Asset Acceptance Capital 10Q 2005 Q2 Quarterly report

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 June 30, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the transition period from to

Commission file number: 000-50552

Asset Acceptance Capital Corp.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		80-0076779 (I.R.S.Employer Identification No.)

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.

Yesþ Noo

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 25, 2005, 37,225,275 shares of the Registrant’s common stock were outstanding.

TABLE OF CONTENTS


	Page
Part I Financial Information		3

Item 1. Consolidated Financial Statements (unaudited)		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures about Market Risk		29
Item 4. Controls and Procedures		29

Part II Other Information		30

Item 1. Legal Proceedings		30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 4. Submission of Matters to a Vote of Security Holders		31
Item 6. Exhibits		31

Signatures		32

Rule 13a-14(a) Certification of Chief Executive Officer
Rule 13a-14(a) Certification of Chief Financial Officer
Section 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 atwww.assetacceptance.com as soon as reasonably practicable after filing with the Commission.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Financial Position
(Unaudited)


	June 30, 2005		December 31, 2004

ASSETS
Cash	$	45,829,103	$	14,204,579
Purchased receivables		233,953,247		216,479,676
Finance contract receivables, net		694,557		688,497
Property and equipment, net		10,933,125		11,165,103
Goodwill		6,339,574		6,339,574
Other assets		2,526,778		3,628,291

Total assets	$	300,276,384	$	252,505,720

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deferred tax liability, net	$	58,565,603	$	41,246,766
Accounts payable and other liabilities		12,414,344		13,824,600
Capital lease obligations		268,236		254,185

Total liabilities		71,248,183		55,325,551

Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding		—		—
Common stock, $0.01 par value, 100,000,000 shares authorized; issued and outstanding shares —37,225,275 at June 30, 2005 and December 31, 2004		372,253		372,253
Additional paid in capital		159,733,691		159,348,233
Retained earnings		68,922,257		37,459,683

Total equity		229,028,201		197,180,169

Total liabilities and equity	$	300,276,384	$	252,505,720

See accompanying notes.

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Operations
(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
Revenues
Purchased receivable revenues	$	68,700,736		$	51,352,846		$	134,566,930		$	100,939,620
Loss on sale of purchased receivables		(25,831	)		—			(25,831	)		—
Finance contract revenues		128,397			153,776			296,704			314,633

Total revenues		68,803,302			51,506,622			134,837,803			101,254,253

Expenses
Salaries and benefits		19,070,443			16,465,210			37,613,483			77,883,356
Collections expense		18,844,591			12,773,687			37,287,490			25,079,210
Occupancy		2,029,875			1,419,857			4,141,849			2,818,152
Administrative		1,732,091			1,361,671			3,602,646			2,641,342
Depreciation and amortization		842,962			736,747			1,686,110			1,463,587
Loss on disposal of equipment		478			16,380			478			42,906

Total operating expenses		42,520,440			32,773,552			84,332,056			109,928,553

Income (loss) from operations		26,282,862			18,733,070			50,505,747			(8,674,300	)
Other income (expense)
Interest income		192,626			2,288			227,534			9,241
Interest expense		(140,854	)		(337,991	)		(281,672	)		(1,339,185	)
Other		(7,337	)		174			(7,362	)		24,958

Income (loss) before income taxes		26,327,297			18,397,541			50,444,247			(9,979,286	)
Income taxes		10,010,167			6,820,181			18,981,673			14,602,354

Net income (loss)	$	16,317,130		$	11,577,360		$	31,462,574		$	(24,581,640	)


Pro forma income tax benefit										$	(3,712,295	)


Pro forma net loss										$	(6,266,991	)


Weighted average number of shares:
Basic		37,225,275			37,225,275			37,225,275			35,537,424
Diluted		37,264,387			37,235,470			37,254,817			35,537,424
Earnings (loss) per common share outstanding:
Basic	$	0.44		$	0.31		$	0.85		$	(0.69	)
Diluted	$	0.44		$	0.31		$	0.84		$	(0.69	)
Pro forma loss per common share outstanding:
Basic										$	(0.18	)
Diluted										$	(0.18	)

See accompanying notes.

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Cash Flows
(Unaudited)


	Six months ended June 30,
	2005			2004
Cash flows from operating activities
Net income (loss)	$	31,462,574		$	(24,581,640	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		1,686,110			1,463,587
Deferred income taxes		17,318,837			14,594,166
Share-based compensation expense		385,457			26,726,917
Impairment of purchased receivables		2,398,000			—
Loss on disposal of equipment		478			42,906
Charge-offs of finance contracts		102,816			70,623
Changes in assets and liabilities:
Decrease (increase) in other assets		627,510			(547,992	)
Increase (decrease) in accounts payable and other liabilities		(1,040,256	)		425,705

Net cash provided by operating activities		52,941,526			18,194,272

Cash flows from investing activities
Investment in purchased receivables, net of buy backs		(48,163,359	)		(45,438,734	)
Principal collected on purchased receivables		28,291,788			31,822,466
Investment in finance contracts		(433,233	)		(413,909	)
Principal collected on finance contracts		324,358			260,601
Purchase of fixed assets		(1,257,124	)		(884,633	)

Net cash used in investing activities		(21,237,570	)		(14,654,209	)

Cash flows from financing activities
Borrowings under line of credit		6,500,000			41,320,000
Repayment of line of credit		(6,500,000	)		(96,670,000	)
Repayment to related party		—			(39,560,110	)
Repayment of capital lease obligations		(79,432	)		(67,112	)
Dividends and distributions paid		—			(1,000,000	)
Additional assets contributed		—			50,406
Proceeds from initial public offering, net of costs		—			96,077,000

Net cash provided by (used in) financing activities		(79,432	)		150,184

Net increase in cash		31,624,524			3,690,247
Cash at beginning of period		14,204,579			5,498,836

Cash at end of period	$	45,829,103		$	9,189,083

Supplemental disclosure of cash flow information
Cash paid for interest	$	94,861		$	1,217,810
Cash paid (received) for income taxes		(237,265	)		93,584
Non-cash investing and financing activities:
Capital lease obligations incurred		93,483			133,292

See accompanying notes.

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 June 30, 2005 and its results of operations for the three and six month periods ended June 30, 2005 and 2004 and cash flows for the six month periods ended June 30, 2005 and 2004, and all adjustments were of a normal recurring nature. The results of operations of the Company for the three and six month periods ended June 30, 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 Statement of Position 03-3 (“SOP 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. 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. 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 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 impairments.

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 pools to determine whether each static pool is performing as expected. This comparison is used to determine future estimated cash flows. Through financial statement reporting periods ending December 31, 2004, to the extent there were differences in actual performance versus expected performance, the IRR was adjusted prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. For financial statement reporting periods beginning 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 June 30, 2005, the Company had 28 pools on the cost recovery method with an aggregate carrying value of $2.3 million or about 1.0% of the total carrying value of all purchased receivables. The Company had 51 pools on the cost recovery method with an aggregate carrying value of $3.5 million, or about 1.8% of the total carrying value of all purchased receivables as of June 30, 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 240 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 and a gain or loss is recognized on the difference between proceeds received and carrying value. The agreements to sell receivables typically include general representation and warranties. Any accounts returned to the Company under these representations and warranties, and during the negotiated time frame, are reported net of any gains on sale or if they exceed the total reported gains for the period as a “loss on sale of purchased receivables”.

Changes in purchased receivables portfolios for the three and six months ended June 30, 2005 and 2004 were as follows:


	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
Beginning balance	$	234,551,905		$	180,236,262		$	216,479,676		$	183,719,667
Investment in purchased receivables, net of buybacks		15,563,462			33,480,616			48,167,137			45,606,492
Cash collections		(84,862,856	)		(67,566,031	)		(165,260,496	)		(132,762,086	)
Purchased receivable revenues		68,700,736			51,352,846			134,566,930			100,939,620

Ending balance	$	233,953,247		$	197,503,693		$	233,953,247		$	197,503,693

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 and six months ended June 30, 2005 and 2004 were as follows:


	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
Beginning balance	$	817,700,115		$	708,172,196		$	792,755,605		$	665,791,369
Revenue recognized on purchased receivables		(68,700,736	)		(51,352,846	)		(134,566,930	)		(100,939,620	)
Additions due to purchases during the period		40,399,277			91,814,309			106,445,632			133,569,857
Reclassifications from nonaccretable difference		56,269,940			25,071,493			81,034,289			75,283,546

Ending balance	$	845,668,596		$	773,705,152		$	845,668,596		$	773,705,152

Cash collections for the three months and six months ended June 30, 2005 and 2004 include collections from pools that are fully amortized of which 100% were reported as revenue. Components of revenue from fully amortized pools are as follows:


	Three months ended June 30,				Six months ended June 30,
Revenue from fully amortized pools:	2005		2004		2005		2004
Pools that amortized before 60 months	$	9,700,422	$	4,194,642	$	17,413,407	$	6,406,166
Pools that are 60 months or older		4,372,391		2,763,132		8,199,491		5,123,062
Pools under full cost recovery		885,291		424,968		1,474,182		1,017,396

Total revenue from fully amortized pools	$	14,958,104	$	7,382,742	$	27,087,080	$	12,546,624

During the three months ended March 31, 2005 and the six months ended June 30, 2005, the Company recorded $700,000 and $1,698,000, respectively, of impairments related to its purchased receivables and set up an allowance for receivable losses. The impairments charge is included in revenue and the allowance reduced the carrying value of the purchased receivables portfolios. No impairments were recognized during 2004. Changes in the allowance for receivable losses for the year follows:


Impairments recorded:	Through June 30, 2005
Beginning balance	$	—
1Q — 2005		700,000
2Q — 2005		1,698,000

Total	$	2,398,000

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 $426,000 and $424,000 at June 30, 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 $113,000 and $106,000 at June 30, 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 cash collections paid to the third parties as a component of collection expense. The percent of gross cash collections from such third party relationships were 21.2% and 21.5% for the three months ended June 30, 2005 and 2004, and 21.3% and 20.2% for the six months ended June 30, 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 $795,960 and $674,709 for the three months ended June 30, 2005 and 2004, respectively, and $1,582,107 and $1,345,344 for the six months ended June 30, 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 June 30, 2005 included 29,542 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.

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 six months ended June 30, 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 six 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 the Company 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 June 30, 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 $145.0 million plus 50% of net income after September 30, 2004 which required a balance of $167.0 million as of June 30, 2005.

Management believes it is in compliance with all terms of its line of credit agreement as of June 30, 2005.

4. Property and Equipment

Property and equipment, having estimated useful lives ranging from three to ten years consisted of the following:


	June 30, 2005			December 31, 2004
Computers and software	$	8,568,688		$	7,562,797
Furniture and fixtures		8,486,552			8,259,527
Leasehold improvements		1,831,484			1,810,998
Equipment under capital lease		533,026			483,421
Automobiles		136,525			136,525

Total property and equipment, cost		19,556,275			18,253,268
Less accumulated depreciation		(8,623,150	)		(7,088,165	)

Net property and equipment	$	10,933,125		$	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 for 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 June 30, 2005, the Company had issued options to purchase 234,504 shares of its common stock under the plan. These options have been granted to executives and directors of the Company. Options granted under the plan generally vest between one and four years from the grant date. However, when directors accept options in lieu of cash compensation, the options vest immediately. The related expense for the six months ended June 30, 2005 and 2004 of $385,457 and $74,520, respectively is included in administrative expenses. The following summarizes all stock option related transactions from January 1, 2004 through June 30, 2005.


	Options		Weighted-Average
	Outstanding		Exercise Price
January 1, 2004		—		—
Granted		117,220	$	17.01

December 31, 2004		117,220	$	17.01
Granted		117,284	$	20.86
Cancelled		—		—

June 30, 2005		234,504	$	18.93

The following options information is as of June 30, 2005:


	Fair Value				Weighted-Average						Exercisable
	of Option		Number		Remaining		Weighted-Average		Number		Weighted-Average
Exercise Price	Granted		Outstanding		Contractual Life		Exercise Price		Exercisable		Exercise Price
$15.00	$	4.84		45,000		8.60	$	15.00		22,500	$	15.00
$18.50	$	5.90		30,000		8.67	$	18.50		15,000	$	18.50
$19.48	$	6.57		3,850		8.88	$	19.48		3,850	$	19.48
$17.85	$	5.84		4,200		9.13	$	17.85		4,200	$	17.85
$17.97	$	8.48		30,000		9.50	$	17.97		—		—
$17.99	$	8.47		4,170		9.50	$	17.99		4,170	$	17.99
$19.87	$	8.97		3,775		9.81	$	19.87		3,775	$	19.87
$18.89	$	8.56		30,000		9.81	$	18.89		—		—
$18.89	$	8.56		25,000		9.81	$	18.89		—		—
$19.48	$	11.68		9,685		9.88	$	19.48		4,843	$	19.48
$23.42	$	10.56		45,624		9.88	$	23.42		—		—
$23.42	$	10.56		3,200		9.88	$	23.42		3,200	$	23.42

Total / Average				234,504		9.37	$	18.93		61,538	$	17.62

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:	2005			2004
Weighted-average fair value of options granted	$	9.66		$	6.26
Expected Volatility		46.00	%		30.00	%
Risk-free interest rate		3.82%—3.97	%		2.98%—3.93	%
Expected dividend yield		0.00	%		0.00	%
Expected life	5 Years			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 June 30, 2005 and does not believe exposure to be material.

7. Income Taxes

Income taxes for the six months ended June 30, 2004 included a deferred tax charge of $19.3 million resulting from RBR Holding Corp. relinquishing 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 six months ended June 30, 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 June 30, 2004 reflected income tax expense on 100% of pretax income as RBR Holding Corp. became a wholly-owned subsidiary of Asset Acceptance Capital Corp. as part of the reorganization that occurred on February 4, 2004 related to the IPO.

Components of income tax expense are set forth below:


	Three months ended June 30,					Six months ended June 30,
	2005		2004			2005		2004
Income taxes consist of:
Federal actual	$	480,000	$	—		$	850,000	$	—
State actual		481,250		(3,371	)		812,519		8,187
Federal deferred — net		8,733,146		6,419,865			16,803,994		13,799,301
State deferred — net		315,771		403,687			515,160		794,866

Total	$	10,010,167	$	6,820,181		$	18,981,673	$	14,602,354

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 June 30,				Six months ended June 30,
	2005		2004		2005		2004
Federal taxes at statutory rate	$	9,213,146	$	6,419,865	$	17,653,994	$	(3,491,660	)
S corporation benefit — federal		—		—		—		(825,193	)
S corporation benefit — state		—		—		—		(51,869	)
Deferred tax charge — federal		—		—		—		18,116,154
Deferred tax charge — state		—		—		—		1,190,490
State income taxes, net of federal tax benefit		797,021		400,316		1,327,679		(335,568	)

Effective income taxes	$	10,010,167	$	6,820,181	$	18,981,673	$	14,602,354

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 six months of 2005, cash collections increased 24.5% to $165.3 million. Revenues for the first six months of 2005 were $134.8 million, a 33.2% increase over the prior year. Net income was $31.5 million for the first six months of 2005, compared to a net loss of $24.6 million for the same period in 2004. Net loss for the first six months 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 six months of 2005, we invested $49.4 million in charged-off consumer receivable portfolios, with an aggregate face value of $2.2 billion, or 2.26% 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 are stabilizing during the first half 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 increased from 20.2% for the six months ended June 30, 2004 to 21.3% for the six months ended June 30, 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.

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. 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 onForm 10-K for the year ended December 31, 2004 in the section titled “Forward Looking Statements and 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;

	•		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 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 Six Months Ended June 30, 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 paid approximately $500,000 of the expenses related to the secondary offering and currently maintains an accrual of $50,000 for any additional expenses that may be 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.

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 Collections
	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30,						June 30,						June 30,						June 30,
	2005			2004			2005			2004			2005			2004			2005			2004
Revenues
Purchased receivable revenues		99.8	%		99.7	%		99.8	%		99.7	%		81.0	%		76.0	%		81.4	%		76.0	%
Loss on sale of purchased receivables		(0.0	)		0.0			(0.0	)		0.0			(0.0	)		0.0			(0.0	)		0.0
Finance contract revenues		0.2			0.3			0.2			0.3			0.1			0.2			0.2			0.3

Total revenues		100.0			100.0			100.0			100.0			81.1			76.2			81.6			76.3

Expenses
Salaries and benefits		27.7			32.0			27.9			76.9	(1)		22.5			24.4			22.7			58.7	(1)
Collections expense		27.4			24.8			27.6			24.8			22.2			18.9			22.6			18.9
Occupancy		3.0			2.8			3.1			2.8			2.4			2.1			2.5			2.1
Administrative		2.5			2.6			2.7			2.6			2.0			2.0			2.2			2.0
Depreciation and amortization		1.2			1.4			1.2			1.5			1.0			1.1			1.0			1.1
Loss on disposal of equipment		0.0			0.0			0.0			0.0			0.0			0.0			0.0			0.0

Total operating expenses		61.8			63.6			62.5			108.6	(1)		50.1			48.5			51.0			82.8	(1)

Income (loss) from operations		38.2			36.4			37.5			(8.6	)		31.0			27.7			30.6			(6.5	)
Other income (expense)
Interest income		0.3			0.0			0.1			0.0			0.2			0.0			0.1			0.0
Interest expense		(0.2	)		(0.7	)		(0.2	)		(1.3	)		(0.2	)		(0.5	)		(0.2	)		(1.0	)
Other		(0.0	)		0.0			(0.0	)		0.0			0.0			0.0			0.0			0.0

Income (loss) before income taxes		38.3			35.7			37.4			(9.9	)		31.0			27.2			30.5			(7.5	)
Income taxes		14.6			13.2			14.1			14.4			11.8			10.1			11.5			11.0

Net Income (loss)		23.7	%		22.5	%		23.3	%		(24.3	)%		19.2	%		17.1	%		19.0	%		(18.5	)%

Pro forma income taxes											(3.7	)%											(2.8	)%
Pro forma net loss											(6.2	)%											(4.7	)%


(1)		Excluding the $45.7 million compensation and related payroll tax charge, salaries and benefits were 31.8% and 24.3% of revenues and collections, respectively and total operating expenses were 63.5% and 48.4% of revenues and collections, respectively, for the six months ended June 30, 2004. See discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004 — Operating Expenses”.

Three Months Ended June 30, 2005 Compared To Three Months Ended June 30, 2004

Revenue

Total revenues were $68.8 million for the three months ended June 30, 2005, an increase of $17.3 million, or 33.6%, over total revenues of $51.5 million for the three months ended June 30, 2004. Purchased receivable revenues were $68.7 million for the three months ended June 30, 2005, an increase of $17.3 million, or 33.8%, over the $51.4 million for the same period in 2004. 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 25.6% to $84.9 million for the three months ended June 30, 2005 from $67.6 million for the same period in 2004. Cash collections for the three months ended June 30, 2005 and 2004 include collections from fully amortized portfolios of $15.0 million and $7.4 million, respectively, of which 100% were reported as revenue.

Revenue reflects impairments recognized during the three months ended June 30, 2005 of $1.7 million. The impairments were recognized under Practice Bulletin 6 (“PB 6”), as amended by Statement of Position 03-3 (“SOP 03-3”), which requires that an impairment be taken for decreases in expected cash flows. During the three months ended June 30, 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 June 30, 2005, we acquired charged-off consumer receivables portfolios with an aggregate face value amount of $1.1 billion at a cost of $16.4 million, or 1.51% of face value, net of buybacks. Included in these purchase totals were nine portfolios with an aggregate face value of $80.9 million at a cost of $3.0 million, or 3.72% of face value, which were acquired through three forward flow contracts. During the three months ended June 30, 2004, we acquired charged-off consumer receivables portfolios with an aggregate face value of $2.0 billion at a cost of $32.7 million, or 1.64% of face value (adjusted for buybacks through June 30, 2005). Included in these purchase totals were eight portfolios with an aggregate face value of $54.3 million at a cost of $1.6 million, or 2.98% of face value, which were acquired through three forward flow contracts. 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.

Operating Expenses

Total operating expenses were $42.5 million for the three months ended June 30, 2005, an increase of $9.7 million, or 29.7%, compared to total operating expenses of $32.8 million for the three months ended June 30, 2004. Total operating expenses were 61.8% of total revenues and 50.1% of cash collections for the three months ended June 30, 2005, compared with 63.6% and 48.5%, respectively, for the same period in 2004.

Salaries and Benefits.Salary and benefit expenses were $19.1 million for the three months ended June 30, 2005, an increase of $2.6 million, or 15.8%, compared to salary and benefit expenses of $16.5 million for the three months ended June 30, 2004. Salary and benefit expenses were 27.7% of total revenue and 22.5% of cash collections for the three months ended June 30, 2005, compared with 32.0% and 24.4%, respectively, for the same period in 2004.

The dollar increase over the prior year was primarily due to an increase in total employees which grew to 1,862 at June 30, 2005 from 1,608 at June 30, 2004, in response to the growth in the number of our portfolios of charged-off consumer receivables. The decrease in salary and benefits expenses, as a percent of cash collections, was primarily due to improved benefit costs and overall increased 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 $41,987 for the three months ended June 30, 2005, compared to $42,013 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 1,054 for the three months ended June 30, 2005 from 917 during the same period in 2004.

Collections Expense.Collections expense increased to $18.8 million for the three months ended June 30, 2005, reflecting an increase of $6.0 million, or 47.5%, over collections expense of $12.8 million for the three months ended June 30, 2004. The increase was primarily attributable to the increased number of accounts on which we were collecting. Collections expense increased to 22.2% of cash collections for the three months ended June 30, 2005 from 18.9% of cash collections for the three months ended June 30, 2004. This increase was primarily due to increases in amounts spent for collection letters as well as increased legal expenses. The increase in the collection letters expense was primarily due to collection strategies that focused on stimulating payments through letter campaigns and an increase in the number of accounts owned and actively pursued. The increase in legal expense was due to an increase in the number of accounts for which legal action has been initiated.

Occupancy.Occupancy expense was $2.0 million for the three months ended June 30, 2005, an increase of $0.6 million, or 43.0%, over occupancy expense of $1.4 million for the three months ended June 30, 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 $1.7 million for the three months ended June 30, 2005, from $1.4 million for the three months ended June 30, 2004, reflecting a $0.3 million, or 27.2%, increase. The increase in administrative expenses was principally due to costs related to the secondary offering and increased director fees and expenses.

Depreciation.Depreciation expense was $0.8 million for the three months ended June 30, 2005, an increase of $0.1 million or 14.4% over depreciation expense of $0.7 million for the three months ended June 30, 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 $0.2 million for the three months ended June 30, 2005, reflecting an increase of $0.2 million over the prior year. 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 June 30, 2005, reflecting a decrease of $0.2 million, or 58.3%, compared to interest expense of $0.3 million for the three months ended June 30, 2004. The decrease in interest expense was due to lower average borrowings on our line of credit, which decreased from $17.1 million as of June 30, 2004 to zero in 2005. The reduction in our average borrowings was due to cash generated from operations. Interest expense includes the amortization of capitalized bank fees of $54,982 and $71,256 for the three months ended June 30, 2005 and 2004, respectively.

Income Taxes.Income tax expense of $10.0 million reflects normal tax rates of 35.0% for federal taxes and 2.3% for state taxes (net of federal tax benefit) for the three months ended June 30, 2005. The state tax rate was increased 0.1% during the second quarter of 2005 and therefore the three-month period ended June 30, 2005 reflects the cumulative adjustment in this rate and the impact of this change on the deferred tax liability. The increase of 0.1% was due to changing apportionment percentages among the various states. Tax rates of 35% federal and 2.2% for state (net of federal tax benefit) were applicable for the three months ended June 30, 2004. Income tax expense increased $3.2 million, or 46.8% over income tax expense of $6.8 million for the three months ended June 30, 2004. The increase in tax expense was due to an increase in pre tax financial statement income which was $26.3 million for the three months ended June 30, 2005, compared to $18.4 million for the same period in 2004.

Six Months Ended June 30, 2005 Compared To Six Months Ended June 30, 2004

Revenue

Total revenues were $134.8 million for the six months ended June 30, 2005, an increase of $33.5 million, or 33.2%, over total revenues of $101.3 million for the six months ended June 30, 2004. Purchased receivable revenues were $134.6 million for the six months ended June 30, 2005, an increase of $33.7 million, or 33.3%, over the six months ended June 30, 2004 amount of $100.9 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 24.5% to $165.3 million for the six months ended June 30, 2005 from $132.8 million for the same period in 2004. Cash collections for the six months ended June 30, 2005 and 2004 include collections from fully amortized portfolios of $27.1 million and $12.5 million, respectively, of which 100% were reported as revenue.

Revenue reflects impairments recognized during the six months ended June 30, 2005 of $2.4 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 six months ended June 30, 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 six months ended June 30, 2005, we acquired charged-off consumer receivables portfolios with an aggregate face value amount of $2.2 billion at a cost of $49.4 million, or 2.26% of face value, net of buybacks. Included in these purchase totals were 19 portfolios with an aggregate face value of $169.1 million at a cost of $6.2 million, or 3.64% of face value, which were acquired through four forward flow contracts. During the six months ended June 30, 2004, we acquired charged-off consumer receivables portfolios with an aggregate face value of $2.5 billion at a cost of $44.7 million, or 1.80% of face value (adjusted for buybacks through June 30, 2005). Included in these purchase totals were 10 portfolios with an aggregate face value of $134.1 million at a cost of $4.0 million, or 2.98% of face value, which were acquired through three forward flow contracts. 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 2.26% for the six months ended June 30, 2005 from 1.80% for the same period in 2004, is primarily due to an increase in the amount of primary (newer) accounts purchased, because newer accounts generally demand a slightly higher purchase price than older accounts. Primary accounts made up 19.2% of our purchases in the six months ended June 30, 2005 compared to only 12.6% for the same period in 2004.

Operating Expenses

Total operating expenses were $84.3 million for the six months ended June 30, 2005, a decrease of $25.6 million, or 23.3%, compared to total operating expenses of $109.9 million for the six months ended June 30, 2004. Total operating expenses were 62.5% of total revenues and 51.0% of cash collections for the six months ended June 30, 2005, compared with 108.6% and 82.8%, respectively, for the same period in 2004. Operating expenses for the six months ended June 30, 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 $84.3 million for the six months ended June 30, 2005 increased $20.0 million, or 31.2% from the $64.3 million in operating expenses for the same period in 2004. Operating expenses were 62.5% of total revenues and 51.0% of cash collections for the three months ended June 30, 2005, compared with 63.5% and 48.4%, respectively, for the same period in 2004. The increase as a percent of cash collections was primarily due to an increase in collection expenses partially offset by a reduction in salaries and benefits expenses.

Salaries and Benefits.Salary and benefit expenses were $37.6 million for the six months ended June 30, 2005, a decrease of $40.3 million, or 51.7%, compared to salary and benefit expenses of $77.9 million for the six months ended June 30, 2004. Salary and benefit expenses were 27.9% of total revenue and 22.8% of cash collections for the six months ended June 30, 2005, compared with 76.9% and 58.7%, 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 $37.6 million for the six months ended June 30, 2005 increased $5.4 million, or 16.8% from the $32.2 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 1,862 at June 30, 2005 from 1,608 at June 30, 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 27.9% of total revenues and 22.8% of cash collections for the six months ended June 30, 2005 from 31.8% of total revenue and 24.3% 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 $86,455 for the six months ended June 30, 2005, compared to $89,327 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 1,027 for the six months ended June 30, 2005 from 890 during the same period in 2004.

Collections Expense.Collections expense increased to $37.3 million for the six months ended June 30, 2005, reflecting an increase of $12.2 million, or 48.7%, over collections expense of $25.1 million for the six months ended June 30, 2004. The increase was primarily attributable to the increased number of accounts on which we were collecting. Collections expense increased to 22.6% of cash collections for the six months ended June 30, 2005 from 18.9% of cash collections for the six months ended June 30, 2004. This increase was primarily due to increases in amounts spent for collection letters as well as increased legal expenses. The increase in the collection letters expense was primarily due to collection strategies that focused on stimulating payments through letter campaigns and an increase in the number of accounts owned and actively pursued. The increase in legal expense was due to an increase in the number of accounts for which legal action has been initiated.

Occupancy.Occupancy expense was $4.1 million for the six months ended June 30, 2005, an increase of $1.3 million, or 47.0%, over occupancy expense of $2.8 million for the six months ended June 30, 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 $3.6 million for the six months ended June 30, 2005, from $2.6 million for the six months ended June 30, 2004, reflecting a $1.0 million, or 36.4%, increase. The increase in administrative expenses was principally due to costs related to the secondary offering and increased director fees and expenses.

Depreciation.Depreciation expense was $1.7 million for the six months ended June 30, 2005, an increase of $0.2 million or 15.2% over depreciation expense of $1.5 million for the six months ended June 30, 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 $0.2 million for the six months ended June 30, 2005, reflecting an increase of $0.2 million over the prior year. The increase was due primarily to interest received related to our increased cash position over the prior year.

Interest Expense.Interest expense was $0.3 million for the six months ended June 30, 2005, reflecting a decrease of $1.0 million, or 79.0%, compared to interest expense of $1.3 million for the six months ended June 30, 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 six months ended June 30, 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 $0.3 million for the six months ended June 30, 2005 from $29.8 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 $104,318 and $141,163 for the six months ended June 30, 2005 and 2004, respectively.

Income Taxes.Income tax expense of $19.0 million reflects normal tax rates of 35.0% for federal taxes and 2.3% for state taxes (net of federal tax benefit) for the six months ended June 30, 2005. The state tax rate was increased 0.1% during the second quarter of 2005 and therefore the six-month period ended June 30, 2005 reflects the cumulative adjustment in this rate and the impact of this change on the deferred tax liability. The increase of 0.1% was due to changing apportionment percentages among the various states. Tax rates of 35% federal and 2.2% for state (net of federal tax benefit) were applicable for the six months ended June 30, 2004. Income taxes for the six months ended June 30, 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 June 30, 2004 reflected income tax expense on 100% of pretax income as RBR Holding Corp. became a wholly-owned subsidiary of Asset Acceptance Capital Corp. as part of the reorganization.

Supplemental Performance Data

Portfolio Performance

The following table summarizes our historical portfolio purchase price and cash collections on an annual vintage basis since 1990 through June 30, 2005.


											Total Estimated
					Cash Collections		Estimated		Total		Collections as a
	Number of		Purchase		Including Cash		Remaining		Estimated		Percentage of
Purchase Period	Portfolios		Price (1)		Sales (2)		Collections		Collections		Purchase Price (2)
	(dollars in thousands)
1990		9	$	638	$	3,115	$	—	$	3,115		488	%
1991		12		280		1,461		—		1,461		522
1992		29		309		2,910		—		2,910		942
1993		30		790		7,847		—		7,847		993
1994		36		1,427		6,853		—		6,853		480
1995		53		1,519		7,779		43		7,822		515
1996		46		3,844		16,861		513		17,374		452
1997		45		4,345		27,608		1,618		29,226		673
1998		61		16,412		75,818		8,250		84,068		512
1999		51		12,925		53,650		10,101		63,751		493
2000		49		20,596		100,521		30,357		130,878		635
2001		62		43,133		187,600		87,147		274,747		637
2002		94		72,294		202,235		176,696		378,931		524
2003		76		87,323		181,748		314,296		496,044		568
2004		106		88,166		58,987		305,380		364,367		413
2005 (3)		50		49,380		5,842		145,220		151,062		306


(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 six months of activity through June 30, 2005.

The following table summarizes the remaining unamortized balances of our purchased receivables portfolios by year of purchase as of June 30, 2005.


					Unamortized			Unamortized
	Unamortized				Balance as a			Balance as a
	Balance as of		Purchase		Percentage of			Percentage of
Purchase Period	June 30, 2005		Price (1)		Purchase Price (2)			Total
	(dollars in thousands)
2000	$	400	$	20,596		1.94	%		0.17	%
2001		8,432		43,133		19.55			3.60
2002		34,636		72,294		47.91			14.81
2003		58,436		87,323		66.92			24.98
2004		80,508		88,166		91.31			34.41
2005 (3)		51,541		49,380		104.38			22.03

Totals	$	233,953	$	360,892		64.83	%		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 six months of activity through June 30, 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


	Year ended December 31,				Three months ended June 30,				Six months ended June 30,
Number of collectors:	2003		2004		2004		2005		2004		2005
One year or more (1)		322		472		468		513		449		510
Less than one year (2)		478		436		449		541		441		517

Total		800		908		917		1,054		890		1,027


(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


	Year ended December 31,				Three months ended June 30,				Six months ended June 30,
Collection Averages:	2003		2004		2004		2005		2004		2005
One year or more (1)	$	171,506	$	195,094	$	49,290	$	51,856	$	101,907	$	107,547
Less than one year (2)		135,792		140,157		34,415		32,634		76,576		65,653
Overall Average		150,178		168,708		42,013		41,987		89,327		86,455


(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.

Cash Collections

The following tables provide further detailed vintage collection analysis on an annual and a cumulative basis.

Historical Collections (1)


																									Six Months
																									Ended
Purchase	Purchase		Year Ended December 31,																						June 30,
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	$	143
1994	$	1,427		345		1,763		1,430		1,005		647		457		357		258		176		188		126		67
1995		1,519		—		388		1,566		1,659		1,118		786		708		472		343		278		227		118
1996		3,844		—		—		827		3,764		3,085		2,601		2,098		1,440		1,041		816		687		348
1997		4,345		—		—		—		1,682		4,919		5,573		5,017		3,563		2,681		1,784		1,526		754
1998		16,412		—		—		—		—		4,835		15,220		15,045		12,962		11,021		7,987		5,582		2,587
1999		12,925		—		—		—		—		—		3,761		11,331		10,862		9,750		8,278		6,675		2,745
2000		20,596		—		—		—		—		—		—		8,895		23,444		22,559		20,318		17,196		7,632
2001		43,133		—		—		—		—		—		—		—		17,630		50,327		50,967		45,713		21,890
2002		72,294		—		—		—		—		—		—		—		—		22,340		70,813		72,024		36,562
2003		87,323		—		—		—		—		—		—		—		—		—		36,067		94,564		50,951
2004		88,166		—		—		—		—		—		—		—		—		—		—		23,365		35,622
2005		49,380		—		—		—		—		—		—		—		—		—		—		—		5,842

Total			$	3,412	$	4,691	$	5,611	$	9,395	$	15,438	$	29,047	$	44,006	$	71,068	$	120,540	$	197,819	$	267,928	$	165,261

Cumulative Collections (1)


																									Total
																									Through
Purchase	Purchase		Total Through December 31,																						June 30,
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	$	6,819
1995		1,519		—		388		1,954		3,613		4,731		5,517		6,225		6,697		7,040		7,318		7,545		7,663
1996		3,844		—		—		827		4,591		7,676		10,277		12,375		13,815		14,856		15,672		16,359		16,707
1997		4,345		—		—		—		1,682		6,601		12,174		17,191		20,754		23,435		25,219		26,745		27,499
1998		16,412		—		—		—		—		4,835		20,055		35,100		48,062		59,083		67,070		72,652		75,239
1999		12,925		—		—		—		—		—		3,761		15,092		25,954		35,704		43,982		50,657		53,402
2000		20,596		—		—		—		—		—		—		8,895		32,339		54,898		75,216		92,412		100,044
2001		43,133		—		—		—		—		—		—		—		17,630		67,957		118,924		164,637		186,527
2002		72,294		—		—		—		—		—		—		—		—		22,340		93,153		165,177		201,739
2003		87,323		—		—		—		—		—		—		—		—		—		36,067		130,631		181,582
2004		88,166		—		—		—		—		—		—		—		—		—		—		23,365		58,987
2005		49,380		—		—		—		—		—		—		—		—		—		—		—		5,842

Cumulative Collections as Percentage of Purchase Price (1)


																																				Total
																																				Through
Purchase	Purchase		Total Through December 31,																																	June 30,
Period	Price(2)		1994			1995			1996			1997			1998			1999			2000			2001			2002			2003			2004			2005
1994	$	1,427		24	%		148	%		248	%		318	%		364	%		396	%		421	%		439	%		451	%		464	%		473	%		478	%
1995		1,519		—			26			129			238			311			363			410			441			463			482			497			504
1996		3,844		—			—			22			119			200			267			322			359			386			408			426			435
1997		4,345		—			—			—			39			152			280			396			478			539			580			616			633
1998		16,412		—			—			—			—			29			122			214			293			360			409			443			458
1999		12,925		—			—			—			—			—			29			117			201			276			340			392			413
2000		20,596		—			—			—			—			—			—			43			157			266			365			449			486
2001		43,133		—			—			—			—			—			—			—			41			158			276			382			432
2002		72,294		—			—			—			—			—			—			—			—			31			129			228			279
2003		87,323		—			—			—			—			—			—			—			—			—			41			149			208
2004		88,166		—			—			—			—			—			—			—			—			—			—			26			67
2005		49,380		—			—			—			—			—			—			—			—			—			—			—			12


(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.

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 June 30, 2005.

Total Cash Collections


Quarter	2001		2002		2003		2004		2005
First	$	15,592,577	$	27,297,721	$	44,017,730	$	65,196,055	$	80,397,640
Second		17,661,537		30,475,078		51,190,533		67,566,031		84,862,856
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		—

Below is a table that illustrates the percentages by source of our total collections:


	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
Traditional collections		52.15	%		57.00	%		53.74	%		59.90	%
Legal collections		36.49			31.65			34.43			29.03
Other collections		11.36			11.35			11.83			11.07

Total collections		100.00	%		100.00	%		100.00	%		100.00	%

The following chart categorizes our purchased receivables portfolios acquired during January 1, 1990 through June 30, 2005, into major asset types, as of June 30, 2005.


	Face Value of
	Charged-off					No. of
Asset Type	Receivables (2)		%			Accounts		%
Visa(R)/MasterCard(R)/Discover(R)	$	9,079,716,329		43.4	%		4,004,058		19.7	%
Private Label Credit Cards		3,042,396,474		14.5			4,569,402		22.5
Telecommunications/Utility/Gas		2,164,398,458		10.4			5,215,062		25.6
Auto Deficiency		1,389,853,769		6.6			249,019		1.2
Health Club		1,330,834,959		6.4			1,374,922		6.8
Installment loans		651,382,190		3.1			209,599		1.0
Other (1)		3,268,071,358		15.6			4,719,513		23.2

Total	$	20,926,653,537		100.0	%		20,341,575		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.

The following chart categorizes our purchased receivables portfolios acquired during January 1, 1990 through June 30, 2005 into major account types as of June 30, 2005.


	Face Value of
	Charged-off					No. of
Account Type	Receivables (2)		%			Accounts		%
Fresh	$	1,029,429,534		4.9	%		418,539		2.1	%
Primary		3,779,461,124		18.1			2,527,636		12.4
Secondary		3,639,874,357		17.4			3,606,323		17.7
Tertiary (1)		11,205,811,974		53.5			13,122,753		64.5
Other		1,272,076,548		6.1			666,324		3.3

Total	$	20,926,653,537		100.0	%		20,341,575		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 June 30, 2005 based on geographic location of debtor, as of June 30, 2005.


	Face Value of
	Charged-off					No. of
Geographic Location	Receivables (3)		%			Accounts		%
Texas (1)	$	2,890,225,168		13.8	%		2,544,607		12.5	%
California		2,371,125,273		11.3			2,642,683		13.0
Florida (1)		1,971,018,435		9.4			1,397,207		6.9
Michigan (1)		1,527,772,095		7.3			1,806,806		8.9
New York		1,233,051,576		5.9			1,062,309		5.2
Ohio (1)		1,204,751,876		5.8			1,402,165		6.9
Illinois (1)		961,831,977		4.6			1,213,977		6.0
Pennsylvania		636,672,710		3.0			556,792		2.7
North Carolina		587,734,502		2.8			464,215		2.3
Georgia		532,696,167		2.6			454,418		2.2
Other (2)		7,009,773,758		33.5			6,796,396		33.4

Total	$	20,926,653,537		100.0	%		20,341,575		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 June 30, 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;

	•		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 $145.0 million plus 50% of net income after September 30, 2004 which required a balance of $167.0 million as of June 30, 2005.

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 June 30, 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 six months ended June 30, 2005, we invested $48.2 million in purchased receivables, net of buybacks, while only borrowing $6.5 million against our line of credit, which was subsequently repaid and had no outstanding balance as of June 30, 2005. Our cash balance has increased from $14.2 million at December 31, 2004 to $45.8 million as of June 30, 2005.

Our operating activities provided cash of $52.9 million and $18.2 million for the six months ended June 30, 2005 and 2004, respectively. Cash provided by operating activities for the six months ended June 30, 2005 was generated primarily from net income earned through cash collections net of impairments. Cash provided by operating activities for the six months ended June 30, 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 $21.2 million and $14.7 million for the six months ended June 30, 2005 and 2004, respectively. Cash used for investing purposes in the six months ended June 30, 2005 and 2004 was primarily due to acquisitions of purchased receivables, net of cash collections applied to principal.

Financing activities used cash of $79,432 for the six months ended June 30, 2005 and provided cash of $150,184 for the same period in 2004. Cash used by financing activities for the first six months of 2005 was due to repayments on capital lease obligations. Cash provided by financing activities in the first six months of 2004 was primarily due to proceeds from our initial public offering and borrowings on our line of credit offset by repayments on our line of credit and the repayment of our related party notes payable.

Cash paid for interest was $94,861 and $1.2 million for the six months ended June 30, 2005 and 2004, respectively. Cash paid for interest in the six months ended June 30, 2005 was related to the line of credit. Cash paid for interest in the six months ended June 30, 2004 consisted of $0.8 million for the line of credit and $0.4 million paid for the related party debt.

Cash received for income taxes for the six months ended June 30, 2005 was due to a refund from an overpayment of estimated taxes that was made during the fourth quarter of 2004, partially offset by tax payments made in the first half of 2005.

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.

Future Contractual Cash Obligations

The following table summarizes our future contractual cash obligations as of June 30, 2005:


	Year Ending December 31,
	2005		2006		2007		2008(1)		2009		Thereafter
Capital lease obligations	$	84,764	$	129,173	$	54,682	$	10,914	$	—	$	—
Operating lease obligations		2,680,065		6,110,747		5,871,854		4,945,812		4,130,472		15,300,075
Purchased receivables (2)		—		—		—		—		—		—
Line of credit (1)		—		—		—		—		—		—
Employment agreements		408,750		500,000		—		—		—		—

Total	$	3,173,579	$	6,739,920	$	5,926,536	$	4,956,726	$	4,130,472	$	15,300,075


(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 June 30, 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 June 2005 with the last contract expiring November 2006. Those three contracts call for monthly purchases of approximately $850,000, depending upon circumstances.

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.

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 the first interim period 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 $0.3 million and $29.8 million for the six months ended June 30, 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 $281,000 for the six months ended June 30, 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 June 30, 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.

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 named in one class action lawsuit in which an underlying class has been certified. Additionally, as of July 29, 2005, we were named in nine class action lawsuits in which the underlying classes have not been certified. We do not believe that these ordinary course matters, individually or in the aggregate, are material to our business or financial condition. However, there can be no assurance that a 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

Our non-management directors have the right to receive a quarterly fee in the amount of $5,000. In lieu of the cash fee, the non-management directors have the right to receive immediately vested options to purchase shares of our common stock in an amount equal to three times the quarterly fee. In addition, each non-management director is entitled to receive 7,500 options as of the date of the annual stockholders meeting. This set of options vest 50% on the first anniversary of the granting of the option and 50% on the second anniversary of the granting of the options.

These options were issued in private placements in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. Each option entitles the holder to purchase one share of our common stock at the exercise price shown below. Pursuant to this program, the following options have been issued to the non-management directors:


Director	Option Grant Date	Number of Options		Exercise Price
Jennifer L. Adams	April 20, 2005		755	$	19.87
Terrence L. Daniels	April 20, 2005		755	$	19.87
Donald Haider	April 20, 2005		755	$	19.87
Anthony Ignaczak	April 20, 2005		755	$	19.87
H. Eugene Lockhart	April 20, 2005		755	$	19.87
Jennifer L. Adams	May 17, 2005		7,500	$	23.42
Terrence L. Daniels	May 17, 2005		7,500	$	23.42
Donald Haider	May 17, 2005		7,500	$	23.42
Anthony Ignaczak	May 17, 2005		7,500	$	23.42
William Jacobs	May 17, 2005		4,062	$	23.42
H. Eugene Lockhart	May 17, 2005		7,500	$	23.42
William Pickard	May 17, 2005		4,062	$	23.42
Jennifer L. Adams	May 18, 2005		640	$	23.42
Terrence L. Daniels	May 18, 2005		640	$	23.42
Donald Haider	May 18, 2005		640	$	23.42
Anthony Ignaczak	May 18, 2005		640	$	23.42
H. Eugene Lockhart	May 18, 2005		640	$	23.42

Item 4. Submission of Matters to a Vote of Security Holders

The stockholders, at an annual stockholder meeting held on May 17, 2005 elected Terrence D. Daniels, William F. Pickard and Rufus H. Reitzel, Jr. directors for a three-year term expiring at the annual stockholders meeting to be held in 2008 or until their successors are appointed and qualified. The voting on the directors is described below:


Name of Director	Votes For		Votes Withheld

Terrence D. Daniels		35,235,048		253,246

William F. Pickard		35,484,821		3,473

Rufus H. Reitzel, Jr.		35,244,094		244,200

The following is a list of the other directors whose term of office has extended beyond the annual stockholder meeting:

Jennifer L. Adams
Nathaniel F. Bradley IV
Donald R. Haider
Anthony R. Ignaczak
William I. Jacobs
H. Eugene Lockhart

At the annual stockholders meeting, the stockholders ratified the Company’s appointment of Ernst & Young, LLP as the Company’s independent auditors for the fiscal year ending December 31, 2005, where 35,487,781 shares voted to ratify Ernst & Young, LLP’s selection and 513 shares abstained.

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.

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: August 1, 2005	By:	/s/ Nathaniel F. Bradley IV

		Nathaniel F. Bradley IV
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: August 1, 2005	By:	/s/ Mark A. Redman

		Mark A. Redman
		Vice President — Finance and
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX


EX		DESCRIPTION
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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Asset Acceptance Capital (AACC) Inactive 10-Q2005 Q2 Quarterly report

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