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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 September 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 October 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
    
    
    27Item 1.
    
    Legal Proceedings
    
    
    27Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    27Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    28Signatures
    
    
    
    
    29Rule 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. 2




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements ASSET ACCEPTANCE CAPITAL CORP.
Consolidated Statements of Financial Position
(Unaudited) September 30, 2004
    
    December 31, 2003ASSETSCash
    
    $
    11,519,955
    
    
    $
    5,498,836Purchased receivables
    
    
    200,853,658
    
    
    
    183,719,667Finance contract receivables, net
    
    
    699,453
    
    
    
    642,530Property and equipment, net
    
    
    7,348,336
    
    
    
    7,970,570Goodwill
    
    
    6,339,574
    
    
    
    6,339,574Other assets
    
    
    3,662,632
    
    
    
    2,938,999Total assets
    
    $
    230,423,608
    
    
    $
    207,110,176LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Line of credit
    
    $
    
    
    
    $
    72,950,000Notes payable  related party
    
    
    
    
    
    
    39,560,110Deferred tax liability
    
    
    34,075,127
    
    
    
    11,905,768Accounts payable and other liabilities
    
    
    11,571,606
    
    
    
    8,092,844Capital lease obligations
    
    
    262,115
    
    
    
    218,765Total liabilities
    
    
    45,908,848
    
    
    
    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 September 30,
2004 and 28,448,449 at December 31, 2003
    
    
    372,253
    
    
    
    284,484Additional paid in capital
    
    
    159,249,595
    
    
    
    36,385,000Retained earnings
    
    
    24,892,912
    
    
    
    37,713,205Total equity
    
    
    184,514,760
    
    
    
    74,382,689Total liabilities and equity
    
    $
    230,423,608
    
    
    $
    207,110,176
 See accompanying notes. 3




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ASSET ACCEPTANCE CAPITAL CORP.
Consolidated Statements of Income
(Unaudited) Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003RevenuesPurchased receivable revenues
    
    $
    55,870,763
    
    
    $
    43,020,901
    
    
    $
    156,810,383
    
    
    $
    115,451,811Finance contract revenues
    
    
    127,967
    
    
    
    122,472
    
    
    
    442,600
    
    
    
    437,998Total revenues
    
    
    55,998,730
    
    
    
    43,143,373
    
    
    
    157,252,983
    
    
    
    115,889,809ExpensesSalaries and benefits
    
    
    16,240,718
    
    
    
    12,846,772
    
    
    
    94,124,074
    
    
    
    37,229,116Collections expense
    
    
    15,671,416
    
    
    
    13,437,229
    
    
    
    40,750,626
    
    
    
    32,703,443Occupancy
    
    
    1,509,896
    
    
    
    1,129,155
    
    
    
    4,328,048
    
    
    
    3,096,293Administrative
    
    
    1,343,371
    
    
    
    685,225
    
    
    
    3,984,713
    
    
    
    2,422,069Depreciation
    
    
    669,213
    
    
    
    652,898
    
    
    
    2,132,800
    
    
    
    1,890,429(Gain)/loss on disposal of equipment
    
    
    (1,041
    )
    
    
    
    
    
    
    41,865
    
    
    
    2,714Total operating expense
    
    
    35,433,573
    
    
    
    28,751,279
    
    
    
    145,362,126
    
    
    
    77,344,064Income from operations
    
    
    20,565,157
    
    
    
    14,392,094
    
    
    
    11,890,857
    
    
    
    38,545,745Net interest expense
    
    
    224,323
    
    
    
    1,876,203
    
    
    
    1,554,267
    
    
    
    5,465,598Other income
    
    
    (414
    )
    
    
    (174,107
    )
    
    
    (25,372
    )
    
    
    (355,005
    )Income before income taxes
    
    
    20,341,248
    
    
    
    12,689,998
    
    
    
    10,361,962
    
    
    
    33,435,152Income taxes
    
    
    7,579,901
    
    
    
    2,614,363
    
    
    
    22,182,255
    
    
    
    6,831,500Net income (loss)
    
    $
    12,761,347
    
    
    $
    10,075,635
    
    
    $
    (11,820,293
    )
    
    $
    26,603,652Pro forma income tax expense
    
    
    
    
    
    $
    4,753,285
    
    
    $
    3,854,650
    
    
    $
    12,471,312Pro forma net income
    
    
    
    
    
    $
    7,936,713
    
    
    $
    6,507,312
    
    
    $
    20,963,840Weighted average number of shares :Basic
    
    
    37,225,275
    
    
    
    28,448,449
    
    
    
    36,104,148
    
    
    
    28,448,449Diluted
    
    
    37,230,985
    
    
    
    28,448,449
    
    
    
    36,110,708
    
    
    
    28,448,449Earnings (loss) per common share outstanding:Basic
    
    $
    0.34
    
    
    $
    0.35
    
    
    $
    (0.33
    )
    
    $
    0.94Diluted
    
    $
    0.34
    
    
    $
    0.35
    
    
    $
    (0.33
    )
    
    $
    0.94Proforma earnings per common share
outstanding:Basic
    
    
    
    
    
    $
    0.28
    
    
    $
    0.18
    
    
    $
    0.74Diluted
    
    
    
    
    
    $
    0.28
    
    
    $
    0.18
    
    
    $
    0.74
 See accompanying notes. 4




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ASSET ACCEPTANCE CAPITAL CORP.
Consolidated Statements of Cash Flows
(Unaudited) Nine months ended September 30,2004
    
    2003Cash flows from operating activitiesNet income (loss)
    
    $
    (11,820,293
    )
    
    $
    26,603,652Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation
    
    
    2,132,800
    
    
    
    1,890,429Deferred income taxes
    
    
    22,169,359
    
    
    
    6,830,588Share-based compensation expense
    
    
    26,824,957
    
    
    
    Loss on disposal of equipment
    
    
    41,865
    
    
    
    2,714Provision for losses on finance contracts
    
    
    126,980
    
    
    
    144,239Changes in assets and liabilities:Increase in other assets
    
    
    (903,865
    )
    
    
    (829,841
    )Increase in accounts payable and other liabilities
    
    
    3,478,762
    
    
    
    4,458,836Net cash provided by operating activities
    
    
    42,050,565
    
    
    
    39,100,617Cash flows from investing activitiesInvestment in purchased receivables, net of buybacks
    
    
    (59,911,516
    )
    
    
    (63,743,884
    )Principal collected on purchased receivables
    
    
    42,777,525
    
    
    
    28,379,281Investment in finance contracts
    
    
    (590,677
    )
    
    
    (700,132
    )Principal collected on finance contracts
    
    
    406,775
    
    
    
    407,049Proceeds from sale of fixed assets
    
    
    
    
    
    
    1,956Purchase of fixed assets
    
    
    (1,224,125
    )
    
    
    (2,240,374
    )Net cash used in investing activities
    
    
    (18,542,018
    )
    
    
    (37,896,104
    )Cash flows from financing activitiesBorrowings under line of credit
    
    
    45,420,000
    
    
    
    43,700,000Repayment of line of credit
    
    
    (118,370,000
    )
    
    
    (42,400,000
    )Borrowings from related party
    
    
    
    
    
    
    1,779,363Repayments to related party
    
    
    (39,560,110
    )
    
    
    Repayment of capital lease obligations
    
    
    (104,724
    )
    
    
    (59,400
    )Dividends and distributions paid
    
    
    (1,000,000
    )
    
    
    (738,500
    )Additional assets contributed
    
    
    50,406
    
    
    
    Proceeds from initial public offering, net of costs
    
    
    96,077,000
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (17,487,428
    )
    
    
    2,281,463Net increase in cash
    
    
    6,021,119
    
    
    
    3,485,976Cash at beginning of period
    
    
    5,498,836
    
    
    
    2,280,861Cash at end of period
    
    $
    11,519,955
    
    
    $
    5,766,837Supplemental disclosure of cash flow informationCash paid for interest
    
    $
    1,380,658
    
    
    $
    2,452,403Cash paid for income taxes
    
    
    91,746
    
    
    
    Non-cash investing and financing activities:Capital lease obligations incurred
    
    
    148,075
    
    
    
    173,530
 See accompanying notes. 5




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ASSET ACCEPTANCE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 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 September 30,
2004 and its results of operations for the three and nine month periods ended
September 30, 2004 and 2003 and cash flows for the nine month periods ended
September 30, 2004 and 2003. The results of operations of the Company for the
three and nine month periods ended September 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 that have been charged-off as
uncollectible by the originating organization and typically have been subject
to previous collection efforts. The Company acquires the rights to the
unrecovered balances owed by individual debtors through such purchases. The
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 line 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 September 30, 2004, the Company had 46 pools
on the cost recovery method with an aggregate carrying value of $3.1 million or
about 1.5% 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 and nine months
ended September 30, 2004 and 2003 were as follows: Three Months ended September 30,
    
    Nine Months ended September 30,2004
    
    2003
    
    2004
    
    2003Beginning balance
    
    $
    197,503,693
    
    
    $
    147,464,897
    
    
    $
    183,719,667
    
    
    $
    133,336,581Investment in purchased
receivables, net of buybacks
    
    
    14,305,024
    
    
    
    26,838,216
    
    
    
    59,911,516
    
    
    
    63,743,884Cash collections
    
    
    (66,825,822
    )
    
    
    (48,622,829
    )
    
    
    (199,587,908
    )
    
    
    (143,831,091
    )Purchased receivable revenues
    
    
    55,870,763
    
    
    
    43,020,901
    
    
    
    156,810,383
    
    
    
    115,451,811Ending balance
    
    $
    200,853,658
    
    
    $
    168,701,185
    
    
    $
    200,853,658
    
    
    $
    168,701,185
 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 $432,000
and $417,000 at September 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 $99,000 and
$106,000 at September 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 24% and 21% for the three months ended September
30, 2004 and 2003, and 21% and 17% for the nine months ended September 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. 8




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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 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. The Company recognized $433,536 and $2,728,641 of
interest expense on these notes for the nine months ended September 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 that 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. Additionally, the company pays an annual commitment fee of 0.375%
on the unused portion of the line of credit. The outstanding balance
was $72,950,000 at December 31, 2003. There was no outstanding balance at
September 30, 2004. 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 September 30, 2004. 4. Property and Equipment Property and equipment, having estimated useful lives ranging from three
to ten years consisted of the following: September 30,
    
    December 31,2004
    
    2003Computers and software
    
    $
    7,338,295
    
    
    $
    6,641,311Furniture and fixtures
    
    
    5,644,831
    
    
    
    5,284,614Leasehold improvements
    
    
    705,091
    
    
    
    689,043Equipment under capital lease
    
    
    453,856
    
    
    
    397,908Automobiles
    
    
    133,325
    
    
    
    133,325Total property and equipment, cost
    
    
    14,275,398
    
    
    
    13,146,201Less accumulated depreciation
    
    
    (6,927,062
    )
    
    
    (5,175,631
    )Net property and equipment
    
    $
    7,348,336
    
    
    $
    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 that
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 September 30, 2004, the Company had issued options to purchase
83,050 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 when directors accept options
in lieu of cash compensation, the options vest immediately. The related
expense of $172,559 for the nine months ended September 30, 2004 is included in
administrative expenses. The following summarizes all stock option related
transactions from January 1, 2004 through September 30, 2004. WeightedAverageOptions
    
    ExerciseOutstanding
    
    PriceJanuary 1, 2004
    
    
    
    
    
    
    Granted
    
    
    83,050
    
    
    $
    16.62Cancelled
    
    
    
    
    
    
    September 30, 2004
    
    
    83,050
    
    
    $
    16.62
 The following options information is as of September 30, 2004: Weighted-Average
    
    Weighted-
    
    
    
    
    
    Weighted-Fair Value
    
    
    
    
    
    Remaining
    
    Average
    
    
    
    
    
    AverageExercise
    
    of Option
    
    Number
    
    Contractual
    
    Exercise
    
    Number

    
    ExercisePrice
    
    Granted
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$15.00
    
    $
    4.84
    
    
    
    45,000
    
    
    
    9.35
    
    
    $
    15.00
    
    
    
    
    
    
    
    $18.50
    
    $
    5.90
    
    
    
    30,000
    
    
    
    9.42
    
    
    $
    18.50
    
    
    
    
    
    
    
    $19.48
    
    $
    6.57
    
    
    
    3,850
    
    
    
    9.63
    
    
    $
    19.48
    
    
    
    3,850
    
    
    $
    19.48$17.85
    
    $
    5.84
    
    
    
    4,200
    
    
    
    9.88
    
    
    $
    17.85
    
    
    
    4,200
    
    
    $
    17.85Total
    
    
    
    
    
    
    83,050
    
    
    
    9.41
    
    
    $
    16.62
    
    
    
    8,050
    
    
    $
    18.63
 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 10




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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: Options issue year:
    
    2004Weighted average fair value of options granted
    
    $
    5.35Expected 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 September 30, 2004 and does not believe
exposure to be material. 7. Income Taxes Income taxes for the nine months ended September 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 nine months ended September 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 September 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 nine
month period ended September 30, 2003 of $6.8 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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Components of income tax expense are set forth below: Three months ended September 30
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003Income taxes consist of:State actual
    
    $
    4,708
    
    
    $
    912
    
    
    $
    12,895
    
    
    $
    912Federal deferred  net
    
    
    7,127,341
    
    
    
    2,454,076
    
    
    
    20,926,642
    
    
    
    6,434,930State deferred  net
    
    
    447,852
    
    
    
    159,375
    
    
    
    1,242,718
    
    
    
    395,658Total
    
    $
    7,579,901
    
    
    $
    2,614,363
    
    
    $
    22,182,255
    
    
    $
    6,831,500
 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 September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003Federal taxes at statutory rate
    
    $
    7,127,341
    
    
    $
    4,314,599
    
    
    $
    3,635,681
    
    
    $
    11,369,992S corporation benefit  federal
    
    
    
    
    
    
    (1,860,523
    )
    
    
    (825,193
    )
    
    
    (4,935,062
    )S corporation benefit  state
    
    
    
    
    
    
    (120,387
    )
    
    
    (51,869
    )
    
    
    (319,328
    )Deferred tax charge  federal
    
    
    
    
    
    
    
    
    
    
    18,116,154
    
    
    
    Deferred tax charge  state
    
    
    
    
    
    
    
    
    
    
    1,190,490
    
    
    
    State income taxes, net of federal tax
benefit
    
    
    452,560
    
    
    
    280,674
    
    
    
    116,992
    
    
    
    715,898Effective income taxes
    
    $
    7,579,901
    
    
    $
    2,614,363
    
    
    $
    22,182,255
    
    
    $
    6,831,500
 12




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Third Quarter 2004 Overview We have been purchasing and collecting defaulted or charged-off accounts
receivable portfolios from consumer credit originators since the formation of
our predecessor company in 1962. Charged-off receivables are the unpaid
obligations of individuals to credit originators, such as credit card issuers,
consumer finance companies, retail merchants and utility providers. Since
these receivables are delinquent or past due, we are able to purchase them at a
substantial discount. Unlike many of our competitors, we purchase and collect
charged-off consumer receivable portfolios for our own account as we believe
this affords us the best opportunity to use long-term strategies to maximize
our profits. We currently do not collect on a commission or contingent fee
basis. For the third quarter of 2004, cash collections increased 37.4% to $66.8
million. Revenues for the third quarter of 2004 were $56.0 million, a 29.8%
increase over the prior year. Net income was $12.8 million for the third
quarter of 2004, an increase of $2.7 million over the prior year. On a pro
forma basis, net income in the third quarter was $12.8 million, an increase of
$4.8 million over the prior year. For the third quarter of 2004, we invested $16.1 million in charged-off
consumer receivable portfolios, with an aggregate face value of $642.1 million,
for a blended rate of 2.50% of face value. For the first three quarters, the
Company has acquired $3.2 billion of charged-off consumer receivable portfolios
with an aggregate face value of $62.0 million for blended rate of 1.95% of the
face value. We began preparing for our fourth quarter move
to a new corporate headquarters located in Warren, Michigan. The new
building lease has a term of 120 months and will commence December 2004. The lease has future contractual cash obligations of
$26.0 million over 10 years. Additionally, we expect to invest $4.0
to $4.5 million in capital expenditures related to our new corporate
headquarters. We
believe that pricing for charged-off consumer receivables is cyclical. Current
pricing continues to  be competitive, but we are determined to remain
disciplined and purchase portfolios only when we believe we can
achieve acceptable returns. 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; 13




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##### Table of Contents




    
    our ability to make reasonable 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 integrate acquired portfolios or businesses
into our company;
    
    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 (which may include legal proceedings arising
out of purchases of portfolios or companies for which seller
indemnification is not available);
    
    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 Nine Months Ended September 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 14




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##### Table of Contents



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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003RevenuesPurchased receivable revenues
    
    
    99.8
    %
    
    
    99.7
    %
    
    
    99.7
    %
    
    
    99.6
    %Finance contract revenues
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.4Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0ExpensesSalaries and benefits
    
    
    29.0
    
    
    
    29.8
    
    
    
    59.9
    
    
    
    32.1Collections expense
    
    
    28.0
    
    
    
    31.1
    
    
    
    25.9
    
    
    
    28.2Occupancy
    
    
    2.7
    
    
    
    2.6
    
    
    
    2.7
    
    
    
    2.7Administrative
    
    
    2.4
    
    
    
    1.6
    
    
    
    2.5
    
    
    
    2.1Depreciation
    
    
    1.2
    
    
    
    1.5
    
    
    
    1.4
    
    
    
    1.6Loss on disposal of equipment
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total operating expense
    
    
    63.3
    
    
    
    66.6
    
    
    
    92.4
    
    
    
    66.7Income from operations
    
    
    36.7
    
    
    
    33.4
    
    
    
    7.6
    
    
    
    33.3Net interest expense
    
    
    0.4
    
    
    
    4.4
    
    
    
    1.0
    
    
    
    4.7Other expense (income)
    
    
    0.0
    
    
    
    (0.4
    )
    
    
    0.0
    
    
    
    (0.3
    )Income before income taxes
    
    
    36.3
    
    
    
    29.4
    
    
    
    6.6
    
    
    
    28.9Income taxes
    
    
    13.5
    
    
    
    6.0
    
    
    
    14.1
    
    
    
    5.9Net income (loss)
    
    
    22.8
    %
    
    
    23.4
    %
    
    
    (7.5
    )%
    
    
    23.0
    %Pro forma income tax expense (1)
    
    
    
    
    
    
    11.0
    %
    
    
    2.5
    %
    
    
    10.8
    %Pro forma net income (1)
    
    
    
    
    
    
    18.4
    %
    
    
    4.1
    %
    
    
    18.1
    %
   (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 September 30, 2004 Compared To Three Months Ended September 30, 2003 Revenue Total revenues were $56.0 million for the three months ended September 30,
2004, an increase of $12.9 million or 29.8% over total revenues of $43.1
million for the three months ended September 30, 2003. Purchased receivable
revenues were $55.9 million for the three months ended September 30, 2004, an
increase of $12.9 million or 29.9% over the three months ended September 30,
2003 amount of $43.0 million. The increase in revenue was due primarily to an
increase in the average outstanding balance of purchased receivables. 15




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##### Table of Contents



Cash collections on charged-off consumer receivables increased 37.4% to
$66.8 million for the three months ended September 30, 2004 from $48.6 million
for the same period in 2003. Cash collections for the three months ended
September 30, 2004 and 2003 include collections from fully amortized portfolios
of $8.6 million and $3.3 million, respectively. 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 September 30, 2004, we acquired charged-off
consumer receivables portfolios with an aggregate face value amount of $642.1
million at a cost of $16.1 million. Included in these purchase
totals were ten
portfolios acquired through four forward flow contracts with an aggregate face
value of $72.4 million at a cost of $2.0 million. Forward flow contracts commit
a debt seller to sell us receivable portfolios over a specified period of time
in the future. During the three months ended September 30, 2003, we acquired
charged-off consumer receivables portfolios with an aggregate face value of
$1.3 billion at a cost of $25.8 million, net of buybacks. Operating Expenses Total operating expenses were $35.4 million for the three months ended
September 30, 2004, an increase of $6.6 million or 23.2% compared to total
operating expenses of $28.8 million for the three months ended September 30,
2003. Total operating expenses were 53.0% of cash collections for the three
months ended September 30, 2004 compared with 59.1% 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, the application of successful collection strategies and a focus on
expense reduction. Salaries and Benefits.Salary and benefit expenses were $16.2 million for
the three months ended September 30, 2004, an increase of $3.4 million or 26.4%
compared to salary and benefit expenses of $12.8 million for the three months
ended September 30, 2003. The increase was primarily due to an increase in
total employees which grew to 1,618 at September 30, 2004 from 1,475 at
September 30, 2003, 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 24.3% of cash collections
for the three months ended September 30, 2004 from 26.4% 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 $40,224 for the three months ended
September 30, 2004 compared to $33,077 for the same period in 2003. The
average headcount for this class of employees increased to 910 in the third
quarter of 2004 from 847 in the same period of 2003 calculated on a full-time
equivalent basis. Collections Expense.Collections expense increased to $15.7 million for
the three months ended September 30, 2004, reflecting an increase of $2.3
million or 16.6% over $13.4 million for the three months ended September 30,
2003. The increase was primarily attributable to the increased number of
accounts on which we were collecting. Collections expense decreased to 23.5% of
cash collections for the three months ended September 30, 2004 from 27.6% of
cash collections for the three months ended September 30, 2003. This decrease
was primarily due to decreases in amounts spent for postage and letters, credit
reports and legal expenses, as a percentage of cash collections, as we
continuously improve and refine our collection strategies. Occupancy.Occupancy expense was $1.5 million for the three months ended
September 30, 2004, an increase of $0.4 million or 33.7% over occupancy
expense of $1.1 million for the three months ended September 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 $1.3 million for the
three months ended September 30, 2004 from $0.7 million for the three months
ended September 30, 2003, reflecting a $0.6 16




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million or 96.0% 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 September 30, 2004, and 2003, respectively. Capital expenditures for 2004
and 2003 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 $0.2 million for the three months ended September
30, 2004, a decrease of $1.7 million or 88.0% compared to net interest expense
of $1.9 million for the three months ended September 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 September 30, 2004 from the same prior year period. In addition,
average borrowings on our line of credit decreased to $4.9 million for the
three months ended September 30, 2004 from $68.6 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 and cash generated from operations
which was used to pay down debt. Net interest expense included the amortization
of capitalized bank fees of $71,138 and $76,499 for the three months ended
September 30, 2004 and 2003, respectively. Income Taxes Income tax expense was $7.6 million for the three months ended September
30, 2004, an increase of $5.0 million or 189.9% over income tax expense of $2.6
million for the three months ended September 30, 2003. The increase is
primarily due to increased income and taxes related to RBR Holding Corp. For
the three months ended September 30, 2004 taxes were incurred on 100% of pretax
income as RBR Holding Corp. 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 September
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. Nine Months Ended September 30, 2004 Compared To Nine Months Ended
September 30, 2003 Revenue Total revenues were $157.3 million for the nine months ended September 30,
2004, an increase of $41.4 million or 35.7% over total revenues of $115.9
million for the nine months ended September 30, 2003. Purchased receivable
revenues were $156.8 million for the nine months ended September 30, 2004, an
increase of $41.3 million or 35.8% over the nine months ended September 30,
2003 amount of $115.5 million. The increase in revenue was due primarily to an
increase in the average outstanding balance of purchased receivables. Cash collections on charged-off consumer receivables increased 38.8% to
$199.6 million for the nine months ended September 30, 2004 from $143.8 million
for the same period in 2003. Cash collections for the nine months ended
September 30, 2004 and 2003 include collections from fully amortized portfolios
of $21.2 million and $8.4 million, respectively. 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 nine months ended September 30, 2004, we acquired charged-off
consumer receivables portfolios with an aggregate face value amount of $3.2
billion at a cost of $62.0 million. Included in these purchase totals were 20
portfolios with an aggregate face value of $208.3 million at a cost of $6.1
million acquired through four forward flow contracts. During the nine months
ended September 30, 2003, we 17




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acquired charged-off consumer receivables portfolios with an aggregate
face value of $2.7 billion at a cost of $63.4 million, net of buybacks. Operating Expenses Total operating expenses were $145.4 million for the nine months ended
September 30, 2004, an increase of $68.1 million or 87.9% compared to total
operating expenses of $77.3 million for the nine months ended September 30,
2003. Total operating expenses were 72.8% of cash collections for the nine
months ended September 30, 2004 compared with 53.8% 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 $99.7 million for the nine
months ended September 30, 2004, an increase of $22.4 million or 28.9% over the
prior year. Excluding the share appreciation rights charge and related payroll
taxes, operating expenses decreased to 49.9% of cash collections for the nine
months ended September 30, 2004 from 53.8% of cash collections for the same
nine 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 and a focus on expense reduction. Salaries and Benefits.Salary and benefit expenses were $94.1 million for
the nine months ended September 30, 2004, an increase of $56.9 million or
152.8% compared to salary and benefit expenses of $37.2 million for the nine
months ended September 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. We
believe that 2004 salary and benefit expenses, excluding the share
appreciation rights charge of $45.7 million, provides a better
measure of financial performance as it is more consistent between
2004 and 2003. As such, we have included this non-GAAP measure below. Excluding the share appreciation rights charge and related payroll taxes,
salary and benefit expenses were $48.5 million for the nine months ended
September 30, 2004, an increase of $11.3 million or 30.1% compared to 2003.
The increase over the prior year was primarily due to an increase in total
employees which grew to 1,618 at September 30, 2004 from 1,475 at September 30,
2003, 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 nine months ended
September 30, 2004 from 25.9% of cash collections for the same period in 2003.
The decrease as a percent of cash collections was primarily due to increased
collector efficiency and improved collection strategies. Traditional call
center collections per employee increased to $129,486 for the nine months ended
September 30, 2004 compared to $114,047 for the same period in 2003. Average
headcount for this class of employees increased to 897 for the first nine
months of 2004 from 779 during the same period in 2003 calculated on a
full-time equivalent basis. Collections Expense.Collections expense increased to $40.8 million for
the nine months ended September 30, 2004, reflecting an increase of $8.1
million or 24.6% over $32.7 million for the nine months ended September 30,
2003. The increase was primarily attributable to the increased number of
accounts on which we were collecting. Collections expense decreased to 20.4% of
cash collections for the nine months ended September 30, 2004 from 22.7% of
cash collections for the nine months ended September 30, 2003. This decrease
was primarily due to decreases in amounts spent for postage and letters, credit
reports and legal expenses, as a percentage of cash collections, as we
continuously improve and refine our collection strategies. Occupancy.Occupancy expense was $4.3 million for the nine months ended
September 30, 2004, an increase of $1.2 million or 39.8% over occupancy expense
of $3.1 million for the nine months ended September 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 $4.0 million for the
nine months ended September 30, 2004 from $2.4 million for the nine months
ended September 30, 2003, reflecting a $1.6 18




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##### Table of Contents



million or 64.5% 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 $2.1 million for the nine months
ended September 30, 2004, an increase of $0.2 million or 12.8% over
depreciation expense of $1.9 million for the nine months ended September 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 $1.6 million for the nine months ended September
30, 2004 reflecting a decrease of $3.9 million or 71.6% compared to net
interest expense of $5.5 million for the nine months ended September 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 $2.3 million
during the nine months ended September 30, 2004 from the same prior year
period. Additionally, the decrease in interest expense was due to lower
average borrowings on our line of credit, which decreased to $21.5 million for
the nine months ended September 30, 2004 from $67.3 million for the same period
in 2003. The reduction in our average borrowings was due to repayment of $37.7
million of debt from the proceeds of the IPO and cash generated from operations
which was used to pay down debt. Net interest expense included the amortization
of capitalized bank fees of $212,302 and $226,859 for the nine months ended
September 30, 2004 and 2003, respectively. Income Taxes Income taxes of $22.2 million for the nine months ended September 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 nine months ended September 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 September 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 nine month period
ended September 30, 2003 of $6.8 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. 19




---



##### 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 September 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
    
    
    $
    3,095
    
    
    
    485
    %1991
    
    
    12
    
    
    
    280
    
    
    
    1,449
    
    
    
    5181992
    
    
    29
    
    
    
    309
    
    
    
    2,847
    
    
    
    9211993
    
    
    30
    
    
    
    790
    
    
    
    7,745
    
    
    
    9801994
    
    
    36
    
    
    
    1,427
    
    
    
    6,750
    
    
    
    4731995
    
    
    53
    
    
    
    1,519
    
    
    
    7,617
    
    
    
    5011996
    
    
    46
    
    
    
    3,844
    
    
    
    16,381
    
    
    
    4261997
    
    
    45
    
    
    
    4,345
    
    
    
    26,531
    
    
    
    6111998
    
    
    61
    
    
    
    16,412
    
    
    
    72,132
    
    
    
    4401999
    
    
    51
    
    
    
    12,926
    
    
    
    49,394
    
    
    
    3822000
    
    
    49
    
    
    
    20,599
    
    
    
    89,098
    
    
    
    4332001
    
    
    62
    
    
    
    43,136
    
    
    
    155,345
    
    
    
    3602002
    
    
    94
    
    
    
    72,304
    
    
    
    148,574
    
    
    
    2052003
    
    
    76
    
    
    
    87,605
    
    
    
    107,216
    
    
    
    1222004 (3)
    
    
    82
    
    
    
    62,015
    
    
    
    12,617
    
    
    
    20
   (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
that were entered into subsequent to purchase. Cash sales, however,
exclude the sale of portfolios which occurred at the time of purchase.(3)
    
    Includes only nine months of activity through September 30, 2004. 20




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##### Table of Contents



Cash Collections The following tables provide further detailed vintage collection analysis
on an annual and a cumulative basis. Historical Collections (1) Purchase
    
    Purchase
    
    Year Ended December 31,
    
    NineMonthsendedSeptember 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
    
    
    $
    951993
    
    $
    790
    
    
    
    526
    
    
    
    1,911
    
    
    
    1,630
    
    
    
    1,022
    
    
    
    768
    
    
    
    480
    
    
    
    373
    
    
    
    311
    
    
    
    236
    
    
    
    175
    
    
    
    175
    
    
    
    881994
    
    
    1,427
    
    
    
    
    
    
    
    345
    
    
    
    1,763
    
    
    
    1,430
    
    
    
    1,005
    
    
    
    647
    
    
    
    457
    
    
    
    357
    
    
    
    258
    
    
    
    176
    
    
    
    188
    
    
    
    891995
    
    
    1,519
    
    
    
    
    
    
    
    
    
    
    
    388
    
    
    
    1,566
    
    
    
    1,659
    
    
    
    1,118
    
    
    
    786
    
    
    
    708
    
    
    
    472
    
    
    
    343
    
    
    
    278
    
    
    
    1821996
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    827
    
    
    
    3,764
    
    
    
    3,085
    
    
    
    2,601
    
    
    
    2,098
    
    
    
    1,440
    
    
    
    1,041
    
    
    
    816
    
    
    
    5551997
    
    
    4,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,682
    
    
    
    4,919
    
    
    
    5,573
    
    
    
    5,017
    
    
    
    3,563
    
    
    
    2,681
    
    
    
    1,784
    
    
    
    1,2021998
    
    
    16,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,835
    
    
    
    15,220
    
    
    
    15,045
    
    
    
    12,962
    
    
    
    11,021
    
    
    
    7,987
    
    
    
    4,4851999
    
    
    12,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,761
    
    
    
    11,331
    
    
    
    10,862
    
    
    
    9,750
    
    
    
    8,278
    
    
    
    5,1662000
    
    
    20,599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,895
    
    
    
    23,444
    
    
    
    22,559
    
    
    
    20,318
    
    
    
    13,4182001
    
    
    43,136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,630
    
    
    
    50,327
    
    
    
    50,967
    
    
    
    35,5372002
    
    
    72,304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,340
    
    
    
    70,813
    
    
    
    55,0052003
    
    
    87,605
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,067
    
    
    
    71,1492004
    
    
    62,015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,617Total
    
    
    
    
    
    $
    1,920
    
    
    $
    3,412
    
    
    $
    4,691
    
    
    $
    5,611
    
    
    $
    9,395
    
    
    $
    15,438
    
    
    $
    29,047
    
    
    $
    44,006
    
    
    $
    71,068
    
    
    $
    120,540
    
    
    $
    197,819
    
    
    $
    199,588
 Cumulative Collections (1) Purchase
    
    Purchase
    
    Total Through December 31,
    
    TotalThroughSeptember 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
    
    
    $
    7,6951994
    
    
    1,427
    
    
    
    
    
    
    
    345
    
    
    
    2,108
    
    
    
    3,538
    
    
    
    4,543
    
    
    
    5,190
    
    
    
    5,647
    
    
    
    6,004
    
    
    
    6,262
    
    
    
    6,438
    
    
    
    6,626
    
    
    
    6,7151995
    
    
    1,519
    
    
    
    
    
    
    
    
    
    
    
    388
    
    
    
    1,954
    
    
    
    3,613
    
    
    
    4,731
    
    
    
    5,517
    
    
    
    6,225
    
    
    
    6,697
    
    
    
    7,040
    
    
    
    7,318
    
    
    
    7,5001996
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    827
    
    
    
    4,591
    
    
    
    7,676
    
    
    
    10,277
    
    
    
    12,375
    
    
    
    13,815
    
    
    
    14,856
    
    
    
    15,672
    
    
    
    16,2271997
    
    
    4,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,682
    
    
    
    6,601
    
    
    
    12,174
    
    
    
    17,191
    
    
    
    20,754
    
    
    
    23,435
    
    
    
    25,219
    
    
    
    26,4211998
    
    
    16,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,835
    
    
    
    20,055
    
    
    
    35,100
    
    
    
    48,062
    
    
    
    59,083
    
    
    
    67,070
    
    
    
    71,5551999
    
    
    12,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,761
    
    
    
    15,092
    
    
    
    25,954
    
    
    
    35,704
    
    
    
    43,982
    
    
    
    49,1482000
    
    
    20,599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,895
    
    
    
    32,339
    
    
    
    54,898
    
    
    
    75,216
    
    
    
    88,6342001
    
    
    43,136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,630
    
    
    
    67,957
    
    
    
    118,924
    
    
    
    154,4612002
    
    
    72,304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,340
    
    
    
    93,153
    
    
    
    148,1582003
    
    
    87,605
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,067
    
    
    
    107,2162004
    
    
    62,015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,617
 Cumulative Collections as Percentage of Purchase Price (1) Purchase
    
    Purchase
    
    Total Through December 31,
    
    TotalThroughSeptember 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
    %
    
    
    974
    %1994
    
    
    1,427
    
    
    
    
    
    
    
    24
    
    
    
    148
    
    
    
    248
    
    
    
    318
    
    
    
    364
    
    
    
    396
    
    
    
    421
    
    
    
    439
    
    
    
    451
    
    
    
    464
    
    
    
    4711995
    
    
    1,519
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    129
    
    
    
    238
    
    
    
    311
    
    
    
    363
    
    
    
    410
    
    
    
    441
    
    
    
    463
    
    
    
    482
    
    
    
    4941996
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    119
    
    
    
    200
    
    
    
    267
    
    
    
    322
    
    
    
    359
    
    
    
    386
    
    
    
    408
    
    
    
    4221997
    
    
    4,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    152
    
    
    
    280
    
    
    
    396
    
    
    
    478
    
    
    
    539
    
    
    
    580
    
    
    
    6081998
    
    
    16,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    122
    
    
    
    214
    
    
    
    293
    
    
    
    360
    
    
    
    409
    
    
    
    4361999
    
    
    12,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    117
    
    
    
    201
    
    
    
    276
    
    
    
    340
    
    
    
    3802000
    
    
    20,599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    157
    
    
    
    266
    
    
    
    365
    
    
    
    4302001
    
    
    43,136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    158
    
    
    
    276
    
    
    
    3582002
    
    
    72,304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    129
    
    
    
    2052003
    
    
    87,605
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    1222004
    
    
    62,015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
   (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.   21




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##### 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
consistent 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 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 September 2004. (PERFORMANCE 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
    
    
    
    66,825,822Fourth
    
    
    12,164,526
    
    
    
    20,046,733
    
    
    
    33,429,419
    
    
    
    53,988,333
    
    
    
    
 We monitor asset types for our portfolios because different asset types
have different performance characteristics. The following chart categorizes
our purchased receivables portfolios, as of September 30, 2004, into the major
asset types represented: Face Value ofCharged-off
    
    
    
    
    
    No. ofAsset Type
    
    Receivables
    
    %
    
    Accounts
    
    %Visa®/MasterCard®/Discover®
    
    $
    8,354,115,638
    
    
    
    46.7
    %
    
    
    3,809,860
    
    
    
    23.3
    %Private Label Credit Cards
    
    
    2,511,712,059
    
    
    
    14.1
    
    
    
    3,612,612
    
    
    
    22.1Health Club
    
    
    1,269,920,687
    
    
    
    7.1
    
    
    
    1,329,881
    
    
    
    8.1Auto Deficiency
    
    
    1,240,060,146
    
    
    
    6.9
    
    
    
    207,147
    
    
    
    1.3Telecommunications/Utility/Gas
    
    
    1,166,454,458
    
    
    
    6.5
    
    
    
    2,697,476
    
    
    
    16.5Installment loans
    
    
    754,095,427
    
    
    
    4.2
    
    
    
    221,761
    
    
    
    1.3Other (1)
    
    
    2,582,668,979
    
    
    
    14.5
    
    
    
    4,496,529
    
    
    
    27.4Total
    
    $
    17,879,027,394
    
    
    
    100.0
    %
    
    
    16,375,266
    
    
    
    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. 22




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##### Table of Contents



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 are typically more difficult to collect. The accounts
receivable management industry places receivables into the following categories
depending on the number of collection agencies that have previously attempted
to collect on the receivables:  
    
    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 September 30, 2004, into the major account types represented: Face Value ofCharged-off
    
    
    
    
    
    No. ofAccount Type
    
    Receivables
    
    %
    
    Accounts
    
    %Fresh
    
    $
    1,023,449,269
    
    
    
    5.7
    %
    
    
    378,002
    
    
    
    2.3
    %Primary
    
    
    3,445,187,495
    
    
    
    19.3
    
    
    
    2,264,203
    
    
    
    13.8Secondary
    
    
    3,090,065,830
    
    
    
    17.3
    
    
    
    2,001,613
    
    
    
    12.2Tertiary(1)
    
    
    9,354,895,328
    
    
    
    52.3
    
    
    
    11,218,150
    
    
    
    68.5Other
    
    
    965,429,472
    
    
    
    5.4
    
    
    
    513,298
    
    
    
    3.2Total
    
    $
    17,879,027,394
    
    
    
    100.0
    %
    
    
    16,375,266
    
    
    
    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.   23




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##### Table of Contents



We also review the geographic distribution of accounts within a portfolio
because collection laws differ from state to state. The following chart
illustrates, as of September 30, 2004, our purchased receivables portfolios
based on geographic location of debtor: Face Value ofCharged-off
    
    
    
    
    
    No. ofGeographic Location
    
    Receivables
    
    %
    
    Accounts
    
    %Texas(1)
    
    $
    2,343,320,905
    
    
    
    13.1
    %
    
    
    1,924,727
    
    
    
    11.8
    %California
    
    
    1,772,487,411
    
    
    
    9.9
    
    
    
    1,711,424
    
    
    
    10.4Florida(1)
    
    
    1,693,757,787
    
    
    
    9.5
    
    
    
    1,173,949
    
    
    
    7.2Michigan(1)
    
    
    1,393,654,018
    
    
    
    7.8
    
    
    
    1,590,793
    
    
    
    9.7New York
    
    
    1,064,149,983
    
    
    
    5.9
    
    
    
    856,925
    
    
    
    5.2Ohio(1)
    
    
    1,035,394,129
    
    
    
    5.8
    
    
    
    1,093,776
    
    
    
    6.7Illinois(1)
    
    
    825,438,179
    
    
    
    4.6
    
    
    
    1,060,901
    
    
    
    6.5Pennsylvania
    
    
    537,032,419
    
    
    
    3.0
    
    
    
    456,750
    
    
    
    2.8North Carolina
    
    
    463,424,181
    
    
    
    2.6
    
    
    
    371,159
    
    
    
    2.3Georgia
    
    
    449,221,218
    
    
    
    2.5
    
    
    
    376,296
    
    
    
    2.3New Jersey(1)
    
    
    353,473,833
    
    
    
    2.0
    
    
    
    297,886
    
    
    
    1.8Other(2)
    
    
    5,947,673,331
    
    
    
    33.3
    
    
    
    5,460,680
    
    
    
    33.3Total
    
    $
    17,879,027,394
    
    
    
    100.0
    %
    
    
    16,375,266
    
    
    
    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. 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 September
30, 2004, we did not have any borrowings on our line of credit, however we
anticipate using our line of credit to fund operations when necessary. The
line of credit has certain covenants and restrictions which we believe we are
in compliance with as of September 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.
For the nine months ended September 30, 2004, we invested $59.9 million in
purchased receivables, net of buybacks, while our balance under our line of
credit decreased $73.0 million (including the payment of $37.7 million from the
proceeds of the IPO). 24




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##### Table of Contents



Our operating activities provided cash of $42.1 million and $39.1 million
for the nine months ended September 30, 2004 and 2003, respectively. Cash
provided by operating activities for the nine months ended September 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 $61.1 million.
Cash provided by operating activities for the nine months ended September 30,
2003 of $39.1 million was generated primarily from net income earned through
cash collections. Investing activities used cash of $18.5 million and $37.9 million for the
nine months ended September 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 used cash of $17.5 million for the nine months ended
September 30, 2004 and provided cash of $2.3 million for the same period in
2003. In 2004, cash used by financing activities was primarily due to
repayments on our line of credit, net of borrowings, and the repayment of our
related party notes payable. The total reduction in debts was partially offset
by proceeds from our IPO. In 2003, the cash provided by financing activities
was primarily due to borrowing on our line of credit, net of repayments. Cash paid for interest was $1.4 million and $2.5 million for the nine
months ended September 30, 2004 and 2003, respectively. Cash paid for interest
consisted of $1.0 million for the line of credit and $0.4 million paid for the
related party debt for the nine months ended September 30, 2004 and consisted
of $2.5 million for the line of credit for the nine months ended September 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 (which may be dilutive of existing
positions) or debt securities or secure additional availability under our line
of credit. New Corporate Headquarters We plan on relocating to our
new corporate headquarters in Warren, Michigan during the fourth
quarter of 2004. Our new headquarters will be in a 200,000 square
foot building that provides sufficient room for growth, accommodating
up to 1,400 employees. Currently we have 535 employees occupying
70,000 square feet at our corporate headquarters. The lease was
entered into in October 2003 and will commence December 2004
with an annual base rent expense of approximately $2.6 million
compared to approximately $600,000 for our existing headquarters. We
expect operating net costs for the new building to be less than the
approximately $7.50 per square foot that we pay now because newer
buildings require less maintenance and we will receive abatements of
most real and personal property taxes due to the
buildings location in a Renaissance Zone. Michigan Single
Business taxes are also abated to the extent our business activities
are located in the Renaissance Zone. The tax abatements will expire
in 2012 with a three year phase out period beginning in 2009. Additionally, we
expect to invest $4.0 to $4.5 million in capital expenditures of
which most will be incurred during the fourth quarter of 2004. It is possible that some of the
capital expenditures may be reimbursed based on certain contingent
events. Future Contractual Cash Obligations The following table summarizes our future contractual cash obligations as
of September 30, 2004: Year ending December 31,2004
    
    2005
    
    2006
    
    2007 (2)
    
    2008
    
    ThereafterCapital
lease obligations
    
    $
    37,496
    
    
    $
    129,176
    
    
    $
    83,545
    
    
    $
    11,899
    
    
    $
    
    
    
    $
    Operating leases (1)
    
    
    968,626
    
    
    
    5,057,970
    
    
    
    5,665,154
    
    
    
    5,414,746
    
    
    
    4,502,118
    
    
    
    17,655,858Employment agreements
    
    
    283,750
    
    
    
    976,250
    
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,289,872
    
    
    $
    6,163,396
    
    
    $
    6,248,699
    
    
    $
    5,426,645
    
    
    $
    4,502,118
    
    
    $
    17,655,858
   (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 will
commence December 2004. This lease has future contractual
cash obligations of $26.0 million.(2)
    
    To the extent that a balance is outstanding on our line of credit, it
would be due in 2007. There was no outstanding balance on our line of
credit at September 30, 2004. 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 (PB 6). 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 25




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##### Table of Contents



collections for pools with similar characteristics. An internal rate of
return (IRR) is calculated for each static pool of receivables based on the
projected cash flows 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 PB 6 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 nine months ended September 30, 2004, every 20 basis point change in
the average IRR for all pools would have affected year-to-date revenue by
approximately $3.4 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 $17.7 million or 11.3%. 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. This treatment differs form our current guidance,
Practice Bulletin 6 (PB 6). Under both the
guidance of PB 6 and SOP 03-3, when expected cash flows are higher than prior projections,
the increase in expected cash flows results in an increase in the IRR
and therefore, the effect of the cash flow increase is recognized as increased revenue
prospectively over the remaining life of the affected pool. However, when expected cash
flows are lower than prior projections, SOP 03-3 requires that the expected decrease
be recognized as an impairment by decreasing the carrying value  of the affected pool
(rather than lower the IRR) so that the pool will amortize over its expected life using
the original IRR. Under our current guidance (PB 6), a decrease in expected cash flows
results in a reduction of the IRR and therefore, the effect of the cash flow reduction
is recognized as lower revenue prospectively over the remaining life of the affected pool. Beginning with
the adoption  of SOP 03-3 in January 2005, when expected cash flows are lower than
originally projected, an immediate impairment will be recognized. However, under
SOP 03-3 the IRR is not lowered and therefore, more revenue will be recognized
over the remaining life of the pool than would be recognized under PB 6. The amount of revenue
recognized over the approximate 60 month life of each pool is identical under both PB 6 and SOP 03-3. 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. 
 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 September 30, 2004 we did not have any
borrowings against our variable line of credit. The average borrowings on the
variable line of credit were $21.5 million and $67.3 million for the nine
months ended September 30, 2004 and 2003, respectively. Assuming a 200 basis
point increase in interest rates on our variable rate debt, interest expense
would have increased approximately $306,000 and $409,000 for the nine months
ended September 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 within 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. 26




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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 October 22, 2004, we are
named in seven 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. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities The Companys non-management directors have the right to receive a
quarterly fee in the amount of $5,000. In lieu of the cash fee, the
non-management directors who are eligible to receive options under
our 2004 stock incentive plan have the right to receive immediately vested options
to purchase shares of our common stock in an amount equal to three times the cash compensation.
These options were issued in private placements in reliance on the
exemption from registration contained in Section 4(2) of the
Securities Act of 1933, as amended. Each option entitles the holder
to purchase one share of our common stock at the exercise price shown
below.
Pursuant to this program, the following options have been issued to the
non-management directors: Director1
    
    Option Grant Date
    
    Number of Options
    
    Exercise PriceJennifer L. Adams
    
    May 19, 2004
    
    
    770
    
    
    
    19.48Terrence L. Daniels
    
    May 19, 2004
    
    
    770
    
    
    
    19.48Donald Haider
    
    May 19, 2004
    
    
    770
    
    
    
    19.48Anthony Ignaczak
    
    May 19, 2004
    
    
    770
    
    
    
    19.48H. Eugene Lockhart
    
    May 19, 2004
    
    
    770
    
    
    
    19.48Jennifer L. Adams
    
    September 1, 2004
    
    
    840
    
    
    
    17.85Terrence L. Daniels
    
    September 1, 2004
    
    
    840
    
    
    
    17.85Donald Haider
    
    September 1, 2004
    
    
    840
    
    
    
    17.85Anthony Ignaczak
    
    September 1, 2004
    
    
    840
    
    
    
    17.85H. Eugene Lockhart
    
    September 1, 2004
    
    
    840
    
    
    
    17.85
 1 Messrs. Daniels and Ignaczak assigned their options granted on May 19,
2004 to Quad-C Management, Inc. 27




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##### Table of Contents



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 July 29, 2004 relating
to its reporting of the Results of Operations and Financial Condition for the
quarter ended June 30, 2004. 28




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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: October 29, 2004
    By:
    /s/ Nathaniel F. Bradley IVNathaniel F. Bradley IVPresident and Chief Executive Officer
(Principal Executive Officer) Date: October 29, 2004
    By:
    /s/ Mark A. RedmanMark A. RedmanVice President  Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer) 29




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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
    
    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer