2 0 0 6 A nnu al Re p o r t
Financial Highlights
(in thousands, except per share amounts)
2006
2005
2004
Revenues
Operating income
Net income
Diluted earnings per share
Diluted operating cash flow per share
Shares outstanding (diluted)
Operating margin
Net margin
Return on average equity
Working capital
Finance receivables, net
Total assets
Stockholders’ equity
$ 188,322
$ 72,000
$ 44,490
2.77
$
3.70
$
16,082
$ 148,525
$ 59,600
$ 36,772
2.28
$
3.58
$
16,149
$ 113,396
$ 44,890
$ 27,451
1.73
$
3.11
$
15,853
38.2%
23.6%
19.9%
40.1%
24.8%
21.1%
39.6%
24.2%
20.4%
$ 18,981
$ 226,447
$ 293,378
$ 247,278
$ 6,062
$ 193,645
$ 247,772
$ 195,322
$ 43,883
$ 105,189
$ 175,176
$ 151,389
Just Getting Started
Portfolio Recovery Associates, Inc. and its subsidiaries purchase and manage
portfolios of defaulted consumer receivables and provide a broad range of
accounts receivable management services for lenders, service providers, gov-
ernments and others. The Company combines a disciplined approach to pricing
and portfolio acquisitions with a long-term view of collections, while maintaining
a dedication to reputation, customer service and continuous innovation. We
have built a rewarding organization for our employees that produces exceptional
results for investors and clients alike.
We operate seven call centers. By mid-2007 with the completion of several
current projects, we will own or lease almost 200,000 square feet of space
with the capacity for more than 2,000 employees. At December 31, 2006 we
employed 1,291 people in Virginia, Kansas, Alabama, Nevada, and Tennessee.
P o r t f o l i o R e c o v e r y A s s o c i a t e s , I n c .
We are very proud of our employees and our facilities. All photographs in this report are of actual
PRA employees and/or facilities.
2
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Portfolio Recovery Associates, Inc.
Riverside Commerce Center
120 Corporate Blvd., Suite 100
Norfolk, Virginia 23502
2 0 0 6 A nnu al Re p o r t
300000
25
$261.4
$261.4
20.3%
20.4%
21.1%
19.9%
20.3%
20.4%
21.1%
19.9%
$205.2
$205.2
$160.6
$160.6
$120.2
$261.4
$120.2
$261.4
$205.2
$205.2
$160.6
$160.6
20.3%
20.4%
21.1%
19.9%
20.3%
20.4%
21.1%
19.9%
$120.2
’03
’04
’05
’06
$120.2
’03
’04
’05
’06
’03
’04
’05
’06
’03
’04
’05
’06
Cash Receipts
($ in millions)
Cash Receipts
($ in millions)
Return on Equity
(in percent)
Return on Equity
(in percent)
Cash Receipts
($ in millions)
Cash Receipts
Return on Equity
($ in millions)
(in percent)
Return on Equity
(in percent)
’03
’04
’05
’06
’03
’04
’05
’06
’03
’04
’05
’06
’03
’04
’05
’06
Cash Receipts
($ in millions)
Cash Receipts
Return on Equity
($ in millions)
(in percent)
Return on Equity
(in percent)
Just Getting Started
Cash Receipts
($ in millions)
$44.5
Return on Equity
Cash Receipts
We at PRA have achieved significant
(in percent)
($ in millions)
success in our first 10 years, but we
are not satisfied.
$44.5
52.1%
Return on Equity
(in percent)
52.1%
$36.8
$36.8
$27.5
$27.5
$20.7
$44.5
$20.7
$44.5
33.5%
31.0%
33.5%
31.0%
52.1%
26.8%
52.1%
26.8%
$36.8
$36.8
$27.5
$27.5
$20.7
$20.7
33.5%
31.0%
33.5%
31.0%
26.8%
26.8%
’03
’04
’05
’06
’03
’04
’05
’06
’03
’04
’05
’06
’03
’04
’05
’06
Net Income
($ in millions)
Net Income
($ in millions)
Annual Revenue Growth
(in percent)
Annual Revenue Growth
(in percent)
P o r t f o l i o R e c o v e r y A s s o c i a t e s , I n c .
’03
’04
’05
’06
’03
’04
’05
’06
’03
’04
’05
’06
’03
’04
’05
’06
Net Income
($ in millions)
Net Income
($ in millions)
Annual Revenue Growth
(in percent)
Annual Revenue Growth
(in percent)
Net Income
($ in millions)
Net Income
Annual Revenue Growth
Annual Revenue Growth
($ in millions)
(in percent)
(in percent)
300000
250000
200000
300000
150000
250000
100000
200000
50000
150000
0
100000
50000
0
50000
40000
30000
50000
20000
40000
10000
30000
0
20000
10000
0
250000
200000
300000
150000
250000
100000
200000
50000
150000
0
100000
50000
0
50000
40000
30000
50000
20000
40000
10000
30000
0
20000
10000
0
20
15
25
10
20
5
15
0
10
5
0
60
50
40
60
30
50
20
40
10
30
0
20
10
0
25
20
15
25
10
20
5
15
0
10
5
0
60
50
40
60
30
50
20
40
10
30
0
20
10
0
Net Income
($ in millions)
Net Income
Annual Revenue Growth
Annual Revenue Growth
($ in millions)
(in percent)
(in percent)
10
years
and going STRONG
We built a great business during our first 10 years.
Our goal is to build a better one over the next ten.
Board of Directors
Corporate Governance
Management
Steve Fredrickson
President and
Chief Executive Officer
1996
> March—company formed. 4 employees
> May—operations commence, first portfolios acquired
> 4,500 square foot call center
> Invest $3.2 million in portfolios
1997
> Invest total of $7.9 million in portfolios
> End year with 50 employees
1998
> First $1 million collection month
1999
> Move to 30,000 SF Norfolk, VA call center
> Employee count tops 100
2000
> Anchor business begun
> First remote office opened in Hutchinson, KS
> First year where cash collections exceed purchases
2001
> Exceed $5 million in monthly collections
2002
> IPO in November
2003
> Opened Hampton, VA office
> Began bankruptcy buying business
> Exceed $10 million in monthly collections
$(0.4)
$0.1
$0.4
$1.1
$1.6
2004
> Opened second Norfolk, VA building
> Acquisition of IGS Nevada business
2005
> Opened new IGS Nevada call center
> Acquired RDS/Alatax business
> Expansion of Hutchinson, KS facility
> Purchases of debt surpass $100 million for first time
> Employee count passes 1,000. 110,000 SF of office space
> Exceed $15 million in monthly collections
2006
> Exceed $20 million in monthly collections
> Opened new RDS operations center in Birmingham, AL
> Opened Jackson, TN office
$36.8
$27.5
$20.7
$11.4
$3.5
Steve Fredrickson
Chairman of the Board
David Roberts
Director
$44.5
William Brophey
Director
Scott Tabakin
Director
Kevin Stevenson
Executive Vice President,
Chief Financial and
Administrative Officer,
Treasurer and Asst.
Secretary
Craig Grube
Executive Vice President,
Acquisitions
Judith Scott
Executive Vice President,
General Counsel and
Secretary
Penelope Kyle
Director
James Voss
Director
Corporate Information
Stock Exchange Listing
Portfolio Recovery Associates’ common
stock trades on the NASDAQ Global
Stock 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
McLean, Virginia
Legal Counsel
Dechert, LLP
New York, New York
Financial Publications/Investor
Inquiries
Shareholders may acquire copies of the
2006 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
Price Range of Common Stock
The Company’s common stock began
trading on the NASDAQ Global Stock
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 2006.
High
Low
2006
$52.98 $38.23
As of February 16, 2007, there were
approximately 23 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 11,629 beneficial
owners of the common stock as of
February 16, 2007.
1996
1997
1998
1999
2000
2001
Net Income Over 10 Years (in millions)
2002
2003
2004
2005
2006
2002 and prior years are proforma net income. Note that 1996 net income is for a partial year and was never published publicly.
designed by curran & connors, inc. / www.curran-connors.com
Financial Highlights
(in thousands, except per share amounts)
2006
2005
2004
Revenues
Operating income
Net income
Diluted earnings per share
Diluted operating cash flow per share
Shares outstanding (diluted)
Operating margin
Net margin
Return on average equity
Working capital
Finance receivables, net
Total assets
Stockholders’ equity
$ 188,322
$ 72,000
$ 44,490
2.77
$
3.70
$
16,082
$ 148,525
$ 59,600
$ 36,772
2.28
$
3.58
$
16,149
$ 113,396
$ 44,890
$ 27,451
1.73
$
3.11
$
15,853
38.2%
23.6%
19.9%
40.1%
24.8%
21.1%
39.6%
24.2%
20.4%
$ 18,981
$ 226,447
$ 293,378
$ 247,278
$ 6,062
$ 193,645
$ 247,772
$ 195,322
$ 43,883
$ 105,189
$ 175,176
$ 151,389
Portfolio Recovery Associates, Inc. and its subsidiaries purchase and manage
portfolios of defaulted consumer receivables and provide a broad range of
accounts receivable management services for lenders, service providers, gov-
ernments and others. The Company combines a disciplined approach to pricing
and portfolio acquisitions with a long-term view of collections, while maintaining
a dedication to reputation, customer service and continuous innovation. We
have built a rewarding organization for our employees that produces exceptional
results for investors and clients alike.
We operate seven call centers. By mid-2007 with the completion of several
current projects, we will own or lease almost 200,000 square feet of space
with the capacity for more than 2,000 employees. At December 31, 2006 we
employed 1,291 people in Virginia, Kansas, Alabama, Nevada, and Tennessee.
We are very proud of our employees and our facilities. All photographs in this report are of actual
PRA employees and/or facilities.
NASDAQ Opening Ceremony, March 2006
Steve Fredrickson
Chairman, President & Chief Executive Officer
Dear Fellow Shareholders:
Ten years old and just getting started. Portfolio
Recovery Associates produced another strong year
of growth and profitability during 2006. Cash receipts
grew 27%. Cash collections from our owned portfolio
grew 24%. Revenue grew 27%. Net Income grew
21%. Return on equity was 20% (or higher) for the
fifth year in a row, and with virtually no financial
leverage. All in all, an exciting year and a continuation
of a record of performance that makes me very proud
of the managers and employees of PRA who made
it happen. Yet many of the most exciting things that
happened during the year occurred behind the scenes.
We added a great deal of fantastic managerial talent
during the year as we prepared the company for
additional growth and success. Here are our key
additions from 2006:
• Information Technology: With the belief that our
future will depend on our ability to quickly convert
great ideas into reality, we dramatically expanded
our IT team both in terms of size and capabilities.
We are now able to do more, more quickly, and
with a higher degree of professionalism and com-
petence than ever before.
• Bankruptcy: The future of our bankruptcy busi-
ness remains bright, so we added senior people
in analytical, processing, and sales and marketing
positions. The addition of these talented managers
prepares us well for strong growth in this attrac-
tive and growing market segment.
• Analytics: The best way to mitigate competitive
market conditions in the debt buying arena is to
price smarter and collect more efficiently than any-
one else. To accomplish this, we added industry-
savvy senior management to drive collection
strategies and processes and teamed with experts
in the field of advanced modeling and simulation
techniques to create ever better pricing algorithms.
• Business Development: The ability to source,
underwrite and collect many types of charged off
debt will help us drive growth and minimize price
competition, so we hired leaders from the utility
and medical industries to drive forward those ini-
tiatives. And finally, the traditional charge-off debt
purchase market is still extremely attractive, so
we added top talent to our already deep bench of
marketing and underwriting personnel.
2
Norfolk Call Center
RDS Executives
Birmingham Call Center
We added new call centers in Birmingham, Alabama
and Jackson, Tennessee. At this writing we are close
to moving into a third building in Norfolk, Virginia to
accommodate our growth, and we are in the midst
of expanding our highly productive Hutchinson,
Kansas office which will permit us to add another
50 seats there. All of these moves demonstrate our
commitment to the bright future of PRA, and all will
enable us to handle more volume, hire more people,
and generate more revenue and income.
We celebrated our 10th anniversary ringing the open-
ing bell at the NASDAQ market on March 20, 2006.
The event was meant to help thank those who saw
us through the first 10 years, including investors,
employees, bankers, and management, as well as
to challenge ourselves as we begin a second decade
of growth.
We included a 10-year timeline in this year’s report
for a couple of reasons. First, we are proud of what
we have achieved and we believe that it’s important
to celebrate our achievements with our employees,
associates and families. Second, we like to remind
ourselves that nearly anything is possible and within
our grasp if we set our minds to it. The growth we
have experienced over the past 10 years is no acci-
dent. We accomplished it as a team and we are
determined to continue the kind of growth and suc-
cess we have become accustomed to since 1996.
Debt Buying
2006 was a great year for our debt buying business
as we grew cash collections 24% over 2005. We
invested $112 million in acquiring new pools of
charged off debt during the year. The unusually large
amount of buying that we accomplished in 2005,
principally from volumes driven during that year’s
fourth quarter by the bankruptcy law changes,
resulted in 2006 being the first year in our 10-year
history that year-over-year purchases were not flat
or increasing.
$150
120
90
60
30
0
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’00
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Portfolio Purchases by Year ($ in millions)
150
120
90
60
30
0
That said, the bad debt purchase market continued
to be extremely competitive during 2006. In order to
compete effectively in a market like this, a bad debt
buyer has to do three things exceptionally well. First,
you have to know what you are buying. Second,
you need to make the most of what you buy. Third,
you need to buy with a goal of realizing appropriate
profit, not just to put out dollars. Underwriting,
collections, and discipline are the three primary
ingredients of PRA’s success.
Underwriting. We believe we are the best in the
business. Using over 10 years of collection data and
a great team of statisticians we carefully and thor-
oughly analyze every account in every portfolio we
consider for purchase. Using a variety of analyses,
we are able to determine how a given portfolio will
likely liquidate for PRA. Remember, we aren’t buying
3
4
Our accounting, human resources, and IT professionals meet in our Norfolk office
Cash receipts for 2006 were $261.4 million compared
with $205.2 million in 2005.
$261.4
Million
5
250000
200000
150000
100000
50000
0
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bonds or CDs or some financial instrument that is
going to liquidate itself. The fact of the matter is that
a portfolio is worth different amounts to different
buyers based upon the specific capabilities and cost
structure of their collection operation. We have a
great track record of being able to accurately deter-
mine how well we will be able to liquidate any given
pool—before we invest.
Collections. Given equal return requirements, the
company that can generate more collections for less
cost is the one that can afford to pay the most for a
given portfolio. By operating our own collection call
centers, we have been able to refine and improve
our processes as demonstrated by our long record
of increasing collector productivity. By collecting the
paper we purchase in-house as opposed to using
a third-party collection agency, we accomplish two
things: first, we pocket the profit margin that any
third party is going to demand of a debt-buying cli-
ent; and, second, we control every aspect of the
recovery process which allows us to collect well
and collect consistently. Unlike our competitors that
outsource, we aren’t guessing which collectors or
processes a third party may use or change at their
whim. We aren’t speculating what settlement cam-
paigns might be offered and when. We aren’t trying
to get every last dime in by month end for fear of
losing a placement in the next month. By contrast,
we tightly control settlement policy and collection
procedures throughout the life of an account. We
maintain a long-term collection process designed to
maximize our lifetime net collections; that is our
cash recoveries less collection expense.
$250
200
150
100
50
0
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’99
’00
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’02
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’04
’05
’06
Owned Portfolio Cash Collections Per Purchase Period ($ in millions)
Discipline. Anybody with a checkbook can buy a
portfolio of charged off debt. Any debt buyer with
access to capital can put out more money for port-
folios year after year. All you need to do is forget
about the economics of what you are doing and
write the check. We start and end our financial
analysis with a profit projection. If our hurdle cannot
be met, no bid is made—it is that simple. We would
sooner buy nothing than buy portfolios that do not
meet our profit goals. Conversely, if we see many
portfolios that hit our profit hurdles, we will buy all
we can within the constraints of concentration, oper-
ating, and balance sheet risk. As a result, our buying
in 2006 reflected our commitment to only buy
portfolios that make economic sense.
The buying we did during the year shifted somewhat
towards the fresh spectrum as we entered into a
flow of this stage of paper on terms we felt appro-
priate. Although this fresh paper costs more than
older vintages, it also tends to be more liquid and
provides us with a longer period in which to collect.
Norfolk IT Staff
RDS Operations
Birmingham Call Center
We compete in a large, fragmented market. Sellers
or owners of delinquent debt can choose from liter-
ally thousands of competing firms as they contem-
plate the sale or outsource of delinquent accounts.
Why then PRA? The sale market remains driven to
a large degree by price. Bright smiles, great market-
ing, and solid credentials only get you so far. You
need all those things plus the high bid to win most
deals. This is the reason we take the collection pro-
cess so seriously. The more you can collect, the
more you can afford to pay for a pool of debt, all
other things being equal—it is that simple.
Price, however, is not everything, especially to the
larger, more knowledgeable and sophisticated sell-
ers. We have achieved our goal of becoming a low
risk, high value provider that’s easy to work with.
The following evidence of our market leadership in
these dimensions makes PRA the buyer of choice:
Low Risk—Our enlightened, customer-aware collec-
tion philosophy, continuous training, integrated com-
pliance controls, dedicated quality control group, and
our ability to back up our contractual obligations with
our strong balance sheet, makes PRA one of the
very “safest” buyers in the market from a seller’s
point of view. On top of this, PRA is one of the few
buyers that does not resell the accounts it buys—
which puts our selling clients at ease and gives us
a decided competitive advantage. 2006 saw an
upsurge in negative stories about debt sellers as
various state attorneys general, consumer protec-
tion agencies, and even the press began focusing
more energy on debt buyers and collectors who have
compliance issues. Sellers that want to stay out of
the headlines seem to be paying more attention
than ever to ultra-compliant collectors like PRA,
especially as “amateur hour” in the debt purchase
market continues.
High Value—As I have mentioned repeatedly, the
better you collect, the more you can afford to pay
for a given pool of accounts. Higher recoveries and
lower costs are both competitive advantages for
PRA. Our scale of operations gives us buying power
and operating leverage that many competitors will
never be able to match. As a result, our bids can be
high while maintaining targeted levels of profitability,
helping us to win more than our fair share of offerings.
$44.5
Million
Net income grew 21% to $44.5 million,
or $2.77 per diluted share.
Easy To Work With—PRA can underwrite quickly
and close in hours when needed, attributes that
many sellers highly value. We stringently avoid the
industry rumor mill and do not talk about who we
buy from or why any client may be selling. We have
invested in great systems and people. This makes
us one of the best post-sale administration groups in
the industry, and makes the seller’s job that much
easier and much less costly when compared to
many of our competitors. And finally, we are there
for sellers, month after month, year after year. We
don’t flit in and out of the market based on capital
availability. We don’t back out of purchases at the
last minute because we failed to raise the money to
close or pre-arrange flip sales. Instead, we are a reli-
able, constant resource for sellers, which helps win
us business.
Bankruptcy Debt Purchase
During 2006, we continued to develop more sophisti-
cated bankruptcy underwriting tools and dramati-
cally improved our bankruptcy administrative
processes. We are well underway with an extremely
ambitious systems development process which,
when completed, we feel, will give us a strong
competitive advantage.
Our bankruptcy pools are maturing and performing
at least as well as expected at the time of purchase.
Although we gain more experience every day, we
continue to take a conservative bent to underwriting
new purchases as a result of the October 2005
amendments to the bankruptcy laws. With these
amendments came changes to our collection curves,
both in terms of the magnitude and timing of cash
flows. As we recalibrate these curves based on
post-amendment activity, we will gain additional
underwriting precision which will allow us to be more
assertive in bidding on future bankruptcy portfolios.
Productivity
As I have already mentioned, we are very focused
on making the most of what we buy. Improvements
in systems, training, scoring and segmentation, col-
lection strategy and collector retention all contribute,
as well as portfolio mix. The chart on the following
page shows our productivity growth as measured
by dollars collected per hour paid over the past nine
years. Productivity for the full year of 2006 moved
up to $146.03 from $133.39 in 2005. Impressively,
during 2006 we collected more from the accounts
we bought in 1996 than we did in 2005—a result
of our commitment to continuously improve our
long-term recovery approach and collection skills
and performance.
Warehouse
Quad
Tertiary
Secondary
Primary
Paying
Mixed
Legal/Judgement
Fresh
BK Trustees
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Investment Percentage by Paper Type
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100
80
60
40
20
0
100
80
60
40
20
0
8
$150
120
90
60
30
$146.03
$99.06
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’01
’02
’03
’04
’05
’06
Owned Portfolio Cash Collection Per Hour Paid
(collection per hour paid in dollars)
$ Recovered/Hr Paid
$ Recovered/Hr Paid WO Legal
Owned Portfolio Performance
The heart of our owned portfolio underwriting pro-
cess rests with static pool analysis; reviewing each
of the approximately 800 portfolios we have acquired
over the past 11 years each month, looking at both
150
90
30
60
a98
120
cash collections and direct operating expenses. Each
quarter we summarize this information for the
investment community, by publishing cash collec-
tions by year, by year of purchase. As we did last
year in the 10-K and annual report, we are providing
a further breakout of purchased bankrupt and pur-
a99
a03
chased non-bankrupt collections, in order to provide
enhanced transparency to our investors. Our pur-
chased bankrupt accounts cost far less to liquidate
than do our standard charged off portfolios. As a
result, bankrupt pools tend to have much lower
purchase price to collection multiples and much
lower expense ratios, but with very similar return
characteristics when compared with our standard
charged-off pools.
a02
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Cash Collections by Year, by Year of Purchase—Purchased Bankruptcy Portfolio Only ($ in thousands)
Purchase
Period
Purchase
Price
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Total
Cash Collected Year
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Total
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
—
—
—
—
—
—
—
$ 7,472
$ 29,358
$ 18,650
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 743
—
—
$ 4,554
$ 3,777
—
$ 3,956
$ 15,500
$ 5,608
$ 9,253
$ 19,277
$ 5,608
$ 55,480
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ 743
$ 8,331
$ 25,064
$ 34,138
Cash Collections by Year, by Year of Purchase—Entire Portfolio Less Purchased Bankruptcy Portfolio ($ in thousands)
Purchase
Period
Purchase
Price
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Total
Cash Collected Year
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Total
$ 3,080 $ 548
$ 2,484
$ 1,890
$ 1,348
$ 1,025
$
730
$
496
$
398
$
285
$ 7,685 — $ 2,507
$ 5,215
$ 4,069
$ 3,347
$ 2,630
$ 1,829
$ 1,324
$ 1,022
$
$
210
860
$
$
237
597
$ 9,651
$ 23,400
$ 11,089 —
— $ 3,776
$ 6,807
$ 6,398
$ 5,152
$ 3,948
$ 2,797
$ 2,200
$ 1,811
$ 1,415
$ 34,304
$ 18,898 —
$ 25,016 —
$ 33,468 —
$ 42,280 —
$ 61,461 —
$ 51,859 —
$ 114,008 —
$ 91,021 —
—
—
—
—
—
—
—
—
— $ 5,138
$ 13,069
$ 12,090
$ 9,598
$ 7,336
$ 5,615
$ 4,352
$ 3,032
$ 60,230
—
—
—
—
—
—
—
— $ 6,894
$ 19,498
$ 19,478
$ 16,628
$ 14,098
$ 10,924
$ 8,067
$ 95,587
—
—
—
—
—
—
— $ 13,048
$ 28,831
$ 28,003
$ 26,717
$ 22,639
$ 16,048
$ 135,286
—
—
—
—
—
— $ 15,073
$ 36,258
$ 35,742
$ 32,497
$ 24,729
$ 144,299
—
—
—
—
— $ 24,308
$ 49,706
$ 52,640
$ 43,728
$ 170,382
—
—
—
— $ 17,276
$ 41,921
$ 36,468
$ 95,665
—
—
— $ 15,191
$ 59,645
$ 74,836
—
— $ 17,363
$ 17,363
$ 459,865 $ 548
$ 4,991
$ 10,881
$17,362
$ 30,733
$ 53,148
$ 79,253
$ 117,052
$ 152,661
$ 183,045
$ 211,329
$ 861,003
9
RDS employees in our new Birmingham operations center
27%
Total Revenue increased to $188.3 million during 2006, up from
$148.5 million in 2005. Total revenue consists of cash collections
reduced by amounts applied to the Company’s owned debt
portfolios plus commissions from its fee-for-service businesses.
RDS executives conference
Jackson, Tennessee call center under construction
RDS employee
Employees discuss operations in our new Jackson, Tennessee call center
Revenue Recognition
Our amortization, or the amount of our cash collec-
tions applied to principal, links our balance sheet and
income statement. The amortization rate determines
the portion of cash collections that are recognized as
revenue, and the complementary “amortization” por-
tion reduces the net finance receivable (remaining
unamortized purchase price) that we carry on our
balance sheet. Over the life of any pool, its amortiza-
tion rate will be the inverse of its ratio of collections
to purchase price. Thus, a pool that collects three
times its purchase price over its life will have a life-
time 33% amortization rate, while a two times deal
will have a 50% amortization rate. Historically we
have tended to collect more cash from pools than
we originally estimated, causing numerous pools to
have no remaining net finance receivable before the
end of their economic life. When a pool has no cost
basis or net finance receivable remaining on the bal-
ance sheet, it is said to be fully amortized, and all
future cash collections from the pool will be recog-
nized 100% as revenue. It is our stated accounting
goal to accurately match amortization with cash col-
lections, in a perfect world, creating a situation where
a portion of the last dollar of cash collections goes
to amortize the final remaining net finance receivable
outstanding from that pool. Collections from fully
amortized pools have the effect of lowering our
published amortization rate, so we also discuss
“core amortization”, which is the rate of amortization
against the non-zero basis portfolios during a
given period.
Beginning in 2005, as a result of a new accounting
rule (SOP 03-3), we began aggregating all similar
pools purchased in a single quarter. Over time the
effect of this change should be to enable us to more
accurately draw our collection curves and thus bet-
ter predict amortization. As a result, the instance of
early amortization and hence zero basis pools should
decline and apply downward pressure on amortiza-
tion rates (all other variables remaining unchanged)
as core amortization and stated amortization rates
converge. The following chart shows our core and
stated amortization rates for the past four years.
12
In 2006, the company’s EBIT totaled $72.0 million growing 21%,
compared with $59.6 million in 2005.
$72.0
Million
Core Amortization Rate
Gross Amortization Rate
40%
30%
20%
10%
0%
Q1
’03
Q2
’03
Q3
’03
Q4
’03
Q1
’04
Q2
’04
Q3
’04
Q4
’04
Q1
’05
Q2
’05
Q3
’05
Q4
’05
Q1
’06
Q2
’06
Q3
’06
Q4
’06
Amortization Rates
35
40
30
25
40
35
and has a high probability of continued similar perfor-
mance. If you set initial collection expectations that
are too aggressive, impairment is a near certainty.
Likewise, if you move collection expectations
upwards too early, only to find they are not sustain-
able, impairments inevitably occur. Our review pro-
cess and adjustment decisions are exhaustive,
accurate and time-proven.
10
15
20
10
30
15
20
25
5
0
0
5
A question we get from time to time is what can
PRA do to minimize its impairment charges over
time? The answer is generally two-fold. First is solid
underwriting and knowing how much to pay for any
given type of charged off paper. If you avoid over-
paying, you can dramatically reduce the risk of
impairment. Second is accurate and appropriate
administration of the level yield process under SOP
03-3. We use initial projections and collection curves
that have a very high degree of certainty. Then we
adjust curves upwards only when collection activity
dependably exceeds our established expectations
Fee for Service
IGS is our collateral location business. In 2006 the
IGS business experienced exceptional advancement.
In last year’s report I wrote, “Our mission for 2006
is to continue aggressively marketing to new clients,
provide best in class results to existing clients, and
grow revenue back to, and then beyond, the levels
of early 2005.” I am proud to be able to say “mis-
sion accomplished.” No one is better at asset loca-
tion and repossession coordination than Jim Snead
and his team at IGS. During the year we improved
our systems to better serve our clients, we dramati-
cally expanded our client list, and we provided
13
Core Amortization Rate
Gross Amortization Rate
40%
30%
20%
10%
0%
Q1
’05
Q2
’05
Q3
’05
Q4
’05
Q1
’06
Q2
’06
Q3
’06
Q4
’06
Amortization Rates
Employees in our Norfolk-owned portfolio call center
to $25.0 million, from $13.9 million in 2005.80%
The Company’s fee-for-service revenue increased by 80% in 2006
Jackson, TN
Our Norfolk IT staff
Birmingham, Alabama
renovated operations center—giving the business
room and resources to grow for many years to come.
We continue to be big believers in the RDS manage-
ment team and think our future in the government
accounts receivable management space is bright.
In summary, 2006 was another strong year for PRA,
its 10th year in business. While we produced great
results yet again, we spent a great deal of time and
money preparing for the future. We invested in port-
folios, people, facilities, and systems, all of which
will help us maintain our position as one of the finest
firms in the accounts receivable management indus-
try. I am more excited about our future today than I
was even 10 years ago. We have an incredible team
of smart, dedicated employees that I know is going
to take PRA to ever higher heights.
Steve Fredrickson
Chairman, President & Chief Executive Officer
results so exceptional that we gained dramatic levels
of new placements. We increased our skip-tracer
workforce during the year from about 25 to more
than 75. These new employees compressed our
margins for much of the year as they steadily built
competency and productivity, but by year end were
poised to contribute significantly in 2007 and beyond.
Anchor is our contingent fee collection business.
Anchor had a disappointing year in an industry
where a combination of increasing client demands,
decreasing contingency fee, and client consolidation
have teamed up to make appropriately profitable
business elusive. Our placement levels and results
improved steadily through the latter part of 2005 and
into 2006. However a combination of client mergers,
which resulted in lost volume, and client strategy
shifts, which resulted in delayed volume, together
created an unacceptable year of results. We employ
a great team at Anchor. During 2007, we will work
to make Anchor the contributor that we all believe
it can be.
RDS is our government revenue administration,
audit and collection business. In our first full year of
operations we made good progress in establishing a
very solid foundation from which to grow this excit-
ing new business. During the year, we continued our
growth outside of Alabama, winning contracts in
Georgia, Tennessee, and Puerto Rico. We bolstered
our professional staff, established strong operational
and cross selling relationships between RDS and the
other PRA businesses, and then capped the year
with the relocation of the business into a newly
15
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 opportu-
nity, 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 workforce
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 a significant portion of
their net worth invested in the Company. We expect our senior managers to retain substantial stock ownership positions—common
stock, not just options—throughout their terms of employment.
Develop and support employees. Provide and support ongoing employee skill development to help create ever increasing levels of
individual potential with high levels of performance for continuing personal and company growth.
Safe Harbor Act
Certain 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, regarding earnings, financial
results, the outlook for the economy, management’s intentions, beliefs and expectations, growth opportunities, business prospects,
projections, plans or predictions of the future, and other similar matters, 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 assumptions, uncertainties and risks, 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, many of which are beyond our control, which could affect our oper-
ations, performance, business strategy and results, and could cause our experience to differ materially from the expectations and
objectives expressed in any forward-looking statements. These factors include, but are not limited to, the factors, risks and uncertain-
ties that are described from time to time in the company’s filings with the Securities and Exchange Commission, including but not
limited to, its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q and its Current Reports on Form 8-K, which contain
more detailed discussions of the company’s business, including risks and uncertainties that may affect our future.
Due to such uncertainties and risks, readers are cautioned not to place undue reliance on any forward-looking statements, which speak
only as of the dates on which they are made. The content of this Annual Report includes time-sensitive information, and is accurate as
of the date hereof, April 16, 2007, which is the approximate date of the mailing of this Annual Report. The company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, any changes
in the company’s expectations with regard thereto, or the impact of circumstances, events or conditions that may arise after the dates
such statements are made. The reader should, however, consult any further disclosures we may make in future Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which we may file after the date hereof.
16
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, 2006
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:
Common Stock, $0.01 par value per share
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. YES (cid:59) NO (cid:133)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d)
of the Act.
YES (cid:133) NO (cid:59)
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
YES (cid:59) NO (cid:133)
90 days.
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. ___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-
accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. Large accelerated filer X Accelerated filer Non-accelerated filer _____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
YES (cid:133) NO (cid:59)
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2006
was $706,688,211 based on the $45.70 closing price as reported on the NASDAQ Global Stock Market.
The number of shares of the registrant’s Common Stock outstanding as of February 14, 2007 was
15,990,932.
1
Documents incorporated by reference: Portions of the Proxy Statement to be filed by April 30, 2007 for our
2007 Annual Meeting of Stockholders are incorporated by reference into Items 11, 12 and 13 of Part III of this
Form 10-K.
2
Table of Contents
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4.
Submission of Matters to a Vote of Securityholders
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
Exhibit List
4
18
24
24
24
25
25
27
30
46
47
72
72
72
73
75
75
75
76
77
79
3
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 our results 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:
•
•
•
•
•
•
•
•
•
•
•
•
our ability to purchase defaulted consumer receivables at appropriate prices;
changes in the business practices of credit originators 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 our ability to collect sufficient amounts on our acquired or
serviced receivables;
changes in bankruptcy laws that could negatively affect our business;
our ability to employ and retain qualified employees, especially collection personnel;
changes in the credit or capital markets, which affect our ability to borrow money or raise capital to
purchase or service defaulted consumer receivables;
the degree and nature of our competition;
our future ability to comply with the provisions of the Sarbanes-Oxley Act of 2002 and the rules and
regulations promulgated thereunder;
our ability to successfully integrate our IGS and Alatax/RDS businesses (we refer to these businesses in
this document as “IGS” and “RDS”, respectively) into our business operations;
our ability to secure sufficient levels of placements for our fee-for-service businesses;
the sufficiency of our funds generated from operations, existing cash and available borrowings to
finance our current operations; and
the risk factors listed from time to time in our filings with the Securities and Exchange Commission (the
“SEC”).
You should assume that the information appearing in this annual report is accurate only as of the date it was
issued. Our business, financial condition, results of operations and prospects may have changed since that date.
For a discussion of the risks, uncertainties and assumptions that could affect our future events,
developments or results, you should carefully review the “ Risk Factors” described beginning on page 18, as well
as “Business” beginning on page 4 and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” beginning on page 30.
Our forward-looking statements could be wrong in light of these and other risks, uncertainties and
assumptions. The future events, developments or results described in this report could turn out to be materially
different. We have no obligation to publicly update or revise our forward-looking statements after the date of this
annual report and you should not expect us to do so.
4
Investors should also be aware that while we do, from time to time, communicate with securities analysts
and others, we do not, by policy, selectively disclose to them any material nonpublic information or other
confidential commercial information. Accordingly, stockholders should not assume that we agree with any
statement or report issued by any analyst regardless of the content of the statement or report. We do not, by
policy, confirm forecasts or projections issued by others. Thus, to the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
Item 1. Business.
General
PART I
We are a full-service provider of outsourced receivables management and related services. Our primary
business is the purchase, collection and management of portfolios of defaulted consumer receivables. These are
the unpaid obligations of individuals to credit originators, which include banks, credit unions, consumer and auto
finance companies and retail merchants. We also provide a broad range of contingent and fee-based services,
including collateral-location services for credit originators via IGS, fee-based collections through Anchor
Receivables Management (we refer to this business in this document as “ARM”) and revenue administration,
audit and debt discovery/recovery services for government entities through RDS which we commenced after our
acquisition of the assets of Alatax, Inc. in July 2005. We believe that the strengths of our business are our
sophisticated approach to portfolio pricing and servicing, our emphasis on developing and retaining our
collection personnel, our sophisticated collections systems and procedures and our relationships with many of the
largest consumer lenders in the United States. Our proven ability to service defaulted consumer receivables
allows us to offer debt owners a complete outsourced solution to address their defaulted consumer receivables.
The defaulted consumer receivables we collect are generally either purchased from sellers of defaulted consumer
debt or are collected on behalf of debt owners on a commission fee basis. We intend to continue to build on our
strengths and grow our business through the disciplined approach that has contributed to our success to date.
We use the following terminology throughout our reports: “Cash Receipts” refers to collections on our
owned portfolios together with commission income and sales of finance receivables. “Cash Collections” refers
to collections on our owned portfolios only, exclusive of commission income and sales of finance receivables.
“Amortization Rate” refers to cash collections applied to principal as a percentage of total cash collections.
“Income Recognized on Finance Receivables” refers to income derived from our owned debt portfolios and is
shown net of valuation allowances. “Cash Sales of Finance Receivables” refers to the sales of our owned
portfolios. “Commissions” refers to fee income generated from our wholly-owned contingent fee and fee-for-
service subsidiaries.
We specialize in receivables that have been charged-off by the credit originator. Because the credit
originator and/or other debt servicing companies have unsuccessfully attempted to collect these receivables, we
are able to purchase them at a substantial discount to their face value. From our 1996 inception through
December 31, 2006, we acquired 803 portfolios with a face value of $24.2 billion for $527.8 million,
representing more than 11.4 million customer accounts. The success of our business depends on our ability to
purchase portfolios of defaulted consumer receivables at appropriate valuations and to collect on those
receivables effectively and efficiently. Since inception, we have been able to collect at an average rate of 2.5 to
3.0 times our purchase price for defaulted consumer receivables portfolios, as measured over a five to ten year
period, which has enabled us to generate increasing profits and positive cash flow.
We have achieved strong financial results since our formation, with cash collections growing from $10.9
million in 1998 to $236.4 million in 2006. Total revenue has grown from $6.8 million in 1998 to $188.3 million
in 2006, a compound annual growth rate of 51%. Similarly, pro forma net income has grown from $402,000 in
1998 to net income of $44.5 million in 2006.
We were initially formed as Portfolio Recovery Associates, L.L.C., a Delaware limited liability company, on
March 20, 1996. Prior to the formation of Portfolio Recovery Associates, Inc., members of our current
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, now owned by
HSBC. In connection with our 2002 initial public offering (our “IPO”), all of the membership units of Portfolio
5
Recovery Associates, L.L.C. were exchanged, simultaneously with the effectiveness of our 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.
The Company maintains an Internet website at the following address: www.portfoliorecovery.com.
We make available on or through our website certain reports that we file with or furnish to the SEC in
accordance with the Securities Exchange Act of 1934. These include our annual reports on Form 10-K, our
quarterly reports on Form 10-Q and our current reports on Form 8-K. We make this information available on our
website free of charge as soon as reasonably practicable after we electronically file the information with or
furnish it to the SEC. The information that is filed with the SEC may be read or copied at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, information on the operation of the
Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet
site that contains reports, proxy and information statements and other information regarding issuers that file
electronically with the SEC at: www.sec.gov.
Reports filed with or furnished to the SEC are also available free of charge upon request by contacting our
corporate office at:
Portfolio Recovery Associates, Inc.
Attn: Investor Relations
120 Corporate Boulevard, Suite 100
Norfolk, Virginia 23502
Competitive Strengths
Complete Outsourced Solution for Debt Owners
We offer debt owners a complete outsourced solution to address their defaulted consumer receivables.
Depending on a debt owner’s timing and needs, we can either purchase their defaulted consumer receivables,
providing immediate cash, or service those receivables on their behalf for either a fee-for-service or a
commission fee, based on a percentage of our collections. We 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 internal and external collection efforts. This flexibility
helps us meet the needs of debt owners and allows us to become a trusted resource. Furthermore, our strength
across multiple transaction and asset types provides the opportunity to cross-sell our services to debt owners,
building on successful engagements. Through our RDS business, we have the ability to provide these services to
local governments.
Disciplined and Proprietary Underwriting Process
One of the key components of our growth has been our ability to price portfolio acquisitions at levels that
have generated profitable returns on investment. Since inception, we have been able to collect at an average rate
of 2.5 to 3.0 times our purchase price for defaulted consumer receivables portfolios, as measured over a five to
ten year period, which has enabled us to generate increasing profits and cash flow. In order to price portfolios
and forecast the targeted collection results for a portfolio, we use two separate statistical models developed
internally, which we may supplement with on-site due diligence and data obtained from the debt owner’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 we collect on our portfolios, the results are input back into the models in an ongoing process which
we believe increases their accuracy. Through December 31, 2006 we have acquired 803 portfolios with a face
value of $24.2 billion.
6
Ability to Hire, Develop and Retain Productive Collectors
We place considerable focus on our ability to hire, develop and retain effective collectors who are key to our
continued growth and profitability. Several large military bases and numerous telemarketing, customer service
and reservation phone centers are located near our headquarters and regional offices in Virginia, providing access
to a large pool of eligible personnel. The Hutchinson, Kansas, Las Vegas, Nevada, Birmingham, Alabama and
Jackson, Tennessee areas also provide a sufficient potential workforce of eligible personnel. We have found that
tenure is a primary driver of our collector effectiveness. We offer our 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 our collectors at the time of our IPO, and many tenured collectors were awarded nonvested
shares in 2004, 2005 and 2006. We have a comprehensive six week training program for new owned portfolio
collectors and provide continuing advanced training classes which are conducted in our four training centers.
Recognizing the demands of the job, our management team has endeavored to create a professional and
supportive environment for all of our employees.
Established Systems and Infrastructure
We have devoted significant effort to developing our systems, including statistical models, databases and
reporting packages, to optimize our portfolio purchases and collection efforts. In addition, we believe that our
technology infrastructure is flexible, secure, reliable and redundant, to ensure the protection of our sensitive data
and to mitigate exposure to systems failure or unauthorized access. We believe that our systems and
infrastructure give us meaningful advantages over our competitors. We have developed financial models and
systems for pricing portfolio acquisitions, managing the collections process and monitoring operating results.
We perform a static pool analysis monthly on each of our portfolios, inputting actual results back into our
acquisition models, to enhance their accuracy. We monitor collection results continuously, seeking to identify
and resolve negative trends immediately. Our comprehensive management reporting package is designed to fully
inform our management team so that they may make timely operating decisions. This combination of hardware,
software and proprietary modeling and systems has been developed by our management team through years of
experience in this industry and we believe provides us with an important competitive advantage from the
acquisition process all the way through collection operations.
Strong Relationships with Major Credit Originators
We have done business with most of the top consumer lenders in the United States. We maintain an
extensive marketing effort and our senior management team is in contact on a regular basis with known and
prospective credit originators. We believe that we have 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. We have never failed to close on a
transaction. Similarly, if a credit originator sells a portfolio to a debt buyer which has a reputation for violating
industry standard collecting practices, it can taint the reputation of the credit originator. We go to great lengths
to collect from consumers in a responsible, professional and legally compliant manner. We believe our strong
relationships with major credit originators provide us with access to quality opportunities for portfolio purchases
and contingent fee collection placements.
7
Experienced Management Team
We have an experienced management team with considerable expertise in the accounts receivable
management industry. Prior to our formation, our 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, now owned by HSBC. As we have grown, the original management team
has been expanded to include a group of experienced, seasoned executives.
Portfolio Acquisitions
Our portfolio of defaulted consumer receivables includes a diverse set of accounts that can be categorized by
asset type, age and size of account, level of previous collection efforts and geography. To identify attractive
buying opportunities, we maintain an extensive marketing effort with our senior officers contacting known and
prospective sellers of defaulted consumer receivables. We acquire receivables of Visa®, MasterCard® and
Discover® credit cards, private label credit cards, installment loans, lines of credit, bankrupt, deficiency balances
of various types, legal judgments, and trade payables, all from a variety of debt owners. These debt owners
include major banks, credit unions, consumer finance companies, telecommunication providers, retailers,
utilities, insurance companies, medical groups/hospitals, other debt buyers and auto finance companies. In
addition, we exhibit at trade shows, advertise in a variety of trade publications and attend industry events in an
effort to develop account purchase opportunities. We also maintain active relationships with brokers of defaulted
consumer receivables.
The following chart categorizes our life to date owned portfolios as of December 31, 2006 into the major
asset types represented.
Asset Type
Visa/MasterCard/Discover
Consumer Finance
Private Label Credit Cards
Auto Deficiency
No. of
Accounts
5,376,651
3,606,270
2,146,784
333,467
Life to Date Purchased Face
Value of Defaulted Consumer
Receivables (1)
$ 16,348,256,929
3,049,956,353
2,781,276,748
2,039,524,851
%
46.9%
31.5%
18.7%
2.9%
%
67.5%
12.6%
11.5%
8.4%
Total:
11,463,172
100.0%
$
24,219,014,881
100.0%
(1)
The “Life to Date Purchased Face Value of Defaulted Consumer Receivables” represents the original face
amount purchased from sellers and has not been decremented by any adjustments including payments and
buybacks (“buybacks” are defined as purchase price refunded by the seller due to the return of non-compliant
accounts).
We have done business with most of the largest consumer lenders in the United States. Since our formation,
we have purchased accounts from approximately 110 debt owners.
We have acquired portfolios at various price levels, depending on the age of the portfolio, its geographic
distribution, our historical experience with a certain asset type or credit originator and similar factors. A typical
defaulted consumer receivables portfolio ranges from $1 million to $150 million in face value and contains
defaulted consumer receivables from diverse geographic locations with average initial individual account
balances of $400 to $7,000.
The age of a defaulted consumer receivables portfolio (the time since an account has been charged-off) is an
important factor in determining the price at which we will purchase a receivables portfolio. Generally, there is an
inverse relationship between the age of a portfolio and the price at which we will purchase the portfolio. This
8
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 360 to 450 days past due and charged-off, have been previously
placed with one contingent fee servicer and receive a lower purchase price. Secondary and tertiary accounts are
typically more than 540 days past due and charged-off, have been placed with two or three contingent fee
servicers and receive even lower purchase prices.
9
As shown in the following chart, as of December 31, 2006, we purchase or service accounts at any point in
the delinquency cycle.
Account Type
No. of Accounts
%
Life to Date Purchased Face
Value of Defaulted Consumer
Receivables (1)
Fresh
Primary
Secondary
Tertiary
BK Trustees (2)
Other (2)
272,695
2.4% $ 1,163,166,261
1,287,466
11.2% 2,820,152,617
2,124,532
18.6% 3,942,881,497
2,990,790
26.1% 3,708,911,628
1,550,738
13.5% 6,320,427,075
3,236,951
28.2% 6,263,475,803
%
4.8%
11.6%
16.3%
15.3%
26.1%
25.9%
Total:
11,463,172
100.0%
$
24,219,014,881
100.0%
(1) The “Life to Date Purchased Face Value of Defaulted Consumer Receivables” represents the original
face amount purchased from sellers and has not been decremented by any adjustments including
payments and buybacks.
(2) Included in “Other” are purchased accounts that were previously included in “BK Trustees”. These
accounts have been reclassified to more properly reflect historical buying and the nature of the accounts.
We also review the geographic distribution of accounts within a portfolio because we have 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 our
maximum purchase price equation.
The following chart sets forth our overall life to date portfolio of defaulted consumer receivables
geographically as of December 31, 2006:
Geographic Distribution
Texas
California
Florida
New York
Pennsylvania
New Jersey
Ohio
Illinois
North Carolina
Georgia
Michigan
Massachusetts
Virginia
Arizona
Maryland
Missouri
Other (3)
No. of
Accounts
2,155,782
1,062,532
843,108
644,997
346,765
285,265
368,310
451,219
367,796
287,220
305,659
236,485
214,999
166,535
182,371
324,497
3,219,632
Life to Date Purchased Face
Value of Defaulted Consumer
Receivables (1)
%
19% $ 3,002,971,595
9% 2,835,314,011
7% 2,380,826,790
6% 1,698,736,386
3% 918,977,752
2% 849,277,542
3% 791,995,960
4% 824,313,924
3% 796,496,805
3% 682,589,442
3% 611,109,844
2% 545,904,331
2% 455,610,000
1% 452,744,304
2% 430,945,120
3% 433,370,156
28% 6,507,830,919
Original Purchase Price of
Defaulted Consumer
Receivables (2)
%
12% $ 63,109,706
12% 55,225,551
10% 48,030,067
7% 37,429,693
4% 22,331,632
4% 16,876,671
3% 17,859,999
3% 19,372,074
3% 18,589,155
3% 17,865,638
3% 15,176,646
2% 11,195,670
2% 11,167,323
2% 8,874,522
2% 9,088,320
2% 9,615,054
26% 146,009,891
%
12%
10%
9%
7%
4%
3%
3%
4%
4%
3%
3%
2%
2%
2%
2%
2%
28%
Total:
11,463,172
100%
$
24,219,014,881
100%
$
527,817,612
100%
(1) The “Life to Date Purchased Face Value of Defaulted Consumer Receivables” represents the original face
amount purchased from sellers and has not been decremented by any adjustments including payments and
buybacks.
(2) The “Original Purchase Price of Defaulted Consumer Receivables” represents the cash paid to sellers to
acquire portfolios of defaulted consumer receivables.
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(3) Each state included in "Other" represents less than 2% of the face value of total defaulted consumer
receivables.
Purchasing Process
We acquire portfolios from debt owners through auctions and negotiated sales. In an auction process, the
seller will assemble a portfolio of receivables and will either broadly offer the portfolio to the market or seek
purchase prices from specifically invited potential purchasers. In a privately negotiated sale process, the debt
owner will contact known, reputable purchasers directly, take bids and negotiate the terms of sale. On a limited
basis, we also acquire accounts in forward flow contracts. Under a forward flow contract, we agree to purchase
defaulted consumer receivables from a debt owner 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 owner efforts to
collect these receivables will not change. If this provision is not adhered to, 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 owner with
a reliable source of revenue and a professional resolution of defaulted consumer receivables.
In a typical sale transaction, a debt owner distributes a computer data file containing ten to fifteen 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.
We perform our initial due diligence on the portfolio by electronically cross-checking the data fields on the
computer disk or data tape against the accounts in our owned portfolios and against national demographic and
credit databases. We compile a variety of portfolio level reports examining all demographic data available.
When valuing pools of bankrupt consumer receivables, we seek to access information on the status of each
account’s bankruptcy case.
In order to determine a purchase price for a portfolio, we use two separate internally developed computer
models, which we may supplement 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. We analyze the portfolio using our
proprietary multiple regression model, which analyzes each account of the portfolio using variables in the
regression model. In addition, we analyze the portfolio as a whole using an 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. From these models we derive our quantitative purchasing
analysis which is 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, as we receive new flows under the
aforementioned contract we may obtain a representative test portfolio to evaluate and compare the performance
of the portfolio to the projections we developed in our purchasing analysis. In addition, when purchasing
bankrupt consumer receivables, we utilize a specifically designed pricing model.
Our 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 our collection history in
similar portfolios. We then use our multiple regression model to value each account. Using the two valuation
approaches, we determine cash collections over the life of the portfolio. We then summarize all anticipated cash
collections and associated direct expenses and project a collectibility value expressed both in dollars and
liquidation percentage and a detailed expense projection over the portfolio's estimated six to ten year economic
life. We use the total projected collectibility value and expenses to determine an appropriate purchase price.
We maintain a detailed static pool analysis on each portfolio that we have acquired, capturing all
demographic data and revenue and expense items for further analysis. We use the static pool analysis to refine
the underwriting models that we use to price future portfolio purchases. The results of the static pool analysis are
input back into our models, increasing the accuracy of the models as the data set increases with every portfolio
purchase and each day's collection efforts.
11
The quantitative and qualitative data derived in our due diligence is evaluated together with our knowledge
of the current defaulted consumer receivables market and any subjective factors about the portfolio or the debt
owner of which management may be aware. A portfolio acquisition approval memorandum is prepared for each
prospective portfolio before a purchase price is submitted to the debt owner. This approval memorandum, which
outlines the portfolio's anticipated collectibility and purchase structure, is distributed to members of our
Investment Committee. The approval by the Committee sets a maximum purchase price for the portfolio. The
Investment Committee is currently comprised of Steve Fredrickson, Chief Executive Officer and President,
Kevin Stevenson, Chief Financial and Administrative Officer and Craig Grube, Executive Vice President -
Acquisitions.
Once a portfolio purchase has been approved by our investment committee and the terms of the sale have
been agreed to with the debt owner, the acquisition is documented in an agreement that contains customary terms
and conditions. Provisions are typically incorporated for bankrupt, disputed, fraudulent or deceased accounts
and typically, the debt owner either agrees to repurchase these accounts or replace them with acceptable
replacement accounts within certain time frames.
Owned Collection Operations
Our work flow management system places, recalls and prioritizes accounts in collectors' work queues, based
on our analyses of our accounts and other demographic, credit and prior work collection attributes. We use this
process to focus our work effort on those consumers most likely to pay on their accounts and to rotate to other
collectors the non-paying but most likely to pay accounts from which other collectors have been unsuccessful in
receiving payment. The majority of our collections occur as a result of telephone contact with consumers.
The collectibility forecast for a newly acquired portfolio will help determine collection strategy. Accounts
which are determined to have the highest predicted collection 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 another passive, low cost method. Some accounts may be worked using a letter and/or settlement
strategy. We may obtain credit reports for various accounts after the collection process begins. When a collector
establishes contact with a consumer, the account information is placed automatically in the collector's work
queue.
Our 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 and tenure of the collector. The work
queue is depleted and replenished automatically by our 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 us. 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 generally 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, we have developed a system which enables us to make withdrawals from a consumer's
bank account, in accordance with the directions of the customer.
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, or verifying the accuracy of such
information. 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 us 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, we determine whether to commence legal action to judicially collect on the receivable. The
12
legal process can take an extended period of time, but it also generates cash collections that likely would not have
been realized otherwise.
Our legal recovery department oversees our internal legal collections 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 flat fee or contingent fee basis. Legal cash collections currently constitute approximately 32% of our
total cash collections. As our portfolio matures, a larger number of accounts will be directed to our legal
recovery department for judicial collection; consequently, we anticipate that legal cash collections will grow
commensurately and comprise a larger percentage of our total cash collections. During 2004, we began using a
combination of internal staff (attorney and support), as well as external attorneys, to pursue legal collections in
certain states and under certain circumstances. This has grown to over 30 states, utilizing the lower courts, up to
jurisdictional limits. This distribution channel allows us to work accounts that we would not normally pursue
through the use of contingent fee collection attorneys because of cost. Our legal recovery department also
collects claims against estates in cases involving deceased debtors having assets at the time of death.
Our bankruptcy department files proofs of claim (“POCs”) and performs all administrative functions and
tracking on accounts that are included in consumer bankruptcies filed under Chapter 13 of the U.S. Bankruptcy
Code in order to substantiate our claims and ensure that we participate in any distributions to creditors. The
Bankruptcy Abuse Prevention and Consumer Protection Act, which was passed on October 17, 2005 (the
“Bankruptcy Reform Act”), established a “means test” which imposed strict income criteria for the filing of a
Chapter 7 bankruptcy petition. If a debtor’s income exceeds the median income for his or her state, he or she
may be required to file for Chapter 13 bankruptcy. Consequently, fewer debtors may be able to have their
obligations completely discharged in Chapter 7 bankruptcy actions, and instead may be required to repay a
portion of their debts under Chapter 13 payment plans. If this scenario occurs, it would enable us to generate
recoveries from a larger number of bankrupt debtors through the filing of POCs with the trustees of bankruptcy
courts. However, the increased complexities and expense of filing for bankruptcy, regardless of chapter, may
reduce the total number of bankruptcies filed and consequently limit our potential recoveries.
Fee-for-Service Businesses
In order to provide debt owners with alternative collection solutions and to capitalize on common
competencies between a fee-for-service collections operation and an acquired receivables portfolio business, we
commenced our ARM third-party contingent fee collections operation in March 2001. In a contingent fee
arrangement, debt owners typically place defaulted receivables with a third party collection agency 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 twelve months. 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 of receivables.
The determination of the commission fee to be paid for third-party collections is generally based upon the
age and 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
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, competition among third party agencies, and the clients' collection procedures and work standards
also contribute to establishing a commission fee.
Revenues from IGS are accounted for as commission revenue. IGS performs national skip tracing and
collateral recovery services, principally for auto finance companies, for a fee. The amount of fee earned is
generally dependent on several different outcomes: whether the debtor was found and a resolution on the account
occurred, if the collateral was repossessed or if payment was made by the debtor to the debt owner. For example,
13
if the debtor is not found, our fee is less than if the debtor is found and we are able to create a positive resolution
on the account.
RDS computes revenue using both of the aforementioned approaches. RDS collects delinquent taxes and
earns a contingent fee. This fee can vary based on the age of the debt being collected. RDS also processes tax
payments for taxing authorities. For this work, we are paid a fee for each transaction. RDS also performs tax
audit services, for which we are paid at an hourly rate. RDS provides local and state governments with a range
of revenue enhancement services including revenue administration, revenue discovery and recovery, aged
receivables management and compliance auditing.
Competition
We face competition in both of the markets we serve — owned portfolio and fee-for-service 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. We estimate 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.
We face bidding competition in our acquisition of defaulted consumer receivables and in obtaining
placement of fee-for-service receivables. We also compete on the basis of reputation, industry experience and
performance. Among the positive factors which we believe influence our ability to compete effectively in this
market are our ability to bid on portfolios at appropriate prices, our reputation from previous transactions
regarding our ability to close transactions in a timely fashion, our relationships with originators of defaulted
consumer receivables, our team of well-trained collectors who provide quality customer service and compliance
with applicable collections laws, our ability to collect on various asset types and our ability to provide both
purchased and contingent fee solutions to debt owners. Among the negative factors which we believe could
influence our ability to compete effectively in this market are that some of our 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 our industry than we
currently have.
Information Technology
Technology Operating Systems and Server Platform
The scalability of our systems provides us with a technology system that is flexible, secure, reliable and
redundant to ensure the protection of our sensitive data. We utilize Intel-based servers running industry standard
open systems coupled with Microsoft Windows 2000/2003 and NT Server operating systems. In addition, we
utilize a blend of purchased and proprietary software systems tailored to the needs of our business. These
systems are designed to eliminate inefficiencies in our collections, continue to meet business objectives in a
changing environment and meet compliance obligations with regulatory entities. Our proprietary hardware and
software systems are being leveraged to manage location information, phone and operational applications for
IGS and RDS. We believe our custom solutions will enhance the overall investigative capabilities of this
business while meeting compliance obligations with regulatory entities.
Network Technology
To provide delivery of our applications, we utilize Intel-based workstations across our entire business
operations. The environment is configured to provide speeds of 100 megabytes to the desktops of our collections
and administration staff. Our one gigabyte server network architecture supports high-speed data transport. Our
14
network system is designed to be scalable and meet expansion and inter-building bandwidth and quality of
service demands.
Database and Software Systems
The ability to access and utilize data is essential to us being able to operate nationwide in a cost-effective
manner. Our centralized computer-based information systems support the core processing functions of our
business under a set of integrated databases and are designed to be both replicable and scalable to accommodate
our internal growth. This integrated approach helps to assure that consistent sources are processed efficiently.
We use these systems for portfolio and client management, skip tracing, check taking, financial and management
accounting, reporting, and planning and analysis. The systems also support our consumers, including on-line
access to account information, account status and payment entry. We use a combination of Microsoft, Oracle
and Cache database software to manage our portfolios, financial, customer and sales data, and we believe these
systems will be sufficient for our needs for the foreseeable future. RDS maintains a unique, proprietary software
system that manages the movement of data, accounts and information throughout the unit. We believe this
system will be sufficient for our needs in the foreseeable future. Our contingent fee collections operations
database incorporates an integrated and proprietary predictive dialing platform used with our predictive dialer
discussed below.
Redundancy, System Backup, Security and Disaster Recovery
Our 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 our business.
We believe our 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, Kansas and Tennessee in order to help provide redundancy for data and processes should one
site be completely disabled. We have a disaster recovery plan covering our business that is tested on a periodic
basis. The combination of our locally distributed call control systems provides enterprise-wide call and data
distribution between our call centers for efficient portfolio collection and business operations. In addition to data
replication 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. Our Virginia
headquarters has two separate power and telecommunications feeds, an uninterruptible power supply and a
diesel-generator power plant, all of which provide a level of redundancy should a power outage or interruption
occur. We also have generators installed at our Hampton and Kansas locations. We also employ rigorous
physical and electronic security to protect our data. Our call centers have restricted card key access and
appropriate additional physical security measures. Electronic protections include data encryption, firewalls and
multi-level access controls. The facilities which currently house IGS and RDS feature uninterruptible power
supply units and electronic protections. Full-scale site power, telecommunication and all of the other systems
abilities of our other sites will be installed at IGS and RDS at a later time.
Plasma Displays for Real Time Data Utilization
We utilize plasma displays at our main facility to aid in recovery of portfolios. The displays provide real-
time business-critical information to our collection personnel for efficient collection efforts such as telephone,
production, employee status, goal trending, training and corporate information.
Predictive Dialer Technology
15
The Avaya Proactive Contact Dialer ensures that our collection staff focuses on certain defaulted consumer
receivables according to our specifications. Our predictive dialer takes account of all campaign and dialing
parameters and is able to automatically adjust its dialing pace to match changes in campaign conditions and
provide the lowest possible wait times and abandon rates. In addition, the dialer allows our collectors to only
handle live voice calls by leaving automated messages on all calls where answering machines are detected. This
feature allows our representatives to speak with more debtors per agent hour, and also increases our inbound call
volume.
Employees
We employed 1,291 persons on a full-time basis, including the following number of front line operations
employees by business: 937 on our owned portfolios, 81 working in our ARM contingent fee collections
operations, 85 working in our IGS operations and 32 working in our RDS government collections operations, as
of December 31, 2006. None of our employees are represented by a union or covered by a collective bargaining
agreement. We believe that our relations with our employees are good.
Hiring
We recognize that our collectors are critical to the success of our business as a majority of our collection
efforts occur as a result of telephone contact with consumers. We have found that the tenure and productivity of
our collectors are directly related. Therefore, attracting, hiring, training, retaining and motivating our collection
personnel is a major focus for us. We pay our collectors competitive wages and offer employees a full benefits
program which includes comprehensive medical coverage, short and long term disability, life insurance, dental
and vision coverage, pre-paid legal plan, 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, we provide 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. We have awarded stock based compensation to many of our tenured collectors. We
believe that these practices have helped us achieve an annual post-training turnover rate of 56% in 2006.
A large number of telemarketing, customer-service and reservation phone centers are located near our
Virginia headquarters. We believe that we offer a competitive and, in many cases, a higher base wage than many
local employers and therefore have access to a large number of eligible personnel. In addition, there are several
military bases in the area. We employ numerous military spouses and retirees and find them to be an excellent
source of employees. We have also found the Las Vegas, Nevada, Hutchinson, Kansas, Birmingham, Alabama
and Jackson, Tennessee areas to provide a large potential workforce of eligible personnel.
Training
We provide 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 our profitability. Each
trainee must successfully pass a comprehensive examination before being assigned to the collection floor. In
addition, we conduct continuing advanced classes in our four training centers. Our technology and systems
allow us to monitor individual employees and then offer additional training in areas of deficiency to increase
productivity.
Outsourced Collections Department
Legal Recovery
An important component of our collections effort involves our outsourced collections department and the
judicial collection of accounts of customers who have the ability, but not the willingness, to resolve their
obligations. Accounts for which the consumer is not cooperative and for which we can establish a garnishable
job or attachable asset are reviewed for legal action. Depending on the balance of the defaulted consumer
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receivable and the applicable state collection laws, we determine whether to commence legal action to 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. Our legal recovery department oversees internal legal collections
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, all of which work on a contingent fee basis. Legal cash
collections currently constitute approximately 32% of our total collections. As our portfolio matures, a larger
number of accounts will be directed to our outsourced collections department for judicial collection;
consequently, we anticipate that legal collections will grow commensurately and comprise a larger percentage of
our total cash collections. During 2004, we began using a combination of internal staff (attorney and support), as
well as external attorneys, to pursue legal collections in certain states and under certain circumstances. This has
grown to over 30 states, utilizing the lower courts, up to jurisdictional limits. This distribution channel allows us
to work accounts that we would not normally pursue through the use of contingent fee collection attorneys
because of cost.
Bankruptcy
Our bankruptcy department files POCs and performs all administrative functions and tracking on accounts
that are included in consumer bankruptcies filed under Chapter 13 of the U.S. Bankruptcy Code in order to
substantiate our claims and ensure that we participate in any distributions to creditors. The Bankruptcy Reform
Act established a “means test” which imposed strict income criteria for the filing of a Chapter 7 bankruptcy
petition. If a debtor’s income exceeds the median income for his or her state, he or she may be required to file
for Chapter 13 bankruptcy. Consequently, fewer debtors may be able to have their obligations completely
discharged in Chapter 7 bankruptcy actions, and instead may be required to repay a portion of their debts under
Chapter 13 payment plans. If this scenario occurs, it would enable us to generate recoveries from a larger
number of bankrupt debtors through the filing of POCs with the trustees of bankruptcy courts. However, the
increased complexities and expense of filing for bankruptcy, regardless of chapter, may reduce the total number
of bankruptcies filed and consequently limit our potential recoveries.
Corporate Legal Department
Our corporate legal department manages general corporate governance, litigation management, insurance
management and risk assessment, corporate transactions, intellectual property, contract and document preparation
and review, including real estate purchase and lease agreements and portfolio purchase documents, federal
securities law and other regulatory and statutory compliance, obtaining and maintaining multi-state licensing,
bonding and insurance, dispute and complaint resolution. As a part of its compliance functions, our corporate
legal department works with our internal auditor and the Audit Committee of our Board of Directors in the
implementation of our Code of Ethics. In that connection, we have implemented company wide ethics training
and mandatory ethics quizzes and have established a confidential telephone hotline to report suspected policy
violations, fraud, embezzlement, deception in record keeping and reporting, accounting, auditing matters and
other acts which are inappropriate, criminal and/or unethical. Our Code of Ethics Policy is available at the
Investor Relations page of our website. Our corporate legal department also provides guidance to our quality
control department and assists with training our staff in relevant areas including extensive training on the Fair
Debt Collection Practices Act and other relevant laws and regulations. Our corporate legal department distributes
guidelines and procedures for collection personnel to follow when communicating with customers, customer’s
agents, attorneys and other parties during our recovery efforts. This includes overseeing the letter process and
approving all written communications to account debtors. In addition, our corporate legal department regularly
researches, and provides collections personnel and our training department with summaries and updates of
changes in, federal and state statutes and relevant case law, so that they are aware of and in compliance with
changing laws and judicial decisions when skip-tracing or collecting accounts.
Regulation
Federal and state statutes establish specific guidelines and procedures which debt collectors must follow
when collecting consumer accounts. It is our policy to comply with the provisions of all applicable federal laws
and comparable state statutes in all of our recovery activities, even in circumstances in which we may not be
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specifically subject to these laws. Our failure to comply with these laws could have a material adverse effect on
us in the event and to the extent that they apply to some or all of our recovery activities. 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 our 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. We provide information concerning our accounts to the
three major credit reporting agencies, and it is our practice to correctly report this information and to investigate
credit reporting disputes. The Fair and Accurate Credit Transactions Act amended the Fair Credit Reporting Act
to include additional duties applicable to data furnishers with respect to information in the consumer’s credit file
that the consumer identifies as resulting from identity theft, and requires that data furnishers have procedures in
place as of December 1, 2004 to prevent such information from being furnished to credit reporting agencies. We
have instituted measures to effect compliance with these requirements.
• 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 we do not share consumer information with non-related entities,
except as required by law, or except as needed to collect on the receivables, our 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
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, we use 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.
• Servicemembers Civil Relief Act. The Soldiers’ and Sailors’ Civil Relief Act of 1940 was amended in
December 2003 as the Servicemembers Civil Relief Act (“SCRA”). The SCRA gives U.S. military service
personnel relief from credit obligations they may have incurred prior to entering military service, and may also
apply in certain circumstances to obligations and liabilities incurred by a servicemember while serving on active
duty. The SCRA prohibits creditors from taking specified actions to collect the defaulted accounts of
servicemembers. The SCRA impacts many different types of credit obligations, including installment contracts
and court proceedings, and tolls the statute of limitations during the time that the servicemember is engaged in
active military service. The SCRA also places a cap on interest bearing obligations of servicemembers to an
amount not greater than 6% per year, inclusive of all related charges and fees.
• Health Insurance Portability and Accountability Act. The Health Insurance Portability and Accountability
Act (“HIPAA”) provides standards to protect the confidentiality of patients’ personal healthcare and financial
information. Pursuant to HIPAA, business associates of health care providers, such as agencies which collect
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healthcare receivables, must comply with certain privacy and security standards established by HIPAA to ensure
that the information provided will be safeguarded from misuse.
• 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 the above federal laws, and
specific licensing requirements which affect our 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 we are not a credit originator, some of these laws directed toward credit originators may
occasionally affect our operations because our 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 originators require, among other things, that credit card issuers disclose to
consumers the interest rates, fees, grace periods and balance calculation methods associated with their credit card
accounts. Consumers are entitled under current laws to have payments and credits applied to their accounts
promptly, to receive prescribed notices and to require billing errors to be resolved promptly. Some laws prohibit
discriminatory practices in connection with the extension of credit. Federal statutes further provide that, in some
cases, consumers cannot be held liable for, or their liability is limited with respect to, charges to the credit card
account that were a result of an unauthorized use of the credit card. These laws, among others, may give
consumers a legal cause of action against us, or may limit our ability to recover amounts owing with respect to
the receivables, whether or not we committed any wrongful act or omission in connection with the account. If the
credit originator fails to comply with applicable statutes, rules and regulations, it could create claims and rights
for consumers that could reduce or eliminate their obligations to repay the account and have a possible material
adverse effect on us.
Accordingly, when we acquire defaulted consumer receivables, we contractually require credit originators to
indemnify us against any losses caused by their failure to comply with applicable statutes, rules and regulations
relating to the receivables before they are sold to us.
The U.S. Congress and several states have enacted legislation concerning identity theft. 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, as well as existing consumer protection and privacy protection laws, may
adversely affect our ability to recover the receivables. In addition, our failure to comply with these requirements
could adversely affect our ability to enforce the receivables.
We cannot assure you that some of the receivables were not established as a result of identity theft or
unauthorized use of a credit card and, accordingly, we could not recover the amount of the defaulted consumer
receivables. As a purchaser of defaulted consumer receivables, we may acquire receivables subject to legitimate
defenses on the part of the consumer. Our account purchase contracts allow us to return to the debt owners
certain defaulted consumer receivables that may not be collectible, due to these and other circumstances. Upon
return, the debt owners are required to replace the receivables with similar receivables or repurchase the
receivables. These provisions limit to some extent our losses on such accounts.
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Item 1A. Risk Factors.
To the extent not described elsewhere in this Annual Report, the following are risks related to our business.
We may not be able to purchase defaulted consumer receivables at appropriate prices, and a decrease in our
ability to purchase portfolios of receivables could adversely affect our ability to generate revenue
If we are unable to purchase defaulted receivables from debt owners at appropriate prices, or one or more
debt owners stop selling defaulted receivables to us, we could lose a potential source of income and our business
may be harmed.
The availability of receivables portfolios at prices which generate an appropriate return on our investment
depends on a number of factors both within and outside of our control, including the following:
• the continuation of current growth trends in the levels of consumer obligations;
• sales of receivables portfolios by debt owners; and
• competitive factors affecting potential purchasers and credit originators of receivables.
Because of the length of time involved in collecting defaulted consumer receivables on acquired portfolios
and the volatility in the timing of our collections, we may not be able to identify trends and make changes in our
purchasing strategies in a timely manner.
We may not be able to collect sufficient amounts on our defaulted consumer receivables to fund our operations
Our business primarily consists of acquiring and servicing receivables that consumers have failed to pay and
that the credit originator has deemed uncollectible and has generally charged-off. The debt owners 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 we may not collect a sufficient amount to cover our investment associated with purchasing the
defaulted consumer receivables and the costs of running our business.
We experience high employee turnover rates and we may not be able to hire and retain enough sufficiently
trained employees to support our operations
The accounts receivables management industry is very labor intensive and, similar to other companies in our
industry, we typically experience a high rate of employee turnover. Our annual turnover rate, excluding those
employees that do not complete our six week training program, was 56% in 2006. We compete for qualified
personnel with companies in our industry and in other industries. Our growth requires that we continually hire
and train new collectors. A higher turnover rate among our collectors will increase our recruiting and training
costs and limit the number of experienced collection personnel available to service our defaulted consumer
receivables. If this were to occur, we would not be able to service our defaulted consumer receivables effectively
and this would reduce our ability to continue our growth and operate profitability.
We serve markets that are highly competitive, and we may be unable to compete with businesses that may have
greater resources than we have
We face competition in both of the markets we serve — owned portfolio and fee based accounts receivable
management — from new and existing providers of outsourced receivables management services, including other
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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 is highly fragmented and competitive, consisting of approximately 6,000
consumer and commercial agencies, most of which compete in the contingent fee business.
We face bidding competition in our acquisition of defaulted consumer receivables and in our placement of
fee based receivables, and we also compete on the basis of reputation, industry experience and performance.
Some of our 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 our industry than we currently have. In the future, we may not have the resources or
ability to compete successfully. As there are few significant barriers for entry to new providers of fee based
receivables management services, there can be no assurance that additional competitors with greater resources
than ours will not enter the market. Moreover, there can be no assurance that our existing or potential clients will
continue to outsource their defaulted consumer receivables at recent levels or at all, or that we may continue to
offer competitive bids for defaulted consumer receivables portfolios. If we are unable to develop and expand our
business or adapt to changing market needs as well as our current or future competitors are able to do, we may
experience reduced access to defaulted consumer receivables portfolios at appropriate prices and reduced
profitability.
We may not be successful at acquiring receivables of new asset types or in implementing a new pricing structure
We may pursue the acquisition of receivables portfolios of asset types in which we have little current
experience. We may not be successful in completing any acquisitions of receivables of these asset types and our
limited experience in these asset types may impair our ability to collect on these receivables. This may cause us
to pay too much for these receivables and consequently, we may not generate a profit from these receivables
portfolio acquisitions.
In addition, we may in the future provide a service to debt owners in which debt owners will place consumer
receivables with us 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. We may not be
successful in determining and implementing the appropriate pricing for this pricing structure, which may cause
us to be unable to generate a profit from this business.
Our collections may decrease if certain types of bankruptcy filings involving liquidations increase
Various economic trends may contribute 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 we service are generally unsecured we often would not be able to collect on those receivables. We
cannot ensure that our collection experience would not decline with an increase in personal bankruptcy filings or
a change in bankruptcy regulations or practices. If our actual collection experience with respect to a defaulted
bankrupt consumer receivables portfolio is significantly lower than we projected when we purchased the
portfolio, our financial condition and results of operations could deteriorate.
We may make acquisitions that prove unsuccessful or strain or divert our resources
We intend to consider acquisitions of other companies in our industry that could complement our business,
including the acquisition of entities offering greater access and expertise in other asset types and markets that are
related but that we do not currently serve. If we do acquire other businesses, we may not be able to successfully
integrate these businesses with our own and we may be unable to maintain our standards, controls and policies.
Further, acquisitions may place additional constraints on our resources by diverting the attention of our
management from other business concerns. Through acquisitions, we may enter markets in which we have 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
our profitability and harm our business.
The loss of IGS customers could negatively affect our operations
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In October 2004 we acquired substantially all of the assets of IGS Nevada, Inc. A significant portion of the
valuation was tied to existing client relationships. Our customers, in general, may terminate their relationship
with us on 90 days’ prior notice. In the event a customer or customers terminate or significantly cut back any
relationship with us, it could reduce our profitability and harm our business and could potentially give rise to an
impairment charge related to an intangible asset specifically ascribed to existing client relationships.
We may not be able to continually replace our defaulted consumer receivables with additional receivables
portfolios sufficient to operate efficiently and profitably
To operate profitably, we must continually acquire and service a sufficient amount of defaulted consumer
receivables to generate revenue that exceeds our expenses. Fixed costs such as salaries and lease or other facility
costs constitute a significant portion of our overhead and, if we do not continually replace the defaulted
consumer receivables portfolios we service with additional portfolios, we may have to reduce the number of our
collection personnel. We would then have to rehire collection staff as we obtain additional defaulted consumer
receivables portfolios. These practices could lead to:
• low employee morale;
• fewer experienced employees;
• higher training costs;
• disruptions in our operations;
• loss of efficiency; and
• excess costs associated with unused space in our facilities.
Furthermore, heightened regulation of the credit card and consumer lending industry or changing credit
origination strategies may result in decreased availability of credit to consumers, potentially leading to a future
reduction in defaulted consumer receivables available for purchase from debt owners. We cannot predict how
our 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.
We may not be able to manage our growth effectively
We have expanded significantly since our formation and we intend to maintain our growth focus. However,
our growth will place additional demands on our resources and we cannot ensure that we will be able to manage
our growth effectively. In order to successfully manage our growth, we may need to:
• expand and enhance our administrative infrastructure;
• continue to improve our management, financial and information systems and controls; and
• recruit, train, manage and retain our employees effectively.
Continued growth could place a strain on our management, operations and financial resources. We cannot
ensure that our infrastructure, facilities and personnel will be adequate to support our future operations or to
effectively adapt to future growth. If we cannot manage our growth effectively, our results of operations may be
adversely affected.
Our operations could suffer from telecommunications or technology downtime or increased costs
Our success depends in large part on sophisticated telecommunications and computer systems. The
temporary or permanent loss of our computer and telecommunications equipment and software systems, through
casualty or operating malfunction, could disrupt our operations. In the normal course of our business, we must
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record and process significant amounts of data quickly and accurately to access, maintain and expand the
databases we use for our collection activities. Any failure of our information systems or software and our backup
systems would interrupt our business operations and harm our business. Our headquarters are 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, our 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 our profitability or disrupt our operations and harm our business.
We may not be able to successfully anticipate, manage or adopt technological advances within our industry
Our business relies on computer and telecommunications technologies and our ability to integrate these
technologies into our business is essential to our competitive position and our success. Computer and
telecommunications technologies are evolving rapidly and are characterized by short product life cycles. We
may not be successful in anticipating, managing or adopting technological changes on a timely basis.
While we believe that our existing information systems are sufficient to meet our current demands and
continued expansion, our future growth may require additional investment in these systems. We depend on
having the capital resources necessary to invest in new technologies to acquire and service defaulted consumer
receivables. We cannot ensure that adequate capital resources will be available to us at the appropriate time.
Our senior management team is important to our continued success and the loss of one or more members of
senior management could negatively affect our operations
The loss of the services of one or more of our key executive officers or key employees could disrupt our
operations. We have employment agreements with Steve Fredrickson, our president, chief executive officer and
chairman of our board of directors, Kevin Stevenson, our executive vice president and chief financial and
administrative officer, Craig Grube, our executive vice president of portfolio acquisitions, and most of our 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
we cannot ensure that the non-compete provisions will be enforceable. Our success depends on the continued
service and performance of our key executive officers, and we cannot guarantee that we will be able to retain
those individuals. The loss of the services of Mr. Fredrickson, Mr. Stevenson, Mr. Grube or other key executive
officers could seriously impair our ability to continue to acquire or collect on defaulted consumer receivables and
to manage and expand our business. Under one of our credit agreements, if both Mr. Fredrickson and
Mr. Stevenson cease to be president and chief financial and administrative officer, respectively, it would
constitute a default.
Our ability to recover and enforce our defaulted consumer receivables may be limited under federal and state
laws
Federal and state laws may limit our ability to recover and enforce our defaulted consumer receivables
regardless of any act or omission on our part. Some laws and regulations applicable to credit issuers may
preclude us from collecting on defaulted consumer receivables we purchase 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 our 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 our ability to collect on our defaulted consumer receivables and may harm
our 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 our defaulted consumer receivables.
Additionally, the Bankruptcy Reform Act is expected to temporarily disrupt our historical bankruptcy collection
curves, making it more difficult to accurately price bankrupt accounts that filed bankruptcy on or after October
17, 2005, the effective date of the Bankruptcy Reform Act. Further, new tax law changes such as Internal
Revenue Code Section 6050P (requiring 1099-C returns to be filed on discharge of indebtedness in excess of
$600) could negatively impact our ability to collect or cause us to incur additional expenses. Although we
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cannot predict if or how any future legislation would impact our business, our failure to comply with any current
or future laws or regulations applicable to us could limit our ability to collect on our defaulted consumer
receivables, which could reduce our profitability and harm our business. Our ability to recover on portfolios of
bankrupt consumer receivables may be impacted by changes in federal laws or the change in administrative
practices of the various bankruptcy courts.
Our ability to recover on portfolios of bankrupt consumer receivables may be impacted by changes in federal
laws or the change in administrative practices of the various bankruptcy courts
We recover on consumer receivables that have filed for bankruptcy protection under available U.S.
bankruptcy legislation. We recover on consumer receivables that have filed for bankruptcy protection after we
acquired them, and we also purchase accounts that are currently in bankruptcy proceedings. Changes in
bankruptcy laws may affect the process in which the various bankruptcy courts administer bankruptcy plans as
well as our ability to recover on bankrupt consumer receivables.
We utilize the interest method of revenue recognition for determining our 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
We utilize the interest method to determine income recognized on finance receivables. Under this method,
static pools of receivables we acquire are modeled upon their 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 the accuracy of
the modeling process deteriorates or there is a decline in anticipated cash flows, we would suffer reductions in
future revenues or a decline in the carrying value of our receivables portfolios or impairment charges, which in
any case would result in lower earnings in future periods and could negatively impact our stock price.
We may be required to incur impairment charges as a result of the application of American Institute of Certified
Public Accountants Statement of Position 03-3
In October 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of
Position 03-3 (“SOP 03-3”), “Accounting for Loans or Certain Securities Acquired in a Transfer.” SOP 03-3
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. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004
and amends Practice Bulletin 6 which remains in effect for loans acquired prior to the SOP 03-3 effective date.
SOP 03-3 limits 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. SOP 03-3 requires that the excess of the contractual
cash flows over expected cash flows not be recognized as an adjustment of revenue, expense, or on the balance
sheet. SOP 03-3 initially freezes 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, effective January 1, 2005, the carrying value of a portfolio will be
written down to maintain the then-current IRR. SOP 03-3 also amends Practice Bulletin 6 in a similar manner
and applies to all loans acquired prior to January 1, 2005. Increases in expected future cash flows can be
recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any
increased yield then becomes the new benchmark for impairment testing. SOP 03-3 provides that previously
issued annual financial statements would not need to be restated. Historically, as we have applied the guidance of
Practice Bulletin 6, we have moved yields upward and downward as appropriate under that guidance. However,
since SOP 03-3 guidance does not permit yields to be lowered, under either the revised Practice Bulletin 6 or
SOP 03-3, it will increase the probability of us having to incur impairment charges in the future, which could
reduce our profitability in a given period and could negatively impact our stock price.
We incur increased costs as a result of enacted and proposed changes in laws and regulations
Enacted and proposed changes in the laws and regulations affecting public companies, including the
provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the SEC and by the NASDAQ Global Stock
24
Market, have resulted in increased costs to us as we implement their requirements. These rules may affect the
cost of certain types of insurance, including director and officer liability insurance, or force us to accept reduced
policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact
of these events could also make it more difficult for us to attract and retain qualified persons to serve on our
board of directors, our board committees or as executive officers. We continue to evaluate and monitor
developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional
costs we will incur or the timing of such costs.
The future impact on us of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations
promulgated thereunder
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public
companies to include a report by management on the company’s internal control over financial reporting in our
annual reports on Form 10-K. This report is required to contain an assessment by management of the
effectiveness of such company’s internal controls over financial reporting. In addition, the public accounting firm
auditing a public company’s financial statements must attest to and report on management’s assessment of the
effectiveness of the company’s internal controls over financial reporting. As is the case with many public
companies, at this time the long-term impact of Section 404 on us is unclear. In the future, if we are unable to
comply with the requirements of Section 404 in a timely manner, it could result in an adverse reaction in the
financial markets due to a loss of confidence in the reliability of our internal controls over financial reporting,
which could cause the market price of our common stock to decline and make it more difficult for us to finance
our operations.
The market price of our shares of common stock could fluctuate significantly
Wide fluctuations in the trading price or volume of our shares of common stock could be caused by many
factors, including factors relating to our company or to investor perception of our company (including changes in
financial estimates and recommendations by research analysts), but also factors relating to (or relating to investor
perception of) the accounts receivable management industry or the economy in general.
Our certificate of incorporation, by-laws and Delaware law contain provisions that may prevent or delay a
change of control or that may otherwise be in the best interest of our stockholders
Our certificate of incorporation and by-laws contain provisions that may make it more difficult, expensive or
otherwise discourage a tender offer or a change in control or takeover attempt by a third-party, even if such a
transaction would be beneficial to our stockholders. The existence of these provisions may have a negative
impact on the price of our common stock by discouraging third-party investors from purchasing our common
stock. In particular, our certificate of incorporation and by-laws include provisions that:
• classify our board of directors into three groups, each of which will serve for staggered three-year terms;
• permit a majority of the stockholders to remove our directors only for cause;
• permit our directors, and not our stockholders, to fill vacancies on our board of directors;
• require stockholders to give us advance notice to nominate candidates for election to our board of directors
or to make stockholder proposals at a stockholders’ meeting;
• permit a special meeting of our stockholders be called only by approval of a majority of the directors, the
chairman of the board of directors, the chief executive officer, the president or the written request of
holders owning at least 30% of our common stock;
• permit our board of directors to issue, without approval of our stockholders, preferred stock with such
terms as our board of directors may determine;
25
• permit the authorized number of directors to be changed only by a resolution of the board of directors; and
• require the vote of the holders of a majority of our voting shares for stockholder amendments to our by-
laws.
In addition, we are subject to Section 203 of the Delaware General Corporation Law which provides certain
restrictions on business combinations between us and any party acquiring a 15% or greater interest in our voting
stock other than in a transaction approved by our board of directors and, in certain cases, by our stockholders.
These provisions of our certificate of incorporation and by-laws and Delaware law could delay or prevent a
change in control, even if our stockholders support such proposals. Moreover, these provisions could diminish
the opportunities for stockholders to participate in certain tender offers, including tender offers at prices above
the then-current market value of our common stock, and may also inhibit increases in the trading price of our
common stock that could result from takeover attempts or speculation.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal executive offices and primary operations facility are located in approximately 65,000 square
feet of leased space in two adjacent buildings in Norfolk, Virginia. This site can currently accommodate
approximately 770 employees. We own a two-acre parcel of land across from our headquarters which we
developed into a parking lot for use by our employees. We have also entered into a new lease for approximately
17,500 square feet in a new office being built adjacent to our current Norfolk headquarters. The majority of this
space will be occupied by our administrative and executive staff. We expect to move into this new facility in the
second quarter of 2007.
We own an approximately 20,000 square foot facility in Hutchinson, Kansas, and contiguous parcels of land
which are used primarily for employee parking. The Hutchinson site can currently accommodate approximately
200 employees. In conjunction with a recent expansion, we acquired an additional 4,000 square foot building
and 35,000 square feet of adjacent land in order to secure parking for the expanded facility.
We also lease a facility located in approximately 21,000 square feet of space in Hampton, Virginia which
can accommodate approximately 300 employees.
We also lease a 13,500 square-foot call center in Las Vegas, Nevada which can accommodate approximately
150 employees.
In connection with the purchase of Alatax, Inc. and the commencement of our RDS business, we assumed
existing leases for 5,600 square feet of office space in Birmingham, Alabama and approximately 400 square feet
of space in Montgomery, Alabama. We vacated the 5,600 square-foot facility in December 2006 when RDS
moved into a newly leased 15,000 square-foot facility in Birmingham, Alabama. The new facility can
accommodate approximately 160 employees.
In November 2006, we purchased a 34,000 square foot building and a nine-acre parcel of land in Jackson,
Tennessee. The new site can accommodate approximately 390 employees.
We do not consider any specific leased or owned facility to be material to our operations. We believe that
equally suitable alternative facilities are available in all areas where we currently do business.
Item 3. Legal Proceedings.
From time to time, we are involved in various legal proceedings which are incidental to the ordinary course
of our business. We regularly initiate lawsuits against consumers and are occasionally countersued by them in
such actions. Also, consumers occasionally initiate litigation against us, in which they allege that we have
violated a state or federal law in the process of collecting on an account. We do not believe that these routine
26
matters represent a substantial volume of our accounts or that, individually or in the aggregate, they are material
to our business or financial condition.
We are not a party to any material legal proceedings and we are unaware of any contemplated material
actions against us.
Item 4. Submission of Matters to a Vote of Securityholders.
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Price Range of Common Stock
Our common stock (“Common Stock”) began trading on the NASDAQ Global Stock Market under the
symbol “PRAA” on November 8, 2002. Prior to that time there was no public trading market for our common
stock. The following table sets forth the high and low sales price for the Common Stock, as reported by the
NASDAQ Global Stock Market, for the periods indicated.
2005
Quarter ended March 31, 2005
Quarter ended June 30, 2005
Quarter ended September 30, 2005
Quarter ended December 31, 2005
2006
Quarter ended March 31, 2006
Quarter ended June 30, 2006
Quarter ended September 30, 2006
Quarter ended December 31, 2006
High
$43.00
$42.29
$45.00
$48.39
$51.77
$52.98
$46.81
$47.97
Low
$33.52
$31.60
$38.71
$35.00
$43.89
$43.91
$38.23
$41.11
As of February 16, 2007, there were 23 holders of record of the Common Stock. Based on information
provided by our transfer agent and registrar, we believe that there are 11,629 beneficial owners of the Common
Stock.
Stock Performance
The following graph compares, from November 8, 2002, the date of the Company’s initial public offering,
to December 31, 2006, the cumulative stockholder returns assuming an initial investment of $100 on November
8, 2002 in the Company’s Common Stock, the stocks comprising the NASDAQ Global Market Composite Index
and the stocks comprising a peer group index consisting of six peers.
27
Stock Performance
$400
$300
$200
$100
$0
Nov 8, 2002
Dec. 31,
2002
Dec. 31,
2003
Dec. 31,
2004
Dec. 31,
2005
Dec. 31,
2006
PRAA
NASDAQ Global Market Composite Index
Peer Group Index
The comparisons of stock performance shown above are not intended to forecast or be indicative of possible
future performance of the Company’s common stock. The Company does not make or endorse any predictions as
to its future stock performance. In 2006, two of the companies historically in the peer group were removed
because they are no longer publicly traded companies. The impact of these companies has been removed for all
prior periods. The companies removed were NCO Group, Inc. and West Corporation.
Equity Incentives
The table below provides information with respect to securities authorized for issuance under our equity
compensation plans as of December 31, 2006:
Number of Securities
Authorized for
Issuance Under the
Pla
Number of Securities to be Issued
Upon Exercise of Outstanding
Options, Warrants, and Rights or
Upon Vesting of Nonvested Shares
Under the Plan
Weighted-average
Exercise Price
Outstanding Options,
Warrants and Rights (1)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plan (2)
Plan Category
Equity Compensation plans
approved by security holders
Equity Compensation plans not
approved by security holders
Total
995,30
(1) Includes grants of nonvested shares, for which there is no exercise price, but with respect to which
2,000,00
2,000,00
472,12
995,30
472,12
$10.4
$10.4
Non
Non
Non
N/
shares are awarded without cost when the restrictions have been realized. Excluding the impact of the
nonvested shares, the weighted average exercise price of outstanding options, warrants and rights is
$16.43.
(2) Excludes 532,573 exercised options and vested shares, which are not available for re-issuance.
Dividend Policy
Our board of directors sets our dividend policy. We do not currently pay dividends on our Common Stock;
however, our board of directors may determine in the future to declare or pay dividends on our Common Stock.
Any future determination as to the declaration and payment of dividends will be at the discretion of our board of
directors and will depend on then existing conditions, including our financial condition, results of operations,
contractual restrictions, capital requirements, business prospects and other factors that our board of directors may
consider relevant.
28
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the audited financial statements.
2006
2005
2004
2003
2002
Year Ended December 31,
(Dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Revenue:
Income recognized on finance receivables
Commissions
Net gain on cash sales of defaulted consumer receivables
Total revenue
$
163,357
24,965
-
188,322
$
134,674
13,851
-
148,525
$
106,254
7,142
-
113,396
$
81,796
3,131
-
84,927
$
53,803
1,944
100
55,847
Operating expenses:
Compensation and employee services
Outside legal and other fees and services
Communications
Rent and occupancy
Other operating expenses
Depreciation and amortization
Total operating expenses
Income from operations
Net interest income/(expenses)
Income before income taxes
Provision for income taxes
Net income (1)
Pro forma income taxes(2)
Pro forma net income(2)
Net income per share
Basic
Diluted
Pro forma net income per share(3)
Basic
Diluted
Weighted average shares (3)
Basic
Diluted
OPERATING AND OTHER FINANCIAL DATA:
Cash collections and commissions (4)
Operating expenses to cash collections and commissions
Return on equity (5)
Acquisitions of finance receivables, at cost (6)
Acquisitions of finance receivables, at face value
Employees at period end:
Total employees
Ratio of collection personnel to total employees (7)
58,142
40,139
5,876
2,276
4,758
5,131
116,322
72,000
206
72,206
27,716
44,332
29,965
4,424
2,101
3,424
4,679
88,925
59,600
331
59,931
23,159
36,620
21,408
3,638
1,745
2,712
2,383
68,506
44,890
(51)
44,839
17,388
28,987
14,147
2,772
1,189
1,932
1,445
50,472
34,455
(542)
33,913
13,199
$
44,490
$
36,772
$
27,451
$
20,714
$
$
2.80
2.77
$
$
2.35
2.28
$
$
1.79
1.73
$
$
1.42
1.32
21,701
8,093
1,915
799
1,436
940
34,884
20,963
(2,425)
18,538
1,473
17,065
5,694
$
11,371
$
$
1.08
0.94
15,911
16,082
15,642
16,149
15,357
15,853
14,546
15,712
10,529
12,066
$
$
$
$
261,357
45%
20%
112,406
7,788,158
$
$
205,226
43%
21%
149,645
5,307,918
$
$
160,546
43%
20%
61,165
3,340,434
$
$
120,183
42%
20%
61,815
2,229,682
$
$
$
81,198
43%
25%
42,382
1,966,296
$
$
1,291
88%
1,110
88%
948
89%
798
90%
581
88%
(1) At the time of our initial public offering, which commenced on November 8, 2002, we changed our legal
structure from a limited liability company to a corporation. As a limited liability company we were not
subject to Federal or state corporate income taxes. Therefore, net income does not give effect to taxes for all
periods prior to our initial public offering.
(2) For comparison purposes, for periods prior to 2003 we have presented pro forma net income, which reflects
income taxes assuming we had been a corporation since the time of our formation and assuming tax rates
equal to the rates that would have been in effect had we been required to report tax expenses in such years.
We believe that pro forma net income for periods prior to 2003 may be compared to net income for periods
subsequent to 2002.
(3) For periods prior to 2003, pro forma net income per share 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 fees received during the relevant
period.
(5) Calculated by dividing net income for each year by average monthly stockholders’ equity for the same year.
(6) Represents cash paid for finance receivables. It does not include certain capitalized costs or 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 us. 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.
29
(7) Includes all collectors and all first-line collection supervisors at December 31.
Below is listed some key balance sheet data for the periods presented:
(Dollars in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents
Investments
Finance receivables, net
Total assets
Long-term debt
Total debt, including obligations under capital lease and revolving lines of credit
Total stockholders' equity
2006
2005
As of December 31,
2004
2003
2002
$
25,101
-
226,447
293,378
690
932
247,278
$
15,985
-
193,645
247,772
1,152
16,535
195,322
$
24,513
23,950
105,189
175,176
1,924
2,501
151,389
$
24,912
-
92,569
126,394
1,657
2,208
119,148
$
11,989
5,950
65,526
88,288
966
1,465
80,608
Below is listed the quarterly income statements for the years ended December 31, 2006 and 2005:
(Dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Revenue:
Income recognized on finance receivables
Commissions
Total revenue
Operating expenses:
Compensation and employee services
Outside legal and other fees and services
Communications
Rent and occupancy
Other operating expenses
Depreciation and amortization
Total operating expenses
Income from operations
Net interest income (expense)
Income before income taxes
Provision for income taxes
Net income
Net income per share
Basic
Diluted
Weighted average shares
Basic
Diluted
Dec. 31,
2006
Sept. 30,
2006
June 30,
2006
For the Quarter Ended
Mar. 31,
Dec. 31,
2005
2006
Sept. 30,
2005
June 30,
2005
Mar. 31,
2005
$
41,830
7,129
48,959
$
41,760
6,076
47,836
$
40,394
5,791
46,185
$
39,373
5,968
45,341
$
34,614
4,712
39,326
$
33,987
3,518
37,505
$
33,823
2,093
35,916
$
32,249
3,529
35,778
15,160
10,757
1,483
583
1,264
1,360
30,607
18,352
100
18,452
7,038
14,550
10,582
1,475
573
1,212
1,279
29,671
18,165
105
18,270
7,027
14,335
9,740
1,304
560
1,205
1,239
28,383
17,802
96
17,898
6,795
14,096
9,060
1,614
561
1,076
1,253
27,660
17,681
(95)
17,586
6,856
11,841
7,811
1,211
558
1,108
1,410
23,939
15,387
41
15,428
5,980
11,216
7,417
1,116
555
834
1,288
22,426
15,079
129
15,208
5,866
10,415
7,575
1,040
512
729
1,039
21,310
14,606
129
14,735
5,673
10,861
7,162
1,058
476
753
940
21,250
14,528
32
14,560
5,640
$
11,414
$
11,243
$
11,103
$
10,730
$
9,448
$
9,342
$
9,062
$
8,920
$
$
0.72
0.71
$
$
0.71
0.70
$
$
0.70
0.69
$
$
0.68
0.67
$
$
0.60
0.58
$
$
0.60
0.58
$
$
0.58
0.56
$
$
0.57
0.55
15,960
16,106
15,915
16,071
15,897
16,085
15,872
16,065
15,745
16,196
15,692
16,173
15,599
16,074
15,532
16,152
30
Below is listed the quarterly balance sheet for the years ended December 31, 2006 and 2005:
Dec. 31,
2006
Sept. 30,
2006
June 30,
2006
Mar. 31,
2006
Dec. 31,
2005
Sept. 30,
2005
June 30,
2005
Mar. 31,
2005
Quarter Ended
(Dollars in thousands)
BALANCE SHEET DATA:
Assets
Cash and cash equivalents
Finance receivables, net
Property and equipment, net
Income tax receivable
Goodwill
Intangible assets, net
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
Total liabilities
Stockholders' equity
Common stock
Additional paid in capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
$
$
$
$
$
25,101
226,447
11,193
1,513
18,287
6,754
4,083
293,378
26,662
211,763
7,730
662
18,287
7,321
2,845
275,270
25,205
197,438
7,289
-
18,287
7,888
3,009
259,116
23,352
189,847
7,569
-
18,287
8,456
3,748
251,259
15,985
193,645
7,186
-
18,287
9,023
3,646
247,772
67,398
117,246
7,432
-
18,288
9,777
1,688
221,829
68,515
114,838
6,755
-
6,397
5,429
1,689
203,623
61,093
107,344
6,057
-
6,397
5,874
2,717
189,482
$
$
$
$
$
$
$
$
$
2,891
2,579
-
6,245
33,453
-
690
242
46,100
$
2,763
2,639
-
6,091
28,971
-
807
276
41,547
$
1,536
4,420
929
4,039
25,119
-
922
310
37,275
$
3,624
4,516
5,009
3,657
23,378
-
1,035
345
41,564
$
2,333
2,239
3,055
5,943
22,346
15,000
1,152
382
52,450
$
2,738
1,964
3,486
5,535
21,865
-
1,269
428
37,285
$
313
1,837
6,940
4,865
15,408
-
1,669
477
31,509
$
1,754
1,703
2,766
3,128
15,676
-
1,797
526
27,350
160
115,528
131,590
247,278
293,378
$
159
113,387
120,177
233,723
275,270
$
159
112,749
108,933
221,841
259,116
$
159
111,706
97,830
209,695
251,259
$
158
108,063
87,101
195,322
247,772
$
157
106,735
77,652
184,544
221,829
$
156
103,648
68,310
172,114
203,623
$
156
102,728
59,248
162,132
189,482
$
31
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, 2006, 2005 and 2004:
Revenue:
Income recognized on finance receivables
Commissions
Total revenue
Operating expenses:
Compensation and employee services
Outside legal and other fees and services
Communications
Rent and occupancy
Other operating expenses
Depreciation and amortization
Total operating expenses
Income from operations
Interest income
Interest expense
Income before income taxes
Provision for income taxes
Net income
_______
2006
2005
2004
$
163,357,323
24,964,444
188,321,767
58,141,684
40,139,272
5,875,815
2,276,140
4,758,157
5,130,628
116,321,696
72,000,071
584,092
(378,546)
72,205,617
27,715,801
44,489,816
$
86.7%
13.3
100.0
30.9
21.3
3.1
1.2
2.6
2.7
61.8
38.2
0.3
(0.2)
38.3
14.7
23.6%
$
134,674,344
13,850,805
148,525,149
44,332,298
29,964,999
4,424,080
2,100,914
3,423,791
4,678,598
88,924,680
59,600,469
611,490
(280,503)
59,931,456
23,159,461
36,771,995
$
90.7%
9.3
100.0
29.8
20.2
3.0
1.4
2.3
3.2
59.9
40.1
0.4
(0.2)
40.4
15.6
24.8%
$
106,254,441
7,141,796
113,396,237
36,620,054
21,407,570
3,638,144
1,744,885
2,712,463
2,382,896
68,506,012
44,890,225
222,718
(273,355)
44,839,588
17,388,148
27,451,440
$
93.7%
6.3
100.0
32.3
18.9
3.2
1.5
2.4
2.1
60.4
39.6
0.2
(0.2)
39.5
15.3
24.2%
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Revenue
Total revenue was $188.3 million for the year ended December 31, 2006, an increase of $39.8 million or
26.8% compared to total revenue of $148.5 million for the year ended December 31, 2005.
Income Recognized on Finance Receivables
Income recognized on finance receivables was $163.4 million for the year ended December 31, 2006, an
increase of $28.7 million or 21.3% compared to income recognized on finance receivables of $134.7 million for
the year ended December 31, 2005. The majority of the increase was due to an increase in our cash collections
on our owned defaulted consumer receivables to $236.4 million from $191.4 million, an increase of $45.0
million or 23.5%. Our amortization rate on owned portfolios for the year ended December 31, 2006 was 30.9%
while for the year ended December 31, 2005 it was 29.6%. During the year ended December 31, 2006, we
acquired defaulted consumer receivables portfolios with an aggregate face value amount of $7.8 billion at an
original purchase price of $112.4 million. During the year ended December 31, 2005, we acquired defaulted
consumer receivable portfolios with an aggregate face value of $5.3 billion at an original purchase price of
$149.6 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age,
type and ultimate collectibility. We may pay significantly different purchase rates for purchased receivables
within any period as a result of this quality fluctuation. As a result, the average purchase rate paid for any given
period can fluctuate dramatically based on our particular buying activity in that period. However, regardless of
the average purchase price, we intend to target a similar internal rate of return (after direct expenses) in pricing
our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to estimated profitability of
a period’s buying.
Income recognized on finance receivables is shown net of valuation allowances recognized under SOP 03-
3, which requires that a valuation allowance be taken for decreases in expected cash flows. For the year ended
December 31, 2006 and 2005 we booked allowance charges of $1.1 million and $0.2 million, respectively.
32
Commissions
Commissions were $25.0 million for the year ended December 31, 2006, an increase of $11.1 million or
79.9% compared to commissions of $13.9 million for the year ended December 31, 2005. Commissions
increased as a result of the addition of our RDS government processing and collection business in the third
quarter of 2005 as well as increases in revenue in both our IGS fee-for-service business and our ARM contingent
fee business compared to the prior year period.
Operating Expenses
Total operating expenses were $116.3 million for the year ended December 31, 2006, an increase of $27.4
million or 30.8% compared to total operating expenses of $88.9 million for the year ended December 31, 2005.
Total operating expenses, including compensation expenses, were 44.5% of cash receipts for the year ended
December 31, 2006 compared with 43.3% for the same period in 2005.
Compensation and Employee Services
Compensation and employee services expenses were $58.1 million for the year ended December 31, 2006,
an increase of $13.8 million or 31.2% compared to compensation and employee services expenses of $44.3
million for the year ended December 31, 2005. Compensation and employee services expenses increased as
total employees grew from 1,110 at December 31, 2005 to 1,291 at December 31, 2006. Additionally, existing
employees received normal salary increases. Compensation and employee services expenses as a percentage of
cash receipts excluding sales increased to 22.3% for the year ended December 31, 2006 from 21.6% of cash
receipts excluding sales for the same period in 2005 as a result of increased collector headcount as well as
increases in salaries related to the hiring of non-collection personnel including several key new employees in our
information technology department.
Outside Legal and Other Fees and Services
Outside legal and other fees and services expenses were $40.1 million for the year ended December 31,
2006, an increase of $10.1 million or 33.7% compared to outside legal and other fees and services expenses of
$30.0 million for the year ended December 31, 2005. Of the $10.1 million increase, $1.0 million was attributable
to increases in outside fees and services, $1.8 million was attributable to increases in agency fees mainly incurred
by our IGS subsidiary, $0.5 million was attributable to increases in credit bureau fees and $0.7 million was
attributable in increases in corporate legal expenses which included legal fees incurred as a result of the
investigation requested by the audit committee that occurred during the third quarter of 2006. The remaining
$6.1 million of 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 we
experienced in our portfolio of defaulted consumer receivables and a portfolio management strategy implemented
in mid-2002. This strategy resulted in us 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 32.2% of total cash collections for the year
ended December 31, 2006, compared to 33.1% for the year ended December 31, 2005. Total legal expenses for
the year ended December 31, 2006 were 37.4% of legal cash collections compared to 35.1% for the year ended
December 31, 2005.
Communications
Communications expenses were $5.9 million for the year ended December 31, 2006, an increase of $1.5
million or 34.1% compared to communications expenses of $4.4 million for the year ended December 31, 2005.
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 80.0% or
$1.2 million of this increase, while the remaining 20.0% or $0.3 million was attributable to higher phone charges.
33
Rent and Occupancy
Rent and occupancy expenses were $2.3 million for the year ended December 31, 2006, an increase of
$175,000 or 8.3% compared to rent and occupancy expenses of $2.1 million for the year ended December 31,
2005. The increases were mainly attributable to the commencement of our RDS business, the opening of our
new IGS location which opened in April 2005 and higher utility and other occupancy charges generally. Of the
$175,000 increase in 2006, the new RDS location accounted for $89,000 of the increase, the new IGS space
accounted for $42,000 of the increase and utility and other occupancy charges accounted for $64,000 of the
increase. This was partially offset by a $20,000 decrease in storage and other facility charges.
Other Operating Expenses
Other operating expenses were $4.8 million for the year ended December 31, 2006, an increase of $1.4
million or 41.2% compared to other operating expenses of $3.4 million for the year ended December 31, 2005.
The increase was due to increases in travel and meals, miscellaneous expenses, hiring expenses, repairs and
maintenance, taxes fees and licenses and other expenses. Travel and meals increased by $456,000, miscellaneous
expenses increased by $368,000, hiring expenses increased by $226,000, repairs and maintenance increased by
$148,000, taxes, fees and licenses increased by $111,000 and other expenses increased by $82,000.
Depreciation and Amortization
Depreciation and amortization expenses were $5.1 million for the year ended December 31, 2006, an
increase of $0.4 million or 8.5% compared to depreciation and amortization expenses of $4.7 million for the year
ended December 31, 2005. The increase was attributable to expenditures for the RDS expansion and the new
Jackson, Tennessee facility in 2006, as well as continued capital expenditures on equipment, software and
computers related to our growth and systems upgrades.
Interest Income
Interest income was $584,000 for the year ended December 31, 2006, a decrease of $27,000 or 4.4%
compared to interest income of $611,000 for the year ended December 31, 2005. This decrease is the result of the
investment of larger balances in higher yielding auction rate certificates and tax exempt money market accounts
in 2005 than in 2006.
Interest Expense
Interest expense was $379,000 for the year ended December 31, 2006, an increase of $98,000 or 34.9%
compared to interest expense of $281,000 for the year ended December 31, 2005. The increase is due to a higher
unused line fee under the new revolving credit arrangement offset by a decrease due to lower balances on our
long-term debt and obligations under capital leases.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Revenue
Total revenue was $148.5 million for the year ended December 31, 2005, an increase of $35.1 million or
31.0% compared to total revenue of $113.4 million for the year ended December 31, 2004.
Income Recognized on Finance Receivables
Income recognized on finance receivables was $134.7 million for the year ended December 31, 2005, an
increase of $28.4 million or 26.7% compared to income recognized on finance receivables of $106.3 million for
the year ended December 31, 2004. The majority of the increase was due to an increase in our cash collections
on our owned defaulted consumer receivables to $191.4 million from $153.4 million, an increase of 24.8%. Our
amortization rate on owned portfolios for the year ended December 31, 2005 was 29.6% while for the year ended
December 31, 2004 it was 30.7%. During the year ended December 31, 2005, we acquired defaulted consumer
receivables portfolios with an aggregate face value amount of $5.3 billion at an original purchase price of $149.6
34
million, of which more than 60% was purchased in the fourth quarter. During the year ended December 31,
2004, we acquired defaulted consumer receivable portfolios with an aggregate face value of $3.3 billion at an
original purchase price of $61.2 million. In any period, we acquire defaulted consumer receivables that can vary
dramatically in their age, type and ultimate collectibility. We may pay significantly different purchase rates for
purchased receivables within any period as a result of this quality fluctuation. As a result, the average purchase
rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period.
However, regardless of the average purchase price, we intend to target a similar internal rate of return (after
direct expenses) in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant
to estimated profitability of a period’s buying.
Income recognized on finance receivables is shown net of valuation allowances recognized under SOP 03-
3, which requires that a valuation allowance be taken for decreases in expected cash flows. For the year ended
December 31, 2005 we booked an allowance charge of $200,000. For the year ended December 31, 2004 we
accounted for defaulted consumer receivables under Practice Bulletin 6, which allowed lowering of yields for
decreases in expected cash flows, and therefore no valuation allowances were recognized.
Commissions
Commissions were $13.9 million for the year ended December 31, 2005, an increase of $6.8 million or
95.8% compared to commissions of $7.1 million for the year ended December 31, 2004. Commissions increased
as a result of the additions of our IGS fee-for-service business in the fourth quarter of 2004 and our RDS
government processing and collection business in the third quarter of 2005, as well as a slight increase in revenue
generated by our ARM contingent fee business compared to the prior year period.
Operating Expenses
Total operating expenses were $88.9 million for the year ended December 31, 2005, an increase of $20.4
million or 29.8% compared to total operating expenses of $68.5 million for the year ended December 31, 2004.
Total operating expenses, including compensation expenses, were 43.3% of cash receipts for the year ended
December 31, 2005 compared with 42.7% for the same period in 2004.
Compensation and Employee Services
Compensation and employee services expenses were $44.3 million for the year ended December 31, 2005,
an increase of $7.7 million or 21.0% compared to compensation and employee services expenses of $36.6 million
for the year ended December 31, 2004. Compensation and employee services expenses increased as total
employees grew from 948 at December 31, 2004 to 1,110 at December 31, 2005. Additionally, existing
employees received normal salary increases. Compensation and employee services expenses as a percentage of
cash receipts excluding sales decreased to 21.6% for the year ended December 31, 2005 from 22.8% of cash
receipts excluding sales for the same period in 2004.
Outside Legal and Other Fees and Services
Outside legal and other fees and services expenses were $30.0 million for the year ended December 31,
2005, an increase of $8.6 million or 40.2% compared to outside legal and other fees and services expenses of
$21.4 million for the year ended December 31, 2004. The increase was attributable to the increased cash
collections resulting from the increased number of accounts placed with independent contingent fee attorneys.
This increase is consistent with the growth we experienced in our portfolio of defaulted consumer receivables
and a portfolio management strategy implemented in mid-2002. This strategy resulted in us 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
33.1% of total cash collections for the year ended December 31, 2005, up from 30.2% for the year ended
December 31, 2004. Total legal expenses for the year ended December 31, 2005 were 35.1% of legal cash
collections compared to 34.5% for the year ended December 31, 2004.
35
Communications
Communications expenses were $4.4 million for the year ended December 31, 2005, an increase of $786,000
or 21.8% compared to communications expenses of $3.6 million for the year ended December 31, 2004. 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 94.9% or
$746,000 of this increase, while the remaining 5.1% or $40,000 was attributable to higher phone charges.
Rent and Occupancy
Rent and occupancy expenses were $2.1 million for the year ended December 31, 2005, an increase of
$356,000 or 20.9% compared to rent and occupancy expenses of $1.7 million for the year ended December 31,
2004. The increases were mainly attributable to rent escalations at our Norfolk, Virginia location, the
commencement of our RDS business, the opening of our new IGS location which opened in April 2005 and
higher utility and other occupancy charges generally. Of the $356,000 increase in 2005, the new IGS space
accounted for $188,000 of the increase, the Norfolk rent escalations accounted for $81,000 of the increase, the
new RDS location accounted for $33,000 and utility and other occupancy charges accounted for $72,000 of the
increase. This was offset by a decrease of $18,000 related to the Virginia Beach, Virginia administrative space
that was vacated in January 2004 and other storage spaces.
Other Operating Expenses
Other operating expenses were $3.4 million for the year ended December 31, 2005, an increase of $712,000
or 26.3% compared to other operating expenses of $2.7 million for the year ended December 31, 2004. The
increase was due to increases in taxes, fees and licenses, travel and meals, advertising and marketing, repairs and
maintenance, insurance expenses and other miscellaneous expenses. Taxes, fees and licenses increased by
$184,000, travel and meals increased by $179,000, advertising and marketing increased by $111,000, repairs and
maintenance expenses increased by $42,000, insurance expenses increased by $58,000 and other expense items
increased by $138,000.
Depreciation and Amortization
Depreciation and amortization expenses were $4.7 million for the year ended December 31, 2005, an
increase of $2.3 million or 95.8% compared to depreciation and amortization expenses of $2.4 million for the
year ended December 31, 2004. The increase was attributable to the depreciation and amortization of the
acquired assets of IGS and RDS and the continued capital expenditures on equipment, software and computers
related to our growth and systems upgrades. The amortization of the IGS and RDS intangible assets accounted
for $1.8 million of the increase while the remaining increase of $0.5 million resulted from continued capital
expenditures on equipment, software and computers.
Interest Income
Interest income was $611,000 for the year ended December 31, 2005, an increase of $388,000 or 174.0%
compared to interest income of $223,000 for the year ended December 31, 2004. This increase is the result of the
investment of larger balances in higher yielding auction rate certificates and tax exempt money market accounts
in 2005 than in 2004.
Interest Expense
Interest expense was $281,000 for the year ended December 31, 2005, an increase of $8,000 or 2.9%
compared to interest expense of $273,000 for the year ended December 31, 2004. The increase is due to a higher
unused line fee under the new revolving credit arrangement offset by a decrease due to lower balances on our
long-term debt and obligations under capital leases.
36
Supplemental Performance Data
Owned Portfolio Performance:
The following tables show certain data related to our owned portfolio. These tables describe the purchase
price, cash collections and related multiples. Further, these tables disclose our entire portfolio, the portfolio of
purchased bankrupt accounts only and our entire portfolio less the impact of our purchased bankrupt accounts.
The accounts represented in the purchased bankruptcy tables are those accounts that were bankrupt at the time of
purchase. This contrasts with accounts that file bankruptcy after we purchase them.
($ in thousands)
Entire Portfolio
Purchase
Period
Purchase
Price(1)
Unamortized
Purchase Price
Balance at
December 31, 2006 (2)
Percentage
of Purchase Price
Actual Cash
Collections
Estimated
Remaining Unamortized Including Cash Remaining Total Estimated
Collections (4) Collections (5)
at December 31, 2006 (3)
Sales
Total Estimated
Collections to
Purchase Price (6)
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
$3,080
$7,685
$11,089
$18,898
$25,016
$33,468
$42,280
$61,461
$59,331
$143,366
$109,671
$0
$0
$0
$0
$0
$457
$1,909
$8,248
$15,384
$101,243
$99,206
Purchased Bankruptcy only Portfolio
0%
0%
0%
0%
0%
1%
5%
13%
26%
71%
90%
$9,713
$23,898
$34,340
$60,922
$96,049
$140,777
$144,310
$170,381
$104,924
$94,113
$22,971
$57
$203
$346
$1,151
$3,663
$11,549
$17,684
$40,950
$57,948
$211,636
$208,034
$9,770
$24,101
$34,686
$62,073
$99,712
$152,326
$161,994
$211,331
$162,872
$305,749
$231,005
317%
314%
313%
328%
399%
455%
383%
344%
275%
213%
211%
Purchase
Period
Purchase
Price(1)
Unamortized
Purchase Price
Balance at
December 31, 2006 (2)
Percentage
of Purchase Price
Actual Cash
Collections
Estimated
Remaining Unamortized Including Cash Remaining Total Estimated
Collections (4) Collections (5)
at December 31, 2006 (3)
Sales
Total Estimated
Collections to
Purchase Price (6)
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
$0
$0
$0
$0
$0
$0
$0
$0
$7,472
$29,358
$18,650
$0
$0
$0
$0
$0
$0
$0
$0
$2,937
$16,176
$13,330
0%
0%
0%
0%
0%
0%
0%
0%
39%
55%
71%
$0
$0
$0
$0
$0
$0
$0
$0
$9,253
$19,278
$5,608
$0
$0
$0
$0
$0
$0
$0
$0
$6,603
$22,298
$20,367
$0
$0
$0
$0
$0
$0
$0
$0
$15,856
$41,576
$25,975
0%
0%
0%
0%
0%
0%
0%
0%
212%
142%
139%
Entire Portfolio less Purchased Bankruptcy Portfolio
Purchase
Period
Purchase
Price(1)
Unamortized
Purchase Price
Balance at
December 31, 2006 (2)
Percentage
of Purchase Price
Actual Cash
Collections
Estimated
Remaining Unamortized Including Cash Remaining Total Estimated
Collections (4) Collections (5)
at December 31, 2006 (3)
Sales
Total Estimated
Collections to
Purchase Price (6)
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
$3,080
$7,685
$11,089
$18,898
$25,016
$33,468
$42,280
$61,461
$51,859
$114,008
$91,021
$0
$0
$0
$0
$0
$457
$1,909
$8,248
$12,447
$85,067
$85,876
0%
0%
0%
0%
0%
1%
5%
13%
24%
75%
94%
$9,713
$23,898
$34,340
$60,922
$96,049
$140,777
$144,310
$170,381
$95,671
$74,835
$17,363
$57
$203
$346
$1,151
$3,663
$11,549
$17,684
$40,950
$51,345
$189,338
$187,667
$9,770
$24,101
$34,686
$62,073
$99,712
$152,326
$161,994
$211,331
$147,016
$264,173
$205,030
317%
314%
313%
328%
399%
455%
383%
344%
283%
232%
225%
37
(1) Purchase price refers to the cash paid to a seller to acquire defaulted consumer receivables, plus certain
capitalized costs, 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 us. 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) Unamortized purchase price balance refers to the purchase price less amortization over the life of the
portfolio.
(3) Percentage of purchase price remaining unamortized refers to the amount of unamortized purchase price
divided by the purchase price.
(4) Estimated remaining collections refers to the sum of all future projected cash collections on our owned
portfolios.
(5) Total estimated collections refers to the actual cash collections, including cash sales, plus estimated
remaining collections.
(6) Total estimated collections to purchase price refers to the total estimated collections divided by the
purchase price.
The following graph shows the purchase price of our 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 costs, less the purchase price refunded by the seller due to the return of non-compliant
accounts.
Portfolio Purchases by Year
$160,000,000
$140,000,000
$120,000,000
$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$-
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
We utilize a long-term approach to collecting our owned portfolios of receivables. This approach has
historically caused us to realize significant cash collections and revenues from purchased portfolios of finance
receivables years after they are originally acquired. As a result, we have in the past been able to temporarily
reduce our level of current period acquisitions without a corresponding negative current period impact on cash
collections and revenue.
38
The following tables, which exclude any proceeds from cash sales of finance receivables, demonstrates our
ability to realize significant multi-year cash collection streams on our owned portfolios.
Cash Collections By Year, By Year of Purchase - Entire Portfolio
($ in thousands)
Purchase Purchase
Period
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Total
3,080
7,685
11,089
18,898
25,016
33,468
42,280
61,461
59,331
143,366
109,671
515,346
1996
548
$
-
-
-
-
-
-
-
-
-
-
$
548
Price
$
1997
1998
1999
2000
$
$
$
$
Cash Collection Period
2002
$
2001
$
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
28,831
15,073
-
-
-
-
79,253
2003
$
398
1,324
2,797
7,336
16,628
28,003
36,258
24,308
-
-
-
2004
$
285
1,022
2,200
5,615
14,098
26,717
35,742
49,706
18,019
-
-
2005
$
210
860
1,811
4,352
10,924
22,639
32,497
52,640
46,475
18,968
-
$
117,052
$
153,404
$
191,376
2006
$
237
597
1,415
3,032
8,067
16,048
24,729
43,728
40,424
75,145
22,971
236,393
$
Total
$
$
$
$
$
$
$
$
$
$
$
$
9,651
23,400
34,304
60,230
95,587
135,286
144,299
170,382
104,918
94,113
22,971
895,141
$
$
$
$
$
$
$
Cash Collections By Year, By Year of Purchase - Bankruptcy only Portfolio
($ in thousands)
Purchase Purchase
Period
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Total
Price
-
$
-
-
-
-
-
-
-
7,472
29,358
18,650
55,481
$
1996
-
$
-
-
-
-
-
-
-
-
-
-
$
-
1997
-
$
-
-
-
-
-
-
-
-
-
-
$
-
1998
-
$
-
-
-
-
-
-
-
-
-
-
$
-
1999
-
$
-
-
-
-
-
-
-
-
-
-
$
-
2000
-
$
-
-
-
-
-
-
-
-
-
-
$
-
Cash Collection Period
2002
-
$
-
-
-
-
-
-
-
-
-
-
$
-
2001
-
$
-
-
-
-
-
-
-
-
-
-
$
-
2003
-
$
-
-
-
-
-
-
-
-
-
-
$
-
2004
-
$
-
-
-
-
-
-
-
743
-
-
$
743
2005
-
$
-
-
-
-
-
-
-
4,554
3,777
-
8,331
$
2006
-
$
-
-
-
-
-
-
-
3,956
15,500
5,608
25,064
$
Total
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
9,253
$
19,277
$
5,608
$
34,138
Cash Collections By Year, By Year of Purchase - Entire Portfolio less Bankruptcy
($ in thousands)
Purchase Purchase
Period
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Total
3,080
7,685
11,089
18,898
25,016
33,468
42,280
61,461
51,859
114,008
91,021
459,865
1996
548
$
-
-
-
-
-
-
-
-
-
-
$
548
Price
$
1997
1998
1999
2000
$
$
$
$
Cash Collection Period
2002
$
2001
$
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
28,831
15,073
-
-
-
-
79,253
2003
$
398
1,324
2,797
7,336
16,628
28,003
36,258
24,308
-
-
-
2004
$
285
1,022
2,200
5,615
14,098
26,717
35,742
49,706
17,276
-
-
2005
$
210
860
1,811
4,352
10,924
22,639
32,497
52,640
41,921
15,191
-
$
117,052
$
152,661
$
183,045
2006
$
237
597
1,415
3,032
8,067
16,048
24,729
43,728
36,468
59,645
17,363
211,329
$
Total
$
$
$
$
$
$
$
$
$
$
$
$
9,651
23,400
34,304
60,230
95,587
135,286
144,299
170,382
95,665
74,836
17,363
861,003
$
$
$
$
$
$
$
39
When we acquire a new portfolio of finance receivables, our estimates typically result in a 84-96 month
projection of cash collections. The following chart shows our 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)
Actual Cash Collections
Original Projections
$1,000.0
$900.0
$800.0
$700.0
$600.0
$500.0
$400.0
$300.0
$200.0
$100.0
$0.0
8
9
-
n
a
J
8
9
-
y
a
M
8
9
-
p
e
S
9
9
-
n
a
J
9
9
-
y
a
M
9
9
-
p
e
S
0
0
-
n
a
J
0
0
-
y
a
M
0
0
-
p
e
S
1
0
-
n
a
J
1
0
-
y
a
M
1
0
-
p
e
S
2
0
-
n
a
J
2
0
-
y
a
M
2
0
-
p
e
S
3
0
-
n
a
J
3
0
-
y
a
M
3
0
-
p
e
S
4
0
-
n
a
J
4
0
-
y
a
M
4
0
-
p
e
S
5
0
-
n
a
J
5
0
-
y
a
M
5
0
-
p
e
S
6
0
-
n
a
J
6
0
-
y
a
M
6
0
-
p
e
S
Owned Portfolio Personnel Performance:
We measure the productivity of each collector each month, breaking results into groups of similarly tenured
collectors. The following three tables display various productivity measures that we track.
Tenure at:
One year +(1)
Less than one year (2)
Total(2)
12/31/02
210
223
433
12/31/03
241
338
579
12/31/04
298
349
647
12/31/05
327
364
691
12/31/06
340
375
715
Collector by Tenure
(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)
12/31/02
$16,927
8,689
12/31/03
$18,158
8,303
12/31/04
$17,129
9,363
12/31/05
$16,694
8,491
12/31/06
$18,024
8,533
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
Cash Collections per Hour Paid(1)
12/31/04
$117.59
$82.06
12/31/03
$108.27
$80.10
12/31/02
$96.37
$77.72
12/31/05
$133.39
$89.25
12/31/06
$146.03
$99.06
(1) Cash collections (assigned and unassigned) divided by total hours paid (including holiday, vacation and
sick time) to all collectors (including those in training).
40
Cash collections have substantially exceeded revenue in each quarter since our formation. The following
chart illustrates the consistent excess of our cash collections on our owned portfolios over income recognized on
finance receivables on a quarterly basis. The difference between cash collections and income recognized on
finance receivables is referred to as payments applied to principal. It is also referred to as amortization of
purchase price. This amortization is the portion of cash collections that is used to recover the cost of the
portfolio investment represented on the Balance Sheet.
Cash Collections (1) vs. Incom e Recognized on Finance Receivables
($ in millions)
Payments applied to principal or "amortization of purchase price"
Income recognized on finance receivables
Cash Collections
$70.0
$60.0
$50.0
$40.0
$30.0
$20.0
$10.0
$0.0
8
9
-
1
Q
8
9
-
2
Q
8
9
-
3
Q
8
9
-
4
Q
9
9
-
1
Q
9
9
-
2
Q
9
9
-
3
Q
9
9
-
4
Q
0
0
-
1
Q
0
0
-
2
Q
0
0
-
3
Q
0
0
-
4
Q
1
0
-
1
Q
1
0
-
2
Q
1
0
-
3
Q
1
0
-
4
Q
2
0
-
1
Q
2
0
-
2
Q
2
0
-
3
Q
2
0
-
4
Q
3
0
-
1
Q
3
0
-
2
Q
3
0
-
3
Q
3
0
-
4
Q
4
0
-
1
Q
4
0
-
2
Q
4
0
-
3
Q
4
0
-
4
Q
5
0
-
1
Q
5
0
-
2
Q
5
0
-
3
Q
5
0
-
4
Q
6
0
-
1
Q
6
0
-
2
Q
6
0
-
3
Q
6
0
-
4
Q
(1)
Includes cash collections on finance receivables only. Excludes commissions and cash proceeds from sales
of defaulted consumer receivables.
Seasonality
We depend on the ability to collect on our owned and serviced defaulted consumer receivables. Collections
tend to be higher in the first and second quarters of the year and lower in the third and fourth quarters of the year,
due to consumer payment patterns in connection with seasonal employment trends, income tax refunds and
holiday spending habits. Historically, our growth has partially masked the impact of this seasonality.
Quarterly Cash Collections (1)
($ in millions)
$65.0
$60.0
$55.0
$50.0
$45.0
$40.0
$35.0
$30.0
$25.0
$20.0
$15.0
$10.0
$5.0
$-
8
9
-
1
Q
8
9
-
2
Q
8
9
-
3
Q
8
9
-
4
Q
9
9
-
1
Q
9
9
-
2
Q
9
9
-
3
Q
9
9
-
4
Q
0
0
-
1
Q
0
0
-
2
Q
0
0
-
3
Q
0
0
-
4
Q
1
0
-
1
Q
1
0
-
2
Q
1
0
-
3
Q
1
0
-
4
Q
2
0
-
1
Q
2
0
-
2
Q
2
0
-
3
Q
2
0
-
4
Q
3
0
-
1
Q
3
0
-
2
Q
3
0
-
3
Q
3
0
-
4
Q
4
0
-
1
Q
4
0
-
2
Q
4
0
-
3
Q
4
0
-
4
Q
5
0
-
1
Q
5
0
-
2
Q
5
0
-
3
Q
5
0
-
4
Q
6
0
-
1
Q
6
0
-
2
Q
6
0
-
3
Q
6
0
-
4
Q
(1) Includes cash collections on finance receivables only. Excludes commission fees and cash proceeds from
sales of defaulted consumer receivables.
41
The following table shows the changes in finance receivables, including the amounts paid to acquire new
portfolios.
2006
2005
2004
Balance at beginning of period
Acquisitions of finance receivables, net of buybacks (1)
Cash collections applied to principal on finance receivables (2)
$
193,644,670
$
105,188,906
$
92,568,557
105,838,296
145,157,090
(73,035,471)
(56,701,326)
59,770,354
(47,150,005)
Balance at end of period
$
226,447,495
$
193,644,670
$
105,188,906
Estimated Remaining Collections ("ERC")(3)
$
553,222,894
$
492,924,998
$
308,111,355
_________
(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. We refer to repurchased accounts as buybacks. We also
capitalize certain acquisition related costs.
(2) Cash collections applied to principal (also referred to as amortization) on finance receivables consists of
cash collections less income recognized on finance receivables, net of allowance charges.
(3) Estimated Remaining Collections refers to the sum of all future projected cash collections on our owned
portfolios. ERC is not a balance sheet item, however, it is provided here for informational purposes.
Liquidity and Capital Resources
Historically, our primary sources of cash have been cash flows from operations, bank borrowings and
equity offerings. Cash has been used for acquisitions of finance receivables, corporate acquisitions, repayments
of bank borrowings, purchases of property and equipment and working capital to support our growth.
We believe that funds generated from operations, together with existing cash and available borrowings
under our credit agreement will be sufficient to finance our current operations, planned capital expenditure
requirements and internal growth at least through the next twelve months. However, we could require additional
debt or equity financing if we were to make any other significant acquisitions requiring cash during that period.
Cash generated from operations is dependent upon our ability to collect on our defaulted consumer
receivables. Many factors, including the economy and our ability to hire and retain qualified collectors and
managers, are essential to our ability to generate cash flows. Fluctuations in these factors that cause a negative
impact on our business could have a material impact on our expected future cash flows.
Our operating activities provided cash of $59.5 million, $57.9 million and $49.3 million for the years ended
December 31, 2006, 2005 and 2004, respectively. In these periods, cash from operations was generated
primarily from net income earned through cash collections and commissions received. Net income increased to
$44.5 million for the year ended December 31, 2006 from $36.8 million for the year ended December 31, 2005
and $27.5 million for the year ended December 31, 2004. In addition, we realized tax benefits derived from
share- based compensation of $2.2 million in 2005 and $1.1 million in 2004. In 2006, in accordance with the
adoption of Financial Accounting Standards Board (“FASB”) statement No. 123(R), “Share-Based Payment”
(“SFAS 123R”) the benefit derived from share-based compensation was reclassified to financing activities.
Our investing activities used cash of $39.7 million, $83.0 million and $50.8 million for the years ended
December 31, 2006, 2005 and 2004, respectively. Cash used in investing activities is primarily driven by
acquisitions of defaulted consumer receivables, purchases of property and equipment and purchases of auction
rate certificates and variable rate demand notes. In addition, in 2005, we purchased the assets of Alatax, Inc. for
$15.0 million in cash including acquisition costs and, in 2004, we purchased the assets of IGS Nevada, Inc. for
$12.1 million in cash including acquisition costs. Cash provided by investing activities is primarily driven by
cash collections applied to principal on finance receivables and the sale of auction rate certificates and variable
rate demand notes.
42
Our financing activities used cash of $10.7 million in 2006, and provided cash of $16.6 million and $1.1
million for the years ended December 31, 2005 and 2004, respectively. Cash provided by financing activities
was generated primarily from draws on lines of credit and proceeds from long-term debt. Also, in accordance
with the adoption of SFAS 123R on January 1, 2006, the benefit derived from share-based compensation was
$2.4 million in 2006. This was previously classified in operating activities. In addition, the exercise of stock
options and stock warrants generated cash from financing activities of $2.5 million for the year ended December
31, 2006, $2.6 million for the year ended December 31, 2005 and $1.1 million for the year ended December 31,
2004. Cash used by financing activities was primarily driven by payments on lines of credit, long-term debt and
capital lease obligations.
Cash paid for interest expense was approximately $411,000, $281,000 and $273,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. The majority of interest expenses were paid on our revolving
lines of credit, capital lease obligations and other long-term debt.
On November 29, 2005, we entered into a Loan and Security Agreement for a revolving line of credit
jointly offered by Bank of America, N.A. and Wachovia Bank, National Association. This agreement was
amended on May 9, 2006 to include RBC Centura Bank as an additional lender. The agreement is a revolving
line of credit in an amount equal to the lesser of $75,000,000 or 20% of our estimated remaining collections of all
its eligible asset pools. The new line of credit replaces our previous $25,000,000 credit facility with RBC Centura
Bank, which was terminated on November 28, 2005. Borrowings under the new revolving credit facility bear
interest at a floating rate equal to the LIBOR Market Index Rate plus 1.75% and expires on November 29, 2008.
The loan is collateralized by substantially all of our tangible and intangible assets. The agreement provides for:
• restrictions on monthly borrowings are limited to 20% of Estimated Remaining Collections;
• a funded debt to EBITDA ratio of less than 1.0 to 1.0 calculated on a rolling twelve-month average;
• tangible net worth of at least 100% of prior quarter tangible net worth plus 25% of cumulative positive net
income since the end of such fiscal quarter, plus 100% of the net proceeds from any equity offering; and
• restrictions on change of control.
This facility had no amounts outstanding at December 31, 2006. As of December 31, 2006 we are in
compliance with all of the covenants of this agreement.
As of December 31, 2006 there are three loans outstanding. On February 20, 2002, one of our subsidiaries
entered into an arrangement for a $500,000 commercial loan in order to finance construction of a parking lot at
our Norfolk, Virginia location. This loan bears interest at a fixed rate of 6.47% and matures on September 1,
2007. On May 1, 2003, we entered into a commercial loan agreement in the amount of $975,000 to finance
equipment purchases for our Hampton, Virginia location. This loan bears interest at a fixed rate of 4.25% and
matures on May 1, 2008. On January 9, 2004, we entered into a commercial loan agreement in the amount of
$750,000 to finance equipment purchases at our newly leased Norfolk facility. This loan bears interest at a fixed
rate of 4.45% and matures on January 1, 2009. The loans are collateralized by the related asset and require us to
maintain net worth greater than $20 million and a cash flow coverage ratio of at least 1.5 to 1.0 calculated on a
rolling twelve-month average. As of December 31, 2006 we are in compliance with all of the covenants of these
agreements.
43
Contractual Obligations
The following summarizes our contractual obligations that exist as of December 31, 2006:
$
$
$
Contractual Obligations
Operating Leases
Long-Term Debt
Capital Lease Obligations
Purchase Commitments (1)
Employment Agreements
Total
Total
15,087,181
717,287
254,186
21,162,211
8,567,063
45,787,928
$
$
$
Less
than 1
year
2,243,392
463,229
148,539
20,999,373
4,580,268
28,434,801
Payments due by period
1 - 3
years
4 - 5
years
More
than 5
years
4,891,519
254,058
105,647
162,838
3,986,795
9,400,857
$
4,044,540
$
3,907,730
-
-
-
-
-
-
-
-
$
4,044,540
$
3,907,730
(1) The Purchase Commitments’ amount includes the maximum remaining amount to be purchased under
forward flow contracts for the purchase of charged-off consumer debt in the amount of $18.3 million.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements as defined by Regulation S-K 303(a)(4) promulgated
under the Securities Exchange Act of 1934.
Recent Accounting Pronouncements
On December 16, 2004, the FASB issued Statement of Financial Accounting Standards (‘SFAS”) No.
123(R), “Share-Based Payment”. SFAS 123R revises SFAS No. 123, “Accounting for Stock-Based
Compensation,” (“SFAS 123”) and requires companies to expense the fair value of employee stock options and
other forms of stock-based compensation. In addition to revising SFAS 123, SFAS 123R supersedes Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and amends FASB Statement No.
95, “Statement of Cash Flows.” SFAS 123R applies to all stock-based compensation transactions in which a
company acquires services by (1) issuing its stock or other equity instruments, except through arrangements
resulting from employee stock-ownership plans (ESOPs) or (2) incurring liabilities that are based on the
company’s stock price. SFAS 123R is effective for fiscal years that began after June 15, 2005. We believe that
all of our existing stock-based awards are equity instruments. We previously adopted SFAS 123 on January 1,
2002 and have been expensing equity based compensation since that time. We adopted SFAS 123R on January 1,
2006. The adoption of SFAS123R had no material impact on our financial statements.
On July 13, 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The evaluation of a tax position in accordance with FIN 48 is a two-step
process. The first step is recognition: the enterprise determines whether it is more-likely-than-not that a tax
position will be sustained upon examination, including resolution of any related appeals or litigation processes,
based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-
not recognition threshold, the enterprise should presume that the position will be examined by the appropriate
taxing authority that would have full knowledge of all relevant information. The second step is measurement: a
tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of
benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that
is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed
to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial
reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the
more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting
period in which that threshold is no longer met. We will be required to adopt the provisions of FIN 48 with
44
respect to all of our tax positions as of January 1, 2007. The cumulative effect of applying the provisions of FIN
48 will be reported as an adjustment to the opening balance of retained earnings on January 1, 2007. We have
estimated the impact of adopting FIN 48 to be an immaterial adjustment to retained earnings with a
corresponding offset to liabilities.
On September 13, 2006, the SEC issued Staff Accounting Bulletin No. 108 “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”).
SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that
registrants should quantify errors using both a balance sheet and an income statement approach and evaluate
whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are
considered, is material and therefore must be quantified. SAB 108 is effective for fiscal years ending on or after
November 15, 2006. We believe SAB 108 will have no material impact on our financial statements.
On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).
SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value
measurements. The changes to current practice resulting from the application of SFAS 157 relate to the definition
of fair value, the methods used to measure fair value, and the expanded disclosures about fair value
measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. We are currently evaluating the impact SFAS 157 will have on our financial
statements.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted
accounting principles and our discussion and analysis of our financial condition and results of operations require
our management to make judgments, assumptions, and estimates that affect the amounts reported in our
consolidated financial statements and accompanying notes. Note 2 of the Notes to Consolidated Financial
Statements of this Form 10-K describes the significant accounting policies and methods used in the preparation
of our consolidated financial statements. We base our estimates on historical experience and on various other
assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and
such differences may be material.
Management believes our critical accounting policies and estimates are those related to revenue recognition,
valuation of acquired intangibles and goodwill and income taxes. Management believes these policies to be
critical because they are both important to the portrayal of our financial condition and results, and they require
management to make judgments and estimates about matters that are inherently uncertain. Our senior
management has reviewed these critical accounting policies and related disclosures with the Audit Committee of
our Board of Directors.
Revenue Recognition
We acquire accounts that have experienced deterioration of credit quality between origination and our
acquisition of the accounts. The amount paid for an account reflects our determination that it is probable we will
be unable to collect all amounts due according to the account's contractual terms. At acquisition, we review each
account to determine whether there is evidence of deterioration of credit quality since origination and if it is
probable that we will be unable to collect all amounts due according to the account's contractual terms. If both
conditions exist, we determine whether each such account is to be accounted for individually or whether such
accounts will be assembled into pools based on common risk characteristics. We consider expected prepayments
and estimate the amount and timing of undiscounted expected principal, interest and other cash flows for each
acquired portfolio and subsequently aggregated pools of accounts. We determine the excess of the pool's
scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as
an amount that should not be accreted (nonaccretable difference) based on our proprietary acquisition models.
The remaining amount, representing the excess of the account's cash flows expected to be collected over the
amount paid, is accreted into income recognized on finance receivables over the remaining life of the account or
pool (accretable yield).
45
Prior to January 1, 2005, we accounted for our investment in finance receivables using the interest method
under the guidance of Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans.” Effective
January 1, 2005, we adopted and began to account for our investment in finance receivables using the interest
method under the guidance of SOP 03-3, “Accounting for Loans or Certain Securities Acquired in a Transfer.”
For loans acquired in fiscal years beginning prior to December 15, 2004, Practice Bulletin 6 is still effective;
however, Practice Bulletin 6 was amended by SOP 03-3 as described further in this note. For loans acquired in
fiscal years beginning after December 15, 2004, SOP 03-3 is effective. Under the guidance of SOP 03-3 (and the
amended Practice Bulletin 6), static pools of accounts are established. Pools purchased during a given quarter
are aggregated based on certain common risk criteria. Each static pool is recorded at cost, which includes
certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of
income, principal payments and loss provision. Once a static pool is established for a quarter, individual
receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless
sold or returned to the seller). SOP 03-3 (and the amended Practice Bulletin 6) requires that the excess of the
contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on
the balance sheet. SOP 03-3 initially freezes the internal rate of return, referred to as IRR, estimated when the
accounts receivable are purchased as the basis for subsequent impairment testing. Significant increases in
expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a
portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing.
Effective for fiscal years beginning after December 15, 2004 under SOP 03-3 and the amended Practice Bulletin
6, rather than lowering the estimated IRR if the collection estimates are not received, the carrying value of a pool
would be written down to maintain the then current IRR. Income on finance receivables is accrued quarterly
based on each static pool’s effective IRR and shown net of allowance charges on our income statement.
Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static pool. Likewise,
cash flows that are less than the accrual will accrete the carrying balance. The IRR is estimated and periodically
recalculated based on the timing and amount of anticipated cash flows using our proprietary collection models.
A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash
collections. In this case, all cash collections are recognized as revenue when received. Additionally, we use the
cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under
the cost recovery method, no revenue is recognized until we have fully collected the cost of the portfolio, or until
such time that we consider the collections to be probable and estimable and begin to recognize income based on
the interest method as described above.
We establish valuation allowances for all acquired accounts subject to SOP 03-3 to reflect only those losses
incurred after acquisition (that is, the present value of cash flows initially expected at acquisition that are no
longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the
accounts. During the years ended December 31, 2006 and 2005, we recorded a $1,100,000 and $200,000
allowance charge on our finance receivables, respectively. Prior to January 1, 2005, in the event that a reduction
of the yield to as low as zero in conjunction with estimated future cash collections that were inadequate to
amortize the carrying balance, an allowance charge would be taken with a corresponding write-off of the
receivable balance.
We utilize the provisions of Emerging Issues Task Force 99-19, “Reporting Revenue Gross as a Principal
versus Net as an Agent” (“EITF 99-19”) to commission revenue from our contingent fee, skip-tracing and
government processing and collection subsidiaries. Under our arrangements, we recognize a percentage of the
amount collected as our contractual collection fee. EITF 99-19 requires an analysis to be completed to determine
if certain revenues should be reported gross or reported net of their related operating expense. This analysis
includes an assessment of who retains inventory/credit risk, who controls vendor selection, who establishes
pricing and who remains the primary obligor on the transaction. Each of these factors was considered to
determine the correct method of recognizing revenue from our subsidiaries.
For our contingent fee subsidiary, the portfolios which are placed for servicing are owned by our clients and
are placed under a contingent fee commission arrangement. Our subsidiary is paid to collect funds from the
client’s debtors and earns a commission generally expressed as a percentage of the gross collection amount. The
“Commissions” line of our income statement reflects the contingent fee amount earned, and not the gross
collection amount.
Our skip tracing subsidiary utilizes gross reporting under EITF 99-19. We generate revenue by working an
account and successfully locating a customer for our client. An “investigative fee” is received for these services.
46
In addition, we incur “agent expenses” where we hire a third-party collector to effectuate repossession. In many
cases we have an arrangement with our client which allows us to bill the client for these fees. We have
determined these fees to be gross revenue based on the criteria in EITF 99-19 and they are recorded as such in
the line item “Commissions,” primarily because we are primarily liable to the third party collector. There is a
corresponding expense in the line item “Outside Legal and Other Fees and Services” for these pass-through
items.
Our government processing and collection business’s primary source of income is derived from servicing
taxing authorities in several different ways: processing all of their tax payments and tax forms, collecting
delinquent taxes, identifying taxes that are not being paid and auditing tax payments. The processing and
collection pieces are standard commission based billings or fee for service transactions. When RDS conducts an
audit, there are two components. The first is a charge for the hours incurred on conducting the audit. This
charge is for hours worked. This charge is up-charged from the actual costs incurred. The gross billing is a
component of the line item “Commissions” and the expense is included in the line item “Compensation and
employee services.” The second item is for expenses incurred while conducting the audit. Most jurisdictions
will reimburse RDS for direct expenses incurred for the audit including such items as travel and meals. The
billed amounts are included in the line item “Commissions” and the expense component is included in its
appropriate expense category, generally, “Other operating expenses.”
We account for our gain on cash sales of finance receivables under SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Gains on sale of finance
receivables, representing the difference between the sales price and the unamortized value of the finance
receivables sold, are recognized when finance receivables are sold.
We apply 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.
Valuation of Acquired Intangibles and Goodwill
In accordance with SFAS No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” we are required
to perform a review of goodwill for impairment annually, or earlier if indicators of potential impairment exist.
The review of goodwill for potential impairment requires a two-step approach, is highly subjective and requires
that: (1) goodwill be allocated to various reporting units of our business to which it relates; and (2) we estimate
the fair value of those reporting units to which the goodwill relates and then determine the book value of those
reporting units. We measure the fair value based on present value techniques involving cash flows consistent
with the objective of measuring fair value based on reasonable and supportive assumptions. If the estimated fair
value of reporting units with allocated goodwill is determined to be less than their book value, we are required to
estimate the fair value of all identifiable assets and liabilities of those reporting units in a manner similar to a
purchase price allocation for an acquired business. This requires independent valuation of certain unrecognized
assets. Once this process is complete, the amount of goodwill impairment, if any, can be determined.
We underwent a SFAS 142 review as of October 1, 2006 and believe that, as of December 31, 2006, there
was no impairment of goodwill or other intangible assets. However, changes in various circumstances including
changes in our market capitalization, changes in our forecasts and changes in our internal business structure
could cause one of our reporting units to be valued differently thereby causing an impairment of goodwill.
Additionally, in response to changes in our industry and changes in global or regional economic conditions, we
may strategically realign our resources and consider restructuring, disposing or otherwise exiting businesses,
which could result in an impairment of some or all of our identifiable intangibles or goodwill.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. In
accordance with SFAS No. 109, “Accounting for Income Taxes,” the provision for income taxes is computed
using the asset and liability method, under which deferred tax assets and liabilities are recognized for the
47
expected future tax consequences of temporary differences between the financial reporting and tax bases of
assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are
measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those
tax assets are expected to be realized or settled.
We believe it is more likely than not that forecasted income, including income that may be generated as a
result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be
sufficient to fully recover the remaining deferred tax assets. In the event that all or part of the deferred tax assets
are determined not to be realizable in the future, a valuation allowance would be established and charged to
earnings in the period such determination is made. Similarly, if we subsequently realize deferred tax assets that
were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in
a positive adjustment to earnings or a decrease in goodwill in the period such determination is made. In addition,
the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the
application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations
could have a material impact on our results of operations and financial position.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Our exposure to market risk relates to interest rate risk with our variable rate credit line. As of December
31, 2006, we had no variable rate debt outstanding on our revolving credit lines. We do not have any other
variable rate debt outstanding as of December 31, 2006. 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.
48
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
As of December 31, 2006 and 2005
Consolidated Income Statements
For the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows
For the years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Page
48-49
50
51
52
53
54-71
49
Report of Independent Registered Public Accounting Firm
To Board of Directors and Stockholders of Portfolio Recovery Associates, Inc.:
We have completed integrated audits of Portfolio Recovery Associates, Inc.'s consolidated financial statements and of its
internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial
position of Portfolio Recovery Associates, Inc. and its subsidiaries at December 31, 2006 and December 31, 2005, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 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 the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
of financial statements 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.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management's Report on Internal Control Over Financial
Reporting appearing under item 9A, that the Company maintained effective internal control over financial reporting as
of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated
Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal
control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures
as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
50
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 1, 2007
51
Portfolio Recovery Associates, Inc.
Consolidated Balance Sheets
December 31, 2006 and 2005
Assets
Cash and cash equivalents
Finance receivables, net
Property and equipment, net
Income tax receivable
Goodwill
Intangible assets, net
Other assets
December 31,
2006
December 31,
2005
$
25,100,834
226,447,495
11,192,974
1,512,823
18,287,511
6,754,014
4,082,780
$
15,984,855
193,644,670
7,186,418
-
18,287,511
9,022,666
3,646,126
Total assets
$
293,378,431
$
247,772,246
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
Total liabilities
Commitments and contingencies (Note 16)
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 - 15,987,432 at December 31, 2006,
and 15,767,443 at December 31, 2005
Additional paid in capital
Retained earnings
Total stockholders' equity
$
2,891,469
2,578,896
-
6,244,852
33,452,670
-
689,892
242,385
46,100,164
$
2,332,685
2,239,267
3,054,883
5,942,618
22,345,995
15,000,000
1,151,965
382,658
52,450,071
-
-
159,874
115,527,975
131,590,418
247,278,267
157,674
108,063,899
87,100,602
195,322,175
Total liabilities and stockholders' equity
$
293,378,431
$
247,772,246
The accompanying notes are an integral part of these consolidated financial statements.
52
Portfolio Recovery Associates, Inc.
Consolidated Income Statements
For the years ended December 31, 2006, 2005 and 2004
2006
2005
2004
Revenues:
Income recognized on finance receivables, net
Commissions
$
163,357,323
24,964,444
$
134,674,344
13,850,805
$
106,254,441
7,141,796
Total revenue
Operating expenses:
Compensation and employee services
Outside legal and other fees and services
Communications
Rent and occupancy
Other operating expenses
Depreciation and amortization
188,321,767
148,525,149
113,396,237
58,141,684
40,139,272
5,875,815
2,276,140
4,758,157
5,130,628
44,332,298
29,964,999
4,424,080
2,100,914
3,423,791
4,678,598
36,620,054
21,407,570
3,638,144
1,744,885
2,712,463
2,382,896
Total operating expenses
116,321,696
88,924,680
68,506,012
Income from operations
72,000,071
59,600,469
44,890,225
Other income and (expense):
Interest income
Interest expense
584,092
(378,546)
611,490
(280,503)
222,718
(273,355)
Income before income taxes
72,205,617
59,931,456
44,839,588
Provision for income taxes
27,715,801
23,159,461
17,388,148
Net income
$
44,489,816
$
36,771,995
$
27,451,440
Net income per common share
Basic
Diluted
$
$
2.80
2.77
$
$
2.35
2.28
$
$
1.79
1.73
Weighted average number of shares outstanding
Basic
Diluted
15,910,795
16,081,798
15,641,862
16,148,703
15,357,475
15,852,916
The accompanying notes are an integral part of these consolidated financial statements.
53
Portfolio Recovery Associates, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2006, 2005 and 2004
Common
Stock
Additional
Paid in
Capital
Retained
Earnings
Total
Stockholders'
Equity
Balance at December 31, 2003
$
152,947
$
96,117,932
$
22,877,167
$
119,148,046
Net income
Exercise of stock options, warrants and vesting of restricted shares
Issuance of common stock for acquisition
Amortization of stock-based compensation
Stock-based compensation income tax benefits
-
1,336
699
-
-
-
1,195,013
1,999,540
507,091
1,086,275
27,451,440
-
-
-
-
27,451,440
1,196,349
2,000,239
507,091
1,086,275
Balance at December 31, 2004
$
154,982
$
100,905,851
$
50,328,607
$
151,389,440
Net income
Exercise of stock options, warrants and vesting of restricted shares
Issuance of common stock for acquisition
Amortization of stock-based compensation
Stock-based compensation income tax benefits
-
2,355
337
-
-
-
3,001,532
1,443,426
520,845
2,192,245
36,771,995
-
-
-
-
36,771,995
3,003,887
1,443,763
520,845
2,192,245
Balance at December 31, 2005
$
157,674
$
108,063,899
$
87,100,602
$
195,322,175
Net income
Exercise of stock options, warrants and vesting of restricted shares
Amortization of stock-based compensation
FAS123R adoption reclass of payroll liability to additional paid in capital
Income tax benefit from share based compensation
-
2,200
-
-
-
-
2,500,425
2,116,631
426,752
2,420,268
44,489,816
-
-
-
-
44,489,816
2,502,625
2,116,631
426,752
2,420,268
Balance at December 31, 2006
$
159,874
$
115,527,975
$
131,590,418
$
247,278,267
The accompanying notes are an integral part of these consolidated financial statements.
54
Portfolio Recovery Associates, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2006, 2005 and 2004
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 and amortization
Deferred tax expense (benefit), net
Changes in operating assets and liabilities:
Other assets
Accounts payable
Income taxes
Accrued expenses
Accrued payroll and bonuses
2006
2005
2004
$
44,489,816
$
36,771,995
$
27,451,440
2,116,631
-
5,130,628
11,106,675
(436,654)
558,784
(4,567,706)
339,629
728,986
967,281
2,192,245
4,678,598
8,695,272
(215,371)
(92,241)
2,872,662
517,233
1,466,699
575,157
1,086,275
2,382,896
15,660,148
(820,317)
123,394
534,082
1,049,598
1,242,510
Net cash provided by operating activities
59,466,789
57,854,373
49,285,183
Cash flows from investing activities:
Purchases of property and equipment
Acquisition of finance receivables, net of buybacks
Collections applied to principal on finance
receivables
Purchases of auction rate certificates
Sales of auction rate certificates
Acquisitions, net of acquisition costs and cash acquired
(6,868,532)
(105,838,296)
73,035,471
(1,450,000)
1,450,000
-
(3,484,415)
(145,157,090)
56,701,326
(105,725,000)
129,675,000
(14,983,332)
(2,090,934)
(59,770,354)
47,150,005
(23,950,000)
-
(12,146,899)
Net cash used in investing activities
(39,671,357)
(82,973,511)
(50,808,182)
Cash flows from financing activities:
Proceeds from exercise of options and warrants
Income tax benefit related to stock option exercise
Draws on lines of credit
Payments on lines of credit
Proceeds from long-term debt
Payments on long-term debt
Payments on capital lease obligations
2,502,625
2,420,268
-
(15,000,000)
-
(462,073)
(140,273)
2,557,451
-
15,000,000
-
-
(772,457)
(193,576)
Net cash (used in)/provided by financing activities
(10,679,453)
16,591,418
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
9,115,979
15,984,855
(8,527,720)
24,512,575
1,128,283
-
-
-
750,000
(482,550)
(272,000)
1,123,733
(399,266)
24,911,841
Cash and cash equivalents, end of period
$
25,100,834
$
15,984,855
$
24,512,575
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Noncash investing and financing activities:
$
$
411,376
18,763,763
$
$
280,503
9,399,281
$
$
273,355
390,000
FAS123R adoption reclass of payroll liability to additional paid in capital
Capital lease obligations incurred
Acquisitions - Common stock issued
426,752
$
$
-
$
-
-
$
$
-
$
1,443,763
$
-
$
296,910
$
2,000,239
The accompanying notes are an integral part of these consolidated financial statements.
55
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
1. Organization and Business:
Portfolio Recovery Associates, LLC (“PRA”) was formed on March 20, 1996. Portfolio Recovery Associates,
Inc. (“PRA Inc”) was formed in August 2002. On November 8, 2002, PRA Inc completed its initial public offering
(“IPO”) of common stock. As a result, all of the membership units and warrants of PRA were exchanged on a one
to one basis for warrants and shares of a single class of common stock of PRA Inc. One of PRA Inc’s wholly
owned subsidiaries, Thomas West Associates, LLC (“TWA”), was dissolved as an entity on May 8, 2006. Another
subsidiary, PRA II, was dissolved immediately prior to the IPO. PRA Inc, a Delaware corporation, and its
subsidiaries (collectively, the “Company”) are full-service providers of outsourced receivables management and
related services. The Company is engaged in the business of purchasing, managing and collecting portfolios of
defaulted consumer receivables as well as offering a broad range of accounts receivable management services. The
majority of the Company’s business activities involve the purchase, management and collection of defaulted
consumer receivables. These are purchased from sellers of finance receivables and collected by a highly skilled
staff whose purpose is to locate and contact customers and arrange payment or resolution of their debts. The
Company, through its Legal Recovery Department, collects accounts judicially, either by using its own attorneys, or
by contracting with independent attorneys throughout the country through whom the Company takes legal action to
satisfy consumer debts. The Company also services receivables on behalf of clients on either a commission or
transaction-fee basis. Clients include entities in the financial services, auto, retail, utility, health care and
government sectors. Services provided to these clients include standard collection services on delinquent accounts,
obtaining location information for clients in support of their collection activities (known as skip tracing), and the
management of both delinquent and non-delinquent tax receivables for government entities.
On December 28, 1999, PRA formed a wholly owned subsidiary, PRA Holding I, LLC (“PRA Holding I”), and
is the sole member. The purpose of PRA Holding I is to enter into leases of office space and hold the Company’s
real property (see Note 10) in Hutchinson, Kansas, Norfolk, Virginia and other real and personal property.
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 October 1, 2004, the Company acquired the assets of IGS Nevada, Inc., a privately held company specializing
in asset-location and debt resolution services (the resulting business is referred to herein as “IGS”). The transaction
was completed at a price of $14 million, consisting of $12 million in cash and $2 million in PRA Inc common stock.
On September 10, 2004, the Company created a wholly owned subsidiary, PRA Location Services, LLC d/b/a IGS
Nevada to operate IGS. IGS Nevada, Inc.’s founder and his top management team signed long-term employment
agreements and continue to manage IGS. The income statement includes the results of operations of IGS for the
period from October 1, 2004 through December 31, 2006.
On July 29, 2005, the Company acquired substantially all of the assets and liabilities of Alatax, Inc., a provider of
outsourced business revenue administration, audit and debt discovery/recovery services for local governments (the
resulting business is referred to herein as “RDS”). The transaction was completed for consideration of
$17.5 million, consisting of $16.1 million in cash and 33,684 shares of the Company’s common stock, valued at
$1.4 million at the closing in accordance with the calculation set forth in the asset purchase agreement. Alatax
Inc.’s two top executives both signed long-term employment agreements and continue to manage the company.
Although most of its clients are located in Alabama (where it operates as Alatax), RDS, through PRA Government
Services, LLC, a wholly owned subsidiary formed by the Company on June 23, 2005, recently began expanding
into surrounding states (where it operates as Revenue Discovery Systems (RDS)). The income statement includes
the results of operations of RDS for the period from August 1, 2005 through December 31, 2006.
PRA Funding, LLC and PRA III were merged into PRA on November 24, 2003.
On October 13, 2006, PRA formed a wholly owned subsidiary, PRA Holding II, LLC (“PRA Holding II”), and is
the sole member. The purpose of PRA Holding II is to hold the Company’s real property in Jackson, Tennessee and
other real and personal property.
56
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
The consolidated financial statements of the Company include the accounts of PRA Inc, PRA, PRA Holding I,
PRA Holding II, Anchor, IGS and RDS.
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 Inc, PRA, PRA Holding I, PRA Holding II, Anchor, IGS and RDS. 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. Included in cash and cash equivalents are funds held on the
behalf of others arising from the collection of accounts placed with the Company. The balance of the funds held on
behalf of others was $435,522 and $656,407 at December 31, 2006 and 2005, respectively. There is an offsetting
liability that is included in “Accounts payable” on the balance sheet.
Investments: The Company accounts for its investments under the guidance of the Financial Accounting
Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 115 (“SFAS 115”),
“Accounting for Certain Investments in Debt and Equity Securities.” The Company typically invests in variable
rate auction rate certificates and variable rate demand notes which are classified as available-for-sale securities. At
December 31, 2006 and 2005, the Company did not have any investments on the balance sheet; however, it did
purchase investments during 2006 and 2005. These securities are recorded at cost, which approximates fair market
value due to their variable interest rates, which typically reset every 7 to 35 days, and, despite the long term nature
of their stated contractual maturities, the Company has the ability to quickly liquidate these investments. As a
result, the Company had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from
these investments and all income generated was recorded as interest income.
Concentrations of Credit Risk: Financial instruments, which potentially expose the Company to concentrations
of credit risk, consist primarily of cash and cash equivalents and investments. The Company places its cash and
cash equivalents and investments with high quality financial institutions. At times, cash balances may be in excess
of the amounts insured by the Federal Deposit Insurance Corporation.
Finance receivables and income recognition: The Company’s principal business consists of the acquisition and
collection of accounts that have experienced deterioration of credit quality between origination and the Company's
acquisition of the accounts. The amount paid for an account reflects the Company’s determination that it is
probable the Company will be unable to collect all amounts due according to the account's contractual terms. At
acquisition, the Company reviews each account to determine whether there is evidence of deterioration of credit
quality since origination and if it is probable that the Company will be unable to collect all amounts due according
to the account's contractual terms. If both conditions exist, the Company determines whether each such account is to
be accounted for individually or whether such accounts will be assembled into pools based on common risk
characteristics. The Company considers expected prepayments and estimates the amount and timing of
undiscounted expected principal, interest and other cash flows for each acquired portfolio and subsequently
aggregated pools of accounts. The Company determines the excess of the pool's scheduled contractual principal and
contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted
(nonaccretable difference) based on the Company’s proprietary acquisition models. The remaining amount,
representing the excess of the account's cash flows expected to be collected over the amount paid, is accreted into
income recognized on finance receivables, net over the remaining life of the account or pool (accretable yield).
Prior to January 1, 2005, the Company accounted for its investment in finance receivables using the interest
method under the guidance of Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans.”
Effective January 1, 2005, the Company adopted and began to account for its investment in finance receivables
using the interest method under the guidance of American Institute of Certified Public Accountants (“AICPA”)
Statement of Position (“SOP”) 03-3, “Accounting for Loans or Certain Securities Acquired in a Transfer.” For
loans acquired in fiscal years beginning prior to December 15, 2004, Practice Bulletin 6 is still effective; however,
Practice Bulletin 6 was amended by SOP 03-3 as described further in this note. For loans acquired in fiscal years
57
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
beginning after December 15, 2004, SOP 03-3 is effective. Under the guidance of SOP 03-3 (and the amended
Practice Bulletin 6), static pools of accounts are established. These pools are aggregated based on certain common
risk criteria. Each static pool is recorded at cost, which includes certain direct costs of acquisition paid to third
parties, and is accounted for as a single unit for the recognition of income, principal payments and loss provision.
Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless
replaced by the seller) or removed from the pool (unless sold or returned to the seller). SOP 03-3 (and the amended
Practice Bulletin 6) requires that the excess of the contractual cash flows over expected cash flows not be
recognized as an adjustment of revenue or expense or on the balance sheet. SOP 03-3 initially freezes the internal
rate of return, referred to as IRR, estimated when the accounts receivable are purchased as the basis for subsequent
impairment testing. Significant increases in actual, or expected future cash flows may be recognized prospectively
through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes
the new benchmark for impairment testing. Effective for fiscal years beginning after December 15, 2004 under
SOP 03-3 (and the amended Practice Bulletin 6), rather than lowering the estimated IRR if the collection estimates
are not received or projected to be received, the carrying value of a pool would be written down to maintain the then
current IRR and is shown as a reduction in revenue in the consolidated income statements with a corresponding
valuation allowance offsetting the finance receivables, net, on the balance sheet. Income recognized on finance
receivables, net is accrued quarterly based on each static pool’s effective IRR and is shown net of allowance charges
on the income statement. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the
static pool. Likewise, cash flows that are less than the accrual will accrete the carrying balance. The IRR is
estimated and periodically recalculated based on the timing and amount of anticipated cash flows using the
Company’s proprietary collection models. A pool can become fully amortized (zero carrying balance on the
balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue
when received. Additionally, the Company uses the cost recovery method when collections on a particular pool of
accounts cannot be reasonably predicted. These pools are not aggregated with other portfolios. Under the cost
recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio, or until
such time that the Company considers the collections to be probable and estimable and begins to recognize income
based on the interest method as described above. At December 31, 2006 and 2005, the Company had unamortized
purchased principal (purchase price) in pools accounted for under the cost recovery method of $1,611,130 and
$1,312,032, respectively.
The Company establishes valuation allowances for all acquired accounts subject to SOP 03-3 to reflect only those
losses incurred after acquisition (that is, the present value of cash flows initially expected at acquisition that are no
longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the
accounts. At December 31, 2006 and 2005, the Company had an allowance against its finance receivables of
$1,300,000 and $200,000, respectively. Prior to January 1, 2005, in the event that a reduction of the yield to as low
as zero in conjunction with estimated future cash collections that were inadequate to amortize the carrying balance,
an allowance charge would be taken with a corresponding write-off of the receivable balance.
The Company capitalizes certain fees paid to third parties related to the direct acquisition of a portfolio of
accounts. These fees are added to the acquisition cost of the portfolio and accordingly are amortized over the life of
the portfolio using the interest method. The balance of the unamortized capitalized fees at December 31, 2006,
2005 and 2004 was $1,322,721, $1,028,401 and $1,098,847, respectively. During the years ended December 31,
2006, 2005 and 2004 the Company capitalized $805,640, $502,556 and $708,632, respectively, of these direct
acquisition fees. During the years ended December 31, 2006, 2005 and 2004 the Company amortized $511,320,
$573,002 and $881,330, respectively, of these direct acquisition fees. At June 30, 2004 the Company wrote-off
$530,649 related to the capitalization of fees paid to third parties for address correction and other customer data
associated with the acquisition of portfolios purchased over the past five years. As a result of a review of the
Company’s accounting, the Company determined these capitalized acquisition fees should be expensed.
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. Any funds received from the seller of finance receivables as a return of purchase price are
referred to as buybacks. Buyback funds are simply applied against the finance receivable balance received and are
not included in the Company’s cash collections from operations. In some cases, the seller will replace the returned
accounts with new accounts in lieu of returning the purchase price. In that case, the old account is removed from
the pool and the new account is added.
58
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Commissions: The Company utilizes the provisions of Emerging Issues Task Force 99-19, “Reporting Revenue
Gross as a Principal versus Net as an Agent” (“EITF 99-19”) to record commission revenue from its contingent fee,
skip-tracing and government processing and collection subsidiaries. EITF 99-19 requires an analysis to be
completed to determine if certain revenues should be reported gross or reported net of their related operating
expense. This analysis includes who retains inventory/credit risk, who controls vendor selection, who establishes
pricing and who remains the primary obligor on the transaction. The Company considered each of these factors to
determine the correct method of recognizing revenue from its subsidiaries.
For the Company’s contingent fee collection subsidiary, the portfolios which are placed for servicing are owned
by its clients and are placed under a contingent fee commission arrangement. The Company’s subsidiary is paid to
collect funds from the client’s debtors and earns a commission generally expressed as a percentage of the gross
collection amount. The “Commissions” line of the income statement reflects the contingent fee amount earned, and
not the gross collection amount.
The Company’s skip tracing subsidiary utilizes gross reporting under EITF 99-19. IGS generates revenue by
working an account and successfully locating a customer for their client. An “investigative fee” is received for
these services. In addition, the Company incurs “agent expenses” where it hires a third-party collector to effectuate
repossession. In many cases the Company has an arrangement with its client which allows it to bill the client for
these fees. The Company has determined these fees to be gross revenue based on the criteria in EITF 99-19 and
they are recorded as such in the line item “Commissions,” primarily because the Company is primarily liable to the
third party collector. There is a corresponding expense in “Outside Legal and Other Fees and Services” for these
pass-through items.
The Company’s government processing and collection subsidiary utilizes both gross and net reporting under
EITF 99-19. RDS’s primary source of income is derived from servicing taxing authorities in several different ways:
processing all of their tax payments and tax forms, collecting delinquent taxes, identifying taxes that are not being
paid and auditing tax payments. The processing and collection pieces are standard commission based billings or fee
for service transactions and are included in the line item “Commissions.” When RDS conducts an audit, there are
two components. The first is a charge for the hours incurred on conducting the audit. This charge is for hours
worked and includes a profit margin above our actual cost. The gross billing is a component of the line item
“Commissions” and the expense is included in the line item “Compensation and employee services.” The second
item is for expenses incurred while conducting the audit. Most jurisdictions will reimburse RDS for direct expenses
incurred for the audit including such items as travel and meals. The billed amounts are included in the line item
“Commissions” and the expense component is included in their appropriate expense category, generally the line
item “Other operating expenses.”
Net gain on cash sales of finance receivables: The Company accounts for its gain on cash sales of finance
receivables under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.” Gains on sale of finance receivables, representing the difference between the sales price and the
unamortized value of the finance receivables sold, 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 lesser of the useful life, which ranges from three to ten years, or the remaining life of the leased
property. Building improvements are depreciated over ten to thirty-nine years. When property is sold or retired, the
59
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is included in the
income statement.
Intangible assets: The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS
142”) on October 1, 2004. Prior to this date, the Company had no assets in this category. With the acquisition of
IGS on October 1, 2004, and RDS on July 29, 2005, the Company purchased certain tangible and intangible assets.
Intangible assets purchased included client and customer relationships, non-compete agreements and goodwill. In
accordance with SFAS 142, the Company is amortizing the IGS client relationships over seven years, the RDS
customer relationships over ten years and the non-compete agreements over three years for both the IGS and RDS
acquisitions. The Company reviews them at least annually for impairment. In addition, goodwill, pursuant to SFAS
142, is not amortized but rather reviewed annually for impairment.
Income taxes: The Company records a tax provision for the anticipated tax consequences of the reported results
of operations. In accordance with SFAS No. 109, “Accounting for Income Taxes,” the provision for income taxes
is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between the financial reporting and tax bases of
assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax
assets are expected to be realized or settled.
Effective with the Company’s 2002 tax filings, the Company adopted the cost recovery method of income
recognition for tax purposes. The Company believes cost recovery to be an acceptable tax revenue recognition
method for companies in the bad debt purchasing industry and results in the reduction of current taxable income as,
for tax purposes, collections on finance receivables are applied first to principal to reduce the finance receivables to
zero before any income is recognized.
The Company believes that it is more likely than not that forecasted income, including income that may be
generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities,
will be sufficient to fully recover the remaining deferred tax assets. In the event that all or part of the deferred tax
assets are determined not to be realizable in the future, a valuation allowance would be established and charged to
earnings in the period such determination is made. Similarly, if the Company subsequently realizes deferred tax
assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed,
resulting in a positive adjustment to earnings or a decrease in goodwill in the period such determination is made. In
addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in
the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s
expectations could have a material impact on the Company’s results of operations and financial position.
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. In addition, future minimum lease payments (including the impact of rent escalations) are
expensed on a straight-lined basis over the life of the lease. Material leasehold improvements are capitalized and
depreciated over the remaining 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. The lease is recorded as a liability with each
payment amortizing the principal balance and a portion classified as interest expense.
Stock-based compensation: The Company applied the intrinsic value method provided for under Accounting
Principles Board (“APB”) Opinion 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.” Effective
60
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
January 1, 2006, the Company adopted FASB Statement No. 123R (“SFAS 123R”), “Share-Based Payment” using
the modified prospective approach.
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 quarterly basis, management reviews the estimate of future cash
collections, and whether it is reasonably possible that its assessment of collectibility may change based on actual
results and other factors.
Estimated fair value of financial instruments: The Company applies the provisions of SFAS No. 107,
“Disclosures About Fair Value of Financial Instruments,” to its financial instruments. Its financial instruments
consist of cash and cash equivalents, finance receivables, net, revolving lines of credit, long-term debt, and
obligations under capital leases. See Note 11 for additional disclosure.
Recent Accounting Pronouncements: On December 16, 2004, FASB issued SFAS 123R. SFAS 123R revises
SFAS 123 and requires companies to expense the fair value of employee stock options and other forms of stock-
based compensation. In addition to revising SFAS 123, SFAS 123R supersedes APB No. 25 and amends FASB
Statement No. 95, “Statement of Cash Flows.” SFAS 123R applies to all stock-based compensation transactions in
which a company acquires services by (1) issuing its stock or other equity instruments, except through arrangements
resulting from employee stock-ownership plans (ESOPs) or (2) incurring liabilities that are based on the company’s
stock price. SFAS 123R is effective for annual periods that began after June 15, 2005. The Company believes that
all of its existing stock-based awards are equity instruments. The Company previously adopted SFAS 123 on
January 1, 2002 and has been expensing equity based compensation since that time. The adoption of SFAS 123R
had no material impact on the Company’s financial statements.
On July 13, 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, “Accounting for Income
Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The
evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition: the
enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should
presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all
relevant information. The second step is measurement: a tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The
tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold
should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized
in the first subsequent financial reporting period in which that threshold is no longer met. The Company is required
to adopt the provisions of FIN 48 with respect to all of its tax positions as of January 1, 2007. The cumulative
effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained
earnings on January 1, 2007. The Company has estimated the impact of adopting FIN 48 to be an immaterial
adjustment to retained earnings with a corresponding offset to liabilities.
61
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
On September 13, 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin
No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff
believes that registrants should quantify errors using both a balance sheet and an income statement approach and
evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors
are considered, is material and therefore must be quantified. SAB 108 is effective for fiscal years ending on or after
November 15, 2006. The Company believes that SAB 108 will have no material impact on its financial statements.
On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157
establishes a framework for measuring fair value and expands disclosures about fair value measurements. The
changes to current practice resulting from the application of SFAS 157 relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The
Company is currently evaluating the impact SFAS 157 will have on its financial statements.
3. Finance Receivables, net:
As of December 31, 2006 and 2005, the Company had $226,447,495 and $193,644,670, respectively, remaining
of finance receivables. Changes in finance receivables at December 31, 2006 and 2005, were as follows:
2006
2005
Balance at beginning of period
Acquisitions of finance receivables, net of buybacks
$
193,644,670
105,838,296
$
105,188,906
145,157,090
Cash collections
Income recognized on finance receivables, net
Cash collections applied to principal
(236,392,794)
163,357,323
(73,035,471)
(191,375,670)
134,674,344
(56,701,326)
Balance at end of period
$
226,447,495
$
193,644,670
At the time of acquisition, the life of each pool is generally estimated to be between 84 to 96 months based on
projected amounts and timing of future cash receipts using the proprietary models of the Company. As of
December 31, 2006 the Company had $226,447,495 in finance receivables included in the balance sheet. Based
upon current projections, cash collections applied to principal will be as follows for the twelve months in the years
ending:
December 31, 2007
December 31, 2008
December 31, 2009
December 31, 2010
December 31, 2011
December 31, 2012
December 31, 2013
$
59,710,787
50,938,800
39,646,727
33,309,270
27,219,796
14,167,174
1,454,941
226,447,495
$
During the year ended December 31, 2006, the Company purchased $7.8 billion of face value of charged-off
consumer receivables. During the year ended December 31, 2005, the Company purchased $5.3 billion of face
value of charged-off consumer receivables. At December 31, 2006, the estimated remaining collections on the
receivables purchased during 2006 are $208,034,893. At December 31, 2006, the estimated remaining collections
on the receivables purchased during 2005 are $211,635,968.
62
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Accretable yield represents the amount of income the Company can expect to generate over the remaining life of
its existing portfolios based on estimated future cash flows as of December 31, 2006 and 2005. Reclassifications
from nonaccretable difference to accretable yield primarily result from the Company’s increase in its estimate of
future cash flows. Changes in accretable yield for the years ended December 31, 2006 and 2005 were as follows:
2006
2005
Balance at beginning of period
Income recognized on finance receivables, net
Additions
Reclassifications from nonaccretable difference
Balance at end of period
$
$
299,280,328
(163,357,323)
128,771,384
62,081,010
326,775,399
202,922,449
(134,674,344)
157,081,401
73,950,822
299,280,328
$
$
During the years ended December 31, 2006 and 2005, the Company recorded a $1,100,000 and $200,000
allowance charge, respectively, on portfolios that had underperformed expectations. The Company previously had
not booked any other valuation allowances on its finance receivables. The change in the valuation allowance for the
years ended December 31, 2006 and 2005 are as follows:
2006
2005
Balance at beginning of period
Allowance charges recorded
Reversal of previously recorded allowance charges
Change in allowance charge
Balance at end of period
4. Operating Leases:
$
200,000
1,100,000
-
1,100,000
1,300,000
$
-
200,000
-
200,000
200,000
$
$
The Company rents office space and equipment under operating leases. Rental expense was $1,915,103,
$1,803,812 and $1,520,100 for the years ended December 31, 2006, 2005 and 2004, respectively.
Future minimum lease payments at December 31, 2006, are as follows:
2007
2008
2009
2010
2011
Thereafter
5. Intangible Assets, net:
$
2,243,392
2,414,851
2,476,668
2,133,302
1,911,238
3,907,730
$
15,087,181
With the acquisitions of IGS on October 1, 2004 and RDS on July 29, 2005, the Company purchased certain
tangible and intangible assets. Intangible assets purchased included client and customer relationships, non-compete
agreements and goodwill. In accordance with SFAS 142, the Company is amortizing the IGS client relationships
over seven years, the RDS customer relationships over ten years and the non-compete agreements over three years
for both the IGS and RDS acquisitions with a combined original weighted average amortization period of 7.54
years. The Company reviews them at least annually for impairment. Total amortization expense for the years ended
December 31, 2006, 2005 and 2004 was $2,268,652, $2,296,172 and $481,162, respectively.
63
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Intangible assets consist of the following at December 31, 2006:
Client and customer relationships
Non-compete agreements
Accumulated amortization
Intangible assets, net
$
$
9,800,000
2,000,000
(5,045,986)
6,754,014
Amortization expense relating to the non-compete agreements is calculated on a straight-line method (which
approximates the pattern of economic benefit concept) for the IGS non-compete agreements and a pattern of
economic benefit concept for the Alatax non-compete agreements. Amortization expense relating to the client and
customer relationships is calculated using a pattern of economic benefit concept. The pattern of economic benefit
concept relies on expected net cash flows from all existing clients. The rate of amortization of the client
relationships will fluctuate annually to match these expected cash flows. The future amortization of these intangible
assets is as follows as of December 31, 2006:
2007
2008
2009
2010
Thereafter
$
$
1,812,680
1,354,075
1,177,279
963,579
1,446,401
6,754,014
In addition, goodwill, pursuant to SFAS 142, is not amortized but rather is reviewed at least annually for
impairment. During the fourth quarter of 2006, the Company underwent its annual review of goodwill. Based upon
the results of this review, which was conducted as of October 1, 2006, no impairment charges to goodwill or the
other intangible assets were necessary as of the date of this review. The Company believes that nothing has
occurred since the review was performed through December 31, 2006, that would necessitate an impairment charge
to goodwill or the other intangible assets. At December 31, 2006 and 2005, the carrying value of goodwill was
$18,287,511.
6. Capital Leases:
Leased assets included in property and equipment consists of the following:
Software
Computer equipment
Furniture and fixtures
Equipment
Less accumulated depreciation
2006
2005
$
270,008
56,063
1,260,287
27,249
(1,278,095)
$
270,008
59,652
1,260,287
27,249
(1,097,780)
$
335,512
$
519,416
Depreciation expense recognized on capital leases for the years ended December 31, 2006, 2005 and 2004 was
$183,904, $235,164 and $255,025, respectively.
64
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Commitments for minimum annual rental payments for these leases as of December 31, 2006 are as follows:
2007
2008
2009
Less amount representing interest and taxes
$
148,539
99,949
5,698
254,186
11,801
Present value of net minimum lease payments
$
242,385
7. 401(k) Retirement Plan:
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 100% of their
compensation, subject to Internal Revenue Service limitations after completing six months of service, as defined in
the plan. The Company makes matching contributions of up to 4% of an employee’s salary. Total compensation
expense related to these contributions was $682,115, $603,830 and $434,778 for the years ended December 31,
2006, 2005 and 2004, respectively.
8. Revolving Lines of Credit:
The Company maintained a $25.0 million revolving line of credit pursuant to an agreement entered into with
RBC Centura Bank on November 28, 2003 and amended on November 22, 2004. This facility was terminated on
November 28, 2005. The credit facility bore interest at a spread of 2.50% over LIBOR and extended through
November 28, 2006. The agreement called 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 during 2005 through the time of its termination.
On November 29, 2005, the Company entered into a Loan and Security Agreement for a revolving line of credit
jointly offered by Bank of America, N.A. and Wachovia Bank, National Association. This agreement was amended
on May 9, 2006 to include RBC Centura Bank as an additional lender. The agreement is a revolving line of credit
in an amount equal to the lesser of $75,000,000 or 20% of the Company’s estimated remaining collections of all its
eligible asset pools. Borrowings under the new revolving credit facility will bear interest at a floating rate equal to
the LIBOR Market Index Rate plus 1.75% and expires on November 29, 2008. The loan is collateralized by
substantially all the tangible and intangible assets of the Company. The agreement provides for:
• restrictions on monthly borrowings are limited to 20% of estimated remaining collections;
• a funded debt to EBITDA ratio of less than 1.0 to 1.0 calculated on a rolling twelve-month average;
• tangible net worth of at least 100% of prior quarter tangible net worth plus 25% of cumulative positive net
income since the end of such fiscal quarter, plus 100% of the net proceeds from any equity offering; and
• restrictions on change of control.
This facility had $0 and $15 million outstanding at December 31, 2006 and 2005, respectively. The weighted
average interest rate on the amount outstanding at December 31, 2005 was 6.13%. As of December 31, 2006 the
Company is in compliance with all of the covenants of this agreement.
65
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
9. Property and equipment, net:
Property and equipment, at cost, consist of the following as of December 31, 2006 and 2005:
Software
Computer equipment
Furniture and fixtures
Equipment
Leasehold improvements
Building and improvements
Land
Less accumulated depreciation
December 31,
2006
December 31,
2005
$
5,007,449
4,467,524
2,716,723
3,802,427
1,842,402
3,282,620
930,263
(10,856,434)
$
3,253,454
3,626,353
2,182,388
2,743,966
1,644,566
1,714,353
150,922
(8,129,584)
Property and equipment, net
$
11,192,974
$
7,186,418
Depreciation expense for the years ended December 31, 2006, 2005 and 2004 was $2,861,976, $2,382,426 and
$1,901,734, respectively.
Beginning in July 2006 upon initiation of certain internally developed software projects, in accordance with the
provisions of SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,”
the Company began capitalizing qualifying computer software costs incurred during the application development
stage and amortizing them over their estimated useful life of three years on a straight-line basis beginning when the
project is completed. Costs associated with preliminary project stage activities, training, maintenance and all other
post implementation stage activities are expensed as incurred. The Company’s policy provides for the capitalization
of certain direct payroll costs for employees who are directly associated with internal use computer software
projects, as well as external direct costs of services associated with developing or obtaining internal use software.
Capitalizable personnel costs are limited to the time directly spent on such projects. As of December 31, 2006, the
Company has incurred and capitalized $165,964 of these direct payroll costs related to software developed for
internal use. Of these costs, $99,712 is for projects that are in the development stage and therefore are a component
of Other Assets. Once the projects are completed the costs will be transferred to Software and amortized over their
estimated useful life of three years. Depreciation expense and remaining unamortized costs relating to this
internally developed software for the year ended December 31, 2006 was $2,208 and $64,044, respectively.
10.
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. Monthly principal payments on the loan were $4,583 for an amortized term of 10
years. A balloon payment of $275,000 was due July 21, 2005, which resulted in a five-year principal payout. The
loan was paid in full at its maturity date of July 21, 2005.
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 were $2,170 and the loan was paid in full at its maturity date of 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.
66
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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 collateralized by computer equipment. Monthly payments are $18,096 and the loan
matures on May 1, 2008.
On January 9, 2004, the Company entered into a commercial loan agreement in the amount of $750,000 to
finance equipment purchases at one of its leased Norfolk facilities. This loan bears interest at a fixed rate of 4.45%,
matures on January 1, 2009 and is collateralized by the purchased equipment.
Annual payments on all loans outstanding as of December 31, 2006 are as follows:
2007
2008
2009
Less amount representing interest
Principal due
$
$
463,229
240,083
13,975
717,287
(27,395)
689,892
At December 31, 2006 and 2005, the three and five outstanding loans were collateralized by property and
buildings that have a book value of $939,341 and $1,290,244, respectively. The loans require the Company to
maintain net worth greater than $20 million and a cash flow coverage ratio of at least 1.5 to 1.0 calculated on a
rolling twelve-month average. As of December 31, 2006 the Company is in compliance with all of the covenants of
these agreements.
11.
Estimated Fair Value of Financial Instruments:
The accompanying financial statements include various estimated fair value information as of December 31,
2006, as required by SFAS No. 107, “Disclosures About Fair Value of Financial Instruments.” Disclosure of the
estimated fair values of financial instruments often requires the use of estimates. The Company uses the following
methods and assumptions to estimate the fair value of financial instruments.
Cash and cash equivalents: The carrying amount approximates fair value.
Finance receivables, net: The Company records purchased receivables at cost, which represents a significant
discount from the contractual receivable balances due. The cost of the receivables is reduced as cash is received
based upon the guidance of Practice Bulletin 6 and SOP 03-3. The balance at December 31, 2006 and 2005 was
$226,447,495 and $193,644,670, respectively. The Company computed the fair value of these receivables using our
proprietary pricing models that the Company utilizes to make portfolio purchase decisions. At December 31, 2006
and 2005, using the aforementioned methodology, we computed the approximate fair value to be $246,000,000 and
$232,000,000, respectively.
Revolving lines of credit: The carrying amount approximates fair value.
Long-term debt: The carrying amount approximates fair value.
Obligations under capital lease: The carrying amount approximates fair value.
12.
Stock-Based Compensation:
The Company has a stock warrant plan and a stock option plan. The Amended and Restated Portfolio Recovery
2002 Stock Option Plan and 2004 Restricted Stock Plan (the “Amended Plan”) was approved by the Company’s
shareholders at its Annual Meeting of Shareholders on May 12, 2004, enabling the Company to issue to its
employees and directors restricted shares of stock, as well as stock options. Also, in connection with the IPO, all
existing PRA warrants that were owned by certain individuals and entities were exchanged for an equal number of
PRA Inc warrants. Prior to 2002, the Company accounted for stock compensation issued under the recognition and
67
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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 prospectively
to all employee awards granted, modified, or settled after January 1, 2002. All stock-based compensation measured
under the provisions of APB 25 became fully vested during 2002. All stock-based compensation expense
recognized thereafter was derived from stock-based compensation based on the fair value method prescribed in
SFAS 123. Effective January 1, 2006, the Company adopted SFAS 123R using the modified prospective approach.
The adoption of SFAS 123R resulted in a reclassification which increased cash flows from financing activities and
decreased cash flows from operating activities by $2,420,268 relating to income tax benefits from share based
compensation and increased equity by $426,752 for the year ended December 31, 2006. The adoption of SFAS
123R had no material impact on the Company’s Income Statement. The adoption of SFAS 123R had no impact on
previously reported interim periods. As of December 31, 2006, total future compensation costs related to nonvested
awards of stock options and nonvested shares are $6,747,122 with a weighted average remaining life (contractual
term) of 3.04 years for stock options and 3.82 years for nonvested shares. Based upon historical data, the Company
used an annual forfeiture rate of 3.38% for stock options and 2.90% for nonvested shares for most of the employee
grants. Grants made to key employee hires and directors of the Company were assumed to have no forfeiture rates
associated with them due to the low turnover among this group. In addition, concurrently with the adoption of
SFAS 123R, all previous references to “restricted” stock are now referred to as “nonvested” shares.
Total stock-based compensation was $2,116,631, $1,190,446 and $749,754 for the years ended December 31,
2006, 2005 and 2004, respectively. Tax benefits resulting from tax deductions in excess of share-based
compensation expense recognized under the fair value recognition provisions of SFAS No. 123R (windfall tax
benefits) are credited to additional paid-in capital in the Company’s balance sheets. Realized tax shortfalls are first
offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax
expense. The total tax benefit realized from stock-based compensation was $2,988,274, $2,568,327 and $1,185,984
for the years ended December 31, 2006, 2005 and 2004, respectively.
Stock Warrants
Prior to the IPO, 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 five and seven years and
vested within three 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. All warrants became fully vested at the Company’s
IPO in 2002.
The following summarizes all warrant related transactions from December 31, 2003 through December 31,
2006:
Weighted Average
Exercise Price
$
4.20
4.20
4.20
4.20
4.20
4.20
-
$
December 31, 2003
Exercised
December 31, 2004
Exercised
December 31, 2005
Exercised
December 31, 2006
Warrants
Outstanding
107,500
(67,500)
40,000
(36,250)
3,750
(3,750)
-
68
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Stock Options
The Company created the 2002 Stock Option Plan on November 7, 2002. The plan was amended in 2004 by the
Amended Plan to enable the Company to issue restricted shares of stock to its employees and directors. The
Amended Plan was approved by the Company’s shareholders at its Annual Meeting on May 12, 2004. Up to
2,000,000 shares of common stock may be issued under the Amended Plan. The Amended Plan expires
November 7, 2012. All options issued under the Amended Plan vest ratably over five years. Granted options expire
seven years from grant date. Expiration dates range between November 7, 2009 and January 16, 2011. Options
granted to a single person cannot exceed 200,000 in a single year. As of December 31, 2006, 895,000 options have
been granted under the Amended Plan of which 109,170 have been cancelled and are eligible for regrant. These
options are accounted for under SFAS 123R and all expenses for 2006, 2005 and 2004 are included in earnings as a
component of compensation and employee services expense.
The following summarizes all option related transactions from December 31, 2003 through December 31, 2006:
December 31, 2003
Granted
Exercised
Cancelled
December 31, 2004
Exercised
Cancelled
December 31, 2005
Exercised
Cancelled
December 31, 2006
Options
Weighted-
Average
$
Outstanding Exercise Price
14.09
28.79
13.30
13.00
14.65
13.22
15.63
15.12
13.19
13.00
16.43
797,910
20,000
(63,511)
(47,940)
706,459
(181,910)
(20,040)
504,509
(188,475)
(15,015)
301,019
$
Weighted-
Average
Fair Value
$
2.9414
2.8468
2.7794
2.7133
2.9692
2.7265
2.8107
3.0624
2.7561
2.7133
3.2717
$
All of the stock options were issued to employees of the Company except for 40,000 that were issued to non-
employee directors. Non-employee directors were granted 20,000 stock options in 2004. No stock options were
granted in 2005 or 2006. The total intrinsic value of options exercised during the years ended December 31, 2006,
2005, and 2004, was $6.3 million, $4.7 million, and $1.3 million, respectively.
The following information is as of December 31, 2006:
Options Outstanding
Options Exercisable
Exercise
Prices
Number
Outstanding
Average
Remaining
Contractual
Life
Weighted-
Average
Exercise
Price
Aggregate
Intrinsic Value
Number
Exercisable
Weighted-
Average
Exercise
Price
$ 13.00
$ 16.16
$ 27.77 - $ 29.79
Total at December 31, 2006
226,519
7,500
67,000
301,019
2.9
2.9
3.7
3.0
$
$
13.00
16.16
28.06
16.43
$
$
7,631,425
228,975
1,248,320
9,108,720
95,749
5,500
36,000
137,249
$
$
13.00
16.16
27.96
17.05
Aggregate
Intrinsic Value
$
$
3,225,784
167,915
674,360
4,068,059
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.
69
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
The following assumptions were used:
Options issue year:
Weighted average fair value
of options granted
Expected volatility
Risk-free interest rate
Expected dividend yield
Expected life (in years)
2004
$ 2.85
13.26% - 13.55%
3.16% - 3.37%
0.00%
5.00
Utilizing these assumptions, each non-employee director stock option granted in 2004 is valued between $2.62
and $2.92. No options have been awarded to Messrs. Fredrickson, Stevenson or Grube since the IPO in November
2002.
Nonvested Shares
Prior to the approval of the Amended Plan on May 12, 2004, nonvested shares were issued by the Company as an
incentive to attract new employees and, effective May 12, 2004, are being issued pursuant to the Amended Plan to
directors and existing employees as well. Generally, the terms of the nonvested share awards are similar to those of
the stock option awards, wherein the shares are issued at or above market values and typically vest ratably over five
years. Nonvested share grants are expensed over their vesting period.
The following summarizes all nonvested share transactions from December 31, 2003 through December 31,
2006:
Nonvested
Shares
Outstanding
Weighted
Average
Price at
Grant Date
December 31, 2003
Granted
Vested
Cancelled
December 31, 2004
Granted
Vested
Cancelled
December 31, 2005
Granted
Vested
Cancelled
December 31, 2006
13,045
84,350
(2,609)
(4,900)
89,886
74,600
(17,389)
(11,760)
135,337
82,700
(27,764)
(19,165)
171,108
$
$
27.57
26.94
27.57
26.08
27.06
41.92
27.10
30.40
34.96
46.88
33.88
37.75
40.59
The total fair value of shares vested during the years ended December 31, 2006, 2005, and 2004, was $940,644,
$471,241 and $71,930, respectively.
70
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
13.
Earnings per Share:
Basic earnings per share (“EPS”) are computed by dividing income available to common shareholders by
weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS
with the denominator adjusted for the dilutive effect of stock warrants, stock options and nonvested stock awards.
The dilutive effect of stock options and nonvested restricted stock is computed using the treasury stock method,
which assumes any proceeds that could be obtained upon the exercise of stock options and vesting of restricted
stock would be used to purchase common shares at the average market price for the period. The assumed proceeds
include the windfall tax benefit that is received upon assumed exercise. The following table provides a
reconciliation between the computation of basic EPS and diluted EPS for the years ended December 31, 2006 and
2005:
Basic EPS
Dilutive effect of stock warrants,
options and restricted stock awards
Diluted EPS
Net Income
$44,489,816
$44,489,816
For the year ended December 31,
2006
Weighted Average
Common Shares
EPS
15,910,795
$2.80
2005
Weighted Average
Common Shares
EPS
15,641,862
$2.35
Net Income
$36,771,995
171,003
16,081,798
$2.77
$36,771,995
506,841
16,148,703
$2.28
As of December 31, 2006 and 2005, there were no antidilutive options outstanding.
14.
Stockholders’ Equity:
Shares of common stock outstanding were as follows:
December 31, 2003
Exercise of warrants, options and vesting of nonvested shares
Issuance of common stock for acquisition
December 31, 2004
Exercise of warrants, options and vesting of nonvested shares
Issuance of common stock for acquisition
December 31, 2005
Exercise of warrants, options and vesting of nonvested shares
December 31, 2006
Common Stock
15,294,676
133,620
69,914
15,498,210
235,549
33,684
15,767,443
219,989
15,987,432
15.
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.
71
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
The income tax expense recognized for the years ended December 31, 2006, 2005 and 2004 is composed of the
following:
For the year ended December 31, 2006
Federal
State
Total
Current tax expense
Deferred tax expense
Total income tax expense
$
$
14,344,676
9,563,369
23,908,045
$
$
2,264,450
1,543,306
3,807,756
$
$
16,609,126
11,106,675
27,715,801
For the year ended December 31, 2005
Federal
State
Total
Current tax expense
Deferred tax expense
Total income tax expense
$
$
11,741,714
7,817,133
19,558,847
$
$
2,352,431
1,248,183
3,600,614
$
$
14,094,145
9,065,316
23,159,461
For the year ended December 31, 2004
Federal
State
Total
Current tax expense
Deferred tax expense
Total income tax expense
$
638,583
14,056,721
14,695,304
$
-
2,692,844
2,692,844
$
$
638,583
16,749,565
17,388,148
$
$
The Company has recognized a net deferred tax liability of $33,452,670 and $22,345,995 as of December 31,
2006 and 2005, respectively. The components of this net liability are:
Deferred tax assets:
Employee compensation
State tax credit
Intangible assets and goodwill
Other
Total deferred tax asset
Deferred tax liabilities:
Depreciation expense
Prepaid expenses
Cost recovery
Total deferred tax liability
2006
2005
$
733,523
137,475
573,800
7,591
1,452,389
$
473,746
-
473,364
-
947,110
115,432
406,756
34,382,871
34,905,059
370,923
336,865
22,585,317
23,293,105
Net deferred tax liability
$
33,452,670
$
22,345,995
that were previously determined
A valuation allowance has not been provided at December 31, 2006 or 2005 since management believes it is
more likely than not that the deferred tax assets will be realized. In the event that all or part of the deferred tax
assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged
to earnings in the period such determination is made. Similarly, if the Company subsequently realizes deferred tax
assets
the respective valuation allowance would
be reversed, resulting in a positive adjustment to earnings or a decrease in goodwill in the period such determination
is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of
uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with
management's expectations could have a material impact on the Company's results of operations and financial
position.
to be unrealizable,
72
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
The Company believes cost recovery to be an acceptable tax revenue recognition method for companies in the
bad debt purchasing industry and results in the reduction of current taxable income as, for tax purposes, collections
on finance receivables are applied first to principal to reduce the finance receivables to zero before any taxable
income is recognized. The timing difference from the adoption of cost recovery resulted in a deferred tax liability at
December 31, 2006 and 2005.
A reconciliation of the Company’s expected tax expense at statutory tax rates to actual tax expense for the years
ended December 31, 2006, 2005 and 2004 consists of the following components:
2006
2005
2004
Federal tax at statutory rates
State tax expense, net of federal benefit
Other
Total income tax expense
16.
Commitments and Contingencies:
Employment Agreements:
$
$
25,271,966
2,475,041
(31,206)
27,715,801
$
$
20,976,009
2,340,399
(156,947)
23,159,461
$
$
15,693,856
1,750,349
(56,057)
17,388,148
The Company has employment agreements with all of its executive officers and with several members of its
senior management group, most of which expire on December 31, 2008. Such agreements provide for base salary
payments as well as bonuses which are based on the attainment of specific management goals. Estimated future
compensation under these agreements is approximately $8,567,063. The agreements also contain confidentiality and
non-compete provisions.
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.
73
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in
the SEC's rules and forms, and that such information is accumulated and communicated to our management,
including our 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. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
We conducted an evaluation, under the supervision and with the participation of our principal executive officer and
principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period
covered by this report. Based on this evaluation, the principal executive officer and principal financial officer have
concluded that, as of December 31, 2006, our disclosure controls and procedures were effective.
Management's Report on Internal Control Over Financial Reporting. We are responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f) as a process designed by, or under the supervision of, the company's
principal executive and principal financial officers and effected by the company's board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements.
Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we carried out an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on its assessment, management has
determined that, as of December 31, 2006, its internal control over financial reporting was effective based on the
criteria set forth in the COSO framework. The company’s independent registered public accounting firm,
PricewaterhouseCoopers LLP, has issued an attestation report on management’s assessment of our internal control
over financial reporting, as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial
reporting that occurred during the quarter ended December 31, 2006 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
74
Item 10. Directors and Executive Officers of the Registrant.
PART III
The following table sets forth certain information as of February 11, 2007 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 and Administrative Officer,
Treasurer and Assistant Secretary
Craig A. Grube ............. Executive Vice President — Acquisitions
Judith S. Scott ............... Executive Vice President, General Counsel and Secretary
William P. Brophey ...... Director*
Penelope W. Kyle ......... Director
David N. Roberts .......... Director
Scott M. Tabakin .......... Director*
James M. Voss .............. Director*
Age
47
42
46
61
69
59
44
48
64
* Member of the Company’s audit committee (the “Audit Committee”), which has been established in accordance
with Section 3(a)(58)(A) of the Exchange Act. In the opinion of the Board, Mr. Voss and Mr. Tabakin are
independent directors who qualify as “audit committee financial experts,” pursuant to Section 401(h) of Regulations
S-K.
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 and Administrative 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.
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
75
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 appointed as a director of Portfolio Recovery Associates in
2002 and subsequently elected at the Company’s next Annual Meeting of Stockholders. 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.
Penelope W. Kyle, Director. Mrs. Kyle was appointed as a director of Portfolio Recovery Associates in 2005
and subsequently elected at the Company’s next Annual Meeting of Stockholders. Mrs. Kyle presently serves as
President of Radford University. Prior to her appointment as President of Radford University in June 2005, she had
served since 1994 as Director of the Virginia Lottery. Earlier in her career, she worked as an attorney at the law
firm McGuire, Woods, Battle and Boothe, in Richmond, Virginia. Mrs. Kyle was later employed at CSX
Corporation, where during a 13-year career she became the company's first female officer and a vice president in the
finance department. She earned an MBA at the College of William and Mary and a law degree from the University
of Virginia.
David N. Roberts, Director. Mr. Roberts has been a director of Portfolio Recovery Associates since its
formation in 1996. Mr. Roberts joined Angelo, Gordon & Company, L.P. 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.
Scott M. Tabakin, Director. Mr. Tabakin was appointed as a director of Portfolio Recovery Associates in
2004 and subsequently elected at the Company’s next Annual Meeting of Stockholders. Since July 2006, Mr.
Tabakin has served as Executive Vice President and Chief Financial Officer of Elder Health, Inc., a privately owned
Medicare managed health-care company. From November 2003 until July 2006, Mr. Tabakin was an independent
financial consultant. Mr. Tabakin has more than 20 years of public-company experience. He served as Executive
Vice President and CFO of AMERIGROUP Corporation, a managed health-care company, from May 2001 until
October 2003. Prior to May 2001, Mr. Tabakin was Executive Vice President and CFO of Beverly Enterprises,
Inc., then the nation's largest provider of long-term health care. Earlier in his career, Mr. Tabakin was an executive
with the accounting firm of Ernst & Young. He is a certified public accountant and received a B.S. degree in
accounting from the University of Illinois.
James M. Voss, Director. Mr. Voss was appointed as a director of Portfolio Recovery Associates in 2002 and
subsequently elected at the Company’s next Annual Meeting of Stockholders. Mr. Voss has more than 35 years of
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.
76
77
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 Global 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 info@portfoliorecovery.com. The Code of Ethics is also posted
on the Company 's website at www.portfoliorecovery.com.
Certain information required by Item 10 is incorporated herein by reference to the section labeled “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement in connection with the
Company’s 2007 Annual Meeting of Stockholders.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated herein by reference to (a) the section labeled
“Compensation Discussion and Analysis” in the Company’s definitive Proxy Statement in connection with the
Company’s 2007 Annual Meeting of Stockholders and (b) the section labeled “Compensation Committee Report” in
the Company’s definitive Proxy Statement in connection with the Company’s 2007 Annual Meeting of
Stockholders, which section (and the report contained therein) shall be deemed to be furnished in this report and
shall not be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange
Act of 1934 as a result of such furnishing in this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management And Related
Stockholder Matters.
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 2007 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated herein by reference to Item 5 of this report and to the
section labeled “Certain Relationships and Related Transactions” in the Company’s definitive Proxy Statement in
connection with the Company’s 2007 Annual Meeting of Stockholders.
78
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, 2006 and 2005 are presented in the table below:
Audit Fees
Annual audit
Tax Fees
Advice (1)
Other Fees
Investigation Review Fees (3)
Subscription Fees (2)
2006
2005
$
522,799
$
410,000
-
-
58,004
1,500
59,504
9,975
9,975
-
1,500
1,500
Total Accountant Fees
$
582,303
$
421,475
(1) Tax advice fees relate to work done on cost recovery method research for tax purposes.
(2) Subscription fees represent fees paid for an annual subscription to the PricewaterhouseCoopers LLP
research tool, Comperio.
(3) Investigation review fees relate to the work performed by PricewaterhouseCoopers LLP to review and
assess the adequacy and results of the internal control deficiency investigation initiated by our Audit
Committee. See Item 9A. of our Quarterly Report on Form 10-Q for the period ended June 30, 2006,
filed on August 3, 2006, for more information.
The Audit Committee’s charter provides that the Audit Committee will:
• Approve the fees and other significant compensation to be paid to auditors.
• Review the non-audit services to determine whether they are permissible under current law.
• Pre-approve the provision of any permissible non-audit services by the independent auditors and the
related fees of the independent auditors therefore.
• 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.
79
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements.
The following financial statements of the Company are included in Item 8 of this Annual Report on Form 10-K:
Page
Report of Independent Registered Public Accounting Firm 48-49
Consolidated Balance Sheets at December 31, 2006 and 2005
50
Consolidated Income Statements
for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows
For the years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
(b) Exhibits.
51
52
53
54-71
2.1
2.2
2.3
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
Equity Exchange Agreement between Portfolio Recovery Associates, L.L.C. and Portfolio
Recovery Associates, Inc. (Incorporated by reference to Exhibit 2.1 of the Registration Statement
on Form S-1).
Asset Purchase Agreement dated as of October 1, 2004, by and among Portfolio Recovery
Associates, Inc, PRA Location Services, LLC, IGS Nevada, Inc., and James Snead (Incorporated
by reference to Exhibit 2.1 of the Form 8-K dated October 7, 2004).
Asset Purchase Agreement dated as of July 29, 2005, by and among Portfolio Recovery
Associates, Inc, PRA Government Services, LLC, Alatax, Inc. and its stockholders (Incorporated
by reference to Exhibit 2.1 of the Form 8-K dated August 2, 2005).
Amended and Restated Certificate of Incorporation of Portfolio Recovery Associates, Inc.
(Incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1).
Amended and Restated By-Laws of Portfolio Recovery Associates, Inc. (Incorporated by
reference to Exhibit 3.2 of the Registration Statement on Form S-1).
Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form S-1).
Form of Warrant (Incorporated by reference to Exhibit 4.2 of the Registration Statement on
Form S-1).
Employment Agreement, dated December 22, 2005, by and between Steven D. Fredrickson and
Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.1 of the Form 8-K
dated January 6, 2006).
Employment Agreement, dated December 22, 2005, by and between Kevin P. Stevenson and
Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.2 of the Form 8-K
dated January 6, 2006).
Employment Agreement, dated December 22, 2005, by and between Craig A. Grube and Portfolio
Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.3 of the Form 8-K dated
January 6, 2006).
Employment Agreement, dated December 22, 2005, by and between Judith S. Scott and Portfolio
Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.4 of the Form 8-K dated
January 6, 2006).
Amendment to Employment Agreement, dated March 23, 2006, by and between Judith S. Scott
and Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.1 of the Form 8-
K dated March 24, 2006).
Portfolio Recovery Associates, Inc. Amended and Restated 2002 Stock Option Plan and 2004
Restricted Stock Plan. (Incorporated by reference to Exhibit 10.9 of the form 10-Q for the period
ended June 30, 2004).
80
10.7
10.8
10.9
Loan and Security Agreement, dated November 29, 2005, by and between Portfolio Recovery
Associates, Inc, Bank of America and Wachovia Bank. (Incorporated by reference to Exhibit 10.1
of the Form 8-K dated December 5, 2005).
Promissory Note dated November 29, 2005 by and between Portfolio Recovery Associates, Inc,
and Bank of America (Incorporated by reference to Exhibit 10.2 of the Form 8-K dated December
5, 2005).
Promissory Note dated November 29, 2005 by and between Portfolio Recovery Associates, Inc,
and Wachovia Bank (Incorporated by reference to Exhibit 10.3 of the Form 8-K dated December
5, 2005).
10.10 Amended and Restated Loan and Security Agreement, dated May 9, 2006, by and between
Portfolio Recovery Associates, Inc, Bank of America, Wachovia Bank and RBC Centura Bank.
(Incorporated by reference to Exhibit 10.1 of the Form 8-K dated May 11, 2006).
21.1 Subsidiaries of Portfolio Recovery Associates, Inc.
Consent of PricewaterhouseCoopers LLP
23.1
Powers of Attorney (included on signature page).
24.1
31.1
Section 302 Certifications of Chief Executive Officer
31.2
Section 302 Certifications of Chief Financial Officer
32.1 Section 906 Certifications of Chief Executive Officer and Chief Financial Officer
81
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: March 1, 2007
Dated: March 1, 2007
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 and Administrative 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: March 1, 2007
Dated: March 1, 2007
Dated: March 1, 2007
Dated: March 1, 2007
Dated: March 1, 2007
By:/s/ Steven D. Fredrickson
Steven D. Fredrickson
President and Chief Executive Officer
(Principal Executive Officer)
By:/s/ Kevin P. Stevenson
Kevin P. Stevenson
Chief Financial and Administrative Officer,
Executive Vice President, Treasurer and Assistant Secretary
(Principal Financial and Accounting Officer)
By:/s/ William P. Brophey
William P. Brophey
Director
By:/s/ Penelope W. Kyle
Penelope W. Kyle
Director
By:/s/ David N. Roberts
David N. Roberts
Director
82
Dated: March 1, 2007
Dated: March 1, 2007
By:/s/ Scott M. Tabakin
Scott M. Tabakin
Director
By:/s/ James M. Voss
James M. Voss
Director
83
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries of the Registrant and Jurisdiction of Incorporation or Organization
Portfolio Recovery Associates, LLC - Delaware
PRA Holding I, LLC - Virginia
PRA Holding II, LLC - Virginia
PRA Receivables Management, LLC - Virginia (Doing business as Anchor Receivables
Management)
PRA Location Services, LLC – Delaware (Doing business as IGS Nevada)
PRA Government Services, LLC – Delaware (Doing business as RDS and Alatax)
84
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8
(No. 333-110330 and No. 333-110331) of Portfolio Recovery Associates, Inc. of our report dated March 1, 2007
relating to the financial statements, financial statement schedules, management’s assessment of the effectiveness of
internal control over financial reporting and the effectiveness of internal control over financial reporting, which
appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 1, 2007
85
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal controls over financial reporting, or caused such internal controls over financial
reporting to be designed under my supervision to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the financial statements for external purposes in accordance with
generally accepted accounting principles;
(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: March 1, 2007
By: /s/ Steven D. Fredrickson
Steven D. Fredrickson
Chief Executive Officer, President and
Chairman of the Board of Directors
(Principal Executive Officer)
86
Exhibit 31.2
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal controls over financial reporting, or caused such internal controls over financial
reporting to be designed under my supervision to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the financial statements for external purposes in accordance with
generally accepted accounting principles;
(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: March 1, 2007
By: /s/ Kevin P. Stevenson
Kevin P. Stevenson
Chief Financial and Administrative
Officer, Executive Vice President,
Treasurer and Assistant Secretary
(Principal Financial and Accounting
Officer)
87
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, 2006 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
results of operations of the Company.
Date: March 1, 2007
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, 2006 as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Kevin P. Stevenson, Chief Financial and Administrative 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
results of operations of the Company.
Date: March 1, 2007
By: /s/ Kevin P. Stevenson
Kevin P. Stevenson
Chief Financial and Administrative Officer,
Executive Vice President, Treasurer and Assistant
Secretary
(Principal Financial and Accounting Officer)
88
Board of Directors
Corporate Governance
Management
Steve Fredrickson
President and
Chief Executive Officer
Steve Fredrickson
Chairman of the Board
David Roberts
Director
William Brophey
Director
Scott Tabakin
Director
Penelope Kyle
Director
James Voss
Director
Kevin Stevenson
Executive Vice President,
Chief Financial and
Administrative Officer,
Treasurer and Asst.
Secretary
Craig Grube
Executive Vice President,
Acquisitions
Judith Scott
Executive Vice President,
General Counsel and
Secretary
Corporate Information
Stock Exchange Listing
Portfolio Recovery Associates’ common
stock trades on the NASDAQ Global
Stock 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
McLean, Virginia
Legal Counsel
Dechert, LLP
New York, New York
Financial Publications/Investor
Inquiries
Shareholders may acquire copies of the
2006 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
Price Range of Common Stock
The Company’s common stock began
trading on the NASDAQ Global Stock
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 2006.
High
Low
2006
$52.98 $38.23
As of February 16, 2007, there were
approximately 23 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 11,629 beneficial
owners of the common stock as of
February 16, 2007.
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Norfolk, Virginia 23502
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$261.4
$261.4
20.3%
20.4%
21.1%
19.9%
20.3%
20.4%
21.1%
19.9%
$205.2
$205.2
$160.6
$160.6
$120.2
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$120.2
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19.9%
$120.2
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$120.2
’03
’04
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’06
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’04
’05
’06
’03
’04
’05
’06
Cash Receipts
($ in millions)
Cash Receipts
($ in millions)
Return on Equity
(in percent)
Return on Equity
(in percent)
Cash Receipts
($ in millions)
Cash Receipts
Return on Equity
($ in millions)
(in percent)
Return on Equity
(in percent)
’03
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Cash Receipts
($ in millions)
$44.5
Return on Equity
Cash Receipts
We at PRA have achieved significant
(in percent)
($ in millions)
success in our first 10 years, but we
are not satisfied.
$44.5
52.1%
Return on Equity
(in percent)
52.1%
$36.8
$36.8
$27.5
$27.5
$20.7
$44.5
$20.7
$44.5
33.5%
31.0%
33.5%
31.0%
52.1%
26.8%
52.1%
26.8%
$36.8
$36.8
$27.5
$27.5
$20.7
$20.7
33.5%
31.0%
33.5%
31.0%
26.8%
26.8%
’03
’04
’05
’06
’03
’04
’05
’06
’03
’04
’05
’06
’03
’04
’05
’06
Net Income
($ in millions)
Net Income
($ in millions)
Annual Revenue Growth
(in percent)
Annual Revenue Growth
(in percent)
P o r t f o l i o R e c o v e r y A s s o c i a t e s , I n c .
’03
’04
’05
’06
’03
’04
’05
’06
’03
’04
’05
’06
’03
’04
’05
’06
Net Income
($ in millions)
Net Income
($ in millions)
Annual Revenue Growth
(in percent)
Annual Revenue Growth
(in percent)
Net Income
($ in millions)
Net Income
Annual Revenue Growth
Annual Revenue Growth
($ in millions)
(in percent)
(in percent)
Cash Receipts
($ in millions)
Cash Receipts
Return on Equity
($ in millions)
(in percent)
Return on Equity
(in percent)
300000
250000
200000
300000
150000
250000
100000
200000
50000
150000
0
100000
50000
0
50000
40000
30000
50000
20000
40000
10000
30000
0
20000
10000
0
250000
200000
300000
150000
250000
100000
200000
50000
150000
0
100000
50000
0
50000
40000
30000
50000
20000
40000
10000
30000
0
20000
10000
0
20
15
25
10
20
5
15
0
10
5
0
60
50
40
60
30
50
20
40
10
30
0
20
10
0
25
20
15
25
10
20
5
15
0
10
5
0
60
50
40
60
30
50
20
40
10
30
0
20
10
0
Net Income
($ in millions)
Net Income
Annual Revenue Growth
Annual Revenue Growth
($ in millions)
(in percent)
(in percent)