Asset Acceptance Capital Corp. Reports First Quarter 2013 Results

  Asset Acceptance Capital Corp. Reports First Quarter 2013 Results

Business Wire

WARREN, Mich. -- April 29, 2013

Asset Acceptance Capital Corp. (NASDAQ: AACC), a leading purchaser and
collector of charged-off consumer debt, today reported results for the quarter
ended March 31, 2013.

First Quarter 2013 Financial Highlights

Cash collections for the first quarter of 2013 increased 2.6% compared to the
same period of the prior year, to $103.8 million.

First quarter revenues were $55.2 million, a decrease of 10.7% from the same
period of the prior year. The Company reported net impairments on purchased
receivables of $0.2 million, which decreased revenues for the quarter, versus
net impairment reversals of $4.5 million in the prior year period.

Operating expenses were $47.0 million, a decrease of $1.4 million compared to
the prior year period. Results reflected continued investment in the Company’s
legal channel and an increase in related up-front costs ahead of associated
collections. Legal investments increased to $8.0 million during the quarter
compared to $6.9 million in the same period of the prior year. Despite the
increased legal investment, cost to collect for the quarter was 45.3%, an
improvement of 253 basis points from the first quarter of 2012. Reported
operating expenses and cost to collect do not include $1.9 million of costs
related to the pending merger transaction with Encore Capital Group, Inc.
(“Encore”), disclosed on March 6, 2013. These costs have been reported as
Other Income (Expense).

Adjusted Earnings Before Interest Taxes Depreciation and Amortization
(“Adjusted EBITDA”) was $56.5 million, a 3.3% increase from $54.7 million in
the first quarter of 2012. Please see a reconciliation of net income according
to U.S. Generally Accepted Accounting Principles (“GAAP”) to Adjusted EBITDA
on page 13.

The Company reported net income of $0.4 million or $0.01 per fully diluted
share during the first quarter of 2013, compared to net income of $5.4 million
or $0.18 per fully diluted share in the first quarter of 2012. The quarterly
effective tax rate of 70.8% included the effect of a significant amount of
non-deductible costs related to the pending merger transaction.

During the first quarter of 2013, the Company acquired $27.1 million in
charged-off consumer receivables with a face value of $431.6 million for a
blended rate of 6.27% of face value. By comparison, the Company purchased
$21.1 million in charged-off consumer receivables with a face value of $803.2
million during the prior year’s first quarter, representing a blended rate of
2.63% of face value. All purchase data is adjusted for buybacks.

As previously reported on March 6, 2013, the Company has entered into a
definitive agreement and plan of merger (the “Merger Agreement”) with Encore,
pursuant to which a wholly-owned subsidiary of Encore will merge with and into
the Company, with the Company continuing as the surviving corporation and
becoming a wholly-owned subsidiary of Encore (the “Merger”). For terms of the
Merger Agreement, including circumstances under which the Merger Agreement can
be terminated and the ramifications of such a termination, as well as other
terms and conditions, refer to the Merger Agreement filed as Exhibit 1.1 to
our Current Report on Form 8-K with the SEC Commission on March 11, 2013. The
parties to the Merger Agreement currently expect to complete the Merger in the
second quarter of 2013, although neither the Company nor Encore can assure
completion by any particular date or that the Merger will be completed at all.
Because the Merger is subject to a number of conditions, the exact timing of
completion of the Merger cannot be determined at this time.

Please refer to Supplemental Financial Data beginning on page five for
additional information about the Company’s financial results for the three
months ended March 31, 2013 and prior year quarters.

About Asset Acceptance Capital Corp.

For over 50 years, Asset Acceptance has provided credit originators, such as
credit card issuers, consumer finance companies, retail merchants, utilities
and others an efficient alternative in recovering defaulted consumer debt. For
more information, please visit www.AssetAcceptance.com.

Asset Acceptance Capital Corp. Safe Harbor Statement

This press release contains certain statements, including the Company's plans
and expectations regarding its operating strategies, charged-off receivables,
collections and costs, which are forward-looking statements and are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements include reference to the
Company’s presentations and webcasts. These forward-looking statements reflect
the Company's views, expectations and beliefs at the time such statements were
made with respect to such matters, as well as the Company's future plans,
objectives, events, portfolio purchases and pricing, collections and financial
results such as revenues, expenses, income, earnings per share, capital
expenditures, operating margins, financial position, expected results of
operations and other financial items. Forward-looking statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions (“Risk Factors”) that make the timing, extent, likelihood and
degree of occurrence of these matters difficult to predict. Words such as
“anticipates,” “believes,” “estimates,” “expects,” “intends,” “should,”
“could,” “will,” variations of such words and similar expressions are intended
to identify forward-looking statements.

There are a number of factors, many of which are beyond the Company's control,
which could cause actual results and outcomes to differ materially from those
described in the forward-looking statements. These Risk Factors include the
Risk Factors discussed under “Item 1A Risk Factors” in the Company’s most
recently filed Annual Report on Form 10-K and in other SEC filings, in each
case under a section titled “Risk Factors” or similar headings and those
discussions regarding risk factors as well as the discussion of
forward-looking statements in such sections are incorporated herein by
reference. Other Risk Factors exist, and new Risk Factors emerge from time to
time that may cause actual results to differ materially from those contained
in any forward-looking statements. Factors that could affect our results and
cause them to materially differ from those contained in the forward-looking
statements include the following:

  *the parties to the Merger Agreement may be unable to satisfy the
    conditions to the completion of the Merger and the pending Merger with
    Encore may not be completed, which could negatively impact the market
    price of AACC common stock and our financial condition and results of
    operation;
  *until the consummation of the Merger, the Merger Agreement with Encore
    restricts our ability to engage in certain actions, including, among
    others, purchases of portfolio accounts receivable and making capital
    expenditures;
  *failure to comply with government regulation;
  *a decrease in collections if changes in or enforcement of debt collection
    laws impair our ability to collect, including any unknown ramifications
    from the Dodd-Frank Wall Street Reform and Consumer Protection Act;
  *our ability to purchase charged-off receivable portfolios on acceptable
    terms and in sufficient amounts;
  *instability in the financial markets and continued economic weakness or
    recession impacting our ability to acquire and collect on charged-off
    receivable portfolios and our operating results;
  *our ability to maintain existing, and to secure additional financing on
    acceptable terms;
  *changes in relationships with third parties collecting on our behalf;
  *ongoing risks of litigation in connection with the pending Merger and
    litigation in our litigious industry generally, including individual and
    class actions under consumer credit, collections and other laws;
  *concentration of a significant portion of our portfolio purchases during
    any period with a small number of sellers;
  *our ability to substantiate our application of tax rules against
    examinations and challenges made by tax authorities;
  *our ability to collect sufficient amounts from our purchases of
    charged-off receivable portfolios;
  *our ability to diversify beyond collecting on our purchased receivables
    portfolios into ancillary lines of business;
  *a decrease in collections as a result of negative attention or news
    regarding the debt collection industry and debtors’ willingness to pay the
    debt we acquire;
  *our ability to respond to technology downtime and changes in technology to
    remain competitive;
  *our ability to make reasonable estimates of the timing and amount of
    future cash receipts and assumptions underlying the calculation of the net
    impairment charges or IRR increases for purposes of recording purchased
    receivable revenues;
  *the costs, uncertainties and other effects of legal and administrative
    proceedings impacting our ability to collect on judgments in our favor;
  *our ability to successfully hire, train, integrate into our collections
    operations and retain in-house account representatives; and
  *other unanticipated events and conditions that may hinder our ability to
    compete.

Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results. Furthermore,
the Company expressly disclaims any obligation to update, amend or clarify
forward-looking statements.

Supplemental Financial Data
Quarterly trends for certain financial metrics are shown in the table below.
                                                             
(Unaudited, $ in Millions,
except collections per      Q1 ‘13   Q4 ‘12    Q3 ‘12   Q2 ‘12    Q1 ‘12
account representative)
Total revenues              $55.2    $51.7     $54.7    $ 58.7    $ 61.8
Cash collections            $103.8   $85.7     $89.2    $ 91.9    $ 101.1
Operating expenses to cash  45.3%    54.7%     54.5%    52.7%     47.8%
collections (1)
Call center collections     $53.4    $39.2     $44.1    $ 48.8    $ 58.7
Legal collections           $50.4    $46.5     $45.1    $ 43.1    $ 42.4
Amortization rate           47.0%    39.8%     39.0%    36.4%     39.1%
Core amortization (2)       52.5%    45.1%     44.4%    42.0%     44.7%
Collections on fully        $10.8    $10.0     $10.9    $ 12.2    $ 12.7
amortized portfolios
Investment in purchased     $27.1    $60.8     $23.9    $ 58.6    $ 21.1
receivables (3)
Face value of purchased     $431.6   $1,334.0  $765.6   $2,074.1  $803.2
receivables (3)
Average cost of purchased   6.27%    4.56%     3.12%    2.83%     2.63%
receivables (3)
Number of purchased         33       40        17       28        27
receivable portfolios
Collections per account     $93,771  $61,044   $45,005  $48,369   $58,052
representative FTE (4) (5)
Average account
representative FTE’s (4)    250      291       437      460       500
(5)
                                                                 

(1)  Does not include $1.9 million of costs related to the pending merger
      transaction with Encore
(2)   The core amortization rate is calculated as total amortization divided
      by collections on amortizing portfolios.
(3)   All purchase data is adjusted for buybacks.
(4)   Historical information has not been adjusted for collection center
      closings.
(5)   Prior period results have been restated to the current period
      presentation.
      
      
      

The Company provided the following details of purchased receivable revenues by
year of purchase:

         
           Three Months Ended March 31, 2013
Year of                                   Amortization   Monthly   Net            Zero Basis
Purchase   Collections    Revenue       Rate (1)      Yield    Impairments   Collections
                                                         (2)       (Reversals)
2007 and   $ 16,135,973    $ 11,219,563   N/M            N/M       $ 240,000      $ 9,036,577
prior
2008         7,700,591       4,384,781    43.1      %    8.31  %   —                834,276
2009         12,809,632      7,314,556    42.9           9.09      —                939,169
2010         14,698,010      7,277,386    50.5           4.65      —                —
2011         23,981,608      11,607,867   51.6           3.94      —                —
2012         27,009,667      12,458,244   53.9           2.84      —                —
2013        1,470,797      751,933      48.9           2.70      —              —
Totals     $ 103,806,278   $ 55,014,330   47.0      %    5.01  %   $ 240,000     $ 10,810,022
           
                                                                 
           Three Months Ended March 31, 2012
Year of                                   Amortization   Monthly   Net            Zero Basis
Purchase   Collections     Revenue        Rate (1)       Yield     Impairments    Collections
                                                         (2)       (Reversals)
2006 and   $ 17,272,755    $ 15,422,027   N/M            N/M       $          )   $ 10,463,961
prior                                                              (2,639,700
2007         8,341,851       4,264,360    48.9      %    7.05  %   (751,300   )     702,788
2008         11,339,770      7,035,787    38.0           7.80      —                1,472,986
2009         17,025,412      11,049,852   35.1           8.14      (1,105,700 )     66,092
2010         19,183,043      9,211,988    52.0           3.70      —                —
2011         26,549,426      13,911,748   47.6           3.13      —                —
2012        1,420,618      713,586      49.8           3.25      —              —
Totals     $ 101,132,875   $ 61,609,348   39.1      %    5.94  %   $          )   $ 12,705,827
                                                                   (4,496,700
                                                                                    

(1)  “N/M” indicates that the calculated percentage is not meaningful.
      The monthly yield is the weighted-average yield determined by dividing
(2)   purchased receivable revenues recognized in the period by the average of
      the beginning monthly carrying values of the purchased receivables for
      the period presented.
      

Purchased Receivable Revenues and Amortization

The table below shows the components of revenue from purchased receivables,
the amortization rate and the core amortization rate. We use the core
amortization rate to monitor performance of pools with remaining balances, and
to determine if impairments, impairment reversals, or yield increases should
be recorded. Core amortization trends may identify over or under performance
compared to forecasts for pools with remaining balances.

The following factors contributed to the change in amortization rates from the
prior year:

  *total amortization and the amortization rate increased during the first
    quarter of 2013 compared to the same period in 2012. The increase in the
    amortization rate and total amortization was primarily the result of lower
    weighted-average yields, lower zero-basis collections and impairments
    during 2013 compared to impairment reversals during 2012. Portfolio
    balances that amortize too slowly in relation to current or expected
    collections may lead to impairments. If portfolio balances amortize too
    quickly and we expect collections to continue to exceed expectations,
    previously recognized impairments may be reversed, or if there are no
    impairments to reverse, assigned yields may increase;
  *amortization of receivable balances for 2013 increased compared to 2012 as
    a result of higher collections on amortizing pools;
  *net impairments are recorded as additional amortization, and increase the
    amortization rate, while net reversals have the opposite effect.
    Impairment for 2013 increased total amortization compared to the same
    period in 2012; and
  *declining zero basis collections in the first quarter of 2013 compared to
    the same period in 2012 increased the amortization rate because 100% of
    these collections are recorded as revenue and do not contribute towards
    portfolio amortization.

                                      Three Months Ended
                                       March 31,
($ in millions)                        2013       2012
Cash collections:
Collections on amortizing portfolios   $ 93.0      $ 88.4
Zero basis collections                  10.8      12.7  
Total collections                      $ 103.8    $ 101.1 
                                                   
Amortization:
Amortization of receivables balances   $ 48.6      $ 43.9
Impairments                              0.2         —
Reversals of impairments                 —           (4.5  )
Cost recovery amortization              —         0.1   
Total amortization                     $ 48.8     $ 39.5  
                                                   
Purchased receivable revenues, net     $ 55.0     $ 61.6  
                                                   
Amortization rate                        47.0  %     39.1  %
                                                   
Core amortization rate (1)               52.5  %     44.7  %
                                                           

(1)  The core amortization rate is calculated as total amortization divided
      by collections on amortizing portfolios.
      
      
      

Consolidated Statements of Operations

(Unaudited)
                                             
                                               Three Months Ended March 31,
                                               2013            2012
Revenues
Purchased receivable revenues, net             $ 55,014,330     $ 61,609,348
Other revenues, net                             180,166        224,952    
Total revenues                                  55,194,496     61,834,300 
Expenses
Salaries and benefits                            14,217,244       16,336,882
Collections expense                              28,129,456       27,312,560
Occupancy                                        1,322,154        1,428,226
Administrative                                   2,184,239        1,850,100
Depreciation and amortization                    999,246          1,323,745
Restructuring charges                            138,362          81,688
(Gain) loss on disposal of equipment and        (700       )    8,402      
other assets
Total operating expenses                        46,990,001     48,341,603 
Income from operations                           8,204,495        13,492,697
Other income (expense)
Merger transaction expense                       (1,938,987 )     —
Interest expense                                 (4,914,639 )     (5,327,354 )
Interest income                                  5,495            2,098
Other                                           4,643          46,470     
Income before income taxes                       1,361,007        8,213,911
Income tax expense                              963,593        2,782,052  
Net income                                     $ 397,414       $ 5,431,859  
                                                                
Weighted-average number of shares:
Basic                                            30,939,753       30,806,948
Diluted                                          31,054,020       30,878,147
Earnings per common share outstanding:
Basic                                          $ 0.01           $ 0.18
Diluted                                        $ 0.01           $ 0.18
                                                                             
                                                                             
                                                                             

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Financial Position
                                         
                                           
                                           March 31, 2013   December 31, 2012
                                           (Unaudited)
ASSETS
                                                             
Cash                                       $ 19,654,111      $  14,012,541
Purchased receivables, net                   348,976,297        370,899,893
Income taxes receivable                      192,367            620,096
Property and equipment, net                  12,451,738         12,568,066
Goodwill                                     14,323,071         14,323,071
Other assets                                12,003,341       12,314,572   
Total assets                               $ 407,600,925    $  424,738,239  

LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                             
Liabilities:
Accounts payable                           $ 2,416,094       $  3,467,348
Accrued liabilities                          21,891,938         22,416,766
Income taxes payable                         1,385,616          426,353
Notes payable                                165,889,599        182,911,146
Capital lease obligations                    24,704             37,020
Deferred tax liability, net                 65,337,849       65,422,456   
Total liabilities                           256,945,800      274,681,089  
                                                             
Stockholders’ Equity:
Preferred stock, $0.01 par value,
10,000,000 shares authorized; no shares      —                  —
issued and outstanding
Common stock, $0.01 par value,
100,000,000 shares authorized; issued
shares — 33,537,623 and 33,443,347 at        335,376            334,433
March 31, 2013 and December 31, 2012,
respectively
Additional paid in capital                   152,063,741        151,749,449
Retained earnings                            40,477,640         40,080,226
Accumulated other comprehensive loss,        (491,106    )      (548,948     )
net of tax
Common stock in treasury; at cost,
2,699,166 and 2,672,237 shares at March     (41,730,526 )     (41,558,010  )
31, 2013 and December 31, 2012,
respectively
Total stockholders’ equity                  150,655,125      150,057,150  
Total liabilities and stockholders’        $ 407,600,925    $  424,738,239  
equity
                                                                             
                                                                             
                                                                             

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Cash Flows

(Unaudited)
                                           
                                             Three Months Ended March 31,
                                             2013             2012
Cash flows from operating activities
Net income                                   $ 397,414         $ 5,431,859
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization                  999,246           1,323,745
Amortization of deferred financing costs       859,856           898,966
and debt discount
Amortization of de-designated hedge            —                 79,450
Deferred income taxes                          (117,143    )     2,529,164
Share-based compensation expense               315,235           231,950
Net impairment (impairment reversals) of       240,000           (4,496,700  )
purchased receivables
Non-cash revenue                               (46,335     )     (1,001      )
(Gain) loss on disposal of equipment and       (700        )     8,402
other assets
Changes in assets and liabilities:
Decrease (increase) in other assets            17,328            (1,874,816  )
Decrease in accounts payable and other         (1,471,000  )     (3,030,067  )
accrued liabilities
Increase in net income taxes payable          1,386,992       143,362     
Net cash provided by operating activities     2,580,893       1,244,314   
                                                               
Cash flows from investing activities
Investments in purchased receivables, net      (26,868,352 )     (20,923,049 )
of buybacks
Principal collected on purchased               48,598,283        44,021,228
receivables
Purchases of property and equipment            (897,622    )     (129,454    )
Proceeds from sale of property and            700             500         
equipment
Net cash provided by investing activities     20,833,009      22,969,225  
                                                               
Cash flows from financing activities
Repayments of term loan facility               (2,187,500  )     (2,187,500  )
Net (repayments) borrowings on revolving       (15,400,000 )     (8,200,000  )
credit facility
Payments of deferred financing costs           —                 (3,469      )
Payments on capital lease obligations          (12,316     )     (131,011    )
Purchases of treasury shares                  (172,516    )    (51,580     )
Net cash used in financing activities         (17,772,332 )    (10,573,560 )
Net increase in cash                           5,641,570         13,639,979
Cash at beginning of period                   14,012,541      6,990,757   
Cash at end of period                        $ 19,654,111     $ 20,630,736  
                                                               
Supplemental disclosure of cash flow
information
Cash paid for interest, net of capitalized   $ 3,986,086       $ 4,551,695
interest
Net cash (paid) received for income taxes      (2,525      )     109,526
Non-cash investing and financing
activities:
Change in fair value of interest rate swap     90,378            (199,587    )
liabilities
Change in unrealized loss on cash flow         (57,842     )     101,840
hedge, net of tax
                                                                             
                                                                             
                                                                             

Reconciliation of GAAP Net Income or Loss to Adjusted EBITDA (Unaudited)

This press release includes a discussion of "Adjusted EBITDA," which is a
non-GAAP financial measure. The Company defines Adjusted EBITDA as net income
or loss plus (a) the provision for income taxes, (b) interest expense, (c)
depreciation and amortization, (d) share-based compensation, (e) gain or loss
on sale of assets, net, (f) non-cash restructuring charges and impairment of
assets, (g) purchased receivables amortization, (h) loss on extinguishment of
debt, and (i) in accordance with our Credit Agreement, certain FTC related
charges and cash restructuring charges (not to exceed $2.25 million for any
period of four consecutive fiscal quarters).

The Company believes this non-GAAP financial measure provides important
supplemental information to management and investors. This non-GAAP financial
measure reflects an additional way of viewing aspects of the Company's
operations that, when viewed with the GAAP results and the accompanying
reconciliation to the most directly comparable GAAP financial measure, provide
a more complete understanding of factors and trends affecting the Company's
business and results of operations.

Management uses Adjusted EBITDA for planning purposes, including the
preparation of internal budgets and forecasts; in communications with the
Company’s Board of Directors, stockholders, analysts and investors concerning
its financial performance; as a key component in management’s annual incentive
compensation plan; and as a measure of operating performance for the financial
covenants in the Company’s amended credit agreement. The Company also believes
that analysts and investors use Adjusted EBITDA as supplemental measures to
evaluate the overall operating performance of companies in its industry.

Adjusted EBITDA, which is a non-GAAP financial measure, should not be
considered an alternative to, or more meaningful than, net income or loss
prepared on a GAAP basis. Management strongly encourages investors to review
the Company's consolidated financial statements in their entirety and to not
rely on any single financial measure. Because non-GAAP financial measures are
not standardized, it may not be possible to compare this financial measure
with other companies' non-GAAP financial measures having the same or similar
names. In addition, the Company expects to continue to incur expenses similar
to the non-GAAP adjustments described above, and exclusion of these items from
the Company's non-GAAP measure should not be construed as an inference that
these costs are unusual, infrequent or non-recurring.

The Company provided the following table which reconciles GAAP net income, as
reported, to Adjusted EBITDA.

                                    Three Months Ended March 31,
                                     2013            2012
Net income                           $ 397,414        $ 5,431,859
Adjustments:
                                       963,593          2,782,052
Income tax expense
Interest expense                       4,914,639        5,327,354
Depreciation and amortization          999,246          1,323,745
Share-based compensation               315,235          231,950
(Gain) loss on sale of assets, net     (700       )     8,402
Purchased receivables amortization     48,791,948       39,523,527
Cash restructuring charges             138,362          81,688
FTC related charges                   —              14,898
Adjusted EBITDA                      $ 56,519,737    $ 54,725,475

Contact:

Asset Acceptance Capital Corp.
Mary Arraf, 586-983-7087
marraf@assetacceptance.com