    
    
    
    
    No. ofAsset Type
    
    Receivables
    
    %
    
    Accounts
    
    %Visa®/MasterCard®/Discover®
    
    $
    7,896,483,015
    
    
    
    45.6
    %
    
    
    3,657,096
    
    
    
    22.4
    %Private Label Credit Cards
    
    
    2,515,864,395
    
    
    
    14.5
    
    
    
    3,615,609
    
    
    
    22.2Auto Deficiency
    
    
    1,240,060,146
    
    
    
    7.2
    
    
    
    207,147
    
    
    
    1.3Health Club
    
    
    1,238,869,437
    
    
    
    7.1
    
    
    
    1,305,897
    
    
    
    8.0Telecommunications/Utility/Gas
    
    
    1,223,747,716
    
    
    
    7.1
    
    
    
    2,831,517
    
    
    
    17.3Installment loans
    
    
    672,562,136
    
    
    
    3.9
    
    
    
    195,673
    
    
    
    1.2Other(1)
    
    
    2,528,804,768
    
    
    
    14.6
    
    
    
    4,493,643
    
    
    
    27.6Total
    
    $
    17,316,391,613
    
    
    
    100.0
    %
    
    
    16,306,582
    
    
    
    100.0
    %
 21




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##### Table of Contents



(1)
    
    Other includes charged-off receivables of several debt types, including
student loan, mobile home deficiency and retail mail order. This includes
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. 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
value 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 typically are 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:  
    
    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 charge-off collection activity or are placed with a third party
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 receivables portfolios, as
of June 30, 2004, into the major account types represented: Face Value ofCharged-off
    
    
    
    
    
    No. ofAccount Type
    
    Receivables
    
    %
    
    Accounts
    
    %Fresh
    
    $
    952,797,532
    
    
    
    5.5
    %
    
    
    355,805
    
    
    
    2.2
    %Primary
    
    
    3,314,906,616
    
    
    
    19.1
    
    
    
    2,224,195
    
    
    
    13.6Secondary
    
    
    3,057,790,403
    
    
    
    17.7
    
    
    
    1,999,101
    
    
    
    12.3Tertiary(1)
    
    
    9,220,592,509
    
    
    
    53.3
    
    
    
    11,295,942
    
    
    
    69.3Other
    
    
    770,304,553
    
    
    
    4.4
    
    
    
    431,539
    
    
    
    2.6Total
    
    $
    17,316,391,613
    
    
    
    100.0
    %
    
    
    16,306,582
    
    
    
    100.0
    %
   (1)
    
    This includes 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. 22




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##### Table of Contents



We also review the geographic distribution of accounts within a portfolio
because we have found that certain states have less favorable collection laws
than others and, therefore, are less desirable from a collectibility
perspective. The following chart illustrates, as of June 30, 2004, our
purchased receivables portfolios based on geographic location of debtor: Face Value ofCharged-off
    
    
    
    
    
    No. ofGeographic Location
    
    Receivables
    
    %
    
    Accounts
    
    %Texas(1)
    
    $
    2,255,242,678
    
    
    
    13.0
    %
    
    
    1,896,818
    
    
    
    11.6
    %California
    
    
    1,707,694,763
    
    
    
    9.8
    
    
    
    1,688,640
    
    
    
    10.4Florida(1)
    
    
    1,641,848,707
    
    
    
    9.5
    
    
    
    1,152,772
    
    
    
    7.1Michigan(1)
    
    
    1,384,385,063
    
    
    
    8.0
    
    
    
    1,592,994
    
    
    
    9.8New York
    
    
    1,033,617,375
    
    
    
    6.0
    
    
    
    846,969
    
    
    
    5.2Ohio(1)
    
    
    1,021,430,570
    
    
    
    5.9
    
    
    
    1,090,545
    
    
    
    6.7Illinois(1)
    
    
    808,474,123
    
    
    
    4.7
    
    
    
    1,055,006
    
    
    
    6.5Pennsylvania
    
    
    509,665,314
    
    
    
    2.9
    
    
    
    446,136
    
    
    
    2.7North Carolina
    
    
    435,942,584
    
    
    
    2.5
    
    
    
    360,299
    
    
    
    2.2Georgia
    
    
    428,222,201
    
    
    
    2.5
    
    
    
    366,314
    
    
    
    2.2New Jersey(1)
    
    
    345,031,747
    
    
    
    2.0
    
    
    
    294,560
    
    
    
    1.8Indiana
    
    
    341,238,339
    
    
    
    2.0
    
    
    
    428,745
    
    
    
    2.6Other(2)
    
    
    5,403,598,149
    
    
    
    31.2
    
    
    
    5,086,784
    
    
    
    31.2Total
    
    $
    17,316,391,613
    
    
    
    100.0
    %
    
    
    16,306,582
    
    
    
    100.0
    %
   (1)
    
    Collection site located in this state.(2)
    
    Each state included in Other represents under 2.0% individually of the
face value of total charged-off consumer receivables. Liquidity and Capital Resources Historically, our primary sources of cash have been from operations and
bank borrowings. However, during the first quarter of 2004 we completed our
IPO and used $77.7 million of the proceeds to reduce our outstanding debt. We
have traditionally used cash for acquisitions of purchased receivables,
repayment of bank borrowings, purchasing property and equipment and working
capital to support growth. 23




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##### Table of Contents



Borrowings We maintain a $100.0 million line of credit secured by a first priority
lien on all of our assets that expires in May 2007 and bears interest at prime
or 25 basis points over prime depending upon our liquidity as defined in the
credit agreement. Alternately, at our discretion, we may borrow by entering
into 30, 60 or 90 day LIBOR contracts at rates between 200 to 275 basis points
over the respective LIBOR rates, depending on our liquidity. As of June 30,
2004, the balance outstanding on our line of credit was $17.6 million and had a
weighted average interest rate of 3.90%. The line of credit has certain
covenants and restrictions which we believe we are in compliance with as of
June 30, 2004. During February 2004, we used $37.7 million of the proceeds
from the IPO to reduce the outstanding amount on our line of credit. At December 31, 2003, the Company had a note payable outstanding to a
related party totaling $39.6 million including principal and accrued interest.
During February 2004, we used $40.0 million of the proceeds from the IPO to pay
our related party debt in full. Cash Flows The majority of our purchases have been funded with internal cash flow.
From January 1, 2002 through June 30, 2004, we invested $206.9 million in
purchased receivables while our balance under the line of credit increased by
$17.6 million (excluding the payment of $37.7 million on our line of credit
from the proceeds of the IPO). Company funds generated by operations, investing and financing activities,
as reported in the consolidated statements of cash flows, are summarized below. Our operating activities provided cash of $18.2 million and $25.4 million
for the six months ended June 30, 2004 and 2003, respectively. Cash provided
by operating activities for the six months ended June 30, 2004 includes the use
of cash of $19.0 million for payment of withholding taxes and employer taxes
related to the share appreciation rights. Excluding this use of cash, cash
provided by operating activities would have been $37.2 million. Cash provided
by operating activities for the six months ended June 30, 2003 of $25.4 million
was generated primarily from net income earned through cash collections. Investing activities used cash of $14.7 million and $15.5 million for the
six months ended June 30, 2004 and 2003, respectively. For both periods the
cash used for investing purposes was primarily due to acquisitions of purchased
receivables, net of cash collections applied to principal. Financing activities provided cash of $0.2 million for the six months
ended June 30, 2004 and used cash of $4.7 million for the same period in 2003.
In 2004 the cash provided by financing activities was primarily due to cash from
our IPO, which was offset by borrowings under our line of credit, net of
repayments and the repayment of our related party notes payable. In 2003 the cash used for financing purposes was primarily due to
paying down our line of credit balance. Cash paid for interest was $1.2 million and $1.5 million for the six
months ended June 30, 2004 and 2003, respectively. Cash paid for interest
consisted of $0.8 million for the line of credit and $0.4 million paid for the
related party debt for the six months ended June 30, 2004 and consisted of $1.5
million for the line of credit for the six months ended June 30, 2003. We believe that borrowing available under our line of credit, combined
with cash generated from operations, should be sufficient to fund our
operations for the next 12 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 equity or debt securities or secure additional
availability under our line of credit. 24




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##### Table of Contents



Future Contractual Cash Obligations The following table summarizes our future contractual cash obligations as
of June 30, 2004: Year ending December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterCapital lease obligations
    
    $
    78,342
    
    
    $
    130,601
    
    
    $
    80,393
    
    
    $
    8,947
    
    
    $
    
    
    
    $
    Operating leases (1)
    
    
    2,042,739
    
    
    
    5,116,692
    
    
    
    5,643,694
    
    
    
    5,418,996
    
    
    
    4,506,326
    
    
    
    17,436,025Employment
agreements
    
    
    567,500
    
    
    
    976,250
    
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    Line of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,600,000
    
    
    
    
    
    
    
    Total
    
    $
    2,688,581
    
    
    $
    6,223,543
    
    
    $
    6,224,087
    
    
    $
    23,027,943
    
    
    $
    4,506,326
    
    
    $
    17,436,025
   (1)
    
    On October 31, 2003, we entered into a lease for a new headquarters site
in Warren, Michigan. The lease term is 120 months and is expected to
commence on or about November 1, 2004. This lease has future contractual
cash obligations of $26.0 million. Critical Accounting Policies We believe that the amounts and timing of cash collections for our
purchased receivables can be reasonably estimated and therefore, we utilize the
interest method of accounting for our purchased receivables prescribed by the
Accounting Standards Executive Committee Practice Bulletin 6 (PB6). This belief
is predicated on our historical results and our knowledge of the industry. 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 established for each
static pool of receivables based on the projected cash flows and applied to the
balance of the static pool. The resulting revenue recognized is based on the
IRR applied to the remaining balance of each static pool of accounts. Each
static pool is analyzed monthly 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. Application of PB6 requires the use of estimates to calculate a projected
IRR for each pool. These estimates are based on historical cash collections. If
future cash collections are materially different in amount or timing than
projected cash collections, earnings could be affected either positively or
negatively. Higher collection amounts or cash collections that occur sooner
than projected cash collections will have a favorable impact on IRR and
revenues. Lower collection amounts or cash collections that occur later than
projected cash collections will have an unfavorable impact on IRR and revenues.
For the six months ended June 30, 2004, every 20 basis point change in the
average IRR for all pools would have affected year-to-date revenue by
approximately $2.2 million or 2.2%. A full percentage point change (100 basis
points) in the average IRR for all pools would have affected year-to-date
revenue by approximately $11.4 million or 11.2%. New Accounting Pronouncements In December 2003, the Accounting Standards Executive Committee issued
Statement of Position 03-3, Accounting for Certain Loans of Debt Securities
Acquired in a Transfer. This Statement of Position (SOP) addresses
accounting for differences between contractual cash flows and cash flows
expected to be collected from an investors initial investment in loans or debt
if those differences are attributable, at least in part, to credit quality.
Increases in expected cash flows should be recognized prospectively through
adjustment of IRR while decreases in expected cash flows should be recognized
as impairment. The SOP is effective for loans acquired in fiscal years
beginning after December 15, 2004 and should be applied 25




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##### Table of Contents



prospectively to loans acquired on or before December 15, 2004 as it
applies to decreases in expected cash flows. We are currently evaluating the
effects of this SOP, but believe that the impact on our results of operations
will not be significant. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Our exposure to market risk relates to the interest rate risk with our
variable line of credit. As of June 30, 2004, we had variable interest rate
borrowings of $17.6 million. Assuming a 200 basis point increase in interest
rates on our variable rate debt, interest expense would have increased
approximately $281,000 and $266,000 for the six months ended June 30, 2004 and
2003, respectively. The estimated increases in interest expense are based on
the portion of our variable interest debt that is not offset by interest rate
swap agreements and assumes no changes in the volume or composition of the
debt. 
 Item 4. Controls and Procedures With respect to 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 with the time periods specified in the
Commissions rules and forms. There have been no changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, the registrants 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. Currently, we are not named in any class action lawsuits in which an
underlying class has been certified. However, as of July 20, 2004, we are
named in eight class action lawsuits in which the underlying classes have not
been certified. 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 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 our business. 26




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders The shareholders, at an annual shareholder meeting held on May 19, 2004
elected Nathaniel F. Bradley IV and Anthony R. Ignczak directors for a
three-year term expiring at the annual shareholders meeting to be held in 2007
or until their successors are appointed and qualified. The voting on the
directors is described below: Name of Director
    
    Votes For
    
    Votes WithheldNathaniel F. Bradley IV
    
    
    25,678,499
    
    
    
    3,132,255Anthony R. Ignaczak
    
    
    25,678,499
    
    
    
    3,132,255
 The following is a list of directors whose term of office has extended
beyond the annual shareholder meeting: Jennifer L. Adams
Terrence D. Daniels
Donald R. Haider
H. Eugene Lockhart
Rufus H. Reitzel, Jr. At the annual shareholders meeting, the shareholders ratified the
Companys appointment of Ernst & Young, LLP as the Companys independent
auditors for the fiscal year ending December 31, 2004. 28,780,094 shares voted
to ratify Ernst & Young, LLPs selection, 29,660 shares were voted against the
selection and 1,000 shares abstained. 
 Item 6. Exhibits and Report on Form 8-K (a) Exhibits  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. (b) Current Reports on Form 8-K. The Company filed a Current Report on Form 8-K on April 29, 2004 relating
to its reporting under Item 12 of the Results of Operations and Financial
Condition for the quarter ended March 31, 2004. 27




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##### Table of Contents



SIGNATURES Pursuant to the requirements 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. ASSET ACCEPTANCE CAPITAL CORP.Date: July 28, 2004
    By:
    /s/ Nathaniel F. Bradley IVNathaniel F. Bradley IVPresident and Chief Executive Officer
(Principal Executive Officer)Date: July 28, 2004
    By:
    /s/ Mark A. RedmanMark A. RedmanVice President  Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer) 28




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Description31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer and Chief Financial
Officer