UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

For the transition period from                    to                    

Commission file number: 000-50552

Asset Acceptance Capital Corp.

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

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

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

Yes þ       No o

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

Yes o       No þ

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

As of May 10, 2005, 37,225,275 shares of the Registrant’s common stock were outstanding.

TABLE OF CONTENTS

10-Q Report

This Form 10-Q and all other Company filings with the Securities and Exchange Commission are also accessible at no charge on the Company’s website at www.assetacceptance.com as soon as reasonably practicable after filing with the Commission.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Financial Position
(Unaudited)

See accompanying notes.

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ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Operations
(Unaudited)

See accompanying notes.

4

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Cash Flows
(Unaudited)

See accompanying notes.

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ASSET ACCEPTANCE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies

   Nature of Operations

     Asset Acceptance Capital Corp. and its subsidiaries (collectively referred to as the “Company”) are engaged in the purchase and collection of defaulted or charged-off accounts receivable portfolios. These receivables are acquired from consumer credit originators, primarily credit card issuers, consumer finance companies, retail merchants and telecommunications and other utility providers as well as from resellers and other holders of consumer debt. As part of the collection process, the Company occasionally sells receivables from these portfolios to unaffiliated companies.

     The Company also finances the sales of consumer product retailers located primarily in Michigan and Florida.

   Reporting Entity

     On February 4, 2004, a reorganization was completed in which all of the shares of capital stock of AAC Investors, Inc. and RBR Holding Corp. were contributed to Asset Acceptance Capital Corp. in exchange for all of the outstanding shares of common stock of Asset Acceptance Capital Corp. Prior to this reorganization, AAC Investors, Inc. and RBR Holding Corp. held a 60% and 40% ownership interest in Asset Acceptance Holdings LLC, respectively. The resulting consolidated entity includes Asset Acceptance Capital Corp., AAC Investors, Inc., RBR Holding Corp. and Asset Acceptance Holdings LLC and its wholly-owned subsidiaries, Asset Acceptance, LLC, Rx Acquisitions, LLC and Consumer Credit, LLC. On February 5, 2004, Asset Acceptance Capital Corp. completed an initial public offering (“IPO”) of common stock.

     The accompanying unaudited financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair statement of the Company’s financial position as of March 31, 2005 and its results of operations for the three month periods ended March 31, 2005 and 2004 and cash flows for the three month periods ended March 31, 2005 and 2004, and all adjustments were of a normal recurring nature. The results of operations of the Company for the three month periods ended March 31, 2005 and 2004 may not be indicative of future results. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2004.

   Purchased Receivables Portfolios and Revenue Recognition

     Purchased receivables are receivables that have been charged-off as uncollectible by the originating organization and typically have been subject to previous collection efforts. The Company acquires the rights to the unrecovered balances owed by individual debtors through such purchases. The receivable portfolios are purchased at a substantial discount (usually discounted 95% to 98%) from their face amounts and are initially recorded at the Company’s cost to acquire the portfolio. Financing for the purchases is primarily provided by the Company’s cash generated from operations and the Company’s line of credit.

     The Company accounts for its investment in purchased receivables using the guidance provided by the Accounting Standards Executive Committee Statement of Position 03-3, “Accounting for Certain Loans of Debt Securities Acquired in a Transfer” and Practice Bulletin 6 (“PB 6”), “Amortization of Discounts on Certain Acquired Loans”. The provisions of SOP 03-3 were adopted by the Company effective January 2005 and apply to purchased receivables acquired after December 31, 2004. Purchased receivables acquired before January 1, 2005 will continue to be accounted for under PB 6, as amended, for provisions related to decreases in expected cash flows. The Company purchases pools of homogenous accounts receivable and records each pool at its acquisition cost. Pools purchased after 2004 may be aggregated into a single pool (static pool), within each quarter, based on common risk characteristics. Pools purchased before 2005 may not be aggregated with

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other pool purchases. Each static pool, either aggregated or not aggregated, retains its own identity and does not change. Each static pool is accounted for as a single unit for recognition of revenue, principal payments and impairment.

     Collections on each static pool are allocated to revenue and principal reduction based on the estimated internal rate of return (“IRR”). The IRR is the rate of return that each static pool requires to amortize the cost or carrying value of the pool to zero over its estimated life. Each pool’s IRR is determined by estimating future cash flows, which are based on historical collection data for pools with similar characteristics. Based on historical cash collections, each pool is given an expected life of 60 months. The actual life of each pool may vary, but each pool generally amortizes between 50 and 60 months. Monthly cash flows greater than revenue recognized will reduce the carrying value of each static pool and monthly cash flows lower than revenue recognized will increase the carrying value of the static pool. Each static pool is reviewed at least quarterly and compared to historical cash flows to determine whether each static pool is performing as expected. Through December 31, 2004 to the extent there were differences in actual performance versus expected performance, the IRR is adjusted prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. Beginning in January 2005, under SOP 03-3, if the revised estimate of cash flows is less than the original estimate, the IRR will remain unchanged and an immediate impairment is recognized.

     The cost recovery methods prescribed by PB 6 and SOP 03-3 are used when collections on a particular portfolio cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until we have fully collected the cost of the portfolio. As of March 31, 2005, the Company had 38 pools on the cost recovery method with an aggregate carrying value of $3.0 million or about 1.3% of the total carrying value of all purchased receivables. The Company had 52 pools on the cost recovery method with an aggregate carrying value of $2.8 million, or about 1.6% of the total carrying value of all purchased receivables as of March 31, 2004.

     The agreements to purchase receivables typically include general representations and warranties from the sellers covering account holder death, bankruptcy, fraud and settled or paid prior accounts prior to sale. The representation and warranty period permits the return of certain accounts from the Company back to the seller. The general time frame to return accounts is within 60 to 365 days. Returns are applied against the carrying value of the static pool.

     Periodically the Company will sell, on a non-recourse basis, all or a portion of a pool to third parties. The Company does not have any significant continuing involvement with the sold pools subsequent to sale. Proceeds of these sales are generally compared to the carrying value of the accounts; a gain or loss is recognized on the difference between proceeds received and carrying value.

     Changes in purchased receivables portfolios for the three months ended March 31, 2005 and 2004 were as follows:

     Accretable yield represents the amount of revenue the Company can expect over the remaining life of the existing portfolios. Changes in accretable yield for the three months ended March 31, 2005 and 2004 were as follows:

     During the three months ended March 31, 2005, the Company recorded a $700,000 impairment related to its purchased receivables and set up an allowance for receivable losses. The impairment charge is included in revenue and the allowance reduced the carrying value of the purchased receivables portfolios. No impairments were recognized during 2004.

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    Finance Contract Receivables

     Finance contract revenues are recognized based on the accretion of the discount at which these contracts are financed over their respective terms. Unearned discounts on finance contract receivables were approximately $439,000 and $424,000 at March 31, 2005 and December 31, 2004, respectively. The fair value of finance contract receivables does not materially differ from their book value. Interest is recognized over the life of the contract. An allowance for doubtful accounts is established for estimated losses on accounts for which collection has been delayed or is in doubt. The allowance for doubtful accounts, which is netted against finance contract receivables on the consolidated statements of financial position, was approximately $88,000 and $106,000 at March 31, 2005 and December 31, 2004, respectively.

   Collections from Third Parties

     The Company regularly utilizes unaffiliated third parties, primarily attorneys and other contingent collection agencies, to collect certain account balances on behalf of the Company in exchange for a percentage of balances collected by the third party. The Company records the gross proceeds received by the unaffiliated third parties as cash collections. The Company includes the reimbursement of certain legal and other costs as cash collections. The Company records the percentage of the gross collections paid to the third parties as a component of collection expense. The percent of gross cash collections from such third party relationships were 21.4% and 18.9% for the three months ended March 31, 2005 and 2004, respectively.

   Property and Equipment

     Property and equipment is recorded at cost. Expenditures for repairs and maintenance are charged to operations as incurred. The Company records depreciation expense on a straight-line basis with lives ranging from three to ten years. Depreciation includes amortization of certain intangible assets which are being amortized over a period of five to seven years. Depreciation expense was $786,147 and $670,635 for the three months ended March 31, 2005 and 2004, respectively.

   Initial Public Offering

     Asset Acceptance Capital Corp. commenced an initial public offering of common stock on February 5, 2004. Effective February 4, 2004, a reorganization was completed pursuant to which all of the shares of capital stock of AAC Investors, Inc. and RBR Holding Corp., which held a 60% and 40% interest in Asset Acceptance Holdings LLC, respectively, were contributed to Asset Acceptance Capital Corp. in exchange for all of the outstanding shares of common stock of Asset Acceptance Capital Corp. The resulting consolidated entity includes Asset Acceptance Capital Corp., AAC Investors, Inc., RBR Holding Corp. and Asset Acceptance Holdings LLC and its wholly-owned subsidiaries. Prior to this reorganization, Asset Acceptance Capital Corp. did not conduct any business and did not have any assets or liabilities, except as related to the IPO.

     The Company received net proceeds of $96.1 million (net of expenses of $8.9 million) from the IPO of 7,000,000 shares of common stock which were used to eliminate the related party debt of $40.0 million, reduce the line of credit by $37.7 million and pay withholding taxes on behalf of the share appreciation rights holders in the amount of $18.4 million.

    Share Appreciation Rights Compensation Charge

     The Company recognized a compensation charge (including related payroll taxes) of $45.7 million ($28.7 million net of income taxes) during the first quarter of 2004 resulting from the vesting of the outstanding share appreciation rights upon the Company’s IPO. The share appreciation rights plan, adopted by Asset Acceptance Holdings LLC during 2002, granted participants the right to share in the appreciation of the value of Asset Acceptance Holdings LLC. The benefit earned was based on certain financial objectives and vested 100% upon completion of the IPO.

   Earnings (Loss) Per Share and Pro Forma Loss Per Share

     Earnings (loss) per share reflect net income (loss) divided by the weighted-average number of shares outstanding. Diluted weighted average shares outstanding at March 31, 2005 included 19,419 dilutive shares related to outstanding stock options. Pro forma loss per share reflects pro forma loss adjusted for pro forma income taxes, divided by weighted-average number of shares outstanding.

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   Income Taxes and Deferred Tax Charge

     The Company recognized a deferred tax charge of $19.3 million during the first quarter of 2004 related to deferred taxes of RBR Holding Corp. RBR Holding Corp. was previously structured as an S corporation under the Internal Revenue Code. The shareholders of RBR Holding Corp. included their respective shares of taxable income or loss in their individual tax returns and therefore no income tax expense was recognized on the financial statements of the Company. As a result of the reorganization completed on February 4, 2004, RBR Holding Corp. became a wholly-owned subsidiary of Asset Acceptance Capital Corp. and could no longer be structured as an S corporation.

     The provision for deferred income taxes results from temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates.

   Recently Issued Accounting Pronouncements

   SFAS No. 123(R), “Share-Based Payment”

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment”, a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) requires all stock-based compensation awards granted to employees be recognized in the financial statements at fair value, similar to that prescribed under SFAS No. 123 and is effective for fiscal years beginning after June 15, 2005. We adopted the fair value recognition provisions of SFAS No. 123 effective January 2004 and therefore, adoption of SFAS No. 123(R) is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

2. Related-Party Transactions

     On October 1, 2002, the Company borrowed $35.0 million from certain shareholders. Interest on this indebtedness of 10% per annum, compounded on June 30 and December 31 of each year. The Company recognized interest expense of $433,536 for the three months ended March 31, 2004. These notes were paid in full and cancelled during February 2004.

     In October 2004, certain related parties became 50% owners of RNJ Holdings, LLC, which is the owner of an aircraft held for charter by Jet Management, Inc. These related parties periodically use the aircraft for travel. To the extent the aircraft is used for business travel on our behalf, the Company will reimburse Jet Management, Inc. for the use of the aircraft without any profit to RNJ Holdings, LLC. During the first three months of 2005, the Company reimbursed Jet Management, Inc. $21,221 for use of the aircraft.

3. Line of Credit

     The Company maintains a $100.0 million line of credit secured by a first priority lien on all of the Company’s assets that expires in May 2008 and bears interest at prime or 25 basis points over prime depending upon the Company’s liquidity as defined in the credit agreement. Alternatively, at the Company’s discretion, the Company may borrow by entering into 30, 60 or 90 day LIBOR contracts at rates between 150 to 250 basis points over the respective LIBOR rates, depending on the Company’s liquidity. The Company’s line of credit includes an accordion loan feature that allows us to request a $20.0 million increase in the credit facility. Additionally, the Company pays an annual commitment fee of between 0.25% and 0.50% on the unused portion of the line of credit, depending on the Company’s liquidity. There was no outstanding balance at March 31, 2005 and December 31, 2004. The line of credit facility has certain covenants and restrictions with which the Company must comply, including:

	•	Funds borrowed can be used to purchase portfolios of charged-off receivables and for general corporate purposes.
	•	Leverage ratio (as defined in the line of credit agreement) cannot exceed 1.5 to 1.0.
	•	Debt to total capitalization ratio (as defined in the line of credit agreement) cannot exceed 1.25 to 1.0.
	•	Tangible net worth must exceed $145 million plus 50% of net income after September 30, 2004.

     The Company’s management believes it is in compliance with all terms of its line of credit agreement as of March 31, 2005.

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4. Property and Equipment

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

5. Stock Based Compensation

     Effective January 1, 2004, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” prospectively to all employee awards granted, modified, or settled after January 1, 2004. Adoption of the fair value recognition provisions SFAS No. 123 did not have a material impact on our consolidated financial position, results of operations or cash flow.

     The Company adopted a stock incentive plan during February 2004 that authorizes the use of stock options, stock appreciation rights, restricted stock grants and units, performance share awards and annual incentive awards to key employees, primarily management. The Company has reserved 3,700,000 shares of common stock for issuance in conjunction with all options and other stock-based awards to be granted under the plan. The purpose of the plan is (1) to promote the best interests of the Company and its stockholders by encouraging employees to acquire an ownership interest in the Company, thus identifying their interests with those of stockholders and (2) to enhance the ability of the Company to attract and retain qualified employees, consultants and non-employee directors. No participant may be granted options during any one fiscal year to purchase more than 500,000 shares of common stock.

   Stock Options

     As of March 31, 2005, the Company had issued options to purchase 118,888 shares of its common stock under the plan. These options have been granted to non-employee directors of the Company. Options granted under the plan generally vest 50% after one year from the grant date and 100% after two years from the grant date. However, when directors accept options in lieu of cash compensation, the options vest immediately. The related expense for the three months ended March 31, 2005 and 2004 of $70,255 and $23,936, respectively is included in administrative expenses. The following summarizes all stock option related transactions from January 1, 2004 through March 31, 2005.

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     The following options information is as of March 31, 2005:

     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:

   Share Appreciation Rights

     In 2002, Asset Acceptance Holdings LLC adopted a share appreciation rights plan for certain key employees. The purpose of the plan was to further the long-term stability and financial success of the Company. Participants in the plan had the potential to share in the appreciation of the value of Asset Acceptance Holdings LLC if certain financial objectives were met or upon partial or complete liquidation events, as defined in the plan. No expense had been recognized in the consolidated statements of income during 2002 and 2003 as a result of this plan, as the value of such shares could not be reasonably estimated and the benefits were contingent upon achieving certain returns upon a liquidity event such as a sale of the Company or an initial public offering of common stock.

     In connection with the consummation of the Company’s IPO in February 2004, the Company exercised its right to vest 100% of the share appreciation rights held by the participants in the plan which resulted in a payment of $18.4 million dollars for the applicable withholding taxes due by the participants and the issuance of 1,776,826 unregistered shares of the Company’s common stock to the participants. As a result, the Company recognized a compensation charge including employer payroll taxes of $45.7 million ($28.7 million net of taxes) during the first quarter of 2004 related to this.

6. Litigation Contingencies

     The Company is involved in certain legal matters that management considers incidental to its business. Management has evaluated pending and threatened litigation against the Company as of March 31, 2005 and does not believe exposure to be material.

7. Income Taxes

     Income taxes for the three months ended March 31, 2004 included a deferred tax charge of $19.3 million resulting from RBR Holding Corp. losing its S corporation tax status after becoming a wholly-owned subsidiary of Asset Acceptance Capital Corp. during the first quarter of 2004.

     Income taxes for the three months ended March 31, 2004 (excluding the deferred tax charge related to RBR Holding Corp.) reflected income tax expense on 60% of pretax income for the period January 1, 2004 through February 4, 2004, as RBR Holding Corp. (40% owner of Asset Acceptance Holdings LLC) was structured as a S corporation under the Internal Revenue Code and, therefore, taxable income was included on the shareholders’ individual tax returns. Income taxes during the period February 5, 2004 through March 31, 2004 reflected income tax expense on 100% of pretax income as RBR Holding Corp. became a wholly-owned subsidiary of Asset Acceptance Capital Corp. as part of the reorganization that occurred on February 4, 2004 related to the IPO.

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     Components of income tax expense are set forth below:

     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:

8. Subsequent Events

     On April 21, 2005 we completed a secondary public offering of 5,750,000 shares of our common stock at $18.89 per share, including an over-allotment option which was exercised in full. All of these shares were sold by selling stockholders, which included members of management and other holders, and none of the shares were sold by the Company. The selling stockholders received all of the net proceeds from the sale of the shares. Pursuant to the registration rights agreement between the company and certain of the selling stockholders, the Company will bear substantially all of the expenses of the secondary offering, other than the underwriting discounts, which are estimated at approximately $575,000.

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

First Quarter 2005 Overview

   Company Overview

     We have been purchasing and collecting defaulted or charged-off accounts receivable portfolios from consumer credit originators since the formation of our predecessor company in 1962. Charged-off receivables are the unpaid obligations of individuals to credit originators, such as credit card issuers, consumer finance companies, retail merchants and utility providers. Since these receivables are delinquent or past due, we are able to purchase them at a substantial discount. We purchase and collect charged-off consumer receivable portfolios for our own account as we believe this affords us the best opportunity to use long-term strategies to maximize our profits. We currently do not collect on a commission or contingent fee basis.

     For the first quarter of 2005, cash collections increased 23.3% to $80.4 million. Revenues for the first quarter of 2005 were $66.0 million, a 32.7% increase over the prior year. Net income was $15.1 million for the first quarter of 2005, compared to a net loss of $36.2 million for the same period in 2004. Net loss for the first quarter of 2004 included a $45.7 million compensation and related payroll charge ($28.7 million on an after-tax basis) for the vesting of outstanding share appreciation rights and a deferred tax charge of $19.3 million.

     For the first quarter of 2005, we invested $33.1 million in charged-off consumer receivable portfolios, with an aggregate face value of $1.1 billion, or 2.99% of face value. We have seen prices for charged-off accounts receivable portfolios increase over the past 12 to 18 months and believe prices to be relatively high at the current time. We believe we have seen some indications that prices have stabilized during the first quarter of 2005, however we cannot give any assurances that prices will not increase in the future. We are determined to remain disciplined and purchase portfolios only when we believe we can achieve acceptable returns.

     We regularly utilize unaffiliated third parties, primarily attorneys and other collection agencies, to collect certain account balances on our behalf. The percent of gross collections from such third parties has steadily increased from 15% for the year ended December 31, 2002 to 21% for the three months ended March 31, 2005. The increase is primarily due to increased legal activity in states that we are not located in, as well as a slight increase in the use of third party collection agencies. These increases do not reflect any specific strategy to increase third party collections.

Forward Looking Statements

     This report contains forward-looking statements that involve risks and uncertainties. These statements include, without limitation, statements about future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “potential” or “continue”, the negative of these terms or other comparable terminology. In addition, we, or persons acting on our behalf, may from time to time publish or communicate other items that could also be construed to be forward looking statements. Statements of this sort are or will be based on our estimates, assumptions and projections, and are subject to risks and uncertainties, including those specifically listed below that could cause actual results to differ materially from those included in the forward looking statements. These statements may be found in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These statements involve a number of risks and uncertainties. Actual events or results may differ materially from any forward-looking statement as a result of various factors, including those we discuss in our Annual Report on Form 10-K in the section titled “Risk Factors” and elsewhere in this Report.

     Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations. Factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include the following:

	•	our ability to purchase charged-off receivable portfolios on acceptable terms and in sufficient amounts;
	•	our ability to recover sufficient amounts on our charged-off receivable portfolios;
	•	our ability to hire and retain qualified personnel;
	•	a decrease in collections if bankruptcy filings increase or if bankruptcy laws or other debt collection laws change;

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	•	our ability to make reasonable estimates of the timing and amount of future cash receipts for purposes of recording purchased receivable revenues in accordance with Accounting Standards Executive Committee Practice Bulletin 6 as well as the Accounting Standards Executive Committee Statement of Position 03-3;
	•	changes in, or failure to comply with, governmental regulations, including our ability to timely comply with Section 404 of the Sarbanes-Oxley Act and the costs related to compliance;
	•	the costs and uncertainties related to compliance with Internal Revenue Code Section 6050P-2 and the related Treasury Regulations and the issuance of 1099-C information returns;
	•	our ability to maintain existing, and secure additional, financing on acceptable terms;
	•	the loss of any of our executive officers or other key personnel;
	•	the costs, uncertainties and other effects of legal and administrative proceedings;
	•	our ability to successfully expand our businesses and train and integrate new collectors;
	•	the temporary or permanent loss of our computer or telecommunications systems, as well as our ability to respond to changes in technology and increased competition; and
	•	other unanticipated events and conditions that may hinder our ability to compete.

Significant Events During the Three Months Ended March 31, 2005

     On April 21, 2005, we completed a secondary public offering of 5,750,000 shares of our common stock at $18.89 per share, including an over-allotment option which was exercised in full. All of these shares were sold by selling stockholders, which included members of management and other holders, and none of the shares were sold by us. The selling stockholders received all of the net proceeds from the sale of the shares. Pursuant to the registration rights agreement between the company and certain of the selling stockholders, the Company will bear substantially all of the expenses of the secondary offering, other than underwriting discounts, which are estimated at approximately $575,000. These expenses will be reflected as a charge in the period incurred. In addition, certain of the selling stockholders, pursuant to the registration rights agreement, retain the right to request three additional registrations of specified shares, in which case we will be required to bear such offering expenses in the quarter in which any future offering occurs.

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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.

   Three Months Ended March 31, 2005 Compared To Three Months Ended March 31, 2004

   Revenue

     Total revenues were $66.0 million for the three months ended March 31, 2005, an increase of $16.3 million, or 32.7%, over total revenues of $49.7 million for the three months ended March 31, 2004. Purchased receivable revenues were $65.9 million for the three months ended March 31, 2005, an increase of $16.3 million, or 32.8%, over the three months ended March 31, 2004, amount of $49.6 million. The increase in revenues was due primarily to an increase in the average outstanding balance of purchased receivables. Cash collections on charged-off consumer receivables increased 23.3% to $80.4 million for the three months ended March 31, 2005 from $65.2 million for the same period in 2004. Cash collections for the three months ended March 31, 2005 and 2004 include collections from fully amortized portfolios of $12.1 million and $5.2 million, respectively, of which 100% were reported as revenue.

     Revenue reflects impairments recognized during the three months ended March 31, 2005 of $.7 million. The impairments were recognized under Practice Bulletin 6 (“PB 6”), as amended by SOP 03-3, which requires that an impairment be taken for decreases in expected cash flows. During the three months ended March 31, 2004, we accounted for our purchased receivable portfolios under the provisions of PB 6, which required lowering of yields for decreases in expected cash flows and therefore no impairments were recognized.

     During the three months ended March 31, 2005, we acquired charged-off consumer receivables portfolios with an aggregate face value amount of $1.1 billion at a cost of $33.1 million, or 2.99% of face value, net of buybacks. Included in these purchase totals were

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10 portfolios with an aggregate face value of $88.6 million at a cost of $3.2 million, or 3.56% of face value, which were acquired through four forward flow contracts. During the three months ended March 31, 2004, we acquired charged-off consumer receivables portfolios with an aggregate face value of $501.0 million at a cost of $12.1 million, or 2.42% of face value (adjusted for buybacks through March 31, 2005). From period to period we may buy paper of varying age, types and cost. As a result, the cost of our purchases, as a percent of face value, may fluctuate from one period to the next. The increase in our cost as a percent of face value to 2.99% for the three months ended March 31, 2005 from 2.42% for the same period in 2004, is primarily due to an increase in the amount of fresh, primary and secondary (newer) accounts purchased, because newer accounts generally demand a slightly higher purchase price than older accounts. These types of accounts made up 58.2% of our purchases in the three months ended March 31, 2005 compared to only 33.5% for the same period in 2004.

   Operating Expenses

     Total operating expenses were $41.8 million for the three months ended March 31, 2005, a decrease of $35.4 million, or 45.8%, compared to total operating expenses of $77.2 million for the three months ended March 31, 2004. Total operating expenses were 63.3% of total revenues and 52.0% of cash collections for the three months ended March 31, 2005, compared with 155.1% and 118.3%, respectively, for the same period in 2004. Operating expenses for the three months ended March 31, 2004 include a $45.0 million compensation charge and a $0.7 million payroll tax charge resulting from the vesting of the outstanding share appreciation rights upon our initial public offering.

     We incurred a one-time compensation and related payroll tax charge of $45.7 million resulting from the vesting of the share appreciation rights that occurred upon our initial public offering in 2004. We are providing the total operating expense and salary and benefit expense information and related percentages of total revenue and cash collections excluding the one-time charge incurred solely in connection with our initial public offering because we believe doing so provides investors with a more direct comparison of results of operations between 2004 and 2005. In addition, we use the adjustments for purposes of our internal planning, review and period-to-period comparison process.

     Excluding the $45.7 million compensation and related payroll tax charge in 2004, total operating expenses of $41.8 million for the three months ended March 31, 2005 increased $10.3 million, or 32.8% from the $31.5 million in operating expenses for the same period in 2004. Operating expenses remained level at 63.3% of total revenues for the three months ended March 31, 2005 and 2004. As a percent of collections, operating expenses increased to 52.0% for the three months ended March 31, 2005 from 48.3% for the three months ended March 31, 2004, primarily due to an increase in collection expenses.

     Salaries and Benefits. Salary and benefit expenses were $18.5 million for the three months ended March 31, 2005, a decrease of $42.9 million, or 69.8%, compared to salary and benefit expenses of $61.4 million for the three months ended March 31, 2004. Salary and benefit expenses were 28.1% of total revenue and 23.1% of cash collection for the three months ended March 31, 2005, compared with 123.5% and 94.2%, respectively, for the same period in 2004. Salary and benefit expenses decreased primarily due to the $45.7 million compensation and related payroll tax charge resulting from the vesting of the outstanding share appreciation rights upon our initial public offering.

     Excluding the $45.7 million compensation and related payroll tax charge in 2004, salary and benefit expenses of $18.5 million for the three months ended March 31, 2005 increased of $2.8 million, or 17.8% from the $15.7 million in salary and benefit expenses for the same period in 2004. The increase over the prior year was primarily due to an increase in total employees which grew to 1,788 at March 31, 2005 from 1,562 at March 31, 2004, in response to the growth in the number of our portfolios of charged-off consumer receivables. Salary and benefit expenses, excluding the $45.7 million compensation and related payroll tax charge, decreased to 28.1% of total revenues and 23.1% of cash collections for the three months ended March 31, 2005 from 31.7% of total revenue and 24.2% of cash collections for the same period in 2004. The decrease in salary and benefits expenses, as adjusted, as a percent of cash collections was primarily due to improved benefit costs and increased overall collection efficiencies. The overall gains in collection efficiency from our legal and forwarding areas were partially offset by decreases in traditional call center collections efficiency. Traditional call center collections per full-time equivalent collection employee decreased to $44,535 for the three months ended March 31, 2005, compared to $47,476 for the same period in 2004. This decrease is primarily due to a decrease in productivity for collectors with less than a year of experience as productivity for collectors with more than one year of experience increased compared to the same period in 2004. Average full-time equivalent collection employees increased to 1,000 for the three months ended March 31, 2005 from 864 during the same period in 2004.

     Collections Expense. Collections expense increased to $18.4 million for the three months ended March 31, 2005, reflecting an increase of $6.1 million, or 49.9%, over collection expense of $12.3 million for the three months ended March 31, 2004. The increase

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was primarily attributable to the increased number of accounts on which we were collecting. Collections expense increased to 22.9% of cash collections for the three months ended March 31, 2005 from 18.9% of cash collections for the three months ended March 31, 2004. This increase was primarily due to increases in amounts spent for collection letters and information acquisition expenses as well as increased legal expenses and forwarding fees. The increases in the collection letters and information acquisition expense was primarily due to an increase in the number of accounts purchased in the first quarter of 2005. During the three months ended March 31, 2005, we acquired 2.0 million accounts compared to 0.2 million for the same period in 2004. The increase in legal expense was due to an increase in the number of accounts for which legal action has been initiated. The increase in forwarding fees was due to increased legal activity in states that we are not located in, as well as a slight increase in the use of third party collection agencies. The percent of gross collections from such third parties has steadily increased from 15% for the year ended December 31, 2002 to 21% for the three months ended March 31, 2005. The increases in forwarding fees do not reflect any specific strategy to increase third party collections.

     Occupancy. Occupancy expense was $2.1 million for the three months ended March 31, 2005, an increase of $0.7 million, or 51.0%, over occupancy expense of $1.4 million for the three months ended March 31, 2004. The increase was primarily attributable to the relocation of our headquarters to a larger facility in Warren, Michigan in November 2004.

     Administrative. Administrative expenses increased to $1.9 million for the three months ended March 31, 2005, from $1.3 million for the three months ended March 31, 2004, reflecting a $0.6 million, or 46.2%, increase. The increase in administrative expenses was principally a result of the increased number of accounts being processed and expenses related to the secondary offering.

     Depreciation. Depreciation expense was $0.8 million for the three months ended March 31, 2005, an increase of $0.1 million or 16.0% over depreciation expense of $0.7 million for the three months ended March 31, 2004. The increase was due to capital expenditures during 2005 and 2004, which were required to support the increased number of accounts serviced by us and the purchase of furniture and technology equipment in our new and expanded facilities.

     Interest Income. Interest income was $34,908 for the three months ended March 31, 2005, reflecting an increase of $27,955 compared to net interest income of $6,953 for the three months ended March 31, 2004. The increase was due primarily to interest received related to our increased cash position over the prior year.

     Interest Expense. Interest expense was $0.1 million for the three months ended March 31, 2005, reflecting a decrease of $0.9 million, or 89.3%, compared to interest expense of $1.0 million for the three months ended March 31, 2004. During February 2004, we paid in full a related party debt of $40.0 million, which resulted in a reduction in interest expense of $0.4 million during the three months ended March 31, 2005 from the same period in the prior year. Additionally, the decrease in interest expense was due to lower average borrowings on our line of credit, which decreased to $0.6 million for the three months ended March 31, 2005 from $42.4 million for the same period in 2004. The reduction in our average borrowings was due to repayment of $37.7 million of debt from the proceeds of the initial public offering and cash generated from operations. Interest expense includes the amortization of capitalized bank fees of $49,336 and $69,908 for the three months ended March 31, 2005 and 2004, respectively.

     Income Taxes. Income tax expense of $9.0 million reflects normal tax rates of 35% for federal taxes and 2.2% for state taxes for the three months ended March 31, 2005. Income taxes for the three months ended March 31, 2004 (excluding the deferred tax charge related to RBR Holding Corp.) reflected income tax expense on 60% of pretax income for the period January 1, 2004 through February 4, 2004, as RBR Holding Corp. (40% owner of Asset Acceptance Holdings LLC) was taxed as a S corporation under the Internal Revenue Code and, therefore, taxable income was included on the shareholders’ individual tax returns. Income taxes during the period February 5, 2004 through March 31, 2004 reflected income tax expense on 100% of pretax income as RBR Holding Corp. became a wholly-owned subsidiary of Asset Acceptance Capital Corp. as part of the reorganization.

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Supplemental Performance Data

   Portfolio Performance

     The following table summarizes our historical portfolio purchase price and cash collections on an annual vintage basis since 1990 through March 31, 2005.

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     The following table summarizes the remaining unamortized balances of our purchased receivables portfolios by year of purchase as of March 31, 2005.

  Collector Productivity

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

Collectors by Experience

Collection Averages by Experience

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  Cash Collections

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

Historical Collections(1)

Cumulative Collections(1)

Cumulative Collections as Percentage of Purchase Price(1)

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Seasonality

     Our business depends on our ability to collect on our purchased portfolios of charged-off consumer receivables. Collections within portfolios tend to be seasonally higher in the first and second quarters of the year due to consumers’ receipt of tax refunds and other factors. Conversely, collections within portfolios tend to be lower in the third and fourth quarters of the year due to consumers’ spending in connection with summer vacations, the holiday season and other factors. Our historical growth in purchased portfolios and in our resultant quarterly cash collections has helped to minimize the effect of seasonal cash collections. Operating expenses are seasonally higher during the first and second quarters of the year due to expenses necessary to process the increase in cash collections. However, revenue recognized is relatively level due to the application of the interest method for revenue recognition. In addition, our operating results may be affected to a lesser extent by the timing of purchases of charged-off consumer receivables due to the initial costs associated with purchasing and integrating these receivables into our system. Consequently, income and margins may fluctuate from quarter to quarter.

     Below is a chart that illustrates our quarterly collections for years 2001 through March 31, 2005.

Cash Collections

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     The following chart categorizes our purchased receivables portfolios acquired during January 1, 1990 through March 31, 2005, into major asset types, as of March 31, 2005.