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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
   FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto Commission file number: 000-50552 Asset Acceptance Capital Corp.  Delaware
    
    80-0076779(State or other jurisdiction of
    
    (I.R.S.Employer Identification No.)incorporation or organization)
 28405 Van Dyke Avenue
Warren, Michigan 48093
(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 þ       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 þ Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. As of May 10, 2005, 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
    
    27Item 4. Controls and Procedures
    
    27Part II Other Information
    
    28Item 1. Legal Proceedings
    
    28Item 6. Exhibits and Reports on Form 8-K
    
    28Signatures
    
    29Rule 13a-14(a) Certification of Chief Executive OfficerRule 13a-14(a) Certification of Chief Financial OfficerSection 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.




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PART I - FINANCIAL INFORMATION 
 Item 1. Financial Statements ASSET ACCEPTANCE CAPITAL CORP. Consolidated Statements of Financial Position
(Unaudited) March 31, 2005
    
    
    December 31, 2004ASSETSCash
    
    $
    22,110,828
    
    
    $
    14,204,579Purchased receivables
    
    
    234,551,905
    
    
    
    216,479,676Finance contract receivables, net
    
    
    732,073
    
    
    
    688,497Property and equipment, net
    
    
    11,449,587
    
    
    
    11,165,103Goodwill
    
    
    6,339,574
    
    
    
    6,339,574Other assets
    
    
    2,534,293
    
    
    
    3,628,291Total assets
    
    $
    277,718,260
    
    
    $
    252,505,720LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Deferred tax liability, net
    
    $
    49,518,003
    
    
    $
    41,246,766Accounts payable and other liabilities
    
    
    15,545,616
    
    
    
    13,824,600Capital lease obligations
    
    
    258,773
    
    
    
    254,185Total liabilities
    
    
    65,322,392
    
    
    
    55,325,551Stockholders equity:Preferred stock, $0.01 par value,
10,000,000 shares authorized, no
shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value,
100,000,000 shares authorized; issued
and outstanding shares 37,225,275 at March 31, 2005 and December 31, 2004
    
    
    372,253
    
    
    
    372,253Additional paid in capital
    
    
    159,418,488
    
    
    
    159,348,233Retained earnings
    
    
    52,605,127
    
    
    
    37,459,683Total equity
    
    
    212,395,868
    
    
    
    197,180,169Total liabilities and equity
    
    $
    277,718,260
    
    
    $
    252,505,720
 See accompanying notes. 3




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ASSET ACCEPTANCE CAPITAL CORP. Consolidated Statements of Operations
(Unaudited) Three months ended March 31,2005
    
    
    2004RevenuesPurchased receivable revenues
    
    $
    65,866,194
    
    
    $
    49,586,774Finance contract revenues
    
    
    168,307
    
    
    
    160,857Total revenues
    
    
    66,034,501
    
    
    
    49,747,631ExpensesSalaries and benefits
    
    
    18,543,040
    
    
    
    61,418,146Collections expense
    
    
    18,442,899
    
    
    
    12,305,523Occupancy
    
    
    2,111,974
    
    
    
    1,398,295Administrative
    
    
    1,870,555
    
    
    
    1,279,671Depreciation and amortization
    
    
    843,148
    
    
    
    726,840Loss on disposal of equipment
    
    
    
    
    
    
    26,526Total operating expenses
    
    
    41,811,616
    
    
    
    77,155,001Income (loss) from operations
    
    
    24,222,885
    
    
    
    (27,407,370
    )Other income (expense)Interest income
    
    
    34,908
    
    
    
    6,953Interest expense
    
    
    (140,818
    )
    
    
    (1,001,194
    )Other
    
    
    (25
    )
    
    
    24,784Income (loss) before income taxes
    
    
    24,116,950
    
    
    
    (28,376,827
    )Income taxes
    
    
    8,971,506
    
    
    
    7,782,173Net income (loss)
    
    $
    15,145,444
    
    
    $
    (36,159,000
    )Pro forma income taxes
    
    
    
    
    
    $
    (10,556,180
    )Pro forma net loss
    
    
    
    
    
    $
    (17,820,647
    )Weighted average number of shares:Basic
    
    
    37,225,275
    
    
    
    33,849,573Diluted
    
    
    37,244,694
    
    
    
    33,849,573Earnings (loss) per common share outstanding:Basic
    
    $
    0.41
    
    
    $
    (1.07
    )Diluted
    
    $
    0.41
    
    
    $
    (1.07
    )Pro forma loss per common share outstanding:Basic
    
    
    
    
    
    $
    (0.53
    )Diluted
    
    
    
    
    
    $
    (0.53
    )
 See accompanying notes. 4




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ASSET ACCEPTANCE CAPITAL CORP. Consolidated Statements of Cash Flows
(Unaudited) Three months ended March 31,2005
    
    
    2004Cash flows from operating activitiesNet income (loss)
    
    $
    15,145,444
    
    
    $
    (36,159,000
    )Adjustments
to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    843,148
    
    
    
    726,840Deferred income taxes
    
    
    8,271,237
    
    
    
    7,770,615Share-based compensation expense
    
    
    70,255
    
    
    
    26,676,334Loss on disposal of equipment
    
    
    
    
    
    
    26,526Charge-offs of finance contracts
    
    
    25,967
    
    
    
    25,302Changes in assets and liabilities:Decrease (increase) in other assets
    
    
    1,036,996
    
    
    
    (427,954
    )Increase in accounts payable and other liabilities
    
    
    1,721,017
    
    
    
    1,495,418Net cash provided by operating activities
    
    
    27,114,064
    
    
    
    134,081Cash flows from investing activitiesInvestment in purchased receivables, net of buy backs
    
    
    (32,603,676
    )
    
    
    (10,569,845
    )Principal collected on purchased receivables
    
    
    14,531,446
    
    
    
    15,609,280Investment in finance contracts
    
    
    (246,732
    )
    
    
    (164,546
    )Principal collected on finance contracts
    
    
    177,189
    
    
    
    144,460Purchase of fixed assets
    
    
    (1,026,429
    )
    
    
    (474,102
    )Net cash provided by (used in) investing activities
    
    
    (19,168,202
    )
    
    
    4,545,247Cash flows from financing activitiesBorrowings under line of credit
    
    
    6,500,000
    
    
    
    11,500,000Repayment of line of credit
    
    
    (6,500,000
    )
    
    
    (69,050,000
    )Repayment to related party
    
    
    
    
    
    
    (39,560,110
    )Repayment of capital lease obligations
    
    
    (39,613
    )
    
    
    (29,916
    )Dividends and distributions paid
    
    
    
    
    
    
    (1,000,000
    )Additional assets contributed
    
    
    
    
    
    
    50,406Proceeds from initial public offering, net of costs
    
    
    
    
    
    
    96,077,000Net cash used in financing activities
    
    
    (39,613
    )
    
    
    (2,012,620
    )Net increase in cash
    
    
    7,906,249
    
    
    
    2,666,708Cash at beginning of period
    
    
    14,204,579
    
    
    
    5,498,836Cash at end of period
    
    $
    22,110,828
    
    
    $
    8,165,544Supplemental disclosure of cash flow informationCash paid for interest
    
    $
    17,752
    
    
    $
    956,839Cash paid (received) for income taxes
    
    
    (963,981
    )
    
    
    58,102Non-cash investing and financing activities:Capital lease obligations incurred
    
    
    44,201
    
    
    
    103,726
 See accompanying notes. 5




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ASSET ACCEPTANCE CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 1. Summary of Significant Accounting Policies Nature of Operations Asset
Acceptance Capital Corp. and its subsidiaries (collectively referred to as the
Company) are engaged in the purchase and collection of defaulted or charged-off accounts
receivable portfolios. 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. Reporting Entity 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. Prior to this reorganization, 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 its wholly-owned subsidiaries, Asset Acceptance, LLC, Rx Acquisitions,
LLC and Consumer Credit, LLC. On February 5, 2004, Asset Acceptance Capital Corp. completed an
initial public offering (IPO) of common stock. 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
U.S. generally accepted accounting principles. In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments necessary for a fair statement of the
Companys financial position as of March 31, 2005 and its results of operations for the three month
periods ended March 31, 2005 and 2004 and cash flows for the three month periods ended March 31,
2005 and 2004, and all adjustments were of a normal recurring nature. The results of operations of
the Company for the three month periods ended March 31, 2005 and 2004 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, 2004. Purchased Receivables Portfolios and Revenue Recognition Purchased receivables are receivables that have been charged-off as uncollectible by the
originating organization and typically have been subject to previous collection efforts. The
Company acquires the rights to the unrecovered balances owed by individual debtors through such
purchases. The receivable portfolios are purchased at a substantial discount (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 cash generated from
operations and the Companys line of credit. The Company accounts for its investment in purchased receivables using the guidance provided by the
Accounting Standards Executive Committee Statement of Position 03-3, Accounting for Certain Loans
of Debt Securities Acquired in a Transfer and Practice Bulletin 6 (PB 6), Amortization of
Discounts on Certain Acquired Loans. The provisions of SOP 03-3 were adopted by the Company
effective January 2005 and apply to purchased receivables acquired after
December 31, 2004. Purchased receivables acquired before January 1, 2005 will continue to be accounted for under PB 6,
as amended, for provisions related to decreases in expected cash flows. The Company purchases
pools of homogenous accounts receivable and records each pool at its acquisition cost. Pools
purchased after 2004 may be aggregated into a single pool (static pool), within each quarter, based
on common risk characteristics. Pools purchased before 2005 may not be aggregated with 6




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other pool purchases. Each
static pool, either aggregated or not aggregated, retains its own identity
and does not change. Each static 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. 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 static pool is reviewed at least quarterly and
compared to historical cash flows to determine whether each static
pool is performing as expected. Through December 31, 2004 to the
extent there were 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. Beginning in January 2005, under SOP 03-3, if the revised estimate of cash flows is less than
the original estimate, the IRR will remain unchanged and an immediate impairment is recognized. The cost recovery methods prescribed by PB 6 and SOP 03-3 are used when collections on a
particular portfolio cannot be reasonably predicted. Under the cost recovery method, no revenue is
recognized until we have fully collected the cost of the portfolio. As of March 31, 2005, the
Company had 38 pools on the cost recovery method with an aggregate carrying value of $3.0 million
or about 1.3% of the total carrying value of all purchased receivables. The Company had 52 pools on
the cost recovery method with an aggregate carrying value of $2.8 million, or about 1.6% of the
total carrying value of all purchased receivables as of March 31, 2004. The agreements to purchase receivables typically include general representations and
warranties from the sellers covering account holder death, bankruptcy, fraud and settled or paid
prior accounts prior to sale. The representation and warranty period permits the return of certain
accounts from the Company back to the seller. The general time frame to return accounts is within
60 to 365 days. Returns are applied against the carrying value of the static pool. Periodically the Company will sell, on a non-recourse basis, all or a portion of a pool to
third parties. The Company does not have any significant continuing involvement with the sold pools
subsequent to sale. Proceeds of these sales are generally compared to the carrying value of the
accounts; a gain or loss is recognized on the difference between proceeds received and carrying
value. Changes in purchased receivables portfolios for the three months ended March 31, 2005 and 2004
were as follows: Three months ended March 31,2005
    
    
    2004Beginning balance
    
    $
    216,479,676
    
    
    $
    183,719,667Investment in purchased receivables, net of buybacks
    
    
    32,603,675
    
    
    
    12,125,876Cash collections
    
    
    (80,397,640
    )
    
    
    (65,196,055
    )Purchased receivable revenues
    
    
    65,866,194
    
    
    
    49,586,774Ending balance
    
    $
    234,551,905
    
    
    $
    180,236,262
 Accretable yield represents the amount of revenue the Company can expect over the remaining
life of the existing portfolios. Changes in accretable yield for the three months ended March 31,
2005 and 2004 were as follows: Three months ended March 31,2005
    
    
    2004Beginning balance
    
    $
    792,755,605
    
    
    $
    665,791,369Revenue recognized on purchased receivables
    
    
    (65,866,194
    )
    
    
    (49,586,774
    )Additions due to purchases during the period
    
    
    77,787,360
    
    
    
    41,281,337Reclassifications from nonaccretable difference
    
    
    13,023,344
    
    
    
    50,686,264Ending balance
    
    $
    817,700,115
    
    
    $
    708,172,196
 During the three months ended March 31, 2005, the Company recorded a $700,000 impairment
related to its purchased receivables and set up an allowance for receivable losses. The impairment
charge is included in revenue and the allowance reduced the carrying value of the purchased
receivables portfolios. No impairments were recognized during 2004. 7




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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 $439,000 and $424,000 at March 31, 2005 and December 31, 2004,
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 $88,000 and
$106,000 at March 31, 2005 and December 31, 2004, 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 cash collections from such third party relationships were 21.4% and 18.9% for
the three months ended March 31, 2005 and 2004, respectively. Property and Equipment Property and equipment is recorded at cost. Expenditures for repairs and maintenance are
charged to operations as incurred. The Company records depreciation expense on a straight-line
basis with lives ranging from three to ten years. Depreciation includes amortization of certain
intangible assets which are being amortized over a period of five to seven years. Depreciation
expense was $786,147 and $670,635 for the three months ended March 31, 2005 and 2004, respectively. Initial Public Offering Asset Acceptance Capital Corp.
commenced an initial public offering of common stock on
February 5, 2004. Effective February 4, 2004, a reorganization was completed pursuant to which all
of the shares of capital stock of AAC Investors, Inc. and RBR Holding Corp., which held a 60% and
40% interest 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 wholly-owned
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. The Company received net proceeds of $96.1 million (net of expenses of $8.9 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 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 resulting from the
vesting of the outstanding share appreciation rights upon the Companys IPO. 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. Earnings
(Loss) Per Share and Pro Forma Loss Per Share Earnings
(loss) per share reflect net income (loss) divided by the weighted-average number of shares
outstanding. Diluted weighted average shares outstanding at March 31, 2005 included 19,419 dilutive
shares related to outstanding stock options. Pro forma loss per share
reflects pro forma loss adjusted for pro forma income taxes, divided by weighted-average number of shares
outstanding. 8




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Income Taxes and Deferred Tax Charge 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 structured 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 structured 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. Recently Issued Accounting Pronouncements SFAS No. 123(R), Share-Based Payment In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment, a revision of SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123(R) requires all stock-based
compensation awards granted to employees be recognized in the financial statements at fair value,
similar to that prescribed under SFAS No. 123 and is effective
for fiscal years beginning after June 15,
2005. We adopted the fair value recognition provisions of SFAS No. 123 effective January 2004 and
therefore, adoption of SFAS No. 123(R) is not expected to have a material impact on our
consolidated financial position, results of operations or cash flows. 2. Related-Party Transactions On October 1, 2002, the Company borrowed $35.0 million from certain shareholders. Interest on
this indebtedness of 10% per annum, compounded on June 30 and December 31 of each year. The Company
recognized interest expense of $433,536 for the three months ended March 31, 2004. These notes
were paid in full and cancelled during February 2004. In October 2004, certain related parties became 50% owners of RNJ Holdings, LLC, which is the
owner of an aircraft held for charter by Jet Management, Inc. These related parties periodically
use the aircraft for travel. To the extent the aircraft is used for business travel on our behalf,
the Company will reimburse Jet Management, Inc. for the use of the aircraft without any profit to
RNJ Holdings, LLC. During the first three months of 2005, the Company reimbursed Jet Management,
Inc. $21,221 for use of the aircraft. 3. Line of Credit The Company maintains a $100.0 million line of credit secured by a first priority lien on all
of the Companys assets that expires in May 2008 and bears interest at prime or 25 basis points
over prime depending upon the Companys liquidity as defined in
the credit agreement. Alternatively,
at the Companys discretion, the Company may borrow by entering into 30, 60 or 90 day LIBOR
contracts at rates between 150 to 250 basis points over the respective LIBOR rates, depending on
the Companys liquidity. The Companys line of credit includes an accordion loan feature that
allows us to request a $20.0 million increase in the credit facility. Additionally, the Company
pays an annual commitment fee of between 0.25% and 0.50% on the unused portion of the line of
credit, depending on the Companys liquidity. There was no outstanding balance at March 31, 2005
and December 31, 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.
    Tangible net worth must exceed $145 million plus 50% of net income after September 30, 2004. The Companys management believes it is in compliance with all terms of its line of credit
agreement as of March 31, 2005. 9




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4. Property and Equipment Property and equipment, having estimated useful lives ranging from three to ten years
consisted of the following: March 31, 2005
    
    
    December 31, 2004Computers and software
    
    $
    8,457,454
    
    
    $
    7,562,797Furniture and fixtures
    
    
    8,433,206
    
    
    
    8,259,527Leasehold improvements
    
    
    1,769,090
    
    
    
    1,810,998Equipment under capital lease
    
    
    527,623
    
    
    
    483,421Automobiles
    
    
    136,525
    
    
    
    136,525Total property and equipment, cost
    
    
    19,323,898
    
    
    
    18,253,268Less accumulated depreciation
    
    
    (7,874,311
    )
    
    
    (7,088,165
    )Net property and equipment
    
    $
    11,449,587
    
    
    $
    11,165,103
 5. Stock Based Compensation Effective January 1, 2004, the Company adopted the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, prospectively to all employee awards granted,
modified, or settled after January 1, 2004. Adoption of the fair value recognition provisions SFAS
No. 123 did not have a material impact on our consolidated financial position, results of
operations or cash flow. 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 stockholders by encouraging employees to acquire an ownership interest in
the Company, thus identifying their interests with those of stockholders and (2) to enhance the
ability of the Company to attract and retain qualified employees, consultants and non-employee
directors. No participant may be granted options during any one fiscal year to purchase more than
500,000 shares of common stock. Stock Options As of March 31, 2005, the Company had issued options to purchase 118,888 shares of its common
stock under the plan. These options have been granted to non-employee directors of the Company.
Options granted under the 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 for the three months ended March 31, 2005 and
2004 of $70,255 and $23,936, respectively is included in administrative expenses. The following
summarizes all stock option related transactions from January 1, 2004 through March 31, 2005. Options
    
    
    Weighted-AverageOutstanding
    
    
    Exercise PriceJanuary 1, 2004
    
    
    
    
    
    
    Granted
    
    
    118,888
    
    
    $
    17.03December 31, 2004
    
    
    118,888
    
    
    $
    17.03Granted
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    March 31, 2005
    
    
    118,888
    
    
    $
    17.03
 10




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##### Table of Contents



The following options information is as of March 31, 2005: Fair Value
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    
    
    
    
    Exercisableof Option
    
    
    Number
    
    
    Remaining
    
    
    Weighted-Average
    
    
    Number
    
    
    Weighted-AverageExercise Price
    
    Granted
    
    
    Outstanding
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$15.00
    
    $
    4.84
    
    
    
    45,000
    
    
    
    8.85
    
    
    $
    15.00
    
    
    
    22,500
    
    
    $
    15.00$18.50
    
    $
    5.90
    
    
    
    30,000
    
    
    
    8.92
    
    
    $
    18.50
    
    
    
    15,000
    
    
    $
    18.50$19.48
    
    $
    6.57
    
    
    
    3,850
    
    
    
    9.13
    
    
    $
    19.48
    
    
    
    3,850
    
    
    $
    19.48$17.85
    
    $
    5.84
    
    
    
    4,200
    
    
    
    9.38
    
    
    $
    17.85
    
    
    
    4,200
    
    
    $
    17.85$17.97
    
    $
    5.87
    
    
    
    30,000
    
    
    
    9.59
    
    
    $
    17.97
    
    
    
    
    
    
    
    $17.99
    
    $
    5.91
    
    
    
    5,838
    
    
    
    9.64
    
    
    $
    17.99
    
    
    
    5,838
    
    
    $
    17.99Total
    
    
    
    
    
    
    118,888
    
    
    
    9.12
    
    
    $
    17.03
    
    
    
    51,388
    
    
    $
    16.93
 The Company utilizes the Black-Scholes option-pricing model to calculate the value of the
stock options when granted. This model was developed to estimate the fair value of traded options,
which have different characteristics than employee stock options. In addition, changes to the
subjective input assumptions can result in materially different fair market value estimates. The
Black-Scholes model may not necessarily provide a reliable single measure of the fair value of
employee stock options. The fair value of each option was based on the following assumptions: Options issue year:
    
    2004Weighted-average fair value of options granted
    
    $
    5.51Expected 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. Participants in the plan had the potential to share in the appreciation of the
value of Asset Acceptance Holdings LLC if certain financial objectives were met or upon partial or
complete liquidation events, as defined in the plan. No expense had been recognized in the
consolidated statements of income during 2002 and 2003 as a result of this plan, as the value of
such shares could not be reasonably estimated and the benefits were contingent upon achieving
certain returns upon a liquidity event such as a sale of the Company or an initial public offering
of common stock. 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 a 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 taxes) during the first quarter of 2004 related
to this. 6. Litigation Contingencies The Company is involved in certain legal matters that management considers incidental to its
business. Management has evaluated pending and threatened litigation against the Company as of
March 31, 2005 and does not believe exposure to be material. 7. Income Taxes Income taxes for the three months ended March 31, 2004 included 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. Income taxes for the three months ended March 31, 2004 (excluding the deferred tax charge
related to RBR Holding Corp.) reflected income tax expense on 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 structured 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 March 31, 2004 reflected income tax expense on 100% of pretax
income as RBR Holding Corp. became a wholly-owned subsidiary of Asset Acceptance Capital Corp. as
part of the reorganization that occurred on February 4, 2004 related to the IPO. 11




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##### Table of Contents



Components of income tax expense are set forth below: Three months ended March 31,2005
    
    
    2004Income taxes consist of:Federal actual
    
    $
    370,000
    
    
    $
    State actual
    
    
    331,269
    
    
    
    11,558Federal deferred  net
    
    
    8,070,848
    
    
    
    7,379,436State deferred  net
    
    
    199,389
    
    
    
    391,179Total
    
    $
    8,971,506
    
    
    $
    7,782,173
 Tax expense differs from the application of statutory rates to pretax income. The
reconciliation of income tax expense and the statutory rates is set forth below: Three months ended March 31,2005
    
    
    2004Federal taxes at statutory rate
    
    $
    8,440,848
    
    
    $
    (9,911,525
    )S corporation benefit  federal
    
    
    
    
    
    
    (825,193
    )S corporation benefit  state
    
    
    
    
    
    
    (51,869
    )Deferred tax charge  federal
    
    
    
    
    
    
    18,116,154Deferred tax charge  state
    
    
    
    
    
    
    1,190,490State income taxes, net of federal tax benefit
    
    
    530,658
    
    
    
    (735,884
    )Effective income taxes
    
    $
    8,971,506
    
    
    $
    7,782,173
 8. Subsequent Events On April 21, 2005 we completed
a secondary public offering of 5,750,000 shares of our common
stock at $18.89 per share, including an over-allotment option which
was exercised in full. All of these
shares were sold by selling stockholders, which included members of management and other holders,
and none of the shares were sold by the Company. The selling stockholders received all of the net proceeds
from the sale of the shares. Pursuant to the registration rights agreement between the company and
certain of the selling stockholders, the Company will bear substantially all of the expenses of the
secondary offering, other than the underwriting discounts, which are estimated at approximately $575,000. 12




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##### Table of Contents



Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations First Quarter 2005 Overview Company Overview We have been purchasing and collecting defaulted or charged-off accounts receivable portfolios
from consumer credit originators since the formation of our predecessor company in 1962.
Charged-off receivables are the unpaid obligations of individuals to credit originators, such as
credit card issuers, consumer finance companies, retail merchants and utility providers. Since
these receivables are delinquent or past due, we are able to purchase them at a substantial
discount. We purchase and collect charged-off consumer receivable portfolios for our own account as
we believe this affords us the best opportunity to use long-term strategies to maximize our
profits. We currently do not collect on a commission or contingent fee basis. For the first quarter of 2005, cash collections increased 23.3% to $80.4 million. Revenues for
the first quarter of 2005 were $66.0 million, a 32.7% increase over the prior year. Net income was
$15.1 million for the first quarter of 2005, compared to a net loss of $36.2 million for the same
period in 2004. Net loss for the first quarter of 2004 included a $45.7 million compensation and
related payroll charge ($28.7 million on an after-tax basis) for the vesting of outstanding share
appreciation rights and a deferred tax charge of $19.3 million. For the first quarter of 2005, we invested $33.1 million in charged-off consumer receivable
portfolios, with an aggregate face value of $1.1 billion, or 2.99% of face value. We have seen
prices for charged-off accounts receivable portfolios increase over the past 12 to 18 months and
believe prices to be relatively high at the current time. We believe we have seen some indications
that prices have stabilized during the first quarter of 2005, however we cannot give any assurances
that prices will not increase in the future. We are determined to remain disciplined and purchase
portfolios only when we believe we can achieve acceptable returns. We regularly utilize unaffiliated third parties, primarily attorneys and other collection
agencies, to collect certain account balances on our behalf. The percent of gross collections from
such third parties has steadily increased from 15% for the year ended December 31, 2002 to 21% for
the three months ended March 31, 2005. The increase is primarily due to increased legal activity in
states that we are not located in, as well as a slight increase in the use of third party
collection agencies. These increases do not reflect any specific strategy to increase third party
collections. Forward Looking Statements This report contains forward-looking statements
that involve risks and uncertainties. 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. These
statements may be found in the section titled Managements
Discussion and Analysis of Financial Condition and Results of
Operations. These statements involve a number of risks and
uncertainties. Actual events or results may differ materially from
any forward-looking statement as a result of various factors,
including those we discuss in our Annual Report on Form 10-K in
the section titled Risk Factors and elsewhere in this
Report. Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Except as required by law, we undertake no obligation to update publicly any forward-looking
statements for any reason after the date of this report to conform these statements to actual
results or to changes in our expectations. Factors that could affect our results and cause them to
materially differ from those contained in the forward-looking statements include the following:  
    our ability to purchase charged-off receivable portfolios on acceptable terms and in sufficient amounts;
    our ability to recover sufficient amounts on our charged-off receivable portfolios;
    our ability to hire and retain qualified personnel;
    a decrease in collections if bankruptcy filings increase or if bankruptcy laws or other debt collection laws change; 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 as well as the
Accounting Standards Executive Committee Statement of Position 03-3;
    changes in, or failure to comply with, governmental regulations, including our ability
to timely comply with Section 404 of the Sarbanes-Oxley Act and the costs related to
compliance;
    the costs and uncertainties related to compliance with Internal Revenue Code Section
6050P-2 and the related Treasury Regulations and the issuance of 1099-C information
returns;
    our ability to maintain existing, and secure additional, financing on acceptable terms;
    the loss of any of our executive officers or other key personnel;
    the costs, uncertainties and other effects of legal and administrative proceedings;
    our ability to successfully expand our businesses and train and integrate new collectors;
    the temporary or permanent loss of our computer or telecommunications systems, as well
as our ability to respond to changes in technology and increased
competition; and
    other unanticipated events and conditions that may hinder our ability to compete. Significant Events During the Three Months Ended March 31, 2005 On
April 21, 2005, we completed a secondary public offering of 5,750,000 shares of our common
stock at $18.89 per share, including an over-allotment option which
was exercised in full. All of these
shares were sold by selling stockholders, which included members of management and other holders,
and none of the shares were sold by us. The selling stockholders received all of the net proceeds
from the sale of the shares. Pursuant to the registration rights agreement between the company and
certain of the selling stockholders, the Company will bear substantially all of the expenses of the
secondary offering, other than underwriting discounts, which are
estimated at approximately $575,000. These expenses will be
reflected as a charge in the period incurred. In addition, certain of the selling stockholders,
pursuant to the registration rights agreement, retain the right to request three additional
registrations of specified shares, in which case we will be required to bear such offering expenses
in the quarter in which any future offering occurs. 14




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##### Table of Contents



Results of Operations The
following table sets forth selected statement of operations data expressed as a percentage of
total revenues and as a percentage of cash collections for the periods indicated. Percent of Total Revenues
    
    
    Percent of Cash CollectionsThree Months Ended March 31,
    
    
    Three Months Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004RevenuesPurchased receivable revenues
    
    
    99.7
    %
    
    
    99.7
    %
    
    
    81.9
    %
    
    
    76.1
    %Finance contract revenues
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.2Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    82.1
    
    
    
    76.3ExpensesSalaries and benefits
    
    
    28.1
    
    
    
    123.5
    (1)
    
    
    23.1
    
    
    
    94.2
    (1)Collections expense
    
    
    27.9
    
    
    
    24.7
    
    
    
    22.9
    
    
    
    18.9Occupancy
    
    
    3.2
    
    
    
    2.8
    
    
    
    2.6
    
    
    
    2.1Administrative
    
    
    2.8
    
    
    
    2.6
    
    
    
    2.3
    
    
    
    2.0Depreciation and amortization
    
    
    1.3
    
    
    
    1.5
    
    
    
    1.1
    
    
    
    1.1Loss on disposal of equipment
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total
operating expenses
    
    
    63.3
    
    
    
    155.1
    (1)
    
    
    52.0
    
    
    
    118.3
    (1)Income (loss) from operations
    
    
    36.7
    
    
    
    (55.1
    )
    
    
    30.1
    
    
    
    (42.0
    )Other income (expense)Interest income
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.0Interest expense
    
    
    (0.2
    )
    
    
    (2.0
    )
    
    
    (0.2
    )
    
    
    (1.5
    )Other
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.0
    
    
    
    0.0Income (loss) before income taxes
    
    
    36.5
    
    
    
    (57.0
    )
    
    
    30.0
    
    
    
    (43.5
    )Income taxes
    
    
    13.6
    
    
    
    15.7
    
    
    
    11.2
    
    
    
    12.0Net Income (loss)
    
    
    22.9
    %
    
    
    (72.7
    )%
    
    
    18.8
    %
    
    
    (55.5
    )%Pro forma income taxes
    
    
    
    
    
    
    (21.2
    )%
    
    
    
    
    
    
    (16.2
    )%Pro forma net loss
    
    
    
    
    
    
    (35.8
    )%
    
    
    
    
    
    
    (27.3
    )%
   (1)
    
    Excluding the $45.7 million compensation and related payroll tax charge, salaries and
benefits were 31.7% and 24.2% of revenues and collections, respectively and total operating
expenses were 63.3% and 48.3% of revenues and collections, respectively, for the three months
ended March 31, 2004. See discussion in Managements Discussion and Analysis of Financial
Condition and Results of Operations  Three Months Ended March 31, 2005 Compared to Three
Months Ended March 31, 2004  Operating Expenses. Three Months Ended March 31, 2005 Compared To Three Months Ended March 31, 2004 Revenue Total revenues were $66.0 million for the three months ended March 31, 2005, an increase of
$16.3 million, or 32.7%, over total revenues of $49.7 million for the three months ended March 31,
2004. Purchased receivable revenues were $65.9 million for the three months ended March 31, 2005,
an increase of $16.3 million, or 32.8%, over the three months ended March 31, 2004, amount of $49.6
million. The increase in revenues was due primarily to an increase in the average outstanding
balance of purchased receivables. Cash collections on charged-off consumer receivables increased
23.3% to $80.4 million for the three months ended March 31, 2005 from $65.2 million for the same
period in 2004. Cash collections for the three months ended March 31, 2005 and 2004 include
collections from fully amortized portfolios of $12.1 million and $5.2 million, respectively, of
which 100% were reported as revenue. Revenue reflects impairments recognized during the three months ended March 31, 2005 of $.7
million. The impairments were recognized under Practice
Bulletin 6 (PB 6), as amended by SOP 03-3, which requires that
an impairment be taken for decreases in expected cash flows. During the three months ended March
31, 2004, we accounted for our purchased receivable portfolios under
the provisions of PB 6, which required lowering of yields for decreases in expected cash flows and
therefore no impairments were recognized. During the three months ended March 31, 2005, we acquired charged-off consumer receivables
portfolios with an aggregate face value amount of $1.1 billion at a cost of $33.1 million, or 2.99%
of face value, net of buybacks. Included in these purchase totals were 15




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10 portfolios with an aggregate face value of $88.6 million at a cost of $3.2 million, or
3.56% of face value, which were acquired through four forward flow contracts. During the three
months ended March 31, 2004, we acquired charged-off consumer receivables portfolios with an
aggregate face value of $501.0 million at a cost of $12.1 million, or 2.42% of face value (adjusted
for buybacks through March 31, 2005). From period to period we may buy paper of varying age, types
and cost. As a result, the cost of our purchases, as a percent of face value, may fluctuate from
one period to the next. The increase in our cost as a percent of face value to 2.99% for the three
months ended March 31, 2005 from 2.42% for the same period in 2004, is primarily due to an increase
in the amount of fresh, primary and secondary (newer) accounts purchased, because newer accounts
generally demand a slightly higher purchase price than older accounts. These types of accounts made
up 58.2% of our purchases in the three months ended March 31, 2005 compared to only 33.5% for the
same period in 2004. Operating Expenses Total operating expenses were $41.8 million for the three months ended March 31, 2005, a
decrease of $35.4 million, or 45.8%, compared to total operating expenses of $77.2 million for the
three months ended March 31, 2004. Total operating expenses were 63.3% of total revenues and 52.0%
of cash collections for the three months ended March 31, 2005, compared with 155.1% and 118.3%,
respectively, for the same period in 2004. Operating expenses for the three months ended March 31,
2004 include a $45.0 million compensation charge and a $0.7 million payroll tax charge resulting
from the vesting of the outstanding share appreciation rights upon our initial public offering. We incurred a one-time compensation and related payroll tax charge of $45.7 million resulting
from the vesting of the share appreciation rights that occurred upon our initial public offering in
2004. We are providing the total operating expense and salary and benefit expense information and
related percentages of total revenue and cash collections excluding the one-time charge incurred
solely in connection with our initial public offering because we believe doing so provides
investors with a more direct comparison of results of operations between 2004 and 2005. In
addition, we use the adjustments for purposes of our internal planning, review and period-to-period
comparison process. Excluding
the $45.7 million compensation and related payroll tax charge in
2004, total operating
expenses of $41.8 million for the three months ended March 31, 2005 increased $10.3 million, or
32.8% from the $31.5 million in operating expenses for the same period in 2004. Operating expenses
remained level at 63.3% of total revenues for the three months ended March 31, 2005 and 2004. As a
percent of collections, operating expenses increased to 52.0% for the three months ended March 31,
2005 from 48.3% for the three months ended March 31, 2004, primarily due to an increase in
collection expenses. Salaries and Benefits.Salary and benefit expenses were $18.5 million for the three months
ended March 31, 2005, a decrease of $42.9 million, or 69.8%, compared to salary and benefit
expenses of $61.4 million for the three months ended March 31, 2004. Salary and benefit expenses
were 28.1% of total revenue and 23.1% of cash collection for the three months ended March 31, 2005,
compared with 123.5% and 94.2%, respectively, for the same period in 2004. Salary and benefit
expenses decreased primarily due to the $45.7 million compensation and related payroll tax charge
resulting from the vesting of the outstanding share appreciation rights upon our initial public
offering. Excluding
the $45.7 million compensation and related payroll tax charge in
2004, salary and benefit
expenses of $18.5 million for the three months ended March 31, 2005 increased of $2.8 million, or
17.8% from the $15.7 million in salary and benefit expenses for the same period in 2004. The
increase over the prior year was primarily due to an increase in total employees which grew to
1,788 at March 31, 2005 from 1,562 at March 31, 2004, in response to the growth in the number of
our portfolios of charged-off consumer receivables. Salary and benefit expenses, excluding the
$45.7 million compensation and related payroll tax charge, decreased to 28.1% of total revenues and
23.1% of cash collections for the three months ended March 31, 2005 from 31.7% of total revenue and
24.2% of cash collections for the same period in 2004. The decrease in salary and benefits
expenses, as adjusted, as a percent of cash collections was primarily due to improved benefit costs
and increased overall collection efficiencies. The overall gains in collection efficiency from our
legal and forwarding areas were partially offset by decreases in traditional call center
collections efficiency. Traditional call center collections per full-time equivalent collection
employee decreased to $44,535 for the three months ended March 31, 2005, compared to $47,476 for
the same period in 2004. This decrease is primarily due to a decrease in productivity for
collectors with less than a year of experience as productivity for collectors with more than one
year of experience increased compared to the same period in 2004. Average full-time
equivalent collection employees increased to 1,000 for the three months ended March 31, 2005 from
864 during the same period in 2004. Collections Expense.Collections expense increased to $18.4 million for the three months
ended March 31, 2005, reflecting an increase of $6.1 million, or 49.9%, over collection expense of
$12.3 million for the three months ended March 31, 2004. The increase 16




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##### Table of Contents



was primarily attributable to the increased number of accounts on which we were collecting.
Collections expense increased to 22.9% of cash collections for the three months ended March 31,
2005 from 18.9% of cash collections for the three months ended March 31, 2004. This increase was
primarily due to increases in amounts spent for collection letters and information acquisition
expenses as well as increased legal expenses and forwarding fees. The increases in the collection
letters and information acquisition expense was primarily due to an increase in the number of
accounts purchased in the first quarter of 2005. During the three months ended March 31, 2005, we
acquired 2.0 million accounts compared to 0.2 million for the same period in 2004. The increase in
legal expense was due to an increase in the number of accounts for which legal action has been
initiated. The increase in forwarding fees was due to increased legal activity in states that we
are not located in, as well as a slight increase in the use of third party collection agencies.
The percent of gross collections from such third parties has steadily increased from 15% for the
year ended December 31, 2002 to 21% for the three months ended March 31, 2005. The increases in
forwarding fees do not reflect any specific strategy to increase third party collections. Occupancy.Occupancy expense was $2.1 million for the three months ended March 31, 2005, an
increase of $0.7 million, or 51.0%, over occupancy expense of $1.4 million for the three months
ended March 31, 2004. The increase was primarily attributable to the relocation of our headquarters
to a larger facility in Warren, Michigan in November 2004. Administrative.Administrative expenses increased to $1.9 million for the three months ended
March 31, 2005, from $1.3 million for the three months ended March 31, 2004, reflecting a $0.6
million, or 46.2%, increase. The increase in administrative expenses was principally a result of
the increased number of accounts being processed and expenses related to the secondary offering. Depreciation.Depreciation expense was $0.8 million for the three months ended March 31,
2005, an increase of $0.1 million or 16.0% over depreciation expense of $0.7 million for the three
months ended March 31, 2004. The increase was due to capital expenditures during 2005 and 2004,
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. Interest Income.Interest income was $34,908 for the three months ended March 31, 2005,
reflecting an increase of $27,955 compared to net interest income of $6,953 for the three months
ended March 31, 2004. The increase was due primarily to interest received related to our increased
cash position over the prior year. Interest Expense.Interest expense was $0.1 million for the three months ended March 31,
2005, reflecting a decrease of $0.9 million, or 89.3%, compared to interest expense of $1.0 million
for the three months ended March 31, 2004. During February 2004, we paid in full a related party
debt of $40.0 million, which resulted in a reduction in interest expense of $0.4 million during the
three months ended March 31, 2005 from the same period in the prior year. Additionally, the
decrease in interest expense was due to lower average borrowings on our line of credit, which
decreased to $0.6 million for the three months ended March 31, 2005 from $42.4 million for the same
period in 2004. The reduction in our average borrowings was due to repayment of $37.7 million of
debt from the proceeds of the initial public offering and cash generated from operations. Interest
expense includes the amortization of capitalized bank fees of $49,336 and $69,908 for the three
months ended March 31, 2005 and 2004, respectively. Income
Taxes.Income tax expense of $9.0 million reflects normal
tax rates of 35% for federal taxes and 2.2% for state taxes for the three months ended March 31, 2005.
Income taxes for the three months ended March 31, 2004
(excluding the deferred tax charge related to RBR Holding Corp.) reflected income tax expense on
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 March 31, 2004 reflected income
tax expense on 100% of pretax income as RBR Holding Corp. became a wholly-owned subsidiary of Asset
Acceptance Capital Corp. as part of the reorganization. 17




---



##### Table of Contents



Supplemental Performance Data Portfolio Performance The following table summarizes our historical portfolio purchase price and cash collections on
an annual vintage basis since 1990 through March 31, 2005. Total EstimatedCash Collections
    
    
    Estimated
    
    
    Total
    
    
    Collections as aNumber of
    
    
    Purchase
    
    
    Including Cash
    
    
    Remaining
    
    
    Estimated
    
    
    Percentage ofPurchase Period
    
    Portfolios
    
    
    Price (1)
    
    
    Sales (2)
    
    
    Collections
    
    
    Collections
    
    
    Purchase Price (2)(dollars in thousands)1990
    
    
    9
    
    
    $
    638
    
    
    $
    3,108
    
    
    $
    
    
    
    $
    3,108
    
    
    
    487
    %1991
    
    
    12
    
    
    
    280
    
    
    
    1,459
    
    
    
    
    
    
    
    1,459
    
    
    
    5211992
    
    
    29
    
    
    
    309
    
    
    
    2,878
    
    
    
    
    
    
    
    2,878
    
    
    
    9311993
    
    
    30
    
    
    
    790
    
    
    
    7,806
    
    
    
    
    
    
    
    7,806
    
    
    
    9881994
    
    
    36
    
    
    
    1,427
    
    
    
    6,808
    
    
    
    
    
    
    
    6,808
    
    
    
    4771995
    
    
    53
    
    
    
    1,519
    
    
    
    7,719
    
    
    
    77
    
    
    
    7,796
    
    
    
    5131996
    
    
    46
    
    
    
    3,844
    
    
    
    16,676
    
    
    
    630
    
    
    
    17,306
    
    
    
    4501997
    
    
    45
    
    
    
    4,345
    
    
    
    27,196
    
    
    
    1,801
    
    
    
    28,997
    
    
    
    6671998
    
    
    61
    
    
    
    16,412
    
    
    
    74,477
    
    
    
    8,887
    
    
    
    83,364
    
    
    
    5081999
    
    
    51
    
    
    
    12,925
    
    
    
    52,225
    
    
    
    10,678
    
    
    
    62,903
    
    
    
    4872000
    
    
    49
    
    
    
    20,597
    
    
    
    96,783
    
    
    
    32,390
    
    
    
    129,173
    
    
    
    6272001
    
    
    62
    
    
    
    43,134
    
    
    
    176,938
    
    
    
    92,262
    
    
    
    269,200
    
    
    
    6242002
    
    
    94
    
    
    
    72,298
    
    
    
    183,787
    
    
    
    184,340
    
    
    
    368,127
    
    
    
    5092003
    
    
    76
    
    
    
    87,345
    
    
    
    156,785
    
    
    
    326,453
    
    
    
    483,238
    
    
    
    5532004
    
    
    106
    
    
    
    88,875
    
    
    
    40,157
    
    
    
    296,807
    
    
    
    336,964
    
    
    
    3792005 (3)
    
    
    22
    
    
    
    33,084
    
    
    
    1,204
    
    
    
    97,927
    
    
    
    99,131
    
    
    
    300
   (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 defined as
buybacks) less the purchase price for accounts that were sold at the time of purchase to
another debt purchaser.(2)
    
    For purposes of this table, cash collections include selected cash sales which were entered
into subsequent to purchase. Cash sales, however, exclude the sales of portfolios which
occurred at the time of purchase.(3)
    
    Includes only three months of activity through March 31, 2005. 18




---



##### Table of Contents



The following table summarizes the remaining unamortized balances of our purchased receivables
portfolios by year of purchase as of March 31, 2005. UnamortizedUnamortized
    
    
    
    
    
    
    Balance as a
    
    
    UnamortizedBalance as of
    
    
    Purchase
    
    
    Percentage of
    
    
    Balance as aPurchase Period
    
    March 31, 2005
    
    
    Price(1)
    
    
    Purchase Price(2)
    
    
    Percentage of Total(dollars in thousands)1999
    
    $
    1
    
    
    $
    12,925
    
    
    
    0.01
    %
    
    
    3.612000
    
    
    795
    
    
    
    20,597
    
    
    
    3.86
    
    
    
    5.752001
    
    
    10,712
    
    
    
    43,134
    
    
    
    24.83
    
    
    
    12.042002
    
    
    39,294
    
    
    
    72,298
    
    
    
    54.35
    
    
    
    20.182003
    
    
    63,873
    
    
    
    87,345
    
    
    
    73.13
    
    
    
    24.382004
    
    
    85,997
    
    
    
    88,875
    
    
    
    96.76
    
    
    
    24.812005 (3)
    
    
    33,880
    
    
    
    33,084
    
    
    
    102.41
    
    
    
    9.23Totals
    
    
    234,552
    
    
    
    358,258
    
    
    
    65.47
    
    
    
    100.00
   (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 defined as
buybacks) less the purchase price for accounts that were sold at the time of purchase to
another debt purchaser.(2)
    
    For purposes of this table, cash collections include selected cash sales which were entered
into subsequent to purchase. Cash sales, however, exclude the sales of portfolios which
occurred at the time of purchase.(3)
    
    Includes only three months of activity through March 31, 2005. Collector Productivity We measure traditional call center collector productivity by two major categories, those with
less then one year of experience and those with one or more years of experience. The following
tables display our results. Collectors by Experience For the year ended December 31,
    
    
    For the three months ended March 31,Number of collectors:
    
    2003
    
    
    2004
    
    
    2004
    
    
    2005One year or more (1)
    
    
    322
    
    
    
    472
    
    
    
    431
    
    
    
    507Less than one year (2)
    
    
    478
    
    
    
    436
    
    
    
    433
    
    
    
    493Total
    
    
    800
    
    
    
    908
    
    
    
    864
    
    
    
    1,000
   (1)
    
    Based on number of traditional call center Full Time Equivalent (FTE) collectors with one
or more years of service.(2)
    
    Based on number of traditional call center FTE collectors with less than one year of service,
including new employees in training. Collection Averages by Experience For the year ended December 31,
    
    
    For the three months ended March 31,Collection Averages:
    
    2003
    
    
    2004
    
    
    2004
    
    
    2005One year or more (1)
    
    $
    171,506
    
    
    $
    195,094
    
    
    $
    52,638
    
    
    $
    55,710Less than one year (2)
    
    $
    135,792
    
    
    $
    140,157
    
    
    $
    42,333
    
    
    $
    33,040Overall Average
    
    $
    150,178
    
    
    $
    168,708
    
    
    $
    47,476
    
    
    $
    44,535
   (1)
    
    Based on number of traditional call center FTE collectors with one or more years of service.(2)
    
    Based on number of traditional call center FTE collectors with less than one year of service,
including new employees in training. 19




---



##### Table of Contents



Cash Collections The following tables provide further detailed vintage collection analysis on an annual and a
cumulative basis. Historical Collections(1) Three MonthsPurchase
    
    Purchase
    
    
    Year Ended December 31,
    
    
    Ended March 31,Period
    
    Price(2)
    
    
    1994
    
    
    1995
    
    
    1996
    
    
    1997
    
    
    1998
    
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005(dollars in thousands)Pre-1994
    
    
    
    
    
    $
    3,067
    
    
    $
    2,540
    
    
    $
    1,788
    
    
    $
    1,285
    
    
    $
    834
    
    
    $
    649
    
    
    $
    555
    
    
    $
    437
    
    
    $
    302
    
    
    $
    323
    
    
    $
    243
    
    
    $
    581994
    
    $
    1,427
    
    
    
    345
    
    
    
    1,763
    
    
    
    1,430
    
    
    
    1,005
    
    
    
    647
    
    
    
    457
    
    
    
    357
    
    
    
    258
    
    
    
    176
    
    
    
    188
    
    
    
    126
    
    
    
    221995
    
    
    1,519
    
    
    
    
    
    
    
    388
    
    
    
    1,566
    
    
    
    1,659
    
    
    
    1,118
    
    
    
    786
    
    
    
    708
    
    
    
    472
    
    
    
    343
    
    
    
    278
    
    
    
    227
    
    
    
    571996
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    827
    
    
    
    3,764
    
    
    
    3,085
    
    
    
    2,601
    
    
    
    2,098
    
    
    
    1,440
    
    
    
    1,041
    
    
    
    816
    
    
    
    687
    
    
    
    1631997
    
    
    4,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,682
    
    
    
    4,919
    
    
    
    5,573
    
    
    
    5,017
    
    
    
    3,563
    
    
    
    2,681
    
    
    
    1,784
    
    
    
    1,526
    
    
    
    3411998
    
    
    16,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,835
    
    
    
    15,220
    
    
    
    15,045
    
    
    
    12,962
    
    
    
    11,021
    
    
    
    7,987
    
    
    
    5,582
    
    
    
    1,2471999
    
    
    12,925
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,761
    
    
    
    11,331
    
    
    
    10,862
    
    
    
    9,750
    
    
    
    8,278
    
    
    
    6,675
    
    
    
    1,3202000
    
    
    20,597
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,895
    
    
    
    23,444
    
    
    
    22,559
    
    
    
    20,318
    
    
    
    17,196
    
    
    
    3,8922001
    
    
    43,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,630
    
    
    
    50,327
    
    
    
    50,967
    
    
    
    45,713
    
    
    
    11,2162002
    
    
    72,298
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,340
    
    
    
    70,813
    
    
    
    72,024
    
    
    
    18,1042003
    
    
    87,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,067
    
    
    
    94,564
    
    
    
    25,9822004
    
    
    88,875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,365
    
    
    
    16,7922005
    
    
    33,084
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,204Total
    
    
    
    
    
    $
    3,412
    
    
    $
    4,691
    
    
    $
    5,611
    
    
    $
    9,395
    
    
    $
    15,438
    
    
    $
    29,047
    
    
    $
    44,006
    
    
    $
    71,068
    
    
    $
    120,540
    
    
    $
    197,819
    
    
    $
    267,928
    
    
    $
    80,398
 Cumulative Collections(1) Total ThroughPurchase
    
    Purchase
    
    
    Total Through December 31,
    
    
    March 31,Period
    
    Price(2)
    
    
    1994
    
    
    1995
    
    
    1996
    
    
    1997
    
    
    1998
    
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005(dollars in thousands)1994
    
    $
    1,427
    
    
    $
    345
    
    
    $
    2,108
    
    
    $
    3,538
    
    
    $
    4,543
    
    
    $
    5,190
    
    
    $
    5,647
    
    
    $
    6,004
    
    
    $
    6,262
    
    
    $
    6,438
    
    
    $
    6,626
    
    
    $
    6,752
    
    
    $
    6,7741995
    
    
    1,519
    
    
    
    
    
    
    
    388
    
    
    
    1,954
    
    
    
    3,613
    
    
    
    4,731
    
    
    
    5,517
    
    
    
    6,225
    
    
    
    6,697
    
    
    
    7,040
    
    
    
    7,318
    
    
    
    7,545
    
    
    
    7,6021996
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    827
    
    
    
    4,591
    
    
    
    7,676
    
    
    
    10,277
    
    
    
    12,375
    
    
    
    13,815
    
    
    
    14,856
    
    
    
    15,672
    
    
    
    16,359
    
    
    
    16,5221997
    
    
    4,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,682
    
    
    
    6,601
    
    
    
    12,174
    
    
    
    17,191
    
    
    
    20,754
    
    
    
    23,435
    
    
    
    25,219
    
    
    
    26,745
    
    
    
    27,0861998
    
    
    16,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,835
    
    
    
    20,055
    
    
    
    35,100
    
    
    
    48,062
    
    
    
    59,083
    
    
    
    67,070
    
    
    
    72,652
    
    
    
    73,8991999
    
    
    12,925
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,761
    
    
    
    15,092
    
    
    
    25,954
    
    
    
    35,704
    
    
    
    43,982
    
    
    
    50,657
    
    
    
    51,9772000
    
    
    20,597
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,895
    
    
    
    32,339
    
    
    
    54,898
    
    
    
    75,216
    
    
    
    92,412
    
    
    
    96,3042001
    
    
    43,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,630
    
    
    
    67,957
    
    
    
    118,924
    
    
    
    164,637
    
    
    
    175,8532002
    
    
    72,298
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,340
    
    
    
    93,153
    
    
    
    165,177
    
    
    
    183,2812003
    
    
    87,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,067
    
    
    
    130,631
    
    
    
    156,6132004
    
    
    88,875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,365
    
    
    
    40,1572005
    
    
    33,084
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,204
 Cumulative Collections as Percentage of Purchase Price(1) Total ThroughPurchase
    
    Purchase
    
    
    Total Through December 31,
    
    
    March 31,Period
    
    Price(2)
    
    
    1994
    
    
    1995
    
    
    1996
    
    
    1997
    
    
    1998
    
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    20051994
    
    $
    1,427
    
    
    
    24
    %
    
    
    148
    %
    
    
    248
    %
    
    
    318
    %
    
    
    364
    %
    
    
    396
    %
    
    
    421
    %
    
    
    439
    %
    
    
    451
    %
    
    
    464
    %
    
    
    473
    %
    
    
    475
    %1995
    
    
    1,519
    
    
    
    
    
    
    
    26
    
    
    
    129
    
    
    
    238
    
    
    
    311
    
    
    
    363
    
    
    
    410
    
    
    
    441
    
    
    
    463
    
    
    
    482
    
    
    
    497
    
    
    
    5001996
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    119
    
    
    
    200
    
    
    
    267
    
    
    
    322
    
    
    
    359
    
    
    
    386
    
    
    
    408
    
    
    
    426
    
    
    
    4301997
    
    
    4,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    152
    
    
    
    280
    
    
    
    396
    
    
    
    478
    
    
    
    539
    
    
    
    580
    
    
    
    616
    
    
    
    6231998
    
    
    16,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    122
    
    
    
    214
    
    
    
    293
    
    
    
    360
    
    
    
    409
    
    
    
    443
    
    
    
    4501999
    
    
    12,925
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    117
    
    
    
    201
    
    
    
    276
    
    
    
    340
    
    
    
    392
    
    
    
    4022000
    
    
    20,597
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    157
    
    
    
    266
    
    
    
    365
    
    
    
    449
    
    
    
    4682001
    
    
    43,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    158
    
    
    
    276
    
    
    
    382
    
    
    
    4082002
    
    
    72,298
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    129
    
    
    
    228
    
    
    
    2542003
    
    
    87,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    149
    
    
    
    1792004
    
    
    88,875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    452005
    
    
    33,084
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
   (1)
    
    Does not include proceeds from sales of any receivables.(2)
    
    Purchase amount refers to the cash paid to a seller to acquire a portfolio less the purchase
price refunded by a seller due to the return of non-compliant accounts (also defined as
buybacks) less the purchase price for accounts that were sold at the time of purchase to
another debt purchaser. 20




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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 level due to the
application of the interest method for revenue recognition. In addition, our operating results may
be affected to a lesser extent by the timing of purchases of charged-off consumer receivables due
to the initial costs associated with purchasing and integrating these receivables into our system.
Consequently, income and margins may fluctuate from quarter to quarter. Below is a chart that illustrates our quarterly collections for years 2001 through March 31,
2005. (BAR CHART) Cash Collections Quarter
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005First
    
    $
    15,592,577
    
    
    $
    27,297,721
    
    
    $
    44,017,730
    
    
    $
    65,196,055
    
    
    $
    80,397,640Second
    
    
    17,661,537
    
    
    
    30,475,078
    
    
    
    51,190,533
    
    
    
    67,566,031
    
    
    
    Third
    
    
    17,766,800
    
    
    
    29,337,914
    
    
    
    48,622,829
    
    
    
    66,825,822
    
    
    
    Fourth
    
    
    20,046,733
    
    
    
    33,429,419
    
    
    
    53,988,333
    
    
    
    68,339,797
    
    
    
    
 21




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##### Table of Contents



The following chart categorizes our purchased receivables portfolios acquired during
January 1, 1990 through March 31, 2005, into major asset types, as of March 31, 2005. Face Value ofCharged-off
    
    
    
    
    
    
    No. ofAsset Type
    
    Receivables (2)
    
    
    %
    
    
    Accounts
    
    
    %Visa(R)/MasterCard(R)/Discover(R)
    
    $
    8,508,293,655
    
    
    
    42.7
    %
    
    
    3,792,317
    
    
    
    18.9
    %Private Label Credit Cards
    
    
    3,068,324,796
    
    
    
    15.4
    
    
    
    4,580,612
    
    
    
    22.9Telecommunications/Utility/Gas
    
    
    2,163,328,520
    
    
    
    10.9
    
    
    
    5,205,773
    
    
    
    26.0Health Club
    
    
    1,310,138,140
    
    
    
    6.6
    
    
    
    1,359,556
    
    
    
    6.8Auto Deficiency
    
    
    1,239,423,149
    
    
    
    6.2
    
    
    
    207,064
    
    
    
    1.0Installment loans
    
    
    651,382,190
    
    
    
    3.3
    
    
    
    209,599
    
    
    
    1.0Other (1)
    
    
    2,967,805,596
    
    
    
    14.9
    
    
    
    4,678,221
    
    
    
    23.4Total
    
    $
    19,908,696,046
    
    
    
    100.0
    %
    
    
    20,033,142
    
    
    
    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.(2)
    
    Face value of charged-off receivables represents the cumulative amount of purchases net of
buybacks. The amount is not adjusted for payments received, settlements or additional accrued
interest on any accounts in such portfolios after the date we purchased the applicable
portfolio 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. 22




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##### Table of Contents



The following chart categorizes our purchased receivables
portfolios acquired during January 1, 1990 through March 31, 2005 into major account types as of March 31, 2005. Face Value ofCharged-off
    
    
    
    
    
    
    No. ofAccount Type
    
    Receivables (2)
    
    
    %
    
    
    Accounts
    
    
    %Fresh
    
    $
    1,008,211,748
    
    
    
    5.1
    %
    
    
    402,264
    
    
    
    2.0
    %Primary
    
    
    3,540,255,866
    
    
    
    17.8
    
    
    
    2,348,264
    
    
    
    11.7Secondary
    
    
    3,630,664,785
    
    
    
    18.2
    
    
    
    3,604,974
    
    
    
    18.0Tertiary (1)
    
    
    10,742,687,983
    
    
    
    54.0
    
    
    
    13,140,872
    
    
    
    65.6Other
    
    
    986,875,664
    
    
    
    4.9
    
    
    
    536,768
    
    
    
    2.7Total
    
    $
    19,908,696,046
    
    
    
    100.0
    %
    
    
    20,033,142
    
    
    
    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.(2)
    
    Face value of charged-off receivables represents the cumulative amount of purchases net of
buybacks. The amount is not adjusted for payments received, settlements or additional accrued
interest on any accounts in such portfolios after the date we purchased the applicable
portfolio We also review the geographic distribution of accounts within a portfolio because collection
laws differ from state to state. The following chart illustrates our purchased receivables
portfolios acquired during January 1, 1990 through March 31, 2005 based on geographic location of
debtor, as of March 31, 2005. Face Value ofCharged-off
    
    
    
    
    
    
    No. ofGeographic Location
    
    Receivables (3)
    
    
    %
    
    
    Accounts
    
    
    %Texas (1)
    
    $
    2,742,545,079
    
    
    
    13.8
    %
    
    
    2,500,075
    
    
    
    12.5
    %California
    
    
    2,281,859,485
    
    
    
    11.5
    
    
    
    2,634,701
    
    
    
    13.1Florida (1)
    
    
    1,853,708,905
    
    
    
    9.3
    
    
    
    1,354,643
    
    
    
    6.8Michigan (1)
    
    
    1,509,072,127
    
    
    
    7.6
    
    
    
    1,804,345
    
    
    
    9.0New York
    
    
    1,200,155,765
    
    
    
    6.0
    
    
    
    1,045,683
    
    
    
    5.2Ohio (1)
    
    
    1,177,131,027
    
    
    
    5.9
    
    
    
    1,395,498
    
    
    
    7.0Illinois (1)
    
    
    941,308,000
    
    
    
    4.7
    
    
    
    1,213,485
    
    
    
    6.1Pennsylvania
    
    
    606,243,688
    
    
    
    3.1
    
    
    
    540,755
    
    
    
    2.7North Carolina
    
    
    527,349,051
    
    
    
    2.6
    
    
    
    445,777
    
    
    
    2.2Georgia
    
    
    493,875,994
    
    
    
    2.5
    
    
    
    442,263
    
    
    
    2.2New Jersey (1)
    
    
    398,831,588
    
    
    
    2.0
    
    
    
    363,286
    
    
    
    1.8Other (2)
    
    
    6,176,615,337
    
    
    
    31.0
    
    
    
    6,292,631
    
    
    
    31.4Total
    
    $
    19,908,696,046
    
    
    
    100.0
    %
    
    
    20,033,142
    
    
    
    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.(3)
    
    Face value of charged-off receivables represents the cumulative amount of purchases net of
buybacks. The amount is not adjusted for payments received, settlements or additional accrued
interest on any accounts in such portfolios after the date we purchased the applicable
portfolio Liquidity and Capital Resources Historically, our primary sources of cash have been from operations and bank borrowings.
However, during the first quarter of 2004, we completed our initial public offering and used $77.7
million of the proceeds to reduce our outstanding debt. We have traditionally used cash for
acquisitions of purchased receivables, repayment of bank borrowings, purchasing property and
equipment and working capital to support growth. Borrowings We maintain a $100.0 million line of credit secured by a first priority lien on all of our
assets that expires in May 2008 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 150 to 250 basis points
over the respective LIBOR rates, depending on our liquidity. Our line of credit includes an
accordion loan feature that allows us to request a $20.0 million increase in the credit facility.
The line of credit has certain covenants and restrictions that we must comply with, which, as of
March 31, 2005, we believe we were in compliance with, including:  
    funds borrowed can be used to purchase portfolios of charged-off receivables and for
general corporate purposes; 23




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##### Table of Contents




    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; and
    tangible net worth must exceed $145 million plus 50% of net income after September 30, 2004. During February 2004, we used $37.7 million of the proceeds from our initial public offering
to reduce the outstanding amount on our line of credit. There was no outstanding balance on our
line of credit at March 31, 2005. At December 31, 2003, we had a note payable outstanding to a related party totaling $39.6
million including principal and accrued interest. During February 2004, we used $40.0 million of
the proceeds from our initial public offering to pay our related party debt in full. Cash Flows The majority of our purchases have been funded with internal cash flow. For the three months
ended March 31, 2005, we invested $32.6 million in purchased receivables, net of buybacks, while
only borrowing $6.5 million against our line of credit, which was subsequently paid and had no
outstanding balance as of March 31, 2005. Our operating activities provided cash of $27.1 million and $0.1 million for the three months
ended March 31, 2005 and 2004, respectively. Cash provided by operating activities for the three
months ended March 31, 2005 was generated primarily from net income earned through cash
collections. Cash provided by operating activities for the three months ended March 31, 2004 was
reduced by a $19.0 million cash payment of withholding taxes and employer taxes related to the
share appreciation rights. Investing activities used cash of $19.2 million for the three months ended March 31, 2005 and
provided cash of $4.5 million for the three months ended March 31, 2004. Cash used for investing
purposes in the first quarter of 2005 was primarily due to acquisitions of purchased receivables,
net of cash collections applied to principal. Cash provided by investing activities in the first
quarter of 2004 was primarily due to cash collections applied to principal which exceeded
acquisitions of purchased receivables by $5.0 million. Financing activities used cash of $39,613 and $2.0 million for the three months ended March
31, 2005 and 2004, respectively. Cash used by financing activities for the first quarter of 2005
was due to repayments on capital lease obligations. Cash used by financing activities in the first
quarter of 2004 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 debt was partially offset by
proceeds from our initial public offering. Cash paid for interest was $17,752 and $1.0 million for the three months ended March 31, 2005
and 2004, respectively. Cash paid for interest in the three months ended March 31, 2005 was related
to the line of credit. Cash paid for interest in the three months ended March 31, 2004 consisted of
$0.6 million for the line of credit and $0.4 million paid for the related party debt. Cash received for income taxes for the three months ended March 31, 2005 was due to a refund
from an overpayment of estimated taxes that was made during the fourth quarter of 2004. We believe that cash generated from operations combined with borrowing available under our
line of credit, 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 additional equity or debt securities or we may seek to increase the availability
under our line of credit. 24




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##### Table of Contents



Future Contractual Cash Obligations The following table summarizes our future contractual cash obligations as of March 31, 2005: Year Ending December 31,2005
    
    
    2006
    
    
    2007
    
    
    2008(1)
    
    
    2009
    
    
    ThereafterCapital lease obligations
    
    $
    117,967
    
    
    $
    111,713
    
    
    $
    37,222
    
    
    $
    2,610
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    3,818,933
    
    
    
    5,694,779
    
    
    
    5,443,409
    
    
    
    4,504,512
    
    
    
    3,675,927
    
    
    
    13,979,931Purchased receivables
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Line of credit (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employment agreements
    
    
    692,500
    
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,629,400
    
    
    $
    6,306,492
    
    
    $
    5,480,631
    
    
    $
    4,507,122
    
    
    $
    3,675,927
    
    
    $
    13,979,931
   (1)
    
    To the extent that a balance is outstanding on our line of credit, it would be due in May
2008. There was no outstanding balance on our line of credit as of March 31, 2005.(2)
    
    During 2004, we entered into five forward flow contracts that commit us to purchase
receivables for a fixed percentage of the face amount of the receivables. Three of the
contracts have terms beyond March 2005 with the last contract expiring November 2005. Two of
the contracts call for monthly purchases of between $184,000 and $822,000, depending upon
circumstances, and the other two have unspecified minimum and maximum contractual amounts. 25




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##### Table of Contents



Off-Balance Sheet Arrangements We currently do not have any off-balance sheet arrangements. Internal Revenue Code Section 6050P and Related Treasury Regulations Internal Revenue Code Section 6050P and the related Treasury Regulations, in certain
circumstances, require creditors to send out Form 1099-C information returns to those debtors whose
debt, in an amount in excess of $600, has been deemed to have been forgiven for tax purposes,
thereby alerting them to the amount of the forgiveness and the fact that such amount may be taxable
income to them. Under these regulations, a debt is deemed to have been forgiven for tax purposes if
(i) there has been no payment on the debt for 36 months and if there were no bona fide collection
activities (as defined in the regulation) for the preceding 12 month period, (ii) the debt was
settled for less than the full amount or (iii) other similar situations outlined in the
regulations. U.S. Treasury Regulation Section 1.6050P-2 became final in 2004 and is effective for
2005 and forward and indicates that the rules apply to companies who acquire indebtedness and,
therefore, we will need to comply with the reporting requirements. Our cost of compliance with
these regulations is uncertain. In some instances, we may engage in additional monitoring
activities of accounts and will send 1099-C information returns, which will increase our
administrative costs. If we are required to send a 1099-C information return, despite the fact that
we are continuing our collections efforts on an account, it may become more difficult to collect
from those accounts because debtors may perceive the 1099-C as notice of debt relief rather than as
tax information. This mistaken perception may lead to increased litigation costs for us as we may need to
overcome affirmative defenses and counterclaims based on this belief by certain debtors. In
addition, we may be required to modify our historical collection practices to conform to the
regulations definition of bona fide collection practices which could increase our costs to
monitor accounts and manage our collection activities. Penalties for failure to comply with these
regulations are $50 per instance, with a maximum penalty of $250,000 per year, except where failure
is due to intentional disregard, for which penalties are $100 per instance, with no maximum
penalty. An additional penalty of $100 per information return, with no annual maximum, applies for
a failure to provide the statement to the recipient. Critical Accounting Policies We utilize the interest method of accounting for our purchased receivables because we believe
that the amounts and timing of cash collections for our purchased receivables can be reasonably
estimated. This belief is predicated on our historical results and our knowledge of the industry.
The interest method is prescribed by the Accounting Standards Executive Committee Practice Bulletin 6
(PB 6), Amortization of Discounts on Certain Acquired Loans as well as the Accounting
Standards Executive Committee Statement of Position 03-3 (SOP 03-3), Accounting for Certain
Loans or Debt Securities Acquired in a Transfer. The provisions of SOP 03-3 were
adopted by us in January 2005 and apply to purchased
receivables acquired after December 31, 2004. The provisions of SOP 03-3 that relate to decreases
in expected cash flows amend PB 6 for consistent treatment and apply prospectively to receivables
acquired before January 1, 2005. Purchased receivables acquired before January 1, 2005 will
continue to be accounted for under PB 6, as amended, for provisions related to decreases in expected
cash flows. Each static pool of receivables is statistically modeled to determine its projected cash flows
based on historical cash collections for pools with similar characteristics. An internal rate of
return (IRR) is calculated for each static pool of receivables based on the projected cash flows
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 at
least quarterly to assess the actual performance compared to the expected performance. To the
extent there are differences in actual performance versus expected performance, the IRR is adjusted
prospectively to reflect the revised estimate of cash flows over the remaining life of the static
pool. Beginning in January 2005, under SOP 03-3, if the revised estimate of cash flows is less than
the original estimate, the IRR will remain unchanged and an immediate impairment will be
recognized. Application of the interest method of accounting 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
yields and revenues. Lower collection amounts or cash collections that occur later than projected
cash collections will have an unfavorable impact and result in an immediate impairment being
recognized. 26




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##### Table of Contents



New Accounting Pronouncements SFAS No. 123(R), Share-Based Payment In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment, a revision of SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123(R) requires all stock-based
compensation awards granted to employees be recognized in the financial statements at fair value,
similar to that prescribed under SFAS No. 123 and is effective for fiscal years beginning after June 15, 2005. We adopted the fair value recognition provisions of SFAS No. 123 effective
January 2004 and therefore, adoption of SFAS No. 123(R) is not expected to have a material impact
on our consolidated financial position, results of operations or 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. The average borrowings on the variable line of credit were $0.6 million and $42.4 million
for the three months ended March 31, 2005 and 2004, respectively. Assuming a 200 basis point
increase in interest rates on our variable rate debt, interest expense would have increased
approximately $3,000 and $196,000 for the three months ended March 31, 2005 and 2004, 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. As of March 31, 2005, we did not have any borrowings against our variable
line of credit. We currently do not have any swap or hedge agreements outstanding. 
 Item 4.Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon
that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures are effective to cause material information required to be
disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 to
be recorded, processed, summarized and reported within the time periods specified in the
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, our
internal controls over financial reporting. 27




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##### Table of Contents



PART II - OTHER INFORMATION 
 Item 1. Legal Proceedings In the ordinary course of our business, we are involved in numerous legal proceedings. We
regularly initiate collection lawsuits, using both our in-house attorneys and our network of third
party law firms, against consumers and are occasionally countersued by them in such actions. Also,
consumers occasionally initiate litigation against us, in which they allege that we have violated a
federal or state law in the process of collecting on their account. It is not unusual for us to be
named in a class action lawsuit relating to these allegations, with these lawsuits routinely
settling for immaterial amounts. Currently, we are not named in any class action lawsuits in which
an underlying class has been certified. However, as of May 10, 2005, we were named in 12 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 law suits as a part of the ordinary course of our business (resulting
occasionally in countersuits against us) and we may, from time to time, become a party to various
other legal proceedings arising in the ordinary course of business. 
 Item 6. Exhibits 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. 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: May 12, 2005
    By:
    /s/ Nathaniel F. Bradley IVNathaniel F. Bradley IVPresident and Chief Executive Officer
(Principal Executive Officer)Date: May 12, 2005
    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 No.
    
    Exhibit31.1 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