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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 March 31, 2004o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE 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 May 3, 2004, 37,225,275 shares of the Registrants common stock were outstanding.




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TABLE OF CONTENTS PagePart I
    
    Financial Information
    
    
    2Item 1.
    
    Consolidated Financial Statements (unaudited)
    
    
    2Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22Part II
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    23Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    23Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    24Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    24Signatures
    
    
    
    
    25Rule 13a-14(a) Certification of CEORule 13a-14(a) Certification of CFOSection 1350 Certification of CEO and CFO
  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. 1




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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements ASSET ACCEPTANCE CAPITAL CORP.
Consolidated Statements of Financial Position March 31, 2004
    
    December 31, 2003(unaudited)ASSETSCash
    
    $
    8,165,544
    
    
    $
    5,498,836Purchased receivables
    
    
    180,236,262
    
    
    
    183,719,667Finance contract receivables, net
    
    
    637,314
    
    
    
    642,530Property and equipment, net
    
    
    7,851,237
    
    
    
    7,970,570Goodwill
    
    
    6,339,574
    
    
    
    6,339,574Other assets
    
    
    3,310,748
    
    
    
    2,938,999Total assets
    
    $
    206,540,679
    
    
    $
    207,110,176LIABILITIES AND
STOCKHOLDERS' EQUITYLiabilities:Line of credit
    
    $
    15,400,000
    
    
    $
    72,950,000Notes payable  related party
    
    
    
    
    
    
    39,560,110Deferred tax liability
    
    
    19,676,383
    
    
    
    11,905,768Accounts payable and other liabilities
    
    
    11,144,291
    
    
    
    8,092,844Capital lease obligations
    
    
    292,576
    
    
    
    218,765Total liabilities
    
    
    46,513,250
    
    
    
    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 March 31, 2004 and
28,448,449 at December 31, 2003
    
    
    372,253
    
    
    
    284,484Additional paid in capital
    
    
    159,100,971
    
    
    
    36,385,000Retained earnings
    
    
    554,205
    
    
    
    37,713,205Total equity
    
    
    160,027,429
    
    
    
    74,382,689Total liabilities and equity
    
    $
    206,540,679
    
    
    $
    207,110,176
 See accompanying
notes. 2




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ASSET ACCEPTANCE CAPITAL CORP.
Consolidated Statements of Income Three months ended March 31,2004
    
    2003(unaudited)
    
    (unaudited)RevenuesPurchased receivable revenues
    
    $
    49,586,774
    
    
    $
    34,614,193Finance contract revenues
    
    
    160,857
    
    
    
    141,206Total revenues
    
    
    49,747,631
    
    
    
    34,755,399ExpensesSalaries and benefits
    
    
    61,418,146
    
    
    
    11,359,973Collections expense
    
    
    12,305,523
    
    
    
    9,154,942Occupancy
    
    
    1,398,295
    
    
    
    952,907Administrative
    
    
    1,279,671
    
    
    
    881,790Depreciation
    
    
    726,840
    
    
    
    642,678Loss on disposal of equipment
    
    
    26,526
    
    
    
    592Total operating expense
    
    
    77,155,001
    
    
    
    22,992,882Income (loss) from operations
    
    
    (27,407,370
    )
    
    
    11,762,517Net interest expense
    
    
    994,241
    
    
    
    1,831,659Other income
    
    
    (24,784
    )
    
    
    (69,604
    )Income (loss) before income taxes
    
    
    (28,376,827
    )
    
    
    10,000,462Income taxes
    
    
    7,782,173
    
    
    
    2,024,606Net income (loss)
    
    $
    (36,159,000
    )
    
    $
    7,975,856Pro forma income tax expense (benefit)
    
    $
    (10,556,180
    )
    
    $
    3,720,572Pro forma net income (loss)
    
    $
    (17,820,647
    )
    
    $
    6,279,890Weighted average number of sharesBasic
    
    
    33,849,573
    
    
    
    28,448,449Diluted
    
    
    33,849,573
    
    
    
    28,448,449Earnings per common share outstanding:Basic
    
    $
    (1.07
    )
    
    $
    0.28Diluted
    
    $
    (1.07
    )
    
    $
    0.28Proforma earnings per common share outstanding:Basic
    
    $
    (0.53
    )
    
    $
    0.22Diluted
    
    $
    (0.53
    )
    
    $
    0.22
 See accompanying notes. 3




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ASSET ACCEPTANCE CAPITAL CORP.
Consolidated Statements of Cash Flows Three months ended March 31,2004
    
    2003(unaudited)
    
    (unaudited)Cash flows from operating activitiesNet income (loss)
    
    $
    (36,159,000
    )
    
    $
    7,975,556Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation
    
    
    726,840
    
    
    
    642,678Deferred income taxes
    
    
    7,770,615
    
    
    
    2,024,606Share-based compensation expense
    
    
    26,676,334
    
    
    
    Loss on disposal of equipment
    
    
    26,526
    
    
    
    592Provision for losses on finance contracts
    
    
    25,302
    
    
    
    30,000Changes in assets and liabilities:Increase in other assets
    
    
    (427,954
    )
    
    
    (69,116
    )Increase in accounts
payable and other liabilities
    
    
    1,495,418
    
    
    
    2,584,221Net cash provided by operating activities
    
    
    134,081
    
    
    
    13,188,537Cash flows from investing activitiesInvestment in purchased receivables, net of buy backs
    
    
    (10,569,845
    )
    
    
    (22,879,259
    )Principal collected on purchased receivables
    
    
    15,609,280
    
    
    
    9,403,537Investment in finance contracts
    
    
    (164,546
    )
    
    
    (280,505
    )Principal collected on finance contracts
    
    
    144,460
    
    
    
    145,042Purchase of fixed assets
    
    
    (474,102
    )
    
    
    (521,072
    )Net cash provided by (used in) investing activities
    
    
    4,545,247
    
    
    
    (14,132,257
    )Cash flows from financing activitiesBorrowings under line of credit
    
    
    11,500,000
    
    
    
    16,800,000Repayment of line of credit
    
    
    (69,050,000
    )
    
    
    (14,650,000
    )Borrowings
from related party
    
    
    
    
    
    
    889,682Repayments to related party
    
    
    (39,560,110
    )
    
    
    Repayment of capital lease obligations
    
    
    (29,916
    )
    
    
    (20,227
    )Dividends and distributions paid
    
    
    (1,000,000
    )
    
    
    Additional assets contributed
    
    
    50,406
    
    
    
    Proceeds from initial public offering, net of costs
    
    
    96,077,000
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (2,012,620
    )
    
    
    3,019,455Net increase in cash
    
    
    2,666,708
    
    
    
    2,075,735Cash at beginning of period
    
    
    5,498,836
    
    
    
    2,280,861Cash at end of period
    
    $
    8,165,544
    
    
    $
    4,356,596Supplemental disclosure of cash flow
informationCash paid for interest
    
    $
    956,839
    
    
    $
    843,470Cash paid for income taxes
    
    
    58,102
    
    
    
    Non-cash investing and financing activities:Capital lease obligations incurred
    
    
    103,726
    
    
    
    44,191
 See accompanying notes. 4




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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, 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 financials
statements contain all adjustments necessary for a fair statement of the
Companys financial position as of March 31, 2004 and its results of operations
and its cash flows for the three month periods ended March 31, 2004 and 2003. The
results of operations of the Company for the three month periods ended March
31, 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
other unaffiliated companies. 5




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The Company also finances the sales of consumer product retailers located
primarily in Michigan and Florida. 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 March 31, 2004, we had 52 pools on the cost
recovery method with an aggregate carrying value of $2.8 million or less than
1.6% 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. Changes in purchased receivables portfolios for the three months ended
March 31, 2004 and March 31, 2003 were as follows: 6




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Three months ended March 31,2004
    
    2003Balance at beginning of period
    
    $
    183,719,667
    
    
    $
    133,336,581Investment in purchased receivables, net of buy backs
    
    
    12,125,876
    
    
    
    22,879,260Cash collections
    
    
    (65,196,055
    )
    
    
    (44,017,730
    )Purchased receivable revenues
    
    
    49,586,774
    
    
    
    34,614,193Balance at end of period
    
    $
    180,236,262
    
    
    $
    146,812,304
 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 $403,000
and $417,000 at March 31, 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 to reflect 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 $88,000 and $106,000 at March 31, 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 18.9% and 15.1% for the three months ended March
31, 2004 and 2003, respectively. Initial Public Offering The
Company received net proceeds of $96.1 million from the initial public
offering 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 SAR holders in the amount of $18.4
million. Share Appreciation Rights Compensation Charge As previously announced in the Company's S-1 Registration Statement and the Company's Annual Report on form 10-K, 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 S-1 Registration Statement and the Company's Annual Report on form 10-K, 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 the Company 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. 7




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2. Related-Party Transactions On October 1, 2002, the Company borrowed $35.0 million from its
shareholders. Interest on the note 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 $889,682 of interest expense on
these notes for the three months ended March 31, 2004 and 2003, respectively.
The Company owed the related party $39,560,110 as of December 31, 2003. This
note was paid in full during February 2004. 3. Line of Credit The
Company has a $100.0 million line of credit with a syndication
of commercial lenders which originated September 30, 2002 and
was amended most recently February 11, 2004. The Line 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 $15,400,000 and $72,950,000
at March 31, 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 March 31, 2004. 4. Property and Equipment Property and equipment, having estimated useful lives ranging from three
to ten years consisted of the following: March 31,
    
    December 31,2004
    
    2003Computers and software
    
    $
    6,768,420
    
    
    $
    6,641,311Furniture and fixtures
    
    
    5,592,909
    
    
    
    5,284,614Leasehold improvements
    
    
    676,341
    
    
    
    689,043Equipment under capital lease
    
    
    427,917
    
    
    
    397,908Automobiles
    
    
    133,325
    
    
    
    133,325Total property and equipment, cost
    
    
    13,598,912
    
    
    
    13,146,201Less accumulated depreciation
    
    
    (5,747,675
    )
    
    
    (5,175,631
    )Net property and equipment
    
    $
    7,851,237
    
    
    $
    7,970,570
 8




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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 March 31, 2004 the Company had issued 75,000 stock options under the
plan. All options, granted under the Stock Incentive Plan, vest 50% after one year and 100%
after two years. These options have been granted to non-employee directors of
the Company. The related expense of $23,936 for the three months ended March
31, 2004 is included in administrative expenses. The following summarizes all
stock option related transactions from January 1, 2004 through March 31, 2004. WeightedAverageOptions
    
    ExerciseOutstanding
    
    PriceJanuary 1, 2004
    
    
    
    
    
    
    Granted
    
    
    75,000
    
    
    $
    16.40Cancelled
    
    
    
    
    
    
    March 31, 2004
    
    
    75,000
    
    
    $
    16.40
 The
following options information is as of March 31, 2004: Weighted-AverageExercise
    
    Fair Value of
    
    Number
    
    Remaining
    
    Weighted-Average
    
    
    
    
    
    Weighted-AveragePrice
    
    Option Granted
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Number Exercisable
    
    Exercise Price$15.00
    
    $
    4.84
    
    
    
    45,000
    
    
    
    9.85
    
    
    $
    15.00
    
    
    
    
    
    
    $
    15.00$18.50
    
    $
    5.90
    
    
    
    30,000
    
    
    
    9.92
    
    
    $
    18.50
    
    
    
    
    
    
    $
    18.50Total
    
    
    
    
    
    
    75,000
    
    
    
    9.88
    
    
    $
    16.40
    
    
    
    
    
    
    
    
 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: 9




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Options issue year:
    
    2004Weighted average fair value of options granted
    
    $
    5.26Expected Volatility
    
    
    30.00
    %Risk-free interest rate
    
    
    2.98%-3.15
    %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 have the potential to share in the appreciation of the value of Asset
Acceptance Holdings LLC. A benefit may be earned by participants if certain
financial objectives are met upon partial or complete liquidation events, as
defined in the plan. In
connection with the consummation of the Companys initial public offering 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 March 31, 2004 and does not believe
exposure to be material. 7. Income taxes Income taxes for the three months ended March 31, 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 three months ended March 31, 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. (then a 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 of February 5, 2004 through March 31, 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 three month period ended March 31, 2003 of $2.0 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. 10




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##### Table of Contents



Components of income tax expense are set forth below: Three months ended,March 31, 2004
    
    March 31, 2003Income taxes consist of:State actual
    
    $
    11,558
    
    
    $
    Federal deferred  net
    
    
    7,379,436
    
    
    
    1,901,564State deferred  net
    
    
    391,179
    
    
    
    123,042Total
    
    $
    7,782,173
    
    
    $
    2,024,606
 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,March 31, 2004
    
    March 31, 2003Federal taxes at statutory rate
    
    $
    (9,911,525
    )
    
    $
    3,431,944S-corporation benefit  federal
    
    
    (825,193
    )
    
    
    (1,530,380
    )S-corporation benefit  state
    
    
    (51,869
    )
    
    
    (96,195
    )Deferred tax charge  federal
    
    
    18,116,154
    
    
    
    Deferred tax charge  state
    
    
    1,190,490
    
    
    
    State income taxes, net of federal tax
benefit
    
    
    (735,884
    )
    
    
    219,237Effective income taxes
    
    $
    7,782,173
    
    
    $
    2,024,606
 11




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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. Significant Events during the three months ended March 31, 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 held 60% and 40% of
the ownership interests in Asset Acceptance Holdings LLC, respectively, were
contributed to Asset 12




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##### Table of Contents



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 initial public offering
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 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. 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 March 31,2004
    
    2003RevenuesPurchased receivable revenues
    
    
    99.7
    %
    
    
    99.6
    %Finance contract revenues
    
    
    0.3
    
    
    
    0.4Total revenues
    
    
    100.0
    
    
    
    100.0ExpensesSalaries and benefits
    
    
    123.5
    
    
    
    32.7Collections expense
    
    
    24.7
    
    
    
    26.3Occupancy
    
    
    2.8
    
    
    
    2.8Administrative
    
    
    2.6
    
    
    
    2.5Depreciation
    
    
    1.5
    
    
    
    1.9Loss on disposal of equipment
    
    
    0.0
    
    
    
    0.0Total operating expense
    
    
    155.1
    
    
    
    66.2Income (loss) from operations
    
    
    (55.1
    )
    
    
    33.8Net interest expense
    
    
    2.0
    
    
    
    5.2Other income
    
    
    (0.1
    )
    
    
    (0.2
    )Income (loss) before income taxes
    
    
    (57.0
    )
    
    
    28.8Income taxes
    
    
    15.7
    
    
    
    5.9Net income (loss)
    
    
    (72.7
    )%
    
    
    22.9
    %Pro forma
income tax expense (benefit) (1)
    
    
    (21.2
    )%
    
    
    10.7
    %Pro forma
net income (loss) (1)
    
    
    (35.8
    )%
    
    
    18.1
    %
 13




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##### Table of Contents



(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 March 31, 2004 Compared To Three Months Ended March 31,
2003 Revenue Total revenues were $49.7 million for the three months ended March 31,
2004, an increase of $14.9 million or 43.1% over total revenues of $34.8
million for the three months ended March 31, 2003. Purchased receivable
revenues were $49.6 million for the three months ended March 31, 2004, an
increase of $15.0 million or 43.3% over the three months ended March 31, 2003
amount of $34.6 million. The increase was due primarily to an increase in cash
collections on charged-off consumer receivables to $65.2 million from $44.0
million, an increase of 48.1%. The increase in collections was primarily due
to the increased number of consumer receivable portfolios as well as a
heightened focus on collector efficiency. During the three months ended March
31, 2004, we acquired charged-off consumer receivables portfolios with an
aggregate face value amount, net of buybacks, of $514.1 million at a cost of
$12.4 million. Included in the 2004 purchases were two forward flow purchases
with an aggregate face value of $80.6 million at a cost of $2.4 million.
During the three months ended March 31, 2003, we acquired charged-off consumer
receivables portfolios with an aggregate face value, net of buybacks, of $897.9
million at a cost of $23.1 million. Operating
Expenses Total operating expenses were $77.2 million for the three months ended
March 31, 2004, an increase of $54.2 million or 235.6% compared to total
operating expenses of $23.0 million for the three months ended March 31, 2003.
Total operating expenses were 118.3% of cash collections for the three months
ended March 31, 2004 compared with 52.2% 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 $31.5 million for the three
months ended March 31, 2004, an increase of $8.5 million or 36.9% over the
prior year. Excluding the share appreciation rights charge and related payroll
taxes, operating expenses decreased to 48.3% of cash collections for the three
months ended March 31, 2004 from 52.2% of cash collections for the same three
month period in 2003. The improvement in operating expenses as a percent of
cash collections was primarily attributable to strong collections resulting
from an increased focus on collector efficiency combined with lower purchases
of receivable portfolios during the first quarter of 2004 compared with the
first quarter of 2003 which resulted in lower expenses associated with
initial collection efforts. Salaries and Benefits.Salary and benefit expenses were $61.4 million for
the three months ended March 31, 2004, an increase of $50.0 million or 440.7%
compared to salary and benefit expenses of $11.4 million for the three months
ended March 31, 2003. Salary and benefit expenses increased primarily due to a
$45.0 million charge related to the vesting of the outstanding share
appreciation rights and $0.7 million in related payroll taxes. Excluding the share appreciation rights charge and related payroll taxes,
salary and benefit expenses were $15.7 million for the three months ended March
31, 2004, an increase of $4.3 million or 38.6% compared to 2003. The increase
over the prior year was due to an increase in total employees which grew to
1,562 at March 31, 2004 from 1,302 at March 31, 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 one-time charge described above, decreased to 24.2%
for the three months ended March 31, 2004 from 25.8% of cash collections for
the same period in 2003. The decrease as a percent of cash collections was
primarily attributable to increased collector efficiencies during the first
quarter of 2004 compared to the same period last year, partially offset by an
increase in related bonuses paid to collectors. 14




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##### Table of Contents



Collections Expense.Collections expense increased to $12.3 million for
the three months ended March 31, 2004 reflecting an increase of $3.1 million or
34.4% over $9.2 million for the three months ended March 31, 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 March 31, 2004 from 20.8% for the three months ended March
31, 2003. This decrease was primarily due to a decrease in the number of new
accounts purchased in the quarter compared to the same period last year. The
decrease in acquisitions led to lower letter volumes, credit reports and other
collection expenses normally associated with initial collection efforts. Occupancy.Occupancy expense was $1.4 million for the three months ended
March 31, 2004, an increase of $0.4 million or 46.7% over occupancy expense of
$1.0 million for the three months ended March 31, 2003. The increase was
primarily attributable to the move of our Florida location to Riverview,
Florida in January 2004, the move of our Phoenix, Arizona location and the
addition of our Chicago, Illinois location in September 2003. Administrative.Administrative expenses increased to $1.3 million for the
three months ended March 31, 2004 from $0.9 million for the three months ended
March 31, 2003, reflecting a $0.4 million or 45.1% increase. The increase in
administrative expenses was principally a result of the increased number of
accounts being processed. Depreciation.Depreciation expense was $0.7 million for the three months
ended March 31, 2004, an increase of $0.1 million or 13.1% over depreciation
expense of $0.6 million for the three months ended March 31, 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 $1.0 million for the three
months ended March 31, 2004, a decrease of $0.8 million or 45.7% compared to
net interest expense of $1.8 million for the three months ended March 31, 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 $0.5 million
during the three month ended March 31, 2004 compared to 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 $42.4 million for
the three months ended March 31, 2004 from $67.9 million for the same period in
2003. The reduction in our average borrowings was due primarily to payment of
$37.7 million of debt from the proceeds of the IPO. Income
Taxes Income taxes of $7.8 million for the three months ended
March 31, 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 three months ended March 31, 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. (then a 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 of February 5, 2004 through March 31, 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 three month period ended March 31, 2003 of $2.0 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. 15




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##### Table of Contents



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 March 31, 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
    
    
    $
    3,082
    
    
    
    483
    %1991
    
    
    12
    
    
    
    280
    
    
    
    1,438
    
    
    
    5141992
    
    
    29
    
    
    
    309
    
    
    
    2,819
    
    
    
    9121993
    
    
    30
    
    
    
    790
    
    
    
    7,690
    
    
    
    9731994
    
    
    36
    
    
    
    1,427
    
    
    
    6,688
    
    
    
    4691995
    
    
    53
    
    
    
    1,519
    
    
    
    7,482
    
    
    
    4931996
    
    
    46
    
    
    
    3,844
    
    
    
    16,009
    
    
    
    4161997
    
    
    45
    
    
    
    4,345
    
    
    
    25,702
    
    
    
    5921998
    
    
    61
    
    
    
    16,412
    
    
    
    69,095
    
    
    
    4211999
    
    
    51
    
    
    
    12,926
    
    
    
    46,041
    
    
    
    3562000
    
    
    49
    
    
    
    20,599
    
    
    
    80,288
    
    
    
    3902001
    
    
    62
    
    
    
    43,138
    
    
    
    132,489
    
    
    
    3072002
    
    
    94
    
    
    
    72,400
    
    
    
    112,486
    
    
    
    1552003
    
    
    76
    
    
    
    89,306
    
    
    
    60,619
    
    
    
    682004 (3)
    
    
    17
    
    
    
    12,430
    
    
    
    474
    
    
    
    4
   (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 three months of activity through March 31, 2004. Cash Collections The following tables provide further detailed vintage collection analysis
on an annual and a cumulative basis. Historical Collections (1) ThreeMonthsPurchase
    
    Purchase
    
    Year Ended December 31,
    
    EndedMarch 31,Period
    
    Amount(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
    
    
    $
    391993
    
    $
    790
    
    
    
    526
    
    
    
    1,911
    
    
    
    1,630
    
    
    
    1,022
    
    
    
    768
    
    
    
    480
    
    
    
    373
    
    
    
    311
    
    
    
    236
    
    
    
    175
    
    
    
    175
    
    
    
    331994
    
    
    1,427
    
    
    
    
    
    
    
    345
    
    
    
    1,763
    
    
    
    1,430
    
    
    
    1,005
    
    
    
    647
    
    
    
    457
    
    
    
    357
    
    
    
    258
    
    
    
    176
    
    
    
    188
    
    
    
    281995
    
    
    1,519
    
    
    
    
    
    
    
    
    
    
    
    388
    
    
    
    1,566
    
    
    
    1,659
    
    
    
    1,118
    
    
    
    786
    
    
    
    708
    
    
    
    472
    
    
    
    343
    
    
    
    278
    
    
    
    481996
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    827
    
    
    
    3,764
    
    
    
    3,085
    
    
    
    2,601
    
    
    
    2,098
    
    
    
    1,440
    
    
    
    1,041
    
    
    
    816
    
    
    
    1821997
    
    
    4,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,682
    
    
    
    4,919
    
    
    
    5,573
    
    
    
    5,017
    
    
    
    3,563
    
    
    
    2,681
    
    
    
    1,784
    
    
    
    3731998
    
    
    16,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,835
    
    
    
    15,220
    
    
    
    15,045
    
    
    
    12,962
    
    
    
    11,021
    
    
    
    7,987
    
    
    
    1,4481999
    
    
    12,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,761
    
    
    
    11,331
    
    
    
    10,862
    
    
    
    9,750
    
    
    
    8,278
    
    
    
    1,8132000
    
    
    20,599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,895
    
    
    
    23,444
    
    
    
    22,559
    
    
    
    20,318
    
    
    
    4,6082001
    
    
    43,138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,630
    
    
    
    50,327
    
    
    
    50,967
    
    
    
    12,6812002
    
    
    72,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,340
    
    
    
    70,813
    
    
    
    18,9172003
    
    
    89,306
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,067
    
    
    
    24,5522004
    
    
    12,430
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    474Total
    
    
    
    
    
    $
    1,920
    
    
    $
    3,412
    
    
    $
    4,691
    
    
    $
    5,611
    
    
    $
    9,395
    
    
    $
    15,438
    
    
    $
    29,047
    
    
    $
    44,006
    
    
    $
    71,068
    
    
    $
    120,540
    
    
    $
    197,819
    
    
    $
    65,196
 16




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##### Table of Contents



Cumulative Collections (1) TotalPurchase
    
    Purchase
    
    Total through December 31,
    
    throughMarch 31,Period
    
    Amount(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
    
    
    $
    7,6401994
    
    
    1,427
    
    
    
    
    
    
    
    345
    
    
    
    2,108
    
    
    
    3,538
    
    
    
    4,543
    
    
    
    5,190
    
    
    
    5,647
    
    
    
    6,004
    
    
    
    6,262
    
    
    
    6,438
    
    
    
    6,626
    
    
    
    6,6541995
    
    
    1,519
    
    
    
    
    
    
    
    
    
    
    
    388
    
    
    
    1,954
    
    
    
    3,613
    
    
    
    4,731
    
    
    
    5,517
    
    
    
    6,225
    
    
    
    6,697
    
    
    
    7,040
    
    
    
    7,318
    
    
    
    7,3661996
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    827
    
    
    
    4,591
    
    
    
    7,676
    
    
    
    10,277
    
    
    
    12,375
    
    
    
    13,815
    
    
    
    14,856
    
    
    
    15,672
    
    
    
    15,8541997
    
    
    4,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,682
    
    
    
    6,601
    
    
    
    12,174
    
    
    
    17,191
    
    
    
    20,754
    
    
    
    23,435
    
    
    
    25,219
    
    
    
    25,5921998
    
    
    16,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,835
    
    
    
    20,055
    
    
    
    35,100
    
    
    
    48,062
    
    
    
    59,083
    
    
    
    67,070
    
    
    
    68,5181999
    
    
    12,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,761
    
    
    
    15,092
    
    
    
    25,954
    
    
    
    35,704
    
    
    
    43,982
    
    
    
    45,7952000
    
    
    20,599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,895
    
    
    
    32,339
    
    
    
    54,898
    
    
    
    75,216
    
    
    
    79,8242001
    
    
    43,138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,630
    
    
    
    67,957
    
    
    
    118,924
    
    
    
    131,6052002
    
    
    72,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,340
    
    
    
    93,153
    
    
    
    112,0702003
    
    
    89,306
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,067
    
    
    
    60,6192004
    
    
    12,430
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    474Cumulative Collections as Percentage of Purchase Amount (1)TotalPurchase
    
    Purchase
    
    Total through December 31,
    
    throughMarch 31,Period
    
    Amount(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
    %
    
    
    967
    %1994
    
    
    1,427
    
    
    
    
    
    
    
    24
    
    
    
    148
    
    
    
    248
    
    
    
    318
    
    
    
    364
    
    
    
    396
    
    
    
    421
    
    
    
    439
    
    
    
    451
    
    
    
    464
    
    
    
    4661995
    
    
    1,519
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    129
    
    
    
    238
    
    
    
    311
    
    
    
    363
    
    
    
    410
    
    
    
    441
    
    
    
    463
    
    
    
    482
    
    
    
    4851996
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    119
    
    
    
    200
    
    
    
    267
    
    
    
    322
    
    
    
    359
    
    
    
    386
    
    
    
    408
    
    
    
    4121997
    
    
    4,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    152
    
    
    
    280
    
    
    
    396
    
    
    
    478
    
    
    
    539
    
    
    
    580
    
    
    
    5891998
    
    
    16,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    122
    
    
    
    214
    
    
    
    293
    
    
    
    360
    
    
    
    409
    
    
    
    4171999
    
    
    12,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    117
    
    
    
    201
    
    
    
    276
    
    
    
    340
    
    
    
    3542000
    
    
    20,599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    157
    
    
    
    266
    
    
    
    365
    
    
    
    3882001
    
    
    43,138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    158
    
    
    
    276
    
    
    
    3052002
    
    
    72,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    129
    
    
    
    1552003
    
    
    89,306
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    682004
    
    
    12,430
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
   (1)
    
    Does not include proceeds from sales of any receivables.(2)
    
    Purchase amount 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. Changes in Purchased Receivables The following table shows the changes in purchased receivables, including
the amounts paid to acquire new portfolios, and the correlation between our
cash collections on our purchased portfolios and revenue recognized on
purchased receivables. Three Months ended March 31,2004
    
    2003(In thousands)Beginning balance
    
    $
    183,720
    
    
    $
    133,337Investment in purchased receivables, net of buybacks
    
    
    12,125
    
    
    
    22,879Cash collections
    
    
    (65,196
    )
    
    
    (44,018
    )Purchased receivable revenues
    
    
    49,587
    
    
    
    34,614Ending balance
    
    $
    180,236
    
    
    $
    146,812
 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. 17




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##### Table of Contents



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 March 31, 2004. (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
    
    
    
    Third
    
    
    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 March 31, 2004, into the major asset types represented: Face Value ofCharged-off
    
    
    
    
    
    No. ofAsset Type
    
    Receivables
    
    %
    
    Accounts
    
    %Visa®/MasterCard®/Discover®
    
    $
    6,357,065,749
    
    
    
    41.5
    %
    
    
    2,293,496
    
    
    
    16.1
    %Private Label Credit Cards
    
    
    2,377,484,321
    
    
    
    15.5
    
    
    
    3,379,515
    
    
    
    23.8Health Club
    
    
    1,223,390,684
    
    
    
    8.0
    
    
    
    1,294,214
    
    
    
    9.1Auto deficiency
    
    
    1,085,500,984
    
    
    
    7.1
    
    
    
    184,133
    
    
    
    1.3Telecommunications/Utility/Gas
    
    
    1,064,796,320
    
    
    
    7.0
    
    
    
    2,360,543
    
    
    
    16.6Installment loans
    
    
    669,482,376
    
    
    
    4.4
    
    
    
    193,870
    
    
    
    1.4Other(1)
    
    
    2,525,097,808
    
    
    
    16.5
    
    
    
    4,496,067
    
    
    
    31.7Total
    
    $
    15,302,818,242
    
    
    
    100.0
    %
    
    
    14,201,838
    
    
    
    100.0
    %
   (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 18




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##### Table of Contents



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 March 31, 2004, into the major account types represented: Face Value ofCharged-off
    
    
    
    
    
    No. ofAccount Type
    
    Receivables
    
    %
    
    Accounts
    
    %Fresh
    
    $
    911,061,061
    
    
    
    6.0
    %
    
    
    338,265
    
    
    
    2.4
    %Primary
    
    
    3,201,491,807
    
    
    
    20.9
    
    
    
    2,122,165
    
    
    
    14.9Secondary
    
    
    2,425,718,793
    
    
    
    15.8
    
    
    
    1,421,298
    
    
    
    10.0Tertiary(1)
    
    
    8,041,975,548
    
    
    
    52.6
    
    
    
    9,951,258
    
    
    
    70.1Other
    
    
    722,571,033
    
    
    
    4.7
    
    
    
    368,852
    
    
    
    2.6Total
    
    $
    15,302,818,242
    
    
    
    100.0
    %
    
    
    14,201,838
    
    
    
    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. 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 March 31, 2004, our
purchased receivables portfolios based on geographic location of debtor: Face Value ofCharged-off
    
    
    
    
    
    No. ofGeographic Location
    
    Receivables
    
    %
    
    Accounts
    
    %Texas(1)
    
    $
    1,800,894,169
    
    
    
    11.8
    %
    
    
    1,389,520
    
    
    
    9.8
    %California
    
    
    1,409,544,976
    
    
    
    9.2
    
    
    
    1,286,131
    
    
    
    9.1Florida(1)
    
    
    1,379,105,698
    
    
    
    9.0
    
    
    
    997,261
    
    
    
    7.0Michigan(1)
    
    
    1,347,894,597
    
    
    
    8.8
    
    
    
    1,561,191
    
    
    
    11.0Ohio(1)
    
    
    982,253,056
    
    
    
    6.4
    
    
    
    1,058,769
    
    
    
    7.5New York
    
    
    891,680,304
    
    
    
    5.8
    
    
    
    735,082
    
    
    
    5.2Illinois(1)
    
    
    755,432,779
    
    
    
    4.9
    
    
    
    963,236
    
    
    
    6.8Pennsylvania
    
    
    469,140,871
    
    
    
    3.1
    
    
    
    407,516
    
    
    
    2.9North Carolina
    
    
    391,364,196
    
    
    
    2.6
    
    
    
    316,141
    
    
    
    2.2Georgia
    
    
    388,498,678
    
    
    
    2.5
    
    
    
    324,059
    
    
    
    2.3Indiana
    
    
    314,176,384
    
    
    
    2.1
    
    
    
    403,765
    
    
    
    2.8New Jersey(1)
    
    
    305,297,695
    
    
    
    2.0
    
    
    
    262,476
    
    
    
    1.8Other(2)
    
    
    4,867,534,839
    
    
    
    31.8
    
    
    
    4,496,691
    
    
    
    31.6Total
    
    $
    15,302,818,242
    
    
    
    100.0
    %
    
    
    14,201,838
    
    
    
    100.0
    %
 19




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##### Table of Contents



(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
initial public offering 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. 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 March 31,
2004, the balance outstanding on our line of credit was $15.4 million and had a
weighted average interest rate of 3.81%. The line of credit has certain
covenants and restrictions which we believe we are in compliance with as of
March 31, 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, we 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 March 31, 2004, we invested $173.5 million in
purchased receivables while our balance under the line of credit, increased by
$15.4 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 $0.1 million and $13.2 million
for the three months ended March 31, 2004 and 2003, respectively. Cash
provided by operating activities for the three months ended March 31, 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 $19.1 million.
Cash provided by operating activities for the three months ended March 31, 2003
of $13.2 million was generated primarily from net income earned through cash
collections. Investing activities provided cash of $4.5 million for the three months
ended March 31, 2004 and used cash of $14.1 million for the same period in
2003. For the three months ended March 31, 2004, cash provided from investing
activities was primarily due to an excess of cash collections applied to
principal over acquisitions of purchased receivables. For the three months
ended March 31, 2003, cash used for investing purposes was primarily due to
acquisitions of purchased receivables, net of cash collections applied to
principal. Financing activities used cash of $2.0 million for the three months ended
March 31, 2004 and provided cash of $3.0 million for the same period in 2003.
During 2004, the cash used for financing purposes was 20




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##### Table of Contents



primarily due to the payment of notes to related parties and our line of
credit. During 2003, borrowings under our line of credit, net of repayments,
and borrowings from a related party were the primary sources of cash provided
during 2004. Cash paid for interest was $1.0 million and $0.8 million for the three
months ended March 31, 2004 and 2003, respectively. Cash paid for interest
consisted of $0.6 million for the line of credit and $0.4 million paid for the
related party debt for the three months ended March 31, 2004 and consisted of
$0.8 million for the line of credit for the three months ended March 31, 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. Future Contractual Cash Obligations During
February 2004, we reduced our outstanding debt by
$77.7 million with a
portion of the proceeds received from the IPO. We used $40.0 million of the
proceeds to pay our related party debt in full and used $37.7 million to reduce
our line of credit. The following table summarizes our future contractual cash obligations as
of March 31, 2004: Years ending December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterCapital lease
obligations
    
    $
    111,250
    
    
    $
    120,161
    
    
    $
    69,953
    
    
    $
    5,902
    
    
    $
    
    
    
    $
    Operating leases(1)
    
    
    3,203,817
    
    
    
    5,183,525
    
    
    
    5,652,027
    
    
    
    5,427,496
    
    
    
    4,514,743
    
    
    
    16,996,358Employment
agreements
    
    
    851,250
    
    
    
    976,250
    
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    Line of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,400,000
    
    
    
    
    
    
    
    Total
    
    $
    4,166,317
    
    
    $
    6,279,936
    
    
    $
    6,221,980
    
    
    $
    20,833,398
    
    
    $
    4,514,743
    
    
    $
    16,996,358
   (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 September 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 21




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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 yield 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 three months ended March 31, 2004, every 20 basis point change in the
average yield for all pools would have affected year-to-date revenue by
approximately $1.1 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 $5.5 million or 11.1%. 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 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 March 31, 2004, we had variable interest rate
borrowings of $15.4 million. Assuming a 200 basis point increase in interest
rates on our variable rate debt, interest expense would have increased
approximately $196,000 and $139,000 for the three months ended March 31, 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. 22




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##### Table of Contents



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 May 3, 2004, we are named
in nine 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 lawsuit would not, if
decided against us, have a material and adverse effect on our financial
condition. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities (a) The rights of holders of shares of the Companys common stock were
modified by the amendment and restatement of the Companys Certificate of
Incorporation and Bylaws effective February 2, 2004. The modifications had the
effect of (i) increasing the number of the Companys authorized shares of
common stock, (ii) authorizing shares of preferred stock with rights and
preferences to be designated by the Companys Board of Directors, and (iii)
staggering the terms of members of the Companys Board of Directors. (c) The following security sales were made by the Company in the period
covered by this report: On February 4, 2004, pursuant to a Share Exchange Agreement entered into
on October 24, 2003, all of the shares of capital stock of AAC Investors, Inc.
and RBR Holding Corp, which held 60% and 40% ownership interests in Asset
Acceptance Holdings LLC, respectively, were contributed to Asset Acceptance
Capital Corp. in exchange for all of the shares of common stock of Asset
Acceptance Capital Corp. A total of 28,448,449 shares were issued to the
stockholders of AAC Investors, Inc. and RBR Holding Corp., respectively, as a
result of this share exchange. The issuance was effected pursuant to the
registration exemption afforded by Regulation D and/or Section 4(2) of the
Securities Act. No underwriters were involved in the sales of securities
described in this paragraph. On September 30, 2002, Asset Acceptance Holdings LLC adopted the Year 2002
Share Appreciation Rights Plan pursuant to which approximately 60 employees
were granted share appreciation rights entitling the holder to receive
compensation under certain circumstances for an appreciation in the value of
Asset Acceptance Holdings LLC. The share appreciation rights were subject to
vesting and payment restrictions based upon term of the holders employment
with Asset Acceptance Holdings LLC. In connection with the commencement of the
Asset Acceptance Capital Corp.s initial public offering, on February 5, 2004,
Asset Acceptance Holdings LLC exercised its right to vest 100% of the share
appreciation rights held by the holders which resulted in the issuance of
1,776,826 unregistered shares of the common stock of Asset Acceptance Capital
Corp. to the holders as payment for a portion of the purchase price for these
rights. This issuance was effected pursuant to the registration exemption
afforded by Rule 701 and/or Section 4(2) of the Securities Act. No
underwriters were involved in the sales of securities described in this
paragraph. 23




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders The shareholders, through a unanimous written consent on February 4, 2004,
adopted the 2004 stock incentive plan. The plan became effective upon
consummation of the initial public offering and has an aggregate of 3,700,000
shares of common stock reserved for issuance. 
 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 March 10, 2004 relating
to its reporting of the Results of Operations and Financial Condition for the
quarter and year ended December 31, 2003. 24




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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: May 7, 2004
    
    By:
    
    /s/ Nathaniel F. Bradley IVNathaniel F. Bradley IVPresident and Chief Executive Officer(Principal Executive Officer)Date: May 7, 2004
    
    By:
    
    /s/ Mark A. RedmanMark A. RedmanVice President  Finance andChief Financial Officer(Principal Financial and Accounting Officer)
 25




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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