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Asset Acceptance Capital 10-K 2006 Documents found in this filing:
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
28405 Van
Dyke Avenue
Warren, Michigan 48093 (Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act:
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act).
Yes o No þ
The aggregate market value of the Registrant’s Common Stock
held by non-affiliates of the Registrant on February 15,
2006 (based on the February 15, 2006 closing sales
price of $17.70 of the Registrant’s Common Stock, as
reported on The Nasdaq National Market on such date) was
$259,420,032.
Number of shares outstanding of the Registrant’s Common
Stock at February 15, 2006:
37,205,115 shares
of Common Stock, $0.01 par value.
Portions of the Registrant’s definitive Proxy Statement to
be filed for its 2006 Annual Meeting of Stockholders to be held
on May 16, 2006 are incorporated by reference into
Part III of this Report.
ASSET
ACCEPTANCE CAPITAL CORP.
Annual
Report on
Form 10-K
This
Form 10-K
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.
Table of Contents
PART I
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, telecommunications
and other utility providers as well as from resellers and other
holders of consumer debt. Since these receivables are delinquent
or past due, we are able to purchase them at a substantial
discount to their face value. 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. Since
January 1, 1990, we have purchased 863 consumer debt
portfolios through December 31, 2005, with an original
charged-off face value of $22.9 billion for an aggregate
purchase price of $455.4 million, or 1.99% of face value,
net of buybacks. On average, we have been able to collect more
than three times the amount paid for a portfolio, as measured
over a five-year period from the date of purchase.
When considering whether to purchase a portfolio, we conduct a
quantitative and qualitative analysis of the portfolio to
appropriately price the debt and determine whether the portfolio
will yield collections consistent with our goals. This analysis
includes the use of our pricing and collection probability model
and draws upon our extensive experience in the industry. We have
developed experience across a wide range of asset types at
various stages of delinquency, having made purchases across more
than 20 different asset types from over 100 different debt
sellers since 2000. We selectively deploy our capital in the
primary, secondary and tertiary markets where typically between
one and three collection agencies have already tried to collect
the debt. We believe we are well positioned to acquire
charged-off accounts receivable portfolios as a result of our
being price competitive, long-standing history in the industry,
relationships with debt sellers, consistency of performance and
attention to post-sale service.
Unlike many third party collection agencies that typically
attempt to collect the debt only for a period of three to six
months, we generally take a long-term approach, in excess of
five years, to the collection effort as we are the owners of the
debt. We apply an approach that encourages cooperation with the
debtors to make a lump sum settlement payment in full or to
formulate a repayment plan. For those debtors who we believe are
able to repay the debt but who are unwilling to do so, we will
proceed with legal remedies to obtain our collections. In part,
through our strategy of holding the debt for the long-term, we
have established a methodology of converting debtors into paying
customers. In addition, our approach allows us to invest in
various collection management and analysis tools that may be too
costly for traditional, more short-term oriented, collection
agencies, as well as to pursue legal collection strategies as
appropriate. In many cases, we continue to receive collections
on individual portfolios beyond the tenth anniversary of its
purchase.
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Lee Acceptance Company was formed in 1962 by Rufus H.
Reitzel, Jr. as a sole proprietorship for the purpose of
purchasing and collecting charged-off consumer receivables.
Nathaniel F. Bradley IV, our President and Chief Executive
Officer, joined Lee Acceptance Company in 1979. In 1982, Lee
Acceptance Company was incorporated as Lee Acceptance Corp. The
business of purchasing and collecting charged-off consumer
receivables was subsequently conducted by Mr. Reitzel and
Mr. Bradley through several successor companies.
In 1994, in an effort to take advantage of tax planning
opportunities available for S corporations,
Mr. Reitzel and Mr. Bradley formed Asset Acceptance
Corp. for the purpose of purchasing and collecting charged-off
consumer receivables and formed Consumer Credit Corp. for the
purpose of financing sales of consumer product retailers located
primarily in Michigan.
Subsequently, Mr. Reitzel and Mr. Bradley formed
Financial Credit Corp. in 1997 for the purpose of purchasing and
collecting portfolios of charged-off consumer receivables of
health clubs and CFC Financial Corp. in 1998 for the
purpose of purchasing and collecting portfolios of charged-off
consumer receivables of utility companies and small balance
portfolios, both of which were affiliate corporations of Asset
Acceptance Corp. and Consumer Credit Corp.
January
2000 — September 2002
In January 2000, Asset Acceptance Corp., Financial Credit Corp.
and CFC Financial Corp. were joined as wholly-owned subsidiaries
of AAC Holding Corp. for tax planning purposes. Set forth below
is a diagram depicting our predecessor corporations in operation
for the period of January 2000 through September 30, 2002,
their dates of formation and their ownership:
In September 2002, Mr. Reitzel and Mr. Bradley formed Asset
Acceptance Holdings LLC, a Delaware limited liability company,
for the purpose of consummating an equity recapitalization, with
Consumer Credit Corp. and AAC Holding Corp. (which was renamed
RBR Holding Corp. in October 2002), as the initial equity
members of Asset Acceptance Holdings LLC. Effective
September 30, 2002, AAC Investors, Inc. acquired a 60%
equity interest in Asset Acceptance Holdings LLC from RBR
Holding Corp. and Consumer Credit Corp. which collectively
retained a 40% equity interest. In connection with this
recapitalization, RBR Holding Corp. and Consumer Credit Corp.
received 39% and 1%, respectively, of the equity membership
interests of Asset Acceptance Holdings LLC
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and $45,550,000 and $250,000, respectively, in cash. The
majority of the cash proceeds were subsequently distributed to
the owners of RBR Holding Corp. and Consumer Credit Corp. At the
time of this recapitalization, Rufus H. Reitzel, Jr, Nathaniel
F. Bradley IV, our President and Chief Executive Officer and
Mark A. Redman, our Vice President-Finance and Chief Financial
Officer, beneficially owned 57%, 38% and 5%, respectively, of
RBR Holding Corp. and 60%, 40% and 0%, respectively, of Consumer
Credit Corp. Through this recapitalization, the businesses of
Asset Acceptance Corp., Financial Credit Corp., CFC Financial
Corp., Consumer Credit Corp. and the portfolio assets of
Lee Acceptance Corp. were contributed to the subsidiaries
of Asset Acceptance Holdings LLC. After September 30, 2002,
the business of purchasing and collecting portfolios of
charged-off consumer receivables previously conducted by AAC
Holding Corp. and its subsidiaries and the business of financing
sales of consumer product retailers previously conducted by
Consumer Credit Corp. were effected through this newly formed
company and its subsidiaries. Consumer Credit Corp. was merged
into RBR Holding Corp. in January 2003.
Set forth below is a diagram depicting our successor entities in
operation for the period from September 30, 2002, up to the
effective date of the Reorganization (as defined below), their
dates of formation and their ownership:
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On February 4, 2004, immediately prior to the commencement
of our initial public offering, all of the shares of capital
stock of AAC Investors, Inc., an affiliate of Quad-C Management,
Inc., a private equity firm based in Charlottesville, Virginia,
and RBR Holding Corp., which held 60% and 40%, respectively, of
the equity membership interests in Asset Acceptance Holdings
LLC, were contributed to Asset Acceptance Capital Corp. in
exchange for shares of common stock of Asset Acceptance Capital
Corp. The total number of shares issued to the stockholders of
AAC Investors, Inc. and RBR Holding Corp. in such exchange was
28,448,449 with 16,004,017 shares and
12,444,432 shares issued to the stockholders of AAC
Investors, Inc. and the stockholders of RBR Holding Corp.,
respectively. As a result of this reorganization, Asset
Acceptance Holdings LLC and its subsidiaries became indirect
wholly-owned subsidiaries of Asset Acceptance Capital Corp. The
foregoing is referred to herein as the
“Reorganization”. Immediately prior to the
Reorganization, all of the shares of AAC Investors, Inc.
were held by AAC Quad-C Investors LLC, an affiliate of Terrence
D. Daniels and Anthony R. Ignaczak, both of whom serve on our
board of directors, and substantially all of the shares of RBR
Holding Corp. were held by Rufus H. Reitzel, Jr., Nathaniel
F. Bradley IV, our President and Chief Executive Officer, Mark
A. Redman, our Vice President-Finance and Chief Financial
Officer, and their affiliates.
Set forth below is a diagram depicting our successor entities as
of the effective date of the Reorganization, their dates of
formation and their ownership:
Upon the consummation of our February 2004 initial public
offering, our then-current officers, directors and principal
stockholders, together with their affiliates (including
Messrs. Reitzel, Bradley and Redman and AAC Quad-C
Investors LLC), beneficially owned approximately 75.8% of our
issued and outstanding common stock.
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On December 31, 2004, Financial Credit, LLC and CFC
Financial, LLC were merged with and into Asset Acceptance, LLC,
with the result that, by operation of law, all assets of
Financial Credit, LLC and CFC Financial, LLC were vested in
Asset Acceptance, LLC and all obligations of Financial Credit,
LLC and CFC Financial, LLC were assumed by Asset Acceptance,
LLC. Subsequent to the merger, all ownership interests in Asset
Acceptance, LLC continue to be owned by Asset Acceptance
Holdings LLC.
Currently, Asset Acceptance, LLC purchases and holds portfolios
in all asset types except for healthcare. Rx Acquisitions, LLC
purchases and holds portfolios solely in healthcare.
Set forth below is a diagram depicting our current structure:
As used in this Annual Report, all references to us mean:
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Purchasing
Typically, we purchase our portfolios in response to a request
to bid received via
e-mail or
telephone. In addition to these requests, we have developed a
marketing and acquisitions team that contacts and cultivates
relationships with known and prospective sellers of portfolios
in our core markets and in new markets for different asset
types. We have purchased portfolios from over 100 different debt
sellers since 2000, including many of the largest consumer
lenders in the United States. Although 10% or more of the money
we spend on our purchases in a year may be paid to a single debt
seller, historically, we have not purchased more than 10% from
the same debt seller in consecutive years. In 2003, we purchased
one portfolio for $17.3 million (adjusted for buybacks
through 2005) that accounted for 5.9% and 6.3% of our
revenues in 2005 and 2004, respectively, which we believe will
account for a declining percentage of our revenues in 2006 and
beyond. While we have no policy limiting purchases from single
debt sellers, we purchase from a diverse set of suppliers and
our purchasing decisions are based upon constantly changing
economic and competitive environments as opposed to long-term
relationships with particular suppliers. During 2004, we entered
into five forward flow contracts that commit us to purchase
receivables for a fixed percentage of the face value of the
receivables. Three of the five forward flow contracts were
renewed during 2005 with only one of these forward flow
contracts having terms beyond 2005 and this contract is expiring
in February 2006. There were no new contracts entered into
during 2005. These contracts commit a debt seller to sell a
steady flow of charged-off receivables to us and commit us to
purchase receivables for a fixed percentage of the face value.
We have entered into such contracts in the past and may do so in
the future depending on market conditions.
We purchase our portfolios through a variety of sources,
including consumer credit originators, private brokers or agents
and debt resellers. Debt resellers are debt purchasers that sell
some or all of the debt they purchase. Generally, the portfolios
are purchased either in competitive bids through a sealed bid
or, in some cases, through an on-line process or through
privately-negotiated transactions between the credit originator
or other holders of consumer debt and us.
Each potential acquisition begins with a quantitative and
qualitative analysis of the portfolio. In the initial stages of
the due diligence process, we typically review basic data on the
portfolio’s accounts. This data typically includes the
account number, the consumer’s name, address, social
security number, phone numbers, outstanding balance, date of
charge-off, last payment and account origination. We analyze
this information based on quantitative and qualitative factors
and summarize into a format based on certain key metrics, such
as state of debtor’s last known residence, type of debt and
age of the receivable. In addition, we typically provide the
seller with a questionnaire designed to help us understand
important qualitative factors relating to the portfolio.
As part of our due diligence evaluation, we run the portfolio
through our pricing and collection probability model. This model
uses certain characteristics of the portfolio, such as the type
of product, age and level of delinquency and the locations of
the debtors, to calculate an estimate of collectibility for the
portfolio and to determine a base value for the purchase.
Pricing adjustments are factored into the model reflecting
issuer considerations, demographic attributes and other account
criteria. In those circumstances where the type or pricing of
the portfolio is unusual, we consult with management from our
collection operations to help ascertain collectibility,
potential collection strategies and our ability to integrate the
new portfolio into our collection platform. Our analysis also
compares the charged-off consumer receivables in the prospective
portfolio with our collection history on portfolios with similar
attributes.
Once we have compiled and analyzed available data, we factor in
market conditions and determine an appropriate bid price or bid
range. The recommended bid price or bid range, along with a
summary of our due diligence, is submitted to our investment
committee and, for purchases in excess of a certain corporate
threshold, to our audit committee for review and approval. After
appropriate approvals and acceptance of our offer by the seller
of the portfolio, a purchase agreement is negotiated. Provisions
are generally incorporated for bankrupt, disputed, fraudulent or
deceased accounts and, typically, the credit originator either
agrees to repurchase these accounts or replace them with
acceptable replacement accounts within certain time frames,
generally within 60 to 240 days. Upon execution of the
agreement, the transaction is funded.
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The following chart categorizes our purchased receivable
portfolios acquired during January 1, 1990 through
December 31, 2005 into the major asset types, as of
December 31, 2005.
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 and age of the receivables:
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.
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The following chart categorizes our purchased receivable
portfolios acquired during January 1, 1990 through
December 31, 2005 into the major account types, as of
December 31, 2005.
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 receivable
portfolios acquired during January 1, 1990 through
December 31, 2005 based on geographic location of debtor,
as of December 31, 2005.
Our collection operations seek to maximize the recovery of our
purchased charged-off receivables in a cost-effective manner. We
have organized our collection platform into a number of
specialized departments which include collection, legal
collection and bankruptcy and probate recovery.
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Generally, our collection efforts begin in our collection
department and, if warranted, move to our legal collection
department. If the collection account involves a bankrupt debtor
or a deceased debtor, our bankruptcy and probate recovery
department will review and manage the account. If the collection
account merits outsourcing to a third party collection agency,
our agency forwarding department handles the matter. Finally,
our information acquisition department utilizes a network of
data providers to increase recovery rates and promote account
representative efficiency in all of our departments.
Our collection department accounts for the majority of our
collections. Once a portfolio is purchased, we perform a
portfolio review in order to formulate and apply what we believe
to be an effective collection strategy. This review includes a
series of data preparation and information acquisition steps to
provide the necessary information to begin collection efforts.
Portfolio accounts are assigned, sorted and prioritized to
account representative queues based on product type, account
status, various internal and external collectibility predictors,
account demographics, balance sizes and other attributes.
Although we prefer to collect the majority of our charged-off
receivable portfolios through our internal collection
operations, in some cases, we believe it can be more effective
and cost-efficient to outsource collections. We will consider
outsourcing collections involving states with unfavorable legal
or regulatory climates for collections. In addition, we may also
consider outsourcing relatively small balance accounts so that
our account representatives can focus on relatively larger
balance accounts. We have developed a network of third party
collection agencies to service accounts when we believe the
accounts would be better served by outsourcing to an outside
collection agency.
We train our account representatives to be full service account
representatives who handle substantially all collection activity
related to their accounts, including manual and automated dialer
outbound calling activity, inbound call management, skip tracing
or debtor location efforts, referrals to pursue legal action and
settlement and payment plan negotiation. In order to increase
collections on accounts, non-paying accounts are periodically
reassigned to new account representatives. Our performance based
collection model is driven by a bonus program that allows
account representatives to earn bonuses based on their personal
collection goals. In addition, we monitor our account
representatives for compliance with the federal and state debt
collection laws.
When an initial telephone contact is made with a debtor, the
account representative is trained to go through a series of
questions in an effort to obtain accurate location and financial
information on the debtor, the reason the debtor may have
defaulted on the account, the debtor’s willingness to pay
and other relevant information that may be helpful in securing
satisfactory settlement or payment arrangements. Account
representatives are encouraged to attempt to collect the balance
in full in one lump sum payment prior to the end of the month.
If full payment is not available, the account representative
will attempt to negotiate a settlement on the balance in the
highest amount within the shortest time frame. We maintain
settlement guidelines that account representatives, supervisors
and managers must follow in an effort to maximize recoveries.
Exceptions are handled by management on an account by account
basis. If the debtor is unable to pay the balance in full or
settle within allowed guidelines, monthly installment plans are
encouraged in order to have the debtor resume a regular payment
habit. Our experience has shown that debtors are more likely to
respond to this approach which can result in a payment plan or
settlement in full in the future.
If an account representative is unable to establish contact with
a debtor, we require the account representative to undertake
skip tracing procedures to locate, initiate contact and collect
from the debtor. Skip tracing efforts are performed at the
account representative level and by third party information
providers on a larger scale. Each account representative has
access to internal and external information databases that
interface with our collection system at the desktop level. In
addition, we have several information providers from whom we
acquire information that is either systematically or manually
validated and used in our collection and location efforts. Using
these methods, we periodically refresh and supply updated
account information to our account representatives to increase
contact with debtors.
If voluntary payments cannot be established with the debtor, we
have trained our account representatives to identify
opportunities to pursue legal action against those debtors with
an ability, but not the willingness, to pay.
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Using our lawsuit guidelines, our account representatives
recommend debtors for us to commence litigation in an effort to
stimulate collections.
In the event collection has not been obtained through our
collection department and the opportunity for legal action is
verified through our internal process, we pursue a legal
judgment against the debtor. In addition to the accounts
identified for legal action by our account representatives, we
identify accounts to pursue legal action on a batch process
based on predetermined criteria. Our legal collection department
is comprised of an in-house legal department, including
collection attorneys and non-attorney legal account
representatives, and a legal forwarding department.
For accounts in states where we have a local presence, and in
some cases, adjacent states, we prefer to pursue an in-house
legal strategy as it provides us with a greater ability to
manage the process. We currently have in-house capability in
Arizona, Florida, Illinois, Maryland, Michigan, New Jersey,
Ohio, Texas and Virginia. In each of these states, we have
designed our legal policies and procedures to maintain
compliance with state and federal laws while pursuing available
legal opportunities. We will continue to pursue selective and
opportunistic expansion in various geographic regions.
Our legal forwarding department is organized to address the
legal recovery function for accounts principally located in
states where we do not have a local or, in some cases, adjacent
presence, or for accounts that we believe can be better served
by a third party law firm. To that end, we have developed a
nationwide network of independent law firms in all
50 states, as well as the District of Columbia, who work
for us on a contingent fee basis. The legal forwarding
department actively manages and monitors this network.
Once a judgment is obtained, our legal department pursues
voluntary and involuntary collection strategies to secure
payment, including wage and bank account garnishments.
Our bankruptcy and probate recovery department handles
bankruptcy and estate probate processing. This department files
proofs of claims for recoveries on receivables which are
included in consumer bankruptcies filed under Chapter 7
(resulting in liquidation and discharge of a debtor’s
debts) and Chapter 13 (resulting in repayment plans based
on the financial wherewithal of the debtor) of the
U.S. Bankruptcy Code. In addition, this department submits
claims against estates involving deceased debtors having assets
that may become available to us through a probate claim.
The consumer debt collection industry is highly competitive and
fragmented. We compete with a wide range of other purchasers of
charged-off consumer receivables, third party collection
agencies, other financial service companies and credit
originators that manage their own consumer receivables. Some of
these companies may have substantially greater personnel and
financial resources and may experience lower account
representative and employee turnover rates than we do. We
believe that increasing amounts of capital have been invested in
the debt collection industry, which could lead to further
increases in prices for portfolios of charged-off accounts
receivables, the enhanced ability of third parties to collect
debt and the reduction in the number of portfolios of
charged-off accounts receivables available for purchase. In
addition, companies with greater financial resources may elect
at a future date to enter the consumer debt collection business.
Furthermore, current debt sellers may change strategies and
cease selling debt portfolios in the future.
Competitive pressures affect the availability and pricing of
receivable portfolios, as well as the availability and cost of
qualified debt account representatives. In addition, some of our
competitors may have entered into forward flow contracts under
which consumer credit originators have agreed to transfer a
steady flow of charged-off receivables to them in the future,
which could restrict those credit originators from selling
receivables to us.
We face bidding competition in our acquisition of charged-off
consumer receivables. We believe successful bids generally are
awarded based on a combination of price, service and
relationships with the individual debt
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sellers. In addition, there continues to be a consolidation of
issuers of credit cards, which have been a principal source of
our receivable purchases. This consolidation has decreased the
number of sellers in the market and, consequently, could over
time, give the remaining sellers increasing market strength in
the price and terms of the sale of charged-off credit card
accounts.
We believe that information technology is critical to our
success. Our key systems have been purchased from outside
vendors and, with our input, have been tailored to meet our
particular business needs. We have a staff of over
50 full-time employees who monitor and maintain our
information technology and communications structure.
Additionally, we believe we have relationships with many of our
key vendors that will allow any system failure to be remedied in
an expeditious manner. Our centralized data center is in our
Warren, Michigan headquarters and all offices are connected to
this data center. This provides for one standard system in every
one of our offices with all employees accessing the same
database.
We license our collection software and complementary products
from Ontario Systems LLC, a leading provider to the collection
industry. This software has enabled us to:
Our collection software resides on a
Hewlett-Packard®
system that was most recently upgraded in December 2005. This
platform currently handles over 20 million of our accounts
and we believe it is scalable to handle our anticipated growth
for the near future.
We maintain a Microsoft
Windows®
2003 based network that supports our back office functions
including time and attendance systems, payroll and
MAS200®
accounting software. We expect that our
MAS200®
accounting software will be transitioned to
Navisiontm
software during 2006.
In order to minimize the potential for a disaster or other
interruption of data or telephone communications that are
critical to our business, we have:
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Federal and state statutes establish specific guidelines and
procedures which debt account representatives must follow when
collecting consumer accounts. It is our policy to comply with
the provisions of all applicable federal laws and comparable
state statutes in all of our recovery activities, even in
circumstances in which we may not be specifically subject to
these laws. As part of this policy, we monitor our account
representatives and other activities for compliance with federal
and state collection laws. Our failure to comply with these laws
could lead to fines on us and on our account representatives and
could have a material adverse effect on us in the event and to
the extent that they apply to some or all of our recovery
activities. Court rulings in various jurisdictions also impact
our ability to collect.
Federal and state consumer protection, privacy and related laws
and regulations extensively regulate the relationship between
debt collectors and debtors. Significant federal laws and
regulations applicable to our business as a debt collector
include the following:
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Additionally, there are state statutes and regulations
comparable to the above federal laws and other state-specific
licensing requirements which affect our operations. State laws
may also limit interest rates and fees, methods of collections,
as well as the time frame in which judicial actions may be
initiated to enforce the collection of consumer accounts.
Although, generally, we are not a credit originator, some laws,
such as the following, which apply typically to credit
originators, may occasionally affect our operations because our
receivables were originated through credit transactions:
Federal laws which regulate credit originators require, among
other things, that credit card issuers disclose to consumers the
interest rates, fees, grace periods and balance calculation
methods associated with their credit card accounts. Consumers
are entitled under current laws to have payments and credits
applied to their accounts promptly, to receive prescribed
notices, and to require billing errors to be resolved promptly.
Some laws prohibit discriminatory practices in connection with
the extension of credit. Federal statutes further provide that,
in some cases, consumers cannot be held liable for, or their
liability is limited with respect to, charges to the credit card
account that were a result of an unauthorized use of the credit
card. These laws, among others, may give consumers a legal cause
of action against us, or may limit our ability to recover
amounts due on an account, whether or not we committed any
wrongful act or omission in connection with the account. If the
credit originator fails to comply with applicable statutes,
rules and regulations, it could create claims and rights for
consumers that could reduce or eliminate their obligations to
repay the account, and have a possible material adverse effect
on us. Accordingly, when we acquire charged-off consumer
receivables, we typically require credit originators to
indemnify us against certain losses that may result from their
failure to comply with applicable statutes, rules and
regulations relating to the receivables before they are sold to
us.
The U.S. Congress and several states have enacted
legislation concerning identity theft. Some of these provisions
place restrictions on our ability to report information
concerning receivables, which may be subject to identity theft,
to consumer credit reporting agencies. Additional consumer
protection and privacy protection laws may be enacted that would
impose additional requirements on the recovery on consumer
credit card or installment accounts. Any new laws, rules or
regulations that may be adopted, as well as changes to or
interpretations of existing consumer protection and privacy
protection laws, may adversely affect our ability to recover the
receivables. In addition, our failure to comply with these
requirements could adversely affect our ability to recover the
receivables.
It is possible that some of the receivables were established as
a result of identity theft or unauthorized use of a credit card.
In such cases, we would not be able to recover the amount of the
charged-off consumer receivables. As a purchaser of charged-off
consumer receivables, we may acquire receivables subject to
legitimate defenses on the part of the consumer. Most of our
account purchase contracts allow us to return to the credit
originators (within an agreed upon amount of time) certain
charged-off consumer receivables that may not be collectible at
the time of purchase, due to these and other circumstances. Upon
return, the credit originators are required to replace the
receivables with similar receivables or repurchase the
receivables. These provisions limit, to some extent, our losses
on such accounts.
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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
is effective beginning 2005 and applies to companies who
acquire indebtedness. Our cost of compliance with these
regulations is expected to be insignificant. 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. It may become more difficult to
collect from those accounts receiving a 1099-C information
return from the Company 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.
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.
As of December 31, 2005, we employed 1,980 total employees,
including 1,888 persons on a full-time basis and 92 persons on a
part-time basis. Our collection department includes
1,103 full-time and 19 part-time account
representatives. Our legal collection department includes
78 full-time and five part-time legal account
representatives (excluding our attorneys). None of our employees
are represented by a union or covered by a collective bargaining
agreement. We consider our employee relations to be good.
We provide a comprehensive training program for our new and
existing employees. Our training includes several learning
approaches, including lecture, classroom discussion and
discovery, role-playing, computer-aided learning and CD-ROM
modules. We also use our
e-mail
system and newsletters to address on-going training issues.
Each new account representative is required to complete an
eight-week training program. The program is divided into two
four-week modules. The initial four-week module has weekly
learning objectives using various learning activities. The first
week includes structured learning of our collection software and
information technology tools, federal and state collection laws
(with particular emphasis on the FDCPA and the FACT Act),
telephone collection techniques and core company policies,
procedures and practices. The second week continues the
structured learning of the first week and is supplemented by
supervised telephone collection calls. During weeks three and
four, the new hire class is formed as a collection team, with a
trainer as supervisor. Collection goals are established and
collection calls are made and supervised. Instruction and
guidance is shared with the new associate to improve
productivity. Each day includes a debriefing of the day’s
activities and challenges. Solutions are discussed. Role-playing
is used to enhance collection and organization skills.
The second four-week training module transitions the collection
team to the collection floor, where they are assigned a new
collection goal and work under the direction of a collection
supervisor. This team of new hires continues to receive closely
monitored collection training. In addition to collection
training, these team members also review key elements from the
first session as well as instruction in new topics.
Each new legal account representative is required to complete a
four-week training program. The first week of training is the
same for legal account representatives as it is for account
representatives. The second week of training focuses on legal
processes and procedures and also includes supervised collection
calls. Weeks three and four include closely supervised
implementation of assigned duties.
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Furthermore, the account representatives are tested twice per
year on their knowledge of the FDCPA and other applicable
federal laws. Account representatives not achieving our minimum
standards are required to complete an FDCPA review course and
are then retested. In addition, annual supplemental instruction
in the FDCPA and collection techniques is provided to our
account representatives.
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 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 elsewhere in this
report. In addition, we, or persons acting on our behalf, may
from time to time publish or communicate other items that could
also be construed to be forward-looking statements. Statements
of this sort are or will be based on our estimates, assumptions
and projections, and are subject to risks and uncertainties,
including those specifically listed below that could cause
actual results to differ materially from those included in the
forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
Except as required by law, we undertake no obligation to update
publicly any forward-looking statements for any reason after the
date of this report to conform these statements to actual
results or to changes in our expectations. Factors that could
affect our results and cause them to materially differ from
those contained in the forward-looking statements include the
following.
If we are unable to purchase charged-off consumer receivables
from credit originators in sufficient face value amounts at
appropriate prices, our business may be harmed. The availability
of portfolios of consumer receivables at prices which generate
an appropriate return on our investment depends on a number of
factors, both within and outside of our control, including:
Over the last 24 to 30 months, we have seen prices for many
asset classes of charged-off accounts receivable portfolios
increase and, accordingly, it has become more difficult to
acquire portfolios of charged-off accounts receivable that meet
our return thresholds. We believe that price increases have
slowed during 2005, however we cannot give any assurances about
future prices either overall or within account or asset types.
We are determined to remain disciplined and purchase portfolios
only when we believe we can achieve acceptable returns.
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In addition, we believe that issuers of credit cards are
increasingly using off-shore options in connection with their
collection of delinquent accounts in an effort to reduce costs.
If these off-shore efforts are successful, these issuers may
reduce the number of portfolios available for purchase and
increase the purchase price for portfolios available for sale.
Additionally, the success of these enhanced off-shore collection
efforts may render the portfolios available for sale less
collectible.
Because of the length of time involved in collecting charged-off
consumer receivables on acquired portfolios and the volatility
in the timing of our collections, we may not be able to identify
trends and make changes in our purchasing strategies in a timely
manner.
During 2004, we entered into five forward flow contracts that
commit us to purchase receivables for a fixed percentage of the
face value of the receivables. Three of the five forward flow
contracts were renewed during 2005 with only one of these
forward flow contracts having terms beyond 2005 and expiring in
February 2006. There were no new contracts entered into during
2005. During 2005, we purchased portfolios under forward flow
contracts with an aggregate purchase price of approximately
$10.7 million, or approximately 11% of the total invested
during the year. These contracts commit a debt seller to sell a
steady flow of charged-off receivables to us and commit us to
purchase receivables for a fixed percentage of the face value.
Consequently, our results of operations would be negatively
impacted if the fixed percentage is in excess of the appropriate
market value. In the normal course of business, we have entered
into such contracts in the past and may do so in the future
depending on market conditions. To the extent our competition
enters into forward-flow contracts, the pool of portfolios
available for purchase is diminished.
Our success depends on our continued ability to collect on our
purchased receivables. If the economy suffers a material and
adverse downturn for a prolonged period which, in turn,
increases the unemployment rate, we may not be able to collect
during this period in a manner consistent with our past practice
due to the inability of our customers to make payments to us.
Any failure to collect would harm our results of operations.
We
generally account for purchased receivable revenues using the
interest method of accounting in accordance with
U.S. Generally Accepted Accounting Principles, which
requires making reasonable estimates of the timing and amount of
future cash collections. If the timing and actual amount
recovered by us is materially lower than our estimates, it would
cause us to recognize impairments and negatively impact our
earnings.
We generally 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 Statement of Position 03-3
(“SOP 03-3”),
“Accounting for Certain Loans or Debt Securities Acquired
in a Transfer” as well as the Accounting Standards
Executive Committee Practice Bulletin 6 (“PB 6”),
“Amortization of Discounts on Certain Acquired Loans”.
The provisions of
SOP 03-3
were adopted by us effective January 1, 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 are applied
prospectively to purchased receivables acquired before
January 1, 2005. Other than the provisions relating to
decreases in expected cash flow, purchased receivables acquired
before January 1, 2005 will continue to be accounted for
under PB 6, as amended by SOP 03-3.
Each static pool of receivables is 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. The IRR is
applied to the remaining balance of each static pool of accounts
to determine the revenue recognized. 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. Effective January 2005, if revised cash flow estimates are
less than the original
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estimates, the IRR remains unchanged and an impairment is
recognized. If cash flow estimates increase subsequent to
recording an impairment, reversal of the previously recognized
impairment is made prior to any increases to the IRR.
Application of
SOP 03-3
and PB 6 requires the use of reasonable 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.
We are
required to maintain compliance with Section 404 of
Sarbanes Oxley for the year ended December 31, 2005 and
thereafter. If we are unable to maintain compliance with
Section 404 or if the costs related to maintaining
compliance are significant, our profitability and our stock
price could be negatively affected.
We are required to maintain compliance with Section 404 of
Sarbanes Oxley (“Section 404”) for the year ended
December 31, 2005 and thereafter. Section 404 requires
that we update documentation, test our internal controls and
certify that we are responsible for maintaining an adequate
system of internal control procedures. This section also
requires that our independent registered public accounting firm
opine on those internal controls and management’s
assessment of those controls. While we are committed to
maintaining full and timely compliance with the requirements of
Section 404, we believe that the out of pocket costs, the
diversion of management’s attention from running the
day-to-day
operations and operational changes caused by the need to
maintain compliance could be significant. The time and costs
associated with maintaining compliance with Sarbanes Oxley could
reduce our profitability. If we fail to maintain compliance with
the requirements of Section 404, investors could lose
confidence in the accuracy and completeness of our financial
statements and our stock price could be negatively affected.
To operate profitably, we must continually acquire and service a
sufficient amount of charged-off consumer receivables to
generate cash collections that exceed our expenses. Fixed costs,
such as salaries and lease or other facility costs, constitute a
significant portion of our overhead and, if we do not continue
to acquire charged-off consumer receivable portfolios, we may
have to reduce the number of our collection personnel. We would
then have to rehire collection staff as we obtain additional
charged-off consumer receivable portfolios. These practices
could lead to:
Our business consists of acquiring and collecting receivables
that consumers have failed to pay and that the credit originator
has deemed uncollectible and has charged-off. The credit
originators or other debt sellers generally make numerous
attempts to recover on their charged-off consumer receivables
before we purchase such receivables, often using a combination
of in-house recovery and third party collection efforts. Since
there generally have been multiple efforts to collect on these
portfolios of charged-off consumer receivables before we attempt
to collect on them (three or more efforts on more than 50% of
the face value of our portfolios), our attempts to collect on
these portfolios may not be successful. Therefore, we may not
collect a sufficient amount to cover our investment associated
with purchasing the charged-off consumer receivable portfolios
and the costs of running our business,
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which would adversely affect our results of operations. There
can be no assurance that our ability to make collections in the
future will be comparable to our success in making collections
in the past.
Our ability to collect on new and existing portfolios and to
acquire new portfolios is substantially dependent on our ability
to hire and retain qualified account representatives. The
consumer accounts receivables management industry is labor
intensive and, similar to other companies in our industry, we
experience a high rate of employee turnover. For 2005, our
annual turnover rate was 57.3% and our collection department
employee turnover rate was 78.8%. Based on our experience,
account representatives who have been with us for more than one
year are generally more productive than account representatives
who have been with us for less than one year. In 2005, our
turnover rate for all associates employed by us for at least one
year was 28.6% and 39.3% for account representatives only. We
compete for qualified personnel with companies in our industry
and in other industries. Our growth requires that we continually
hire, train and, in particular, retain new account
representatives. In addition, we believe the level of training
we provide to our employees makes our employees attractive to
other collection companies, which may attempt to recruit them. A
higher turnover rate among our account representatives will
increase our recruiting and training costs, may require us to
increase employee compensation levels and will limit the number
of experienced collection personnel available to service our
charged-off consumer receivables. If this were to occur, we
would not be able to service our charged-off consumer
receivables effectively, which would reduce our ability to grow
and operate profitably.
The consumer debt collection industry is highly competitive and
fragmented. We compete with a wide range of other purchasers of
charged-off consumer receivables, third party collection
agencies, other financial service companies and credit
originators and other owners of debt that manage their own
charged-off consumer receivables. Some of these companies may
have substantially greater personnel and financial resources and
may experience lower account representative and employee
turnover rates than we do. Furthermore, some of our competitors
may obtain alternative sources of financing, the proceeds from
which may be used to fund expansion and to increase their number
of charged-off portfolio purchases. We believe that increasing
amounts of capital are being invested in the debt collection
industry, which could lead to increased prices for portfolios of
charged-off accounts receivables, the enhanced ability of third
parties to collect debt and the reduction in the number of
portfolios of charged-off accounts receivables available for
purchase. In addition, companies with greater financial
resources than we have may elect at a future date to enter the
consumer debt collection business. Competitive pressures affect
the availability and pricing of receivable portfolios as well as
the availability and cost of qualified debt account
representatives. In addition, some of our competitors may have
signed forward flow contracts under which consumer credit
originators have agreed to transfer a steady flow of charged-off
receivables to them in the future, which could restrict those
credit originators from selling receivables to us.
We face bidding competition in our acquisition of charged-off
consumer receivable portfolios. We believe successful bids
generally are awarded based on a combination of price, service
and relationships with the debt sellers. Some of our current
competitors, and possible new competitors, may have more
effective pricing and collection models, greater adaptability to
changing market needs and more established relationships in our
industry than we have. Moreover, our competitors may elect to
pay prices for portfolios that we determine are not reasonable
and, in that event, our volume of portfolio purchases may be
diminished. There can be no assurance that our existing or
potential sources will continue to sell their charged-off
consumer receivables at recent levels or at all, or that we will
continue to offer competitive bids for charged-off consumer
receivable portfolios. In addition, there continues to be a
consolidation of issuers of credit cards, which have been a
principal source of our receivable purchases. This consolidation
has decreased the number of sellers in the market and,
consequently, could over time, give the remaining sellers
increasing market strength in the price and terms of the sale of
charged-off credit card accounts and could cause us to accept
lower returns on our investment in that paper than we have
historically achieved.
If we are unable to develop and expand our business or adapt to
changing market needs as well as our current or future
competitors, we may experience reduced access to portfolios of
charged-off consumer receivables in
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sufficient face-value amounts at appropriate prices. As a
result, we may experience reduced profitability which, in turn,
may impair our ability to grow and achieve our goals.
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. 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.
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.
We intend to acquire portfolios of charged-off consumer
receivables in industries in which we have limited experience,
such as telecommunications and healthcare. Some of these
industries may have specific regulatory restrictions with which
we have no experience. We may not be successful in consummating
any acquisitions of receivables in these industries and our
limited experience in these industries may impair our ability to
effectively and efficiently collect on these portfolios.
Furthermore, we need to develop appropriate pricing models for
these markets and there is no assurance that we will do so
effectively. When pricing charged-off consumer receivables for
industries in which we have limited experience, we attempt to
adjust our models for expected or known differences from our
traditional models. However, our pricing models are primarily
based on historical data for industries in which we do have
experience. This may cause us to overpay for these portfolios,
and consequently, our profitability may suffer as a result of
these portfolio acquisitions.
Our
strategy may include the opening of new call centers in selected
locations through the acquisition of assets of businesses and
the training and integration of existing account representatives
into our business. If we open new call centers and do not
successfully acquire assets of businesses and train and
integrate new account representatives into our business, our
results of operations would be negatively affected.
In the past, we have opened new call centers in selected
locations through the acquisition of assets of businesses and
through the training and integration of the account
representatives employed by these businesses. We have
experienced higher collection recoveries in states in which we
have a local or relatively close presence. Any future
acquisitions we make, will be accompanied by the risks
encountered in acquisitions of this type which include the
difficulty and expense of training new account representatives
and the loss of productivity due to the diversion of our
management’s attention. If we open new call centers and do
not successfully train and integrate new account
representatives, it would adversely affect the growth of our
business and negatively impact our operating results.
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Our total revenues have grown at an average annual rate in
excess of 42.1% for the four years 2002 through 2005 and 25.6%
for the two years 2004 and 2005. We do not expect to achieve the
same growth rates in future periods. Therefore, our future
operating results may not reflect past performance.
In addition, our business depends on the ability to collect on
our 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 our
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 portfolios of charged-off
consumer receivables due to the initial costs associated with
purchasing and integrating these receivables into our system.
Consequently, income and margins may fluctuate quarter to
quarter. If the pace of our growth slows, our quarterly cash
collections and operating results may become increasingly
subject to fluctuation.
During times of economic recession, the amount of charged-off
consumer receivables generally increases, which contributes to
an increase in the amount of personal bankruptcy filings. Under
certain bankruptcy filings, a debtor’s assets are sold to
repay creditors, but since the charged-off consumer receivables
we are attempting to collect are generally unsecured or secured
on a second or third priority basis, we often would not be able
to collect on those receivables. Our collections may decline
with an increase in bankruptcy filings or if the bankruptcy laws
change in a manner adverse to our business, in which case, our
financial condition and results of operations could be
materially adversely affected. In 2005, the Bankruptcy Abuse
Prevention and Consumer Protection Act (referred to as the
“Act”) was enacted which made significant changes in
the treatment of consumer filers for bankruptcy protection. The
impact of this Act on the number of bankruptcy filings, on a
prospective basis, and the collectibility of consumer debt is,
as of now, undetermined.
We have expanded significantly over our history and we intend to
continue to grow. However, any future growth will place
additional demands on our resources and we cannot be sure that
we will be able to manage our growth effectively. In order to
successfully manage our growth, we may need to:
Continued growth could place a strain on our management,
operations and financial resources. We cannot assure you that
our infrastructure, facilities and personnel will be adequate to
support our future operations or to effectively adapt to future
growth. If we cannot manage our growth effectively, our results
of operations may be adversely affected.
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Our future success depends on the continued ability to recruit,
hire, retain and motivate highly skilled managerial personnel.
The continued growth and success of our business is particularly
dependent upon the continued services of our executive officers
and other key personnel (particularly in purchasing and
collections), including Nathaniel F. Bradley IV, our President
and Chief Executive Officer and Mark A. Redman, our Vice
President-Finance and Chief Financial Officer, each of whom has
been integral to the development of our business. We cannot
guarantee that we will be able to retain these individuals. Our
performance also depends on our ability to retain and motivate
other officers and key employees. The loss of the services of
one or more of our executive officers or other key employees
could disrupt our operations and seriously impair our ability to
continue to acquire or collect on portfolios of charged-off
consumer receivables and to manage and expand our business. We
have employment agreements with each of Messrs. Bradley and
Redman. However, these agreements do not and will not assure the
continued services of these officers. We do not maintain key
person life insurance policies for our executive officers or key
personnel.
Federal and state consumer protection, privacy and related laws
and regulations extensively regulate the relationship between
debt collectors and debtors. Federal and state laws may limit
our ability to recover on our charged-off consumer receivables
regardless of any act or omission on our part. Some laws and
regulations applicable to credit card issuers may preclude us
from collecting on charged-off consumer receivables we purchase
if the credit card issuer previously failed to comply with
applicable law in generating or servicing those receivables.
Additional consumer protection and privacy protection laws may
be enacted that would impose additional or more stringent
requirements on the enforcement of and collection on consumer
receivables.
Any new laws, rules or regulations that may be adopted, as well
as existing consumer protection and privacy protection laws, may
adversely affect our ability to collect on our charged-off
consumer receivable portfolios and may have a material adverse
effect on our business and results of operations. In addition,
federal and state governmental bodies are considering, and may
consider in the future, other legislative proposals that would
regulate the collection of consumer receivables. Although we
cannot predict if or how any future legislation would impact our
business, our failure to comply with any current or future laws
or regulations applicable to us could limit our ability to
collect on our charged-off consumer receivable portfolios, which
could reduce our profitability and harm our business.
In addition to the possibility of new laws being enacted, it is
possible that regulators and litigants may attempt to extend
debtors’ rights beyond the current interpretations placed
on existing statutes. These attempts could cause us to
(i) expend significant financial and human resources in
either litigating these new interpretations or (ii) alter
our existing methods of conducting business to comply with these
interpretations, either of which could reduce our profitability
and harm our business.
Our
growth strategy may, to a limited extent, include the
acquisition of portfolios in selected countries located outside
of the United States. If we expand our operations outside of the
United States, our international acquisitions could subject us
to risks that could have a material adverse effect on our
business.
We may, to a limited extent, pursue the acquisition of
portfolios of charged-off consumer receivables from credit
originators or collection companies located outside the United
States. If our operations expand internationally, we will be
subject to the risks of conducting business outside the United
States, including:
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There can be no assurance that the acquisition of portfolios of
charged-off consumer receivables from locations outside of the
United States will produce desired levels of net revenues or
profitability, or that we will be able to comply with the
requisite government regulations. In addition, compliance with
these government regulations may also subject us to additional
fees, costs and licenses. The expansion of our operations
overseas could have a material adverse effect on our business
and results of operations.
Our
operations could suffer from telecommunications or technology
downtime or from not responding to changes in
technology.
Our success depends in large part on sophisticated
telecommunications and computer systems. The temporary or
permanent loss of our computer and telecommunications equipment
and software systems, through casualty or operating malfunction
(including outside influences such as computer viruses), could
disrupt our operations. In the normal course of our business, we
must record and process significant amounts of data quickly and
accurately to access, maintain and expand the databases we use
for our collection activities. Any failure of our information
systems or software and their backup systems would interrupt our
business operations and harm our business. In addition, we rely
significantly on Ontario Systems LLC for the software used in
operating our technology platform. Our business operations would
be disrupted and our results of operations may be harmed if they
were to cease operations or significantly reduce their support
to us.
Our
access to capital through our line of credit may be critical to
our ability to continue to grow. If our line of credit is
materially reduced or terminated and if we are unable to replace
it on favorable terms, our revenue growth may slow and our
results of operations may be materially and adversely
affected.
We believe that our access to capital through our line of credit
has been critical to our ability to grow. We currently maintain
a $100.0 million line of credit that expires May 31,
2008. Our line of credit includes an accordion loan feature that
allows us to request a $20.0 million increase in the credit
facility, subject to our compliance with certain conditions and
financial covenants. Our financial strength has increased our
ability to make portfolio purchases and we believe it has also
enhanced our credibility with sellers of debt who are interested
in dealing with firms possessing the financial wherewithal to
consummate a transaction. If our line of credit is materially
reduced or terminated as a result of noncompliance with a
covenant or other event of default and if we are unable to
replace it on relatively favorable terms, our revenue growth may
slow and our results of operations may be materially and
adversely affected.
We do not have any unresolved staff comments.
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The following table provides information relating to our
principal operations facilities as of February 15, 2006.
We believe that our existing facilities are sufficient to meet
our current needs and that suitable additional or alternative
space will be available on a commercially reasonable basis. Our
$100.0 million line of credit is secured by a first
priority lien on all of our assets.
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. As of February 15, 2006, we are named
in four class action lawsuits in which an underlying class has
been certified. Additionally, as of February 15, 2006, we
are named in eight 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 our business.
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There were no matters submitted to a vote of Asset Acceptance
Capital Corp.’s security holders during the fourth quarter
of 2005.
The following table sets forth information regarding our
directors and executive officers as of February 15, 2006.
Rufus H. Reitzel, Jr., Chairman;
Director — Mr. Reitzel founded Lee
Acceptance Company in 1962. He and Mr. Bradley co-founded
Asset Acceptance Corp. in 1994 to continue the business of the
successors to Lee Acceptance Company. Mr. Reitzel served as
Chief Executive Officer of our company and its predecessor
companies from 1962 to June 2003 when he became Chairman. Mr.
Reitzel is the
father-in-law
of Mr. Bradley, our Chief Executive Officer and a director.
On February 14, 2006, Mr. Reitzel announced his
retirement from his position as Chairman of the Board as well as
from his position as director of the Company, which will be
effective as of February 28, 2006.
Nathaniel F. Bradley, IV, President and Chief Executive
Officer; Director — Mr. Bradley joined
Lee Acceptance Company in 1979 and co-founded Asset Acceptance
Corp. in 1994 with Mr. Reitzel. Mr. Bradley served as
Vice President of our predecessor from 1982 to 1994 and was
promoted to President of Asset Acceptance Corp. in 1994. He was
named our Chief Executive Officer in June 2003. Mr. Bradley is
the
son-in-law
of Mr. Reitzel, our Chairman and a director. On
February 14, 2006, Mr. Bradley was elected by the
Board of Directors to become our Chairman of the Board which
will be effective as of March 1, 2006.
Mark A. Redman, Vice President-Finance, Chief Financial
Officer, Secretary and
Treasurer — Mr. Redman joined Asset
Acceptance Corp. in January 1998 as Vice President-Finance,
Secretary and Treasurer. Mr. Redman was appointed as our
Chief Financial Officer in May 2002. Prior to joining us,
Mr. Redman worked in public accounting for 13 years,
the last 11 years at BDO Seidman, LLP, Troy, Michigan,
serving as a Partner in the firm from July 1996 to December
1997. Mr. Redman is a member of the American Institute of
Certified Public Accountants and the Michigan Association of
Certified Public Accountants.
Phillip L. Allen, Vice
President-Operations — Mr. Allen joined
Asset Acceptance Corp. as Vice President-Operations in October
1996. Prior to joining us, Mr. Allen held a variety of
positions in the consumer credit industry including with
Household Finance and Household Retail Services from 1985 to
1991 and with Winkelman’s Stores from 1992 to 1996.
Diane Kondrat, Vice President-Legal
Collections — Ms. Kondrat joined Lee
Acceptance Corp., in November 1991. In 1993, Ms. Kondrat
became Manager of our Legal Recovery Department and, in 1997,
was named
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Assistant Vice President. In 1998, she was promoted to her
current position of Vice President-Legal Collections.
Ms. Kondrat has been in the credit industry since 1976.
Deborah Everly, Vice President-Marketing &
Acquisitions — Ms. Everly joined Asset
Acceptance Corp. in May 1995. Ms. Everly was named our
Director of Marketing & Acquisitions in 1996 and
promoted to Assistant Vice President in 1997. In 1998 she was
promoted again, this time to Vice President-Marketing &
Acquisitions. Ms. Everly has been in the accounts
receivable management industry since 1991.
Patrick Dangel, Vice
President-Collections — Mr. Dangel
joined Asset Acceptance Corp. in December 1998 as a Branch
Manager of the former St. Clair Shores, Michigan office. He was
promoted to Assistant Vice President-Collections in July 2002.
In April 2005, he was promoted to his current position of Vice
President-Collections. Prior to joining us, Mr. Dangel held
varying positions of responsibility in the Credit and Collection
area for Key Corp, including, as a Collection and Recovery
Manager in their Credit Card Division. Mr. Dangel has been
in the collection industry since 1983.
Rubert Chapman III, Vice
President-Collections — Mr. Chapman
joined our subsidiary, Asset Acceptance, LLC in October 2005 as
Vice President-Collections. Prior to joining Asset Acceptance,
LLC, Mr. Chapman was Vice President of Operations for OSI
and Accelerated Bureau of Collections from 1990 through 2005.
Michael T. Homant, Vice President-Information
Technology — Mr. Homant joined our
subsidiary, Asset Acceptance, LLC, in June 2003 as Vice
President-Information Technology. Mr. Homant previously
served as the President (from 1999 to May 2003) and Chief
Financial Officer (from 1997 to 1999) of Comprehensive
Receivables Group, Inc. Prior to joining CRG, Mr. Homant
spent six years in the information technology function of
William Beaumont Hospital, Royal Oak, Michigan.
Deanna Hatmaker, Vice President-Human
Resources — Ms. Hatmaker joined our
subsidiary, Asset Acceptance, LLC, in January 2006 as Vice
President-Human Resources. Ms. Hatmaker previously served as the
Director and Human Resources Officer in the Michigan
Administrative Information Services (MAIS) business unit at the
University of Michigan, Ann Arbor, Michigan (from 2003 to 2005).
Prior to joining MAIS at the University of Michigan, Ms.
Hatmaker also served as Vice President-Human Resources and as a
member of the senior management committee with
H&R Block Financial Advisors (formerly OLDE Financial
Corporation, Detroit, Michigan) from the late 1990’s to
2003. Ms. Hatmaker has been in the financial services
industry for over 17 years.
Thomas Good, General
Counsel — Mr. Good joined the Company in
February 2004 as General Counsel. Mr. Good previously
served as Operations Counsel for General Electric Capital
Corporation from 2002 to 2003. Prior to joining General Electric
Capital Corporation, Mr. Good was Assistant Chief Counsel
for John Deere Credit in Johnston, Iowa from 1997 until 2002.
Our common stock is quoted on The Nasdaq National Market under
the symbol “AACC”. Public trading of our common stock
commenced on February 5, 2004. Prior to that time, there
was no public trading market for our common stock. The following
table sets forth the high and low sales prices for our common
stock, as reported by The Nasdaq National Market, for the
periods indicated.
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On February 15, 2006, the last reported sale price of our
common stock on The Nasdaq National Market was $17.70 per
share. As of February 13, 2006, there were 7,475 record
holders of our common stock.
Asset Acceptance Capital Corp. has never paid any dividends on
its common stock. We currently anticipate that we will retain
any future earnings for the operation and development of our
business. Accordingly, we do not currently intend to declare or
pay dividends in the near term. Any future determination as to
the declaration and payment of dividends will be at the
discretion of our board of directors and will depend on our
financial condition, results of operations, contractual
restrictions, capital requirements, business prospects and other
factors that our board of directors considers relevant.
The following table contains information about our securities
that may be issued upon the exercise of options, warrants and
rights under all of our equity compensation plans as of
December 31, 2005:
In the three years preceding the filing of this
Form 10-K,
we issued the following securities that were not registered
under the Securities Act:
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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, during the
fiscal year ended December 31, 2005, the following options
have been issued to the non-management directors:
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The following options were issued to eligible key employees
under our 2004 stock incentive plan which will vest between one
and four years. Each option entitles the holder to purchase one
share of our common stock at the exercise price shown below.
Pursuant to this plan, during the fiscal year ended
December 31, 2005, the following options have been issued
to the eligible key employees.
All of the foregoing securities are deemed restricted securities
for the purposes of the Securities Act.
The following selected consolidated financial data includes the
results of operations of the following companies for the
indicated periods:
The following selected consolidated statement of income data for
the year ended December 31, 2002, consists of the
predecessor for the nine months ended September 30, 2002
and the successor for the three months ended December 31,
2002, with this referred to as “combined”. The
following income data of the predecessor for the year ended
December 31, 2001 and the nine months ended
September 30, 2002 and the related selected consolidated
financial position data as of December 31, 2001 and the
selected consolidated statement of income data of the successor
for the three months ended December 31, 2002, and the years
ended December 31, 2003, 2004 and 2005 and the related
selected consolidated financial position data as of
December 31, 2002, 2003, 2004 and 2005 have been derived
from our consolidated financial statements which have been
audited by Ernst & Young LLP, independent registered
public accounting firm. The data should be read in connection
with the consolidated financial statements, related notes and
other information included herein.
On February 4, 2004, all of the shares of the capital stock
of AAC Investors, Inc. and AAC Holding Corp. (which changed its
name to RBR Holding Corp. in October 2002), which held 60% and
40% ownership interests in Asset Acceptance Holdings LLC,
respectively, as of that date, were contributed to Asset
Acceptance Capital Corp. in exchange for all of the shares of
the common stock of Asset Acceptance Capital Corp. As a result
of this Reorganization, Asset Acceptance Holdings LLC and its
subsidiaries became indirect wholly-owned subsidiaries of Asset
Acceptance Capital Corp. The information included in the
selected financial data gives effect to the Reorganization as of
October 1, 2002. For more detailed information about our
corporate history and the Reorganization, see “Item 1.
Business — History and Reorganization”.
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31
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You should read the following discussion and analysis in
conjunction with our consolidated financial statements and the
related notes included elsewhere in this Annual Report. This
discussion contains forward-looking statements that involve
risks, uncertainties and assumptions, such as statements of our
plans, objectives, expectations and intentions. Our actual
results may differ materially from those discussed here. Factors
that could cause or contribute to the differences include those
discussed in “Item 1A. Risk Factors”, as well as
those discussed elsewhere in this Annual Report. The references
in this Annual Report to the U.S. Federal Reserve Board are
to the Federal Reserve Statistical Release, dated
January 9, 2006 and the Federal Reserve Consumer Credit
Historical Data website
(www.federalreserve.gov/releases/g19/hist/) and the references
to The Nilson Report (www.nilsonreport.com) are to The Nilson
Report, issue 792, dated July 2003, and issue 835, dated June
2005.
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, telecommunications
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 growth rate of cash collections for the three month and
twelve month periods ending December 31, 2005 slowed to
11.9% and 19.4%, respectively from 26.6% and 35.4% for the three
month and twelve month periods ending December 31, 2004,
respectively. The primary factor contributing to the slowdown in
collection growth is the pace of purchase growth at face value,
which has been relatively flat for the years 2002 through 2005
due to our disciplined approach to purchasing charged-off
receivables. Additional contributors toward slowing growth
include high turnover among our account representative
professionals and lower than expected results on some
non-traditional purchases, specifically wireless
telecommunications. High turnover has negatively impacted
collections as there is a positive correlation between account
representative experience and productivity. Wireless
telecommunications purchases accounted for 13.2% of 2005
purchases at face value and are not performing up to initial
expectations. We addressed turnover during the fourth quarter
and have seen improvement over third quarter 2005 turnover rates.
As a result of the slower than expected collections on our
purchased receivable portfolios, during the fourth quarter of
2005 we recorded net impairments of $15.3 million. The net
impairment charge reduced revenue and the carrying value of the
purchased receivables. The majority of the fourth quarter 2005
purchase impairments are attributable to 2005 purchases of
wireless telecommunications debt. Utilizing the data collected
and experience gained on these purchases, we have adjusted our
purchasing models and have become increasingly thorough in our
due diligence of non-traditional asset classes.
In an effort to stimulate collections during the year, we
expanded our collection efforts and increased the amount spent
for certain collection expenses, specifically letter expenses
and legal expenses. These expenses increased due to an increase
in the number of letter campaigns pursued during the second half
of 2005 and an increase in the number of accounts for which
legal action has been initiated. We expect to benefit in 2006
from the increased legal action initiated during the latter half
of 2005.
During 2005, cash collections increased 19.4% to
$319.9 million. Revenues for 2005 were $252.7 million,
a 17.7% increase over the prior year. Net income was
$51.3 million for 2005, compared to $0.7 million for
2004. Net income in 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.
During 2005, we invested $102.3 million (net of buybacks)
in charged-off consumer receivable portfolios, with an aggregate
face value of $4.2 billion, or 2.45% of face value. We have
seen prices for charged-off accounts receivable portfolios
increase over the past 24 to 30 months and believe prices
to be relatively high at the current time. We believe that price
increases have slowed during 2005, however we cannot give any
assurances about future
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prices either overall or within account or asset types. 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 increased from 21.8% for the year
ended December 31, 2004 to 22.8% for the year ended
December 31, 2005. The increase is primarily due to
increased legal activity in states that we are not located, as
well as a slight increase in the use of third party collection
agencies.
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 include 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 related to the secondary offering. In
addition, the selling stockholders collectively, retain the
right to request three additional registrations of specified
shares, under the registration rights agreement, in which case
we will be required to bear such offering expenses in the
quarter in which any future offering occurs.
The accounts receivable management industry is growing, driven
by a number of industry trends, including:
Historically, credit originators have sought to limit credit
losses either through using internal collection efforts with
their own personnel or outsourcing collection activities to
third party collectors. Credit originators that outsource the
collection of charged-off receivables have typically remained
committed to third party providers as a result of the perceived
economic benefit of outsourcing and the resources required to
establish the infrastructure required to support in-house
collection efforts. The credit originator can pursue an
outsourced solution by either selling its charged-off
receivables for immediate cash proceeds or by placing
charged-off receivables with a third party collector on a
contingent fee basis while retaining ownership of the
receivables.
In the event that a credit originator sells receivables to a
debt purchaser such as us, the credit originator receives
immediate cash proceeds and eliminates the costs and risks
associated with internal recovery operations. The purchase price
for these charged-off receivables are usually discounted 95% to
99% from their face values, depending on the amount the
purchaser anticipates it can recover and the anticipated effort
required to recover that amount. Credit originators, as well as
other holders of consumer debt, utilize a variety of processes
to sell receivables, including the following:
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We believe a debt purchaser’s ability to successfully
collect payments on charged-off receivables, despite previous
collection efforts by the credit originator or third party
collection agencies, is driven by several factors, including the
purchaser’s ability to:
Lee Acceptance Company was formed in 1962 by Rufus H.
Reitzel, Jr. as a sole proprietorship for the purpose of
purchasing and collecting charged-off consumer receivables.
Nathaniel F. Bradley IV joined Lee Acceptance Company in
1979. In 1982, Lee Acceptance Company was incorporated as Lee
Acceptance Corp. The business of purchasing and collecting
charged-off consumer receivables was subsequently conducted by
Mr. Reitzel and Mr. Bradley through several successor
companies.
In 1994, Mr. Reitzel and Mr. Bradley formed Asset
Acceptance Corp. for the purpose of purchasing and collecting
charged-off consumer receivables and formed Consumer Credit
Corp. for the purpose of financing sales of consumer product
retailers located primarily in Michigan and Florida. Since 1994,
we have effected the following transactions:
Immediately prior to our February 2004 initial public offering,
all of the shares of capital stock of AAC Investors, Inc. and
AAC Holding Corp. (which changed its name to RBR Holding Corp.
in October 2002), which held 60% and 40%, respectively, of the
equity membership interests in Asset Acceptance Holdings LLC,
were contributed to Asset Acceptance Capital Corp., a newly
formed Delaware corporation, in exchange for shares of common
stock of Asset Acceptance Capital Corp., which is the class of
common stock offered in our initial public offering. As a result
of this Reorganization, which was effected for the purpose of
establishing a Delaware corporation as the issuer in our initial
public offering, Asset Acceptance Holdings LLC and its
subsidiaries became indirect wholly-owned subsidiaries of the
newly formed Asset Acceptance Capital Corp. In addition, RBR
Holding Corp., which structured as an S corporation under
the Internal Revenue Code, became taxable as a C corporation
after becoming a wholly-owned subsidiary of Asset Acceptance
Capital Corp. For more detailed information about our corporate
history and this Reorganization, see “Item 1.
Business — History and Reorganization”.
For comparison purposes we have presented pro forma net income,
which is net income adjusted for pro forma income taxes assuming
the consolidated entity was a C corporation for all periods
presented.
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Results
of Operations
The following table sets forth selected statement of income data
expressed as a percentage of total revenues and as a percentage
of cash collections for the periods indicated.
Year
Ended December 31, 2005 Compared To Year Ended
December 31, 2004
Total revenues were $252.7 million for the year ended
December 31, 2005, an increase of $37.9 million, or
17.7%, over total revenues of $214.8 million for the year
ended December 31, 2004. Purchased receivable revenues were
$252.2 million for the year ended December 31, 2005,
an increase of $38.5 million, or 18.0%, over the year ended
December 31, 2004 amount of $213.7 million. The
increase in revenue was due primarily to an increase in the
average outstanding balance of purchased receivables. Cash
collections on charged-off consumer receivables increased 19.4%
to $319.9 million for the year ended December 31, 2005
from $267.9 million for the same period in
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2004. Cash collections for the year ended December 31, 2005
and 2004 include collections from fully amortized portfolios of
$56.1 million and $31.2 million, respectively, of
which 100% were reported as revenue.
Revenue reflects net impairments recognized during 2005 of
$22.3 million. The net impairments were recognized under
the provisions of
SOP 03-3,
which require that an impairment be taken for decreases in
expected cash flows for purchased receivables. Of the
$22.3 million net impairment charges for 2005,
$11.0 million are related to purchases made during 2005.
The majority of the 2005 purchase impairments are attributable
to portfolios purchased from one non-traditional asset class,
specifically wireless telecommunications. During 2004, we
accounted for our purchased receivable portfolios under the
provisions of PB 6, which required lowering of prospective
yields for decreases in expected cash flows and therefore no
impairments were recognized.
During the year ended December 31, 2005, we acquired
charged-off consumer receivables portfolios with an aggregate
face value amount of $4.2 billion at a cost of
$102.3 million, or 2.45% of face value, net of buybacks.
Included in these purchase totals were 35 portfolios with an
aggregate face value of $297.6 million at a cost of
$10.7 million, or 3.61% of face value, net of buybacks,
which were acquired through four forward flow contracts. During
the year ended December 31, 2004, we acquired charged-off
consumer receivables portfolios with an aggregate face value of
$4.4 billion at a cost of $87.4 million, or 2.00% of
face value (adjusted for buybacks through 2005). Included in
these purchase totals were 30 portfolios with an aggregate face
value of $277.9 million at a cost of $8.0 million, or
2.89% of face value, which were acquired through five forward
contracts. From period to period, we may buy paper of varying
age, types and cost. As a result, the costs 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
2.45% for 2005 from 2.00% in 2004, is primarily due to increased
competition for accounts, resulting in higher purchase prices
during 2005. Secondary and tertiary accounts made up 31.0% and
50.7%, respectively, of our purchases during 2005 compared to
29.1% and 47.5%, respectively, during 2004. The costs as a
percent of face values for secondary and tertiary accounts were
3.80% and 2.13%, respectively, during 2005 compared to 2.59% and
1.53%, respectively, during 2004.
Total operating expenses were $170.4 million for the year
ended December 31, 2005, a decrease of $12.3 million,
or 6.8%, compared to total operating expenses of
$182.7 million for the year ended December 31, 2004.
Total operating expenses were 67.4% of total revenues and 53.3%
of cash collections for the year ended December 31, 2005,
compared with 85.1% and 68.2%, respectively, for the same period
in 2004. Operating expenses during 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 because we believe doing so provides
investors with a more direct comparison of results of operations
between 2005 and 2004. 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
$170.4 million during 2005 increased $33.3 million, or
24.3% from the $137.1 million in operating expenses for the
same period in 2004. Operating expenses were 67.4% of total
revenues and 53.3% of cash collections for the year ended
December 31, 2005, compared with 63.8% and 51.2%,
respectively, for the same period in 2004. The increase as a
percent of total revenues and 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 $76.1 million for the year ended
December 31, 2005, a decrease of $34.9 million, or
31.5%, compared to salary and benefit expenses of
$111.0 million for the year ended December 31, 2004.
Salary and benefit expenses were 30.1% of total revenue and
23.8% of cash collections during 2005 compared with 51.7% and
41.4%, 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 in 2004.
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Excluding the $45.7 million compensation and related
payroll tax charge in 2004, salary and benefit expenses of
$76.1 million for the year ended December 31, 2005
increased $10.8 million, or 16.4% over the
$65.3 million in salary and benefit expenses during 2004.
The increase over the prior year was primarily due to an
increase in total employees, which grew to 1,980 at
December 31, 2005 from 1,732 at December 31, 2004, in
response to the growth in the number of our portfolios of
charged-off consumer receivables. Salary and benefits expenses,
excluding the $45.7 million compensation and related
payroll tax charge, decreased to 30.1% of total revenues and
23.8% of cash collections for the year ended December 31,
2005 from 30.4% of total revenues and 24.4% of cash collections
for the same period in 2004. The decrease in salary and benefits
expenses, as adjusted, as a percent of total revenues and cash
collections were primarily due to improved benefit costs and
increased efficiencies 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 account representative decreased to
$157,661 for the year ended December 31, 2005, compared to
$168,708 for the same period in 2004. This decrease is primarily
due to a decrease in productivity for account representatives
with less than a year of experience. Average full-time
equivalent account representatives increased to 1,050 for the
fiscal year of 2005 from 908 during the same period in 2004.
Collections Expense. Collections expense
increased to $74.0 million for the year ended
December 31, 2005, reflecting an increase of
$17.1 million, or 29.9%, over collections expense of
$56.9 million for the year ended December 31, 2004.
The increase was primarily attributable to the increased number
of accounts on which we were collecting. Collections expense
increased to 23.1% of cash collections for the year ended
December 31, 2005 from 21.3% of cash collections for the
year ended December 31, 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
$8.4 million for the year ended December 31, 2005, an
increase of $2.3 million, or 36.7%, over occupancy expense
of $6.1 million for the year ended December 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 $8.6 million for the year ended
December 31, 2005, from $5.7 million for the year
ended December 31, 2004, reflecting a $2.9 million, or
51.1%, increase. The increase in administrative expenses was
principally due to costs related to the secondary offering,
additional contract labor and consultants for the testing of
internal controls for compliance with Section 404 of
Sarbanes-Oxley, increased director fees and expenses and
increased property tax assessments.
Depreciation and Amortization. Depreciation
and amortization expense was $3.3 million for the year
ended December 31, 2005, an increase of $0.4 million
or 15.9% over depreciation and amortization expense of
$2.9 million for the year ended December 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
$1.1 million during 2005, reflecting an increase of
$1.1 million compared to nominal interest income for the
year ended December 31, 2004. The increase was primarily
due to interest received related to our increased cash position
over the prior year in addition to higher interest rates during
2005 over the prior year.
Interest Expense. Interest expense was
$0.6 million for the year ended December 31, 2005,
reflecting a decrease of $1.1 million, or 67.3%, compared
to interest expense of $1.7 million for the year ended
December 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
year ended December 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 $0.2 million for the year ended
December 31, 2005 from $16.1 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
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initial public offering and cash generated from operations.
Interest expense included the amortization of capitalized bank
fees of $0.2 million and $0.3 million for the years
ended December 31, 2005 and 2004, respectively.
Income Taxes. Income taxes of
$31.7 million reflects a federal tax rate of 35.1% and a
state tax rate of 3.1% (net of federal tax benefit including
utilization of state net operating losses) for the year ended
December 31, 2005. For the year ended December 31,
2004, the federal tax rate was 35.0% and the state tax rate was
2.2% (net of federal tax benefit). The 0.9% 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 year ended
December 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 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 December 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.
Year
Ended December 31, 2004 Compared To Year Ended
December 31, 2003
Total revenues were $214.8 million for the year ended
December 31, 2004, an increase of $54.6 million, or
34.1%, over total revenues of $160.2 million for the year
ended December 31, 2003. Purchased receivable revenues were
$213.7 million for the year ended December 31, 2004,
an increase of $54.1 million, or 33.9%, over the year ended
December 31, 2003, amount of $159.6 million. The
increase in revenue was due primarily to an increase in the
average outstanding balance of purchased receivables. Cash
collections on charged-off consumer receivables increased 35.4%
to $267.9 million for the year ended December 31, 2004
from $197.8 million for the same period in 2003. Cash
collections for the year ended December 31, 2004 and 2003
include collections from fully amortized portfolios of
$31.2 million and $11.5 million, respectively, of
which 100% were reported as revenue.
During the year ended December 31, 2004, we acquired
charged-off consumer receivables portfolios with an aggregate
face value amount of $4.4 billion at a cost of
$87.4 million, or 2.00% of face value (adjusted for
buybacks through 2005). Included in these purchase totals were
30 portfolios with an aggregate face value of
$277.9 million at a cost of $8.0 million, or 2.89% of
face value, which were acquired through five forward flow
contracts. During the year ended December 31, 2003, we
acquired charged-off consumer receivables portfolios with an
aggregate face value of $4.1 billion at a cost of
$87.3 million, or 2.12% of face value (adjusted for
buybacks through 2005).
Total operating expenses were $182.7 million for the year
ended December 31, 2004, an increase of $77.3 million,
or 73.4%, compared to total operating expenses of
$105.4 million for the year ended December 31, 2003.
Total operating expenses were 85.1% of total revenues and 68.2%
of cash collections for the year ended December 31, 2004,
compared with 65.8% and 53.3%, respectively, for the same period
in 2003. Operating expenses 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. Excluding the
$45.7 million combined compensation and related payroll tax
charge, total operating expenses were $137.1 million for
the year ended December 31, 2004, an increase of
$31.7 million, or 30.0%, over the prior year. Excluding the
compensation and related payroll tax charge, operating expenses
decreased to 63.8% of total revenues and 51.2% of cash
collections for the year ended December 31, 2004 from 65.8%
of total revenues and 53.3% of cash collections for the same
period in 2003. The improvement in operating expenses, as
adjusted, as a percent of total revenue and cash collections was
primarily due to strong collections, resulting from increased
account representative efficiency, along with the application of
successful collection strategies and a continued focus on
expense reduction.
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
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we believe doing so provides investors with a more direct
comparison of results of operations between 2003 and 2004. In
addition, we use the adjustments for purposes of our internal
planning, review and
period-to-period
comparison process.
Salaries and Benefits. Salary and benefit
expenses were $111.0 million for the year ended
December 31, 2004, an increase of $59.7 million, or
116.5%, compared to salary and benefit expenses of
$51.3 million for the year ended December 31, 2003.
Salary and benefit expenses increased 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, salary and benefit expenses were
$65.3 million for the year ended December 31, 2004, an
increase of $14.0 million, or 27.4%, compared to 2003. The
increase over the prior year was primarily due to an increase in
total employees, which grew to 1,732 at December 31, 2004
from 1,490 at December 31, 2003, in response to the growth
in the number of our portfolios of charged-off consumer
receivables. Salary and benefits expenses were 51.7% of total
revenue and 41.4% of cash collection for the year ended
December 31, 2004, compared with 32.0% and 25.9%,
respectively, for the same period in 2003. Salary and benefit
expenses, excluding the $45.7 million compensation and
related payroll tax charge, decreased to 30.4% of total revenues
and 24.4% of cash collections for the year ended
December 31, 2004 from 32.0% of total revenue and 25.9% of
cash collections for the same period in 2003. The decrease in
salary and benefits expenses, as adjusted, as a percent of cash
collections was primarily due to increased account
representative efficiency and improved collection strategies.
Traditional call center collections per full-time equivalent
account representative increased to $168,708 for the year ended
December 31, 2004, compared to $150,178 for the same period
in 2003. Average headcount of full-time equivalent account
representatives increased to 908 for the fiscal year of 2004
from 800 during the same period in 2003.
Collections Expense. Collections expense
increased to $56.9 million for the year ended
December 31, 2004, reflecting an increase of
$13.2 million, or 30.4%, over $43.7 million for the
year ended December 31, 2003. The increase was primarily
attributable to the increased number of accounts on which we
were collecting. Collections expense decreased to 21.3% of cash
collections for the year ended December 31, 2004 from 22.1%
of cash collections for the year ended December 31, 2003.
This decrease was primarily due to decreases in amounts spent
for collection letters, credit reports and legal expenses, as a
percentage of cash collections, as we continue to improve and
refine our collection strategies.
Occupancy. Occupancy expense was
$6.1 million for the year ended December 31, 2004, an
increase of $1.5 million, or 31.9%, over occupancy expense
of $4.6 million for the year ended December 31, 2003.
The increase was primarily attributable to the relocation of our
Florida office to Riverview, Florida in January 2004, the
relocation of our Phoenix, Arizona office in November 2003, the
addition of our Chicago, Illinois office in September 2003 and
the relocation of our headquarters in Warren, Michigan in
November 2004.
Administrative. Administrative expenses
increased to $5.7 million for the year ended
December 31, 2004, from $3.3 million for the year
ended December 31, 2003, reflecting a $2.4 million, or
74.2%, increase. The increase in administrative expenses was
principally a result of the increased number of accounts being
processed, additional expenses related to being a public company
and one-time expenses related to moving our headquarters during
the fourth quarter of 2004.
Depreciation. Depreciation expense was
$2.9 million for the year ended December 31, 2004, an
increase of $0.3 million or 12.0% over depreciation expense
of $2.6 million for the year ended December 31, 2003.
The increase was due to capital expenditures during 2004 and
2003, which were required to support the increased number of
accounts serviced by us and the purchase of furniture and
technology equipment in our new and expanded facilities.
Interest Income. Interest income was $28,191
during 2004, reflecting an increase of $24,657 compared to
interest income of $3,534 for the year ended December 31,
2003. The increase was primarily due to interest received
related to our increased cash position over the prior year.
Interest Expense. Interest expense was
$1.7 million for the year ended December 31, 2004,
reflecting a decrease of $5.5 million, or 75.9%, compared
to interest expense of $7.2 million for the year ended
December 31,
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2003. During February 2004, we paid in full a related party debt
of $40.0 million, which resulted in a reduction in interest
expense of $3.2 million during the year ended
December 31, 2004 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
$16.1 million for the year ended December 31, 2004
from $66.2 million for the same period in 2003. The
reduction in our average borrowings was due to repayment of
$37.7 million of debt from the proceeds of the initial
public offering and cash generated from operations. Interest
expense included the amortization of capitalized bank fees of
$283,700 and $294,899 for the year ended December 31, 2004
and 2003, respectively.
Income Taxes. Income taxes of
$29.6 million for the year ended December 31, 2004
included a deferred tax charge of $19.3 million resulting
from RBR Holding Corp.’s change in tax status from an
S corporation to a C corporation after becoming a
wholly-owned subsidiary of Asset Acceptance Capital Corp. during
the first quarter of 2004.
Income taxes for the year ended December 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 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 December 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. Income
taxes for the year ended December 31, 2003 of
$10.3 million reflected income tax expense on 60% of pretax
income as RBR Holding Corp. was taxed as an S corporation under
the Internal Revenue Code and, therefore, taxable income was
included on the shareholders’ individual tax returns.
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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 December 31, 2005.
The following table summarizes the remaining unamortized
balances of our purchased receivables portfolios by year of
purchase as of December 31, 2005.
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We measure traditional call center account representative
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.
We believe that account representative productivity is adversely
impacted by increases in account representative turnover.
Generally, collection averages increase for account
representatives as they gain experience. The following table
provides annualized account representative turnover data for
traditional collections for 2005, 2004 and 2003:
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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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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 2005.
Below is a table that illustrates the percentages by source of
our total cash collections:
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
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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.
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 December 31, 2005, we
believe we were in compliance with, including:
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 December 31, 2005.
At December 31, 2003, we had a note payable outstanding to
a related party totaling $39.6 million including principal
and accrued interest. During February 2004, we used
$40.0 million of the proceeds from our initial public
offering to pay our related party debt in full.
The majority of our purchases have been funded with internal
cash flow. For the year ended December 31, 2005, we
invested $100.2 million in purchased receivables, net of
buybacks, while only borrowing $13.5 million against our
line of credit, which was subsequently repaid and had no
outstanding balance as of December 31, 2005. Our cash
balance has increased from $14.2 million at
December 31, 2004 to $50.5 million as of
December 31, 2005.
Our operating activities provided cash of $90.7 million,
$62.7 million and $47.9 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Cash
provided by operating activities for the years ended
December 31, 2005, 2004 and 2003 were generated primarily
from net income earned through cash collections. Cash provided
by operating activities for the year ended December 31,
2004 was reduced by a $19.0 million cash payment of
withholding taxes and employer taxes related to the share
appreciation rights.
Investing activities used cash of $54.2 million,
$36.4 million and $49.0 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Cash used
for investing purposes was primarily due to acquisitions of
purchased receivables, net of cash collections applied to
principal.
Financing activities used cash of $0.2 million and
$17.5 million for the years ended December 31, 2005
and 2004, respectively. Financing activities provided cash of
$4.3 million for the year ended December 31, 2003.
Cash used by financing activities in 2005 was primarily due to
repayments on capital lease obligations. Cash used by financing
activities in 2004 was primarily due to repayments on our line
of credit, net of borrowings, and the repayment of our related
party notes payable offset by proceeds from our initial public
offering. Cash provided by financing activities for the year
2003 was primarily due to borrowings on our line of credit and
from related parties, net of repayments.
Cash paid for interest was $0.3 million, $1.5 million
and $3.2 million for the years ended December 31,
2005, 2004 and 2003, respectively. Cash paid for interest
consisted of $0.3 million for the line of credit for the
year ended December 31, 2005. Cash paid for interest
consisted of $1.1 million for the line of credit and
$0.4 million paid for
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the related party debt for the year ended December 31,
2004. Cash paid for interest consisted of $3.2 million for
the line of credit for the year ended December 31, 2003.
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.
The following table summarizes our future contractual cash
obligations as of December 31, 2005:
Off-Balance
Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
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
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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. The IRR
is applied to the remaining balance of each static pool of
accounts to determine the revenue recognized. 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. Effective January 2005, under
SOP 03-3,
if the revised cash flow estimates are less than the original
estimates, the IRR remains unchanged and an impairment is
recognized. If cash flow estimates increase subsequent to
recording an impairment, reversal of the previously recognized
impairment is made prior to any increases to the IRR.
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 reversal of
impairments, 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
impairment being recorded.
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 first fiscal
period beginning after June 15, 2005. We adopted the fair
value recognition provisions of SFAS No. 123 effective
January 2004 and therefore, adoption of
SFAS No. 123(R) is not expected to have a material
impact on our consolidated financial position, results of
operations or cash flows.
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,
$16.1 million and $66.2 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Assuming a
200 basis point increase in interest rates on our variable
rate debt, interest expense would have increased approximately
$3,000, $306,000 and $625,000 for the years ended
December 31, 2005, 2004 and 2003, respectively. The
estimated increases in interest expense are based on the portion
of our variable interest debt that is not offset by interest
rate swap agreements and assumes no changes in the volume or
composition of the debt. As of December 31, 2005, we did
not have any borrowings against our variable line of credit. We
currently do not have any swap or hedge agreements outstanding.
The financial statements filed herewith are set forth on the
Index to Consolidated Financial Statements on
page F-1
of the separate financial section of this Annual Report and are
incorporated herein by reference.
None.
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
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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.
None.
The other information required by Item 10 is included in
the Proxy Statement for the 2006 Annual Meeting of Stockholders
of the Company to be held May 16, 2006 which will be filed
with the Securities and Exchange Commission (the “Proxy
Statement”) and is incorporated herein by reference.
The Company has adopted a code of business conduct applicable to
all directors, officers and employees, which complies with the
definition of a “code of ethics” set forth in
Section 406(c) of the Sarbanes-Oxley Act of 2002 and the
requirement of a “code of ethics” prescribed by
Rule 4350(n) of The Nasdaq Stock Market, Inc. Marketplace
Rules. The code of business conduct is accessible at no charge
on the Company’s website at www.assetacceptance.com.
The information required by Item 11 is included in the
Proxy Statement for the 2006 Annual Meeting of Stockholders of
the Company, which will be filed with the Securities and
Exchange Commission and is incorporated herein by reference.
The information required by Item 12 is included in the
Proxy Statement for the 2006 Annual Meeting of Stockholders of
the Company, which will be filed with the Securities and
Exchange Commission and is incorporated herein by reference. The
Company also incorporates herein by reference the Equity
Compensation Plan information contained in Item 5 of this
Annual Report.
The information required by Item 13 is included in the
Proxy Statement for the 2006 Annual Meeting of Stockholders of
the Company, which will be filed with the Securities and
Exchange Commission and is incorporated herein by reference.
The information required by Item 14 is included in the
Proxy Statement for the 2006 Annual Meeting of Stockholders of
the Company, which will be filed with the Securities and
Exchange Commission and is incorporated herein by reference.
(a) The financial statements filed herewith are set forth
in the Index to Consolidated Financial Statements on
page F-1
of the separate financial section of this Annual Report, which
is incorporated herein by reference.
(b) The following exhibits are filed as a part of this
Annual Report.
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The following exhibits were previously filed unless otherwise
indicated.
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51
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52
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Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant certifies that
it has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Warren,
State of Michigan on February 24, 2006.
ASSET ACCEPTANCE CAPITAL CORP.
Nathaniel F. Bradley IV,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons on
behalf of the Registrant and in the capacities indicated on
February 24, 2006.
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ASSET
ACCEPTANCE CAPITAL CORP.
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The Board of Directors and Shareholders
Asset Acceptance Capital Corp.
Asset Acceptance Capital Corp. (the “Company”)
management is responsible for establishing and maintaining
adequate internal control over financial reporting as such term
is defined in Exchange Act
Rules 13a-15(f).
The Company’s internal control system is designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
in accordance with generally accepted accounting principles.
Under the supervision and with the participation of management,
including its principal executive officer and principal
financial officer, the Company’s management assessed the
design and operating effectiveness of internal control over
financial reporting as of December 31, 2005 based on the
framework set forth in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the “COSO criteria”).
Based on this assessment, management concluded that the
Company’s internal control over financial reporting was
effective as of December 31, 2005, based on the COSO
criteria. Ernst & Young LLP, an independent registered
public accounting firm, has issued an attestation report on
management’s assessment of the Company’s internal
control over financial reporting as of December 31, 2005.
That report is included herein.
Asset
Acceptance Capital Corp.
/s/ Nathaniel F. Bradley IV
President and Chief Executive Officer
February 24, 2006
/s/ Mark A. Redman
Vice President — Finance and Chief Financial
Officer
February 24, 2006
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The Board of Directors and Shareholders
Asset Acceptance Capital Corp.
We have audited management’s assessment, included in the
accompanying Report of Management on Internal Control Over
Financial Reporting, that Asset Acceptance Capital Corp. (the
“Company”) maintained effective internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the “COSO criteria”). The Company’s management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005,
based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statements of financial position of the Company as
of December 31, 2005 and 2004, and the related consolidated
statements of income, equity and cash flows for the years ended
December 31, 2005, 2004 and 2003 and our report dated
February 24, 2006, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
February 24, 2006
Table of Contents
The Board of Directors and Shareholders
Asset Acceptance Capital Corp.
We have audited the accompanying consolidated statements of
financial position of Asset Acceptance Capital Corp. and
subsidiaries (the “Company”) as of December 31,
2005 and 2004, and the related consolidated statements of
income, equity and cash flows for each of the three years in the
period ended December 31, 2005. These financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Asset Acceptance Capital Corp. and
subsidiaries at December 31, 2005 and 2004 and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2005 in conformity with U.S. generally
accepted accounting principles.
As described in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
investments in purchased receivables in accordance with the
Statement of Position 03-3, Accounting for Certain Loans of
Debt Securities Acquired in a Transfer.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 24, 2006
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
February 24, 2006
Table of Contents
ASSET
ACCEPTANCE CAPITAL CORP.
See accompanying notes.
Table of Contents
ASSET
ACCEPTANCE CAPITAL CORP.
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