Portfolio Recovery Associates, Inc.
Riverside Commerce Center, 120 Corporate Boulevard, Suite 100, Norfolk, Virginia 23502
Portfolio Recovery
Associates, Inc.
2003 Annual Report
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A Year of Growth and Performance
MANAGEMENT
CORPORATE GOVERNANCE
Hampton, Virginia call center
Steve Fredrickson
President and
Chief Executive Officer
Kevin Stevenson
Executive Vice President,
Chief Financial Officer,
Treasurer and Asst. Secretary
Craig Grube
Executive Vice President,
Acquisitions
Judith Scott
Executive Vice President,
General Counsel and
Secretary
PORTFOLIO RECOVERY ASSOCIATES, INC. and its subsidiaries purchase, manage, and
collect defaulted consumer debt through two core businesses. Our debt buying
business represents the majority of our operation, acquiring accounts at a very
deep discount and then collecting those accounts typically over a five to seven
year period. Our collection agency business collects defaulted accounts for
others and we are paid a fee for doing so.
WE’RE GIVING DEBT COLLECTION A GOOD NAME®
We operate out of three primary facilities. Our home office, housing both administrative
and call center operations, is located in a leased 65,000 square foot, two building
campus in Norfolk, Virginia. We have call centers located in Hutchinson, Kansas,
an owned 15,000 square foot building, and in Hampton, Virginia, a leased 25,000
square foot facility. The three facilities can accommodate approximately
1,100 employees. At December 31, 2003, we employed 798 people.
BOARD OF DIRECTORS
STEVE FREDRICKSON, Chairman of the Board.
David Roberts
Director
James Voss
Director
Peter Cohen
Director
William Brophey
Director
CORPORATE INFORMATION
STOCK EXCHANGE LISTING
LEGAL COUNSEL
PRICE RANGE OF COMMON STOCK
Portfolio Recovery Associates’ common
stock trades on the Nasdaq National Market
under the symbol “PRAA.” Price information
for the common stock appears daily in major
newspapers.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer
17 Battery Place
8th Floor
New York, New York 10004
Tel: 212-509-4000
Fax: 212-509-5150
AUDITORS
PricewaterhouseCoopers LLP
Harrisburg, Pennsylvania
Swidler Berlin Shereff Friedman, LLP
New York, New York
FINANCIAL PUBLICATIONS/INVESTOR INQUIRIES
Shareholders may acquire copies of the 2003
Form 10-K, Annual Report and other filed
documents by visiting the company’s website
at www.portfoliorecovery.com or by writing
to us at:
Portfolio Recovery Associates
Attn: Investor Relations
120 Corporate Blvd, Suite 100
Norfolk, Virginia 23502
The Company’s common stock began trading
on the Nasdaq National Market under the
symbol “PRAA” on November 8, 2002. The
following table sets forth the high and low
sales price for the Common Stock for the
year 2003.
2003
High
Low
$33.95 $17.76
As of March 5, 2004, there were approximately
28 holders of record of the Common Stock.
Based on information provided by the
Company’s transfer agent and registrar,
the Company believes that there are
approximately 9,871 beneficial owners
of the Common Stock.
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FINANCIAL HIGHLIGHTS
(in thousands, except per share amounts)
2003
2002
2001
2000
1999
Revenues
Operating income
Net income/Pro forma net income*
Diluted earnings per share
Diluted operating cash flow per share
Shares outstanding (diluted)
Operating margin
Pretax margin
Return on average equity
Working capital
Finance receivables, net
Total assets
Stockholders’ equity (members’ equity prior to 2002)
$ 84,927
$ 34,455
$ 20,714
1.32
$
2.23
$
15,712
$55,847
$20,963
$11,371
$ 0.94
$ 1.81
12,066
$32,336
$ 8,766
$ 3,526
$ 0.31
$ 0.57
11,458
$19,334
$ 4,305
$ 1,639
$ 0.14
$ 0.27
11,366
$12,068
$ 2,701
$ 1,128
$ 0.11
$ 0.18
10,000
40.6%
39.9%
20.3%
37.5%
33.2%
27.9%
27.1%
17.4%
13.7%
22.3%
13.1%
7.7%
22.4%
15.1%
6.5%
$ 21,612
$ 92,569
$126,394
$119,148
$13,039
$65,526
$88,288
$80,608
$ 3,156
$47,987
$57,049
$27,752
$ 2,664
$41,124
$47,188
$22,705
$
860
$28,139
$31,495
$20,313
*Adjusted to show impact of corporate income tax prior to the Company’s conversion to a corporation in 2002.
$117.1
20.3%
’00
’01
’02
’03
’00
’01
’02
’03
Cash Collections
($ in millions)
Return on Equity
(in percent)
$20.7
$84.9
’00
’01
’02
’03
’00
’01
’02
’03
Net Income/Pro Forma Net Income
($ in millions)
Annual Revenue
($ in millions)
Page. 1
Hampton, Virginia call center; finished product (left) and under construction (right).
In 2003, Portfolio Recovery Associates solidified its position as a leader in the accounts receivable
management industry. We continued to implement our strategy of controlled, responsible growth,
strong financial performance and conservative finances. We laid the foundation for strong future
collection performance by both increasing our collector force and by making significant purchases
of advantageously-priced portfolios. In summary, during 2003 we:
• Increased cash collections by 48% to $117 million.
• Grew our workforce by 37%, or more than 200 employees, the largest number of
new employees added during a single year in the Company’s history. We maintained
our flat organization, improving our year-end ratio of collectors and their first-level
supervisors to 90%, from 88% at December 31, 2002.
• Grew owned portfolio collection productivity by more than 12% from $96.37 per
hour paid in 2002 to $108.27 in 2003, despite adding a significant amount of net
new employees, who tend to initially be much less effective collectors than our more
tenured staff.
• Increased portfolio purchasing by 46% over 2002, to $62 million in purchase price.
• Increased year-end cash and cash equivalents to $24.9 million in 2003 from $17.9
million at December 31, 2002, putting us in great position to be able to capitalize on
business opportunities in the future.
• Maintained a debt-to-equity ratio of less than 2%, with no outstanding balances on
our line of credit at year-end.
Page. 2
Portfolio Recovery Associates, Inc. 2003 Annual Report
Pursuing a strategy of
controlled, responsible growth.
Portfolio Recovery Associates was formed in 1996 to buy and collect defaulted consumer debt. We
acquire defaulted debt at all stages of its lifecycle, from recently defaulted or “fresh” paper, to
accounts that have been subjected to many rounds of collection efforts from either the original
creditor or subsequent owners, and/or one or more collection agencies. Typically, as the paper ages
from time of charge-off, its collectibility and sale price declines. The Company acquires a wide
variety of account types, including Visa/MasterCard, private label credit card, consumer finance,
student loans, telecommunications, deficiency balances on automobile loans, and utility accounts.
Historically we have been able to collect approximately 2.5 to 3 times the amount we pay for a
portfolio of accounts receivable over a period of five to seven years. Approximately 25% of lifetime
collections from any pool come in the first year following acquisition; 25% in year two; 20% in year
three and the remainder in a diminishing stream in years four through seven.
Page. 3
Our employees are well trained, well motivated and incented with pay-for-performance compensation plans.
We take a very methodical approach to pricing the portfolios that we acquire. We actually value
each account that we purchase, analyzing numerous account attributes against the millions
of data points we have recorded since our inception. As a part of each due diligence process,
we estimate the magnitude and timing, by month, of all cash collections and related collection
expenses for a pool’s projected life. Through our history, we have been able to demonstrate our
ability to conservatively estimate the probable liquidation performance of any given portfolio.
We regularly share this statistic with the investment community in our SEC filings, and it is sum-
marized in the table below:
ACTUAL CASH COLLECTIONS VS. ORIGINAL PROJECTIONS
($ in millions)
$350
$300
$250
$200
$150
$100
$50
$0
1996
1997
1998
1999
2000
2001
2002
2003
Actual Cash Collections
Original Projections
Page. 4
Portfolio Recovery Associates, Inc. 2003 Annual Report
Portfolio Purchases
set stage for future results.
Having watched many competitors run aground after buying too much paper with too little regard
for price, or without the infrastructure to collect it efficiently, we long ago resolved not to make
those mistakes. As we have done many times in the past, we will not make purchases that do not
meet our criteria for profitability or in situations where purchase volume would exceed our ability to
liquidate the debt effectively. The latter was the driver behind our decision in 2003 to scale back
purchases during the second half of the year after we bought a significant amount of paper in the
first and second quarter.
The pricing for individual pools can vary significantly. Our average purchase price in 2003 was a
blended rate of 2.77%. However, we paid between 0.31% and 11.00% for individual pools. Our
average cost in any period may vary significantly depending on the mix of paper we acquire,
as it has historically. The decision point for us on pricing is always our ability to collect profitably
at the price paid, not simply the absolute price paid.
Current period portfolio purchases set the stage for future period results. We established a strong
base for years to come with a dramatic increase in portfolio purchasing during 2003. We invested
$61.8 million, or 46% more than we did in 2002. This is the largest year-over-year percentage
increase since 1999 and continues our track record of steady, controlled growth in our portfolio
purchasing program.
PORTFOLIO PURCHASES* BY YEAR
($ in millions)
$61.8
$70
$60
$50
$40
$30
$20
$10
$0
1996
1997
1998
1999
2000
2001
2002
2003
*Original purchase price
Page. 5
Attention to collections’ operations and focus on productivity drives our growth in cash collections, revenue and profit.
No debt buyer is better than its ability to collect, and at PRA that collector-centric mentality is in
our DNA. We grew our cash collections substantially during the year, by more than 47%, to $117
million. This significant growth came from core collections, and included no portfolio sales.
Once we acquire a portfolio, typically it generates cash collections for a period of five years or
more, with collections generally peaking one to two years after purchase before gradually fading
over time. A single year’s portfolio purchases generate cash flow for an extended period, while
layering these acquisitions year-after-year produces significant and growing streams of recoveries
for the Company. The significant buying in 2003 sets the stage for expanded cash collections in the
future. In order to understand a debt buyer like PRA, investors must know how cash flow is coming
into the Company. For this reason, we provide our shareholders detailed year-by-year cash collec-
tions statistics, including a break-out of our estimated remaining collections by year of purchase.
CASH COLLECTIONS PER PURCHASE PERIOD
($ in millions)
$117.1
1996
1997
1998
1999
2000
2001
2002
2003
$120
$100
$80
$60
$40
$20
$0
Page. 6
Portfolio Recovery Associates, Inc. 2003 Annual Report
Consistent Performance
& Conservative Projections
The two tables below show both summary-level and detailed analysis on our portfolio purchasing
and collections performance. The statistics demonstrate not only our consistency in collecting cash
over time, but also our history of outperforming our projections. These tables are disclosed quarterly
so investors can analyze the data over time. We believe this to be an important piece of disclosure,
allowing investors to understand how we project and collect cash. Additionally, by analyzing the
ERC (Estimated Remaining Collections) the investor can develop an insight into our revenue
recognition methodology.
PORTFOLIO PERFORMANCE BY PURCHASE PERIOD
($ in thousands)
Purchase
Period
Purchase
Price
Actual Cash
Collections
1996
1997
1998
1999
2000
2001
2002
2003
$ 3,080
7,685
11,122
18,912
25,068
33,538
42,588
62,640
$ 8,980
21,387
28,945
47,924
62,960
75,373
51,331
24,308
Total
Estimated
Collections
Total Est.
Collections
to Price
9,224
21,931
30,600
54,554
80,034
112,065
124,429
156,037
299%
285%
275%
288%
319%
334%
292%
249%
ERC
$
244
544
1,655
6,630
17,074
36,692
73,098
131,729
CASH COLLECTIONS BY YEAR, BY YEAR OF PURCHASE
($ in thousands)
Purchase
Period
1996
1997
1998
1999
2000
2001
2002
2003
Total
Purchase
Price
$ 3,080
7,685
11,122
18,912
25,068
33,538
42,588
62,640
1996
$548
—
—
—
—
—
—
—
Cash Collection Period
1997
1998
1999
2000
2001
2002
2003
Total
$2,484
2,507
—
—
—
—
—
—
$ 1,890
5,215
3,776
—
—
—
—
—
$ 1,348
4,069
6,807
5,138
—
—
—
—
$ 1,025
3,347
6,398
13,069
6,894
—
—
—
$
730
2,630
5,152
12,090
19,498
13,048
—
—
$
496
1,829
3,948
9,598
19,478
28,820
15,084
—
$
398
1,324
2,797
7,336
16,628
28,003
36,258
24,308
$ 8,919
20,921
28,878
47,231
62,498
69,871
51,342
24,308
$204,633
$548
$4,991
$10,881
$17,362
$30,733
$53,148
$79,253
$117,052
$313,968
Page. 7
Company Meetings (this one in our Norfolk headquarters building) are regular occurrences as we communicate with and instruct our employees.
We accomplished a great deal in 2003 by increasing our employee workforce dramatically, from
581 at year-end 2002 to 798 at year-end 2003, representing growth of 37%. At the same time, we
increased productivity by 12%. Since new employees are less productive than those with tenure,
periods of high growth have a negative effect on productivity. This phenomenon makes our 2003
performance all the more gratifying.
Each of our three call centers set a productivity record for the year. Our Norfolk office increased
productivity by 29%, and our Kansas office increased productivity by 36%. Our Hampton office,
which opened in 2003, recorded productivity of $43 per hour paid. We are very pleased with the
level of production our Hampton office achieved in its first year. Productivity is strongly correlated
to each office’s average tenure.
Although we are a company driven by cash collections, you will not see that cash collection num-
ber on our Income Statement. Instead, our top-line revenue number is cash collections reduced by
(netted with) purchase price amortization.
The magnitude of that amortization is driven at the debt-pool level, literally derived by examining
the performance of more than 400 pools of purchased debt each period. The amortization rate is
influenced by a number of factors, including the magnitude and timing of cash flow, the collection
amounts originally projected, and the carrying balance of the portfolio. The goal of the amortization
process is to reduce the amount of purchase price carried on our balance sheet to zero over the
economic life of each pool. When the last dollar of collection is realized, the final remaining purchase
price balance should be simultaneously amortized.
Page. 8
Portfolio Recovery Associates, Inc. 2003 Annual Report
As we realize actual collection results over time, we make adjustments to our amortization models to appropriately rec-
ognize revenue. If we experience what we believe are temporary swings in performance not related to the underlying
collectibility of the portfolio, amortization will be increased by higher than expected results and will be lowered by
worse than expected results. An example of this may occur during the first quarter, when seasonally high cash collec-
tions may drive some pool-level recoveries to unusually high levels. This movement may not generally signify that we
will experience an increased level of collections from a particular pool for the remainder of its life, so no long-term
adjustment to the model would be made. This would cause the excess collection to be applied to amortization.
When we experience collection results from a pool that hold a trend over time, we make adjustments in our models
to account for this change in pool quality from what was originally expected. In the case where collection results are
consistently lower than forecast, the amortization rate will increase so that the pool’s carrying balance will be reduced
to zero when that pools’ cash flows are exhausted. In the case of a pool that is consistently out-performing our expec-
tations, the amortization rate will be lowered in an attempt to match the amortization of the carrying balance with the
portfolio’s economic life.
From an accounting perspective, our goal is to ensure that each deal is fully amortized during its forecasted 5-7 year
life and that the last dollar of collection amortizes the last dollar of purchase price. However, we have found that
because of the process used in moving estimates up and down as described in the previous paragraph, numerous
deals have become fully amortized earlier than the end of their economic life. Although fully amortized pools have no
presence on our balance sheet, they continue to generate cash. This occurrence tends to generate a calculated amorti-
zation rate or “gross rate” that is lower than the “core rate”—To determine the core amortization rate, we simply back
out the cash collections from all fully amortized pools when calculating the amortization rate.
During 2003, for instance, approximately $12 million of our $117 million in cash collections, came from fully amor-
tized portfolios.
The chart below shows the core and gross amortization rate for each of the past 8 quarters. The core rate has been
relatively steady around 32–33%, spiking in the first quarter with the seasonal uptick in cash collections, while the gross
rate has shown more fluctuation.
Our $25 million acquisition line of credit continued to have no amounts outstanding at year-end 2003. Despite record
levels of buying, we increased cash by almost 40% from $18 million at the end of 2002 to $25 million at the end of
2003. This leaves us with plenty of “dry powder” to take advantage of opportunities during 2004 and beyond, and
further demonstrates the Company’s ability to generate strong cash flow.
CASH COLLECTIONS PER COLLECTOR HOUR BY FACILITY
(collection per hour paid)
AMORTIZATION RATES
$150
$120
$90
$60
$30
$0
$129.40
$110.52
$42.53
2000
2001
2002
2003
Norfolk
Hutchinson
Hampton
40%
35%
30%
25%
20%
32.90%
Q1
’02
Q2
’02
Q3
’02
Q4
’02
Q1
’03
Q2
’03
Q3
’03
Q4
’03
Core Amortization Rate
Gross Amortization Rate
Page. 9
President
CEO Letter
DEAR FELLOW SHAREHOLDERS:
What makes me especially proud is the committed way PRA people continually respond to the opportunities and chal-
lenges of our business. This was particularly true during 2003, our first full year as a public company. We delivered
strong top and bottom line growth, while widening operating margins, even as we scaled up our workforce substan-
tially. We solidified our foundation for future growth by completing a record level of portfolio acquisitions and by com-
pleting two operating facility expansions that will house our people for years to come. All this was accomplished as we
continued to strengthen our balance sheet, improve our systems, and add to the talent base of our management team.
We held true to our operating principles and grew no faster than we deemed prudent, despite strong deal-flow through-
out the year. The $62 million worth of new debt that we acquired came at good prices and was the maximum we felt
we could reasonably handle, given the pressure increased buying puts on the collection operation. Despite ramping up
our owned portfolio collector force by more than 40%, we managed to improve productivity to more than $108 per
hour paid. Each of our offices increased productivity to record levels. Although it continues to be a relatively small
contributor, our contingent fee collections business, Anchor Receivables Management, made solid progress during the
year. With the addition of several senior member of management in late 2003 and 2004, we look for more exciting
growth from the Anchor unit.
Kevin Stevenson and I worked hard throughout the year to make ourselves available to any investor who had a question.
We presented at eight investor conferences during the year, in addition to our quarterly earnings calls. In between
earnings releases, we stayed focused on producing results, preferring to tell our story with earnings fueled by what we
do—collect bad debt—rather than public relations. Don’t look for that style to change. We also increased our financial
disclosure during the year in an attempt to provide even greater transparency for investors to our business cash flows
and accounting.
Page. 10
Portfolio Recovery Associates, Inc. 2003 Annual Report
We continue to build our Company around the “Operating Principles” I first shared with you in last year’s annual report.
In particular, I believe our strategy of building an integrated business is critical in today’s market conditions, especially
as we look at competitors with what I term “virtual” collection companies (those with little or no ability to collect the
debt they buy). We can price better because of a real time, detailed linkage between our collection systems and our
statistical pricing models; we can collect better since we control the actual collector workforce deployed against the
acquired debt; we can segment our purchased portfolios better without relying on a third party to execute our business
for us; we can price more aggressively because there is no collection agency “middleman” taking his share of profit
along the way; and we can extract more cash over a longer time-frame as we build proprietary collection methods
designed around long-term ownership, something no collection agency can afford to do for a client.
I remain very positive about the future of Portfolio Recovery Associates. Deal-flow for the owned portfolio business has
never been more robust. While pricing is competitive, we are still finding a great deal of appropriately priced paper, as
evidenced by Q4 2003 buying levels. I believe that the more than $2 trillion of outstanding consumer debt is vulnera-
ble to any increase in interest rates or other shock factor. Such an event could create an unprecedented amount of
paper available for purchase. Even without any exogenous factor, increasing rates, high levels of debt outstanding and
newer asset types coming to market in larger numbers (telecom, auto deficiency, utility, healthcare, student loan, etc.)
look to drive large volumes of charged-off accounts for years to come. Portfolio Recovery Associates will continue to
be a major participant in this growing market.
Steve Fredrickson
Chairman, President &
Chief Executive Officer
Page. 11
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Statements of Financial Position
As of December 31, 2003 and 2002
Consolidated Statements of Operations
For the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows
For the years ended December 31, 2003, 2002 and 2001
38
39
40
41
42
Notes to Consolidated Financial Statements
43–57
OPERATING PRINCIPLES FOR THE MANAGEMENT OF PORTFOLIO RECOVERY ASSOCIATES
Disclose. Be honest and open with shareholders. Let them know what is going on.
Invest carefully. Build a diverse portfolio. Never bet the ranch. Make sure each investment, be it a portfolio or a business, has been
reviewed, judged objectively, and priced to achieve appropriate profit hurdles.
Keep the business simple. Operate fewer, larger call centers.
Keep costs low and productivity high. Develop and retain great employees. Keep support staff as small as possible, while providing
excellent service to the collection operation.
Maintain a conservative capital structure. Allow room for error. Keep debt levels low. When borrowing is required because of
opportunity, use low cost, non-participating debt.
Build an integrated business. Portfolio buying and collections must be under the same roof.
Employ steady, controlled growth. We operate process- and people-intensive businesses. Experienced employees are significantly
more productive than newer employees. Growing too quickly puts too many less productive, lower margin people into the work-
force mix, driving down productivity, margin and net income.
Management should be owners, not hired guns. We act like owners because we are. Our senior managers have the vast majority
of their net worth invested in the Company. We expect our senior managers to retain significant stock ownership positions—
common stock, not just options—throughout their terms of employment.
SAFE HARBOR ACT
Statements in this Annual Report which are not historical, including statements of the Company’s Chairman, President and Chief
Executive Officer, in his letter which begins, “Dear Fellow Shareholders” (including, without limitation, information regarding
earnings, financial results, the outlook for the economy, management’s intentions, hopes, beliefs, expectations, representations,
projections, plan or predictions of the future), are forward-looking statements within the meaning of Section 21(e) of the Securities
Exchange Act of 1934. Such statements are not statements of historical fact. Forward-looking statements involve risks, uncertainties
and assumptions, some of which are not currently known to us, which could cause the Company’s results to differ materially from
its management’s current expectations. Actual events or results may differ from those expressed or implied in any such forward-
looking statements as a result of various factors, including the risk factors listed from time to time in the Company’s filings with the
Securities and Exchange Commission, including but not limited to, its Registration Statements on Form S-1 and Form S-8, and its
Annual and Quarterly Reports. The content of this Annual Report includes time-sensitive information and is accurate as of the date
hereof, April 16, 2004, which is the approximate date of the mailing of the Annual Report. The Company disclaims any intention
or obligation to update or revise these forward-looking statements.
Page. 12
Portfolio Recovery Associates, Inc. 2003 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-K
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to __________
Commission File Number: 000-50058
Portfolio Recovery Associates, Inc.
———————
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
120 Corporate Boulevard, Norfolk, Virginia
(Address of Principal Executive Offices)
75-3078675
(I.R.S. Employer
Identification No.)
23502
(Zip Code)
Registrant’s telephone number, including area code: (888) 772-7326
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of Class)
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 and 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 X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 of this Form
10-K. __
The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 12,
2004 was $229,374,131.
The number of shares of the registrant’s Common Stock outstanding as of February 12, 2004 was
15,299,676.
Documents incorporated by reference: Portions of the Proxy Statement to be filed by April 30, 2004 for the
Company’s 2004 Annual Meeting of Stockholders are incorporated by reference into Items 11, 12 and 13 of Part
III of this Form 10-K.
1
Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform
Act of 1995:
This report contains forward-looking statements within the meaning of the federal securities laws. These
forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove
incorrect, could cause the results of the Company (as hereinafter defined) to differ materially from those
expressed or implied by such forward-looking statements. All statements, other than statements of historical fact,
are forward-looking statements, including statements regarding overall trends, operating cost trends, liquidity and
capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and
assumptions referred to above may include the following:
• changes in the business practices of debt owners in terms of selling defaulted consumer receivables or
outsourcing defaulted consumer receivables to third-party contingent fee collection agencies;
• changes in government regulations that affect the Company’s ability to collect sufficient amounts on its
acquired or serviced receivables;
• the Company’s ability to employ and retain qualified employees, especially collection personnel;
• changes in the credit or capital markets, which affect the Company’s ability to borrow money or raise
capital to purchase or service defaulted consumer receivables;
• the degree and nature of the Company’s competition; and
• the risk factors listed from time to time in the Company’s filings with the Securities and Exchange
Commission.
Item 1. Business.
General
PART I
Portfolio Recovery Associates, Inc., together with its subsidiaries (collectively, the “Company”), is a full-
service provider of outsourced receivables management. The Company purchases, collects and manages
portfolios of defaulted consumer receivables. Defaulted consumer receivables are the unpaid obligations of
individuals to credit originators, including banks, credit unions, consumer and auto finance companies, retail
merchants and other providers of goods and services. The defaulted consumer receivables the Company collects
are generally either purchased from sellers of defaulted consumer debt (“Debt Sellers”) or are collected on behalf
of debt owners on a commission fee basis.
The Company uses the following terminology throughout its reports. “Cash Receipts” refers to all
collections of cash, regardless of the source. “Cash Collections” refers to collections on the Company’s owned
portfolios only, exclusive of commission income and sales of finance receivables. “Cash Sales of Finance
Receivables” refers to the sales of the Company’s owned portfolios. “Commissions” refers to fee income
generated from the Company’s wholly-owned contingent fee subsidiary. Prior to the Company’s initial public
offering on November 8, 2002, the Company was organized as a limited liability company with all income taxes
charged to the partners of the partnership. Pro forma adjustments have been made to show the impact of
corporate taxes for all periods prior to the Company’s conversion to a corporation.
The Company specializes in receivables that have been charged-off by the credit originator. Since the Debt
Seller has unsuccessfully attempted to collect these receivables, the Company is able to purchase them at a
substantial discount to their face value. From its 1996 inception through December 31, 2003, the Company
acquired 417 portfolios with a face value of $7.78 billion for $204.6 million, or 2.63% of face value, representing
more than 4.1 million customer accounts. The success of the Company depends on its ability to purchase
2
portfolios of defaulted consumer receivables at appropriate valuations and to collect on those receivables
effectively and efficiently. To date, the Company has consistently been able to collect at a rate of 2.5 to 3.0 times
its purchase price for defaulted consumer receivables portfolios, as measured over a five to seven year period,
which has enabled the Company to generate increasing profits and positive cash flow.
The Company has achieved strong financial results since its formation, with cash collections growing from
$10.9 million in 1998 to $117.1 million in 2003. Total revenue has grown from $6.8 million in 1998 to $84.9
million in 2003, a compound annual growth rate of 66%. Similarly, pro forma net income has grown from
$402,000 in 1998 to net income of $20.7 million in 2003. Excluding the impact of proceeds from occasional
portfolio sales, cash collections have increased every quarter since the Company’s formation.
The Company was initially formed as Portfolio Recovery Associates, L.L.C., a Delaware limited liability
company, on March 20, 1996. Prior to the formation of the Company, founding members of the management
team played key roles in the development of a defaulted consumer receivables acquisition and divestiture
operation for Household Recovery Services, a subsidiary of Household International. In connection with an
initial public offering, which commenced on November 8, 2002 (the “IPO”), all of the membership units of
Portfolio Recovery Associates, L.L.C. were exchanged, simultaneously with the effectiveness of the Company’s
registration statement, for a single class of the common stock of Portfolio Recovery Associates, Inc., a new
Delaware corporation formed on August 7, 2002. Accordingly, the members of Portfolio Recovery Associates,
L.L.C. became the common stockholders of Portfolio Recovery Associates, Inc., which became the parent
company of Portfolio Recovery Associates, L.L.C. and its subsidiaries.
Shares of common stock that were received in exchange for the membership interests of Portfolio Recovery
Associates, L.L.C. as a result of this reorganization, which were not registered by the Company’s initial public
offering were deemed to have a new “holding period” for purposes of Rule 144 under the Securities Act of 1933,
as amended, and therefore could not be sold before November 6, 2003 unless registered under the Securities Act
of 1933, as amended, or sold under an available exemption from registration, as in an organized stock offering.
The “holding period” with respect to these shares has expired; therefore, these shares may now be traded
pursuant to Rule 144, which imposes certain limitations on the manner of sale, notice requirements and the
availability of the Company’s current public information.
A secondary offering of shares of common stock of the Company was completed on May 21, 2003, in
which 4,025,000 shares were sold. After this transaction, the holders of 6,865,261 shares of the Company’s
common stock which were not sold in the secondary offering agreed to a 180-day “lock-up” with respect to
these shares. This generally means that holders of these shares were unable sell these shares during the 180 days
following the date of the prospectus, or until November 21, 2003. These shares may now be sold in accordance
with the provisions of the federal securities laws, including Rule 144.
Competitive Strengths
Complete Outsourced Solution for Debt Owners
The Company offers debt owners a complete outsourced solution to address their defaulted consumer
receivables. Depending on a debt owner’s timing and needs, the Company can either purchase from the debt
owner their defaulted consumer receivables, providing immediate cash, or service those receivables on their
behalf for a commission fee based on a percentage of its collections. Furthermore, the Company can purchase or
service receivables throughout the entire delinquency cycle, from receivables that have only been processed for
collection internally by the debt owner to receivables that have been subject to multiple external collection
efforts. This flexibility helps the Company meet the needs of debt owners and allows it to become a trusted
resource. Furthermore, the Company’s strength across multiple transaction and asset types provides the
opportunity to cross-sell its services to debt owners, building on successful engagements.
Disciplined and Proprietary Underwriting Process
One of the key components of the Company’s growth has been its ability to price portfolio acquisitions at
levels that have generated profitable returns on investment. To date, the Company has consistently been able to
collect at a rate of 2.5 to 3.0 times its purchase price for defaulted consumer receivables portfolios, as measured
3
over a five to seven year period, which has enabled the Company to generate increasing profits and cash flow. In
order to price portfolios and forecast the targeted collection results for a portfolio, the Company uses two
separate statistical models developed internally that are often supplemented with on-site due diligence of the
Debt Seller’s collection process and loan files. One model analyzes the portfolio as one unit based on
demographic comparisons while the second model analyzes each account in a portfolio using variables in a
regression analysis. As the Company collects on its portfolios, the results are input back into the models in an
ongoing process which the Company believes increases their accuracy. Through December 31, 2003 the
Company has acquired 417 portfolios with a face value of $7.78 billion.
Ability to Hire, Develop and Retain Productive Collectors
In an industry characterized by high turnover, the Company’s ability to hire, develop and retain effective
collectors is a key to its continued growth and profitability. The Company has found that tenure is a primary
driver of its collector effectiveness. The Company offers its collectors a competitive wage with the opportunity
to receive unlimited incentive compensation based on performance, as well as an attractive benefits package, a
comfortable working environment and the ability to work on a flexible schedule. Stock options were awarded to
many of the Company’s collectors at the time of the IPO in 2002. The Company has a comprehensive six week
training program for new collectors and provides continuing advanced training classes which are conducted in its
four training centers. Recognizing the demands of the job, the Company’s management has endeavored to create
a professional and supportive environment for collectors. Furthermore, several large military bases and numerous
telemarketing, customer service and reservation phone centers are located near the Company’s headquarters and
regional offices in Virginia, providing access to a large pool of trained personnel. The Company has also found
the Hutchinson, Kansas area to provide a sufficient potential workforce of trained personnel.
Established Systems and Infrastructure
The Company has devoted significant effort to developing its systems, including statistical models, databases
and reporting packages, to optimize its portfolio purchases and collection efforts. In addition, the Company’s
technology infrastructure is flexible, secure, reliable and redundant to ensure the protection of its sensitive data
and to ensure minimal exposure to systems failure or unauthorized access. The Company believes that its
systems and infrastructure give it meaningful advantages over its competitors. The Company has developed
financial models and systems for pricing portfolio acquisitions, managing the collections process and monitoring
operating results. The Company performs a static pool analysis monthly on each of its portfolios, inputting
actual results back into its acquisition models, to enhance their accuracy. The Company monitors collection
results continuously, seeking to identify and resolve negative trends immediately. The Company’s
comprehensive management reporting package is designed to fully inform the Company’s management team so
that it may make timely operating decisions. This combination of hardware, software and proprietary modeling
and systems has been developed by the Company’s management team through years of experience in this
industry and the Company believes provides it with an important competitive advantage from the acquisition
process all the way through collection operations.
Strong Relationships with Major Credit Originators
The Company has done business with most of the top consumer lenders in the United States. The Company
maintains an extensive marketing effort and its senior management team is in contact with known and
prospective credit originators. The Company believes that it has earned a reputation as a reliable purchaser of
defaulted consumer receivables portfolios and as responsible collectors. Furthermore, from the perspective of the
selling credit originator, the failure to close on a negotiated sale of a portfolio consumes valuable time and
expense and can have an adverse effect on pricing when the portfolio is re-marketed. The Company has never
failed to close on a transaction. Similarly, if a credit originator sells a portfolio to a group that violates industry
standard collecting practices, it can taint the reputation of the credit originator. The Company goes to great
lengths to collect from consumers in a responsible, professional and compliant manner. The Company believes
its strong relationships with major credit originators provide it with access to quality opportunities for portfolio
purchases and contingent fee collection placements.
4
Experienced Management Team
The Company has an experienced management team with considerable expertise in the accounts receivable
management industry. Prior to the Company’s formation, the firm’s founders played key roles in the
development and management of a consumer receivables acquisition and divestiture operation of Household
Recovery Services, a subsidiary of Household International. As the Company has grown, the management team
has been expanded with a group of successful, seasoned executives.
Risks Related to the Company’s Business
To the extent not described elsewhere in this Annual Report, the following are risks related to the
Company’s business.
The Company may not be able to collect sufficient amounts on its defaulted consumer receivables to fund its
operations
The Company’s business consists of acquiring and servicing receivables that consumers have failed to pay
and that the Debt Sellers have deemed uncollectible. The Debt Sellers generally make numerous attempts to
recover on their defaulted consumer receivables, often using a combination of in-house recovery efforts and
third-party collection agencies. These defaulted consumer receivables are difficult to collect and the Company
may not collect a sufficient amount to cover its investment associated with purchasing the defaulted consumer
receivables and the costs of running its business.
The Company’s contingent fee collections operations have a limited operating history
The Company’s contingent fee collections operations commenced in March 2001. These operations are in
the early stages of development. Accordingly, these operations have a limited operating history and their
prospects must be considered in light of the risks and uncertainties facing early-stage companies. As of
December 31, 2003, the Company has entered into contingent fee collection arrangements with 9 clients.
Although the Company is currently generating positive operating income from its contingent fee collections
operations, the Company’s limited operating history makes prediction of future results difficult.
The Company may not be able to purchase defaulted consumer receivables at appropriate prices, and a decrease
in its ability to purchase portfolios of receivables could adversely affect its ability to generate revenue
If one or more Debt Sellers stops selling defaulted receivables to the Company and it is otherwise unable to
purchase defaulted receivables at appropriate prices, the Company could lose a potential source of income and its
business may be harmed.
The availability of receivables portfolios at prices which generate an appropriate return on the Company’s
investment depends on a number of factors both within and outside of its control, including the following:
• the continuation of current growth trends in the levels of consumer obligations;
• sales of receivables portfolios by Debt Sellers; and
• competitive factors affecting potential purchasers and Debt Sellers of receivables.
Because of the length of time involved in collecting defaulted consumer receivables on acquired portfolios
and the volatility in the timing of the Company’s collections, the Company may not be able to identify trends and
make changes in its purchasing strategies in a timely manner.
The Company experiences high employee turnover rates and it may not be able to hire and retain enough
sufficiently trained employees to support its operations
The accounts receivables management industry is very labor intensive and, similar to other companies in the
Company’s industry, the Company typically experiences a high rate of employee turnover. The Company’s
5
annual turnover rate, excluding those employees that do not complete its six week training program, was 37% in
2003. The Company competes for qualified personnel with companies in its industry and in other industries.
The Company’s growth requires that it continually hire and train new collectors. A higher turnover rate among
its collectors will increase the Company’s recruiting and training costs and limit the number of experienced
collection personnel available to service its defaulted consumer receivables. If this were to occur, the Company
would not be able to service its defaulted consumer receivables effectively and this would reduce its ability to
continue its growth and operate profitability.
The Company serves markets that are highly competitive, and it may be unable to compete with businesses that
may have greater resources than it has
The Company faces competition in both of the markets it serves — owned portfolio and contingent fee
accounts receivable management — from new and existing providers of outsourced receivables management
services, including other purchasers of defaulted consumer receivables portfolios, third-party contingent fee
collection agencies and debt sellers that manage their own defaulted consumer receivables rather than
outsourcing them. The accounts receivable management industry is highly fragmented and competitive,
consisting of approximately 6,000 consumer and commercial agencies, most of which compete in the contingent
fee business.
The Company faces bidding competition in its acquisition of defaulted consumer receivables and in its
placement of contingent fee receivables, and the Company also competes on the basis of reputation, industry
experience and performance. Some of the Company’s current competitors and possible new competitors may
have substantially greater financial, personnel and other resources, greater adaptability to changing market needs,
longer operating histories and more established relationships in its industry than it currently has. In the future,
the Company may not have the resources or ability to compete successfully. As there are few significant barriers
for entry to new providers of contingent fee receivables management services, there can be no assurance that
additional competitors with greater resources than the Company’s will not enter its market. Moreover, there can
be no assurance that the Company’s existing or potential clients will continue to outsource their defaulted
consumer receivables at recent levels or at all, or that it may continue to offer competitive bids for defaulted
consumer receivables portfolios. If the Company is unable to develop and expand its business or adapt to
changing market needs as well as its current or future competitors are able to do, the Company may experience
reduced access to defaulted consumer receivables portfolios at appropriate prices and reduced profitability.
The Company may not be successful at acquiring receivables of new asset types or in implementing a new
pricing structure
The Company may pursue the acquisition of receivables portfolios of asset types in which it has little current
experience. The Company may not be successful in completing any acquisitions of receivables of these asset
types and its limited experience in these asset types may impair its ability to collect on these receivables. This
may cause the Company to pay too much for these receivables and consequently it may not generate a profit from
these receivables portfolio acquisitions.
In addition, the Company may in the future provide a service to debt owners in which debt owners will place
consumer receivables with it for a specific period of time for a flat fee. This fee may be based on the number of
collectors assigned to the collection of these receivables, the amount of receivables placed or other bases. The
Company may not be successful in determining and implementing the appropriate pricing for this pricing
structure, which may cause it to be unable to generate a profit from this business.
The Company’s collections may decrease if bankruptcy filings increase
During times of economic recession, the amount of defaulted consumer receivables generally increases,
which contributes to an increase in the amount of personal bankruptcy filings. Under certain bankruptcy filings a
debtor’s assets may be sold to repay creditors, but since the defaulted consumer receivables the Company
services are generally unsecured it often would not be able to collect on those receivables. The Company cannot
ensure that its collection experience would not decline with an increase in bankruptcy filings. If the Company’s
actual collection experience with respect to a defaulted consumer receivables portfolio is significantly lower than
6
it projected when it purchased the portfolio, the Company’s financial condition and results of operations could
deteriorate.
The Company may make acquisitions that prove unsuccessful or strain or divert its resources
The Company intends to consider acquisitions of other companies in its industry that could complement its
business, including the acquisition of entities offering greater access and expertise in other asset types and
markets that the Company does not currently serve. The Company has little experience in completing
acquisitions of other businesses, and it may not be able to successfully complete an acquisition. If the Company
does acquire other businesses, it may not be able to successfully integrate these businesses with its own and the
Company may be unable to maintain its standards, controls and policies. Further, acquisitions may place
additional constraints on the Company’s resources by diverting the attention of its management from other
business concerns. Through acquisitions, the Company may enter markets in which it has no or limited
experience. Moreover, any acquisition may result in a potentially dilutive issuance of equity securities, the
incurrence of additional debt and amortization expenses of related intangible assets, all of which could reduce the
Company’s profitability and harm its business.
The Company may not be able to continually replace its defaulted consumer receivables with additional
receivables portfolios sufficient to operate efficiently and profitably
To operate profitably, the Company must continually acquire and service a sufficient amount of defaulted
consumer receivables to generate revenue that exceeds its expenses. Fixed costs such as salaries and lease or
other facility costs constitute a significant portion of the Company’s overhead and, if it does not continually
replace the defaulted consumer receivables portfolios the Company services with additional portfolios, it may
have to reduce the number of its collection personnel. The Company would then have to rehire collection staff as
it obtains additional defaulted consumer receivables portfolios. These practices could lead to:
• low employee morale;
• fewer experienced employees;
• higher training costs;
• disruptions in the Company’s operations;
• loss of efficiency; and
• excess costs associated with unused space in the Company’s facilities.
Furthermore, heightened regulation of the credit card and consumer lending industry may result in decreased
availability of credit to consumers, potentially leading to a future reduction in defaulted consumer receivables
available for purchase from Debt Sellers. The Company cannot predict how its ability to identify and purchase
receivables and the quality of those receivables would be affected if there is a shift in consumer lending
practices, whether caused by changes in the regulations or accounting practices applicable to debt owners, a
sustained economic downturn or otherwise.
The Company may not be able to manage its growth effectively
The Company has expanded significantly since its formation and intends to maintain its growth focus.
However, the Company’s growth will place additional demands on its resources and the Company cannot ensure
that it will be able to manage its growth effectively. In order to successfully manage its growth, the Company
may need to:
• expand and enhance its administrative infrastructure;
• continue to improve its management, financial and information systems and controls; and
7
• recruit, train, manage and retain its employees effectively.
Continued growth could place a strain on the Company’s management, operations and financial resources.
The Company cannot ensure that its infrastructure, facilities and personnel will be adequate to support its future
operations or to effectively adapt to future growth. If the Company cannot manage its growth effectively, its
results of operations may be adversely affected.
The Company’s operations could suffer from telecommunications or technology downtime or increased costs
The Company’s success depends in large part on sophisticated telecommunications and computer systems.
The temporary or permanent loss of its computer and telecommunications equipment and software systems,
through casualty or operating malfunction, could disrupt the Company’s operations. In the normal course of its
business, the Company must record and process significant amounts of data quickly and accurately to access,
maintain and expand the databases it uses for its collection activities. Any failure of the Company’s information
systems or software and its backup systems would interrupt its business operations and harm its business. The
Company’s headquarters is located in a region that is susceptible to hurricane damage, which may increase the
risk of disruption of information systems and telephone service for sustained periods.
Further, the Company’s business depends heavily on services provided by various local and long distance
telephone companies. A significant increase in telephone service costs or any significant interruption in
telephone services could reduce its profitability or disrupt its operations and harm the Company’s business.
The Company may not be able to successfully anticipate, manage or adopt technological advances within its
industry
The Company’s business relies on computer and telecommunications technologies and its ability to integrate
these technologies into its business is essential to the Company’s competitive position and its success. Computer
and telecommunications technologies are evolving rapidly and are characterized by short product life cycles.
The Company may not be successful in anticipating, managing or adopting technological changes on a timely
basis.
While the Company believes that its existing information systems are sufficient to meet its current demands
and continued expansion, the Company’s future growth may require additional investment in these systems. The
Company depends on having the capital resources necessary to invest in new technologies to acquire and service
defaulted consumer receivables. The Company cannot ensure that adequate capital resources will be available to
it at the appropriate time.
The Company’s senior management team is important to its continued success and the loss of one or more
members of senior management could negatively affect the Company’s operations
The loss of the services of one or more of the Company’s key executive officers or key employees could
disrupt its operations. The Company has employment agreements with Steve Fredrickson, its president, chief
executive officer and chairman of its board of directors, Kevin Stevenson, the Company’s executive vice
president and chief financial officer, and most of its other senior executives. The current agreements contain
non-compete provisions that survive termination of employment. However, these agreements do not and will not
assure the continued services of these officers and the Company cannot ensure that the non-compete provisions
will be enforceable. The Company’s success depends on the continued service and performance of its key
executive officers, and it cannot guarantee that it will be able to retain those individuals. The loss of the services
of Mr. Fredrickson, Mr. Stevenson or one or more of the Company’s other key executive officers could seriously
impair its ability to continue to acquire or collect on defaulted consumer receivables and to manage and expand
its business. The Company maintains key man life insurance on Steve Fredrickson.
The Company’s ability to recover and enforce its defaulted consumer receivables may be limited under federal
and state laws
Federal and state laws may limit the Company’s ability to recover and enforce its defaulted consumer
receivables regardless of any act or omission on its part. Some laws and regulations applicable to credit issuers
8
may preclude the Company from collecting on defaulted consumer receivables it purchases if the credit issuer
previously failed to comply with applicable laws in generating or servicing those receivables. Collection laws
and regulations also directly apply to the Company’s business. Additional consumer protection and privacy
protection laws may be enacted that would impose additional requirements on the enforcement of and collection
on consumer credit receivables. Any new laws, rules or regulations that may be adopted, as well as existing
consumer protection and privacy protection laws, may adversely affect the Company’s ability to collect on its
defaulted consumer receivables and may harm its business. In addition, federal and state governmental bodies
are considering, and may consider in the future, other legislative proposals that would regulate the collection of
the Company’s defaulted consumer receivables. Although the Company cannot predict if or how any future
legislation would impact its business, its failure to comply with any current or future laws or regulations
applicable to it could limit its ability to collect on its defaulted consumer receivables, which could reduce its
profitability and harm the Company’s business.
The Company utilizes the interest method of revenue recognition for determining its income recognized on
finance receivables, which is based on an analysis of projected cash flows that may prove to be less than
anticipated and could lead to reductions in future revenues or impairment charges
The Company utilizes the interest method to determine income recognized on finance receivables. Under
this method, each static pool of receivables it acquires is modeled upon its projected cash flows. A yield is then
established which, when applied to the unamortized purchase price of the receivables, results in the recognition
of income at a constant yield relative to the remaining balance in the pool of defaulted consumer receivables.
Each static pool is analyzed monthly to assess the actual performance compared to that expected by the model. If
differences are noted, the yield is adjusted prospectively to reflect the revised estimate of cash flows. If the
accuracy of the modeling process deteriorates or there is a decline in anticipated cash flows, the Company would
suffer reductions in future revenues or a decline in the carrying value of its receivables portfolios, which in either
case would result in lower earnings in future periods and could negatively impact the Company’s stock price.
Portfolio Acquisitions
The Company’s portfolio of defaulted consumer receivables includes a diverse set of accounts that can be
segmented by asset type, age and size of account, level of previous collection efforts and geography. To identify
attractive buying opportunities, the Company maintains an extensive marketing effort with its senior officers
contacting known and prospective sellers of defaulted consumer receivables. The Company acquires receivables
of Visa®, MasterCard® and Discover® credit cards, private label credit cards, installment loans, lines of credit,
deficiency balances of various types and legal judgments, all from a variety of Debt Sellers. These Debt Sellers
include major banks, credit unions, consumer finance companies, telecommunication providers, retailers, other
debt buyers and auto finance companies. In addition, the Company exhibits at trade shows, advertises in a
variety of trade publications and attends industry events in an effort to develop account purchase opportunities.
The Company also maintains active relationships with brokers of defaulted consumer receivables. The following
chart categorizes the Company’s life to date owned portfolios as of December 31, 2003 into the major asset types
represented.
Asset Type
Visa/MasterCard/Discover
Consumer Finance
Private Label Credit Cards
Auto Deficiency
No. of
Accounts
1,229,349
1,757,462
1,073,756
46,639
%
29.9%
42.8%
26.1%
1.2%
Life to Date Purchased Face
Value of Defaulted
Consumer Receivables
%
Finance Receivables, net as of
December 31, 2003
$ 4,070,113,821
1,666,699,152
1,746,593,273
294,980,546
52.3% $ 47,660,466
10,000,312
21.4%
32,658,695
22.5%
2,249,084
3.8%
%
51.5%
10.8%
35.3%
2.4%
Total:
4,107,206
100.0%
$
7,778,386,792
100.0%
$
92,568,557
100.0%
The Company has acquired portfolios at various price levels, depending on the age of the portfolio, its
geographic distribution, its historical experience with a certain asset type or Debt Seller and similar factors. A
typical defaulted consumer receivables portfolio ranges from $5 to $75 million in face value and contains
defaulted consumer receivables from diverse geographic locations with average initial individual account
balances of $1,000 to $7,000.
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The age of a defaulted consumer receivables portfolio (i.e., the time since an account has been charged-off)
is an important factor in determining the maximum price at which the Company will purchase a receivables
portfolio. Generally, there is an inverse relationship between the age of a portfolio and the price that the
Company will purchase the portfolio. This relationship is due to the fact that older receivables typically are more
difficult to collect. The accounts receivables management industry places receivables into categories depending
on the number of collection agencies that have previously attempted to collect on the receivables. Fresh accounts
are typically past due 120 to 270 days and charged-off by the credit originator, that are either being sold prior to
any post-charge-off collection activity or are placed with a third-party for the first time. These accounts typically
sell for the highest purchase price. Primary accounts are typically 270 to 360 days past charge-off, have been
previously placed with one contingent fee servicer and receive a lower purchase price. Secondary and tertiary
accounts are typically more than 360 days past charge-off, have been placed with two or three contingent fee
servicers and receive even lower purchase prices. As shown in the following chart, as of December 31, 2003, a
majority of the Company’s portfolios are secondary and tertiary accounts but it purchases or services accounts at
any point in the delinquency cycle.
Account Type
No. of Accounts
%
Life to Date Purchased Face
Value of Defaulted
Consumer Receivables
Finance Receivables, net as of
December 31, 2003
%
Fresh
Primary
Secondary
Tertiary
Other
150,181
493,779
1,320,477
1,927,410
215,359
3.7% $ 527,043,932
1,810,169,993
2,838,382,673
1,742,524,082
860,266,112
12.0%
32.2%
46.9%
5.2%
6.8% $ 6,672,515
23.2% 26,801,294
36.5% 46,308,802
22.4% 10,186,908
11.1% 2,599,038
%
7.2%
29.0%
50.0%
11.0%
2.8%
Total:
4,107,206
100.0%
$
7,778,386,792
100.0%
$
92,568,557
100.0%
The Company also reviews the geographic distribution of accounts within a portfolio because it has found
that certain states have more debtor-friendly laws than others and, therefore, are less desirable from a
collectibility perspective. In addition, economic factors and bankruptcy trends vary regionally and are factored
into the Company’s maximum purchase price equation.
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As the following chart illustrates, as of December 31, 2003 the Company’s overall life to date portfolio of
defaulted consumer receivables is generally balanced geographically.
Geographic Distribution
Texas
California
Florida
New York
Pennsylvania
New Jersey
North Carolina
Illinois
Ohio
Georgia
Massachusetts
Michigan
Missouri
South Carolina
Arizona
Tennessee
Virginia
Maryland
Other
No. of Accounts
1,232,971
340,759
247,210
201,506
113,490
79,605
92,135
93,038
90,127
79,781
79,257
75,430
179,587
46,090
49,794
56,071
54,025
45,896
950,434
%
30.00%
9.00%
6.00%
5.00%
3.00%
2.00%
2.00%
3.00%
2.00%
2.00%
2.00%
2.00%
4.00%
1.00%
1.00%
1.00%
1.00%
1.00%
23.00%
Life to Date Purchased Face Value
of Defaulted Consumer Receivables
$ 1,172,678,667
864,734,270
698,218,172
626,331,533
298,085,983
241,965,371
240,237,212
217,062,496
212,717,950
205,372,104
202,126,143
179,104,358
163,950,494
141,260,687
133,243,860
131,632,798
129,127,204
124,432,497
1,796,104,993
%
15%
11%
9%
8%
4%
3%
3%
3%
3%
2%
2%
2%
2%
2%
2%
2%
2%
2%
23% (1)
Total:
4,107,206
100%
$
7,778,386,792
100%
__________
(1) Each state included in "Other" represents under 2% of the face value of total defaulted consumer
receivables.
Purchasing Process
The Company acquires portfolios from Debt Sellers through both an auction and a negotiated sale process.
In an auction process, the Debt Seller will assemble a portfolio of receivables and seek purchase prices from
specifically invited potential purchasers. In a privately negotiated sale process, the Debt Seller will contact
known, reputable purchasers directly and negotiate the terms of sale. On a limited basis, the Company also
acquires accounts in forward flow contracts. Under a forward flow contract, the Company agrees to purchase
defaulted consumer receivables from a Debt Seller on a periodic basis, at a set percentage of face value of the
receivables over a specified time period. These agreements typically have a provision requiring that the
attributes of the receivables to be sold will not significantly change each month and that the Debt Seller’s efforts
to collect these receivables will not change. If this provision is not provided for, the contract will allow for the
early termination of the forward flow contract by the purchaser. Forward flow contracts are a consistent source
of defaulted consumer receivables for accounts receivables management providers and provide the Debt Sellers
with a reliable source of revenue and a professional resolution of defaulted consumer receivables.
In a typical sale transaction, a Debt Seller distributes a computer disk or data tape containing 10 to 15 basic
data fields on each receivables account in the portfolio offered for sale. Such fields typically include the
consumer's name, address, outstanding balance, date of charge-off, date of last payment and the date the account
was opened. The Company performs its initial due diligence on the portfolio by electronically cross-checking the
data fields on the computer disk or data tape against the accounts in its owned portfolios and against national
demographic and credit databases. The Company compiles a variety of portfolio level reports examining all
demographic data available.
In order to determine a maximum purchase price for a portfolio, the Company uses two separate computer
models developed internally that often are supplemented with on-site due diligence of the seller’s collection
operation and/or a review of their loan origination files, collection notes and work processes. The Company
analyzes the portfolio using its proprietary multiple regression model, which analyzes each account of the
portfolio using variables in the regression model. In addition, the Company analyzes the portfolio using an
11
adjustment model, which uses an appropriate cash flow model depending upon whether it is a purchase of fresh,
primary, secondary or tertiary accounts. Then, adjustments can be made to the cash flow model to compensate
for demographic attributes supported by a detailed analysis of demographic data. This process yields the
Company’s quantitative purchasing analysis used to help price transactions. The multiple regression model is
also used to prioritize collection work efforts subsequent to purchase. With respect to prospective forward flow
contracts and other long-term relationships, in addition to the procedures outlined above, the Company may
obtain a representative test portfolio to evaluate and compare the performance of the portfolio to the projections
the Company developed in its purchasing analysis.
The Company’s due diligence and portfolio review results in a comprehensive analysis of the proposed
portfolio. This analysis compares defaulted consumer receivables in the prospective portfolio with the
Company’s collection history in similar portfolios. The Company then uses its multiple regression model to
value each account. Using the two valuation approaches, the Company determines cash collections over the life
of the portfolio. The Company then summarizes all anticipated cash collections and associated direct expenses
and projects a collectibility value expressed both in dollars and liquidation percentage and a detailed expense
projection over the portfolio's estimated five to seven year economic life. The Company uses the total projected
collectibility value to determine an appropriate purchase price.
The Company maintains detailed static pool analysis on each portfolio that it has acquired, capturing all
demographic data and revenue and expense items for further analysis. The Company uses the static pool analysis
to refine the underwriting models that it uses to price future portfolio purchases. The results of the static pool
analysis are input back into the Company’s models, increasing the accuracy of the models as the data set
increases with every portfolio purchase and each day's collection efforts.
The quantitative and qualitative data derived in the Company’s due diligence is evaluated together with its
knowledge of the current defaulted consumer receivables market and any subjective factors that management
may know about the portfolio or the Debt Seller. A portfolio acquisition approval memorandum is prepared for
each prospective portfolio before a purchase price is submitted to the seller. This approval memorandum, which
outlines the portfolio's anticipated collectibility and purchase structure, is distributed to members of the
Company’s investment committee. The approval by the committee sets a maximum purchase price for the
portfolio. The investment committee is currently comprised of Steve Fredrickson, CEO and President, Kevin
Stevenson, CFO and Craig Grube, EVP - Acquisitions.
Once a portfolio purchase has been approved by the Company’s investment committee and the terms of the
sale have been agreed to with the seller, the acquisition is documented in an agreement that contains customary
terms and conditions. Provisions are incorporated for bankrupt, disputed, fraudulent or deceased accounts and
typically, the seller either agrees to repurchase these accounts or replace them with acceptable replacement
accounts within certain time frames.
Collection Operations
The Company’s work flow management system places, recalls and prioritizes accounts in collectors' work
queues, based on the Company’s analyses of its accounts and other demographic, credit and prior work collection
attributes. The Company uses this process to focus its work effort on those consumers most likely to pay on their
accounts and to rotate to other collectors the non-paying accounts from which other collectors have been
unsuccessful in receiving payment. The majority of the Company’s collections occur as a result of telephone
contact with consumers.
The collectibility forecast for a newly acquired portfolio will determine collection strategy. Accounts which
are determined to have the highest predicted collectibility probability may be sent immediately to collectors'
work queues. Less collectible accounts may be set aside as house accounts to be collected using a predictive
dialer or other passive, low cost method. All newly purchased accounts are campaign dialed for a period of time
for maximum penetration prior to distribution to collector queues. At such time, only those accounts with
acceptable minimum scores are distributed to collection queues. The Company may obtain credit reports for the
most collectible accounts after the collection process begins.
12
When a collector establishes contact with a consumer, the account information is placed automatically in the
collector's work queue. The Company’s computer system allows each collector to view all the scanned
documents relating to the consumer's account, which can include the original account application and payment
checks. A typical collector work queue may include 650 to 1,000 accounts or more, depending on the skill level
of the collector. The work queue is depleted and replenished automatically by the Company’s computerized
work flow system.
On the initial contact call, the consumer is given a standardized presentation regarding the benefits of
resolving his or her account with the Company. Emphasis is placed on determining the reason for the consumer's
default in order to better assess the consumer's situation and create a plan for repayment. The collector is
incentivized to have the consumer pay the full balance of the account. If the collector cannot obtain payment of
the full balance, the collector will suggest a repayment plan which includes an approximate 20% down payment
with the balance to be repaid over an agreed upon period. At times, when determined to be appropriate, and in
many cases with management approval, a reduced lump-sum settlement may be agreed upon. If the consumer
elects to utilize an installment plan, the Company has developed a system to make monthly withdrawals from a
consumer's bank account.
If a collector is unable to establish contact with a consumer based on information received, the collector
must undertake skip tracing procedures to develop important account information. Skip tracing is the process of
developing new phone, address, job or asset information on a consumer. Each collector does his or her own skip
tracing using a number of computer applications available at his or her workstation, as well as a series of
automated skip tracing procedures implemented by the Company on a regular basis.
Accounts for which the consumer has the likely ability, but not the willingness to resolve their obligations,
are reviewed for legal action. Depending on the balance of the defaulted consumer receivable and the applicable
state collection laws, the Company determines whether to commence legal action to judicially collect on the
receivable. The legal process can take an extended period of time, but it also generates cash collections that
likely would not have been realized otherwise.
The Company’s legal recovery department oversees and coordinates an independent nationwide collections
attorney network which is responsible for the preparation and filing of judicial collection proceedings in multiple
jurisdictions, determining the suit criteria, coordinating sales of property and instituting wage garnishments to
satisfy judgments. This network consists of approximately 70 independent law firms who work on a contingent
fee basis. The Company’s legal department also processes proofs of claims for recovery on receivables which
are included in consumer bankruptcies filed under Chapter 13 of the U.S. Bankruptcy Code, and submits claims
against estates in cases involving deceased debtors having assets at the time of death. Legal cash collections
currently constitute approximately 26% of the Company’s total cash collections. As the Company’s portfolio
matures, a larger number of accounts will be directed to its legal recovery department for judicial collection;
consequently, the Company anticipates that legal cash collections will grow commensurately and comprise a
larger percentage of its total cash collections.
Contingent Fee Collections Operations
In order to provide debt owners with alternative collection solutions and to capitalize on common
competencies between a contingent fee collections operation and an acquired receivables portfolio business, the
Company commenced its third-party contingent fee collections operations in March 2001. In a contingent fee
arrangement, debt owners typically place defaulted receivables with an outsourced provider once they have
ceased their recovery efforts. The debt owners then pay the third-party agency a commission fee based upon the
amount actually collected from the consumer. A contingent fee placement of defaulted consumer receivables is
usually for a fixed time frame, typically four to six months, or as long as nine months or more if there have been
previous collection efforts. At the end of this fixed period, the third-party agency will return the uncollected
defaulted consumer receivables to the debt owner, which may then place the defaulted consumer receivables with
another collection agency or sell the portfolio receivables.
The determination of the commission fee to be paid for third-party collections is generally based upon the
potential collectibility of the defaulted consumer receivables being assigned for placement. For example, if there
has been no prior third-party collection activity with respect to the defaulted consumer receivables, the
13
commission fee would be lower than if there had been one or more previous collection agencies attempting to
collect on the receivables. The earlier the placement of defaulted consumer receivables in the collection process,
the higher the probability of receiving a cash collection and, therefore, the lower the cost to collect and the lower
the commission fee. Other factors, such as the location of the consumers, the size of the defaulted consumer
receivables and the clients' collection procedures and work standards also contribute to establishing a
commission fee.
Once a defaulted consumer receivable has been placed with the Company, the collection process operates in
a slightly different manner than with its portfolio acquisition business. Servicing time limitations imposed by the
debt owner requires a greater emphasis on immediate settlements and larger down payments, compared to much
longer term repayment plans common with the Company’s owned portfolios of defaulted consumer receivables.
In addition, work standards are often dictated by the debt owner. While the Company’s contingent fee
collections operations utilize their own collectors and collection system, the Company has been able to leverage
the portfolio acquisition business' infrastructure, existing facilities and skill set of its management team to
provide support for this business operation. The leveraged competencies of the portfolio acquisition business
include its sophisticated technology systems, account and portfolio scoring abilities, and training techniques.
Competition
The Company faces competition in both of the markets it serves — owned portfolio and contingent fee
accounts receivable management — from new and existing providers of outsourced receivables management
services, including other purchasers of defaulted consumer receivables portfolios, third-party contingent fee
collection agencies and debt owners that manage their own defaulted consumer receivables rather than
outsourcing them. The accounts receivable management industry (owned portfolio and contingent fee) is highly
fragmented and competitive, consisting of approximately 6,000 consumer and commercial agencies. The
Company estimates that more than 90% of these agencies compete in the contingent fee market. There are few
significant barriers for entry to new providers of contingent fee receivables management services and,
consequently, the number of agencies serving the contingent fee market may continue to grow. Greater capital
needs and the need for portfolio evaluation expertise sufficient to price portfolios effectively constitute
significant barriers for entry to new providers of owned portfolio receivables management services.
The Company faces bidding competition in its acquisition of defaulted consumer receivables and in
obtaining placement of contingent fee receivables. The Company also competes on the basis of reputation,
industry experience and performance. Among the positive factors which the Company believes influence its
ability to compete effectively in this market are its ability to bid on portfolios at appropriate prices, its reputation
from previous transactions regarding its ability to close transactions in a timely fashion, its relationships with
originators of defaulted consumer receivables, its team of well-trained collectors who provide quality customer
service and compliance with applicable collections laws, its ability to collect on various asset types and its ability
to provide both purchased and contingent fee solutions to debt owners. Among the negative factors which the
Company believes could influence its ability to compete effectively in this market are that some of its current
competitors and possible new competitors may have substantially greater financial, personnel and other
resources, greater adaptability to changing market needs, longer operating histories and more established
relationships in its industry than the Company currently has.
Information Technology
Technology Operating Systems and Server Platform
The scalability of the Company’s systems provides it with a technology system that is flexible, secure,
reliable and redundant to ensure the protection of its sensitive data. The Company utilizes Intel-based servers
running industry standard open systems coupled with Microsoft Windows 2000/2003 and NT Server operating
systems. In addition, the Company utilizes a blend of purchased and proprietary software systems tailored to the
needs of its business. These systems are designed to eliminate inefficiencies in the Company’s collections,
continue to meet business objectives in a changing environment and meet compliance obligations with regulatory
entities. The Company believes that its combination of purchased and proprietary software packages provide
collections automation that is superior to its competitors.
14
Network Technology
To provide delivery of the Company’s applications, it utilizes Intel-based workstations across its entire
business operations. The environment is configured to provide speeds of 100 megabytes to the desktops of its
collections and administration staff. The Company’s one gigabyte server network architecture supports high-
speed data transport. The Company’s network system is designed to be scalable and meet expansion and inter-
building bandwidth and quality of service demands.
Database Systems
The ability to access and utilize data is essential to the Company being able to operate nationwide in a cost-
effective manner. The Company’s centralized computer-based information systems support the core processing
functions of its business under a set of integrated databases and are designed to be both replicable and scalable to
accommodate its internal growth. This integrated approach helps to assure that consistent sources are processed
efficiently. The Company uses these systems for portfolio and client management, skip tracing, check taking,
financial and management accounting, reporting, and planning and analysis. The systems also support the
Company’s consumers, including on-line access to account information, account status and payment entry. The
Company uses a combination of Microsoft, Oracle and Cache database software to manage its portfolios,
financial, customer and sales data, and the Company believes these systems will be sufficient for its needs for the
foreseeable future. The Company’s contingent fee collections operations database incorporates an integrated and
proprietary predictive dialing platform used with its predictive dialer discussed below.
Redundancy, System Backup, Security and Disaster Recovery
The Company’s data centers provide the infrastructure for innovative collection services and uninterrupted
support of hardware and server management, server co-location and an all-inclusive server administration for its
business. The Company believes its facilities and operations include sufficient redundancy, file back-up and
security to ensure minimal exposure to systems failure or unauthorized access. The preparations in this area
include the use of call centers in Virginia and in Kansas in order to help provide redundancy for data and
processes should one site be completely disabled. The Company has a comprehensive disaster recovery plan
covering its business that is tested on a periodic basis. The combination of the Company’s locally distributed call
control systems provides enterprise-wide call and data distribution between its call centers for efficient portfolio
collection and business operations. In addition to real-time replication of data between the sites, incremental
backups of both software and databases are performed on a daily basis and a full system backup is performed
weekly. Backup data tapes are stored at an offsite location along with copies of schedules and production control
procedures, procedures for recovery using an off-site data center, documentation and other critical information
necessary for recovery and continued operation. The Company’s Virginia headquarters has two separate power
and telecommunications feeds, uninterruptible power supply and a diesel-generator power plant, that provide a
level of redundancy should a power outage or interruption occur. The Company also employs rigorous physical
and electronic security to protect its data. The Company’s call centers have restricted card key access and
appropriate additional physical security measures. Electronic protections include data encryption, firewalls and
multi-level access controls.
Plasma Displays for Real Time Data Utilization
The Company utilizes plasma displays at its Virginia facilities to aid in recovery of portfolios. The displays
provide real-time business-critical information to the Company’s collection personnel for efficient collection
efforts such as telephone, production, employee status, goal trending, training and corporate information.
Dialer Technology
The Noble Systems Predictive Dialer ensures that the Company’s collection staff focuses on certain
defaulted consumer receivables according to the Company’s specifications. The Company’s predictive dialer
takes account of all campaign and dialing parameters and is able to constantly adjust its dialing pace to match
changes in campaign conditions and provide the lowest possible wait times.
15
Employees
The Company employed 798 persons on a full-time basis, including 590 collectors on its owned portfolios
and an additional 57 collectors working in its contingent fee collections operations, as of December 31, 2003.
None of the Company’s employees are represented by a union or covered by a collective bargaining agreement.
The Company believes that its relations with its employees are good.
Hiring
The Company recognizes that its collectors are critical to the success of its business as a majority of the
Company’s collection efforts occur as a result of telephone contact with consumers. The Company has found
that the tenure and productivity of its collectors are directly related. Therefore, attracting, hiring, training,
retaining and motivating its collection personnel is a major focus for the Company. The Company pays its
collectors competitive wages and offers employees a full benefits program which includes comprehensive
medical coverage, short and long term disability, life insurance, dental and vision coverage, an employee
assistance program, supplemental indemnity, cancer, hospitalization, accident insurance, a flexible spending
account for child care and a matching 401(k) program. In addition to a base wage, the Company provides
collectors with the opportunity to receive unlimited compensation through an incentive compensation program
that pays bonuses above a set monthly base, based upon each collector's collection results. This program is
designed to ensure that employees are paid based not only on performance, but also on consistency. The
Company has awarded stock options to many of the Company’s tenured collectors. The Company believes that
these practices have enabled it to achieve an annual post-training turnover rate of 37% in 2003.
A large number of telemarketing, customer-service and reservation phone centers are located near the
Company’s Virginia headquarters. The Company believes that it offers a higher base wage than many local
employers and therefore has access to a large number of trained personnel. In addition, there are approximately
100,000 active-duty military personnel in the area. The Company employs numerous military spouses and
retirees and finds them to be an excellent source of employees. The Company has also found the Hutchinson,
Kansas area to provide a large potential workforce of trained personnel.
Training
The Company provides a comprehensive six-week training program for all new owned portfolio collectors.
The first three weeks of the training program is comprised of lectures to learn collection techniques, state and
federal collection laws, systems, negotiation skills, skip tracing and telephone use. These sessions are then
followed by an additional three weeks of practical experience conducting live calls with additional managerial
supervision in order to provide employees with confidence and guidance while still contributing to the
Company’s profitability. Each trainee must successfully pass a comprehensive examination before being
assigned to the collection floor. In addition, the Company conducts continuing advanced classes in its four
training centers. The Company’s technology and systems allow it to monitor individual employees and then
offer additional training in areas of deficiency to increase productivity.
Legal
Legal Recovery Department
An important component of the Company’s collections effort involves its legal recovery department and the
judicial collection of accounts of customers who have the ability, but not the willingness, to resolve their
obligations. The Company’s legal recovery department oversees and coordinates an independent nationwide
attorney network which is responsible for the preparation and filing of judicial collection proceedings in multiple
jurisdictions, determining the suit criteria, coordinating sales of property and instituting wage garnishments to
satisfy judgments. This nationwide collections attorney network consists of approximately 70 independent law
firms. The Company’s legal recovery department also submits claims against estates in cases involving deceased
debtors having assets at the time of death, and processes proofs of claims for recovery on accounts which are
included in consumer bankruptcies filed under Chapter 13 of the U.S. Bankruptcy Code. Recent proposed
amendments to federal bankruptcy laws, if passed, will very likely have an impact upon the Company’s
operations. The amendments, which, among other things, establish income criteria for the filing of a Chapter 7
16
bankruptcy petition, are expected to cause more debtors to file bankruptcy petitions under Chapter 13, rather than
Chapter 7 of the U.S. Bankruptcy Code. Consequently, the Company expects that fewer debtors will be able to
have their obligations completely discharged in Chapter 7 bankruptcy actions, and will instead enter into the
payment plans required by Chapter 13. The Company expects that this will enable it to generate recoveries from
a larger number of bankrupt debtors through the filing of proofs of claims with bankruptcy trustees.
Corporate Legal Department
The Company’s corporate legal department manages general corporate legal matters, including litigation
management, contract and document preparation and review, regulatory and statutory compliance, obtaining and
maintaining multi-state licensing, bonding and insurance, and dispute and complaint resolution. As a part of its
compliance functions, the Company’s corporate legal department also assists with training the Company’s staff.
The Company provides employees with extensive training on the Fair Debt Collection Practices Act and other
relevant laws and regulations. The Company’s corporate legal department distributes guidelines and procedures
for collection personnel to follow when communicating with a customer, customer's agents, attorneys and other
parties during its recovery efforts. In addition, the Company’s corporate legal department regularly researches,
and provides collection personnel and the training department with summaries and updates of changes in federal
and state statutes and relevant case law, so that they are aware of new laws and judicial interpretations of
applicable requirements and laws when tracing or collecting an account.
Regulation
Federal and state statutes establish specific guidelines and procedures which debt collectors must follow
when collecting consumer accounts. It is the Company’s policy to comply with the provisions of all applicable
federal laws and comparable state statutes in all of its recovery activities, even in circumstances in which it may
not be specifically subject to these laws. The Company’s failure to comply with these laws could have a material
adverse effect on it in the event and to the extent that they apply to some or all of the Company’s recovery
activities. Federal and state consumer protection, privacy and related laws and regulations extensively regulate
the relationship between debt collectors and debtors, and the relationship between customers and credit card
issuers. Significant federal laws and regulations applicable to the Company’s business as a debt collector include
the following:
• Fair Debt Collection Practices Act. This act imposes certain obligations and restrictions on the practices of
debt collectors, including specific restrictions regarding communications with consumer customers, including the
time, place and manner of the communications. This act also gives consumers certain rights, including the right
to dispute the validity of their obligations.
• Fair Credit Reporting Act. This act places certain requirements on credit information providers regarding
verification of the accuracy of information provided to credit reporting agencies and investigating consumer
disputes concerning the accuracy of such information. The Company provides information concerning its
accounts to the three major credit reporting agencies, and it is the Company’s practice to correctly report this
information and to investigate credit reporting disputes.
• Gramm-Leach-Bliley Act. This act requires that certain financial institutions, including collection agencies,
develop policies to protect the privacy of consumers' private financial information and provide notices to
consumers advising them of their privacy policies. This act also requires that if private personal information
concerning a consumer is shared with another unrelated institution, the consumer must be given an opportunity to
opt out of having such information shared. Since the Company does not share consumer information with non-
related entities, except as required by law, or except as needed to collect on the receivables, its consumers are not
entitled to any opt-out rights under this act. This act is enforced by the Federal Trade Commission, which has
retained exclusive jurisdiction over its enforcement, and does not afford a private cause of action to consumers
who may wish to pursue legal action against a financial institution for violations of this act.
• Electronic Funds Transfer Act. This act regulates the use of the Automated Clearing House ("ACH")
system to make electronic funds transfers. All ACH transactions must comply with the rules of the National
Automated Check Clearing House Association ("NACHA") and Uniform Commercial Code § 3-402. This act,
the NACHA regulations and the Uniform Commercial Code give the consumer, among other things, certain
17
privacy rights with respect to the transactions, the right to stop payments on a pre-approved fund transfer, and the
right to receive certain documentation of the transaction. This act also gives consumers a right to sue institutions
which cause financial damages as a result of their failure to comply with its provisions.
• Telephone Consumer Protection Act. In the process of collecting accounts, the Company uses automated
predictive dialers to place calls to consumers. This act and similar state laws place certain restrictions on
telemarketers and users of automated dialing equipment who place telephone calls to consumers.
• U.S. Bankruptcy Code. In order to prevent any collection activity with bankrupt debtors by creditors and
collection agencies, the U.S. Bankruptcy Code provides for an automatic stay, which prohibits certain contacts
with consumers after the filing of bankruptcy petitions.
Additionally, there are in some states statutes and regulations comparable to and in some cases more
stringent than the above federal laws, and specific licensing requirements which affect the Company’s
operations. State laws may also limit credit account interest rates and the fees, as well as limit the time frame in
which judicial actions may be initiated to enforce the collection of consumer accounts.
Although the Company is not a credit originator, some of these laws directed toward credit originators may
occasionally affect its operations because its receivables were originated through credit transactions, such as the
following laws, which apply principally to credit originators:
• Truth in Lending Act;
• Fair Credit Billing Act; and
• Equal Credit Opportunity Act.
Federal laws which regulate credit orginiators require, among other things, that credit issuers disclose to
consumers the interest rates, fees, grace periods, and balance calculation methods associated with their credit
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
account that were a result of an unauthorized use of credit. These laws, among others, may give consumers a
legal cause of action against the Company, or may limit the Company’s ability to recover amounts owing with
respect to the receivables, whether or not it 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 the Company. Accordingly, when the Company acquires defaulted consumer
receivables, it contractually requires credit orginators to indemnify it against any losses caused by their failure to
comply with applicable statutes, rules and regulations relating to the receivables before they are sold to the
Company.
The U.S. Congress and several states are currently in the process of enacting and amending legislation
concerning identity theft. Additional consumer protection and privacy protection laws may be enacted that
would impose additional requirements on the enforcement of and recovery on consumer credit card or installment
accounts. Any new laws, rules or regulations that may be adopted or amended, as well as existing consumer
protection and privacy protection laws, may adversely affect the Company’s ability to recover the receivables. In
addition, the Company’s failure to comply with these requirements could adversely affect its ability to enforce
the receivables.
The Company cannot ensure that some of the receivables were not established as a result of identity theft or
unauthorized use of credit and, accordingly, the Company could not recover the amount of the defaulted
consumer receivables. As a purchaser of defaulted consumer receivables, the Company may acquire receivables
subject to legitimate defenses on the part of the consumer. The Company’s account purchase contracts allow it to
return to the Debt Seller certain defaulted consumer receivables that may not be collectible, due to these and
other circumstances. Upon return, the Debt Sellers are required to replace the receivables with similar
18
receivables or repurchase the receivables. These provisions limit to some extent the Company’s losses on such
accounts.
19
Item 2. Properties.
The Company’s principal executive offices and primary operations facility are located in approximately
40,000 square feet of leased space in Norfolk, Virginia and the Company rents one administrative facility in
Virginia Beach, Virginia that is approximately 2,500 square feet and one storage facility. This space was vacated
during January 2004. The Company owns a two-acre parcel of land across from its headquarters which it
developed into a parking lot for use by its employees. In addition, the Company owns an approximately 15,000
square foot facility in Hutchinson, Kansas that can currently accommodate approximately 100 employees. The
Company also leases a facility located in approximately 21,000 square feet of space in Hampton, Virginia to
accommodate approximately 285 additional employees. This new facility opened in March 2003. The Company
also entered into a new lease for additional space adjacent to its Norfolk, Virginia office. This space became
occupied in January 2004 and consists of 25,000 square feet. This space now accommodates all Anchor
employees, accounting, outsourced collections and other administrative support personnel. The Company does
not consider any specific leased or owned facility to be material to its operations. The Company believes that
equally suitable alternative facilities are available in all areas where it currently does business.
Item 3. Legal Proceedings.
From time to time, the Company is involved in various legal proceedings which are incidental to the
ordinary course of its business. The Company regularly initiates lawsuits against consumers and is occasionally
countersued by them in such actions. Also, consumers occasionally initiate litigation against the Company, in
which they allege that it has violated a state or federal law in the process of collecting on their account. The
Company does not believe that these routine matters represent a substantial volume of its accounts or that,
individually or in the aggregate, they are material to its business or financial condition.
The Company is not a party to any material legal proceedings and it is unaware of any contemplated material
actions against it.
Item 4. Submission of Matters to a Vote of Securityholders.
None.
20
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.
Price Range of Common Stock
The Company’s common stock (“Common Stock”) began trading on the Nasdaq National Market under the
symbol “PRAA” on November 8, 2002. Prior to that time there was no public trading market for the Company’s
common stock. The following table sets forth the high and low sales price for the Common Stock, as reported by
the Nasdaq National Market, for the periods indicated.
2002
Quarter ended December 31, 2002
2003
Quarter ended March 31, 2003
Quarter ended June 30, 2003
Quarter ended September 30, 2003
Quarter ended December 31, 2003
High
$20.50
$25.00
$33.95
$32.50
$30.61
Low
$14.75
$17.76
$20.40
$24.30
$22.55
As of February 12, 2004, there were 30 holders of record of the Common Stock. Based on information
provided by the Company’s transfer agent and registrar, the Company believes that there are 9,623 beneficial
owners of the Common Stock.
Shares Registered After Initial Public Offering
A secondary offering of shares of common stock of the Company was completed on May 21, 2003, in
which 4,025,000 shares were sold. After this transaction, holders of 6,865,261 shares of the Common Stock
which were not sold in the secondary offering agreed to a 180-day “lock-up” with respect to these shares, which
restricted their ability to sell these shares during the 180 days following the date of the prospectus, or until
November 21, 2003. These shares may now be sold in accordance with the provisions of the federal securities
laws, including Rule 144.
On November 7, 2003, the Company filed two Registration Statements with the Securities and Exchange
Commission, both of which were filed on Form S-8, to register (a) the 2,000,000 shares of the Common Stock
underlying the Company’s 2002 Employee Stock Option Plan and (b) 142,500 shares of the Common Stock
underlying Warrants held by certain key employees of the Company.
Dividend Policy
The Company’s board of directors sets its dividend policy. The Company does not pay dividends on the
Common Stock; however, the Company’s board of directors may determine in the future to declare or pay cash
dividends on the Common Stock. Any future determination as to the declaration and payment of dividends will
be at the discretion of the Company’s board of directors and will depend on then existing conditions, including
the Company’s financial condition, results of operations, contractual restrictions, capital requirements, business
prospects and other factors that the Company’s board of directors may consider relevant.
21
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the audited financial statements.
2003
2002
2001
2000
1999
Year Ended December 31,
(Dollars in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue:
Income recognized on finance receivables
Commissions
Net gain on cash sales of defaulted consumer receivables
Total revenue
$
81,796
3,131
-
84,927
$
53,803
1,944
100
55,847
$
31,221
214
901
32,336
$
18,991
-
343
19,334
$
11,746
-
322
12,068
Operating expenses:
Compensation and employee services
Outside legal and other fees and services
Communications
Rent and occupancy
Other operating expenses
Depreciation
Total operating expenses
Income from operations
Loss on extinguishment of debt
Net interest expenses
Income before income taxes
Provision for income taxes
Net income (1)
Pro forma income taxes
Pro forma net income (2)
Pro forma net income per share (3)
Basic
Diluted
Pro forma weighted average shares (3)
Basic
Diluted
OPERATING AND OTHER FINANCIAL DATA:
Cash collections and commission (4)
Operating expenses to cash collections and commissions
Acquisitions of finance receivables, at cost
Acquisitions of finance receivables, at face value
Percentage increase of acquisitions of finance receivables, at cost
Percentage increase in cash collections and commissions
Percentage increase in pro forma net income
Employees at period end:
Total employees
Ratio of collection personnel to total employees (5)
28,987
14,147
2,772
1,189
1,932
1,445
50,472
34,455
-
542
33,913
13,199
$
20,714
21,701
8,093
1,915
799
1,436
940
34,884
20,963
-
2,425
18,538
1,473
17,065
5,694
15,644
3,627
1,645
712
1,265
677
23,570
8,766
(424)
2,716
5,626
-
5,626
2,100
9,883
2,583
871
603
652
437
15,029
4,305
-
1,765
2,540
-
2,540
901
6,119
1,493
553
335
498
369
9,367
2,701
-
876
1,825
-
1,825
697
$
11,371
$
3,526
$
1,639
$
1,128
$
$
1.42
1.32
$
$
1.08
0.94
$
$
0.35
0.31
$
$
0.16
0.14
$
$
0.11
0.11
14,546
15,712
10,529
12,066
10,000
11,458
10,000
11,366
10,000
10,000
$
$
$
$
$
$
120,183
42%
61,815
2,229,682
46%
48%
82%
$
$
81,198
43%
42,382
1,966,296
27%
52%
222%
$
$
53,362
44%
33,381
1,592,353
35%
74%
115%
$
$
30,733
49%
24,663
1,004,114
27%
77%
45%
$
$
$
17,362
54%
19,417
479,778
69%
60%
181%
798
90%
581
88%
501
90%
370
89%
246
86%
__________________________________________________
(1) At the time of the Company’s initial public offering, which commenced on November 8, 2002, the
Company changed its legal structure from a limited liability company to a corporation. As a limited
liability company the Company was not subject to Federal or state corporate income taxes. Therefore, net
income does not give effect to taxes for all periods prior to the Company’s initial public offering.
(2) For comparison purposes, the Company has presented pro forma net income, which reflects income taxes
assuming the Company had been a corporation since the time of the Company’s formation and assuming
tax rates equal to the rates that would have been in effect had the Company been required to report tax
expense in such years. Since the time of the Company’s reorganization, pro forma net income reflects its
actual net income.
(3) Pro forma net income per share and pro forma weighted average shares assumes the Company had
reorganized as a corporation since the beginning of the period presented.
(4) Includes both cash collected on finance receivables and commission fee received during the relevant period.
(5) Includes all collectors and all first-line collection supervisors.
22
2003
Year Ended December 31, 2003
2002
2001
2000
1999
(Dollars in thousands)
FINANCIAL POSITION DATA:
Cash and cash equivalents
Finance receivables, net
Total assets
Long-term debt
Total debt, including capital lease obligations
Total stockholders' equity
$
24,912
92,569
126,394
1,657
2,208
119,148
$
17,939
65,526
88,288
966
1,465
80,608
$
4,780
47,987
57,108
568
26,771
27,752
$
3,191
41,124
47,188
532
23,300
22,705
$
1,456
28,139
31,495
-
10,372
20,313
Dec. 31,
2003
Sept. 30,
2003
June 30,
2003
Mar. 31,
2003
Dec. 31,
2002
Sept. 30,
2002
June 30,
2002
Mar. 31,
2002
For the Quarter Ended,
(Dollars in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue:
Income recognized on finance receivables
Commissions
Net gain on cash sales of defaulted consumer receivables
Total revenue
$
22,172
864
-
23,036
$
21,389
784
-
22,173
$
20,618
785
-
21,403
$
17,618
698
-
18,316
$
15,081
607
-
15,688
$
14,704
521
-
15,225
$
12,837
440
100
13,377
$
11,181
376
-
11,557
Operating expenses:
Compensation and employee services
Outside legal and other fees and services
Communications
Rent and occupancy
Other operating expenses
Depreciation
Total operating expenses
Income from operations
Net interest expenses
Income before income taxes
Provision for income taxes
Net income (1)
Pro forma income taxes
Pro forma net income (2)
Pro forma net income per share (3)
Basic
Diluted
Pro forma weighted average shares (3)
Basic
Diluted
7,545
4,168
769
317
610
391
13,800
9,236
327
8,908
3,467
7,370
3,886
702
317
393
383
13,051
9,122
83
9,038
3,509
7,679
3,276
667
310
456
371
12,759
8,644
75
8,569
3,324
6,393
2,817
634
245
473
300
10,862
7,453
56
7,397
2,899
$
5,441
$
5,529
$
5,245
$
4,498
5,981
2,655
445
228
436
264
10,009
5,679
244
5,435
1,473
3,962
628
5,508
2,197
540
209
324
242
9,020
6,205
1,066
5,139
-
5,139
1,986
5,144
1,951
479
189
370
223
8,356
5,021
589
4,432
-
4,432
1,714
5,068
1,290
451
173
306
211
7,499
4,058
526
3,532
-
3,532
1,365
$
3,334
$
3,153
$
2,718
$
2,167
$
$
0.36
0.35
$
$
0.36
0.35
$
$
0.37
0.33
$
$
0.33
0.29
$
$
0.28
0.24
$
$
0.32
0.27
$
$
0.27
0.24
$
$
0.22
0.19
15,249
15,756
15,149
15,751
14,241
15,750
13,545
15,590
12,063
13,796
10,000
11,496
10,000
11,487
10,000
11,485
23
(Dollars in thousands)
FINANCIAL POSITION DATA:
Assets
Cash and cash equivalents
Finance receivables, net
Property and equipment, net
Deferred tax asset
Income tax receivable
Other assets
Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
Accrued expenses
Income taxes payable
Accrued payroll and bonuses
Deferred tax liability
Revolving lines of credit
Long-term debt
Obligations under capital lease
Basis - swap contract
Total liabilities
Stockholders' equity
Common stock
Additional paid in capital
Members' equity (4)
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
Dec. 31,
2003
Sept. 30,
2003
June 30,
2003
Mar. 31,
2003
Dec. 31,
2002
Sept. 30,
2002
June 30,
2002
Mar. 31,
2002
Quarter Ended
$
$
$
$
$
$
$
$
24,912
92,569
5,166
2,009
352
1,386
126,394
14,810
89,836
5,233
5,414
1,856
1,122
118,271
7,979
86,689
5,059
8,915
2,122
1,304
112,068
12,072
74,418
4,996
-
-
1,211
92,697
17,939
65,526
3,794
-
-
1,029
88,288
6,038
55,133
3,667
-
-
651
65,489
8,323
51,055
3,433
-
-
645
63,456
7,497
46,825
3,376
-
-
935
58,633
$
$
$
$
$
$
$
$
$
1,291
514
-
3,233
-
-
1,657
551
-
7,246
$
1,132
599
-
2,383
-
-
1,744
634
-
6,492
$
1,314
353
-
2,351
-
-
1,829
540
-
6,387
$
861
333
2,603
1,495
368
-
925
618
-
7,203
$
1,370
760
937
2,861
287
-
966
499
-
7,680
$
697
660
-
1,861
-
25,000
1,006
582
-
29,806
$
570
623
-
1,660
-
25,000
1,031
675
434
29,993
$
540
681
-
930
-
25,000
1,050
770
273
29,244
153
96,118
152
94,191
151
93,623
136
78,696
135
78,309
-
-
-
-
-
-
-
22,877
-
119,148
126,394
$
-
17,436
-
111,779
118,271
$
-
11,907
-
105,681
112,068
$
-
6,662
-
85,494
92,697
$
-
2,164
-
80,608
88,288
$
35,683
-
-
35,683
65,489
$
33,897
-
(434)
33,463
63,456
$
29,662
-
(273)
29,389
58,633
$
(1) At the time of the Company’s initial public offering, which commenced on November 8, 2002, the
Company changed its legal structure from a limited liability company to a corporation. As a limited liability
company the Company was not subject to federal or state corporate income taxes. Therefore, net income
does not give effect to taxes for all periods prior to the Company’s initial public offering.
(2) For comparison purposes, the Company has presented pro forma net income, which reflects income taxes
assuming the Company had been a corporation since the time of the Company’s formation and assuming tax
rates equal to the rates that would have been in effect had the Company been required to report tax expense
in such years. Since the time of the Company’s reorganization, pro forma net income reflects its actual net
income.
(3) Pro forma net income per share and pro forma weighted average shares assumes the Company had
reorganized as a corporation since the beginning of the period presented.
(4) For periods prior to December 31, 2002, the Company was a limited liability company and the equity of the
Company is contained in the line item “Members’ equity”.
24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Results of Operations
The following table sets forth certain operating data in dollars and as a percentage of total revenue for the
years ended December 31, 2003, 2002 and 2001:
2003
2002
2001
Revenue:
Income recognized on finance receivables
Commissions
Net gain on cash sales of defaulted consumer receivables
Total revenue
Operating expenses:
$
96.3%
81,796,209
3.7%
3,131,054
0.0%
-
84,927,263 100.0%
$
53,802,718
1,944,428
100,156
55,847,302
96.3%
3.5%
0.2%
100.0%
$
31,220,857
214,539
900,916
96.6%
0.7%
2.8%
32,336,312 100.0%
Compensation and employee services
Outside legal and other fees and services
Communications
Rent and occupancy
Other operating expenses
Depreciation
Total operating expenses
Income from operations
Interest income
Loss on extinguishment of debt
Interest expenses
Income before income taxes
Provision for income taxes
Net income
Pro forma income taxes
Pro forma net income (1)
28,986,795
14,147,394
2,772,110
1,189,379
1,932,055
1,444,825
50,472,558
34,454,705
60,173
-
(602,072)
33,912,806
13,199,303
20,713,503
$
34.1%
16.7%
3.3%
1.4%
2.3%
1.7%
59.4%
40.6%
0.1%
0.0%
-0.7%
39.9%
15.5%
24.4%
21,700,918
8,092,460
1,914,557
799,323
1,436,438
940,352
34,884,048
20,963,254
21,548
-
(2,446,620)
18,538,182
1,473,073
17,065,109
5,693,788
11,371,321
$
$
38.9%
14.5%
3.4%
1.4%
2.6%
1.7%
62.5%
37.5%
0.0%
0.0%
-4.4%
33.2%
2.6%
30.6%
10.2%
20.4%
15,644,460
3,627,135
1,644,557
712,400
1,265,132
676,677
23,570,361
8,765,951
65,362
(423,305)
(2,781,674)
5,626,334
-
5,626,334
2,100,609
3,525,725
$
$
48.4%
11.2%
5.1%
2.2%
3.9%
2.1%
72.9%
27.1%
0.2%
-1.3%
-8.6%
17.4%
0.0%
17.4%
6.5%
10.9%
__________
(1) During 2001 and most of 2002 the Company’s legal structure was a limited liability company. As a limited
liability company the Company was not subject to federal or state corporate income taxes. For comparison
purposes, pro forma net income is presented, which reflects income taxes assuming the Company had been
a corporation since the time of its formation and assuming tax rates equal to the rates that would have been
in effect had the Company been required to report tax expense in such years.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenue
Total revenue was $84.9 million for the year ended December 31, 2003, an increase of $29.1 million or
52.2% compared to total revenue of $55.8 million for the year ended December 31, 2002.
Income Recognized on Finance Receivables
Income recognized on finance receivables was $81.8 million for the year ended December 31, 2003, an
increase of $28.0 million or 52.0% compared to income recognized on finance receivables of $53.8 million for
the year ended December 31, 2002. The majority of the increase was due to an increase in the Company’s cash
collections on its owned defaulted consumer receivables to $117.1 million from $79.3 million, an increase of
47.7%. The Company’s amortization rate on owned portfolios for the year ended December 31, 2003 was 30.1%
while for the year ended December 31, 2002 it was 32.1%. During the year ended December 31, 2003, the
Company acquired defaulted consumer receivables portfolios with an aggregate face value amount of $2.2 billion
at an original purchase price of $61.8 million. During the year ended December 31, 2002, the Company acquired
defaulted consumer receivable portfolios with an aggregate face value of $2.0 billion at an original purchase
price of $42.4 million. The Company’s relative cost of acquiring defaulted consumer receivable portfolios
increased to 2.8% of face value for the year ended December 31, 2003 from 2.2% of face value for the year
ended December 31, 2002. As a percentage of total face acquired in 2003, the Company purchased 2.5% fresh,
25
24.6% primary, 41.3% secondary, 17.9% tertiary, and 13.7% other, while in 2002 the Company purchased 7.5%
fresh, 13.2% primary, 35.1% secondary, 39.6% tertiary and 4.6% other.
Commissions
Commissions were $3.1 million for the year ended December 31, 2003, an increase of $1.2 million or 63.2%
compared to commissions of $1.9 million for the year ended December 31, 2002. Commissions increased as a
result of a growing inventory of accounts.
Net gain on cash sales of defaulted consumer receivables
Net gain on cash sales of defaulted consumer receivables were $0 for the year ended December 31, 2003, a
decrease of $100,000 or 100.0% compared to net gain on cash sales of defaulted consumer receivables of
$100,000 for the year ended December 31, 2002, which was derived from one sale in June 2002.
Operating Expenses
Total operating expenses were $50.5 million for the year ended December 31, 2003, an increase of $15.6
million or 44.7% compared to total operating expenses of $34.9 million for the year ended December 31, 2002.
Total operating expenses, including compensation expenses, were 42.0% of cash receipts excluding sales for the
year ended December 31, 2003 compared with 43.0% for the same period in 2002.
Compensation and Employee Services
Compensation and employee services expenses were $29.0 million for the year ended December 31, 2003,
an increase of $7.3 million or 33.6% compared to compensation and employee services expenses of $21.7 million
for the year ended December 31, 2002. Compensation and employee services expenses increased as total
employees grew from 581 at December 31, 2002 to 798 at December 31, 2003. Additionally, existing employees
received normal salary increases. Compensation and employee services expenses as a percentage of cash receipts
excluding sales decreased to 24.1% for the year ended December 31, 2003 from 26.7% of cash receipts
excluding sales for the same period in 2002.
Outside Legal and Other Fees and Services
Outside legal and other fees and services expenses were $14.1 million for the year ended December 31,
2003, an increase of $6.0 million or 74.1% compared to outside legal and other fees and services expenses of
$8.1 million for the year ended December 31, 2002. The increase was attributable to the increased cash
collections resulting from the increased number of accounts referred to independent contingent fee attorneys.
This increase is consistent with the growth the Company experienced in its portfolio of defaulted consumer
receivables and a portfolio management strategy implemented in mid 2002. This strategy resulted in the
Company referring to the legal suit process more unsuccessfully liquidated accounts that have an identified
means of repayment but that are nearing their legal statute of limitations, than had been referred historically.
Legal cash collections represented 26.0% of total cash collections for the year ended December 31, 2003, up
from 19.5% for the year ended December 31, 2002. Total legal expenses for the year ended December 31, 2003
were 35.7% of legal cash collections compared to 38.4% for the year ended December 31, 2002.
Communications
Communications expenses were $2.8 million for the year ended December 31, 2003, an increase of $900,000
or 47.4% compared to communications expenses of $1.9 million for the year ended December 31, 2002. The
increase was attributable to growth in mailings and higher telephone expenses incurred to collect on a greater
number of defaulted consumer receivables owned and serviced. Mailings were responsible for 52.2% of this
increase, while the remaining 47.8% was attributable to higher phone charges.
26
Rent and Occupancy
Rent and occupancy expenses were $1.2 million for the year ended December 31, 2003, an increase of
$401,000 or 50.2% compared to rent and occupancy expenses of $799,000 for the year ended December 31,
2002. The increase was attributable to increased leased space due to the opening of a call center in Hampton,
Virginia, a storage facility, an off-site administrative and mail handling site and contractual increases in annual
rental rates. The Hampton call center accounted for $293,000 of the increase, the new storage facility accounted
for $28,000 of the increase and the administrative/mail site accounted for $19,000 of the increase. The remaining
increase was attributable to contractual increases in annual rental rates.
Other Operating Expenses
Other operating expenses were $1.9 million for the year ended December 31, 2003, an increase of $500,000
or 35.7% compared to other operating expenses of $1.4 million for the year ended December 31, 2002. The
increase was due to increases in repairs and maintenance, hiring and insurance. Repairs and maintenance
expenses increased by $124,000, hiring expenses increased by $139,000, and insurance expense increased by
$257,000, offset by decreases in other expense items of $20,000.
Depreciation
Depreciation expenses were $1.4 million for the year ended December 31, 2003, an increase of $460,000 or
48.9% compared to depreciation expenses of $940,000 for the year ended December 31, 2002. The increase was
attributable to continued capital expenditures on equipment, software, and computers related to the Company’s
growth and systems upgrades. Of the increase in depreciation expenses, 61.7% is the result of the March 2003
opening of its new Hampton office and an associated $2.0 million in equipment purchases. The remaining
increase of 38.3% was the result of system upgrades.
Interest Income
Interest income was $60,000 for the year ended December 31, 2003, an increase of $38,000 or 172.7%
compared to interest income of $22,000 for the year ended December 31, 2002. This increase of investing in
short-term municipal instruments during the first half of 2003 versus investments of less than two months in
2002.
Interest Expense
Interest expense was $600,000 for the year ended December 31, 2003, a decrease of $1.8 million or 75.0%
compared to interest expense of $2.4 million for the year ended December 31, 2002. This decreased primarily as
a result of the payoff of all outstanding revolving debt with the proceeds from the Company’s initial public
offering, but also includes a $284,000 charge related to the termination of the Westside Funding facility in the
fourth quarter of 2003.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenue
Total revenue was $55.8 million for the year ended December 31, 2002, an increase of $23.5 million or
72.8% compared to total revenue of $32.3 million for the year ended December 31, 2001.
Income Recognized on Finance Receivables
Income recognized on finance receivables was $53.8 million for the year ended December 31, 2002, an
increase of $22.6 million or 72.4% compared to income recognized on finance receivables of $31.2 million for
the year ended December 31, 2001. The majority of the increase was due to an increase in the Company’s cash
collections on its owned defaulted consumer receivables to $79.3 million from $53.1 million, an increase of
49.3%. In the second half of 2001 and continuing throughout 2002, the Company has experienced an
27
acceleration of the increase in its collector productivity resulting in an acceleration of its performance in cash
collections compared to projections. This performance has led to lower amortization rates as the Company’s
projected multiple of cash collections to purchase price has increased. The Company’s amortization rate on
owned portfolios for the year ended December 31, 2002 was 32.1% while for the year ended December 31, 2001
it was 41.2%. During the year ended December 31, 2002, the Company acquired defaulted consumer receivables
portfolios with an aggregate face value amount of $2.0 billion at an original purchase price of $42.4 million.
During the year ended December 31, 2001, the Company acquired defaulted consumer receivable portfolios with
an aggregate face value of $1.6 billion at an original purchase price of $33 million (inclusive of purchases
subsequently sold). The Company’s relative cost of acquiring defaulted consumer receivable portfolios increased
to 2.2% of face value for the year ended December 31, 2002 from 2.1% of face value for the year ended
December 31, 2001.
Commissions
Commissions were $1.9 million for the year ended December 31, 2002, an increase of $1.7 million or
790.7% compared to commissions of $215,000 for the year ended December 31, 2001. Commissions increased
as business volume increased substantially in the Company’s contingent fee collection business as a result of
increased account placements.
Net gain on cash sales of defaulted consumer receivables
Net gain on cash sales of defaulted consumer receivables were $100,000 for the year ended December 31,
2002, a decrease of $801,000 or 88.9% compared to net gain on cash sales of defaulted consumer receivables of
$901,000 for the year ended December 31, 2001. During September 2001, the Company purchased $4.4 million
of defaulted consumer receivables that were immediately sold to a buying entity. A net gain of $369,000 was
recognized on this back to back purchase-sale transaction. The remaining change is the result of one sale in 2002
versus twelve small sales in 2001.
Operating Expenses
Total operating expenses were $34.9 million for the year ended December 31, 2002, an increase of $11.3
million or 47.9% compared to total operating expenses of $23.6 million for the year ended December 31, 2001.
Total operating expenses, including compensation expenses, were 43.0% of cash receipts excluding sales for the
year ended December 31, 2002 compared with 44.4% for the same period in 2001.
Compensation and Employee Services
Compensation and employee services expenses were $21.7 million for the year ended December 31, 2002,
an increase of $6.1 million or 39.1% compared to compensation and employee services expenses of $15.6 million
for the year ended December 31, 2001. Compensation and employee services expenses increased as total
employees grew to 581 at December 31, 2002 from 501 at December 31, 2001. Additionally, existing employees
received normal salary increases and increased bonuses. Compensation and employee services expenses as a
percentage of cash collections decreased to 27.4% for the year ended December 31, 2002 from 29.3% of cash
collections for the same period in 2001.
Outside Legal and Other Fees and Services
Outside legal and other fees and services expenses were $8.1 million for the year ended December 31, 2002,
an increase of $4.5 million or 125.0% compared to outside legal and other fees and services expenses of $3.6
million for the year ended December 31, 2001. The increase was attributable to the increased cash collections
resulting from the increased number of accounts referred to independent contingent fee attorneys. This increase is
consistent with the growth the Company experienced in its portfolio of defaulted consumer receivables, and a
portfolio management strategy shift implemented in mid 2002. This strategy resulted in the Company referring
to the legal suit process unsuccessfully liquidated accounts that have an identified means of repayment but that
are nearing their legal statute of limitations.
28
Communications
Communications expenses were $1.9 million for the year ended December 31, 2002, an increase of $270,000
or 18.8% compared to communications expenses of $1.6 million for the year ended December 31, 2001. The
increase was attributable to growth in mailings and higher telephone expenses incurred to collect on a greater
number of defaulted consumer receivables owned and serviced. Mailings were responsible for 69.4% of this
increase, while the remaining 30.6% was attributable to a higher number of phone calls.
Rent and Occupancy
Rent and occupancy expenses were $799,000 for the year ended December 31, 2002, an increase of $87,000
or 12.2% compared to rent and occupancy expenses of $712,000 for the year ended December 31, 2001. The
increase was attributable to increased leased space related to a storage facility, an off-site administrative and mail
handling site and contractual increases in annual rental rates. The new storage facility accounted for $7,300 of
the increase and the administrative/mail site accounted for $19,000 of the increase. The remaining increase was
attributable to contractual increases in annual rental rates.
Other Operating Expenses
Other operating expenses were $1.4 million for the year ended December 31, 2002, an increase of $171,000
or 13.2% compared to other operating expenses of $1.3 million for the year ended December 31, 2001. The
increase was due to increases in taxes, fees and licenses, travel and meals and miscellaneous expenses. Taxes,
fees and licenses increased by $81,000, travel and meals increased $94,000 and miscellaneous expenses
decreased by $4,000.
Depreciation
Depreciation expenses were $940,000 for the year ended December 31, 2002, an increase of $263,000 or
38.8% compared to depreciation expenses of $677,000 for the year ended December 31, 2001. The increase was
attributable to continued capital expenditures on equipment, software, and computers related to our continued
growth.
Interest Income
Interest income was $22,000 for the year ended December 31, 2002, a decrease of $42,000 or 65.6%
compared to interest income of $64,000 for the year ended December 31, 2001. This decrease occurred due to a
drop in our yields during the fourth quarter of 2001. As a result of the yield decrease, the Company terminated
the treasury repurchase agreement in favor of earning fee offset credit with our bank.
Interest Expense
Interest expense was $2.4 million for the year ended December 31, 2002, a decrease of $335,000 or 12.0%
compared to interest expense of $2.8 million for the year ended December 31, 2001. This decreased primarily as
a result of the payoff of all outstanding revolving debt with the proceeds from the Company’s initial public
offering.
29
Supplemental Performance Data
Owned Portfolio Performance:
The following table shows the Company’s portfolio buying activity by year, setting forth, among other
things, the purchase price, actual cash collections and estimated remaining cash collections as of December 31,
2003.
Actual Cash Collections
Including Cash Sales
($ in thousands)
Purchase Period
Ending
December 31,
1996
1997
1998
1999
2000
2001
2002
2003
Purchase Price(1)
$ 3,080
$ 7,685
$ 11,122
$ 18,912
$ 25,068
$ 33,538
$42,588
$ 62,640
$ 8,980
$ 21,387
$ 28,945
$ 47,924
$ 62,960
$ 75,373
$ 51,331
$ 24,308
Estimated
Remaining
Collections(2)
$ 244
$ 544
$ 1,655
$ 6,630
$ 17,074
$ 36,692
$ 73,098
$131,729
Total
Estimated
Collections(3)
$ 9,224
$ 21,931
$ 30,600
$ 54,554
$ 80,034
$ 112,065
$ 124,429
$ 156,037
Total Estimated
Collections to
Purchase Price(4)
299%
285%
275%
288%
319%
334%
292%
249%
(1) Purchase price refers to the cash paid to a seller to acquire defaulted consumer receivables, plus certain
capitalized expenses, less the purchase price refunded by the seller due to the return of non-compliant
accounts (also defined as buybacks). Non-compliant refers to the contractual representations and
warranties provided for in the purchase and sale contract between the seller and the Company. These
representations and warranties from the sellers generally cover account holders’ death or bankruptcy
and accounts settled or disputed prior to sale. The seller can replace or repurchase these accounts.
(2) Estimated remaining collections refers to the sum of all future projected cash collections on our owned
portfolios.
(3) Total estimated collections refers to the actual cash collections, including cash sales, plus estimated
remaining collections.
(4) Total estimated collections to purchase price refers to the total estimated collections divided by the
purchase price.
When the Company acquires a portfolio of defaulted accounts, it generally does so with a forecast of future
total collections to purchase price paid of no more than 2.4 to 2.6 times. Only after the portfolio has established
probable and estimable performance in excess of that projection will estimated remaining collections be
increased. If actual results are less than the original forecast, the Company moves aggressively to lower
estimated remaining collections to appropriate levels.
30
The following graph shows the Company’s purchase price in its owned portfolios by year beginning in 1996.
The purchase price number represents the cash paid to the seller to acquire defaulted consumer receivables, plus
certain capitalized expenses, less the purchase price refunded by the seller due to the return of non-compliant
accounts.
Portfolio Purchases by Year
$70,000,000
$60,000,000
$50,000,000
$40,000,000
$30,000,000
$20,000,000
$10,000,000
$-
1996
1997
1998
1999
2000
2001
2002
2003
The Company utilizes a long-term approach to collecting its owned pools of receivables. This approach has
historically caused the Company to realize significant cash collections and revenues from purchased pools of
finance receivables years after they are originally acquired. As a result, the Company has in the past been able to
temporarily reduce its level of current period acquisitions without a corresponding negative current period impact
on cash collections and revenue.
The following table, which excludes any proceeds from cash sales of finance receivables, demonstrates the
Company’s ability to realize significant multi-year cash collection streams on its owned pools.
Cash Collections By Year, By Year of Purchase
Cash Collection Period
($ in thousands)
Purchase
Period
1996
1997
1998
1999
2000
2001
2002
2003
Total
Purchase
Price
3,080
7,685
11,122
18,912
25,068
33,538
42,588
62,640
204,633
$
$
$
$
$
$
1996
1997
1998
1999
2000
2001
$
2002
$
2003
$
548
-
-
-
-
-
-
-
548
2,484
2,507
-
-
-
-
-
-
4,991
1,890
5,215
3,776
-
-
-
-
-
10,881
1,348
4,069
6,807
5,138
-
-
-
-
17,362
1,025
3,347
6,398
13,069
6,894
-
-
-
30,733
730
2,630
5,152
12,090
19,498
13,048
-
-
53,148
496
1,829
3,948
9,598
19,478
28,820
15,084
-
79,253
398
1,324
2,797
7,336
16,628
28,003
36,258
24,308
117,052
$
Total
8,919
20,921
28,878
47,231
62,498
69,871
51,342
24,308
313,968
$
$
$
$
$
$
$
$
$
$
31
When the Company acquires a new pool of finance receivables, a 60-72 month projection of cash collections
is created. The following chart shows the Company’s historical cash collections (including cash sales of finance
receivables) in relation to the aggregate of the total estimated collection projections made at the time of each
respective pool purchase.
Actual Cash Collections and Cash Sales vs. Original Projections
($ in millions)
$35
0.0
$300.0
$25
0.0
$20
0.0
$150.0
$100.0
$50.0
$0.0
Actual Cash Collections
Original Projections
7
9
-
n
a
J
7
9
-
r
p
A
7
9
-
l
u
J
7
9
-
t
c
O
8
9
-
n
a
J
8
9
-
r
p
A
8
9
-
l
u
J
8
9
-
t
c
O
9
9
-
n
a
J
9
9
-
r
p
A
9
9
-
l
u
J
9
9
-
t
c
O
0
0
-
n
a
J
0
0
-
r
p
A
0
0
-
l
u
J
0
0
-
t
c
O
1
0
-
n
a
J
1
0
-
r
p
A
1
0
-
l
u
J
1
0
-
t
c
O
2
0
-
n
a
J
2
0
-
r
p
A
2
0
-
l
u
J
2
0
-
t
c
O
3
0
-
n
a
J
3
0
-
r
p
A
3
0
-
l
u
J
3
0
-
t
c
O
Owned Portfolio Personnel Performance:
The Company measures the productivity of each collector each month, breaking results into groups of
similarly tenured collectors. The following three tables display various productivity measures tracked by the
Company.
Collector by Tenure
Tenure at:
One year +(1)
Less than one year (2)
Total(2)
12/31/99
44
158
202
12/31/00
109
180
289
12/31/01
151
218
369
12/31/02
210
223
433
12/31/03
241
338
579
(1) Calculated based on actual employees (collectors) with one year of service or more.
(2) Calculated using total hours worked by all collectors, including those in training to produce a full time
equivalent “FTE.”
Average performance
One year + (2)
Less than one year(3)
12/31/99
12/31/00
12/31/01
12/31/02
12/31/03
$12,906
7,153
$14,081
7,482
$15,205
7,740
$16,927
8,689
$18,158
8,303
Monthly Cash Collections by Tenure(1)
(1) Cash collection numbers include only accounts assigned to collectors. Significant cash collections do occur
on “unassigned” accounts.
(2) Calculated using average YTD monthly cash collections of all collectors with one year or more of tenure.
(3) Calculated using weighted average YTD monthly cash collections of all collectors with less than one year
of tenure, including those in training.
Average performance
Total cash collections
Non-legal cash collections
12/31/99
12/31/00
12/31/01
12/31/02
12/31/03
$53.41
$47.81
$64.37
$53.31
$77.20
$66.87
$96.37
$77.72
$108.27
$80.10
Cash Collections per Hour Paid(1)
(1) Cash collections (assigned and unassigned) divided by total hours paid (including holiday, vacation and
sick time) to all collectors (including those in training).
32
Cash collections have substantially exceeded revenue in each quarter since the Company’s formation. The
following chart illustrates the consistent excess of the Company's cash collections on its owned portfolios over
income recognized in finance receivables on a quarterly basis. The difference between cash collections and
income recognized is referred to as Payments Applied to Principal. It is also referred to as Amortization. This
amortization is the portion of cash collections that is used to recover the cost of the portfolio investment
represented on the Statement of Financial Position.
$35.0
$30.0
$25.0
$20.0
$15.0
$10.0
$5.0
$0.0
Cas h Colle ctions (1) vs . Incom e Re cognize d on Finance Re ce ivable s
Payments applied to principal or "amortization of purchase price"
Income recognized on f inance receivables
Cash Collections
7
9
-
1
Q
7
9
-
3
Q
8
9
-
1
Q
8
9
-
3
Q
9
9
-
1
Q
9
9
-
3
Q
0
0
-
1
Q
0
0
-
3
Q
1
0
-
1
Q
1
0
-
3
Q
2
0
-
1
Q
2
0
-
3
Q
3
0
-
1
Q
3
0
-
3
Q
(1)
Includes cash collections on finance receivables only. Excludes commission fees and cash proceeds from
sales of defaulted consumer receivables.
33
Seasonality
The Company depends on the ability to collect on its owned and serviced defaulted consumer receivables.
Collections tend to be higher in the first and second quarters of the year and lower in the third and fourth quarters
of the year, due to consumer payment patterns in connection with seasonal employment trends, income tax
refunds, and holiday spending habits. Due to the Company’s historical quarterly cash collections, its growth has
partially masked the impact of this seasonality.
( $ i n m i l l i o n s )
Q u a rte rly C a s h C o lle c tio n s ( 1 )
$ 3 5 . 0
$ 3 0 . 0
$ 2 5 . 0
$ 2 0 . 0
$ 1 5 . 0
$ 1 0 . 0
$ 5 . 0
$ -
6
9
-
2
Q
6
9
-
4
Q
7
9
-
2
Q
7
9
-
4
Q
8
9
-
2
Q
8
9
-
4
Q
9
9
-
2
Q
9
9
-
4
Q
0
0
-
2
Q
0
0
-
4
Q
1
0
-
2
Q
1
0
-
4
Q
2
0
-
2
Q
2
0
-
4
Q
3
0
-
2
Q
3
0
-
4
Q
(1) Includes cash collections on finance receivables only. Excludes commission fees and cash proceeds from
sales of defaulted consumer receivables.
The following table shows the changes in finance receivables, including the amounts paid to acquire new
portfolios.
2003
2002
2001
Balance at beginning of year
Acquisitions of finance receivables, net of buybacks(1)
Cash collections applied to principal on finance receivables(2)
Cost of finance receivables sold, net of allowance for returns
Balance at end of year
$
65,526,235
$
47,986,744
$
41,124,377
62,298,316
42,990,924
33,491,211
(35,255,994)
-
92,568,557
$
(25,450,833)
(600)
65,526,235
$
(21,926,815)
(4,702,029)
47,986,744
$
Estimated Remaining Collections ("ERC")(3)
$
267,666,689
$
195,669,147
$
117,022,955
_________
(1) Agreements to purchase receivables typically include general representations and warranties from the
sellers covering account holders’ death or bankruptcy and accounts settled or disputed prior to sale. The
seller can replace or repurchase these accounts. The Company refers to repurchased accounts as buybacks.
The Company also capitalizes certain acquisition related expenses.
(2) Cash collections applied to principal (also referred to as amortization) on finance receivables consists of
cash collections less income recognized on finance receivables.
(3) Estimated Remaining Collections refers to the sum of all future projected cash collections on the
Company’s owned portfolios. ERC is not a balance sheet item, however, it is provided here for
informational purposes.
34
Liquidity and Capital Resources
Historically, the Company’s primary sources of cash have been cash flows from operations, bank
borrowings, and equity offerings. Cash has been used for acquisitions of finance receivables, repayments of
bank borrowings, purchases of property and equipment, and working capital to support the Company’s growth.
The Company believes that funds generated from operations, together with existing cash and available
borrowings under its credit agreement will be sufficient to finance its current operations, planned capital
expenditure requirements, and internal growth at least through the next twelve months. However, the Company
could require additional debt or equity financing if it were to make any other significant acquisitions requiring
cash during that period.
Cash generated from operations is dependent upon the Company’s ability to collect on its defaulted
consumer receivables. Many factors, including the economy and the Company’s ability to hire and retain
qualified collectors and managers, are essential to its ability to generate cash flows. Fluctuations in these factors
that cause a negative impact on the Company’s business could have a material impact on its expected future cash
flows.
The Company’s operating activities provided cash of $35.1 million, $21.8 million and $6.5 million for the
years ended December 31, 2003, 2002 and 2001, respectively. In these periods, cash from operations was
generated primarily from net income earned through cash collections, commissions received and gains on cash
sales of defaulted consumer receivables for the year. Net income increased to $20.7 million for the year ended
December 31, 2003 from $17.1 million for the year ended December 31, 2002 and $5.6 million for the year
ended December 31, 2001. In addition, the Company realized tax benefits derived from stock option and stock
warrant exercises of $16.4 million in 2003, $0.2 million in 2002 and $0 in 2001.
The Company’s investing activities used cash of $29.5 million, $18.8 million and $7.2 million for the years
ended December 31, 2003, 2002 and 2001, respectively. Cash used in investing activities is primarily driven by
acquisitions of defaulted consumer receivables, net of cash collections applied to the cost of the receivables.
The Company’s financing activities provided cash of $1.4 million, $10.1 million and $2.3 million for the
years ended December 31, 2003, 2002 and 2001, respectively. During the current year, the exercise of stock
options and stock warrants generated cash from financing activities of $1.4 million. In 2002, the IPO generated
cash of $40.4 million. Utilizing proceeds from the IPO, the Company paid off the outstanding balance of its line
of credit of $29.0 million. In 2001, a principal source of cash was $2.8 million of proceeds from lines of credit.
Cash paid for interest expense was $281,000, $2.7 million and $2.8 million for the years ended December
31, 2003, 2002 and 2001, respectively. In 2003, the majority of interest expenses were paid on long-term debt
and capital lease obligations. In addition, the Company terminated its line of credit agreement with WestLB and
incurred $284,000 of additional non-cash interest costs. In 2002 and 2001, the majority of interest expenses were
paid for lines of credit used to finance acquisitions of defaulted consumer receivables portfolios.
The Company maintains a $25.0 million revolving line of credit with RBC Centura Bank ("RBC") pursuant
to an agreement entered into on November 28, 2003. The Company, as well as Portfolio Recovery Associates,
LLC, PRA Receivables Management LLC (d/b/a Anchor Receivables Management) and PRA Holding I, LLC
(all of which are wholly-owned subsidiaries of the Company) are guarantors to this agreement. The credit
facility bears interest at a spread over LIBOR and extends through November 28, 2004. The agreement provides
for:
• restrictions on borrowings are limited to 20% of Estimated Remaining Collections;
• a debt coverage ratio of at least 8.0 to 1.0 calculated on a rolling twelve-month average;
• a debt to tangible net worth ratio of less than 0.40 to 1.00;
• net income per quarter of at least $1.00, calculated on a consolidated basis; and
35
• restrictions on change of control.
This facility had no amounts outstanding at December 31, 2003.
As of December 31, 2003 there are four loans outstanding. On July 20, 2000, PRA Holding I entered into a
credit facility for a $550,000 loan, for the purpose of purchasing a building in Hutchinson, Kansas. The loan
bears interest at a variable rate based on LIBOR and consists of monthly principal payments for 60 months and a
final installment of unpaid principal and accrued interest payable on July 21, 2005. On February 9, 2001, the
Company entered into a commercial loan agreement in the amount of $107,000 in order to purchase equipment
for its Norfolk, Virginia location. This loan bears interest at a fixed rate of 7.9% and matures on February 1,
2006. On February 20, 2002, PRA Holding I entered into an additional arrangement for a $500,000 commercial
loan in order to finance construction of a parking lot at the Company’s Norfolk, Virginia location. This loan
bears interest at a fixed rate of 6.47% and matures on September 1, 2007. On May 1, 2003, the Company entered
into a commercial loan agreement in the amount of $975,000 to finance equipment purchases for its Hampton,
Virginia location. This loan bears interest at a fixed rate of 4.25% and matures on May 1, 2008.
Contractual Obligations
Obligations of the Company that exist as of December 31, 2003 are as follows:
Payments due by period
Contractual Obligations
Total
Long-Term Debt
Capital Lease Obligations
Operating Leases
Total
1,817,022
599,508
14,346,186
16,762,716
$
$
$
$
$
$
Less
than 1
year
429,643
249,262
1,391,115
2,070,019
1 - 3
years
3 - 5
years
1,019,464
238,517
2,937,750
4,195,731
$
367,915
111,729
3,064,727
3,544,371
$
More
than 5
years
-
$
-
6,952,595
6,952,595
$
Off Balance Sheet Arrangements
The Company does not have any of these as defined by regulation S-K 303(a)(4).
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46 is an
interpretation of ARB No. 51 and addresses consolidation by business enterprises of variable interest entities
(“VIEs”). This interpretation is based on the theory that an enterprise controlling another entity through interests
other than voting interests should consolidate the controlled entity. Business enterprises are required under the
provisions of this interpretation to identify VIEs, based on specified characteristics, and then determine whether
they should be consolidated. An enterprise that holds a majority of the variable interests is considered the
primary beneficiary, the enterprise that should consolidate the VIE. The primary beneficiary of a VIE is also
required to include various disclosures in interim and annual financial statements. Additionally, an enterprise
that holds a significant variable interest in a VIE, but that is not the primary beneficiary, is also required to make
certain disclosures. This interpretation is effective for all enterprises with variable interest in VIEs created after
January 31, 2003. A public entity with variable interests in a VIE created before February 1, 2003, is required to
apply the provisions of this interpretation to that entity by the end of the first interim or annual reporting period
beginning after June 15, 2003. The adoption of this interpretation did not have a material impact on the
Company’s financial position or the results of operations.
In October 2003, the American Institute of Certified Public Accountants issued Statement of Position
(“SOP”) 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer.” The SOP provides
guidance on accounting for differences between contractual and expected cash flows from an investor’s initial
investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to
credit quality. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The
SOP would limit the revenue that may be accrued to the excess of the estimate of expected future cash flows over
36
a portfolio's initial cost of accounts receivable acquired. The SOP would require that the excess of the contractual
cash flows over expected future cash flows not be recognized as an adjustment of revenue, expense, or on the
balance sheet. The SOP would freeze the internal rate of return, referred to as IRR, originally estimated when the
accounts receivable are purchased for subsequent impairment testing. Rather than lower the estimated IRR if the
original collection estimates are not received, the carrying value of a portfolio would be written down to maintain
the original IRR. Increases in expected future cash flows would be recognized prospectively through adjustment
of the IRR over a portfolio's remaining life. The SOP provides that previously issued annual financial statements
would not need to be restated. Management is in the process of evaluating the application of this SOP.
Critical Accounting Policy
The Company utilizes the interest method under guidance provided by Practice Bulletin 6, “Amortization of
Discounts on Certain Acquired Loans,” to determine income recognized on finance receivables. Under this
method, each static pool of receivables it acquires is statistically modeled to determine its projected cash flows.
A yield is then established which, when applied to the outstanding balance of the receivables, results in the
recognition of income at a constant yield relative to the remaining balance in the pool. Each pool is analyzed
monthly to assess the actual performance to that expected by the model. If differences are noted, the yield is
adjusted prospectively to reflect the estimate of cash flows.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
The Company's exposure to market risk relates to interest rate risk with its variable rate credit line. The
Company terminated its only derivative financial instrument to manage or reduce market risk in September 2002.
As of December 31, 2003, the Company had no variable rate debt outstanding on its revolving credit line. The
Company has variable rate debt outstanding on its long-term debt collateralized by the Kansas real estate. A 10%
change in future interest rates on the variable rate credit line would not lead to a material decrease in future
earnings assuming all other factors remained constant.
37
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Report of Independent Auditors
Consolidated Statements of Financial Position
As of December 31, 2003 and 2002
Consolidated Statements of Operations
For the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows
For the years ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
Page
39
40
41
42
43
44-58
38
Report of Independent Auditors
Board of Directors and Stockholders
Portfolio Recovery Associates, Inc.
In our opinion, the accompanying consolidated statements of financial position and the related consolidated
statements of operations, changes in stockholders’ equity, and of cash flows present fairly, in all material
respects, the financial position of Portfolio Recovery Associates, Inc. and its subsidiaries (the “Company”) at
December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the
United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Harrisburg, Pennsylvania
February 6, 2004
39
Portfolio Recovery Associates, Inc.
Consolidated Statements of Financial Position
December 31, 2003 and 2002
Assets
2003
2002
Cash and cash equivalents
Finance receivables, net
Property and equipment, net
Deferred tax asset
Income tax receivable
Other assets
Total assets
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable
Accrued expenses
Income taxes payable
Accrued payroll and bonuses
Deferred tax liability
Long-term debt
Obligations under capital lease
Total liabilities
Commitments and contingencies (Note 15)
Stockholders' equity:
Preferred stock, par value $0.01, authorized shares, 2,000,000,
issued and outstanding shares - 0
Common stock, par value $0.01, authorized shares, 30,000,000,
issued and outstanding shares - 15,294,676 at December 31, 2003,
and 13,520,000 at December 31, 2002
Additional paid in capital
Retained earnings
Total stockholders' equity
$
24,911,841
92,568,557
5,166,380
2,009,426
351,861
1,385,706
$
17,938,730
65,526,235
3,794,254
-
-
1,029,196
$
126,393,771
$
88,288,415
$
1,290,332
513,687
-
3,233,409
-
1,656,972
551,325
$
1,370,404
760,211
937,231
2,861,336
286,882
965,582
499,151
7,245,725
7,680,797
-
-
152,947
96,117,932
22,877,167
135,200
78,308,754
2,163,664
119,148,046
80,607,618
Total liabilities and stockholders' equity
$
126,393,771
$
88,288,415
The accompanying notes are an integral part of these consolidated financial statements.
40
Portfolio Recovery Associates, Inc.
Consolidated Statements of Operations
For the years ended December 31, 2003, 2002 and 2001
Revenues:
Income recognized on finance receivables
Commissions
Net gain on cash sales of defaulted consumer receivables
$
81,796,209
3,131,054
-
$
53,802,718
1,944,428
100,156
$
31,220,857
214,539
900,916
2003
2002
2001
Total revenue
Operating expenses:
Compensation and employee services
Outside legal and other fees and services
Communications
Rent and occupancy
Other operating expenses
Depreciation
84,927,263
55,847,302
32,336,312
28,986,795
14,147,394
2,772,110
1,189,379
1,932,055
1,444,825
21,700,918
8,092,460
1,914,557
799,323
1,436,438
940,352
15,644,460
3,627,135
1,644,557
712,400
1,265,132
676,677
Total operating expenses
50,472,558
34,884,048
23,570,361
Income from operations
34,454,705
20,963,254
8,765,951
Other income and (expense):
Interest income
Loss on extinguishment of debt
Interest expense
60,173
-
(602,072)
21,548
-
(2,446,620)
65,362
(423,305)
(2,781,674)
Income before income taxes
33,912,806
18,538,182
5,626,334
Provision for income taxes
13,199,303
1,473,073
-
Net income
$
20,713,503
$
17,065,109
$
5,626,334
Pro forma income taxes
Pro forma net income
5,693,788
2,100,609
$
11,371,321
$
3,525,725
Pro forma net income per common share
Basic
Diluted
Pro forma weighted average number of shares outstanding
Basic
Diluted
$
$
1.42
1.32
$
$
1.08
0.94
$
$
0.35
0.31
14,545,985
15,711,956
10,529,452
12,066,202
10,000,000
11,457,741
The accompanying notes are an integral part of these consolidated financial statements.
41
Portfolio Recovery Associates, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2003, 2002 and 2001
Members'
Equity
Common
Stock
Additional
Paid in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
$
22,705,406
5,626,334
-
(202,931)
28,128,809
14,901,445
-
-
-
(37,480,724)
-
(5,549,530)
Balance at December 31, 2000
Net income
Unrealized loss on interest rate swap
Total comprehensive income
Distributions
Balance at December 31, 2001
Net income
Reclassification adjustment on interest rate swap
Total comprehensive income
Proceeds from initial public offering, net of expenses
Exercise of warrants
Recapitalization
Stock-based compensation income tax benefits
Distributions
Balance at December 31, 2002
Net income
Exercise of stock options and warrants
Stock-based compensation income tax benefits,
net of offering expenses
$
-
$
-
$
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,163,664
-
-
377,303
34,700
500
100,000
-
-
40,245,184
209,500
37,480,724
373,346
-
-
-
-
-
-
-
-
-
-
135,200
78,308,754
2,163,664
-
17,747
-
1,377,148
20,713,503
-
-
16,432,030
-
Total
Stockholders'
Equity
$
22,705,406
5,626,334
(377,303)
5,249,031
(202,931)
-
(377,303)
-
(377,303)
27,751,506
17,065,109
377,303
17,442,412
40,279,884
210,000
100,000
373,346
(5,549,530)
80,607,618
20,713,503
1,394,895
16,432,030
-
-
-
-
-
-
-
-
-
Balance at December 31, 2003
$
-
$
152,947
$
96,117,932
$
22,877,167
$
-
$
119,148,046
The accompanying notes are an integral part of these consolidated financial statements.
42
Portfolio Recovery Associates, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2003, 2002 and 2001
Operating activities:
Net income
Adjustments to reconcile net income to cash
provided by operating activities:
Increase in equity from vested options
Income tax benefit related to stock option exercise
Depreciation
Loss on extinguishment of debt
Deferred tax (benefit) expense, net
Gain on sales of finance receivables, net
Gain on disposal of property and equipment
Changes in operating assets and liabilities:
Other assets
Accounts payable
Income taxes
Accrued expenses
Accrued payroll and bonuses
2003
2002
2001
$
20,713,503
$
17,065,109
$
5,626,334
422,127
16,396,867
1,444,825
-
(2,296,308)
-
-
(356,510)
(80,072)
(1,289,092)
(246,524)
372,073
124,386
248,960
940,352
-
286,882
(100,156)
-
(67,824)
1,082,269
937,231
137,180
1,186,965
-
-
676,677
423,305
-
(900,916)
(1,766)
(730,230)
131,382
-
308,168
963,780
Net cash provided by operating activities
35,080,889
21,841,354
6,496,734
Cash flows from investing activities:
Purchases of property and equipment
Acquisition of finance receivables, net of buybacks
Collections applied to principal on finance
receivables
Proceeds from sale of finance receivables, net
of allowances for returns
(2,454,138)
(62,298,316)
35,255,994
-
(1,316,132)
(42,990,924)
(1,279,356)
(33,571,212)
25,450,833
-
100,756
21,926,815
5,682,946
Net cash used in investing activities
(29,496,460)
(18,755,467)
(7,240,807)
Cash flows from financing activities:
Proceeds from initial public offering, net of offering costs
Proceeds from exercise of options and warrants
Public offering costs
Distribution of capital
Net (payments) proceeds from lines of credit
Proceeds from long-term debt
Payments on long-term debt
Payments on capital lease obligations
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
-
1,394,895
(386,964)
-
-
975,000
(283,610)
(310,639)
1,388,682
6,973,111
17,938,730
40,379,884
210,000
-
(5,549,530)
(25,000,000)
500,000
(102,850)
(365,060)
10,072,444
13,158,331
4,780,399
-
-
-
(202,931)
2,833,579
107,000
(70,235)
(334,420)
2,332,993
1,588,920
3,191,479
Cash and cash equivalents, end of period
$
24,911,841
$
17,938,730
$
4,780,399
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Noncash investing and financing activities:
Capital lease obligations incurred
Basis - swap contract
$
$
281,332
389,600
$
2,698,782
$
-
$
2,821,784
$
-
362,813
-
38,896
(377,303)
555,988
377,303
The accompanying notes are an integral part of these consolidated financial statements.
43
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
1.
Organization and Business:
Portfolio Recovery Associates, Inc. was formed in August 2002. On November 8, 2002, Portfolio Recovery
Associates, Inc. completed its initial public offering (“IPO”) of common stock. As a result, all of the
membership units and warrants of Portfolio Recovery Associates, LLC (“PRA”) were exchanged on a one to
one basis for warrants and shares of a single class of common stock of Portfolio Recovery Associates, Inc.
(“PRA Inc”). Another subsidiary, PRA II, was dissolved immediately prior to the IPO. PRA Inc, a Delaware
corporation, and its subsidiaries (collectively, the “Company”) purchase, collect and manage portfolios of
defaulted consumer receivables. The defaulted consumer receivables the Company collects are either
purchased from the Debt Sellers or are collected on behalf of clients on a commission fee basis. This is
primarily accomplished by maintaining a staff of collectors whose purpose is to contact the customers and
arrange payment of the debt. Secondarily, PRA has contracted with independent attorneys, with which the
Company can undertake legal action in order to satisfy the outstanding debt.
On December 22, 1999, PRA formed a wholly owned subsidiary, PRA AG Funding, LLC, whose name was
changed to PRA Funding, LLC in 2003, and is the sole initial member. The Company was organized for the
sole purpose of facilitating the purchase of portfolios of delinquent or charged off consumer credit accounts.
On December 28, 1999, PRA formed a wholly owned subsidiary, PRA Holding I, LLC (“PRA Holding I”),
and is the sole initial member. PRA Holding I is organized for the sole purpose of holding the real property
in Hutchinson, Kansas (see Note 11) and Norfolk, Virginia.
On June 1, 2000, PRA formed a wholly owned subsidiary, PRA Receivables Management, LLC (d/b/a
Anchor Receivables Management, LLC) (“Anchor”) and was the sole initial member. Anchor is organized
as a contingent collection agency and contracts with holders of finance receivables to attempt collection
efforts on a contingent basis for a stated period of time. Anchor became fully operational during April 2001.
PRA, Inc purchased the equity interest in Anchor from PRA immediately after the IPO.
On June 12, 2001, PRA formed a wholly owned subsidiary, PRA III, LLC (“PRA III”) and is the sole initial
member. PRA III is organized for the sole purpose of facilitating the purchase of portfolios of delinquent or
charged off consumer credit accounts, which purchases are financed by loans from an institutional lender.
PRA III was a named borrower under a $25 million loan facility (see Note 7). PRA III was formed under the
laws of the Commonwealth of Virginia and will exist in perpetual existence under those laws.
PRA Funding, LLC and PRA III were dissolved into PRA on November 24, 2003.
2.
Summary of Significant Accounting Policies:
Principles of accounting and consolidation: The consolidated financial statements of the Company are
prepared in accordance with accounting standards generally accepted in the United States of America and
include the accounts of PRA, PRA Holding I, PRA Funding, PRA III, and Anchor. All significant
intercompany accounts and transactions have been eliminated.
Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Finance receivables and income recognition: The Company accounts for its investment in finance
receivables using the interest method under the guidance of Practice Bulletin 6, “Amortization of Discounts
on Certain Acquired Loans.” Static pools of relatively homogenous accounts are established. Once a static
pool is established, the receivable accounts in the pool are not changed. Each static pool is recorded at cost,
and is accounted for as a single unit for the recognition of income, principal payments and loss provision.
Income on finance receivables is accrued monthly based on each static pool’s effective interest rate. This
interest rate is estimated and periodically recalculated based on the timing and amount of anticipated cash
flows using the Company’s proprietary collection model. Monthly cash flows greater than the interest
accrual will reduce the carrying value of the static pool.
44
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Likewise, monthly cash flows that are less than the monthly accrual will accrete the carrying balance. Each
pool is reviewed monthly and compared to the Company’s models to ensure complete amortization of the
carrying balance at the end of each pool’s life.
In the event that cash collections would be inadequate to amortize the carrying balance, an impairment
charge would be taken with a corresponding write-off of the receivable balance. Accordingly, we do not
maintain an allowance for credit losses.
The agreements to purchase the aforementioned receivables include general representations and warranties
from the sellers covering account holder death or bankruptcy and accounts settled or disputed prior to sale.
The representation and warranty period permitting the return of these accounts from the Company to the
seller is typically 90 to 180 days.
Commissions: The Company also receives commission revenue for collections made on behalf of clients,
which may be credit originators or other owners of defaulted consumer receivables. These portfolios are
owned by the clients; however, the collection effort is outsourced to the Company under a commission fee
arrangement based upon the amount the Company collects. Revenue is recognized at the time customer
funds are collected. A loss reserve or allowance amount will be created if there is doubt that fees billed to the
client for services rendered will not be paid.
Net gain on cash sales of finance receivables: Gains on sale of finance receivables, representing the
difference between the sales price and the unamortized value of the finance receivables, are recognized when
finance receivables are sold.
The Company applies a financial components approach that focuses on control when accounting and
reporting for transfers and servicing of financial assets and extinguishments of liabilities. Under that
approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, eliminates financial assets when control has been surrendered, and
eliminates liabilities when extinguished. This approach provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured borrowings.
Property and equipment: Property and equipment, including improvements that significantly add to the
productive capacity or extend useful life, are recorded at cost, while maintenance and repairs are expensed
currently. Property and equipment are depreciated over their useful lives using the straight-line method of
depreciation. Software and computer equipment are depreciated over three to five years. Furniture and
fixtures are depreciated over five years. Equipment is depreciated over five to seven years. Leasehold
improvements are depreciated over the remaining life of the leased property, which ranges from three to
seven years. Building improvements are depreciated over ten to thirty-nine years.
Income taxes: Taxes are provided on substantially all income and expense items included in earnings,
regardless of the period in which such items are recognised for tax purposes. The Company uses an asset
and liability approach that requires the recognition of deferred tax assets and liabilities for the estimated
future tax consequences of events that have been recognized in the Company’s financial statements or tax
returns. In estimating future tax consequences, the Company generally considers all expected future events
other than enactments of changes in the tax laws or rates. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date. For periods presented prior to
the IPO, including the ten months ended October 31, 2002, the tax accounts are pro forma disclosures only
and not recorded on the books of the Company.
Advertising costs: Advertising costs are expensed when incurred.
Operating leases: General abatements or prepaid leasing costs are recognized on a straight-line basis over
the life of the lease.
Capital leases: Leases are analyzed to determine if they meet the definition of a capital lease as defined in
SFAS No. 13, “Accounting for Leases”. Those lease arrangements that meet one of the four criteria are
considered capital leases. As such, the leased asset is capitalized and depreciated per Company policy. The
lease is recorded as a liability with each payment amortizing the principal balance and a portion classified as
interest expense.
45
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Stock-based compensation: The Company applied the intrinsic value method provided for under
Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” for all
warrants issued to employees prior to January 1, 2002. For warrants and options issued to non-employees,
the Company followed the fair value method of accounting as prescribed under SFAS No. 123, “Accounting
for Stock Based Compensation” (“SFAS 123”). On January 1, 2002 the Company adopted SFAS 123 on a
prospective basis for all warrants and options granted and reported the change in accounting principle using
the retroactive restatement method as prescribed in SFAS No. 148 “Accounting for Stock-Based
Compensation – Transition and Disclosure.” For warrants issued to employees prior to January 1, 2002, pro
forma net income assuming the warrants were accounted for as prescribed by SFAS 123, has been disclosed
in Note 12 to the financial statements.
Pro forma earnings per share: Basic earnings per share reflect net income adjusted for the pro forma
income tax provision divided by the weighted average number of shares outstanding. Diluted earnings per
share include the effect of dilutive stock options during the period. As of December 31, 2003, 55,000 stock
options issued under the 2002 Stock Option Plan were antidilutive. These options may become dilutive in
future years.
Use of estimates: The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Significant estimates have been made by management with respect to the collectibility of future cash flows
of portfolios. Actual results could differ from these estimates making it reasonably possible that a change in
these estimates could occur within one year. On a monthly basis, management reviews the estimate of future
collections, and it is reasonably possible that its assessment of collectibility may change based on actual
results and other factors.
Fair value of financial instruments: The company’s financial instruments consist of cash and cash
equivalents, finance receivables, net, long-term debt, and obligations under capital leases. The fair value of
cash and cash equivalents, long-term debt and obligations under capital leases approximates their respective
carrying values. The Company considers it not practicable to perform a fair value calculation of the finance
receivables due to the excessive cost that would be incurred.
Reclassifications: Certain 2002 and 2001 amounts have been reclassified to conform to the 2003
presentation.
Recent Accounting Pronouncements: In January 2003, the FASB issued FIN No. 46, Consolidation of
Variable Interest Entities. FIN No. 46 is an interpretation of ARB No. 51 and addresses consolidation by
business enterprises of variable interest entities (“VIEs”). This interpretation is based on the theory that an
enterprise controlling another entity through interests other than voting interests should consolidate the
controlled entity. Business enterprises are required under the provisions of this interpretation to identify
VIEs, based on specified characteristics, and then determine whether they should be consolidated. An
enterprise that holds a majority of the variable interests is considered the primary beneficiary, the enterprise
that should consolidate the VIE. The primary beneficiary of a VIE is also required to include various
disclosures in interim and annual financial statements. Additionally, an enterprise that holds a significant
variable interest in a VIE, but that is not the primary beneficiary, is also required to make certain disclosures.
This interpretation is effective for all enterprises with variable interest in VIEs created after January 31,
2003. A public entity with variable interests in a VIE created before February 1, 2003, is required to apply
the provisions of this interpretation to that entity by the end of the first interim or annual reporting period
beginning after June 15, 2003. The adoption of this interpretation did not have a material impact on the
Company’s financial position or the results of operations.
In October 2003, the American Institute of Certified Public Accountants issued Statement of Position
(“SOP”) 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer.” This SOP provides
guidance on accounting for differences between contractual and expected cash flows from an investors initial
investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in
46
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
part, to credit quality. This SOP is effective for loans acquired in fiscal years beginning after December 15,
2004. The SOP would limit the revenue that may be accrued to the excess of the estimate of expected future
cash flows over a portfolio's initial cost of accounts receivable acquired. The SOP would require that the
excess of the contractual cash flows over expected future cash flows not be recognized as an adjustment of
revenue, expense, or on the balance sheet. The SOP would freeze the internal rate of return, referred to as
IRR, originally estimated when the accounts receivable are purchased for subsequent impairment testing.
Rather than lower the estimated IRR if the original collection estimates are not received, the carrying value
of a portfolio would be written down to maintain the original IRR. Increases in expected future cash flows
would be recognized prospectively through adjustment of the IRR over a portfolio's remaining life. The SOP
provides that previously issued annual financial statements would not need to be restated. Management is in
the process of evaluating the application of this SOP.
3.
Finance Receivables:
As of December 31, 2003 and 2002, the Company had $92,568,557 and $65,526,235, respectively,
remaining of finance receivables. These amounts represent 412 and 330 pools of accounts as of December
31, 2003 and 2002, respectively.
Changes in finance receivables at December 31, 2003 and 2002, were as follows:
2003
2002
Balance at beginning of year
Acquisitions of finance receivables, net of buybacks
$
65,526,235
62,298,316
$
47,986,744
42,990,924
Cash collections
Income recognized on finance receivables
Cash collections applied to principal
(117,052,203)
81,796,209
(35,255,994)
(79,253,551)
53,802,718
(25,450,833)
Cost of finance receivables sold, net of allowance for returns
-
(600)
Balance at end of year
$
92,568,557
$
65,526,235
At the time of acquisition, the life of each pool is generally set at between 60 and 72 months based upon the
proprietary models of the Company. As of December 31, 2003 the Company had $92,568,557 in finance
receivables included in the Statement of Financial Position. Based upon current projections, cash collections
applied to principal will be as follows for the twelve months in the years ending:
December 31, 2004
December 31, 2005
December 31, 2006
December 31, 2007
December 31, 2008
December 31, 2009
$
32,707,264
27,244,198
18,245,994
10,590,660
3,120,910
659,531
92,568,557
$
47
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
4. Operating Leases:
The Company rents office space and equipment under operating leases. Rental expense was $1,028,530,
$668,795, and $602,783 for the years ended December 31, 2003, 2002 and 2001, respectively.
Future minimum lease payments at December 31, 2003, are as follows:
2004
2005
2006
2007
2008
Thereafter
5.
Capital Leases:
Leased assets included in property and equipment consist of the following:
Software
Computer equipment
Furniture and fixtures
Equipment
Less accumulated depreciation
$
1,391,115
1,467,992
1,469,758
1,510,940
1,553,787
6,952,595
$
14,346,186
2003
2002
$
270,008
61,086
963,377
27,249
(607,591)
$
270,008
178,893
600,564
27,249
(461,326)
$
714,129
$
615,388
Depreciation expense recognized on capital leases for the years ended December 31, 2003, 2002 and 2001
was $210,101, $213,016, and $238,719, respectively.
Commitments for minimum annual rental payments for these leases as of December 31, 2003 are as follows:
2004
2005
2006
2007
2008
Less amount representing interest and taxes
Present value of net minimum lease payments
6.
401(k) Retirement Plan:
$
249,262
150,993
87,524
80,160
31,569
599,508
48,183
$
551,325
Effective October 1, 1998, the Company sponsors a defined contribution plan. Under the Plan, all
employees over twenty-one years of age are eligible to make voluntary contributions to the Plan up to 15%
of their compensation, subject to Internal Revenue Service limitations after completing six months of
service, as defined in the Plan. On January 1, 2004, the Company amended the Plan to allow employees to
make voluntary contributions up to 100% of their compensation, subject to Internal Revenue Service
limitations. The Company makes matching contributions of
48
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
up to 4% of an employee’s salary. Total compensation expense related to these contributions was $284,017,
$265,510, and $198,691 for the years ended December 31, 2003, 2002 and 2001, respectively.
7.
Revolving Lines of Credit:
On September 18, 2001, PRA III arranged with a commercial lender to provide financing under a revolving
line of credit of up to $40 million. The initial draw of $20 million was utilized to facilitate the purchase of all
finance receivable portfolios from PRA and PRA II. PRA then used those funds to terminate an existing line of
credit agreement. An additional $5 million was drawn in the initial funding to purchase additional portfolios
from third parties in the normal course of business. Interest is based on LIBOR and was 6.17% at December
31, 2002. Restrictive covenants under this agreement include:
•
•
•
•
•
Restrictions on monthly borrowings in excess of $4 million per month and quarterly borrowings in excess
of $10 million;
A maximum leverage ratio of not greater than 4 to 1 and net income of at least $0.01, calculated on a
consolidated basis;
Restrictions on distributions in excess of 75% of annual net income;
Compliance with certain special purpose vehicle and corporate separateness covenants; and
Restrictions on change of control.
As of December 31, 2002 the Company was in compliance with all of the covenants of this agreement. Upon
consummation of the reorganization discussed in Note 1, a waiver would have been required in order to
remain in compliance with the terms of the agreement. On October 18, 2002 Westside Funding (“Westside”)
acknowledged our notification letter and provided several options that would be acceptable for Westside. On
November 19, 2002 Westside provided their letter of intent to amend the Loan and Security agreement dated
September 18, 2001 and they began drafting that amendment. On December 18, 2002 the Loan and Security
amendment was finalized. The balance on this facility was paid off on November 14, 2002 with proceeds
obtained from the IPO. The Loan and Security agreement dated December 18, 2002 modified certain terms of
the loan agreement in keeping with the Company’s reduced borrowing needs following the IPO.
Modifications include a reduction in the facility size from $40 million to $25 million, a $75,000 modification
fee, a reduction in the borrowing spread, a reduction in certain monthly fees, and an increase in the facility’s
non-use fee when the amount outstanding is less than $10 million.
On November 28, 2003 this facility was terminated, in favor of the RBC Centura Bank (“RBC”) line.
The Company maintains a $25.0 million revolving line of credit with RBC pursuant to an agreement entered
into on November 28, 2003. The credit facility bears interest at a spread over LIBOR and extends through
November 28, 2004. The agreement provides for:
•
•
•
•
•
restrictions on monthly borrowings are limited to 20% of Estimated Remaining Collections;
a debt coverage ratio of at least 8.0 to 1.0 calculated on a rolling twelve-month average;
a debt to tangible net worth ratio of less than 0.40 to 1.00;
net income per quarter of at least $1.00, calculated on a consolidated basis, and;
restrictions on change of control.
This facility had no amounts outstanding at December 31, 2003.
49
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
In addition, PRA Funding, LLC maintained a $2.5 million revolving line of credit, with a commercial lender
which extended through September 2003. This $2.5 million facility had no amounts outstanding as of
December 31, 2002 and was terminated in 2003.
8. Property and equipment:
Property and equipment, at cost, consist of the following as of December 31, 2003 and 2002:
Software
Computer equipment
Furniture and fixtures
Equipment
Leasehold improvements
Building and improvements
Land
Less accumulated depreciation
Net property and equipment
2003
2002
$
2,030,403
2,193,386
1,283,748
1,602,547
801,516
1,138,924
100,515
(3,984,659)
$
5,166,380
1,431,938
1,435,795
942,178
1,037,372
343,329
1,136,762
100,515
(2,633,635)
$
3,794,254
9. Loss on Extinguishment of Debt:
During 2001 PRA restructured its debt position which gave rise to a loss on extinguishment of debt. The
first item resulted from the termination of the line of credit dated May 2000. The company paid off $20
million in outstanding debt and expensed $231,564 of remaining unamortized acquisition costs. The
second item resulted from the termination of the credit facility from the affiliated lender dated December
1999. PRA paid off all existing loans under this facility ($1,941,119) and incurred a loss on the
extinguishment of the contingent interest provision of $191,741.
10. Hedging Activity:
During 2001, PRA entered into an interest rate swap for the purpose of managing exposure to fluctuations
in interest rates related to variable rate financing. The interest rate swap effectively fixed the interest rate
on $10 million of PRA’s outstanding debt. The swap required payment or receipt of the difference
between a fixed rate of 5.33% and a variable rate of interest based on 1-month LIBOR. The unrealized
gains and losses associated with the change in market value of the interest rate swap were recognized as
other comprehensive income. This swap transaction, which was to expire in May 2004, was paid in full and
terminated in September 2002.
The only expenses incurred related to the swap agreement were interest expenses of $0, $792,047 and
$118,924 for the years ended December 31, 2003, 2002 and 2001, respectively. The interest paid in 2002
represents monthly interest plus the final extinguishment amount of $541,762. The net interest payments
are a component of “Interest Expense.”
11.
Long-Term Debt:
In July 2000, the Company purchased a building in Hutchinson, Kansas. The building was financed with a
commercial loan for $550,000 with a variable interest rate based on LIBOR. This commercial loan is
collateralized by the real estate in Kansas. Interest rates varied between 3.35% and 3.79% during 2003 and
3.74% and 4.47% during 2002. Monthly principal payments on the loan are $4,583 for an amortized term
of 10 years. A balloon payment of $275,000 is due July 21, 2005, which results in a five-year principal
payout. The loan matures July 21, 2005.
50
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
On February 9, 2001, the Company purchased a generator for its Norfolk location. The generator was
financed with a commercial loan for $107,000 with a fixed rate of 7.9%. This commercial loan is
collateralized by the generator. Monthly payments on the loan are $2,170 and the loan matures on
February 1, 2006.
On February 20, 2002, the Company completed the construction of a satellite parking lot at its Norfolk
location. The parking lot was financed with a commercial loan for $500,000 with a fixed rate of 6.47%.
The loan is collateralized by the parking lot. The loan required only interest payments during the first six
months. Beginning October 1, 2002, monthly payments on the loan are $9,797 and the loan matures on
September 1, 2007.
On May 1, 2003, the Company secured financing for its computer equipment purchases related to the
Hampton, Virginia office opening. The computer equipment was financed with a commercial loan for
$975,000 with a fixed rate of 4.25%. This loan is collaterized by computer equipment. Monthly
payments are $18,096 and the loan matures on May 1, 2008.
Annual payments on all loans outstanding as of December 31, 2003 are as follows:
2004
2005
2006
2007
2008
Thereafter
Less amount representing interest
Principal due
$
429,643
680,405
339,059
295,530
72,385
-
1,817,022
(160,050)
$
1,656,972
These four loans are collateralized by property and buildings that have a book value of $2,031,553 and
$1,104,012 as of December 31, 2003 and 2002, respectively.
12.
Stock-Based Compensation
The Company has a stock warrant plan and a stock option plan. Prior to 2002, the Company accounted for
stock compensation issued under the recognition and measurement provisions of APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related Interpretations. Effective January 1, 2002, the
Company adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based
Compensation,” prospectively to all employee awards granted, modified, or settled after January 1, 2002.
Therefore, the cost related to stock-based employee compensation included in the determination of net income
for 2001 is less than that which would have been recognized if the fair value based method had been applied to
all awards since the original effective date of SFAS 123.
51
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
The following table illustrates the effect on net income and earnings per share if the fair value based method
had been applied to all outstanding and unvested awards in each period.
For the Year
Ended
December 31,
2003
For the Year
Ended
December 31,
2002
For the Year
Ended
December 31,
2001
$
20,713,503
$
11,371,321
$
3,525,725
272,828
29,733
-
(272,828)
20,713,503
$
(29,733)
11,371,321
$
(8,054)
3,517,671
$
$
$
1.42
1.42
$
$
1.08
1.08
$
$
0.35
0.35
Net income/Pro forma net income:
As reported
Add: Stock-based employee
compensation expense included
in reported net income, net of
related tax effects
Less: Total stock based
compensation expense
determined under intrinsic value
method for all awards, net of
related tax effects
Pro forma net income
Earnings per share:
Basic - as reported
Basic - pro forma
Diluted - as reported
Diluted - pro forma
$
$
1.32
1.32
$
$
0.94
0.94
$
$
0.31
0.31
Stock Warrants
The PRA management committee was authorized to issue warrants to partners, employees or vendors to
purchase membership units. Generally, warrants granted had a term between 5 and 7 years and vested within 3
years. Warrants had been issued at or above the fair market value on the date of grant. Warrants vest and
expire according to terms established at the grant date.
52
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
The following summarizes all warrant related transactions from December 31, 2000 through December 31, 2003:
December 31, 2000
Granted
Cancelled
December 31, 2001
Granted
Exercised
Cancelled
December 31, 2002
Exercised
Cancelled
December 31, 2003
Warrants
Outstanding
2,160,000
155,000
(120,000)
2,195,000
50,000
(50,000)
(10,000)
2,185,000
(2,026,000)
(51,500)
107,500
Weighted
Average
Exercise
Price
$
4.17
4.20
4.20
4.17
10.00
4.20
4.20
4.30
4.17
9.72
4.20
$
The following information is as of December 31, 2003:
Warrants Outstanding
Weighted-
Average
Remaining
Contractual
Life
Weighted-
Average
Exercise
Price
Warrants Exercisable
Number
Exercisable
Weighted-
Average
Exercise
Price
Number
Outstanding
107,500
107,500
2.28
2.28
$
$
4.20
4.20
107,500
107,500
$
$
4.20
4.20
Exercise
Prices
$ 4.20
Total at December 31, 2003
Had compensation cost for warrants granted under the Agreement been determined pursuant to SFAS 123, the
Company’s net income would have decreased. Using a fair-value (minimum value calculation), the following
assumptions were used:
Warrants issue year:
Expected life from
vest date (in years)
Risk-free interest rates
Volatility
Dividend yield
2002
3.00
4.53%
N/A
N/A
2001
4.00
4.66%-4.77%
N/A
N/A
The fair value model utilizes the risk-free interest rate at grant with an expected exercise date sometime in the
future generally assuming an exercise date in the first half of 2005. In addition, warrant valuation models
require the input of highly subjective assumptions, including the expected exercise date and risk-free interest
rates. Prior to the IPO, the Company’s warrants had characteristics significantly different from those of traded
warrants, and changes in the subjective input assumptions can materially affect the fair value estimate. Based
upon the above assumptions, the weighted average fair value of employee warrants granted during the years
ended December 31, 2002 and 2001 was $1.24 and $0.35, respectively.
53
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Effective December 30, 1999, the Company issued warrants to acquire 125,000 membership units to an
affiliate of Angelo, Gordon & Co. The warrants immediately vested and were exercisable at $3.60 per unit. As
these
warrants were not issued as compensation to an employee or operating member of the Company, an expense of
$0, $17,069, and $17,069 was recognized in the years ended December 31, 2003, 2002, and 2001,
respectively. The value of the warrants was calculated using the fair value approach as designated by SFAS
123 which utilizes a comparison of the discounted value of the underlying units discounted using a risk-free
interest rate at the date of grant. All warrants issued to AG 1999 were exercised in 2003 and none remain
outstanding as of December 31, 2003.
Effective August 18, 1999, the Company issued warrants to acquire 200,000 membership units of PRA to
SMR Research Corporation. The warrants were to vest over a 60 month period and were exercisable at $4.20
per unit. The warrants vested as to 80,000 membership units and the remaining 120,000 membership units
were cancelled upon the termination of an agreement between the Company and SMR Research Corporation.
The value of the warrants was calculated using the intrinsic method and no expense was recognized on these
warrants. The fair value approach was then applied, as designated by SFAS 123, which utilizes a comparison
of the discounted value of the underlying units discounted using a risk-free interest rate at the date of grant.
As a result, these warrants were shown to have a negative present value, and as such no expense has been
recorded. All warrants issued to SMR Research Corporation have been exercised or cancelled and none
remain outstanding as of December 31, 2003.
Stock Options
The Company created the 2002 Stock Option Plan (the “Plan”) on November 7, 2002. Up to 2,000,000 shares
of common stock may be issued under this program. The Plan expires November 7, 2012. All options issued
under the Plan vest ratably over 5 years. Granted options expire seven years from grant date. Expiration dates
range between November 7, 2009 and July 31, 2010. No grant of options to a single person can exceed
200,000 in a single year. As of December 31, 2003, 875,000 options have been granted under the Plan of
which 26,175 have been cancelled. These options are accounted for under SFAS 123 and all expenses for
2003 and 2002 are included in earnings as a component of compensation.
The following summarizes all option related transactions from December 31, 2001 through December 31,
2003:
Options
Outstanding
Weighted
Average
Exercise
Price
-
820,000
(12,150)
807,850
55,000
(50,915)
(14,025)
797,910
$
-
13.06
13.00
13.06
27.88
13.00
13.00
14.09
$
December 31, 2001
Granted
Cancelled
December 31, 2002
Granted
Exercised
Cancelled
December 31, 2003
All of the stock options were issued to employees of the Company except for 20,000 that were issued to the
board of directors.
54
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
The following information is as of December 31, 2003:
Exercise
Prices
$ 13.00
$ 16.16
$ 27.77
$ 28.98
Total at December 31, 2003
Number
Outstanding
727,910
15,000
50,000
5,000
797,910
Options Outstanding
Weighted-
Average
Remaining
Contractual
Life
Weighted-
Average
Exercise
Price
Options Exercisable
Number
Exercisable
Weighted-
Average
Exercise
Price
5.86
5.89
6.59
6.54
5.91
$
$
$
$
$
13.00
16.16
27.88
28.98
14.09
104,930
3,000
-
-
107,930
$
$
$
$
$
13.00
16.16
27.77
28.98
13.09
The Company utilizes the Black-Scholes option-pricing model to calculate the value of the stock options when
granted. This model was developed to estimate the fair value of traded options, which have different
characteristics than employee stock options. In addition, changes to the subjective input assumptions can
result in materially different fair market value estimates. Therefore, the Black-Scholes model may not
necessarily provide a reliable single measure of the fair value of employee stock options.
Options issue year:
2003
2002
Weighted average fair value
of options granted
Expected volatility
Risk-free interest rate
Expected dividend yield
Expected life (in years)
$ 5.84
15.70% - 15.73%
2.92% - 3.19%
0.00%
5.00
$ 2.73
15.70%
2.92%
0.00%
5.00
Utilizing these assumptions, each employee stock option granted in 2002 is valued at $2.71 per share and each
director stock option is valued at $3.37 per share. For stock options issued to employees in 2003, the per share
values range between $5.80 and $6.25.
Restricted Stock
Restricted stock shares are permitted to be issued as an incentive to attract new employees when the stock has
traded for less than one year, as is the case for the Company. During the year ended December 31, 2003, the
Company issued 13,045 shares of restricted stock. The terms are similar to the stock option plan where the
shares are issued at or above market values and vest ratably over 5 years. Restricted stock is expensed over its
vesting period.
55
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
13. Stockholders’ Equity:
Shares of common stock outstanding were as follows:
December 31, 2001
Initial public offering
Exercise of warrants
December 31, 2002
Exercise of warrants and options
December 31, 2003
-
13,470,000
50,000
13,520,000
1,774,676
15,294,676
14.
Income Taxes:
Prior to November 8, 2002, the Company was organized as a limited liability company, taxed as a
partnership, and as such was not subject to federal or state income taxes. Immediately before the IPO, the
Company was reorganized as a corporation and became subject to income taxes.
The income tax expense recognized for the years ended December 31, 2003 and 2002 is composed of the
following:
For the year ended December 31, 2003
Federal
State
Total
Current tax expense
Deferred tax expense
Total income tax expense
$
$
(116,809)
11,279,283
11,162,474
(21,303)
2,058,132
2,036,829
$
$
(138,112)
13,337,415
13,199,303
$
For the year ended December 31, 2002
Federal
State
Total
Current tax expense
Deferred tax expense
Total income tax expense
$
$
1,005,368
242,633
1,248,001
180,823
44,249
225,072
$
$
$
1,186,191
286,882
1,473,073
The Company also recognized a net deferred tax asset of $2,009,426 as of December 31, 2003 and a net
deferred tax liability of $286,882 as of December 31, 2002. The components of this net asset and liability
are:
56
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Deferred tax assets:
Net operating loss - tax
Employee compensation
Other
Total deferred tax asset
Deferred tax liabilities:
Depreciation expense
Prepaid expenses
Cost recovery
Total deferred tax liability
2003
2002
$
21,002,183
181,668
6,895
21,190,746
-
$
47,997
14,872
62,869
516,895
268,712
18,395,713
19,181,320
260,125
89,626
-
349,751
Net deferred tax asset and (liability)
$
2,009,426
$
(286,882)
A valuation allowance has not been provided at December 31, 2003 or 2002 since management believes it is
more likely than not that the deferred tax assets will be realized.
During 2003, the Company recognized a deferred tax asset relating to the net operating loss for tax purposes.
This resulted from the adoption of the cost recovery method of income recognition for tax purposes and
recognizing a tax deduction of approximately $16.4 million relating to stock option and warrant exercises, net
of public offering related expenses. Cost recovery is an acceptable method for companies in the collection
industry and results in the reduction of current taxable income as, for tax purposes, collections on finance
receivables are applied to reduce the finance receivables to zero before any income is recognized. The timing
difference from the adoption of cost recovery resulted in a deferred tax liability at December 31, 2003. The tax
benefit generated by the stock option and warrant exercises reduced the Company’s current tax liability with a
corresponding increase in additional paid in capital.
The Company presented pro forma tax information assuming it has been a taxable corporation since inception
and assuming tax rates equal to the rates that would have been in effect had it been required to report income
tax expense in such years. A reconciliation of the Company’s expected tax expense at statutory tax rates to
actual tax expense for the year ended December 31, 2003 and the pro forma income tax expense for the years
ended December 31, 2002 and 2001, consists of the following components:
2003
2002
2001
Federal tax at statutory rates
State tax expense, net of federal benefit
Other
Total income tax expense
15. Contingencies and Commitments:
$
$
11,869,482
1,323,939
5,882
13,199,303
$
$
6,488,364
725,246
(46,749)
7,166,861
$
$
1,912,953
226,975
(39,319)
2,100,609
Employment Agreements:
The Company has employment agreements with all of its executive officers and with several members of its
senior management group, the terms of which expire on March 31, 2004 or December 31, 2005. Such
agreements provide for base salary payments as well as bonuses which are based on the attainment of specific
management goals. Estimated remaining compensation under these agreements is approximately $3.3 million.
The agreements also contain confidentiality and non-compete provisions.
57
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Litigation:
The Company is from time to time subject to routine litigation incidental to its business. The Company
believes that the results of any pending legal proceedings will not have a material adverse effect on the
financial condition, results of operations or liquidity of the Company.
58
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item 9a. Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such
information is accumulated and communicated to the Company’s management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-
benefit relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision
and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the
Company’s Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based on the foregoing, the Company’s Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and procedures were effective in timely alerting
the Company’s management to material information relating to the Company required to be included in the
Company’s Exchange Act reports.
There have been no significant changes in the Company’s internal controls or in other factors that could
significantly affect the internal controls subsequent to the date the Company completed its evaluation.
59
Item 10. Directors and Executive Officers of the Registrant.
PART III
The following table sets forth certain information as of February 13, 2004 about the Company’s directors and
executive officers.
Name
Position
Steven D. Fredrickson .. President, Chief Executive Officer and Chairman of the Board
Kevin P. Stevenson
Executive Vice President, Chief Financial Officer, Treasurer and
Assistant Secretary
Craig A. Grube ............. Executive Vice President — Acquisitions
James L. Keown............ Senior Vice President — Strategic Initiatives
Judith S. Scott ............... Executive Vice President, General Counsel and Secretary
William P. Brophey ...... Director*
Peter A. Cohen.............. Director*
David N. Roberts .......... Director
James M. Voss .............. Director*
Age
44
39
43
46
58
66
57
41
61
* Member of the Company’s audit committee (the “Audit Committee”), which has been established in accordance4
with Section 3(a)(58)(A) of the Exchange Act. The Board of Directors of the Company has determined that Mr.
Voss is an independent director (as that term is used in Schedule 14A of the Exchange Act) and is the “audit
committee financial expert” for the Company who serves on the Audit Committee.
Steven D. Fredrickson, President, Chief Executive Officer and Chairman of the Board. Prior to co-
founding Portfolio Recovery Associates in 1996, Mr. Fredrickson was Vice President, Director of Household
Recovery Services’ (“HRSC”) Portfolio Services Group from late 1993 until February 1996. At HRSC Mr.
Fredrickson was ultimately responsible for HRSC’s portfolio sale and purchase programs, finance and accounting,
as well as other functional areas. Prior to joining HRSC, he spent five years with Household Commercial Financial
Services managing a national commercial real estate workout team and five years with Continental Bank of Chicago
as a member of the FDIC workout department, specializing in corporate and real estate workouts. He received a
B.S. degree from the University of Denver and a M.B.A. degree from the University of Illinois. He is a past board
member of the American Asset Buyers Association.
Kevin P. Stevenson, Executive Vice President, Chief Financial Officer, Treasurer and Assistant
Secretary. Prior to co-founding Portfolio Recovery Associates in 1996, Mr. Stevenson served as Controller and
Department Manager of Financial Control and Operations Support at HRSC from June 1994 to March 1996,
supervising a department of approximately 30 employees. Prior to joining HRSC, he served as Controller of
Household Bank’s Regional Processing Center in Worthington, Ohio where he also managed the collections,
technology, research and ATM departments. While at Household Bank, Mr. Stevenson participated in eight bank
acquisitions and numerous branch acquisitions or divestitures. He is a certified public accountant and received his
B.S.B.A. with a major in accounting from the Ohio State University.
Craig A. Grube, Executive Vice President — Acquisitions. Prior to joining Portfolio Recovery Associates
in March 1998, Mr. Grube was a senior officer and director of Anchor Fence, Inc., a manufacturing and distribution
business from 1989 to March 1997, when the company was sold. Between the time of the sale and March 1998, Mr.
Grube continued to work for Anchor Fence. Prior to joining Anchor Fence, he managed distressed corporate debt
for the FDIC at Continental Illinois National Bank for five years. He received his B.A. degree from Boston College
and his M.B.A. degree from the University of Illinois.
James L. Keown, Senior Vice President — Strategic Initiatives. Prior to co-founding Portfolio Recovery
Associates in 1996, Mr. Keown had been with HRSC for 14 years and had sales and finance experience prior to
joining HRSC. Mr. Keown’s final position at HRSC was Department Manager, Technology Service where he was
directly responsible for a 275 node local area network, all phone and data communications, as well as performance
engineering and applications programming. Mr. Keown will retire from the Company effective March 31, 2004.
60
Judith S. Scott, Executive Vice President, General Counsel and Secretary. Prior to joining Portfolio
Recovery Associates in March 1998, Ms. Scott held senior positions, from 1991 to March 1998, with Old
Dominion University as Director of its Virginia Peninsula campus, from 1985 to 1991, as General Counsel of a
computer manufacturing firm; as Senior Counsel in the Office of the Governor of Virginia from 1982 to 1985; as
Senior Counsel for the Virginia Housing Development Authority from 1976 to 1982, and as Assistant Attorney
General for the Commonwealth of Virginia from 1975 to 1976. Ms. Scott received her B.S. in business
administration from Virginia State University, a post baccalaureate degree in economics from Swarthmore College,
and a J.D. from the Catholic University School of Law.
William P. Brophey, Director. Mr. Brophey was elected as a director of Portfolio Recovery Associates in
2002. Currently retired, Mr. Brophey has more than 35 years of experience as president and chief executive officer
of Brad Ragan, Inc., a (formerly) publicly traded automotive product and service retailer and as a senior executive at
The Goodyear Tire and Rubber Company. Throughout his career, he held numerous field and corporate positions at
Goodyear in the areas of wholesale, retail, credit, and sales and marketing, including general marketing manager,
commercial tire products. He served as president and chief executive officer and a member of the board of directors
of Brad Ragan, Inc. (a 75% owned public subsidiary of Goodyear) from 1988 to 1996, and vice chairman of the
board of directors from 1994 to 1996, when he was named vice president, original equipment tire sales world wide
at Goodyear. From 1998 until his retirement in 2000, he was again elected president and chief executive officer and
vice chairman of the board of directors of Brad Ragan, Inc. Mr. Brophey has a business degree from Ohio Valley
College and attended advanced management programs at Kent State University, Northwestern University,
Morehouse College and Columbia University.
Peter A. Cohen, Director. Mr. Cohen was elected as a director of Portfolio Recovery Associates in 2002. Mr.
Cohen began his career on Wall Street at Reynolds & Co. in 1969. In 1970, he joined the firm which would later
become Shearson Lehman Brothers. In 1981, when Shearson merged with American Express, he was appointed
president and chief operating officer. From 1983 to 1990, he served as chairman and chief executive officer of
Shearson. From 1991 to 1994, Mr. Cohen served as an advisor and vice chairman of the board of Republic New
York Corporation. In 1994, he started what is today Ramius Capital Group, an investment management business,
which currently has $3 billion of assets under management. Mr. Cohen has served on numerous boards of directors,
including the New York Stock Exchange, the American Express Company, Olivetti SpA, and Telecom SpA.
Currently, he sits on the boards of Presidential Life Corporation, The Mount-Sinai-NYU Medical Center & Health
System, Kroll Inc., and Titan Corporation. Mr. Cohen has an MBA from Columbia University and a Bachelor’s
Degree from Ohio State University.
David N. Roberts, Director. Mr. Roberts has been a director of Portfolio Recovery Associates since its
formation in 1996. Mr. Roberts joined Angelo Gordon in 1993. He manages the firm’s private equity and special
situations area and was the founder of the firm’s opportunistic real estate area. Mr. Roberts has invested in a wide
variety of real estate, corporate and special situations transactions. Prior to joining Angelo, Gordon Mr. Roberts
was a principal at Gordon Investment Corporation, a Canadian merchant bank from 1989 to 1993, where he
participated in a wide variety of principal transactions including investments in the real estate, mortgage banking
and food industries. Prior to joining Gordon Investment Corporation, he worked in the Corporate Finance
Department of L.F. Rothschild where he specialized in mergers and acquisitions. He has a B.S. degree in
economics from the Wharton School of the University of Pennsylvania.
James M. Voss, Director. Mr. Voss was elected as a director of Portfolio Recovery Associates in 2002. Mr.
Voss has more than 35 years experience as a senior finance executive. He currently heads Voss Consulting, Inc.,
serving as a consultant to community banks regarding policy, organization, credit risk management and strategic
planning. From 1992 through 1998, he was with First Midwest Bank as executive vice president and chief credit
officer. He served in a variety of senior executive roles during a 24 year career (1965-1989) with Continental Bank
of Chicago, and was chief financial officer at Allied Products Corporation (1990-1991), a publicly traded (NYSE)
diversified manufacturer. Currently, he serves on the board of Elgin State Bank. Mr. Voss has both an MBA and
Bachelor’s Degree from Northwestern University.
61
Corporate Code of Ethics
The Company has adopted a Code of Ethics which is applicable to all directors, officers, and employees and which
complies with the definition of a “code of ethics” set out in Section 406(c) of the Sarbanes-Oxley Act of 2002, and
the requirement of a “Code of Conduct” prescribed by Section 4350(n) of the Marketplace Rules of the NASDAQ
Stock Market, Inc. The Code of Ethics is available to the public, and will be provided by the Company at no charge
to any requesting party. Interested parties may obtain a copy of the Code of Ethics by submitting a written request to
Investor Relations, Portfolio Recovery Associates, Inc., 120 Corporate Boulevard, Suite 100, Norfolk, Virginia,
23502, or by email at investorrelations@portfoliorecovery.com. The Code of Ethics will also be posted on the
Company website at www.portfoliorecovery.com and will be available online on or about March 10, 2004.
62
Item 11. Executive Compensation.
The information required by Item 11 is incorporated herein by reference to the section labeled “Executive
Compensation” in the Company’s definitive Proxy Statement in connection with the Company’s 2004 Annual
Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated herein by reference to the section labeled “Security
Ownership of Certain Beneficial Owners and Management” in the Company’s definitive Proxy Statement in
connection with the Company’s 2004 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated herein by reference to the section labeled “Certain
Relationships and Related Transactions” in the Company’s definitive Proxy Statement in connection with the
Company’s 2004 Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services.
The aggregate fees billed or expected to be billed by PricewaterhouseCoopers, LLP for the years ended
December 31, 2003 and 2002 are presented in the table below:
Audit Fees
Annual audit
Registration statements
Audit Related Fees
WestLB attest service
Tax Fees
Compliance
Advice
All Other Fees
2003
2002
$
130,575
118,739
249,314
$
124,151
340,321
464,472
4,700
2,000
10,000
125,507
135,507
-
29,625
21,425
51,050
-
Total Accountant Fees
$
389,521
$
517,522
The Audit Committee’s charter provides that they will:
1. Approve the fees and other significant compensation to be paid to auditors.
2. Review the non-audit services to determine whether they are permissible under current law.
63
3. Pre-approve the provision of any permissible non-audit services by the independent auditors and the related
fees of the independent auditors therefor.
4. Consider whether the provision of these other services is compatible with maintaining the auditors’
independence.
All the fees paid to PricewaterhouseCoopers were pre-approved by the Audit Committee.
64
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements.
The following financial statements of the Company are included in Item 8 of this Annual Report on Form 10-K:
Report of Independent Auditors
Consolidated Statements of Financial Position at December 31, 2003 and 2002
Consolidated Statements of Operations
for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows
For the years ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K.
Page
39
40
41
42
43
44-58
Filed October 27, 2003, issuance of a quarterly earnings press release for the three and nine months ended
September 30, 2003.
(c) Exhibits.
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Loan Agreement, dated July 20, 2000, by and between PRA Holding I, LLC, Bank of America,
N.A. and Portfolio Recovery Associates, LLC. (Incorporated by reference to Exhibit 10.2 of the
Registration Statement on Form S-1.)
Business Loan Agreement, dated September 24, 2001, by and between PRA Holding I, LLC,
Bank of America, N.A. and Portfolio Recovery Associates, L.L.C. (Incorporated by reference to
Exhibit 10.5 of the Registration Statement on Form S-1.)
Amendment to Business Loan Agreement, dated February 20, 2002, by and between PRA
Holding I, LLC, Bank of America, N.A. and Portfolio Recovery Associates, L.L.C. (Incorporated
by reference to Exhibit 10.6 of the Registration Statement on Form S-1.)
Employment Agreement, dated December 8, 2002, by and between Steven D. Fredrickson and
Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.8 of the Annual
Report on Form 10-K for the year ended December 31, 2002.)
Employment Agreement, dated December 8, 2002, by and between Kevin P. Stevenson and
Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.9 of the Annual
Report on Form 10-K for the year ended December 31, 2002.)
Employment Agreement, dated December 8, 2002, by and between Craig A. Grube and Portfolio
Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.10 of the Annual Report on
Form 10-K for the year ended December 31, 2002.)
Employment Agreement, dated December 27, 2002, by and between James L. Keown and
Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.12 of the Annual
Report on Form 10-K for the year ended December 31, 2002.)
Employment Agreement, dated December 8, 2002, by and between Judith S. Scott and Portfolio
Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.13 of the Annual Report on
Form 10-K for the year ended December 31, 2002.)
Portfolio Recovery Associates, Inc. 2002 Stock Option Plan. (Incorporated by reference to Exhibit
10.12 of the Registration Statement on Form S-1.)
10.10 Riverside Commerce Center Office Lease, dated February 12, 1999, by and between Riverside
Investors, L.C. and Portfolio Recovery Associates, L.L.C. (Incorporated by reference to Exhibit
10.13 of the Registration Statement on Form S-1.)
65
10.11 First Amendment to Riverside Commerce Center Office Lease, dated April 27, 1999, by and
between Riverside Investors, L.C. and Portfolio Recovery Associates, L.L.C. (Incorporated by
reference to Exhibit 10.14 of the Registration Statement on Form S-1.)
10.12 Second Amendment to Riverside Commerce Center Office Lease, dated September 29, 2000, by
and between Riverside Investors, L.C. and Portfolio Recovery Associates, L.L.C. (Incorporated
by reference to Exhibit 10.15 of the Registration Statement on Form S-1.)
10.13 Office Lease, dated November 13, 2002, by and between NetCenter Partners, LLC and Portfolio
Recovery Associates, L.L.C. (Incorporated by reference to Exhibit 10.16 of the Form 10-Q for the
period ended September 30, 2002.)
10.14 Riverside Commerce Center II Office Lease, dated June 27, 2003, by and between Riverside
Investors, L.C. and Portfolio Recovery Associates, LLC. (Incorporated by reference to Exhibit
10.20 of the Form 10-Q for the period ended June 30, 2003).
10.15 Third Amendment to Riverside Commerce Center Office Lease, dated June 27, 2003, by and
between Riverside Investors, L.C. and Portfolio Recovery Associates, LLC. (Incorporated by
reference to Exhibit 10.21 of the Form 10-Q for the period ended June 30, 2003).
10.16 First Lease Amendment to Riverside Commerce Office Lease, dated June 27, 2003, by and
between Riverside Crossing L.C. and Portfolio Recovery Associates, Inc. (Incorporated by
reference to Exhibit 10.23 of the Form 10-Q for the period ended September 30, 2003).
10.17 Fourth Lease Amendment to Riverside Commerce Center Office Lease, dated February 12, 1999,
by and between Riverside Crossing, L.C. and Portfolio Recovery Associates, Inc. (Incorporated
by reference to Exhibit 10.24 of the Form 10-Q for the period ended September 30, 2003).
10.18 Loan and Security Agreement, dated November 28, 2003, by and between Portfolio Recovery
Associates, Inc. and RBC Centura Bank.
10.19 Commercial Promissory Note, dated November 28, 2003, by and between Portfolio Recovery
Associates, Inc. and RBC Centura Bank.
10.20 Business Loan Agreement, dated January 8, 2004, by and between Portfolio Recovery Associates,
Inc. and RBC Centura Bank.
10.21 Promissory Note, dated January 8, 2004, by and between Portfolio Recovery Associates, Inc. and
RBC Centura Bank.
21.1 Subsidiaries of Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 2.1 of
the Registration Statement on Form S-1.)
Consent of PricewaterhouseCoopers LLP
23.1
Powers of Attorney (included on signature page).
24.1
31.1
Section 302 Certifications of Chief Executive Officer and Chief Financial Officer
32.1 Section 906 Certifications of Chief Executive Officer and Chief Financial Officer
66
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: February 18, 2004
Dated: February 18, 2004
Portfolio Recovery Associates, Inc.
(Registrant)
By:/s/ Steven D. Fredrickson
Steven D. Fredrickson
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
By:/s/ Kevin P. Stevenson
Kevin P. Stevenson
Chief Financial Officer, Executive Vice President,
Treasurer and Assistant Secretary
(Principal Financial and Accounting Officer)
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned whose signature appears below
constitutes and appoints Steven D. Fredrickson and Kevin P. Stevenson, his true and lawful attorneys-in-fact, with
full power of substitution and resubstitution for him and on his behalf, and in his name, place and stead, in any and
all capacities to execute and sign any and all amendments or post-effective amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or any of them
or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof and the registrant
hereby confers like authority on its behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: February 18, 2004
Dated: February 18, 2004
Dated: February 18, 2004
Dated: February 18, 2004
Dated: February 18, 2004
Dated: February 18, 2004
By:/s/ Steven D. Fredrickson
Steven D. Fredrickson
President and Chief Executive Officer
By:/s/ Kevin P. Stevenson
Kevin P. Stevenson
Chief Financial Officer, Executive Vice President,
Treasurer and Assistant Secretary
By:/s/ William P. Brophey
William P. Brophey
Director
By:/s/ Peter A. Cohen
Peter A. Cohen
Director
By:/s/ David N. Roberts
David Roberts
Director
By:/s/ James M. Voss
James M. Voss
Director
67
Exhibit 31.1
I, Steven D. Fredrickson, certify that:
1.
I have reviewed this annual report on Form 10-K of PORTFOLIO RECOVERY ASSOCIATES, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Reserved;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: February 18, 2004
By: /s/ Steven D. Fredrickson
Steven D. Fredrickson
Chief Executive Officer, President and
Chairman of the Board of Directors
(Principal Executive Officer)
68
I, Kevin P. Stevenson, certify that:
1.
I have reviewed this annual report on Form 10-K of PORTFOLIO RECOVERY ASSOCIATES, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Reserved;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: February 18, 2004
By: /s/ Kevin P. Stevenson
Kevin P. Stevenson
Chief Financial Officer, Executive Vice
President, Treasurer
and Assistant
Secretary
(Principal Financial and Accounting
Officer)
69
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Portfolio Recovery Associates, Inc. (the "Company") on Form 10-K for the
fiscal year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Steven D. Fredrickson, Chief Executive Officer, President and Chairman of the Board of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
result of operations of the Company.
Date: February 18, 2004
By: /s/ Steven D. Fredrickson
Steven D. Fredrickson
Chief Executive Officer, President and
Chairman of the Board of Directors
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Portfolio Recovery Associates, Inc. (the "Company") on Form 10-K for the
fiscal year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Kevin P. Stevenson, Chief Financial Officer, Executive Vice President, Treasurer and Assistant
Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
result of operations of the Company.
Date: February 18, 2004
By: /s/ Kevin P. Stevenson
Kevin P. Stevenson
Chief Financial Officer, Executive Vice President,
Treasurer and Assistant Secretary
(Principal Financial and Accounting Officer)
70
MANAGEMENT
CORPORATE GOVERNANCE
Hampton, Virginia call center
Steve Fredrickson
President and
Chief Executive Officer
Kevin Stevenson
Executive Vice President,
Chief Financial Officer,
Treasurer and Asst. Secretary
Craig Grube
Executive Vice President,
Acquisitions
Judith Scott
Executive Vice President,
General Counsel and
Secretary
PORTFOLIO RECOVERY ASSOCIATES, INC. and its subsidiaries purchase, manage, and
collect defaulted consumer debt through two core businesses. Our debt buying
business represents the majority of our operation, acquiring accounts at a very
deep discount and then collecting those accounts typically over a five to seven
year period. Our collection agency business collects defaulted accounts for
others and we are paid a fee for doing so.
WE’RE GIVING DEBT COLLECTION A GOOD NAME®
We operate out of three primary facilities. Our home office, housing both administrative
and call center operations, is located in a leased 65,000 square foot, two building
campus in Norfolk, Virginia. We have call centers located in Hutchinson, Kansas,
an owned 15,000 square foot building, and in Hampton, Virginia, a leased 25,000
square foot facility. The three facilities can accommodate approximately
1,100 employees. At December 31, 2003, we employed 798 people.
BOARD OF DIRECTORS
STEVE FREDRICKSON, Chairman of the Board.
David Roberts
Director
James Voss
Director
Peter Cohen
Director
William Brophey
Director
CORPORATE INFORMATION
STOCK EXCHANGE LISTING
LEGAL COUNSEL
PRICE RANGE OF COMMON STOCK
Portfolio Recovery Associates’ common
stock trades on the Nasdaq National Market
under the symbol “PRAA.” Price information
for the common stock appears daily in major
newspapers.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer
17 Battery Place
8th Floor
New York, New York 10004
Tel: 212-509-4000
Fax: 212-509-5150
AUDITORS
PricewaterhouseCoopers LLP
Harrisburg, Pennsylvania
Swidler Berlin Shereff Friedman, LLP
New York, New York
FINANCIAL PUBLICATIONS/INVESTOR INQUIRIES
Shareholders may acquire copies of the 2003
Form 10-K, Annual Report and other filed
documents by visiting the company’s website
at www.portfoliorecovery.com or by writing
to us at:
Portfolio Recovery Associates
Attn: Investor Relations
120 Corporate Blvd, Suite 100
Norfolk, Virginia 23502
The Company’s common stock began trading
on the Nasdaq National Market under the
symbol “PRAA” on November 8, 2002. The
following table sets forth the high and low
sales price for the Common Stock for the
year 2003.
2003
High
Low
$33.95 $17.76
As of March 5, 2004, there were approximately
28 holders of record of the Common Stock.
Based on information provided by the
Company’s transfer agent and registrar,
the Company believes that there are
approximately 9,871 beneficial owners
of the Common Stock.
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Riverside Commerce Center, 120 Corporate Boulevard, Suite 100, Norfolk, Virginia 23502
Portfolio Recovery
Associates, Inc.
2003 Annual Report
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A Year of Growth and Performance