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As filed with the Securities and Exchange Commission on April 12, 2005.

Registration No. 333-123178

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 4

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Asset Acceptance Capital Corp.

(Exact name of registrant as specified in its charter)


Delaware	7322	80-0076779
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

28405 Van Dyke Avenue

Warren, Michigan 48093

(586) 939-9600

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

Nathaniel F. Bradley IV

President and Chief Executive Officer

28405 Van Dyke Avenue

Warren, Michigan 48093

(586) 939-9600

(Name and address, including zip code, and telephone number,

including area code, of agent for service)

Copies to:


J. Michael Bernard, Esq. Dykema Gossett PLLC 400 Renaissance Center Detroit, Michigan 48243 Phone: (313) 568-6800 Fax: (313) 568-6832		Fred B. White III, Esq. Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 Phone: (212) 735-3000 Fax: (212) 735-2000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), please check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION DATED APRIL 12, 2005

PROSPECTUS

5,000,000 shares

Asset Acceptance Capital Corp.

Common Stock

This is a public offering of 5,000,000 shares of our common stock by the selling stockholders identified in this prospectus. We will not receive any of the proceeds from any sale of shares by these stockholders. We will bear the expenses of this offering, except commissions paid to William Blair & Company.

Our common stock is quoted on The Nasdaq National Market under the symbol “AACC”. The last reported sale price for our common stock on The Nasdaq National Market on April 12, 2005 was $18.57.

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 9 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.


	Per Share	Total

Public Offering Price	$	$
Underwriting Discount	$	$
Proceeds to the Selling Stockholders, Before Expenses	$	$

Certain of the selling stockholders have granted William Blair & Company the option to purchase up to an additional 750,000 shares at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.

Delivery of shares will be made on or about , 2005.

William Blair & Company

The date of this prospectus is , 2005.

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

TABLE OF CONTENTS


		Page

Prospectus Summary			1
	Our Business		1
	The Offering		4
	Summary Consolidated Financial Data		5
Risk Factors			9
Forward-Looking Statements			19
History and Reorganization			20
Use of Proceeds			24
Price Range of Our Common Stock			24
Dividend Policy			24
Capitalization			25
Selected Consolidated Financial Data			26
Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Business			46
Management			61
Certain Relationships and Related Party Transactions			71
Principal and Selling Stockholders			74
Description of Capital Stock			78
Shares Eligible for Future Sale			81
U.S. Federal Tax Considerations for Non-U.S. Holders			84
Underwriting			87
Legal Matters			89
Experts			89
Where You Can Find Additional Information			90
Index to Consolidated Financial Statements			F-1

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. You should carefully read the entire prospectus before making an investment decision. As used in this prospectus, the term “cash collections” refers to collections on our owned portfolios only, exclusive of cash received from the sale of purchased receivables or from finance contract revenues. The references in this prospectus to the U.S. Federal Reserve Board are to the Federal Reserve Statistical Release, dated February 7, 2005 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 806, dated March 2004.

Our Business

Overview

We are a leading purchaser and collector of charged-off consumer receivables in the United States. We purchase and collect defaulted or charged-off accounts receivable portfolios from consumer credit originators, primarily credit card issuers, consumer finance companies, retail merchants and telecommunications and other utility providers as well as from resellers and other holders of consumer debt. We have been purchasing and collecting charged-off receivables portfolios since the formation of our predecessor company in 1962. Charged-off receivables are the unpaid obligations of individuals to credit originators. We generally purchase charged-off receivables from credit originators and other sellers of debt that were unsuccessful in collecting the underlying debt; consequently, we are able to purchase these receivables at a substantial discount to their face value. We currently do not collect on a commission or contingent fee basis. Rather, we purchase and collect charged-off accounts receivable portfolios for our own account as we believe this is the best use of our resources and affords us the best opportunity to maximize our profits. Since January 1, 1990, we have purchased 759 consumer debt portfolios through December 31, 2004, with an original charged-off face value of $18.8 billion for a purchase price of $355.2 million, or 1.89% 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 engage in 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. We specialize in the primary, secondary and tertiary markets where typically between one and three collection agencies have already tried to collect the debt. We deploy our capital within these markets based upon the relative values of the available debt portfolios. Unlike many 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 have achieved strong financial results over our history, with cash collections growing from $44.0 million in 2000 to $267.9 million in 2004, a compound annual growth rate of 57.1%. Total revenues have grown from $37.0 million in 2000 to $214.8 million in 2004, a compound annual growth rate of 55.2%.

Market

The accounts receivable management industry is growing, driven by a number of industry trends, including:


	•	Increasing levels of consumer debt obligations — According to the U.S. Federal Reserve Board, the consumer credit industry increased from $133.7 billion of consumer debt obligations in 1970 to $2.1 trillion of consumer debt obligations in November 2004, a compound annual growth rate of 8.4%. The Nilson Report projects that this market will increase to $2.8 trillion by 2010.

	•	Increasing charge-offs of the underlying receivables — According to The Nilson Report, net charge-offs of credit card debt have increased from $8.2 billion in 1990 to $51.1 billion in 2002, a


		compound annual growth rate of 16.5%. The Nilson Report is forecasting net charge-offs of credit card debt to increase to $86.7 billion in 2010.

	•	Increasing types of credit originators accessing the debt sale market — According to The Nilson Report, the cost for all types of purchased debt sold has increased from $6.0 billion in 1993 to $67.8 billion in 2003, a compound annual growth rate of 27.4%. Charged-off credit card debt averaged 77% of sales for the three year period 1998 through 2000 compared to 73% for the three year period 2001 through 2003. Sellers of charged-off portfolios have expanded to include healthcare, utility and telecommunications providers, commercial banks, consumer finance companies, retail merchants and mortgage and auto finance companies.

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 collector’s ability to:


	•	pursue collections over multi-year periods;

	•	tailor repayment plans based on a consumer’s ability to pay; and

	•	utilize experience and resources, including litigation.

Competitive Strengths

We believe we have a number of strengths which will allow us to continue to capitalize on these favorable industry trends and provide us with a competitive advantage, including:


	•	Disciplined Purchasing and Collections — Our disciplined purchasing strategy and collections process have been central to our success. We have developed and refined a purchasing model that, we believe, has resulted in sound debt buying decisions enabling us to profitably purchase and collect debt in various economic and competitive environments.

	•	Proprietary Collections Database — Since 1990, we have purchased 759 portfolios through December 31, 2004, consisting of a total of 18.1 million accounts across more than 20 different underlying asset types from over 150 different sellers. As a result, we believe we have developed one of the most extensive proprietary databases in the industry from which we run statistical models with the goal of maximizing our profitability.

	•	Focus on Purchasing and Collecting Debt — Over our history, our focus has been on purchasing debt for the purpose of collecting debt. We currently do not collect on a commission or contingent fee basis. Rather, we purchase and collect charged-off accounts receivable portfolios for our own account as we believe this is the best use of our resources to maximize our profits.

	•	Experienced Management Team — We have an experienced management team which has considerable expertise in the accounts receivable management industry. Our Chairman and our Chief Executive Officer have over 40 years and 25 years, respectively, of experience in this industry. In addition, most of our other executive officers have considerable tenure with us and/or other companies engaged in the accounts receivable management industry.

	•	Financial Strength — We believe that our generation of internal cash flows and our position as a well- capitalized firm, with access to capital through our line of credit, has been critical to our ability to grow. 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.

Our Strategy

We have achieved historical growth while seeking to ensure that the level of our portfolio purchases of charged-off receivables is commensurate with our collection ability. We seek to become the leading purchaser and collector of charged-off consumer receivables in the United States through controlled growth. Our strategy to achieve this objective includes the pursuit and execution of the following initiatives:


	•	Leverage Competitive Strengths to Increase Share in a Growing Market
	•	Selective Expansion into Other Geographic Areas
	•	Continue to Recruit, Develop and Retain Collectors
	•	Leverage Purchasing and Collection Expertise into Other Asset Types

History and Reorganization

Our Chairman’s expertise and experience in purchasing and collecting charged-off consumer receivables dates back to 1962 when he formed Lee Acceptance Company as a sole proprietorship. Our

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 our Chairman and our Chief Executive Officer through several successor companies.

In 1994, our Chairman and our Chief Executive Officer 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:


	•	On January 1, 2000, Asset Acceptance Corp. and certain of its affiliates were joined as wholly-owned subsidiaries of AAC Holding Corp. for tax planning purposes.
	•	On September 20, 2002, we formed Asset Acceptance Holdings LLC, a Delaware limited liability company, for the purpose of consummating an equity recapitalization. Effective September 30, 2002, AAC Investors, Inc. acquired a 60% equity interest in Asset Acceptance Holdings LLC. After September 30, 2002, the business of purchasing and collecting charged-off debt 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.

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 hereby and 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. For more detailed information about our corporate history and this Reorganization, see “History and Reorganization”.

Recent Developments

Cash collections on charged-off consumer receivables increased 23.3% to $80.4 million for the three months ended March 31, 2005 from $65.2 million for the same period in 2004. During the three months ended March 31, 2005, we acquired charged-off consumer receivables portfolios with an aggregate face value amount of $1.1 billion at a cost of $33.1 million, or 2.99% of face value, net of buybacks. During the three months ended March 31, 2004, we acquired charged-off consumer receivables portfolios with an aggregate face value amount of $501.0 million at a cost of $12.1 million, or 2.42% of face value, net of buybacks. We expect to report total revenues in the range of $64.0 million to $66.0 million for the three months ended March 31, 2005, as compared to total revenues of $49.7 million for the same period in 2004. In addition, we expect to report net income in the range of $14.0 million to $15.3 million for the three months ended March 31, 2005, or fully diluted earnings per share of $0.38 to $0.41 (which includes offering expenses of approximately $400,000 in connection with this offering). During the three months ended March 31, 2005, we borrowed and repaid $6.5 million and, as of March 31, 2005, we had no outstanding balance on our line of credit.

Separately, we appointed Patrick J. Dangel as a Vice President-Collections effective as of April 1, 2005. Mr. Dangel previously served as an Assistant Vice President-Collections and replaced Donald O’Neill who left our employment effective April 1, 2005.

Our Corporate Information

We were incorporated in Delaware on September 18, 2003. Our executive offices are located at 28405 Van Dyke Avenue, Warren, Michigan 48093, and our telephone number at that location is (586) 939-9600. Our web address is www.assetacceptance.com. Information on our website should not be considered to be part of this prospectus.

The Offering


Common stock offered by Asset Acceptance Capital Corp		None

Common stock offered by the selling stockholders		5,000,000 shares

Common stock outstanding prior to this offering		37,225,275 shares

Common stock outstanding after this offering		37,225,275 shares

Use of proceeds		All of the shares of common stock offered by this prospectus are being offered for sale by the selling stockholders. We will not receive any portion of the net proceeds of this offering.

The Nasdaq National Market symbol		AACC

Risk Factors		See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

The number of shares of common stock outstanding prior to this offering and the number of shares of common stock outstanding upon completion of this offering excludes:


	•	118,888 shares of common stock issuable upon exercise of stock options granted prior to this offering pursuant to our 2004 stock incentive plan; and

	•	3,581,112 additional shares of common stock reserved for issuance under our 2004 stock incentive plan.

Unless otherwise indicated, all information in this prospectus, including the outstanding shares information above, assumes that William Blair & Company has not exercised its option to purchase up to 750,000 additional shares from the selling stockholders.

Summary Consolidated Financial Data

The following summary consolidated financial data includes the results of operations of the following companies for the indicated periods:


	•	Prior to October 1, 2002, AAC Holding Corp. and its subsidiaries, Consumer Credit Corp. and Lee Acceptance Corp., with each of these corporations treated as an S corporation for income tax purposes (except for Lee Acceptance Corp., which was treated as a C corporation for income tax purposes). Each of these corporations are collectively referred to in our financial statements and in the following summary consolidated financial data as the “predecessor”.

	•	From October 1, 2002 to the Reorganization effected on February 4, 2004, to AAC Investors, Inc., including its subsidiary, Asset Acceptance Holdings LLC (referred to collectively in our financial statements as the “successor”).

	•	From February 5, 2004 through December 31, 2004, to Asset Acceptance Capital Corp., including its wholly-owned subsidiaries, AAC Investors, Inc. and RBR Holding Corp., and its indirect wholly-owned subsidiary, Asset Acceptance Holdings LLC and its subsidiaries, with these companies also referred to collectively in our financial statements and in the following summary consolidated financial data as the “successor”.

The following summary 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 nine months ended September 30, 2002 and of the successor for the three months ended December 31, 2002 and the years ended December 31, 2003 and 2004 and the related summary consolidated financial position data of the successor as of December 31, 2002, 2003 and 2004 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 summary financial data gives effect to the Reorganization as of October 1, 2002. For more detailed information about our corporate history and this Reorganization, see “History and Reorganization”.


		Combined		Successor

		Years Ended December 31,

		2002(1)		2003			2004

		(in thousands, except per share data)
STATEMENT OF INCOME DATA:
Revenues
Purchased receivable revenues		$	100,004	$	159,628		$	213,723
Gain on sale of purchased receivables			326		—			468
Finance contract revenues			411		565			562

	Total revenues		100,741		160,193			214,753

Expenses
Salaries and benefits			33,438		51,296			111,034	(2)
Collections expense			26,051		43,656			56,949
Occupancy			3,064		4,633			6,109
Administrative			2,682		3,259			5,677
Depreciation			1,910		2,572			2,881
Loss on disposal of equipment			198		4			98

	Total operating expenses		67,343		105,420			182,748

Income from operations			33,398		54,773			32,005
Net interest expense			3,427		7,195			1,709
Other expenses (income)			423		(448	)		(84	)

Income before income taxes			29,548		48,026			30,380
Income taxes(3)			1,624		10,283			29,634

Net income(4)		$	27,924	$	37,743		$	746	(5)


	Successor

	As of December 31,

	2002		2003		2004

	(in thousands)
FINANCIAL POSITION DATA:
Cash and cash equivalents	$	2,281	$	5,499	$	14,205
Purchased receivables		133,337		183,720		216,480
Total assets		151,277		207,110		252,506
Total debt, including capital lease obligations		103,192		112,729		254
Total stockholders’ equity		41,644		74,383		197,180


	Combined			Successor

	Years Ended December 31,

	2002			2003			2004

	(in thousands)
OPERATING AND OTHER FINANCIAL DATA:
Cash collections for period	$	120,540		$	197,819		$	267,928
Operating expenses to cash collections		55.9	%		53.3	%		68.2	%(6)
Acquisitions of purchased receivables at cost	$	73,684		$	89,586		$	89,192
Acquisitions of purchased receivables at face value	$	5,215,662		$	4,235,319		$	4,472,030


(1)	AAC Investors, Inc. and RBR Holding Corp. became wholly-owned subsidiaries of Asset Acceptance Capital Corp. through a reorganization that was effective February 4, 2004. As a result of the reorganization, Asset Acceptance Holdings LLC and its subsidiaries became indirect wholly-owned subsidiaries of Asset Acceptance Capital Corp. The operations data for the year ended December 31, 2002, include our predecessor for the nine month period ended September 30, 2002 and our successor for the three month period ended December 31, 2002.

(2)	Excluding 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, salaries and benefits would have been $65.3 million for the year ended December 31, 2004. See discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Year Ended December 31, 2004 compared to Year Ended December 31, 2003 — Operating Expenses”.

(3)	Asset Acceptance Capital Corp. included income tax expense on only 60% of pretax income until February 4, 2004, as RBR Holding Corp. (40% owner of Asset Acceptance Holdings LLC) was taxed as a S corporation under the Internal Revenue Code and therefore taxable income was included on the shareholders’ individual tax returns. Prior to October 1, 2002, no income tax expense was incurred as our predecessor was taxed as an S corporation under the Internal Revenue Code and therefore taxable income was included on the shareholders’ individual tax returns. Income tax expense in 2004 includes a deferred tax charge of $19.3 million resulting from RBR Holding Corp. losing its S corporation tax status after becoming a wholly-owned subsidiary of Asset Acceptance Capital Corp. during the first quarter of 2004.

(4)	For comparison purposes, see “Selected Consolidated Financial Data” and notes (5) and (7) thereto in which we have presented pro forma net income, which is net income adjusted for pro forma net income taxes assuming all entities had been a C corporation for all periods presented, and in which we have presented pro forma net income per share and pro forma weighted average shares outstanding assuming the Reorganization had occurred at the beginning of the periods presented.

(5)	Our net income for 2004 included the following one-time events:


	•	The negative effect of a deferred tax charge of $19.3 million, or $0.53 per share, resulting from RBR Holding Corp. losing its S corporation status after becoming a wholly-owned subsidiary of Asset Acceptance Capital Corp. during the first quarter of 2004. See discussion in note (3) above.

	•	The negative effect of a $45.7 million compensation and related payroll tax charge ($28.7 million net of taxes, or $0.79 per share) resulting from the vesting of the outstanding share appreciation rights upon our initial public offering during the first quarter of 2004. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Year Ended December 31, 2004 Comparison to Year Ended December 31, 2003 — Operating Expenses”.

	•	The positive effect related to our incurring income tax on only 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. 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. The impact of the lower tax expense was approximately $0.9 million or $0.03 per share.

(6)

Excluding 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, operating expenses decreased to 51.2% of cash collections for the year ended December 31, 2004. See discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Year Ended December 31, 2004 compared to Year Ended December 31, 2003 — Operating Expenses”.

Reconciliation of GAAP to Adjusted Basis

Set forth below is information on an adjusted basis pertaining to certain expenses for the years ended 2002, 2003 and 2004. We believe the presentation of such adjusted information is useful to investors to help them understand how such expenses affected our operating performance during the relevant periods inasmuch as we use such adjusted information for purposes of our internal planning, review and period-to-period comparisons of our operating performance. Specifically, we believe that salary and benefits in 2004 should be adjusted for the one-time $45.7 million compensation and related payroll tax charge resulting from the vesting of the outstanding share appreciation rights upon our initial public offering and that income tax expense in all three years should be adjusted to record income tax expense on 100% of the adjusted pretax net income. As adjusted, net income and earnings per share for 2002, 2003 and 2004 would have been $18.5 million and $0.65 per share, $30.1 million and $1.06 per share and $47.8 million and $1.31 per share, respectively.

The following table sets forth a reconciliation of GAAP net income to adjusted net income for each of 2002, 2003 and 2004. See discussion in notes (2) and (3) to “Summary Consolidated Financial Data” above. Please note that adjusted net income should not be used as a replacement for GAAP net income.


		Combined		Successor

		Years Ended December 31,

		2002		2003		2004

		(in thousands, except earnings per
		share amounts)
GAAP net income		$	27,924	$	37,743	$	746
Add income tax expense			1,624		10,283		29,634

	Income before income taxes		29,548		48,026		30,380
Add one-time compensation and related payroll tax charge			—		—		45,673

	Adjusted income before adjusted income taxes		29,548		48,026		76,053
Less adjusted income taxes(1)			11,038		17,914		28,292

Adjusted net income(2)		$	18,510	$	30,112	$	47,761

Weighted average number of shares outstanding:
	Basic		—		28,448		36,386
	Diluted		—		28,448		36,394
Earnings per common share outstanding:
	Basic	$	0.98	$	1.33	$	0.02
	Diluted	$	0.98	$	1.33	$	0.02
Pro forma average number of shares outstanding:
	Basic(2)		28,448		—		—
	Diluted(2)		28,448		—		—
Adjusted earnings per common share outstanding:
	Basic	$	0.65	$	1.06	$	1.31
	Diluted	$	0.65	$	1.06	$	1.31


(1)	Adjusted income taxes assumes we were a C corporation for all periods presented. Income tax rates used for 2002, 2003 and 2004 were 37.4%, 37.3% and 37.2%, respectively.

(2)	For the years ended 2002 and 2003, adjusted net income was equal to pro forma net income. For comparison purposes, see “Selected Consolidated Financial Data” and notes (5) and (7) thereto in which we have presented pro forma net income, which is net income adjusted for pro forma net income taxes assuming all entities had been a C corporation for all periods presented, and in which we have presented pro forma weighted average shares outstanding assuming the Reorganization had occurred at the beginning of the periods presented.

RISK FACTORS

You should carefully consider the risks described below before deciding whether to invest in shares of our common stock. Any of the following risks could cause the trading price of our common stock to decline and you may lose all or part of your investment. You should also refer to the other information in this prospectus, including our consolidated financial statements and the related notes.

Risks Related to Our Business

If we are not able to purchase charged-off consumer receivables at appropriate prices, the resulting decrease in our inventory of purchased portfolios of receivables could adversely affect our ability to generate revenue and our ability to continue our growth.

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:


	•	continued growth in the levels of consumer obligations;

	•	continued growth in the number of industries selling charged-off consumer receivable portfolios;

	•	continued sales of charged-off consumer receivables portfolios by credit originators;

	•	competitive factors affecting potential purchasers and credit originators of charged-off receivables, including the number of firms engaged in the collection business and the capitalization of those firms, that may cause an increase in the price we are willing to pay for portfolios of charged-off consumer receivables or cause us to overpay for portfolios of charged-off consumer receivables;

	•	our ability to purchase portfolios in industries in which we have little or no experience with the resulting risk of lower returns if we do not successfully purchase and collect these receivables; and

	•	continued growth in the levels of credit being extended by credit originators.

Over the last 12 to 18 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.

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.

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 with commitment terms ranging from three to twelve months and purchased portfolios with an aggregate purchase price of approximately $8.1 million, or approximately 9% 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 amount. 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.

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 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 effective January 2005 and apply to purchased receivables acquired after December 31, 2004. The provisions of SOP 03-3 that relate to decreases in expected cash flows 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.

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 and applied to the balance of the static pool. The resulting revenue recognized is based on the IRR applied to the remaining balance of each static pool of accounts. Each static pool is analyzed at least quarterly to assess the actual performance compared to the expected performance. To the extent there are differences in actual performance versus expected performance, the IRR is adjusted prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. Beginning in January 2005, under SOP 03-3, if the revised estimate of cash flows is less than the original estimate, the IRR will remain unchanged and an immediate impairment will be taken.

Application of SOP 03-3 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, which we believe is inevitable, earnings could be affected, either positively or negatively. Higher collection amounts or cash collections that occur sooner than projected cash collections will have a favorable impact on yields and revenues. Lower collection amounts or cash collections that occur later than projected cash collections will have an unfavorable impact and result in an immediate impairment, which would negatively impact our earnings.

We are required to comply with Section 404 of Sarbanes Oxley for the year ended December 31, 2005. If we are unable to timely comply with Section 404 or if the costs related to compliance are significant, our profitability and our stock price could be negatively affected.

We are required to comply with Section 404 of Sarbanes Oxley (“Section 404”) for the year ended December 31, 2005 since we are not an accelerated filer as defined by the Securities and Exchange Commission. Section 404 requires that we document and 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 being in 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 comply could be significant. The time and costs associated with complying with Sarbanes Oxley could reduce our profitability. If we fail to fully and timely comply 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.