Asset Acceptance Capital 10Q 2005 Q3 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 September 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		80-0076779
(State or other jurisdiction of		(I.R.S.Employer Identification No.)
incorporation or organization)

28405 Van Dyke Avenue
Warren, Michigan 48093
(Address of principal executive offices)

Registrant’s telephone number, including area code: (586) 939-9600

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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 by check mark whether the registrant is a Shell Company (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 November 3, 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		28
Item 4. Controls and Procedures		28

Part II Other Information		29

Item 1. Legal Proceedings		29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 6. Exhibits		30

Signatures		31
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. Consolidated Financial Statements

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Financial Position
(Unaudited)


	September 30, 2005		December 31, 2004
ASSETS
Cash	$	52,253,038	$	14,204,579
Purchased receivables		247,211,038		216,479,676
Finance contract receivables, net		738,405		688,497
Property and equipment, net		10,769,323		11,165,103
Goodwill		6,339,574		6,339,574
Other assets		2,762,473		3,628,291

Total assets	$	320,073,851	$	252,505,720


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deferred tax liability, net	$	60,282,966	$	41,246,766
Accounts payable and other liabilities		16,526,278		13,824,600
Capital lease obligations		227,173		254,185

Total liabilities		77,036,417		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 September 30, 2005 and December 31, 2004		372,253		372,253
Additional paid in capital		160,036,343		159,348,233
Retained earnings		82,628,838		37,459,683

Total equity		243,037,434		197,180,169

Total liabilities and equity	$	320,073,851	$	252,505,720
��

See accompanying notes.

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Operations
(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Revenues
Purchased receivable revenues	$	63,899,194		$	55,870,763		$	198,466,124		$	156,810,383
Loss on sale of purchased receivables		(151	)		—			(25,982	)		—
Finance contract revenues		117,503			127,967			414,207			442,600

Total revenues		64,016,546			55,998,730			198,854,349			157,252,983

Expenses
Salaries and benefits		19,574,631			16,240,718			57,188,114			94,124,074
Collections expense		17,831,613			15,671,416			55,119,103			40,750,626
Occupancy		2,087,299			1,509,896			6,229,148			4,328,048
Administrative		1,885,207			1,343,371			5,487,853			3,984,713
Depreciation and amortization		831,396			669,213			2,517,506			2,132,800
Loss (gain) on disposal of equipment		14,862			(1,041	)		15,340			41,865

Total operating expenses		42,225,008			35,433,573			126,557,064			145,362,126

Income from operations		21,791,538			20,565,157			72,297,285			11,890,857
Other income (expense)
Interest income		430,407			2,692			657,941			11,933
Interest expense		(135,282	)		(227,015	)		(416,954	)		(1,566,200	)
Other		4,378			414			(2,984	)		25,372

Income before income taxes		22,091,041			20,341,248			72,535,288			10,361,962
Income taxes		8,384,460			7,579,901			27,366,133			22,182,255

Net income (loss)	$	13,706,581		$	12,761,347		$	45,169,155		$	(11,820,293	)


Pro forma income tax expense										$	3,854,650


Pro forma net income										$	6,507,312


Weighted average number of shares:
Basic		37,225,275			37,225,275			37,225,275			36,104,148
Diluted		37,305,950			37,230,985			37,271,255			36,110,708
Earnings (loss) per common share outstanding:
Basic	$	0.37		$	0.34		$	1.21		$	(0.33	)
Diluted	$	0.37		$	0.34		$	1.21		$	(0.33	)
Pro forma earnings per common share outstanding:
Basic										$	0.18
Diluted										$	0.18

See accompanying notes.

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Cash Flows
(Unaudited)


	Nine months ended September 30,
	2005			2004
Cash flows from operating activities
Net income (loss)	$	45,169,155		$	(11,820,293	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		2,517,506			2,132,800
Deferred income taxes		19,036,201			22,169,359
Share-based compensation expense		688,110			26,824,957
Impairment of purchased receivables		6,994,000			—
Non-cash revenue		(3,612,261	)		(2,196,090	)
Loss on disposal of equipment		15,340			41,865
Charge-offs of finance contracts		159,825			126,980
Changes in assets and liabilities:
Decrease (increase) in other assets		714,814			(903,865	)
Increase in accounts payable and other liabilities		2,701,678			3,478,762

Net cash provided by operating activities		74,384,368			39,854,475

Cash flows from investing activities
Investment in purchased receivables, net of buy backs		(75,681,304	)		(59,911,516	)
Principal collected on purchased receivables		41,568,202			44,973,615
Investment in finance contracts		(678,071	)		(590,677	)
Principal collected on finance contracts		468,338			406,775
Purchase of fixed assets		(1,892,577	)		(1,224,125	)

Net cash used in investing activities		(36,215,412	)		(16,345,928	)

Cash flows from financing activities
Borrowings under line of credit		10,500,000			45,420,000
Repayment of line of credit		(10,500,000	)		(118,370,000	)
Repayment to related party		—			(39,560,110	)
Repayment of capital lease obligations		(120,497	)		(104,724	)
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 used in financing activities		(120,497	)		(17,487,428	)

Net increase in cash		38,048,459			6,021,119
Cash at beginning of period		14,204,579			5,498,836

Cash at end of period	$	52,253,038		$	11,519,955

Supplemental disclosure of cash flow information
Cash paid for interest	$	256,985		$	1,380,658
Cash paid for income taxes		4,984,181			91,746
Non-cash investing and financing activities:
Capital lease obligations incurred		93,483			148,075

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 consolidated 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 management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair statement of the Company’s financial position as of September 30, 2005 and its results of operations for the three and nine month periods ended September 30, 2005 and 2004 and cash flows for the nine month periods ended September 30, 2005 and 2004, and all adjustments were of a normal recurring nature. The results of operations of the Company for the three and nine month periods ended September 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 99%) 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 beforeJanuary 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 ended 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. Beginning January 2005, if revised cash flow estimates are less than the original estimates, SOP 03-3 requires that the IRR remain unchanged and an immediate impairment be recognized. If cash flow estimates increase subsequent to recording an impairment, SOP 03-3 requires reversal of the previously recognized impairment before any increases to the IRR are made.

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
September 30, 2005, the Company had 24 unamortized pools on the cost recovery method with an aggregate carrying value of $1.9 million or about 0.8% of the total carrying value of all purchased receivables. The Company had 46 unamortized pools on the cost recovery method with an aggregate carrying value of $3.1 million, or about 1.5% of the total carrying value of all purchased receivables as of September 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 nine months ended September 30, 2005 and 2004 were as follows:


	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Beginning balance	$	233,953,247		$	197,503,693		$	216,479,676		$	183,719,667
Investment in purchased receivables, net of buybacks		27,517,961			14,305,024			75,685,098			59,911,516
Cash collections		(78,159,364	)		(66,825,822	)		(243,419,860	)		(199,587,908	)
Purchased receivable revenues		63,899,194			55,870,763			198,466,124			156,810,383

Ending balance	$	247,211,038		$	200,853,658		$	247,211,038		$	200,853,658

Accretable yield represents the amount of revenue the Company can expect over the remaining life of the existing portfolios. Nonaccretable yield represents the difference between the remaining expected cash flows and the total contractual obligation outstanding (face value) of the purchased receivables. Changes in accretable yield for the three and nine months ended September 30, 2005 and 2004 were as follows:


	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Beginning balance	$	845,668,596		$	773,705,152		$	792,755,605		$	665,791,369
Revenue recognized on purchased receivables		(64,395,319	)		(55,870,763	)		(198,962,249	)		(156,810,383	)
Additions due to purchases during the period		70,411,085			32,590,530			176,856,717			166,160,387
Reclassifications from nonaccretable yield		10,147,989			(12,433,286	)		91,182,278			62,850,260

Ending balance	$	861,832,351		$	737,991,633		$	861,832,351		$	737,991,633

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


	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Revenue from fully amortized pools:
Pools that amortized before 60 months	$	8,312,947	$	4,860,788	$	22,779,854	$	10,916,061
Pools that are 60 months or older		4,543,583		2,968,320		15,044,442		8,187,283
Pools under full cost recovery		1,135,232		794,295		3,254,546		2,066,683

Total revenue from fully amortized pools	$	13,991,762	$	8,623,403	$	41,078,842	$	21,170,027

During the three months ended September 30, 2005, the Company recorded a net impairments of $4,596,000 related to its purchased receivables and set up an allowance for receivable losses. The impairments charge reduced revenue and the allowance reduced the carrying value of the purchased receivables portfolios. No impairments were recognized during 2004 as the Company was accounting for revenue under PB 6. Changes in the allowance for receivable losses for the year follows:


	2005
		First		Second		Third			Total Through
		Quarter		Quarter		Quarter			September 30,
Impairments recorded:
Impairments		$	700,000	$	1,698,000	$	5,112,000		$	7,510,000
Reversal of impairments (1)			—		—		(516,000	)		(516,000	)

Total		$	700,000	$	1,698,000	$	4,596,000		$	6,994,000


(1)		Impairments reversed during the third quarter of 2005 relate to impairment charges recorded during the second quarter of 2005.

Finance Contract Receivables

Finance contract revenues are recognized based on the effective yield method. Unearned discounts on finance contract receivables were approximately $440,000 and $424,000 at September 30, 2005 and December 31, 2004, respectively. The fair value of finance contract receivables does not materially differ from their book value. An allowance for doubtful accounts is established for estimated losses on accounts based on historical losses. The allowance for doubtful accounts, which is netted against finance contract receivables on the consolidated statements of financial position, was approximately $106,000 at September 30, 2005 and December 31, 2004.

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 23.6% for both the three months ended September 30, 2005 and 2004 and 22.0% and 21.3% for the nine months ended September 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 (excluding amortization) was $784,395 and $607,224 for the three months ended September 30, 2005 and 2004, respectively, and $2,366,501 and $1,952,568 for the nine months ended September 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 Income 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 September 30, 2005 included 45,980 dilutive shares related to outstanding stock options. Pro forma income per share reflects pro forma income, adjusted for pro forma income taxes, divided by weighted-average number of shares outstanding. All outstanding stock options at September 30, 2004 were excluded from the earnings per share calculations as they would have been antidilutive.

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 consolidated 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 consolidated 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 nine months ended September 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 nine 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 September 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 $173.9 million as of September 30, 2005.

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

4. Property and Equipment

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


	September 30, 2005			December 31, 2004
Computers and software	$	8,901,455		$	7,562,797
Furniture and fixtures		8,600,409			8,259,527
Leasehold improvements		1,990,786			1,810,998
Equipment under capital lease		488,744			483,421
Automobiles		136,525			136,525

Total property and equipment, cost		20,117,919			18,253,268
Less accumulated depreciation		(9,348,596	)		(7,088,165	)

Net property and equipment	$	10,769,323		$	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 eligible key employees, non-employee directors and consultants. 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 and other participants 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 September 30, 2005, the Company had issued options to purchase 247,219 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 nine months ended September 30, 2005 and 2004 of $688,110 and $172,559, respectively, is included in administrative expenses. The following summarizes all stock option related transactions from January 1, 2004 through September 30, 2005.


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

December 31, 2004		117,220	$	17.01
Granted		129,999	$	21.50
Cancelled		—		—

September 30, 2005		247,219	$	19.37

The following options information is as of September 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		8.35	$	15.00		22,500	$	15.00
$18.50	$	5.90		30,000		8.42	$	18.50		15,000	$	18.50
$19.48	$	6.57		3,850		8.63	$	19.48		3,850	$	19.48
$17.85	$	5.84		4,200		8.88	$	17.85		4,200	$	17.85
$17.97	$	8.48		30,000		9.24	$	17.97		—		—
$17.99	$	8.47		4,170		9.24	$	17.99		4,170	$	17.99
$19.87	$	8.97		3,775		9.55	$	19.87		3,775	$	19.87
$18.89	$	8.56		30,000		9.56	$	18.89		—		—
$18.89	$	8.56		25,000		9.56	$	18.89		—		—
$19.48	$	11.68		9,685		9.62	$	19.48		4,843	$	19.48
$23.42	$	10.56		45,624		9.63	$	23.42		—		—
$23.42	$	10.56		3,200		9.63	$	23.42		3,200	$	23.42
$27.34	$	12.45		10,000		9.83	$	27.34		—		—
$27.61	$	12.58		2,715		9.88	$	27.61		2,715	$	27.61

Total / Average				247,219		9.16	$	19.37		64,253	$	18.04

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	$	9.94		$	6.26
Expected volatility		46.00	%		30.00	%
Risk-free interest rate		3.82%-4.15	%		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 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 September 30, 2005 and does not believe exposure to be material.

7. Income Taxes

Income taxes for the nine months ended September 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. in connection with the Company’s initial public offering during the first quarter of 2004.

Income taxes for the nine months ended September 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 an S corporation under the Internal Revenue Code and, therefore, taxable income was included on the shareholders’ individual tax returns. Income taxes subsequent to February 5, 2004 reflect 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 September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Income taxes consist of:
Federal actual	$	6,158,136	$	—	$	7,008,136	$	—
State actual		509,277		4,708		1,321,796		12,895
Federal deferred — net		1,497,494		7,127,341		18,301,488		20,926,642
State deferred — net		219,553		447,852		734,713		1,242,718

Total	$	8,384,460	$	7,579,901	$	27,366,133	$	22,182,255

Tax expense differs from the application of statutory rates to pretax income. The reconciliation of income tax expense and the statutory rates is set forth below:


	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Federal taxes at statutory rate	$	7,725,560	$	7,127,341	$	25,379,554	$	3,635,681
Other adjustments		56,857		—		56,857		—
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		602,043		452,560		1,929,722		116,992

Effective income taxes	$	8,384,460	$	7,579,901	$	27,366,133	$	22,182,255

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.

The third quarter of 2005 proved challenging as the growth rate of collections on a year-over-year basis slowed to 17.0%. We believe that a significant factor that contributed to this decline in collection growth is the high employee turnover among our collection professionals as there is a positive correlation between collector experience and productivity. Other factors which may have affected the growth of collections on a year-over-year basis include the slowing growth of purchases of defaulted or charged-off receivable portfolios, changes in the mix of purchases, a decline in the average payments size during the third quarter of 2005 and possibly macroeconomic factors such as higher gasoline prices, higher interest rates and the impact of the hurricanes Katrina and Rita which may have reduced disposable income of our debtor base.

For the first nine months of 2005, cash collections increased 22.0% to $243.4 million. Revenues for the first nine months of 2005 were $198.9 million, a 26.5% increase over the prior year. Net income was $45.2 million for the first nine months of 2005, compared to a net loss of $11.8 million for the same period in 2004. Net loss for the first nine 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 nine months of 2005, we invested $77.2 million in charged-off consumer receivable portfolios, with an aggregate face value of $3.3 billion, or 2.34% of face value. During the first nine months of 2004, we invested $60.5 million in charged-off consumer receivable portfolios, with an aggregate face value of $3.1 billion, or 1.94% 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 there are indications that prices have stabilized during the first nine months 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 21.3% for the nine months ended September 30, 2004 to 22.0% for the nine months ended September 30, 2005. The increase is primarily due to increased legal activity in states where we are not located, 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 on
Form 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;

	•		changes in our overall performance based upon significant macroeconomic conditions; and

	•		other unanticipated events and conditions that may hinder our ability to compete.

Significant Events During the Nine Months Ended September 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. 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. 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						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2005			2004			2005			2004			2005			2004			2005			2004
Revenues
Purchased receivable revenues		99.8	%		99.8	%		99.8	%		99.7	%		81.8	%		83.6	%		81.5	%		78.6	%
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			0.2			0.2			0.3			0.1			0.2			0.2			0.2

Total revenues		100.0			100.0			100.0			100.0			81.9			83.8			81.7			78.8

Expenses
Salaries and benefits		30.6			29.0			28.8			59.9	(1)		25.0			24.3			23.5			47.1	(1)
Collections expense		27.9			28.0			27.7			25.9			22.8			23.4			22.6			20.4
Occupancy		3.3			2.7			3.1			2.7			2.7			2.3			2.6			2.2
Administrative		2.9			2.4			2.7			2.5			2.4			2.0			2.3			2.0
Depreciation and amortization		1.3			1.2			1.3			1.4			1.1			1.0			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		66.0			63.3			63.6			92.4	(1)		54.0			53.0			52.0			72.8	(1)

Income loss from operations		34.0			36.7			36.4			7.6			27.9			30.8			29.7			6.0
Other income (expense)
Interest income		0.7			0.0			0.3			0.0			0.5			0.0			0.3			0.0
Interest expense		(0.2	)		(0.4	)		(0.2	)		(1.0	)		(0.2	)		(0.4	)		(0.2	)		(0.8	)
Other		0.0			0.0			(0.0	)		0.0			0.0			0.0			(0.0	)		0.0

Income loss before income taxes		34.5			36.3			36.5			6.6			28.2			30.4			29.8			5.2
Income taxes		13.1			13.5			13.8			14.1			10.7			11.3			11.2			11.1

Net Income (loss)		21.4	%		22.8	%		22.7	%		(7.5	)%		17.5	%		19.1	%		18.6	%		(5.9	)%

Pro forma income taxes											2.5	%											1.9	%
Pro forma net loss											4.1	%											3.3	%


(1)		Excluding the $45.7 million compensation and related payroll tax charge, salaries and benefits were 30.8% and 24.3% of revenues and collections, respectively, and total operating expenses were 63.4% and 49.9% of revenues and collections, respectively, for the nine months ended September 30, 2004. See discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004 — Operating Expenses”.

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

Revenue

Total revenues were $64.0 million for the three months ended September 30, 2005, an increase of $8.0 million, or 14.3%, over total revenues of $56.0 million for the three months ended September 30, 2004. Purchased receivable revenues were $63.9 million for the three months ended September 30, 2005, an increase of $8.0 million, or 14.4%, over the $55.9 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 17.0% to $78.2 million for the three months ended September 30, 2005 from $66.8 million for the same period in 2004. Cash collections for the three months ended September 30, 2005 and 2004 include collections from fully amortized portfolios of $14.0 million and $8.6 million, respectively, of which 100% were reported as revenue.

Revenue reflects net impairments recognized during the three months ended September 30, 2005 of $4.6 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 September 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 September 30, 2005, we acquired charged-off consumer receivables portfolios with an aggregate face value amount of $1.1 billion at a cost of $28.0 million, or 2.49% of face value, net of buybacks. Included in these purchase totals were nine portfolios with an aggregate face value of $76.3 million at a cost of $2.8 million, or 3.65% of face value, which were acquired through three forward flow contracts. During the three months ended September 30, 2004, we acquired charged-off consumer receivables portfolios with an aggregate face value of $0.6 billion at a cost of $15.8 million, or 2.51% of face value (adjusted for buybacks through September 30, 2005). Included in these purchase totals were ten portfolios with an aggregate face value of $70.9 million at a cost of $2.0 million, or 2.82% of face value, which were acquired through four 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 $42.2 million for the three months ended September 30, 2005, an increase of $6.8 million, or 19.2%, compared to total operating expenses of $35.4 million for the three months ended September 30, 2004. Total operating expenses were 66.0% of total revenues and 54.0% of cash collections for the three months ended September 30, 2005, compared with 63.3% and 53.0%, respectively, for the same period in 2004.

Salaries and Benefits.Salary and benefit expenses were $19.6 million for the three months ended September 30, 2005, an increase of $3.4 million, or 20.5%, compared to salary and benefit expenses of $16.2 million for the three months ended September 30, 2004. Salary and benefit expenses were 30.6% of total revenue and 25.0% of cash collections for the three months ended September 30, 2005, compared with 29.0% and 24.3%, 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 1,877 at September 30, 2005 from 1,618 at September 30, 2004, in response to the growth in the number of our portfolios of charged-off consumer receivables. The increase in salary and benefits expenses, as a percent of cash collections, was primarily due to an increase in medical benefit costs and a decrease in traditional call center collections efficiency. Traditional call center collections per full-time equivalent collection employee decreased 9.4% to $36,454 for the three months ended September 30, 2005, compared to $40,224 for the same period in 2004. This decrease is primarily due to a decrease in the average productivity for collectors with less than a year of experience and to a lesser extent, due to a slight decrease in the average productivity for collectors with more than a year of experience. Average full-time equivalent collection employees increased to 1,067 for the three months ended September 30, 2005 from 910 during the same period in 2004.

Collections Expense.Collections expense increased to $17.8 million for the three months ended September 30, 2005, reflecting an increase of $2.1 million, or 13.8%, over collections expense of $15.7 million for the three months ended September 30, 2004. The increase was primarily attributable to the increased number of accounts on which we were collecting. Collections expense as a percentage of collections decreased to 22.8% of cash collections for the three months ended September 30, 2005 from 23.4% of cash collections for the three months ended September 30, 2004. The decrease in collections expense as a percent of collections was primarily due to decreases in agency fees which are generally proportionate to the amount of collections received from contingent agencies, court costs and process server expenses partially offset by increases in expenses related to updating debtors information.

Occupancy.Occupancy expense was $2.1 million for the three months ended September 30, 2005, an increase of $0.6 million, or 38.2%, over occupancy expense of $1.5 million for the three months ended September 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 $1.9 million for the three months ended September 30, 2005, from $1.3 million for the three months ended September 30, 2004, reflecting a $0.6 million, or 40.3%, increase. The increase in administrative expenses was principally due to costs related to the documentation and enhancement of internal controls required to become fully compliant with section 404 of Sarbanes-Oxley and increased director fees and expenses.

Depreciation and Amortization.Depreciation and amortization expense was $0.8 million for the three months ended September 30, 2005, an increase of $0.1 million or 24.2% over depreciation and amortization expense of $0.7 million for the three months ended September 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 $0.4 million for the three months ended September 30, 2005, reflecting an increase of $0.4 million over the prior year. The increase was due primarily to interest received related to our increased cash position over the prior year in addition to higher rates during 2005 over the prior year.

Interest Expense.Interest expense was $0.1 million for the three months ended September 30, 2005, reflecting a decrease of $0.1 million, or 40.4%, compared to interest expense of $0.2 million for the three months ended September 30, 2004. The decrease in interest expense was due to lower average borrowings on our line of credit, which decreased from $4.9 million as of September 30, 2004 to $43,836 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 $71,138 for the three months ended September 30, 2005 and 2004, respectively.

Income Taxes.Income tax expense of $8.4 million reflects combined federal and state tax rates of 37.9%; 34.7% for federal taxes and 3.2% for state taxes (net of federal tax benefit including utilization of state net operating losses) for the three months ended September 30, 2005. Tax rates of 35.0% federal and 2.2% for state (net of federal tax benefit) were applicable for the three months ended September 30, 2004. The 1.0% increase in the state rate was due to changing apportionment percentages among the various states, the decrease in the federal benefit of state tax expenses due to the utilization of state net operating losses, and other adjustments. Income tax expense increased $0.8 million, or 10.6% over income tax expense of $7.6 million for the three months ended September 30, 2004. The increase in tax expense was due to an increase in pretax financial statement income which was $22.1 million for the three months ended September 30, 2005, compared to $20.3 million for the same period in 2004.

Nine Months Ended September 30, 2005 Compared To Nine Months Ended September 30, 2004

Revenue

Total revenues were $198.9 million for the nine months ended September 30, 2005, an increase of $41.6 million, or 26.5%, over total revenues of $157.3 million for the nine months ended September 30, 2004. Purchased receivable revenues were $198.5 million for the nine months ended September 30, 2005, an increase of $41.7 million, or 26.6%, over the nine months ended September 30, 2004 amount of $156.8 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 22.0% to $243.4 million for the nine months ended September 30, 2005 from $199.6 million for the same period in 2004. Cash collections for the nine months ended September 30, 2005 and 2004 include collections from fully amortized portfolios of $41.1 million and $21.2 million, respectively, of which 100% were reported as revenue.

Revenue reflects net impairments recognized during the nine months ended September 30, 2005 of $7.0 million. The impairments were recognized under PB 6, as amended by SOP 03-3, which requires that an impairment be taken for decreases in expected cash flows. During the nine months ended September 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 nine months ended September 30, 2005, we acquired charged-off consumer receivables portfolios with an aggregate face value amount of $3.3 billion at a cost of $77.2 million, or 2.34% of face value, net of buybacks. Included in these purchase totals were 28 portfolios with an aggregate face value of $244.2 million at a cost of $8.9 million, or 3.64% of face value, net of buybacks, which were acquired through four forward flow contracts. During the nine months ended September 30, 2004, we acquired charged-off consumer receivables portfolios with an aggregate face value of $3.1 billion at a cost of $60.5 million, or 1.94% of face value (adjusted for buybacks through September 30, 2005). Included in these purchase totals were 20 portfolios with an aggregate face value of $204.9 million at a cost of $6.0 million, or 2.93% of face value, which were acquired through four 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 2.34% for the nine months ended September 30, 2005 from 1.94% for the same period in 2004, is primarily due to increased competition for accounts resulting in a higher purchase price during the third quarter of 2005 versus the same period in 2004. Tertiary accounts made up 55.5% of our purchases in the nine months ended September 30, 2005 compared to only 42.6% for the same period in 2004.

Operating Expenses

Total operating expenses were $126.6 million for the nine months ended September 30, 2005, a decrease of $18.8 million, or 12.9%, compared to total operating expenses of $145.4 million for the nine months ended September 30, 2004. Total operating expenses were 63.6% of total revenues and 52.0% of cash collections for the nine months ended September 30, 2005, compared with 92.4% and 72.8%, respectively, for the same period in 2004. Operating expenses for the nine months ended September 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 $126.6 million for the nine months ended September 30, 2005 increased $26.9 million, or 27.0% from the $99.7 million in operating expenses for the same period in 2004. Operating expenses were 63.6% of total revenues and 52.0% of cash collections for the three months ended September 30, 2005, compared with 63.4% and 49.9%, 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 $57.2 million for the nine months ended September 30, 2005, a decrease of $36.9 million, or 39.2%, compared to salary and benefit expenses of $94.1 million for the nine months ended September 30, 2004. Salary and benefit expenses were 28.8% of total revenue and 23.5% of cash collections for the nine months ended September 30, 2005, compared with 59.9% and 47.1%, 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 $57.2 million for the nine months ended September 30, 2005 increased $8.7 million, or 18.0% over the $48.5 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 1,877 at September 30, 2005 from 1,618 at September 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 28.8% of total revenues and 23.5% of cash collections for the nine months ended September 30, 2005 from 30.8% of total revenue and 24.3% of cash collections for the same period in 2004. The decrease in salary and benefit expenses, as adjusted, as a percent of cash collections was primarily due to improved benefit costs and increased efficiences in legal collections. 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 $122,713 for the nine months ended September 30, 2005, compared to $129,486 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. Average full-time equivalent collection employees increased to 1,040 for the nine months ended September 30, 2005 from 897 during the same period in 2004.

Collections Expense.Collections expense increased to $55.1 million for the nine months ended September 30, 2005, reflecting an increase of $14.3 million, or 35.3%, over collections expense of $40.8 million for the nine months ended September 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 nine months ended September 30, 2005 from 20.4% of cash collections for the nine months ended September 30, 2004. This increase was primarily due to increases in amounts spent for collection letters as well as increased legal collection 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 $6.2 million for the nine months ended September 30, 2005, an increase of $1.9 million, or 43.9%, over occupancy expense of $4.3 million for the nine months ended September 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 $5.5 million for the nine months ended September 30, 2005, from $4.0 million for the nine months ended September 30, 2004, reflecting a $1.5 million, or 37.7%, increase. The increase in administrative expenses was principally due to costs related to the secondary offering, implementation of internal controls required to become fully compliant with section 404 of Sarbanes-Oxley and increased director fees and expenses.

Depreciation and Amortization.Depreciation and amortization expense was $2.5 million for the nine months ended September 30, 2005, an increase of $0.4 million or 18.0% over depreciation and amortization expense of $2.1 million for the nine months ended September 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 $0.7 million for the nine months ended September 30, 2005, reflecting an increase of $0.7 million over the prior year. The increase was due primarily to interest received related to our increased cash position over the prior year in addition to higher rates during 2005 over the prior year.

Interest Expense.Interest expense was $0.4 million for the nine months ended September 30, 2005, reflecting a decrease of $1.2 million, or 73.4%, compared to interest expense of $1.6 million for the nine months ended September 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 nine months ended September 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 $0.2 million for the nine months ended September 30, 2005 from $21.5 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 $159,300 and $212,302 for the nine months ended September 30, 2005 and 2004, respectively.

Income Taxes.Income tax expense of $27.4 million reflects combined federal and state tax rates of 37.7%; 34.9% for federal taxes and 2.8% for state taxes (net of federal tax benefit including utilization of state net operating losses) for the nine months ended September 30, 2005. Tax rates of 35.0% federal and 2.2% for state (net of federal tax benefit) were applicable for the nine months ended September 30, 2004. The 0.6% increase in the state rate was due to changing apportionment percentages among the various states, the decrease in the federal benefit of state tax expenses due to the utilization of state net operating losses, and other adjustments. Income taxes for the nine months ended September 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 an S corporation under the Internal Revenue Code and, therefore, taxable income was included on the shareholders’ individual tax returns. Income taxes during the period February 5, 2004 through September 30, 2004 reflected income tax expense on 100% of pretax income as RBR Holding Corp. became a wholly-owned subsidiary of Asset Acceptance Capital Corp. as part of the reorganization.

Supplemental Performance Data

Portfolio Performance

The following table summarizes our historical portfolio purchase price and cash collections on an annual vintage basis since 1990 through September 30, 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	$	3,122	$	—	$	3,122		489	%
1991		12		280		1,463		—		1,463		523
1992		29		309		2,917		—		2,917		944
1993		30		790		7,867		—		7,867		996
1994		36		1,427		6,881		—		6,881		482
1995		53		1,519		7,835		14		7,849		517
1996		46		3,844		17,002		411		17,413		453
1997		45		4,345		27,911		2,195		30,106		693
1998		61		16,412		76,856		6,877		83,733		510
1999		51		12,925		54,803		10,781		65,584		507
2000		49		20,596		103,665		22,925		126,590		615
2001		62		43,133		196,886		78,772		275,658		639
2002		94		72,288		218,106		165,960		384,066		531
2003		76		87,317		204,062		290,133		494,195		566
2004		106		87,835		75,985		286,245		362,230		412
2005 (3)		81		77,237		13,633		244,730		258,363		335


(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 nine months of activity through September 30, 2005.

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


					Unamortized		Unamortized
	Unamortized				Balance as a		Balance as a
	Balance as of		Purchase		Percentage of		Percentage of
Purchase Period	September 30, 2005		Price (1)		Purchase Price (2)		Total
	(dollars in thousands)
2000	$	123	$	20,596		0.60%		0.05	%
2001		6,888		43,133		15.97		2.79
2002		31,261		72,288		43.25		12.65
2003		55,016		87,317		63.01		22.25
2004		73,892		87,835		84.13		29.89
2005 (3)		80,031		77,237		103.62		32.37

Totals	$	247,211	$	388,406		63.65%		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 nine months of activity through September 30, 2005.

Collector Productivity and Turnover

We measure traditional call center collector productivity by two major categories, those with less than one year of experience and those with one or more years of experience. The following tables display our results.

Collectors by Experience


	Three months ended				Nine months ended				Year ended
	September 30,				September 30,				December 31,
	2005		2004		2005		2004		2004		2003
Number of collectors:
One year or more (1)		509		486		510		462		472		322
Less than one year (2)		558		424		530		435		436		478

Total		1,067		910		1,040		897		908		800


(1)		Based on number of average traditional call center Full Time Equivalent (“FTE”) collectors with one or more years of service.

(2)		Based on number of average traditional call center FTE collectors with less than one year of service, including new employees in training.

Collection Averages by Experience


	Three months				Nine months				Year ended
	ended September 30,				ended September 30,				December 31,
	2005		2004		2005		2004		2004		2003
Collection Averages:
One year or more (1)	$	45,405	$	46,797	$	152,961	$	148,376	$	195,094	$	171,506
Less than one year (2)		28,281		32,706		93,657		109,447		140,157		135,792
Overall Average		36,453		40,224		122,713		129,486		168,708		150,178


(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.

We believe that collector productivity is adversely impacted by increases in collector termination. Generally collection averages increase for collectors as they gain experience. The following table provides annualized collector turnover data for Traditional Collections for 2004 and 2005:

Turnover by Experience


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Total Collector Turnover		97.9	%		77.1	%		85.7	%		68.6	%
Collectors < 1 year of experience		146.0			113.6			126.5			100.2
Collectors > 1 year of experience		48.8			45.7			45.1			39.7

Cash Collections

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

Historical Collections (1)


																									Nine Months
																									Ended
Purchase	Purchase		Year Ended December 31,																						September 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	$	324	$	243	$	182
1994	$	1,427		345		1,763		1,430		1,005		647		457		357		258		176		188		126		96
1995		1,519		—		388		1,566		1,659		1,118		786		708		472		343		278		227		174
1996		3,844		—		—		827		3,764		3,085		2,601		2,098		1,440		1,041		816		687		489
1997		4,345		—		—		—		1,682		4,919		5,573		5,017		3,563		2,681		1,784		1,526		1,055
1998		16,412		—		—		—		—		4,835		15,220		15,045		12,962		11,021		7,987		5,582		3,625
1999		12,925		—		—		—		—		—		3,761		11,331		10,862		9,750		8,278		6,675		3,898
2000		20,596		—		—		—		—		—		—		8,895		23,444		22,559		20,318		17,196		10,776
2001		43,133		—		—		—		—		—		—		—		17,630		50,327		50,967		45,713		31,175
2002		72,288		—		—		—		—		—		—		—		—		22,340		70,813		72,024		52,432
2003		87,317		—		—		—		—		—		—		—		—		—		36,067		94,564		73,265
2004		87,835		—		—		—		—		—		—		—		—		—		—		23,365		52,620
2005		77,237		—		—		—		—		—		—		—		—		—		—		—		13,633

Total			$	3,412	$	4,691	$	5,611	$	9,395	$	15,438	$	29,047	$	44,006	$	71,068	$	120,540	$	197,820	$	267,928	$	243,420

Cumulative Collections (1)


																									Total
																									Through
Purchase	Purchase		Total Through December 31,																						September 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	$	6,848
1995		1,519		—		388		1,954		3,613		4,731		5,517		6,225		6,697		7,040		7,318		7,545		7,719
1996		3,844		—		—		827		4,591		7,676		10,277		12,375		13,815		14,856		15,672		16,359		16,848
1997		4,345		—		—		—		1,682		6,601		12,174		17,191		20,754		23,435		25,219		26,745		27,800
1998		16,412		—		—		—		—		4,835		20,055		35,100		48,062		59,083		67,070		72,652		76,277
1999		12,925		—		—		—		—		—		3,761		15,092		25,954		35,704		43,982		50,657		54,555
2000		20,596		—		—		—		—		—		—		8,895		32,339		54,898		75,216		92,412		103,188
2001		43,133		—		—		—		—		—		—		—		17,630		67,957		118,924		164,637		195,812
2002		72,288		—		—		—		—		—		—		—		—		22,340		93,153		165,177		217,609
2003		87,317		—		—		—		—		—		—		—		—		—		36,067		130,631		203,896
2004		87,835		—		—		—		—		—		—		—		—		—		—		23,365		75,985
2005		77,237		—		—		—		—		—		—		—		—		—		—		—		13,633

Cumulative Collections as Percentage of Purchase Price (1)


																																				Total
																																				Through
Purchase	Purchase		Total Through December 31,																																	September 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	%		480	%
1995		1,519		—			26			129			238			311			363			410			441			463			482			497			508
1996		3,844		—			—			22			119			200			267			322			359			386			408			426			438
1997		4,345		—			—			—			39			152			280			396			478			539			580			616			640
1998		16,412		—			—			—			—			29			122			214			293			360			409			443			465
1999		12,925		—			—			—			—			—			29			117			201			276			340			392			422
2000		20,596		—			—			—			—			—			—			43			157			267			365			449			501
2001		43,133		—			—			—			—			—			—			—			41			158			276			382			454
2002		72,288		—			—			—			—			—			—			—			—			31			129			228			301
2003		87,317		—			—			—			—			—			—			—			—			—			41			150			234
2004		87,835		—			—			—			—			—			—			—			—			—			—			27			87
2005		77,237		—			—			—			—			—			—			—			—			—			—			—			18


(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 September 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		78,159,364
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 September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Traditional collections		49.75	%		54.76	%		52.45	%		58.18	%
Legal collections		37.20			32.36			35.32			30.15
Other collections		13.05			12.88			12.23			11.67

Total collections		100.00	%		100.00	%		100.00	%		100.00	%

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


	Face Value of
	Charged-off					No. of
Asset Type	Receivables (2)		%			Accounts		%
Visa(R)/MasterCard(R)/Discover(R)	$	9,535,339,642		43.3	%		4,141,217		19.3	%
Private Label Credit Cards		3,032,186,249		13.8			4,545,382		21.2
Telecommunications/Utility/Gas		2,558,051,286		11.6			6,146,978		28.6
Auto Deficiency		1,388,816,864		6.3			248,811		1.2
Health Club		1,355,169,052		6.1			1,393,087		6.5
Installment Loans		651,081,700		3.0			209,587		1.0
Other (1)		3,502,647,971		15.9			4,773,388		22.2

Total	$	22,023,292,764		100.0	%		21,458,450		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 September 30, 2005 into major account types as of September 30, 2005.


	Face Value of
	Charged-off					No. of
Account Type	Receivables (2)		%			Accounts		%
Fresh	$	1,053,059,039		4.8	%		436,735		2.0	%
Primary		3,833,748,292		17.4			2,554,619		11.9
Secondary		3,722,036,308		16.9			3,814,847		17.8
Tertiary (1)		12,142,808,573		55.1			13,986,342		65.2
Other		1,271,640,552		5.8			665,907		3.1

Total	$	22,023,292,764		100.0	%		21,458,450		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 September 30, 2005 based on geographic location of debtor, as of September 30, 2005.


	Face Value of
	Charged-off					No. of
Geographic Location	Receivables (3)		%			Accounts		%
Texas (1)	$	3,010,372,446		13.7	%		2,635,291		12.3	%
California		2,491,158,691		11.3			2,690,677		12.5
Florida (1)		2,062,710,550		9.4			1,471,002		6.9
Michigan (1)		1,561,218,173		7.1			1,876,874		8.8
New York		1,323,172,682		6.0			1,141,125		5.3
Ohio (1)		1,232,211,505		5.6			1,442,486		6.7
Illinois (1)		1,028,199,762		4.7			1,338,322		6.2
Pennsylvania		666,661,661		3.0			575,186		2.7
North Carolina		621,393,002		2.8			489,519		2.3
Georgia		552,848,810		2.5			480,600		2.2
Other (2)		7,473,345,482		33.9			7,317,368		34.1

Total	$	22,023,292,764		100.0	%		21,458,450		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 September 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 $173.9 million as of September 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 September 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 nine months ended September 30, 2005, we invested $75.7 million in purchased receivables, net of buybacks, while only borrowing $10.5 million against our line of credit, which was subsequently repaid and had no outstanding balance as of September 30, 2005. Our cash balance has increased from $14.2 million at December 31, 2004 to $52.3 million as of September 30, 2005.

Our operating activities provided cash of $74.4 million and $39.9 million for the nine months ended September 30, 2005 and 2004, respectively. Cash provided by operating activities for the nine months ended September 30, 2005 was generated primarily from net income earned through cash collections. Cash provided by operating activities for the nine months ended September 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 $36.2 million and $16.3 million for the nine months ended September 30, 2005 and 2004, respectively. Cash used for investing purposes in the nine months ended September 30, 2005 and 2004 was primarily due to acquisitions of purchased receivables, net of cash collections applied to principal.

Financing activities used cash of $0.1 million and $17.5 million for the nine months ended September 30, 2005 and 2004, respectively. Cash used by financing activities for the first nine months of 2005 was due to repayments on capital lease obligations. Cash provided by financing activities in the first nine 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 $0.3 million and $1.4 million for the nine months ended September 30, 2005 and 2004, respectively. Cash paid for interest in the nine months ended September 30, 2005 was related to the line of credit. Cash paid for interest in the nine months ended September 30, 2004 consisted of $1.0 million for the line of credit and $0.4 million paid for the related party debt.

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 September 30, 2005:


	Year Ending December 31,
	2005		2006		2007		2008(1)		2009		Thereafter
Capital lease obligations	$	42,382	$	129,173	$	54,682	$	9,514	$	—	$	—
Operating lease obligations		1,403,141		6,132,650		5,903,767		4,966,757		4,129,345		15,338,799
Purchased receivables (2)		—		—		—		—		—		—
Line of credit (1)		—		—		—		—		—		—
Employment agreements		283,750		976,250		—		—		—		—

Total	$	1,729,273	$	7,238,073	$	5,958,449	$	4,976,271	$	4,129,345	$	15,338,799


(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 September 30, 2005.

(2)		During the nine months ended September 30, 2004, we entered into four forward flow contracts that commit us to purchase receivables for a fixed percentage of the face amount of the receivables. Three of the four forward flow contracts were renewed during 2005 with terms beyond September 2005 with the last contract expiring December 2006. The remainder of those three contracts call for monthly purchases of approximately $330,000, 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, 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 January 2005, if revised cash flow estimates are less than the original estimates, SOP 03-3 requires that the IRR remain unchanged and an immediate impairment be recognized. If cash flow estimates increase subsequent to recording an impairment, SOP 03-3 requires reversal of the previously recognized impairment before any increases to the IRR are made.

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 consolidated financial statements at fair value, similar to that prescribed under SFAS No. 123 and is effective for the first fiscal year 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 $0.2 million and $21.5 million for the nine months ended September 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 $306,000 for the nine months ended September 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 September 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 November 1, 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 lawsuits 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	August 17, 2005		543	$	27.61
Terrence L. Daniels	August 17, 2005		543	$	27.61
Donald Haider	August 17, 2005		543	$	27.61
Anthony Ignaczak	August 17, 2005		543	$	27.61
H. Eugene Lockhart	August 17, 2005		543	$	27.61

On July 29, 2005, Darren Bradshaw, the Company’s Director of Internal Audit received an option to purchase 10,000 shares of common stock of the Company which will vest 25% on each of the following dates: January 1, 2006, January 1, 2007, January 1, 2008 and January 1, 2009.


Employee	Option Grant Date	Number of Options		Exercise Price
Darren Bradshaw	July 29, 2005		10,000	$	27.34

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: November 3, 2005	By:	/s/ Nathaniel F. Bradley IV

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

Date: November 3, 2005	By:	/s/ Mark A. Redman

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

EXHIBIT INDEX


EXHIBIT NO.		DESCRIPTION
EX-31.1		Rule 13a-14(a) Certification of Chief Executive Officer

EX-31.2		Rule 13a-14(a) Certification of Chief Financial Officer

EX-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 Q3 Quarterly report

Content analysis

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents