PeRfoRmiNg
i N a T u R Bu l e N T T i m e
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 .
2 0 0 8 a n n u a l R e p o r t
$383.5
$563.8
21.1%
19.9%
19.8%
17.3%
$410.3
$298.2
$261.4
$205.2
$226.4
$193.6
’05
’06
’07
’08
’05
’06
’07
’08
’05
’06
’07
’08
Cash Receipts
($ in millions)
Return on Equity
(in percent)
Net Finance Receivables
($ in millions)
Cash Re ceipts
($ in millions)
Return on Equity
(in percent)
Net Finance Receivables
($ in millions)
$48.2
$45.4
$44.5
$36.8
31.0%
26.8%
$283.9
$247.3
$235.3
$195.3
19.3%
17.2%
’05
’06
’07
’08
’05
’06
’07
’08
’05
’06
’07
’08
Net Income
($ in millions)
Annual Revenue Growth
(in percent)
Stockholders’ Equity
($ in millions)
Net Income
($ in millions)
Annual Revenue Growth
Shareholder’s Equity
(in percent)
($ in millions)
400
350
300
250
200
150
100
50
0
50
40
30
20
10
0
25
20
15
10
5
0
35
30
25
20
15
10
5
0
600
500
400
300
200
100
0
300
250
200
150
100
50
0
Portfolio Recovery Associates, Inc. and its subsidiaries purchase and manage portfolios of
defaulted consumer receivables and provide a broad range of accounts receivable man
agement services to lenders, service providers, governments, and others. The Company
combines a disciplined approach to portfolio acquisitions with a longterm view of collections
and a commitment to continuous innovation. We have created a rewarding organization for
our employees, who produce exceptional results for our investors and clients alike.
PRA began operations in 1996 and has been a public company since November 2002. Since
our initial public offering, our purchased portfolio has increased to $39.9 billion from
$5.1 billion in face value, and our earnings have increased to $2.97 per diluted share from
$0.94. At yearend 2008, we employed 2,032 people in eight office locations from Virginia
to California.
F in ancial Highl ight s
(in thousands, except per share amounts)
Revenues
Operating income
Net income
Diluted earnings per share
Weightedaverage shares (diluted)
Operating margin
Net margin
Return on average equity
Working capital
Finance receivables, net
Total assets
Total debt
Stockholders’ equity
2008
2007
2006
$ 263,275
$ 84,837
$ 45,362
2.97
$
15,292
$ 220,748
$ 81,184
$ 48,241
3.06
$
15,779
$ 188,322
$ 72,000
$ 44,490
2.77
$
16,082
32.2%
17.2%
17.3%
36.8%
21.9%
19.8%
38.2%
23.6%
19.9%
$ 11,549
$ 563,830
$ 657,840
$ 268,305
$ 283,863
$ 10,827
$ 410,297
$ 476,307
$ 168,103
$ 235,280
$ 18,981
$ 226,447
$ 293,378
$
932
$ 247,278
1
DeAR FellOW SHAReHOlDeRS:
last year’s economic meltdown tested the
mettle of corporations and individuals alike.
Hit hardest were our customers, who dealt
with job and home equity losses that took dead
aim at their sources of funds for paying bills.
Your management team and Board navigated
the Company through the prevailing fear and
hysteria by seeking out the market opportuni
ties that always appear during turbulent times.
We also focused on improving the efficiency
and effectiveness of our operations—a strat
egy that always yields solid paybacks down
the line. Over the years, for example, we have
spent a great deal of time devising and updat
ing what we believe are sensible, probable,
and conservative models for use in our under
writing, investing, and accounting functions.
Those models have served us well.
Before I turn to the particulars of 2008, let me say that our
market and business fundamentals still look good—an
encouraging sign since they have an important bearing on
our ability to maximize shareholder value. Market conditions
in our industry turned more favorable in 2007, accelerating
in the second half of the year. For buyers of distressed debt
who could properly execute, the turnaround opened up
opportunities to realize exceptional longterm returns.
During 2008, the supply of distressed debt skyrocketed as
average credit card chargeoff rates increased over 40%.
At the same time, buyer demand deteriorated, pummeled
by the credit crunch. The combination of weakened demand
and increased supply provided a compelling market oppor
tunity that continues today. Wellcapitalized debt buyers with
underwriting proficiency and proven, scalable operations
can make portfolio investments capable of generating size
able lifetime returns. I am pleased to say that PRA has the
rare combination of available capital, robust pricing models,
operating capacity, and expertise necessary to capitalize on
these substantial opportunities. We intend to act quickly
when they appear, but also prudently.
As for business fundamentals, we feel strongly that the best
way to navigate successfully through business cycles and
changing conditions is to have diverse operations. We have
achieved this diversity in two ways: by purchasing a broad
spectrum of distressed consumer debt, including bankrupt
accounts, and by purchasing and operating complementary
businesses. In addition to our debtpurchasing operations,
we run three feeforservice businesses: IGS, a collateral
location and recovery enterprise that serves the auto finance
industry; RDS, which provides revenue administration, audit,
and collection ser vices for government agencies; and
MuniServices, which specializes in revenue enhancement
for government clients. The clients of these three busi
nesses tend to use their services to a greater degree during
economic downturns. As delinquency rates climb, auto
finance companies need help more often with finding and
recovering their collateral. And as the economy slows,
so do tax revenues. That is when governments turn to com
panies like RDS and MuniServices for help with identifying
and capturing tax dollars owed to them. We intend to
continue growing our fee businesses organically and
through tuckin acquisitions. last year, for example, we
purchased the assets of Broussard Partners, a provider of
audit services to local tax authorities in louisiana, and
folded this business into RDS. We also continue to scour
the market for other interesting fee businesses to add to our
company. Some of the same market forces that have pushed
distresseddebt prices lower have also made business
acquisitions better priced and more compelling than we
have seen in some time.
Now for 2008. last year was the first time in our 13year
history that we did not produce net income growth. It was
the first time since we went public in 2002 that we did
not generate return on equity of 20% or better. So from a
shortterm view of financial performance, PRA fell short of
its targets.
2
Steve Fredrickson
Chairman, President & Chief executive Officer
From a longerterm perspective, however, I am ver y
encouraged by what we were able to accomplish last
year. Our employees made extraordinary efforts as we
worked together to manage through an extremely difficult
economic environment. We underwrote new portfolios
with several added layers of conservatism, and we created
significant portfolio diversification by buying large quantities
of chargedoff and bankrupt accounts from many different
sources.
Although our productivity figures were down modestly
yearoveryear, I feel this was due to the extraordinary eco
nomic situation we confronted, not to our own missteps. In
fact, we refined our collection scoring and segmentation
models and tripled our automated dialing capacity during
the year, allowing us to make millions of more calls, at a
lower cost, to highervalue customers than we did in 2007.
We also expanded our ability to pursue legal actions on our
own behalf, rather than depending largely on thirdparty
attorneys—and in so doing reduced our legal cost per
account. These improvements to our ability to collect more
efficiently and effectively helped soften the force of the
economic headwinds faced by our collection operations.
Without such significant operational improvements, I believe
our results would have suffered much more.
As noted earlier, we continued to diversify our lines of
business in 2008, buying not only MuniServices, but the
assets of Broussard Partners. Both companies brought
experienced management teams, expanded product lines,
new clients, and geographic diversification to our growing
government services business. Revenue from our feefor
service businesses totaled $56.8 million in 2008 compared
with $7.1 million in 2004, the year we acquired IGS. Our fee
businesses accounted for 22% of total revenues in 2008, up
from 16% in 2007, and contributed a record 28% of total
revenues in Q4 2008. For all of 2008, feebusiness revenue
growth was 58%, even with our decision at midyear to
cease operations of our contingentfee business, Anchor
Receivables Management. Anchor’s results were determined
to be continuously and inappropriately low relative to the
employees and infrastructure deployed in that business.
We redeployed essentially all employees from this unit to
our ownedportfolio collections operation, where they are
producing substantially improved returns for the Company.
PRA’s fee businesses are well positioned to continue pros
pering in the difficult economic environment we now face.
While we did many things well in 2008, we also took some
actions that turned out to be less than optimal. In 2007, as
we saw portfolio pricing begin to fall, we began buying in
larger quantities. In doing so we misread the pace at which
pricing would continue falling throughout the year and into
2008. We locked into several forward flows during 2007 and
early 2008 that will be less profitable than what we might
have obtained had we postponed that buying. This lower
expectation has already been reflected in our eRC forecasts
and is clearly visible when comparing our 2006–2008 eRC
to purchase price multiples. Unfortunately, we have no per
fect crystal ball to use in making such decisions. Our only
tools are study and discussion; then we have to live with the
consequences. Right now, we don’t know when and at what
pace economic conditions will improve, and what will
happen to collectability and purchase pricing at that time.
Consequently, we are underwriting assuming a protracted
downturn without a return to historical collection heights.
As always, in each quarter we will compare our assump
tions to our actual collection results, and change our future
assumptions accordingly. We also will continue to update
the investment community about our performance to date
and about our expectations.
I can assure you that PRA’s management team is focusing
on the right things, including prudent and accurate under
writing, daily execution, capital availability, and employee
recruitment and retention. I look forward to sharing with you
the progress we make in 2009 and beyond.
Steve Fredrickson
Chairman, President & Chief executive Officer
3
OPeR ATING
PRINCIPleS
FOR T He M A N AGeMeN T
OF P OR T FOl IO ReCOV eR Y
A S S OCI AT e S
The current year will undoubtedly offer more of the same chal
lenges we faced in 2008. Yet with all the turmoil, risk, and failure
served up in times like this, opportunities abound. Competitors
become fewer. Asset pricing becomes more attractive. Talented
employees become easier to attract and retain. By relying on
our wellestablished Operating Principles, we are determined
to exit this economic downturn stronger than ever. These are
the same ideals we have published in each annual report dating
back to 2002. On the following pages we will go through each
principle and let you know what we have been doing to carry
it out.
4
1—Disclose. Be HONeST AND OPeN WITH SHAReHOlDeRS. leT THeM
kNOW WHAT IS GOING ON.
2—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.
3—Keep the business simple. OPeRATe FeWeR, lARGeR CAll CeNTeRS.
4—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.
5—maintain a conservative capital structure. AllOW ROOM FOR
eRROR. keeP DeBT leVelS lOW. WHeN BORROWING IS ReQUIReD BeCAUSe
OF OPPORTUNITY, USe lOWCOST, NONPARTICIPATING DeBT.
6—builD an integrateD business. PORTFOlIO BUYING AND COlleC
TIONS MUST Be UNDeR THe SAMe ROOF.
7—employ steaDy, controlleD growth. We OPeRATe PROCeSS AND
PeOPle INTeNSIVe BUSINeSSeS. exPeRIeNCeD eMPlOYeeS ARe SIG
NIFICANTlY 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.
8—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.
9—Develop anD support employees. PROVIDe AND SUPPORT ONGOING
eMPlOYee SkIll DeVelOPMeNT TO HelP CReATe eVeRINCReASING
leVelS OF INDIVIDUAl POTeNTIAl WITH HIGH leVelS OF PeRFORMANCe
FOR CONTINUING PeRSONAl AND COMPANY GROWTH.
5
1
DISClOS e
Be HONeST AND OPeN WITH SHAReHOlDeRS. leT THeM
kNOW WHAT IS GOING ON.
A company’s operations should be transparent to the company’s owners. Unfortunately, recent
history has way too many examples of companies that fail to fulfill this critical responsibility.
We always try to approach the issue of disclosure from a position of “why not” as opposed to
“why.” As a result, PRA has been an industry leader in the transparent disclosure of coherent
financial metrics. Disclosure goes beyond filing required reports each quarter. It also includes
fully answering investor questions after each quarterly earnings report, whether those
questions are friendly or otherwise. It means being honest and letting investors know what
you know, when you know it, and what you are unsure of. Companies that don’t have the time
or appetite for the exercise quite frankly shouldn’t be public.
For investors to fully understand our company’s performance, they need to see not just the
basic financial results, but also a careful analysis of our static pool results (i.e., results for
all pools acquired during a calendar year) and amortization rate dynamics. Our supplemental
data disclosure provides this clarity, enabling investors to identify return multiples and
revenue recognition trends. We will continue to provide regular updates to this data in each of
our quarterly filings.
During 2008 cash collections increased 25% to a record $326.7 million. Collections on our
purchased bankruptcy pools grew 110% to $56.8 million, while collections on our core charged
off pools grew 15% to $269.9 million. However, for the period 2006–2008, eRCtopurchase
price multiples are the lowest in the Company’s history, reflecting the difficult pricing
environment of 2006 and the increasingly difficult collections environment we have faced since
2007. Time will prove whether we will be able to extract upside from the 2007 and 2008 pools.
Our lower eRC ratios resulted in higher amortization rates, which in turn reduced the propor
tion of cash collections we recognized as revenue. This effect, combined with increased collec
tion costs resulting from the tougher operating environment, and higher interest expense
resulting from our substantial borrowing increase, explain our 6% decrease in net income to
$45.4 million in 2008.
The following two tables show the cash collections made on our bankruptcy and chargedoff
portfolios in each year, by year of portfolio purchase. Other pool performance data is provided
on pages 38 and 40 of the enclosed 10k.
Our cash collections increased 25% while our
cash receipts increased 29% and our net
income decreased 6% during 2008.
6
Cash Collections by Year, by Year of Purchase—Purchased Bankruptcy Portfolio Only ($ in thousands)
Purchase
Period
Purchase
Price
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Total
Cash Collection Period
$
— $ — $ — $ — $ — $
— $ — $ — $
— $
— $
— $
— $
— $
—
—
—
—
—
—
—
7,469
29,302
17,643
78,933
111,063
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
743
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
— $
— $
— $
— $
— $
— $
—
—
—
—
—
—
—
—
4,554
3,777
—
—
—
3,956
2,777
1,455 $
13,485
15,500
11,934
6,845 $
38,056
5,608
—
—
9,455
2,850
6,522 $
21,585
27,972 $
30,822
—
14,024 $
14,024
Total
$ 244,410 $ — $ — $ — $ — $
— $ — $ — $
— $
743 $ 8,331 $ 25,064 $ 27,016 $ 56,818 $ 117,972
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
2007
2008
Total
Cash Collection Period
$ 3,080 $ 548 $ 2,484 $ 1,890 $ 1,348 $ 1,025 $
730 $
496 $
398 $
285 $
210 $
237 $
102 $
83 $
9,836
5,215
3,776
4,069
6,807
3,347
6,398
2,630
5,152
5,138
13,069
12,090
1,829
3,948
9,598
1,324
2,797
7,336
1,022
2,200
5,615
860
1,811
4,352
6,894
19,498
19,478
16,628
14,098
10,924
597
1,415
3,032
8,067
437
882
2,243
5,202
346 $
24,183
616 $
35,802
1,533 $
64,006
3,604 $ 104,393
7,685
— 2,507
11,089
18,898
25,020
33,481
42,325
61,449
51,709
113,911
90,159
179,839
167,448
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 13,048
28,831
28,003
26,717
22,639
16,048
10,011
6,164 $ 151,461
—
—
—
—
—
—
—
— 15,073
36,258
35,742
32,497
24,729
16,527
9,772 $ 170,598
—
—
—
—
—
—
—
—
—
—
—
—
24,308
49,706
52,640
43,728
30,695
18,818 $ 219,895
—
—
—
—
—
17,276
41,921
36,468
27,973
17,884 $ 141,522
—
—
—
—
15,191
59,645
57,928
42,731 $ 175,495
—
—
—
17,363
43,737
34,038 $
95,138
—
—
39,413
87,039 $ 126,452
—
47,253 $
47,253
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Total
$ 806,093 $ 548 $ 4,991 $ 10,881 $ 17,362 $ 30,733 $ 53,148 $ 79,253 $ 117,052 $ 152,661 $ 183,045 $ 211,329 $ 235,150 $ 269,881 $ 1,366,034
7
2
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.
During 2008 we benefited from the continued decline in portfolio purchase prices. As the
underlying collection environment became more difficult during the year, we underwrote our
deals more conservatively by incorporating lower cash flow assumptions into our models and
increasing our returnrate hurdle to further compensate for the increased economic risk.
Through careful monitoring of the economy and its impact on cash flow, we attempted to keep
our adjustments to collections ahead of the weakening economy, anticipating further softening.
For the year, we invested a total of $280.3 million in new portfolios. Purchasing was diversified
between bankruptcy portfolios ($113.1 million, or 40%) and chargedoff portfolios ($167.2
million, or 60%). Within the chargedoff portfolios, purchasing was distributed across different
recall classifications (the number of rounds of post chargeoff collections the accounts had
already gone through). The graph below shows the percentage distribution of our portfolio
investment each year by type of paper purchased. As you can see, we are an opportunistic
buyer who will shift our investment from year to year to capitalize on those market segments
that we feel offer the best riskreward characteristics.
INVESTMENT PERCE NTAGE BY PAPER TYPE
100
80
60
40
20
0
’96
’97
’98
’99
’00
’01
’02
’03
’04
’05
’06
’07
’08
Warehouse
Quad/Quint
Tertiary
Mixed
Secondary
Primary
Fresh
Paying
Legal/Judgment
BK Trustees
a96
a97
a98
a99
a00
a01
a02
a03
a04
a05
a06
a07
a08
8
100
80
60
40
20
0
We hold ourselves to the same standards of careful investing when buying businesses as we
do when buying portfolios of bad debt. Our goal is to build an increasingly diverse revenue and
income stream for the Company. During 2008 we significantly expanded our presence in the
government revenue administration market by acquiring MuniServices and the contracts and
employees of Broussard Partners. Despite the cessation of our Anchor Receivables
Management business during Q2 and the resulting loss of revenue, we were still able to grow
feeforservice revenue to a record $18.9 million in Q4 2008. In fact, during this quarter, the
revenue and net operating income (i.e., earnings before interest and taxes) attributable to our
feeforservice businesses were similar to the corresponding results for the entire Company
in Q4 of 2002, our first reporting period as a public company. The growth in our fee business is
not an accident, but rather a deliberate strategy we have deployed consistently for years.
The diversity of our fee businesses permits the Company to grow more steadily and minimize
concentration risk from any single market in which we compete. These businesses can give us
added growth when the debtpurchase markets may offer less, while requiring little of our
precious capital to fund their expansion. We intend to continue to build our fee businesses
through positive and negative economic cycles, further diversifying our activities and the
markets and clients we serve.
Courtesy of the NASDAQ OMx Group
9
3
keeP THe BUSINeSS SIMPle
OPeRATe FeWeR,
lARGeR CAll CeNTeRS.
Amen. Fully leverage the capabilities of great managers,
physical facilities, and network hardware and connectivity,
plus corporate support services such as Accounting, Informa
tion Technology, and Human Resources. Our Norfolk campus
now houses more than 800 employees, organized into groups
with manageable sizes. We prefer 14person collection units
reporting to a single manager, with 9 managers reporting to
an Assistant Vice President. These 126person groups are
large enough to allow for great diversity in skill sets, schedul
ing capabilities, and absenteeism coverage, but small enough
to permit strong personal bonds, effective communication,
and a sense of belonging and contribution.
In our Hampton, Virginia call center, almost 230 owned
portfolio collectors are organized into two teams, with each
reporting to an Assistant Vice President. There is a similarly
sized and managed group in jackson, Tennessee, and a
190collector group in Hutchinson kansas, split roughly into
two equal teams. With the transition of employees from
Anchor to PRA, we have some 50 collectors working in
Birmingham, Alabama. each of our ownedportfolio collection
offices works similar accounts, on the same computer
systems, using standardized processes.
With hopes of capitalizing on a significant labor cost arbitrage,
we opened a test center in the Philippines in March 2008,
anticipating solid growth. At yearend, its performance had
not improved to required levels, so we have not expanded this
experiment. During 2009 we anticipate either making satisfac
tory headway in improving performance there or discontinu
ing the experiment altogether.
Our main IGS call center in las Vegas is at capacity with 150
employees. Therefore, we will be moving the business to a
new 30,000 squarefoot operations center in April of 2009 in
order to support its continued growth. RDS has about 60
employees in Birmingham, Alabama, Broussard Partners in
Houston, Texas, employs 24, and MuniServices has approxi
mately 120 employees, most of whom are located at its Fresno,
California, headquarters.
10
keeP COSTS lOW AND
PRODUCTIVIT Y HIGH
4
DeVelOP AND ReTAIN GReAT eMPlOYeeS. keeP SUPPORT
STAFF AS SMAll AS POSSIBle, WHIle PROVIDING exCel
leNT SeRVICe TO THe COlleCTION OPeRATION.
Although we pride ourselves on continuous vigilance over expenses, nothing focuses a man
agement team on lowering costs and increasing productivity like a recession. A tougher
collection environment generally causes lower productivity and higher costs, since collectors
must work harder on each account to arrange realistic payments with customers.
As the graph at the bottom of this page shows, our hourly productivity, as measured in dollars
collected per hour paid, peaked in 2006 before falling about 7% in 2007 and then a further
3% in 2008. We regard these declines as rather modest given the economic environment of
the past two years and the substantial growth in our collection staff, which depresses short
term productivity.
We implemented several major productivity initiatives during 2008. To dramatically increase
the phone call production of our employees, we invested heavily in predictive dialer systems.
By yearend, we were making seven times the number of phone calls per month that we had
made just a year earlier. Without this investment, we feel, we would have seen a greater falloff
in productivity than we actually experienced. We also improved upon our already robust ability
to segment our portfolio, an action that helps us to better allocate precious collection resources
to our highestvalue accounts. In addition, we focused intensely on optimizing our return on
investment from each slice of our portfolio and each type of collection action we took. These
initiatives were vital to offset the economy’s depressive effect on our cash collections.
The following graph shows total ownedportfolio collector hours paid, together with several
hourly productivity measures from 1998 through 2008.
HO URLY PRODUCTIVITY VS. HOUR S PA ID (collections per hour paid in dollars)
r
H
/
d
e
r
e
v
o
c
e
R
$
$150
120
90
60
30
2,500,000
$131.29
2,000,000
$96.95
H
o
u
r
s
P
a
i
d
1,500,000
1,000,000
500,000
’98
’99
’00
’01
’02
’03
’04
’05
’06
’07
0
’08
a98
a99
a00
a01
a02
a03
a04
a05
a06
a07
a08
Hours Paid
$ Recovered/Hr Paid
$ Recovered/Hr Paid WO Legal
11
a98
a99
a00
a01
a02
a03
a04
a05
a06
a07
a08
150
120
90
60
30
2500
2000
1500
1000
500
0
5
MAINTAIN A CONSeRVATIVe
CAPITAl STRUCTURe
AllOW ROOM FOR eRROR. keeP DeBT leVelS lOW. WHeN
BORROWING IS ReQUIReD BeCAUSe OF OPPORTUNITY, USe
lOWCOST, NONPARTICIPATING DeBT.
Operating essentially debtfree from the end of 2002 through early 2007, we decided to utilize
financial leverage to amplify returns to our shareholders. We continued and expanded this
practice in 2008, increasing our borrowings to $268.3 million from $168.0 million at the end of
2007. By yearend we were enjoying a fully loaded borrowing cost of about 1.86% on the $218.3
million portion of this debt on our credit line, which dramatically lowers our weighted average
cost of capital. Our credit line borrowing rate is equal to 30day lIBOR plus 1.40%. An interest
rate swap executed in 2008 fixes our lIBOR index at 1.89% for a $50.0 million portion of our
credit line from january 2010 through May 2011, yielding a total future borrowing cost of 3.29%
on that segment. Another $50.0 million of our debt is priced at a 6.80% fixed rate through
mid2012. With a current debttoequity ratio of about 95%, we consider our debt load highly
manageable and conservative.
Importantly, we are using our borrowing power to acquire wellpriced pools of chargedoff
and bankruptcy debt during a time when we feel market forces are creating extraordinary
opportunities. As we acquire new pools of accounts, and layer these purchases year after year,
we create an annuity stream of longlasting cash flow that is more than sufficient to meet
our debt service obligations. We used the additional $100 million we borrowed in 2008, together
with internal cash flow, to 1] purchase $280 million of chargedoff and bankrupt accounts,
2] acquire MuniServices and the assets of Broussard Partners for about $25 million, and
3] make $6 million in capital expenditures.
We understand that with leverage comes risk. We intend to keep our leverage modest, and to
use it only when it appropriately enhances riskadjusted returns to our shareholders. We feel
that now is just such a time. Our current line of credit is a borrowing base–driven revolver with
a maximum commitment of $365.0 million. Since this commitment extends through May of
2011, we presently see no need to further expand the line; however, we will be on the lookout
for extraordinary opportunities that justify an increase. But we will not lose sight of our
Operating Principle: Maintain a conservative capital structure. Allow room for error. keep debt
levels low.
12
BUIlD AN INTeGRATeD BUSINeSS
6
PORTFOlIO BUYING AND COlleCTIONS MUST Be UNDeR THe
SAMe ROOF.
We continue to be huge believers in our integrated business model. We operate our own
collection call centers because we feel underwriting, strategy, and collection must operate
as a cohesive, coordinated set of functions. We are constantly experimenting with different
collection techniques and processes, something we could never accomplish as effectively
in an outsourced collection environment. What we learn about the portfolios stays within our
walls, and is shared across collection sites so that collectors can quickly benefit from learning
curve improvements without directly or indirectly educating our competitors. likewise, during
challenging economic times such as these, it is more important than ever for our acquisition
and underwriting staffs to obtain monthly, daily, and even hourly results from all of our pools
and collection processes. This allows us to be highly responsive to collection trends as they
evolve, increasing the accuracy of our underwriting projections.
During 2008 we pushed integration even further by insourcing much of our legal collection
work, eliminating our reliance upon the lowperforming portion of our thirdparty attorney
network. By further expanding this internal capability, we believe we can improve our legal
liquidation rates while maintaining a lower cost structure. Our philosophy of integration
yields huge benefits in the form of feedback about control processes and collection results.
It also widens our profit margins because we retain profit that would otherwise be paid to a
thirdparty collector.
OWNeD PORTFOlIO CASH COlleCTI ONS P eR P URCH ASe P eRI OD ($ in millions)
$350
300
250
200
150
100
50
0
’96
’97
’98
’99
’00
’01
’02
’03
’04
’05
’06
’07
’08
13
a96
a97
a98
a99
a00
a01
a02
a03
a04
a05
a06
a07
a08
350000
300000
250000
200000
150000
100000
50000
0
a08
a07
a06
a05
a04
a03
a02
a01
a00
a99
a98
a97
a96
7
eMPlOY STeADY,
CONTROlleD GROW TH
We OPeRATe PROCeSS AND PeOPle INTeNSIVe BUSI
NeSSeS. exPeRIeNCeD eMPlOYeeS ARe SIGNIFICANTlY
MORe PRODUCTIVe THAN NeWeR eMPlOYeeS. GROWING
TOO QUICklY PUTS TOO MANY leSS PRODUCTIVe, lOWeR
MARGIN PeOPle
INTO THe WORkFORCe MIx, WHICH
DRIVeS DOWN PRODUCTIVITY, MARGIN, AND NeT INCOMe.
This principle required us to be more disciplined in 2008, given the significant opportunities we
saw to invest in new baddebt portfolios. We must always balance the potential to profitably
grow our business with the ability to maintain integrated operations. Our ownedportfolio
collectors are well trained and generally become more productive as their tenure with
us increases. As a result, during periods of greater increases in new collector staff, we suffer
depressed productivity and compressed margins. This tradeoff was clearly evident during
2007 as we opened our new jackson, Tennessee, site and aggressively filled it with new
employees.
We have seen many competitors implode as a result of hypergrowth, so this principle is one of
which we never lose sight. During 2008, we increased our ownedportfolio collection staff by
191 employees, or 18%. Although this was a large increase, we were able to raise the productivity
of the new hires (along with that of our existing employees) by using improved scoring, port
folio segmentation, and account strategy design, and by installing a significant number of
predictive dialer seats. As opportunities continue to present themselves, we will be mindful
to pursue them only to the extent that operational control and productivity do not suffer.
PORTFOLIO PURCHASE S BY YEAR ($ in millions)
$300
250
200
150
100
50
0
’96
’97
’98
’99
’00
’01
’02
’03
’04
’05
’06
’07
’08
a96
a97
a98
a99
a00
a01
a02
a03
a04
a05
a06
a07
a08
300
250
200
150
100
50
0
14
MANAGeMeNT SHOUlD Be OWNeRS,
NOT HIReD GUNS
8
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.
The four named executive officers of the Company and the Board of Directors were together
net buyers of PRA common stock during the year, exercising options and covering the exercise
cost and taxes out of pocket. The Board of Directors has established common stock ownership
guidelines for itself and senior executives. All named executive officers own in excess of the
prescribed guidelines.
PRA also has a strong bias towards having executives earn their pay—both cash and equity—
instead of simply giving it to them. Since 2007 the Board of Directors has required that the
majority of executive equity awards be triggered by the achievement of specific operating
goals that are meant to be challenges, not layups. This approach, combined with the difficult
economic environment, appears to be driving the 2007 longTerm Incentive plan to a zero
payout, with similar prospects for the 2008 plan.
PRA has never repriced its options or renegotiated equity incentives due to deteriorating
market conditions. We simply don’t believe in it. likewise, we avoid executive perks of any
kind that are not also offered to every other employee. Private plane use, country club dues,
housing allowances, tax grossups, financial planning services, and even reserved parking
spaces are simply not part of the PRA benefit scheme. Instead, we seek to pay fair cash com
pensation based upon market conditions and performance, and let the executive decide how to
spend his or her own money. This supports our principle of thinking and acting like owners.
likewise, the management team has fair but not excessive employment contracts. The CeO’s
base salary has been targeted at the 25th percentile of peer figures, with the ability to earn
median total cash compensation through bonus only if goals are achieved. PRA prefers to put
a large portion of pay at risk in the form of bonuses. That way, good performance can be
rewarded, while substandard performance results in lowerthanaverage pay.
The management team fully supports the notion that changeofcontrol severance clauses
should not exist at PRA. Shareholders should not have to pay off management that is no longer
deemed valuable in the further operation of the Company. Simply being an incumbent should
provide no right to a windfall. We are owners, but we are managing your company. We do not
forget that for a moment.
15
9
DeVelOP AND
SUPPORT eMPlOYeeS
PROVIDe AND SUPPORT ONGOING eMPlOYee SkIll DeVel
OPMeNT TO HelP CReATe eVeRINCReASING le VelS
OF INDIVIDUAl POTeNTIAl WITH HIGH leVelS OF PeR
FORMANCe FOR CONTINUING PeRSONAl AND COMPANY
GROWTH.
just as the down economy creates opportunities to purchase companies and bad debt portfo
lios, so too does it enhance the likelihood of attracting exceptional employees. In 2008 we hired
a number of executives, managers, analysts, and hourly employees whom it would have been
difficult, if not impossible for us to hire in better times. As lenders and others cut back or
otherwise create uncertainty for their employees, we move in and acquire the very best talent
we can find. Then we pay them right, treat them right, and watch them perform.
PRA believes in investing in its people. In difficult times, many companies are quick to slash
their training budgets to improve their bottom line. We know that this is a temporary fix with
disastrous longterm consequences, and have taken the opposite approach.
employees, especially those who have phone contact with customers, will only achieve their
full potential if they are highly skilled and confident. Skill results from both natural ability and
training, and confidence comes from practice. Our new collector training program provides
weeks of regulatory, negotiation, and system instruction. employees then graduate into a side
byside training phase, in which they practice collecting under close management supervision.
They are then allocated to teams containing more seasoned associates who act as mentors.
Finally, these employees participate in advanced collections training in order to keep their
skills fresh throughout their careers. With over 1,200 collectors, the investment we make in
such skill development is not insignificant, but we believe that it provides PRA with a sustain
able competitive advantage.
16
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.
2 0 0 8 F i n a n c i a l I n f o r m a t i o n
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 operations, 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 uncertainties 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 20, 2009. 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.
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, 2008
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:133) NO (cid:59)
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 (cid:59) Accelerated filer (cid:133) Non-accelerated filer (cid:133) Smaller reporting company (cid:133).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2008
was $556,412,722 based on the $37.50 closing price as reported on the NASDAQ Global Stock Market.
YES (cid:133) NO (cid:59)
The number of shares of the registrant’s Common Stock outstanding as of February 20, 2009 was
15,332,615.
Documents incorporated by reference: Portions of the Proxy Statement to be filed by approximately April
22, 2009 for our 2009 Annual Meeting of Stockholders are incorporated by reference into Items 11, 12 and 13 of
Part III of this Form 10-K.
1
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
26
27
27
27
28
30
32
50
51
80
80
80
81
83
83
83
84
85
87
2
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, but
are not limited to, the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
continued deterioration of the economic environment including the stability of the financial system;
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 or interpretation of tax laws;
deterioration in economic conditions in the United States that may have an adverse effect on the our
collections, results of operations, revenue and stock price;
changes in bankruptcy or collection agency laws that could negatively affect our business;
our ability to employ and retain qualified employees, especially collection personnel;
our work force could become unionized in the future, which could adversely affect the stability of our
production and increase our costs;
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 ability to comply with the provisions of the Sarbanes-Oxley Act of 2002 and the rules and
regulations promulgated thereunder;
our ability to retain existing clients and obtain new clients 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.
3
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” section beginning on page 18, as well as “Business”
section beginning on page 4 and the “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” section beginning on page 32.
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.
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 PRA Location Services, LLC (“IGS”) and revenue
administration, audit and debt discovery/recovery services for government entities through PRA Government
Services, LLC (“RDS”) and MuniServices, LLC (“MuniServices”). 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 purchased from sellers of defaulted consumer debt. 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, 2008, we acquired 1,290 portfolios with a face value of $39.9 billion for $1.1 billion, representing
more than 19.1 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 twelve year period,
which has enabled us to generate increasing profits and positive operational cash flow.
4
We have achieved strong financial results since our formation, with cash collections growing from $10.9
million in 1998 to $326.7 million in 2008. Total revenue has grown from $6.8 million in 1998 to $263.3 million
in 2008, a compound annual growth rate of 44%. Similarly, pro forma net income has grown from $402,000 in
1998 to net income of $45.4 million in 2008.
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
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 locate collateral on their behalf for either a fee-for-service or a success fee. We can
purchase 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 and MuniServices
businesses, we have the ability to provide these services to local and state 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
twelve year period, which has enabled us to generate increasing profits and operational cash flow. In order to
price portfolios and forecast the targeted collection results for a portfolio, we use two separate internally
5
developed statistical models and one externally developed model, 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 and external models analyze 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, 2008, we have acquired 1,290 portfolios with a face value of $39.9 billion.
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,
Jackson, Tennessee, Houston, Texas and Fresno, California 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
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 been unable 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.
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
6
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 accounts, 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, 2008 into the major
asset types represented (amounts in thousands):
Asset Type
Visa/MasterCard/Discover
Consumer Finance
Private Label Credit Cards
Auto Deficiency
Total:
No. of Accounts
10,954
4,955
2,681
484
19,074
%
57.4%
26.0%
14.1%
2.5%
100.0%
Life to Date Purchased Face
Value of Defaulted
Consumer Receivables⁽¹⁾
$ 29,197,790
4,324,737
3,347,550
3,051,001
$
39,921,078
%
73.2%
10.8%
8.4%
7.6%
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 150 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
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 660 days past due and charged-off, have been placed with two or three contingent fee
servicers and receive even lower purchase prices. We also purchase accounts previously worked by four or more
agencies and these are typically 1,260 days or more past due and receive an even lower price. In addition, we
purchase accounts that are included in consumer bankruptcies. These bankrupt accounts are typically filed under
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Chapter 13 of the U.S. Bankruptcy Code and have an associated payment plan that can range from 3 to 5 years.
We purchase bankrupt accounts in both forward flow and spot transactions and consequently, they can be at any
age in the bankruptcy plan life cycle.
As shown in the following chart, as of December 31, 2008, we purchase accounts at any point in the
delinquency cycle (amounts in thousands):
Account Type
No. of Accounts
%
Life to Date Purchased Face
Value of Defaulted
Consumer Receivables⁽¹⁾
Fresh
Primary
Secondary
Tertiary
BK Trustees
Other
Total:
783
4.1% $ 2,897,585
2,396
12.6% 4,086,581
3,272
17.2% 5,039,470
3,672
19.3% 4,633,690
2,053
10.7% 8,631,036
6,898
36.1% 14,632,716
%
7.3%
10.2%
12.6%
11.6%
21.6%
36.7%
19,074
100.0%
$
39,921,078
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.
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, 2008 (amounts in thousands):
Geographic Distribution
Texas
California
Florida
New York
Pennsylvania
North Carolina
Illinois
Ohio
Georgia
New Jersey
Michigan
Virginia
Massachusetts
Tennessee
South Carolina
Arizona
Other (3)
No. of
Accounts
3,321
1,838
1,446
1,144
658
660
763
639
576
445
487
504
352
387
338
291
Life to Date Purchased
Face Value of
Defaulted Consumer
Receivables (1)
$ 5,042,635
4,745,725
3,834,238
2,686,008
1,591,432
1,399,197
1,354,505
1,331,921
1,254,007
1,213,562
1,005,867
835,264
824,884
821,304
755,429
736,685
%
17%
10%
8%
6%
3%
3%
4%
3%
3%
2%
3%
3%
2%
2%
2%
2%
Original Purchase Price of
Defaulted Consumer
Receivables (2)
$ 113,280
110,357
90,289
69,125
46,224
37,896
41,385
44,583
41,698
31,934
33,127
24,947
21,500
27,617
20,246
17,268
%
13%
12%
10%
7%
4%
4%
3%
3%
3%
3%
3%
2%
2%
2%
2%
2%
%
11%
10%
8%
6%
4%
4%
4%
4%
4%
3%
3%
2%
2%
3%
2%
2%
Total:
5,225
28%
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.
10,488,415
39,921,078
$
25%
100%
27%
100%
$
1,071,963
300,487
19,074
(2) The “Original Purchase Price of Defaulted Consumer Receivables” represents the cash paid to sellers to
acquire portfolios of defaulted consumer receivables.
(3) Each state included in "Other" represents less than 2% of the face value of total defaulted consumer
receivables.
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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. 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 or call for a price renegotiation. 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 and one externally developed model, 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. Finally, we use a model that
creates statistically similar portfolios from our existing accounts and develops collection curves for them that are
used in our price modeling. 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. Finally, we use the
statistically similar portfolio analysis model to refine our curves. Using the three 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.
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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, President and Chief Executive Officer,
Kevin Stevenson, Executive Vice President, Chief Financial and Administrative Officer, Craig Grube, Executive
Vice President – Acquisitions, Mike Petit, President, Bankruptcy Services and Neal Stern, Senior Vice President
and Chief Operating Officer – Owned Portfolios. Due to travel arrangements, alternates can be named from time
to time.
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 collectability forecast for a newly acquired portfolio will help determine our initial 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. After owning an account for a month we begin reassessing
the collectability on a daily basis based on a set of observed account behaviors. 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.
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.
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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
legal process can take an extended period of time, but it also generates cash collections that likely would not have
been realized otherwise.
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 40
states, utilizing the lower courts, in which we initiate law suits in amounts up to the jurisdictional limits of the
respective courts. 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 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 50 independent law firms who work
on a flat fee or contingent fee basis. Legal cash collections generated by both our in house attorneys and outside
independent contingent fee attorneys constituted approximately 28% of our total cash collections in 2008. 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.
Our bankruptcy department manages consumer filings under the U.S. Bankruptcy Code on debtor accounts
derived from three sources; 1) the company’s purchased pools of charged off and delinquent accounts, 2) our
purchased pools of bankrupt accounts, and 3) our third party servicing client relationships. On company owned
accounts, we file proofs of claim (“POCs”) or claim transfers and actively manage these accounts through the
entire life cycle of the bankruptcy proceeding in order to substantiate our claims and ensure that we participate in
any distributions to creditors. On accounts managed under a third party relationship, we work on either a full
service contingency fee basis or a menu style fee for service basis.
We developed our proprietary Bankruptcy Management System (“BMS”) as a secure and highly automated
platform for providing bankruptcy notification services, filing POCs and claim transfers, managing documents,
administering our case load, posting and reconciling payments and providing customized reports. BMS is a
robust system designed to manage claims processing and case management in a high volume environment. The
system is highly flexible and its capacity is easily expanded. Daily processing volumes are managed to meet
individual bar dates associated with each bankruptcy case and specific client turnaround times. BMS and its
underlying business rules were developed with emphasis first on minimizing risks through strict compliance to
the bankruptcy code, then on maximizing recoveries from automated claim filing and case administration.
Each of our employees goes through an entry level training program to familiarize them with BMS and the
bankruptcy process, including a general overview of how we interact with the courts, debtor’s attorneys and
trustees. We also use a tiered process of cross training designed to familiarize advancing employees with a
variety of operational assignments and analytical tasks. For example, we utilize specially trained employees to
perform advanced data matching and analytics for clients, while others are tasked with resolving objections
directly with attorneys and trustees. In rare circumstances, resolution to these objections may need to be affected
by working through our network of local counsel.
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
11
debt owner, which may then place the defaulted consumer receivables with another collection agency or sell the
portfolio of receivables. We discontinued our ARM contingent fee operation during the second quarter of 2008.
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, asset
location 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, 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.
For RDS and MuniServices, our government processing and collection businesses, their 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 audits are conducted, 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 us 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.”
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 and our ability to collect on various asset types. 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.
12
Information Technology
Technology Operating Systems and Server Platform
The architecture and design 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
Microsoft Windows 2000/2003 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 software systems are being leveraged to manage location information
and operational applications for MuniServices, 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
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 PRA 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 data 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 and Oracle
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. MuniServices, IGS and RDS all maintain unique,
proprietary software systems that manage the movement of data, accounts and information throughout these
business units. We believe these systems will be sufficient for our needs in the foreseeable future.
Redundancy, System Backup, Security and Disaster Recovery
Our data centers provide the infrastructure for collection services and uninterrupted support of data,
applications and hardware for all of our business units. 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, Alabama 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 telecommunications
feeds, uninterruptible power supplies and natural gas and diesel-generators, all of which provide a level of
redundancy should a power outage or interruption occur. We also have generators installed at each of our remote
call centers, as well as our subsidiary locations in Alabama and as of April 2009, Nevada. 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.
13
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
The Avaya Proactive Contact Dialer ensures that our collection staff focuses on certain defaulted consumer
receivables according to our specifications. Its predictive technology takes into account 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, with the highest volume of outbound calls. In addition,
the dialer allows our collectors to handle only 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 2,032 persons on a full-time basis, including the following number of front line operations
employees by business: 1,478 on our owned portfolios, 158 working in our IGS operations, 67 working in our
RDS government collections operation, and 71 working in our MuniServices operations, as of December 31,
2008. 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 59% in 2008.
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,
Jackson, Tennessee, Houston, Texas and Fresno, California areas to provide a large potential workforce of
eligible personnel.
Training
We provide a comprehensive multi-week training program for all new owned portfolio collectors. The first
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 additional
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, as well as once a
year thereafter. In addition, we conduct continuing advanced classes in our four training centers. Our
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technology and systems allow us to monitor individual employees and then offer additional training in areas of
deficiency to increase productivity and ensure compliance.
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. Additionally, we review accounts using a proprietary scoring
model and select those accounts reflecting a high propensity to pay in a legal environment. Depending on the
balance of the defaulted consumer 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. 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 40 states, utilizing the lower courts, in which
we initiate law suits in amounts up to the jurisdictional limits of the respective courts. 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 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 50 independent law firms, all of which work on a contingent fee basis. Legal
cash collections generated by both our in house attorneys and outside independent contingent fee attorneys
constituted approximately 28% of our total cash collections in 2008. 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.
Bankruptcy
Our bankruptcy department manages consumer filings under the U.S. Bankruptcy Code on debtor accounts
derived from three sources; 1) the company’s purchased pools of charged off and delinquent accounts, 2) our
purchased pools of bankrupt accounts, and 3) our third party servicing client relationships. On company owned
accounts, we file proofs of claim (“POCs”) or claim transfers and actively manage these accounts through the
entire life cycle of the bankruptcy proceeding in order to substantiate our claims and ensure that we participate in
any distributions to creditors. On accounts managed under a third party relationship, we work on either a full
service contingency fee basis or a menu style fee for service basis.
We developed our proprietary Bankruptcy Management System (“BMS”) as a secure and highly automated
platform for providing bankruptcy notification services, filing POCs and claim transfers, managing documents,
administering our case load, posting and reconciling payments and providing customized reports. BMS is a
robust system designed to manage claims processing and case management in a high volume environment. The
system is highly flexible and its capacity is easily expanded. Daily processing volumes are managed to meet
individual bar dates associated with each bankruptcy case and specific client turnaround times. BMS and its
underlying business rules were developed with emphasis first on minimizing risks through strict compliance to
the bankruptcy code, then on maximizing recoveries from automated claim filing and case administration.
Each of our employees goes through an entry level training program to familiarize them with BMS and the
bankruptcy process, including a general overview of how we interact with the courts, debtor’s attorneys and
trustees. We also use a tiered process of cross training designed to familiarize advancing employees with a
variety of operational assignments and analytical tasks. For example, we utilize specially trained employees to
perform advanced data matching and analytics for clients, while others are tasked with resolving objections
directly with attorneys and trustees. In rare circumstances, resolution to these objections may need to be affected
by working through our network of local counsel.
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Corporate Legal Department
Our corporate legal department manages general corporate governance, litigation management, insurance and
risk management, corporate transactions, intellectual property, contract and document preparation and review,
including real estate purchase and lease agreements and portfolio purchase documents, compliance with federal
securities laws and other regulations and statutes, obtaining and maintaining multi-state licensing, bonding and
insurance and 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 companywide 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 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
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 and a right to sue debt collectors who fail to comply with its
provisions, including the right to recover their attorney fees.
• 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 to prevent such information from being furnished to credit reporting agencies.
• 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.
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• 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
healthcare receivables, must comply with certain privacy and security standards established by HIPAA to ensure
that the information provided will be safeguarded from misuse. This act is enforced by the Department of Health
and Human Services and does not afford a private cause of action to consumers who may wish to pursue legal
action against an institution for violations of this act.
• 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 some state 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
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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.
In addition to our obligation to comply with applicable federal, state and local laws and regulations, we are
also obligated to comply with judicial decisions reached in court cases involving legislation passed by any such
governmental bodies.
Item 1A. Risk Factors.
To the extent not described elsewhere in this Annual Report, the following are risks related to our business.
A deterioration in economic conditions in the United States may have an adverse effect on our collections, results
of operations, revenue and stock price
Our performance may be affected by economic conditions in the United States. If the United States economy
deteriorates, personal bankruptcy filings may increase, and the ability of consumers to pay their debts could be
adversely affected. This may in turn adversely impact our financial condition, results of operations, revenue and
stock price. Other factors associated with the economy that could influence our performance include the financial
stability of the lenders on our line of credit, our access to credit, and financial factors affecting consumers.
The current financial turmoil affecting the banking system and financial markets and the possibility that
financial institutions may consolidate, go out of business or be taken over by the federal government have
resulted in a tightening in credit markets. There could be a number of follow-on effects from the credit crisis
and/or the federal government’s response to the credit crisis on our business, including a decrease in the value of
the our financial investments, the insolvency of lending institutions, including the lenders on our line of credit,
resulting in our inability to obtain credit, and the inability of our customers to obtain credit to re-finance their
obligations with us. These and other economic factors could have a material adverse effect on our financial
condition and results of operations.
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.
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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 be unable to obtain account documents for some of the accounts that we purchase. Our inability to
provide account documents on accounts that are subject to judicial collections may negatively impact the
liquidation rate on these accounts
When we collect accounts judicially, courts in certain jurisdictions require that a copy of the account
statements or applications be attached to the pleadings in order to obtain a judgment against the account debtors.
If we are unable to produce account documents, these courts will deny our claims.
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.
Our work force could become unionized in the future, which could adversely affect the stability of our
production and increase our costs
Currently, none of our employees are represented by unions. However, our employees have the right at any
time under the National Labor Relations Act to form or affiliate with a union. If some or all of our workforce
were to become unionized and the terms of the collective bargaining agreement were significantly different from
our current compensation arrangements, it could adversely affect the stability of our work force and increase our
costs. In 2007, the Employee Free Choice Act H.R. 800 ("EFCA") was passed in the U.S. House of
Representatives, and currently remains in the Senate. The EFCA aims to amend the National Labor Relations
Act, by making it easier for workers to organize unions and increasing the penalties employers may incur if they
engage in labor practices in violation of the National Labor Relations Act. The EFCA requires the National
Labor Relations Board ("NLRB") to review petitions filed by employees for the purpose of creating a labor
organization and to certify a bargaining representative without directing an election, if a majority of the
bargaining unit employees have authorized designation of the representative. The EFCA also requires the parties
to begin bargaining within 10 days of the receipt of the petition, or longer time if mutually agreed upon. EFCA
would also require the NLRB to seek a federal injunction against an employer whenever there is reasonable
cause to believe that the employer has discharged or discriminated against an employee to encourage or
discourage membership in the labor organization, threatened to discharge or otherwise discriminate against an
employee in order to interfere with, restrain, or coerce employees in the exercise of guaranteed collective
bargaining rights, or engaged in any other related unfair labor practice that significantly interferes with, restrains,
or coerces employees in the exercise of such guaranteed rights. The EFCA adds additional remedies for such
violations, including back pay plus liquidated damages and civil penalties to be determined by the NLRB not to
exceed $20,000 per infraction. This bill or a variation of it could be enacted in the future and could have an
adverse impact on our operations.
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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 multi-week training program, was 59% in 2008. 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
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 and potential changes to existing legislation, 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
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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, RDS or MuniServices customers could negatively affect our operations
With respect to the acquisitions of IGS, RDS and MuniServices, a significant portion of the valuation was
tied to existing client and customer 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 and customer
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.
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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
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
22
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
The businesses conducted by the Company’s operating subsidiaries are subject to licensing and regulation by
governmental and regulatory bodies in the many jurisdictions in which the Company operates and conducts its
business. 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. Such laws and regulations are extensive and subject to change. 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, legislative proposals that would regulate
the collection of our defaulted consumer receivables. 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 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 changes in the administrative practices of the various bankruptcy courts
We recover on consumer receivables that have filed for bankruptcy protection under available U.S.
bankruptcy laws. 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. Our ability to
recover on portfolios of bankruptcy consumer receivables may be impacted by changes in federal laws or
changes in administrative practices of the various bankruptcy courts. Congress is considering legislation which,
if passed, could allow bankruptcy judges to reduce and or modify mortgages and interest rates on a chapter 13
debtor’s principal residence. If passed, this legislation may affect our ability to collect bankrupt accounts and it
may temporarily disrupt our historical bankruptcy collection curves, making it more difficult to accurately price
bankrupt accounts.
We are subject to examinations and challenges by tax authorities
Our industry is relatively unique and as a result there is not a set of well defined laws or regulations for us to
follow that match our particular facts and circumstances for some tax positions. Therefore, certain tax positions
we take are based on industry practice, tax advice and drawing similarities of our facts and circumstances to
those in case law. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts,
payroll, property and income tax issues, including tax base and apportionment. Challenges made by tax
authorities to our application of tax rules may result in adjustments to the timing or amount of taxable income or
deductions or the allocation of income among tax jurisdictions, as well as, inconsistent positions between
different jurisdictions on similar matters. If any such challenges are made and are not resolved in our favor, they
could have an adverse effect on our financial condition and result of operations.
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
23
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
Market, have resulted in increased costs to us as we implement their requirements. 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 is unclear
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 report on the effectiveness of the company’s internal
controls over financial reporting. 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
24
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.
We may not be able to retain, renegotiate or replace our existing credit facility
If we are unable to retain, renegotiate or replace such facility, our growth could be adversely affected, which
could negatively impact our business operations and the price of our common stock.
We may not be able to continue to satisfy the restrictive covenants in our debt agreements
All of our receivable portfolios are pledged to secure amounts owed to our lenders. Our debt agreements
impose a number of restrictive covenants on how we operate our business. Failure to satisfy any one of these
covenants could result in all or any of the following consequences, each of which could have a materially adverse
effect on our ability to conduct business:
•
acceleration of outstanding indebtedness;
•
our inability to continue to purchase receivables needed to operate our business; or
•
our inability to secure alternative financing on favorable terms, if at all.
Our hedging strategies may not be successful in mitigating our risks associated with changes in interest rates
and could adversely affect our results of operations and financial condition, as could our failure to comply with
hedge accounting principles and interpretations
We entered into an interest rate swap transaction in December 2008 to mitigate our interest rate risk. Our
hedging strategies rely on assumptions and projections. If these assumptions and projections prove to be
incorrect or our hedges do not adequately mitigate the impact of changes in interest rates, we may experience
volatility in our earnings that could adversely affect our results of operations and financial condition.
In addition, hedge accounting in accordance with SFAS 133 requires the application of significant subjective
judgments to a body of accounting concepts that is complex and for which the interpretations have continued to
evolve within the accounting profession and amongst the standard-setting bodies. Our failure to comply with
hedge accounting principles and interpretations could result in the loss of the applicability of hedge accounting
which could adversely affect our results of operations and financial condition.
Terrorist attacks, war and threats of attacks and war may adversely impact results of operations, revenue, and
stock price
Terrorist attacks, war and the outcome of war and threats of attacks may adversely affect our results of
operations, revenue and stock price. Any or all of these occurrences could have a material adverse effect on our
results of operations, revenue and stock price.
Failure to comply with government regulation of the collections industry could result in the suspension or
termination of our ability to conduct its business
The collections industry is governed by various US federal and state laws and regulations. Many states
require us to be a licensed debt collector. The Federal Trade Commission has the authority to investigate
consumer complaints against debt collection companies and to recommend enforcement actions and seek
monetary penalties. If we fail to comply with applicable laws and regulations, it could result in the suspension,
or termination of our ability to conduct collections which would materially adversely affect us. In addition, new
federal and state laws or regulations or changes in the ways these rules or laws are interpreted or enforced could
limit our activities in the future or significantly increase the cost of compliance.
25
Changes in governmental laws and regulations could increase our costs and liabilities or impact our operations
Changes in laws and regulations and the manner in which they are interpreted or applied may alter our
business environment. This could affect our results of operations or increase our liabilities. These negative
impacts could result from changes in collection laws, laws related to credit reporting, consumer bankruptcy,
accounting standards, taxation requirements, employment laws and communications laws, among others. It is
possible that we could become subject to additional liabilities in the future resulting from changes in laws and
regulations that could result in an adverse effect on our results of operations and financial condition.
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;
• 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.
26
Item 2. Properties.
Our principal executive offices and primary operations facility are located in approximately 100,000 square
feet of leased space in three adjacent buildings in Norfolk, Virginia. This site can currently accommodate
approximately 975 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 own an approximately 22,000 square foot facility in Hutchinson, Kansas, comprised of two buildings,
and contiguous parcels of land which are used primarily for employee parking. The Hutchinson site can
currently accommodate approximately 250 employees.
We also lease a facility located in approximately 23,000 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 December 2008, we entered into a lease for an approximately 30,000 square foot call center
in Las Vegas, Nevada. The leased space is currently under renovations and is expected to be completed during
the second quarter of 2009. The newly leased space will be able to accommodate approximately 270 employees
and will replace the 13,500 square foot call center.
We also lease a 15,000 square-foot facility in Birmingham, Alabama which can accommodate approximately
160 employees and approximately 400 square feet of space in Montgomery, Alabama.
We own a 34,000 square foot building and a nine-acre parcel of land in Jackson, Tennessee which can
accommodate approximately 430 employees.
For our MuniServices business, we lease approximately 26,000 square feet of office space in several offices
around the country, the majority of which is in Fresno, California. These offices can accommodate
approximately 140 employees.
We also lease a facility located in approximately 6,000 square feet of space in Houston, Texas which can
accommodate approximately 30 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, most of 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. While we cannot predict the
outcome of these proceedings, or of any other claims that may be brought against us, we do not believe that the
collections related matters represent a substantial volume of our account, and it is not expected that these or any
other legal proceedings or claims in which we are involved will, individually or in the aggregate, have a material
impact on 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.
27
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.
2007
Quarter ended March 31, 2007
Quarter ended June 30, 2007
Quarter ended September 30, 2007
Quarter ended December 31, 2007
2008
Quarter ended March 31, 2008
Quarter ended June 30, 2008
Quarter ended September 30, 2008
Quarter ended December 31, 2008
High
$49.20
$62.61
$65.66
$54.89
$50.50
$47.75
$52.73
$49.49
Low
$41.63
$43.50
$44.26
$36.28
$27.43
$37.12
$35.09
$24.70
As of February 4, 2009, there were 31 holders of record of the Common Stock. Based on information
provided by our transfer agent and registrar, we believe that there are 24,183 beneficial owners of the Common
Stock.
Stock Performance
The following graph compares from December 31, 2003, to December 31, 2008, the cumulative stockholder
returns assuming an initial investment of $100 on January 1, 2004 in the Company’s Common Stock, the stocks
comprising the NASDAQ Global Market Composite Index, the NASDAQ Market Index (U.S.) and the stocks
comprising a peer group index consisting of six peers. Any dividends paid during the five year period are
assumed to be reinvested.
Stock Performance
$200
$100
$0
Dec 31, 2003
Dec 31, 2004
Dec 31, 2005
Dec 31, 2006
Dec 31, 2007
Dec 31, 2008
PRAA
Peer Group Index
NASDAQ Global Market Composite Index
NASDAQ Market Index (U.S.)
As of December 31,
PRAA
NASDAQ Global Market Composite Index
NASDAQ Market Index (U.S.)
Peer Group Index
2004
155
109
109
116
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.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2003
100
100
100
100
2006
176
121
127
136
2005
175
110
113
139
2008
130
61
81
88
2007
152
126
139
133
28
Equity Incentives
The table below provides information with respect to securities authorized for issuance under our equity
compensation plans as of December 31, 2008:
Plan Category
Equity Compensation plans
approved by security holders
Equity Compensation plans not
approved by security holders
Total
Number of Securities
Authorized for
Issuance Under the
Plan
Number of Securities to be Issued
Upon Exercise of Outstanding
Options or Nonvested Shares Under
the Plan
Weighted-average
Exercise Price of
Outstanding Options and
Nonvested Shares(1)
Remaining Available for
Future Issuance Under
the Equity Compensation
Plan(2)
2,000,000
None
2,000,000
378,255
None
378,255
$5.61
N/A
$5.61
843,495
None
843,495
(1) Includes grants of nonvested shares, for which there is no exercise price, but with respect to which
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 is $17.24.
(2) Excludes 778,250 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 regular dividends on our Common
Stock; however, our board of directors may determine in the future to declare or pay dividends on our Common
Stock. On April 23, 2007, the Company’s Board of Directors authorized a special one-time cash dividend of
$1.00 per share with a record date of May 9, 2007. The cash dividends were paid on June 8, 2007 and totaled
$16,069,694. No dividends were paid during 2008. 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.
29
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the audited consolidated financial
statements.
2008
2007
Years Ended December 31,
2006
2005
2004
(Dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Revenues:
Income recognized on finance receivables, net
Commissions
Total revenues
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
Net income per share
Basic
Diluted
Weighted average shares
Basic
Diluted
OPERATING AND OTHER FINANCIAL DATA:
Cash collections and commissions (1)
Operating expenses to cash collections and commissions
Return on equity (2)
Acquisitions of finance receivables, at cost (3)
Acquisitions of finance receivables, at face value
Employees at period end:
Total employees
Ratio of collection personnel to total employees (4)
$
206,486
56,789
263,275
$
184,705
36,043
220,748
$
163,357
24,965
188,322
$
134,674
13,851
148,525
$
106,254
7,142
113,396
88,073
61,752
10,304
3,908
6,977
7,424
178,438
84,837
(11,091)
73,746
28,384
69,022
47,474
8,531
3,105
5,915
5,517
139,564
81,184
(3,285)
77,899
29,658
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
$
45,362
$
48,241
$
44,490
$
36,772
$
27,451
$
$
2.98
2.97
$
$
3.08
3.06
$
$
2.80
2.77
$
$
2.35
2.28
$
$
1.79
1.73
15,229
15,292
15,646
15,779
15,911
16,082
15,642
16,149
15,357
15,853
$
383,488
47%
$
298,209
47%
$
261,357
45%
$
205,226
43%
$
160,546
43%
17%
20%
20%
21%
20%
$
$
280,336
4,588,234
$
$
263,809
11,113,830
$
$
112,406
7,788,158
$
$
149,645
5,307,918
$
$
61,165
3,340,434
2,032
87%
1,677
88%
1,291
88%
1,110
88%
948
89%
(1) Includes both cash collected on finance receivables and commission fees earned during the relevant period.
(2) Calculated by dividing net income for each year by average monthly stockholders’ equity for the same year.
(3) 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.
(4) Includes all collectors and all first-line collection supervisors at December 31.
Below is listed certain 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 line of credit
Total stockholders' equity
2008
2007
As of December 31,
2006
2005
2004
$
13,901
-
563,830
657,840
-
268,305
283,863
$
16,730
-
410,297
476,307
-
168,103
235,280
$
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
30
Below is listed the quarterly consolidated income statements for the years ended December 31, 2008 and 2007:
(Dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Revenues:
Income recognized on finance receivables, net
Commissions
Total revenues
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,
2008
Sept. 30,
2008
June 30,
2008
For the Quarter Ended
Mar. 31,
Dec. 31,
2007
2008
Sept. 30,
2007
June 30,
2007
Mar. 31,
2007
$
48,073
18,898
66,971
$
52,738
15,848
68,586
$
53,047
10,567
63,614
$
52,628
11,476
64,104
$
46,741
10,583
57,324
$
46,111
8,529
54,640
$
46,387
8,389
54,776
$
45,466
8,542
54,008
23,091
15,352
2,769
1,078
2,114
2,285
46,689
20,282
(2,927)
17,355
6,746
22,983
16,709
2,263
1,123
1,912
2,162
47,152
21,434
(3,049)
18,385
6,930
20,872
15,118
2,403
869
1,595
1,507
42,364
21,250
(2,646)
18,604
7,178
21,127
14,573
2,869
838
1,356
1,470
42,233
21,871
(2,469)
19,402
7,530
18,584
12,944
2,604
888
1,449
1,405
37,874
19,450
(2,107)
17,343
6,667
17,322
11,847
2,038
819
1,605
1,455
35,086
19,554
(1,072)
18,482
6,787
16,681
11,246
2,005
739
1,478
1,362
33,511
21,265
(218)
21,047
8,058
16,435
11,437
1,884
659
1,383
1,295
33,093
20,915
112
21,027
8,146
$
10,609
$
11,455
$
11,426
$
11,872
$
10,676
$
11,695
$
12,989
$
12,881
$
$
0.69
0.69
$
$
0.75
0.75
$
$
0.75
0.75
$
$
0.78
0.78
$
$
0.71
0.70
$
$
0.76
0.75
$
$
0.81
0.80
$
$
0.81
0.80
15,283
15,329
15,267
15,336
15,193
15,268
15,170
15,237
15,136
15,230
15,451
15,577
16,005
16,168
15,993
16,140
Below is listed the quarterly consolidated balance sheets for the years ended December 31, 2008 and 2007:
Dec. 31,
2008
Sept. 30,
2008
June 30,
2008
Mar. 31,
2008
Dec. 31,
2007
Sept. 30,
2007
June 30,
2007
Mar. 31,
2007
Quarter Ended
(Dollars in thousands)
BALANCE SHEET DATA:
Assets
Cash and cash equivalents
Finance receivables, net
Property and equipment, net
Income taxes 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
Line of credit
Long-term debt
Obligations under capital lease
Total liabilities
$
$
$
$
$
$
$
$
13,901
563,830
23,884
3,587
27,546
13,429
11,663
657,840
28,006
535,430
23,354
3,715
28,058
13,747
9,251
641,561
16,333
515,367
17,332
3,539
18,620
4,322
5,775
581,288
16,816
477,754
16,631
2,791
18,620
4,684
5,923
543,219
16,730
410,297
16,171
3,022
18,620
5,046
6,422
476,308
14,464
326,476
15,217
2,621
18,620
5,399
4,435
387,232
15,042
288,648
13,510
2,424
18,287
5,773
4,354
348,038
27,883
243,568
12,201
-
18,288
6,263
4,614
312,817
$
$
$
$
$
$
$
$
$
3,438
4,314
-
9,850
88,070
268,300
-
5
373,977
$
4,527
5,294
-
9,605
81,350
267,300
-
23
368,099
$
4,630
4,647
-
4,833
72,577
234,300
-
45
321,032
$
4,008
4,499
-
4,818
64,661
216,800
-
70
294,856
$
4,055
4,471
-
6,820
57,579
168,000
-
103
241,028
$
2,815
3,614
-
6,445
51,018
100,000
-
138
164,030
$
2,456
3,477
-
4,327
43,970
38,000
19
174
92,423
$
4,220
3,063
1,765
4,203
37,849
-
572
208
51,880
Stockholders' equity
Common stock
Additional paid in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
153
74,574
209,047
89
283,863
657,840
$
153
74,873
198,436
-
273,462
641,561
$
152
73,121
186,983
-
260,256
581,288
$
152
72,654
175,557
-
248,363
543,219
$
152
71,443
163,685
-
235,280
476,308
$
151
70,044
153,007
-
223,202
387,232
$
160
114,142
141,313
-
255,615
348,038
$
160
116,383
144,394
-
260,937
312,817
$
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 revenues for the
years ended December 31, 2008, 2007 and 2006:
(Dollars in thousands)
Revenues:
Income recognized on finance receivables, net
Commissions
Total revenues
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
2008
2007
2006
$
206,486
56,789
263,275
88,073
61,752
10,304
3,908
6,977
7,424
178,438
84,837
60
(11,151)
73,746
28,384
45,362
$
78.4%
21.6
100.0
33.5
23.5
3.9
1.4
2.7
2.8
67.8
32.2
0.0
(4.2)
28.0
10.8
17.2%
$
184,705
36,043
220,748
69,022
47,474
8,531
3,105
5,915
5,517
139,564
81,184
419
(3,704)
77,899
29,658
48,241
$
83.7%
16.3
100.0
31.3
21.5
3.9
1.4
2.6
2.5
63.2
36.8
0.2
(1.7)
35.3
13.4
21.9%
$
163,357
24,965
188,322
58,142
40,139
5,876
2,276
4,758
5,131
116,322
72,000
584
(378)
72,206
27,716
44,490
$
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%
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenues
Total revenues were $263.3 million for the year ended December 31, 2008, an increase of $42.6 million or
19.3% compared to total revenues of $220.7 million for the year ended December 31, 2007.
Income Recognized on Finance Receivables, net
Income recognized on finance receivables, net was $206.5 million for the year ended December 31, 2008,
an increase of $21.8 million or 11.8% compared to $184.7 million for the year ended December 31, 2007. The
majority of the increase was due to an increase in our cash collections on our owned defaulted consumer
receivables to $326.7 million from $262.2 million, an increase of $64.5 million or 24.6%. Our finance
receivables amortization rate, including the net allowance charge, on our owned portfolios for the year ended
December 31, 2008 was 36.8% while for the year ended December 31, 2007 it was 29.6%. During the year
ended December 31, 2008, we acquired defaulted consumer receivables portfolios with an aggregate face value
amount of $4.6 billion at an original purchase price of $280.3 million. During the year ended December 31,
2007, we acquired defaulted consumer receivable portfolios with an aggregate face value of $11.1 billion at an
original purchase price of $263.8 million. In any period, we acquire defaulted consumer receivable portfolios
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. In addition,
market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. 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 changes in valuation allowances recognized
under SOP 03-3, which requires that a valuation allowance be taken for decreases in expected cash flows or
change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of
accounts. For the years ended December 31, 2008 and 2007, we recorded net allowance charges of $19.4 million
and $2.9 million, respectively.
32
Commissions
Commissions were $56.8 million for the year ended December 31, 2008, an increase of $20.8 million or
57.8% compared to commissions of $36.0 million for the year ended December 31, 2007. Commissions grew as
a result of the acquisition of MuniServices, LLC (“MuniServices”) on July 1, 2008, as well as increases in
revenue generated by our IGS fee-for-service business and RDS government processing and collection business,
partially offset by a decrease in our Anchor contingent fee business, which ceased operations during the second
quarter of 2008, as compared to the prior year period.
Operating Expenses
Total operating expenses were $178.4 million for the year ended December 31, 2008, an increase of $38.8
million or 27.8% compared to total operating expenses of $139.6 million for the year ended December 31, 2007.
Total operating expenses were 46.5% of cash receipts for the year ended December 31, 2008 compared with
46.8% for the same period in 2007.
Compensation and Employee Services
Compensation and employee services expenses were $88.1 million for the year ended December 31, 2008,
an increase of $19.1 million or 27.7% compared to compensation and employee services expenses of $69.0
million for the year ended December 31, 2007. This increase is mainly due to the acquisition of MuniServices as
well as an overall increase in our owned portfolio collection staff. This increase was offset by a reversal or
decrease of $1.2 million during 2008 of estimated share-based compensation costs that had been accrued in 2007
related to the 2007 Long Term Incentive Programs because the achievement of the performance targets of the
program were unlikely to be achieved. Compensation and employee services expenses increased as total
employees grew from 1,677 at December 31, 2007 to 2,032 at December 31, 2008. Additionally, existing
employees received normal salary increases. Compensation and employee services expenses as a percentage of
cash receipts decreased to 23.0% for the year ended December 31, 2008 from 23.2% of cash receipts for the same
period in 2007.
Outside Legal and Other Fees and Services
Outside legal and other fees and services expenses were $61.8 million for the year ended December 31,
2008, an increase of $14.3 million or 30.1% compared to outside legal and other fees and services expenses of
$47.5 million for the year ended December 31, 2007. Of the $14.3 million increase, $6.6 million was attributable
to increases in agency fees mainly incurred by our IGS subsidiary, $0.9 million was attributable to an increase in
corporate legal and accounting fees, $1.3 million was attributable to an increase in other outside fees and
services, partially offset by a $0.6 million decrease in credit bureau fees. Of the remaining $6.1 million increase,
$2.2 million was attributable to incremental legal costs advanced to our third party collection attorneys. Based on
an analysis of our legal accounts and their liquidation potential, it was determined that we were underinvested in
terms of costs advanced to attorneys. The remaining $3.9 million was attributable to the increased legal fees and
costs incurred resulting from the increased number of accounts referred to both our in house attorneys and
outside independent contingent fee attorneys. Total outside legal expenses paid to independent contingent fee
attorneys for the year ended December 31, 2008 were 39.4% of legal cash collections generated by independent
contingent fee attorneys compared to 34.6% for the year ended December 31, 2007. Outside legal fees and costs
paid to independent contingent fee attorneys increased from $29.1 million for the year ended December 31, 2007
to $33.3 million, an increase of $4.2 million or 14.4%, for the year ended December 31, 2008. Additionally, as
disclosed previously, we also effectuate legal collections using our own in house attorneys. Total legal expenses
incurred by our in house attorneys for the year ended December 31, 2008 were 41.4% of legal cash collections
generated by our in house attorneys compared to 29.0% for the year ended December 31, 2007. Legal fees and
costs incurred by our in house attorneys increased from $1.6 million for the year ended December 31, 2007 to
$3.5 million, an increase of $1.9 million or 119.0%, for the year ended December 31, 2008.
33
Communications
Communications expenses were $10.3 million for the year ended December 31, 2008, an increase of $1.8
million or 21.2% compared to communications expenses of $8.5 million for the year ended December 31, 2007.
The increase was attributable to growth in mailings and higher telephone expenses driven by a greater number of
defaulted consumer receivables to work, as well as a significant expansion of our automated dialer seats and
related calls that are generated by the dialer. Mailings were responsible for 54.8% or $1.0 million of this
increase, while the remaining 45.2% or $0.8 million was attributable to increased call volumes.
Rent and Occupancy
Rent and occupancy expenses were $3.9 million for the year ended December 31, 2008, an increase of $0.8
million or 25.8% compared to rent and occupancy expenses of $3.1 million for the year ended December 31,
2007. The increase was primarily due to the expansion of space in our Norfolk, Virginia administrative and
executive facility and the acquisition of MuniServices, as well as increased utility charges. The new Norfolk,
Virginia administrative and executive facility accounted for $355,000 of the increase, the MuniServices location
accounted for $293,000 of the increase and other occupancy charges accounted for $253,000 of the increase. In
addition, there was a decrease of $74,000 in storage and other facility charges.
Other Operating Expenses
Other operating expenses were $7.0 million for the year ended December 31, 2008, an increase of $1.1
million or 18.6% compared to other operating expenses of $5.9 million for the year ended December 31, 2007.
The increase was due to increases in travel and meals, miscellaneous expenses, repairs and maintenance, dues
and subscriptions and other expenses as well as decreases in taxes (non-income), fees and licenses and hiring
expenses. Travel and meals increased by $201,000, miscellaneous expenses increased by $268,000, repairs and
maintenance increased by $508,000, dues and subscriptions increased by $125,000 and other expenses increased
by $75,000. Taxes (non-income), fees and licenses decreased by $37,000 and hiring expenses decreased by
$77,000.
Depreciation and Amortization
Depreciation and amortization expenses were $7.4 million for the year ended December 31, 2008, an
increase of $1.9 million or 34.5% compared to depreciation and amortization expenses of $5.5 million for the
year ended December 31, 2007. The increase is mainly due to capital purchases in our administrative and
executive facility in Norfolk, Virginia as well as additional expense incurred related to the amortization of
intangible assets in the acquisition of MuniServices on July 1, 2008, and the acquisition of the assets of
Broussard Partners and Associates, Inc. (“BPA”) on August 1, 2008. Additional increases are the result of
continued capital expenditures on equipment, software and computers related to our growth and systems
upgrades.
Interest Income
Interest income was $60,000 for the year ended December 31, 2008, a decrease of $359,000 or 85.7%
compared to interest income of $419,000 for the year ended December 31, 2007. This decrease is mainly due to
lower average invested cash and cash equivalents balances during the year ended December 31, 2008 compared
to the same period in 2007.
Interest Expense
Interest expense was $11.2 million for the year ended December 31, 2008, an increase of $7.5 million
compared to interest expense of $3.7 million for the year ended December 31, 2007. The increase is mainly due
to a significant increase in outstanding borrowings on our line of credit during the year ended December 31,
2008 compared to the same period in 2007. The increase was offset by a decrease in our weighted average
interest rate which decreased to 4.60% for the year ended December 31, 2008 as compared to 6.64% for the year
ended December 31, 2007.
34
Provision for Income Taxes
Income tax expense was $28.4 million for the year ended December 31, 2008, a decrease of $1.3 million or
4.4% compared to income tax expense of $29.7 million for the year ended December 31, 2007. The decrease is
mainly due to a 5.4% decrease in pre-tax income, down from $77.9 million in 2007, to $73.7 million in 2008,
offset by a slight increase in the effective tax rate from 38.1% for the year ended December 31, 2007 to 38.5%
for the year ended December 31, 2008. The higher effective tax rate was due mainly to more state tax credits
generated during the year ended December 31, 2007 as compared to the same period in 2008.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues
Total revenues were $220.7 million for the year ended December 31, 2007, an increase of $32.4 million or
17.2% compared to total revenues of $188.3 million for the year ended December 31, 2006.
Income Recognized on Finance Receivables, net
Income recognized on finance receivables, net was $184.7 million for the year ended December 31, 2007,
an increase of $21.3 million or 13.0% compared to $163.4 million for the year ended December 31, 2006. The
majority of the increase was due to an increase in our cash collections on our owned defaulted consumer
receivables to $262.2 million from $236.4 million, an increase of $25.8 million or 10.9%. Our finance
receivables amortization rate, including the allowance charge, on our owned portfolios for the year ended
December 31, 2007 was 29.6% while for the year ended December 31, 2006 it was 30.9%. During the year
ended December 31, 2007, we acquired defaulted consumer receivables portfolios with an aggregate face value
amount of $11.1 billion at an original purchase price of $263.8 million. During the year ended December 31,
2006, we acquired defaulted consumer receivable portfolios with an aggregate face value of $7.8 billion at an
original purchase price of $112.4 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 changes in valuation allowances recognized
under SOP 03-3, which requires that a valuation allowance be taken for decreases in expected cash flows or
change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of
accounts. For the years ended December 31, 2007 and 2006, we recorded net allowance charges of $2.9 million
and $1.1 million, respectively.
Commissions
Commissions were $36.0 million for the year ended December 31, 2007, an increase of $11.0 million or
44.0% compared to commissions of $25.0 million for the year ended December 31, 2006. Commissions grew as
a result of increases in revenue generated by our IGS fee-for-service business and RDS government processing
and collection business offset by a decrease in our ARM contingent fee business compared to the prior year
period.
Operating Expenses
Total operating expenses were $139.6 million for the year ended December 31, 2007, an increase of $23.3
million or 20.0% compared to total operating expenses of $116.3 million for the year ended December 31, 2006.
Total operating expenses were 46.8% of cash receipts for the year ended December 31, 2007 compared with
44.5% for the same period in 2006.
35
Compensation and Employee Services
Compensation and employee services expenses were $69.0 million for the year ended December 31, 2007,
an increase of $10.9 million or 18.8% compared to compensation and employee services expenses of $58.1
million for the year ended December 31, 2006. Compensation and employee services expenses increased as
total employees grew from 1,291 at December 31, 2006 to 1,677 at December 31, 2007, primarily to
accommodate our owned portfolio purchasing growth. Additionally, existing employees received normal salary
increases. Compensation and employee services expenses as a percentage of cash receipts increased to 23.2% for
the year ended December 31, 2007 from 22.3% of cash receipts for the same period in 2006, mainly due to a
significant increase in employee staffing, especially in our newer Jackson, Tennessee call center, with a
corresponding decrease in collector productivity caused mostly by the addition of this less tenured collection
staff.
Outside Legal and Other Fees and Services
Outside legal and other fees and services expenses were $47.5 million for the year ended December 31,
2007, an increase of $7.4 million or 18.5% compared to outside legal and other fees and services expenses of
$40.1 million for the year ended December 31, 2006. Of the $7.4 million increase, $4.6 million was attributable
to increases in agency fees mainly incurred by our IGS subsidiary, $0.4 million was attributable to increases in
outside fees and services, and $0.2 million was attributable to increases in credit bureau fees. This was offset by a
$0.1 million decrease in corporate legal expenses. The remaining $2.3 million increase was attributable to the
increased legal fees and costs incurred resulting from the increased number of accounts referred to both our in
house attorneys and outside independent contingent fee attorneys. Total outside legal expenses paid to
independent contingent fee attorneys for the year ended December 31, 2007 were 34.6% of legal cash collections
generated by independent contingent fee attorneys compared to 36.1% for the year ended December 31, 2006.
Outside legal fees and costs paid to independent contingent fee attorneys increased from $27.5 million for the
year ended December 31, 2006 to $29.1 million, an increase of $1.6 million or 5.8%, for the year ended
December 31, 2007. Additionally, as disclosed previously, we also effectuate legal collections using our own in
house attorneys. Total legal expenses incurred by our in house attorneys for the year ended December 31, 2007
were 29.0% of legal cash collections generated by our in house attorneys compared to 26.4% for the year ended
December 31, 2006. Legal fees and costs incurred by our in house attorneys increased from $1.0 million for the
year ended December 31, 2006 to $1.6 million, an increase of $0.6 million or 37.5%, for the year ended
December 31, 2007.
Communications
Communications expenses were $8.5 million for the year ended December 31, 2007, an increase of $2.6
million or 44.1% compared to communications expenses of $5.9 million for the year ended December 31, 2006.
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 as well as the addition of our new call
center in Jackson, Tennessee. Mailings were responsible for 53.8% or $1.4 million of this increase, while the
remaining 46.2% or $1.2 million was attributable to increased call volumes.
Rent and Occupancy
Rent and occupancy expenses were $3.1 million for the year ended December 31, 2007, an increase of $0.8
million or 34.8% compared to rent and occupancy expenses of $2.3 million for the year ended December 31,
2006. The increase was primarily due to the addition of our new RDS facility, the addition of our new Norfolk,
Virginia administrative and executive facility as well as increased utility charges. Of the $0.8 million increase in
2007, the new RDS location accounted for $123,000 of the increase, the new Norfolk, Virginia administrative
and executive facility accounted for $391,000 of the increase and utility and other occupancy charges accounted
for $233,000 of the increase. In addition, there was an increase of $83,000 in storage and other facility charges.
Other Operating Expenses
Other operating expenses were $5.9 million for the year ended December 31, 2007, an increase of $1.2
million or 22.9% compared to other operating expenses of $4.8 million for the year ended December 31, 2006.
The increase was due to increases in travel and meals, miscellaneous expenses, repairs and maintenance, taxes
36
(non-income), fees and licenses and other expenses. Travel and meals increased by $317,000, miscellaneous
expenses increased by $465,000, repairs and maintenance increased by $114,000, taxes (non-income), fees and
licenses increased by $231,000 and other expenses increased by $30,000.
Depreciation and Amortization
Depreciation and amortization expenses were $5.5 million for the year ended December 31, 2007, an
increase of $0.4 million or 7.8% compared to depreciation and amortization expenses of $5.1 million for the year
ended December 31, 2006. The increase is mainly due to capital purchases for our new call center in Jackson,
Tennessee, as well as capital purchases for the addition of our new RDS facility, our new administrative and
executive facility in Norfolk, Virginia and our expanded call center in Hutchinson, Kansas. These increases
were offset by a decrease in the amortization expense on intangible assets of $0.4 million for the year ended
December 31, 2007, when compared to the prior year period.
Interest Income
Interest income was $419,000 for the year ended December 31, 2007, a decrease of $165,000 or 28.3%
compared to interest income of $584,000 for the year ended December 31, 2006. This decrease is the result of
lower average invested cash and cash equivalents balances during the year ended December 31, 2007 compared
to the same period in 2006.
Interest Expense
Interest expense was $3,704,000 for the year ended December 31, 2007, an increase of $3,325,000
compared to interest expense of $379,000 for the year ended December 31, 2006. The increase is mainly due to
a significant increase in outstanding borrowings on our lines of credit during the year ended December 31, 2007
compared to the same period in 2006.
Provision for Income Taxes
Income tax expense was $29.7 million for the year ended December 31, 2007, an increase of $2.0 million or
7.2% compared to income tax expense of $27.7 million for the year ended December 31, 2006. The increase is
mainly due to a 7.9% increase in pre-tax income, up from $72.2 million in 2006, to $77.9 million in 2007, offset
by a slight reduction in the effective tax rate from 38.4% for year ended December 31, 2006 versus 38.1% for the
year ended December 31, 2007. The lower effective tax rate was due mainly to state tax credits.
37
Supplemental Performance Data
Owned Portfolio Performance:
The following tables show certain data related to our owned portfolio. These tables describe the purchase
price, cash collections and related multiples. Further, these tables disclose our entire portfolio, the portfolio of
purchased bankrupt accounts only and our entire portfolio less the impact of our purchased bankrupt accounts.
The accounts represented in the purchased bankruptcy tables are those accounts that were bankrupt at the time of
purchase. This contrasts with accounts that file bankruptcy after we purchase them.
Entire Portfolio ($ in thousands)
Purchase
Period
Purchase
Price(1)
Life to Date
Reserve
Allowance (2)
Unamortized
Purchase Price
Balance at
December 31, 2008 (3)
Percentage
of Purchase Price
Remaining Unamortized
at December 31, 2008 (4)
Actual Cash
Collections
Including Cash
Sales
Estimated
Remaining
Collections (5)
Total Estimated
Collections (6)
Total Estimated
Collections to
Purchase Price (7)
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$3,080
$7,685
$11,089
$18,898
$25,020
$33,481
$42,325
$61,449
$59,178
$143,213
$107,802
$258,772
$278,511
$0
$0
$0
$0
$0
$105
$0
$495
$1,760
$5,750
$7,510
$7,380
$620
$0
$0
$0
$0
$0
$234
$0
$2,156
$4,630
$50,272
$55,384
$193,669
$257,485
0%
0%
0%
0%
0%
1%
0%
4%
8%
35%
51%
75%
92%
$9,898
$24,688
$35,831
$64,698
$104,855
$156,953
$170,609
$219,894
$155,011
$213,551
$116,723
$157,274
$61,277
$30
$150
$362
$866
$2,650
$5,040
$6,587
$15,665
$26,575
$106,958
$107,490
$355,745
$487,447
$9,928
$24,838
$36,193
$65,564
$107,505
$161,993
$177,196
$235,559
$181,586
$320,509
$224,213
$513,019
$548,724
322%
323%
326%
347%
430%
484%
419%
383%
307%
224%
208%
198%
197%
Purchased Bankruptcy Portfolio ($ in thousands)
Purchase
Period
Purchase
Price(1)
Life to Date
Reserve
Allowance (2)
Unamortized
Purchase Price
Balance at
December 31, 2008 (3)
Percentage
of Purchase Price
Remaining Unamortized
at December 31, 2008 (4)
Actual Cash
Collections
Including Cash
Sales
Estimated
Remaining
Collections (5)
Total Estimated
Collections (6)
Total Estimated
Collections to
Purchase Price (7)
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$0
$0
$0
$0
$0
$0
$0
$0
$7,469
$29,302
$17,643
$78,933
$111,063
$0
$0
$0
$0
$0
$0
$0
$0
$1,240
$535
$1,360
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$332
$3,598
$3,038
$62,077
$105,049
0%
0%
0%
0%
0%
0%
0%
0%
4%
12%
17%
79%
95%
$0
$0
$0
$0
$0
$0
$0
$0
$13,485
$38,056
$21,585
$30,822
$14,024
$0
$0
$0
$0
$0
$0
$0
$0
$745
$5,414
$6,151
$87,556
$167,098
$0
$0
$0
$0
$0
$0
$0
$0
$14,230
$43,470
$27,736
$118,378
$181,122
0%
0%
0%
0%
0%
0%
0%
0%
191%
148%
157%
150%
163%
Entire Portfolio less Purchased Bankruptcy Portfolio ($ in thousands)
Purchase
Period
Purchase
Price(1)
Life to Date
Reserve
Allowance (2)
Unamortized
Purchase Price
Balance at
December 31, 2008 (3)
Percentage
of Purchase Price
Remaining Unamortized
at December 31, 2008 (4)
Actual Cash
Collections
Including Cash
Sales
Estimated
Remaining
Collections (5)
Total Estimated
Collections (6)
Total Estimated
Collections to
Purchase Price (7)
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$3,080
$7,685
$11,089
$18,898
$25,020
$33,481
$42,325
$61,449
$51,709
$113,911
$90,159
$179,839
$167,448
$0
$0
$0
$0
$0
$105
$0
$495
$520
$5,215
$6,150
$7,380
$620
$0
$0
$0
$0
$0
$234
$0
$2,156
$4,298
$46,674
$52,346
$131,592
$152,436
$9,898
$24,688
$35,831
$64,698
$104,855
$156,953
$170,609
$219,894
$141,526
$175,495
$95,138
$126,452
$47,253
$30
$150
$362
$866
$2,650
$5,040
$6,587
$15,665
$25,830
$101,544
$101,339
$268,189
$320,349
$9,928
$24,838
$36,193
$65,564
$107,505
$161,993
$177,196
$235,559
$167,356
$277,039
$196,477
$394,641
$367,602
322%
323%
326%
347%
430%
484%
419%
383%
324%
243%
218%
219%
220%
0%
0%
0%
0%
0%
1%
0%
4%
8%
41%
58%
73%
91%
38
(1) Purchase price refers to the cash paid to a seller to acquire defaulted consumer receivables, plus certain
capitalized costs, less the purchase price refunded by the seller due to the return of non-compliant
accounts (also defined as buybacks). Non-compliant refers to the contractual representations and
warranties provided for in the purchase and sale contract between the seller and us. These
representations and warranties from the sellers generally cover account holders’ death or bankruptcy
and accounts settled or disputed prior to sale. The seller can replace or repurchase these accounts.
(2) Life to date reserve allowance refers to the total amount of allowance charges incurred on our owned
portfolios net of any reversals.
(3) Unamortized purchase price balance refers to the purchase price less amortization over the life of the
portfolio.
(4) Percentage of purchase price remaining unamortized refers to the amount of unamortized purchase price
divided by the purchase price.
(5) Estimated remaining collections refers to the sum of all future projected cash collections on our owned
portfolios.
(6) Total estimated collections refers to the actual cash collections, including cash sales, plus estimated
remaining collections.
(7) Total estimated collections to purchase price refers to the total estimated collections divided by the
purchase price.
The following graph shows the purchase price of our owned portfolios by year beginning in 1996. The
purchase price number represents the cash paid to the seller to acquire defaulted consumer receivables, plus
certain capitalized costs, less the purchase price refunded by the seller due to the return of non-compliant
accounts.
Portfolio Purchases by Year
($ in thousands)
$300,000
$280,000
$260,000
$240,000
$220,000
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
We utilize a long-term approach to collecting our owned portfolios of receivables. This approach has
historically caused us to realize significant cash collections and revenues from purchased portfolios of finance
receivables years after they are originally acquired. As a result, we have in the past been able to temporarily
reduce our level of current period acquisitions without a corresponding negative current period impact on cash
collections and revenue.
39
The following tables, which exclude any proceeds from cash sales of finance receivables, demonstrates our
ability to realize significant multi-year cash collection streams on our owned portfolios.
Cash Collections By Year, By Year of Purchase - Entire Portfolio
($ in thousands)
Purchase
Period
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
3,080
7,685
11,089
18,898
25,020
33,481
42,325
61,449
59,178
143,213
107,802
258,772
278,511
1,050,503
Purchase
Price
$
1996
$
1997
1998
1999
2000
$
$
$
$
Cash Collection Period
2002
$
2001
$
548
-
-
-
-
-
-
-
-
-
-
-
-
548
2,484
2,507
-
-
-
-
-
-
-
-
-
-
-
4,991
1,890
5,215
3,776
-
-
-
-
-
-
-
-
-
-
10,881
1,348
4,069
6,807
5,138
-
-
-
-
-
-
-
-
-
17,362
1,025
3,347
6,398
13,069
6,894
-
-
-
-
-
-
-
-
30,733
730
2,630
5,152
12,090
19,498
13,048
-
-
-
-
-
-
-
53,148
2003
2004
2005
2006
2007
$
398
1,324
2,797
7,336
16,628
28,003
36,258
24,308
-
-
-
-
-
$
285
1,022
2,200
5,615
14,098
26,717
35,742
49,706
18,019
-
-
-
-
$
210
860
1,811
4,352
10,924
22,639
32,497
52,640
46,475
18,968
-
-
-
$
237
597
1,415
3,032
8,067
16,048
24,729
43,728
40,424
75,145
22,971
-
-
$
102
437
882
2,243
5,202
10,011
16,527
30,695
30,750
69,862
53,192
42,263
-
$
117,052
$
153,404
$
191,376
$
236,393
$
262,166
496
1,829
3,948
9,598
19,478
28,831
15,073
-
-
-
-
-
-
79,253
2008
$
83
346
616
1,533
3,604
6,164
9,772
18,818
19,339
49,576
40,560
115,011
61,277
326,699
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
9,836
24,183
35,802
64,006
104,393
151,461
170,598
219,895
155,007
213,551
116,723
157,274
61,277
1,484,006
Total
$
$
$
$
$
$
$
$
$
Cash Collections By Year, By Year of Purchase – Purchased Bankruptcy Portfolio
1996
-
$
-
-
-
-
-
-
-
-
-
-
-
-
$
-
1997
-
$
-
-
-
-
-
-
-
-
-
-
-
-
$
-
1998
-
$
-
-
-
-
-
-
-
-
-
-
-
-
$
-
1999
-
$
-
-
-
-
-
-
-
-
-
-
-
-
$
-
2000
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
$
Cash Collection Period
2002
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
2001
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
2003
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
$
2004
2005
2006
2007
2008
Total
-
$
-
-
-
-
-
-
-
743
-
-
-
-
743
$
-
$
-
-
-
-
-
-
-
4,554
3,777
-
-
-
8,331
$
-
$
-
-
-
-
-
-
-
3,956
15,500
5,608
-
-
25,064
$
-
$
-
-
-
-
-
-
-
2,777
11,934
9,455
2,850
-
27,016
$
-
$
-
-
-
-
-
-
-
1,455
6,845
6,522
27,972
14,024
56,818
$
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
13,485
$
38,056
$
21,585
$
30,822
$
14,024
$
117,972
($ in thousands)
Purchase
Period
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Purchase
Price
-
$
-
-
-
-
-
-
-
7,469
29,302
17,643
78,933
111,063
244,410
$
Total
Cash Collections By Year, By Year of Purchase - Entire Portfolio less Purchased Bankruptcy Portfolio
($ in thousands)
Purchase
Period
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Purchase
Price
$
3,080
7,685
11,089
18,898
25,020
33,481
42,325
61,449
51,709
113,911
90,159
179,839
167,448
806,093
1996
$
1997
1998
1999
2000
$
$
$
$
Cash Collection Period
2002
$
2001
$
548
-
-
-
-
-
-
-
-
-
-
-
-
548
2,484
2,507
-
-
-
-
-
-
-
-
-
-
-
4,991
1,890
5,215
3,776
-
-
-
-
-
-
-
-
-
-
10,881
1,348
4,069
6,807
5,138
-
-
-
-
-
-
-
-
-
17,362
1,025
3,347
6,398
13,069
6,894
-
-
-
-
-
-
-
-
30,733
730
2,630
5,152
12,090
19,498
13,048
-
-
-
-
-
-
-
53,148
496
1,829
3,948
9,598
19,478
28,831
15,073
-
-
-
-
-
-
79,253
2003
2004
2005
2006
2007
$
398
1,324
2,797
7,336
16,628
28,003
36,258
24,308
-
-
-
-
-
$
285
1,022
2,200
5,615
14,098
26,717
35,742
49,706
17,276
-
-
-
-
$
210
860
1,811
4,352
10,924
22,639
32,497
52,640
41,921
15,191
-
-
-
$
237
597
1,415
3,032
8,067
16,048
24,729
43,728
36,468
59,645
17,363
-
-
$
102
437
882
2,243
5,202
10,011
16,527
30,695
27,973
57,928
43,737
39,413
-
2008
$
83
346
616
1,533
3,604
6,164
9,772
18,818
17,884
42,731
34,038
87,039
47,253
269,881
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
9,836
24,183
35,802
64,006
104,393
151,461
170,598
219,895
141,522
175,495
95,138
126,452
47,253
1,366,034
Total
$
$
$
$
$
$
$
$
117,052
$
152,661
$
183,045
$
211,329
$
235,150
$
$
40
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
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$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
7
0
-
n
a
J
7
0
-
y
a
M
7
0
-
p
e
S
8
0
-
n
a
J
8
0
-
y
a
M
8
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 tables display various productivity measures that we track.
Tenure at:
One year +(1)
Less than one year (2)
Total(2)
12/31/04
298
349
647
12/31/05
327
364
691
12/31/06
340
375
715
12/31/07
327
553
880
12/31/08
452
739
1191
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
Total cash collections
Non-legal cash collections(2)
Non-bk cash collections(3)
Cash Collections per Hour Paid (1)
12/31/06
$146.03
$99.06
$132.15
12/31/05
$133.39
$89.25
$128.02
12/31/04
$117.59
$82.06
-
12/31/07
$135.77
$91.93
$123.10
12/31/08
$131.29
$96.95
$111.17
(1) Cash collections (assigned and unassigned) divided by total hours paid (including holiday, vacation and
sick time) to all collectors (including those in training).
(2) Represents total cash collections less legal cash collections.
(3) Represents total cash collections less bankruptcy cash collections. Although we began bankruptcy
portfolio purchasing in 2004, we began calculating this metric in 2005.
Cash collections have substantially exceeded revenue in each quarter since our formation. The following
chart illustrates the consistent excess of our cash collections on our owned portfolios over income recognized on
finance receivables on a quarterly basis. The difference between cash collections and income recognized on
finance receivables is referred to as payments applied to principal. It is also referred to as amortization of
purchase price. This amortization is the portion of cash collections that is used to recover the cost of the
portfolio investment represented on the balance sheet.
41
Cash Collections(1) vs. Income Recognized on Finance Receivables, net
($ in millions)
Payments applied to principal or "amortization of purchase price"
Cash Collections
Income recognized on finance receivables, net
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
8
9
-
1
Q
8
9
-
2
Q
8
9
-
3
Q
8
9
-
4
Q
9
9
-
1
Q
9
9
-
2
Q
9
9
-
3
Q
9
9
-
4
Q
0
0
-
1
Q
0
0
-
2
Q
0
0
-
3
Q
0
0
-
4
Q
1
0
-
1
Q
1
0
-
2
Q
1
0
-
3
Q
1
0
-
4
Q
2
0
-
1
Q
2
0
-
2
Q
2
0
-
3
Q
2
0
-
4
Q
3
0
-
1
Q
3
0
-
2
Q
3
0
-
3
Q
3
0
-
4
Q
4
0
-
1
Q
4
0
-
2
Q
4
0
-
3
Q
4
0
-
4
Q
5
0
-
1
Q
5
0
-
2
Q
5
0
-
3
Q
5
0
-
4
Q
6
0
-
1
Q
6
0
-
2
Q
6
0
-
3
Q
6
0
-
4
Q
7
0
-
1
Q
7
0
-
2
Q
7
0
-
3
Q
7
0
-
4
Q
8
0
-
1
Q
8
0
-
2
Q
8
0
-
3
Q
8
0
-
4
Q
(1)
Includes cash collections on finance receivables only. Excludes commissions and cash proceeds from sales
of defaulted consumer receivables.
Seasonality
We depend on the ability to collect on our owned and serviced defaulted consumer receivables. Collections
tend to be higher in the first and second quarters of the year and lower in the third and fourth quarters of the year,
due to consumer payment patterns in connection with seasonal employment trends, income tax refunds and
holiday spending habits. Historically, our growth has partially masked the impact of this seasonality.
Quarterly Cash Collections(1)
($ in millions)
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
8
9
-
1
Q
8
9
-
2
Q
8
9
-
3
Q
8
9
-
4
Q
9
9
-
1
Q
9
9
-
2
Q
9
9
-
3
Q
9
9
-
4
Q
0
0
-
1
Q
0
0
-
2
Q
0
0
-
3
Q
0
0
-
4
Q
1
0
-
1
Q
1
0
-
2
Q
1
0
-
3
Q
1
0
-
4
Q
2
0
-
1
Q
2
0
-
2
Q
2
0
-
3
Q
2
0
-
4
Q
3
0
-
1
Q
3
0
-
2
Q
3
0
-
3
Q
3
0
-
4
Q
4
0
-
1
Q
4
0
-
2
Q
4
0
-
3
Q
4
0
-
4
Q
5
0
-
1
Q
5
0
-
2
Q
5
0
-
3
Q
5
0
-
4
Q
6
0
-
1
Q
6
0
-
2
Q
6
0
-
3
Q
6
0
-
4
Q
7
0
-
1
Q
7
0
-
2
Q
7
0
-
3
Q
7
0
-
4
Q
8
0
-
1
Q
8
0
-
2
Q
8
0
-
3
Q
8
0
-
4
Q
(1) Includes cash collections on finance receivables only. Excludes commission fees and cash proceeds from
sales of defaulted consumer receivables.
42
The following table displays our quarterly cash collections by source, for the periods indicated.
Cash Collection Source ($ in thousands)
Call Center & Other Collections
External Legal Collections
Internal Legal Collections
Purchased Bankruptcy Collections
Q42008 Q32008
$43,949
$41,268
21,590
18,424
2,106
2,652
15,362
16,904
Q22008 Q12008 Q42007 Q32007 Q22007 Q12007
$37,841
$46,892
20,844
22,471
1,400
1,947
7,223
13,732
$44,883
21,880
1,819
10,820
$35,551
20,861
1,443
7,245
$36,001
21,384
1,449
6,317
$36,107
20,911
1,357
6,231
The following table shows the components of outside legal and other fees and services for the years ended
December 31, 2008, 2007 and 2006 (amounts in thousands):
Legal fees and costs (1)
Agency fees (2)
Other outside fee and services
2008
2007
2006
$
36,805
$
30,720
$
28,412
16,065
8,882
9,467
7,287
4,906
6,821
$
61,752
$
47,474
$
40,139
(1) Legal fees and costs represent legal fees and costs incurred by both our inhouse attorneys and outside
contingent fee attorneys.
(2) Agency fees are primarily incurred by our IGS skip tracing business.
The following table shows the changes in finance receivables, including the amounts paid to acquire new
portfolios, for the years ended December 31, 2008, 2007 and 2006 (amounts in thousands):
2008
2007
2006
Balance at beginning of year
Acquisitions of finance receivables, net of buybacks (1)
Cash collections applied to principal on finance receivables (2)
$
410,297
273,746
$
226,448
261,310
$
193,645
105,838
(120,213)
(77,461)
(73,035)
Balance at end of year
$
563,830
$
410,297
$
226,448
Estimated Remaining Collections ("ERC")(3)
$
1,115,565
$
902,565
$
553,223
_________
(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, business acquisitions, repurchase of
our common stock, payment of cash dividends, 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
43
debt or equity financing if we were to make any other significant acquisitions requiring cash during that period.
In addition, we file taxes using the cost recovery method for income recognition. If we were to receive an
unfavorable ruling on our tax method, we may be required to pay our current deferred taxes in the near-term,
possibly requiring additional financing from other sources.
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 $81.7 million, $80.4 million and $59.5 million for the years ended
December 31, 2008, 2007 and 2006, respectively. In these periods, cash from operations was generated
primarily from net income earned through cash collections and commissions received for the period. The
increase was due mostly to changes in deferred taxes. Net income decreased to $45.4 million for the year ended
December 31, 2008 from $48.2 million for the year ended December 31, 2007 and increased from $44.5 million
for the year ended December 31, 2006. Net cash provided by operating activities was also impacted by the
amount of income taxes paid during the period which was $3,200, $5.3 million and $18.8 million for the years
ended December 31, 2008, 2007 and 2006, respectively. The remaining changes were due to net changes in
other accounts related to our operating activities.
Our investing activities used cash of $185.7 million, $192.9 million and $39.7 million for the years ended
December 31, 2008, 2007 and 2006, respectively. The majority of the change was due to acquisitions of finance
receivables which increased to $273.7 million for the year ended December 31, 2008 from $261.3 million for the
year ended December 31, 2007 and $105.8 million for the year ended December 31, 2006. Cash provided by
investing activities is primarily driven by cash collections applied to principal on finance receivables. Cash used
in investing activities is primarily driven by acquisitions of defaulted consumer receivables, purchases of
property and equipment and business acquisitions.
Our financing activities provided cash of $101.2 and $104.2 million in 2008 and 2007, respectively, and
used cash of $10.7 million in 2006. Cash used in financing activities is primarily driven by payments on our line
of credit, principal payments on long-term debt and capital lease obligations, repurchases of our common stock
and cash dividends paid on our common stock. Cash provided by financing activities is primarily driven by
proceeds from draws on our line of credit and stock option exercises. The majority of the change was due to net
proceeds received from our line of credit partially offset by cash used to pay a cash dividend on our common
stock and the repurchase of 1,000,000 shares of our common stock during the year ended December 31, 2007.
We had net draws on our line of credit of $100.3 and 168.0 million for 2008 and 2007, respectively, compared to
net repayments of $15.0 million for 2006. Also, in accordance with the adoption of SFAS 123R on January 1,
2006, the benefit derived from share-based compensation was $0.4 million, $1.6 million and $2.4 million in
2008, 2007 and 2006, respectively. This was previously classified in operating activities. In addition, the
exercise of stock options and stock warrants generated cash from financing activities of $0.6 million for the year
ended December 31, 2008, $2.1 million for the year ended December 31, 2007 and $2.5 million for the year
ended December 31, 2006.
Cash paid for interest expense was approximately $11,322,000, $2,779,000 and $411,000 for the years
ended December 31, 2008, 2007 and 2006, respectively. The majority of interest expenses were paid on our
lines of credit, capital lease obligations and other long-term debt. The increase was caused by higher average
balances on our line of credit for the year ended December 31, 2008 when compared to the years ended
December 31, 2007 and December 31, 2006. This increase was offset by a decrease in the weighted average
interest rate on our line of credit which decreased to 4.60% for the year ended December 31, 2008 as compared
to 6.64% and 6.23% for the years ended December 31, 2007 and 2006, respectively.
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. The agreement was
amended on May 9, 2006 to include RBC Centura Bank as an additional lender, again on May 4, 2007 to
increase the line of credit to $150,000,000 and incorporate a $50,000,000 non-revolving fixed rate sub-limit,
again on October 26, 2007 to increase the line of credit to $270,000,000, again on March 18, 2008 to increase the
non-revolving fixed rate sub-limit to $100,000,000, again on May 2, 2008 to include SunTrust Bank as an
additional lender and to increase the line of credit to $340,000,000, and again on September 3, 2008 to include JP
44
Morgan Chase Bank as an additional lender and to increase the line of credit to $365,000,000. The agreement is
a line of credit in an amount equal to the lesser of $365,000,000 or 30% of our estimated remaining collections of
all our eligible asset pools. Borrowings under the revolving credit facility bear interest at a floating rate equal to
the one month LIBOR Market Index Rate plus 1.40%, which was 1.836% at December 31, 2008, and the facility
expires on May 2, 2011. We also pays an unused line fee equal to three-tenths of one percent, or 30 basis points,
on any unused portion of the line of credit. The loan is collateralized by substantially all of our tangible and
intangible assets.
The agreement provides as follows:
• monthly borrowings may not exceed 30% of estimated remaining collections;
•
funded debt to EBITDA (defined as net income, less income or plus loss from discontinued operations
and extraordinary items, plus income taxes, plus interest expense, plus depreciation, depletion,
amortization (including finance receivable amortization) and other non-cash charges) ratio must be less
than 2.0 to 1.0 calculated on a rolling twelve-month average;
tangible net worth must be at least 100% of tangible net worth reported at September 30, 2005, plus
25% of cumulative positive net income since the end of such fiscal quarter, plus 100% of the net
proceeds from any equity offering without giving effect to reductions in tangible net worth due to
repurchases of up to $100,000,000 of the Company’s common stock; and
restrictions on change of control.
•
•
As of December 31, 2008, outstanding borrowings under the facility totaled $268,300,000, of which
$50,000,000 was part of the non-revolving fixed rate sub-limit which bears interest at 6.80% and expires on May
4, 2012. As of December 31, 2008, we are in compliance with all of the covenants of the agreement.
Contractual Obligations
The following summarizes our contractual obligations that exist as of December 31, 2008 (amounts in
thousands):
Contractual Obligations
Operating Leases
Line of Credit (1)
Capital Lease Obligations
Purchase Commitments (2)
Employment Agreements
Total
Less
than 1
year
$
3,638
8,352
5
74,678
9,080
95,753
$
Payments due by period
1 - 3
years
4 - 5
years
$
6,756
$
6,064
More
than 5
years
$
5,266
233,795
-
442
7,397
248,390
51,133
-
-
-
18
-
57,215
$
-
-
5,266
$
$
Total
$
21,724
293,280
5
75,138
16,477
406,624
$
(1) To the extent that a balance is outstanding on our lines of credit, the revolving portion would be due in May,
2011 and the non-revolving fixed rate sub-limit portion would be due in May 2012. This amount also includes
estimated interest and unused line fees due on the line of credit for both the fixed rate and variable rate
components as well as interest due on our interest rate swap. This estimate also assumes that the balance on the
line of credit remains constant from the December 31, 2008 balance of $268.3 million and the balance is paid in
full at its respective maturity.
(2) This 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 approximately $71.6 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.
45
Recent Accounting Pronouncements
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 was originally effective for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years but was amended on February 6, 2008 to defer the effective date for one
year for certain nonfinancial assets and liabilities. We adopted SFAS 157 on January 1, 2008, which had no
material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (“SFAS 159”). SFAS 159 is effective for fiscal years beginning after November 15, 2007.
SFAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities
at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in
current earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw
comparison between entities that elect different measurement attributes for similar assets and liabilities. We
adopted SFAS 159 on January 1, 2008, which had no material impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R “Business Combinations” (“SFAS 141R”). SFAS 141R
establishes principles and requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the
business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and
determining what information to disclose to enable users of the financial statement to evaluate the nature and
financial effects of the business combination. SFAS 141R is effective for acquisitions consummated in fiscal
years beginning after December 15, 2008. We expect SFAS 141R will have an impact on our consolidated
financial statements when effective, but the nature and magnitude of the specific effects will depend upon the
nature, terms and size of the acquisitions we consummate after the effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements” (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation
method significantly changes the accounting for transactions with minority interest holders. SFAS 160 is
effective for fiscal years beginning after December 15, 2008 with early application prohibited. We believe that
SFAS 160 will have no material impact on our consolidated financial statements.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging
Activities"(“SFAS 161”). SFAS 161 requires expanded disclosures regarding the location and amounts of
derivative instruments in an entity’s financial statements, how derivative instruments and related hedged items
are accounted for under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, and how
derivative instruments and related hedged items affect an entity’s financial position, operating results and cash
flows. SFAS 161 is effective for periods beginning on or after November 15, 2008. We believe SFAS 161 will
have no material impact on our consolidated financial statements.
In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets”,
(“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill
and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. We
believe FSP 142-3 will have no material impact on our consolidated financial statements.
46
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. 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).
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 AICPA 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 may be 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 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 and is recorded as a reduction in revenue in the consolidated
income statements with a corresponding valuation allowance offsetting the finance receivables, net, on the
consolidated balance sheets. Income on finance receivables is accrued quarterly based on each static pool’s
effective IRR. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static
47
pool. Likewise, cash flows that are less than the accrual will accrete the carrying balance. We generally do not
allow accretion in the first six to twelve months. 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. These pools are not aggregated with
other portfolios. 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. At December 31, 2008 and 2007, we had a $23.6 million and $4.2 million valuation allowance 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. 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. We discontinued our ARM contingent fee operation during the second quarter of 2008.
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.
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 “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 we conduct 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 us 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.
48
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, “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 is highly subjective and requires that: (1) goodwill is 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. 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 believe that, as of December 31, 2008, 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
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. Beginning with the adoption of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (“FIN 48”) as of January 1, 2007, we recognize the effect of the
income tax positions only if those positions are more likely than not of being sustained. Recognized income tax
positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgement occurs.
Effective with our 2002 tax filings, we adopted the cost recovery method of income recognition for tax
purposes. We believe cost recovery to be an acceptable 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.
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 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.
49
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. The average
borrowings on our variable rate credit line were $182.4 million for the year ended December 31, 2008.
Assuming a 200 basis point increase in interest rates, interest expense would have increased by $3.7 million and
$0.6 million for the years ended December 31, 2008 and 2007, respectively. As of December 31, 2008 and 2007,
we had $218.3 million and $118.0 million, respectively, of variable rate debt outstanding on our credit lines. We
do not have any other variable rate debt outstanding as of December 31, 2008. Significant increases in future
interest rates on the variable rate credit line could lead to a material decrease in future earnings assuming all other
factors remained constant.
50
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
as of December 31, 2008 and 2007
Consolidated Income Statements
for the years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Changes in Stockholders’ Equity and
Comprehensive Income
for the years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
Page
52-55
56
57
58
59
60-79
51
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Portfolio Recovery Associates, Inc.:
We have audited Portfolio Recovery Associates, Inc.’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Portfolio
Recovery Associates, Inc.’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, included in the accompanying Management’s Report on Internal Control Over Financial
Reporting (Item 9A). Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, Portfolio Recovery Associates, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
52
Portfolio Recovery Associates, Inc. acquired MuniServices, LLC (MuniServices) during 2008, and
management excluded from its assessment of the effectiveness of Portfolio Recovery Associates,
Inc.’s internal control over financial reporting as of December 31, 2008, MuniServices’ internal
control over financial reporting associated with less than 5% of the total assets and total revenues
reflected in the consolidated financial statements of Portfolio Recovery Associates, Inc. and
subsidiaries as of and for the year ended December 31, 2008. Our audit of internal control over
financial reporting of Portfolio Recovery Associates, Inc. also excluded an evaluation of the internal
control over financial reporting of MuniServices.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Portfolio Recovery Associates,
Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated
income statements, and statements of changes in stockholders’ equity and comprehensive income,
and cash flows for the years then ended, and our report dated February 27, 2009 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Norfolk, Virginia
February 27, 2009
53
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Portfolio Recovery Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Portfolio Recovery Associates,
Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated
income statements, and statements of changes in stockholders’ equity and comprehensive income,
and cash flows for the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Portfolio Recovery Associates, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their operations and their cash flows for the years
then ended in conformity with U.S. generally accepted accounting principles.
As discussed in note 2 to the consolidated financial statements, the Company adopted the provisions
of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109, effective January 1, 2007.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Portfolio Recovery Associates, Inc.’s internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 27, 2009 expressed an unqualified opinion on
the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Norfolk, Virginia
February 27, 2009
54
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Portfolio Recovery Associates, Inc.:
In our opinion, the consolidated statements of income, stockholders’ equity, and cash flows for the
year ended December 31, 2006 present fairly, in all material respects, the results of operations and
cash flows of Portfolio Recovery Associates, Inc. and its subsidiaries for the year 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 audit. We
conducted our audit 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 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 audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 1, 2007
55
Portfolio Recovery Associates, Inc.
Consolidated Balance Sheets
December 31, 2008 and 2007
(Amounts in thousands, except per share amounts)
Assets
2008
2007
Cash and cash equivalents
Finance receivables, net
Income taxes receivable
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable
Accrued expenses
Accrued payroll and bonuses
Deferred tax liability
Line of credit
Obligations under capital lease
Total liabilities
Commitments and contingencies (Note 18)
Stockholders' equity:
Preferred stock, par value $0.01, authorized shares, 2,000,
issued and outstanding shares - 0
Common stock, par value $0.01, authorized shares, 30,000,
15,398 issued and 15,286 outstanding shares - at December 31, 2008,
and 15,159 issued and outstanding at December 31, 2007
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
$
13,901
563,830
3,587
23,884
27,546
13,429
11,663
$
16,730
410,297
3,022
16,171
18,620
5,046
6,421
$
657,840
$
476,307
$
3,438
4,314
9,850
88,070
268,300
5
373,977
$
4,055
4,471
6,819
57,579
168,000
103
241,027
-
-
153
74,574
209,047
89
283,863
152
71,443
163,685
-
235,280
Total liabilities and stockholders' equity
$
657,840
$
476,307
The accompanying notes are an integral part of these consolidated financial statements.
56
Portfolio Recovery Associates, Inc.
Consolidated Income Statements
For the years ended December 31, 2008, 2007 and 2006
(Amounts in thousands, except per shares amounts)
Revenues:
Income recognized on finance receivables, net
Commissions
$
206,486
56,789
$
184,705
36,043
$
163,357
24,965
2008
2007
2006
Total revenues
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
Other income and (expense):
Interest income
Interest expense
Income before income taxes
Provision for income taxes
263,275
220,748
188,322
88,073
61,752
10,304
3,908
6,977
7,424
178,438
84,837
60
(11,151)
73,746
28,384
69,022
47,474
8,531
3,105
5,915
5,517
139,564
81,184
419
(3,704)
77,899
29,658
58,142
40,139
5,876
2,276
4,758
5,131
116,322
72,000
584
(378)
72,206
27,716
Net income
$
45,362
$
48,241
$
44,490
Net income per common share
Basic
Diluted
Weighted average number of shares outstanding
Basic
Diluted
$
$
2.98
2.97
$
$
3.08
3.06
$
$
2.80
2.77
15,229
15,292
15,646
15,779
15,911
16,082
The accompanying notes are an integral part of these consolidated financial statements.
57
Portfolio Recovery Associates, Inc.
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income
For the years ended December 31, 2008, 2007 and 2006
(Amounts in thousands, except per share amount)
Balance at December 31, 2005
Common
Stock
$
158
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income
Total
Stockholders'
Equity
$
108,064
$
87,101
$
-
$
195,323
Net income
Exercise of stock options, warrants and vesting of nonvested shares
Amortization of share-based compensation
SFAS123R adoption reclass of payroll liability to additional paid-in capital
Income tax benefit from share-based compensation
-
2
-
-
-
-
2,501
2,117
426
2,420
44,490
-
-
-
-
Balance at December 31, 2006
$
160
$
115,528
$
131,591
$
-
Net income
Exercise of stock options and vesting of nonvested shares
Issuance of common stock for acquisition
Repurchase and cancellation of common stock
Cash dividends paid ($1.00 per common share)
Amortization of share-based compensation
Income tax benefit from share-based compensation
Adoption of FIN 48
-
2
(10)
-
-
-
-
-
2,072
50
(50,547)
-
2,575
1,575
190
48,241
-
-
-
(16,070)
-
-
(77)
Balance at December 31, 2007
$
152
$
71,443
$
163,685
$
-
Net income
Net unrealized change in:
Interest rate swap derivative
Comprehensive income
Exercise of stock options and vesting of nonvested shares
Issuance of common stock for acquisition
Amortization of share-based compensation
Income tax benefit from share-based compensation
Reversal of FIN 48 reserve
-
-
1
-
-
-
-
-
-
606
1,847
141
357
180
45,362
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
89
-
-
-
-
-
44,490
2,503
2,117
426
2,420
$
247,279
48,241
2,074
50
(50,557)
(16,070)
2,575
1,575
113
$
235,280
45,362
89
45,451
607
1,847
141
357
180
Balance at December 31, 2008
$
153
$
74,574
$
209,047
$
89
$
283,863
The accompanying notes are an integral part of these consolidated financial statements.
58
Portfolio Recovery Associates, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2008, 2007 and 2006
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of share-based compensation
Depreciation and amortization
Deferred tax expense
Changes in operating assets and liabilities:
Other assets
Accounts payable
Income taxes
Accrued expenses
Accrued payroll and bonuses
Net cash provided by operating activities
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, including acquisition costs and net of cash acquired
2008
2007
2006
$
45,362
$
48,241
$
44,490
141
7,424
30,854
(2,218)
(1,167)
(385)
(413)
2,120
81,718
(6,139)
(273,746)
120,213
-
-
(26,041)
2,575
5,517
24,126
(2,339)
1,164
(1,319)
1,816
575
80,356
(8,662)
(261,310)
77,461
-
-
(409)
2,117
5,131
11,107
(437)
559
(4,568)
339
729
59,467
(6,869)
(105,838)
73,035
(1,450)
1,450
-
Net cash used in investing activities
(185,713)
(192,920)
(39,672)
Cash flows from financing activities:
Dividends paid
Proceeds from exercise of options and warrants
Income tax benefit from share-based compensation
Draws on line of credit
Principal payments on line of credit
Repurchases of common stock
Principal payments on long-term debt
Principal payments on capital lease obligations
Net cash provided by/(used in) financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
-
607
357
171,300
(71,000)
-
-
(98)
-
101,166
(2,829)
16,730
(16,070)
2,074
1,575
171,000
(3,000)
(50,557)
(690)
(139)
-
104,193
(8,371)
25,101
-
2,503
2,420
-
(15,000)
-
(462)
(140)
-
(10,679)
9,116
15,985
Cash and cash equivalents, end of year
$
13,901
$
16,730
$
25,101
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Noncash investing and financing activities:
$
11,322
$
3
$
$
2,779
5,289
$
$
411
18,764
SFAS123R adoption reclass of payroll liability to additional paid-in capital
Acquisitions - Common stock issued
Net unrealized change in interest rate swap derivative
$
-
$
1,847
$
89
$
-
$
50
$
-
$
426
$
-
$
-
The accompanying notes are an integral part of these consolidated financial statements.
59
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. Two of PRA Inc’s wholly
owned subsidiaries, Thomas West Associates, LLC (“TWA”), and PRA Bankruptcy Services, LLC (“PRA BS”)
were dissolved as entities on May 8, 2006 and August 8, 2008, respectively. 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) (“Anchor”) and was the sole initial member. Anchor was organized as a contingent
collection agency and contracted 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. The Company purchased the
equity interest in Anchor from PRA immediately after the IPO. The Company discontinued its Anchor contingent
fee operation during the second quarter of 2008, but PRA Receivables Management, LLC continues to serve as the
operational entity for the Company’s bankruptcy department.
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”). On September
10, 2004, the Company created a wholly owned subsidiary, PRA Location Services, LLC d/b/a IGS to operate IGS.
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”). Although most of its clients are located in Alabama, RDS,
through PRA Government Services, LLC, a wholly owned subsidiary formed by the Company on June 23, 2005,
began expanding into surrounding states.
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.
On July 1, 2008, the Company acquired 100% of the membership interests of MuniServices, LLC (the resulting
business is referred to herein as “MuniServices”). MuniServices was founded in 1978 and is a provider of revenue
enhancement and related services to state and local governments. Although most of its clients are in California, it
also serves clients in Texas, Florida, Pennsylvania, Georgia, Nevada and the District of Columbia. MuniServices
has a workforce of approximately 115 employees. The President of MuniServices and three other members of the
management team have entered into long-term employment agreements with the Company and continue to manage
60
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
MuniServices. The consolidated income statement includes the results of operations of MuniServices for the period
from July 1, 2008 through December 31, 2008. The transaction was completed at a price of $24.6 million,
consisting of $22.5 million in cash and $2.1 million in PRA Inc common stock. The total purchase price could
increase by a total of $4.5 million in stock through contingent payments in 2009 and 2010, related to specific
operating goals.
On August 1, 2008, the Company acquired substantially all of the assets of Broussard Partners and Associates,
Inc. (“BPA”), which is operating as a part of RDS. BPA, founded in 1995, is a provider of audit services to
parishes in Louisiana, with 34 of the state’s 64 parishes as clients. BPA has a workforce of approximately 25
employees. The President of BPA has entered into a long-term employment agreement with RDS. The
consolidated income statement includes the results of operations of BPA for the period from August 1, 2008
through December 31, 2008.
2. Summary of Significant Accounting Policies:
Principles of accounting and consolidation: The consolidated financial statements of the Company are
prepared in accordance with U.S. generally accepted accounting principles and include the accounts of PRA Inc,
PRA, PRA Holding I, PRA Holding II, IGS, RDS and MuniServices. 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 $1,112,175 and $1,263,563 at December 31, 2008 and 2007, respectively. There is an
offsetting liability that is included in “Accounts payable” on the accompanying consolidated balance sheets.
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.” At December 31, 2008 and 2007, the
Company did not have any investments on the consolidated balance sheets; however, it did purchase investments
during 2006.
Other assets: Other assets consist mainly of trade accounts receivable, prepaid expenses and derivatives used
for hedging purposes.
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.
Derivative Instruments and Hedging Activities: The Company accounts for derivatives and hedging activities
in accordance with FASB Statement No. 133, “Accounting for Derivative Instruments and Certain Hedging
Activities,” as amended, which requires entities to recognize all derivative instruments as either assets or liabilities
in the balance sheet at their respective fair values. For derivatives designated in hedging relationships, changes in
the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the
risk being hedged or recognized in accumulated other comprehensive income until the hedged item is recognized in
earnings.
The Company only enters into derivative contracts that it intends to designate as a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow
hedge). For all hedging relationships, the Company formally documents the hedging relationship and its
risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the
nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be
assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. The
Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that
are used in hedging transactions are highly effective in offsetting cash flows of hedged items. For derivative
instruments that are designated and qualify as a cash-flow hedge, the effective portion of the gain or loss on the
61
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
derivative is reported as a component of other comprehensive income and reclassified into earnings in the same
period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative
representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are
recognized in current earnings.
The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer
effective in offsetting cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the
derivative is dedesignated as a hedging instrument because it is unlikely that a forecasted transaction will occur, or
management determines that designation of the derivative as a hedging instrument is no longer appropriate.
In all situations in which hedge accounting is discontinued and the derivative is retained, the Company continues
to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value
in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge
accounting and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive
income.
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 the portfolio both by account and aggregate pool 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 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
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 may be 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 recorded as a reduction in revenue in the consolidated income statements with a corresponding
valuation allowance offsetting the finance receivables, net, on the consolidated balance sheets. Income on finance
receivables is accrued quarterly based on each static pool’s effective IRR. Quarterly cash flows greater than the
62
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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 Company generally does not allow accretion in the first six to twelve months.
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, 2008 and 2007, the Company had unamortized
purchased principal (purchase price) in pools accounted for under the cost recovery method of $3,668,133 and
$6,301,373, 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, 2008 and 2007, the Company had an allowance against its finance receivables of $23.6
million and $4.2 million, 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, 2008,
2007 and 2006 was $3,078,560, $2,434,916 and $1,322,721, respectively. During the years ended December 31,
2008, 2007 and 2006 the Company capitalized $1,250,940, $1,683,951 and $805,640, respectively, of these direct
acquisition fees. During the years ended December 31, 2008, 2007 and 2006 the Company amortized $607,296,
$571,756 and $511,320, respectively, of these direct acquisition fees.
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.
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 considers 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 that 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 discontinued its Anchor contingent fee operation during the second
quarter of 2008.
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
63
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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 subsidiaries utilize both gross and net reporting under
EITF 99-19. The Company’s 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 audits are conducted,
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 the Company 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.”
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 is amortized or 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 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 acquisitions of
IGS on October 1, 2004, RDS on July 29, 2005, The Palmer Group on July 25, 2007, MuniServices on July 1, 2008,
and BPA on August 1, 2008, the Company purchased certain tangible and intangible assets. Intangible assets
purchased included client and customer relationships, non-compete agreements, trademarks and goodwill. In
accordance with SFAS 142, the Company is amortizing the IGS client relationships over seven years, The Palmer
Group customer relationship over 2.42 years, the RDS and BPA customer relationships over ten years and the
MuniServices customer relationships over 11 years. The Company is amortizing the non-compete agreements over
three years for the IGS, RDS and MuniServices acquisitions and 2.42 years for the BPA acquisition. The Company
is amortizing trademarks over 14 years for the MuniServices acquisition. The Company reviews these intangible
assets at least annually for impairment, and when a triggering event occurs. In addition, goodwill, pursuant to
SFAS 142, is not amortized but rather reviewed annually for impairment, and when a triggering event occurs.
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,” (“SFAS 109”) 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. Beginning with the adoption of FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of January 1, 2007, the Company recognizes
the effect of the income tax positions only if those positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being
realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Prior to the adoption of FIN 48, the Company recognized the effect of income tax positions only if such positions
were probable of being sustained.
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
64
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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 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 amortized on a straight-line basis over the shorter of the lease
term or the estimated useful life of the asset. 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
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 U.S. generally accepted accounting
principles 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 timing and amount of future cash
collections of the Company’s finance receivables 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 estimates of future cash collections, and whether it is reasonably possible that its
assessments 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, line of credit and derivative instruments. See Note 13
for additional disclosure.
65
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Recent Accounting Pronouncements: 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 was originally effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years but was amended on February 6, 2008 to defer the effective date for one year for
certain nonfinancial assets and liabilities. The Company adopted SFAS 157 on January 1, 2008, which had no
material impact on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). SFAS 159 is effective for fiscal years beginning after November 15, 2007. SFAS 159
allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value
that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible
item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS
159 also establishes presentation and disclosure requirements designed to draw comparison between entities that
elect different measurement attributes for similar assets and liabilities. The Company adopted SFAS 159 on
January 1, 2008, which had no material impact on its consolidated financial statements
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R
establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree.
The statement also provides guidance for recognizing and measuring the goodwill acquired in the business
combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what
information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the
business combination. SFAS 141R is effective for acquisitions consummated in fiscal years beginning after
December 15, 2008. The Company expects SFAS 141R will have an impact on its consolidated financial statements
when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of
the acquisitions that the Company consummates after the effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements” (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method
significantly changes the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal
years beginning after December 15, 2008 with early application prohibited. The Company believes SFAS 160 will
have no material impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities”
(“SFAS 161”). SFAS 161 requires expanded disclosures regarding the location and amounts of derivative
instruments in an entity’s financial statements, how derivative instruments and related hedged items are accounted
for under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, and how derivative
instruments and related hedged items affect an entity’s financial position, operating results and cash flows. SFAS
161 is effective for periods beginning on or after November 15, 2008. The Company believes SFAS 161 will have
no material impact on its consolidated financial statements.
In April 2008, the FASB issued Staff Position (“FSP”) 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company
believes FSP 142-3 will have no material impact on its consolidated financial statements.
3. Finance Receivables, net:
As of December 31, 2008 and 2007, the Company had $563,830,227 and $410,296,594, respectively, remaining
of finance receivables, net. Changes in finance receivables, net for the years ended December 31, 2008 and 2007,
were as follows (amounts in thousands):
66
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
2008
2007
Balance at beginning of year
Acquisitions of finance receivables, net of buybacks
$
410,297
273,746
$
226,448
261,310
Cash collections
Income recognized on finance receivables, net
Cash collections applied to principal
(326,699)
206,486
(120,213)
(262,166)
184,705
(77,461)
Balance at end of year
$
563,830
$
410,297
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, 2008, the Company had $563,830,227 in finance receivables, net included in the consolidated
balance sheet. Based upon current projections, cash collections applied to principal will be as follows for the
following years ending December 31, (amounts in thousands):
2009
2010
2011
2012
2013
2014
2015
2016
$
$
123,092
137,922
125,508
97,999
47,108
22,250
8,478
1,473
563,830
During the year ended December 31, 2008, the Company purchased $4.6 billion of face value of charged-off
consumer receivables. During the year ended December 31, 2007, the Company purchased $11.1 billion of face
value of charged-off consumer receivables. At December 31, 2008, the estimated remaining collections on the
receivables purchased during 2008 and 2007 were $487,446,858 and $355,745,176, respectively.
Accretable yield represents the amount of income recognized on finance receivables the Company can expect to
generate over the remaining life of its existing portfolios based on estimated future cash flows as of December 31,
2008 and 2007. Reclassifications from nonaccretable difference to accretable yield primarily result from the
Company’s increase in its estimate of future cash flows. Reclassifications to nonaccretable difference from
accretable yield results from allowance charges that exceed the Company’s increase in its estimate of future cash
flows. Changes in accretable yield for the years ended December 31, 2008 and 2007 were as follows (amounts in
thousands):
2008
2007
$
$
492,268
(206,486)
288,854
(22,901)
551,735
326,775
(184,705)
279,726
70,472
492,268
$
$
Balance at beginning of year
Income recognized on finance receivables, net
Additions
Reclassifications (to)/from nonaccretable difference
Balance at end of year
67
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
During the years ended December 31, 2008, 2007 and 2006, the Company recorded a $20,405,000, $3,210,000
and $1,100,000 allowance charge, respectively, on portfolios that had underperformed expectations. During the
years ended December 31, 2008 and 2007, the Company also reversed $1,015,000 and $280,000, respectively, of
allowance charges recorded in prior periods. The changes in the valuation allowance for finance receivables for the
years ended December 31, 2008, 2007 and 2006 are as follows (amounts in thousands):
2008
2007
2006
Balance at beginning of year
Allowance charges recorded
Reversal of previously recorded allowance charges
Change in allowance charge
Balance at end of year
4. Operating Leases:
$
$
$
4,230
20,405
(1,015)
19,390
23,620
1,300
3,210
(280)
2,930
4,230
200
1,100
-
1,100
1,300
$
$
$
The Company rents office space and equipment under operating leases. Rental expense was $3,060,710,
$2,511,842 and $1,915,103 for the years ended December 31, 2008, 2007 and 2006, respectively.
Future minimum lease payments for operating leases at December 31, 2008, are as follows (amounts in
thousands):
2009
2010
2011
2012
2013
Thereafter
$
3,638
3,646
3,111
3,031
3,034
5,266
$
21,726
5. Intangible Assets, net:
With the acquisition of IGS on October 1, 2004, RDS on July 29, 2005, The Palmer Group on July 25, 2007,
MuniServices on July 1, 2008, and BPA on August 1, 2008, the Company purchased certain tangible and intangible
assets. Intangible assets purchased included client and customer relationships, non-compete agreements, trademarks
and goodwill. In accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial
Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company is
amortizing the IGS client relationships over seven years, The Palmer Group customer relationship over 2.42 years,
the RDS and BPA customer relationships over ten years and the MuniServices customer relationships over 11 years.
The Company is amortizing the non-compete agreements over three years for the IGS, RDS and MuniServices
acquisitions and 2.42 years for the BPA acquisition. The Company is amortizing trademarks over 14 years for the
MuniServices acquisition. The combined original weighted average amortization period is 9.14 years. The
Company reviews these relationships at least annually for impairment. Total amortization expense for the years
ended December 31, 2008, 2007 and 2006 was $2,140,942, $1,834,404 and $2,268,652, respectively.
Intangible assets consist of the following at December 31, 2008 and 2007 (amounts in thousands):
2008
2007
Client and customer relationships
Non-compete agreements
Trademarks
Accumulated amortization
Intangible assets, net
$
$
17,823
2,527
2,100
(9,021)
13,429
9,926
2,000
-
(6,880)
5,046
$
$
68
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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, MuniServices and BPA non-compete
agreements and a pattern of economic benefit concept for the RDS non-compete agreements. Amortization expense
relating to the client and customer relationships is calculated using a pattern of economic benefit concept for the
IGS, RDS and MuniServices acquisitions, straight-line over the length of the contract for The Palmer Group
acquisition and straight-line over their estimated useful lives of ten years for the BPA acquisition. Amortization
expense relating to the trademarks is calculated using a pattern of economic benefit concept for the MuniServices
acquisition. 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 estimated to be as follows as of December 31, 2008 (amounts
in thousands):
2009
2010
2011
2012
2013
Thereafter
$
2,673
2,552
2,033
1,414
1,190
3,567
13,429
$
In addition, goodwill, pursuant to SFAS 142, is not amortized but rather is reviewed at least annually for
impairment. During the fourth quarter of 2008, the Company underwent its annual review of goodwill. Based upon
the results of this review, which was conducted as of October 1, 2008, 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, 2008, that would indicate a triggering event and
thereby necessitate an impairment charge to goodwill or the other intangible assets. At December 31, 2008 and
December 31, 2007, the carrying value of goodwill was $27,545,582 and $18,620,277, respectively. The changes
in goodwill for the years ended December 31, 2008 and 2007 are as follows (amounts in thousands):
Goodwill
December 31, 2006
Acquistion of The Palmer Group
December 31, 2007
Acquistion of MuniServices and BPA
December 31, 2008
6. Acquisitions:
$
$
18,287
333
18,620
8,926
27,546
On July 1, 2008, the Company acquired 100% of the membership interests of MuniServices. MuniServices was
founded in 1978 and is a provider of revenue enhancement and related services to state and local governments.
Although most of its clients are in California, it also serves clients in Texas, Florida, Pennsylvania, Georgia, Nevada
and the District of Columbia. MuniServices has a workforce of approximately 115 employees. The President of
MuniServices and three other members of the management team have entered into long-term employment
agreements. The consolidated income statement for 2008 includes the results of operations of MuniServices for the
period from July 1, 2008 through December 31, 2008.
The transaction was completed at a price of $24.6 million, consisting of $22.5 million in cash and $2.1 million
in PRA Inc common stock. The total purchase price could increase by a total of $4.5 million in stock through
contingent payments in 2009 and 2010, related to specific operating goals. The common stock component of the
purchase price resulted in the issuance of 163,622 shares of unregistered stock to the sellers of MuniServices of
which 112,018 shares are being held in escrow and are subject to the earn out and target revenue provisions of the
asset purchase agreement. If the earn out and target revenue provisions are met, the shares held in escrow will be
issued resulting in additional purchase price which will be allocated to goodwill. The share count was determined
by using a formula agreed to by both parties and contained within the purchase agreement.
69
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
On August 1, 2008, the Company acquired substantially all of the assets of Broussard Partners and Associates,
Inc. (“BPA”), which is operating as a part of RDS. BPA, founded in 1995, is a provider of audit services to
parishes in Louisiana, with 34 of the state's 64 parishes as clients. BPA has a workforce of approximately 25
employees. The President of BPA has entered into a long-term employment agreement with RDS. The
consolidated income statement for 2008 includes the results of operations of BPA for the period from August 1,
2008 through December 31, 2008.
Both of these acquisitions provided the Company additional clients and contracts in the government sector.
These clients are located in geographic regions the Company had not previously been servicing. The following is
an allocation of the purchase price to the assets acquired and liabilities assumed in connection with the acquisitions
of MuniServices and BPA (amounts in thousands):
Purchase price, including acquisition costs and net of cash received
Accounts receivable and prepaid expenses (included in other assets)
Customer relationships
Non-compete agreements
Trademarks
Fixed assets
Deferred tax asset
Accounts payable
Accrued expenses
Accrued payroll
Goodwill
$27,888
(2,935)
(7,898)
(527)
(2,100)
(6,857)
(363)
549
257
912
$8,926
7. Capital Leases:
Leased assets included in property and equipment consists of the following as of December 31, 2008 and 2007
(amounts in thousands):
Software
Computer equipment
Furniture and fixtures
Equipment
Less accumulated amortization
2008
2007
$
270
39
1,260
27
(1,519)
$
270
48
1,260
27
(1,413)
$
77
$
192
Amortization expense recognized on capital leases for the years ended December 31, 2008, 2007 and 2006 was
$115,079, $143,313 and $183,904, respectively. Future minimum lease payments for these capital leases as of
December 31, 2008 were $5,675, and these leases were paid in full in January 2009.
8. 401(k) Retirement Plan:
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 $959,902, $843,387 and $682,115 for the years ended December 31, 2008, 2007 and 2006,
respectively.
70
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
9. Line of Credit:
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. The agreement was
amended on May 9, 2006 to include RBC Centura Bank as an additional lender, again on May 4, 2007 to increase
the line of credit to $150,000,000 and incorporate a $50,000,000 non-revolving fixed rate sub-limit, again on
October 26, 2007 to increase the line of credit to $270,000,000, again on March 18, 2008 to increase the non-
revolving fixed rate sub-limit to $100,000,000, again on May 2, 2008 to include SunTrust Bank as an additional
lender and to increase the line of credit to $340,000,000, and again on September 3, 2008 to include J.P. Morgan
Chase Bank as an additional lender and to increase the line of credit to $365,000,000. The agreement is a line of
credit in an amount equal to the lesser of $365,000,000 or 30% of the Company’s estimated remaining collections of
all its eligible asset pools. Borrowings under the revolving credit facility bear interest at a floating rate equal to the
one month LIBOR Market Index Rate plus 1.40%, which was 1.836% at December 31, 2008, and the facility
expires on May 2, 2011. The Company also pays an unused line fee equal to three-tenths of one percent, or 30 basis
points, on any unused portion of the line of credit. The loan is collateralized by substantially all the tangible and
intangible assets of the Company. The agreement provides as follows:
• monthly borrowings may not exceed 30% of estimated remaining collections;
•
funded debt to EBITDA (defined as net income, less income or plus loss from discontinued operations and
extraordinary items, plus income taxes, plus interest expense, plus depreciation, depletion, amortization
(including finance receivable amortization) and other non-cash charges) ratio must be less than 2.0 to 1.0
calculated on a rolling twelve-month average;
tangible net worth must be at least 100% of tangible net worth reported at September 30, 2005, plus 25%
of cumulative positive net income since the end of such fiscal quarter, plus 100% of the net proceeds from
any equity offering without giving effect to reductions in tangible net worth due to repurchases of up to
$100,000,000 of the Company’s common stock; and
restrictions on change of control.
•
•
As of December 31, 2008 and 2007, outstanding borrowings under the facility totaled $268,300,000 and
$168,000,000, respectively, of which $50,000,000 was part of the non-revolving fixed rate sub-limit which bears
interest at 6.80% and expires on May 4, 2012. As of December 31, 2008, the Company is in compliance with all of
the covenants of the agreement.
10.
Derivative Instruments:
The Company may periodically enter into derivative financial instruments, typically interest rate swap
agreements, to reduce its exposure to fluctuations in interest rates on variable-rate debt and their impact on earnings
and cash flows. The Company does not utilize derivative financial instruments with a level of complexity or with a
risk greater than the exposure to be managed nor does it enter into or hold derivatives for trading or speculative
purposes. The Company periodically reviews the creditworthiness of the swap counterparty to assess the
counterparty’s ability to honor its obligation. Based on the provisions of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” as amended and interpreted, the Company records derivative
financial instruments at fair value.
On December 16, 2008, the Company entered into an interest rate forward rate swap transaction (the "Swap")
with J.P. Morgan Chase Bank, National Association pursuant to an ISDA Master Agreement which contains
customary representations, warranties and covenants. The Swap has an effective date of January 1, 2010, with an
initial notional amount of $50,000,000. Under the Swap, the Company will receive a floating interest rate based on
1-month LIBOR Market Index Rate and will pay a fixed interest rate of 1.89% through maturity of the Swap on
May 1, 2011. Notwithstanding the terms of the Swap, the Company is ultimately obligated for all amounts due and
payable under the credit facility.
The Company’s financial derivative instrument is designated and qualifies as a cash flow hedge, and the
effective portion of the gain or loss on such hedge is reported as a component of other comprehensive income in the
consolidated financial statements. To the extent that the hedging relationship is not effective, the ineffective portion
of the change in fair value of the derivative is recorded in other income (expense). The hedge was considered
effective for the period from December 16, 2008 through December 31, 2008. Hedges that receive designated
71
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
hedge accounting treatment are evaluated for effectiveness at the time that they are designated, as well as through
the hedging period.
The fair value of the Company’s cash flow hedge has been recorded as an asset and is included with other
assets in the consolidated balance sheet. The fair value of the asset was $88,813 at December 31, 2008. Changes in
fair value were recorded as an adjustment to other comprehensive income of $88,813 at December 31, 2008. The
Company had no derivative instruments as of December 31, 2007. Amounts in other comprehensive income will be
reclassified into earnings under certain situations; for example, if the occurrence of the transaction is no longer
probable or no longer qualifies for hedge accounting. The Company does not expect to reclassify any amount
currently included in other comprehensive income into earnings within the next 12 months.
11.
Property and equipment, net:
Property and equipment, at cost, consist of the following as of December 31, 2008 and 2007 (amounts in
thousands):
2008
2007
Software
Computer equipment
Furniture and fixtures
Equipment
Leasehold improvements
Building and improvements
Land
Accumulated depreciation and amortization
Property and equipment, net
$
$
14,380
7,951
5,150
5,370
3,449
5,948
992
(19,356)
23,884
6,147
6,083
4,758
4,742
2,557
5,123
939
(14,178)
16,171
$
$
Depreciation and amortization expense, relating to property and equipment, for the years ended December 31,
2008, 2007 and 2006 was $5,283,058, $3,682,686 and $2,861,976, 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, 2008 and
2007, the Company has incurred and capitalized $1,036,275 and $524,456, respectively, of these direct payroll costs
related to software developed for internal use. As of December 31, 2008 and 2007, of these costs, $593,560 and
$98,511, respectively, are 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 to seven years. Amortization expense and remaining unamortized costs relating to this internally
developed software as of and for the year ended December 31, 2008 were $88,543 and $332,718, respectively.
Amortization expense and remaining unamortized costs relating to this internally developed software as of and for
the year ended December 31, 2007 were $21,454 and $404,491, respectively.
12.
Long-Term Debt:
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 was
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 were $9,797 and the loan was paid in full at its maturity date of
September 1, 2007.
72
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 was collateralized by computer equipment. Monthly payments were $18,096, and the loan
was paid in full on May 7, 2007.
On January 9, 2004, the Company entered into a commercial loan agreement to finance equipment purchases at
one of its leased Norfolk facilities in the amount of $750,000 with a fixed rate of 4.45%. Monthly payments were
$13,975, and the loan was paid in full on May 7, 2007.
13.
Estimated Fair Value of Financial Instruments:
The accompanying consolidated financial statements include various estimated fair value information as of
December 31, 2008 and 2007, as required by SFAS No. 107, “Disclosures About Fair Value of Financial
Instruments” and amended by SFAS No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157 defines fair
value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. SFAS 157 also requires the consideration of differing levels
of inputs in the determination of fair values. Based upon the fact there are no quoted prices in active markets or
other observable market data, the Company used unobservable inputs for computation of the fair value of finance
receivables, net. 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 as amended by SOP 03-3. The carrying amount of finance
receivables, net, as of December 31, 2008 and 2007 was approximately $564,000,000 and $410,000,000,
respectively. The Company computed the fair value of these receivables using proprietary pricing models that the
Company utilizes to make portfolio purchase decisions. As of December 31, 2008 and 2007, using the
aforementioned methodology, the Company computed the approximate fair value to be $565,000,000 and
$451,000,000, respectively.
Line of credit: The carrying amount approximates fair value, as the interest rates approximate the rate currently
offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers.
Derivative instrument: The carrying amount approximates fair value, which is determined using pricing models
developed based on the LIBOR swap rate and other observable market data, adjusted for nonperformance risk of
both the counterparty and the Company.
14.
Share-Based Compensation:
The Company has a stock option and nonvested share plan. The Amended and Restated Portfolio Recovery
Associates 2002 Stock Option Plan and 2004 Restricted Stock Plan (“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 nonvested shares of stock, as well as stock options.
Effective January 1, 2002, the Company adopted the fair value recognition provisions of SFAS No. 123 (“SFAS
123”), “Accounting for Stock-Based Compensation,” 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 No. 123R (“SFAS 123R”), “Share-Based Payment” using the modified prospective approach. The
adoption of SFAS 123R had no material impact on the Company’s Consolidated Income Statement or on previously
reported interim periods. As of December 31, 2008, total estimated future compensation costs related to awards of
nonvested shares (not including nonvested shares granted under the Long-Term Incentive Program) were
approximately $3.3 million. The weighted average remaining life is 1.1 years for stock options and 3.4 years for
nonvested shares (not including nonvested shares granted under the Long-Term Incentive Program). Based upon
73
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
historical data, the Company used an annual forfeiture rate of 14% for stock options and between 20%-40% 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 historically low turnover among this
group. In addition, commensurate with the adoption of SFAS 123R, all previous references to “restricted stock” are
now referred to as “nonvested shares”.
Total share-based compensation expense was $140,590, $2,575,253 and $2,116,631 for the years ended
December 31, 2008, 2007 and 2006, respectively. Tax benefits resulting from tax deductions in excess of share-
based compensation expense recognized under the fair value recognition provisions of SFAS 123R (windfall tax
benefits) are credited to additional paid-in capital in the Company’s Consolidated 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 share-based compensation expense was approximately $0.9
million, $2.4 million and $3.0 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Stock Options
The Company created the 2002 Stock Option Plan on November 7, 2002. The plan was amended in 2004 to
enable the Company to issue restricted shares of stock to its employees and directors. 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, 2008, 895,000 options have been granted under the Amended
Plan, of which 118,905 have been cancelled and are eligible for regrant. These options are accounted for under
SFAS 123R and all expenses for 2008, 2007 and 2006 are included in earnings as a component of compensation
and employee services expense.
The following summarizes all option related transactions from December 31, 2005 through December 31, 2008
(amounts in thousands, except per share amounts):
December 31, 2005
Exercised
Cancelled
December 31, 2006
Exercised
Cancelled
December 31, 2007
Exercised
Cancelled
December 31, 2008
Options
Outstanding
505
(189)
(15)
301
(130)
(8)
163
(38)
(2)
123
Weighted-Average
Exercise Price Per
Share
$
Weighted-Average
Fair Value Per
Share
$
15.12
13.19
13.00
16.43
15.97
13.00
16.97
15.87
21.50
17.24
3.06
2.76
2.71
3.27
3.33
2.71
3.25
3.31
4.60
3.21
$
$
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 2008, 2007 or 2006. The total intrinsic value of options exercised during the years ended December 31,
2008, 2007 and 2006, was approximately $0.9 million, $4.1 million, and $6.3 million, respectively.
The following information is as of December 31, 2008 (amounts in thousands except per share amounts):
Options Exercisable
Weighted-Average
Exercise Price Per
Share
Weighted-Average
Exercise Price Per
Share
Average Remaining
Contractual Life
Aggregate
Intrinsic Value
Number
Outstanding
Number
Exercisable
Options Outstanding
Exercise
Prices
Aggregate
Intrinsic Value
$ 13.00
$ 16.16
$ 27.77 - $ 29.79
Total as of December 31, 2008
85
5
33
123
0.9
0.9
1.7
1.1
$
$
13.00
16.16
28.28
17.24
$
$
1,763
97
183
2,043
85
5
30
120
74
$
$
13.00
16.16
28.22
16.95
$
$
1,763
97
169
2,029
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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.
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, nonvested share awards are issued at market value 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, 2005 through December 31,
2008(amounts in thousands except per share amounts):
December 31, 2005
Granted
Vested
Cancelled
December 31, 2006
Granted
Vested
Cancelled
December 31, 2007
Granted
Vested
Cancelled
December 31, 2008
Nonvested
Shares
Outstanding
135
83
(28)
(19)
171
9
(41)
(16)
123
27
(37)
(15)
98
Weighted-
Average Price
at Grant Date
$
34.96
46.88
33.88
37.75
40.59
43.42
38.74
38.23
41.72
37.47
39.55
40.05
41.60
$
The total grant date fair value of shares vested during the years ended December 31, 2008, 2007 and 2006, was
$1,446,897, $1,584,621 and $940,644, respectively.
Long-Term Incentive Programs
Pursuant to the Amended Plan, on March 30, 2007 and January 4, 2008, the Compensation Committee approved
the grant of 96,550 and 80,000, respectively, of performance based nonvested shares. The shares were granted to
key employees of the Company. The grants are performance based and cliff vest after the requisite service period of
three years if certain financial goals are met. The goals are based upon cumulative diluted earnings per share
(“EPS”) totals for the 2007, 2008 and 2009 years for the 2007 grant and EPS totals for the 2008, 2009 and
2010 years for the 2008 grant, as well as the return on invested capital for the same periods. The number of shares
vested can double if the financial goals are exceeded or no shares can vest if the financial goals are not met. For
both the 2007 and 2008 grants, the Company was expensing the nonvested shares over the requisite service period
of three years beginning January 1, 2007 and 2008, respectively. During 2008, the Company reversed $1.2 million
of estimated compensation costs that had been previously accrued relating to the 2007 Long Term Incentive
Program because the achievement of the performance targets of the program were deemed unlikely to be achieved.
During 2008, no estimated compensation costs were accrued relating to the 2008 Long Term Incentive Program
because the achievement of the performance targets of the program were deemed unlikely to be achieved. In the
future, if the Company believes that the performance targets of the programs will be achieved, an adjustment to the
75
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
expense will be made at that time based on the probable outcome. The Company assumed a 7.5% forfeiture rate for
these grants and the shares have a weighted average life of 1.47 years at December 31, 2008.
15.
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 options and nonvested share awards. Share-based
awards that are contingent upon the attainment of performance goals are not included in the computation of diluted
EPS until the performance goals have been attained. The dilutive effect of stock options and nonvested shares is
computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of
stock options and vesting of nonvested shares would be used to purchase common shares at the average market
price for the period. The assumed proceeds include the windfall tax benefit that would be 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, 2008, 2007 and 2006 (amounts in thousands, except per share amounts):
2008
Weighted Average
Net Income Common Shares
15,229
$45,362
EPS
$2.98
For the years ended December 31,
2007
Weighted Average
2006
Weighted Average
Net Income Common Shares EPS Net Income Common Shares EPS
15,911 $2.80
15,646 $3.08
$48,241
$44,490
$45,362
63
15,292
$2.97
$48,241
15,779 $3.06
$44,490
16,082 $2.77
133
171
Basic EPS
Dilutive effect of stock options
and nonvested share awards
Diluted EPS
As of December 31, 2008, 2007 and 2006, there were no antidilutive options outstanding.
16.
Stockholders’ Equity:
Shares of common stock outstanding were as follows for the years ended December, 31 2008, 2007 and 2006
(amounts in thousands):
December 31, 2005
Exercise of warrants, options and vesting of nonvested shares
December 31, 2006
Exercise of options and vesting of nonvested shares
Issuance of common stock for acquisition
Repurchase and cancellation of common stock
December 31, 2007
Exercise of options and vesting of nonvested shares
Issuance of common stock for acquisition
December 31, 2008
Common Stock
15,767
220
15,987
171
1
(1,000)
15,159
75
52
15,286
Cash Dividends Paid on Common Stock:
On April 23, 2007, the Company’s Board of Directors authorized a special one-time cash dividend of $1.00 per
share with a record date of May 9, 2007. The cash dividends were paid on June 8, 2007 and totaled $16,069,694.
There were no cash dividends paid or authorized during 2008 or 2006.
Share Repurchase Program:
On April 23, 2007, the Company’s Board of Directors authorized a share repurchase program to buyback one
million of the Company’s outstanding shares of common stock on the open market. The timing and volume of share
purchases were dependent on several factors, including market conditions. During the year ended December 31,
2007, the Company purchased 1,000,000 shares of its common stock at an average per share price of $50.56. The
program was completed during 2007.
76
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
17.
Income Taxes:
The Company records a tax provision for the anticipated tax consequences of the reported results of operations.
In accordance with SFAS 109, 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.
On July 13, 2006, the FASB issued FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS109. 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 as 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 adopted the provisions of FIN 48 with respect to all of its tax positions as of January 1, 2007.
Total unrecognized tax benefits as of December 31, 2008 and 2007 were $0 and $180,000, respectively. Due to the
approval by the Internal Revenue Service of an application for a change in accounting method with respect to one of
the Company’s tax positions, the balance of unrecognized tax benefits at the date of adoption was reduced from
$388,000 to $180,000 at September 30, 2007. The reduction of $208,000 did not have an impact on the annual
effective rate since the ultimate deductibility of these benefits was highly certain, and only the timing of
deductibility was uncertain. On September 15, 2008, the 2004 tax year closed and is no longer subject to
examination by major taxing jurisdictions, including the Internal Revenue Service. As a result, the remaining
unrecognized tax benefits balance of $180,000 was reversed. The reversal was an adjustment to additional paid-in-
capital and did not affect the annual effective tax rate. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (amounts in thousands):
Balance at January 1, 2007
Additions for tax position of prior year
Decrease due to change in accounting method for tax purposes
Balance at December 31, 2007
Decrease due to lapse of statute of limitations
Balance at December 31, 2008
$
379
9
(208)
180
(180)
$
-
$
The Company was notified on June 21, 2007 that it would be examined by the Internal Revenue Service for the
2005 tax year. As of December 31, 2008, the tax years subject to examination by the major taxing jurisdictions,
including the Internal Revenue Service, are 2003 and 2005 and subsequent years. The 2003 tax year remains open
to examination because of a net operating loss that originated in that year but was not fully utilized until the 2005
tax year. On February 19, 2009, the Company received a “Notice of Proposed Adjustment” dated February 18,
2009. The notice states that the government has made a preliminary finding that the use of cost recovery for tax
income recognition purposes does not clearly reflect income. The Company intends to appeal the government’s
preliminary findings via the normal administrative process unless an agreement can be reached at the local level.
77
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
The Company believes it has substantial authority for using the cost recovery method and that it is more-likely-than-
not that it will be successful in the appeals process.
FIN 48 requires the recognition of interest, if the tax law would require interest to be paid on the underpayment
of taxes, and recognition of penalties, if a tax position does not meet the minimum statutory threshold to avoid
payment of penalties. Penalties and interest may be classified as either penalties and interest expense or income tax
expense. Management has elected to classify accrued penalties and interest as income tax expense. Accrued
penalties and interest as of January 1, 2007, in the amount of $77,000, were recorded to beginning of year retained
earnings. Since January 1, 2007, the Company has accrued additional interest of approximately $34,000. Due to
the approved application for change in accounting method, the balance of accrued penalties and interest was
reduced by $67,000 during 2007. As a result of the lapse in the statute of limitations, the 2004 tax year closed as of
September 15, 2008 resulting in the reversal of the remaining $44,000 of accrued interest.
The income tax expense recognized for the years ended December 31, 2008, 2007 and 2006 is composed of the
following (amounts in thousands):
For the year ended December 31, 2008
Federal
State
Total
For the year ended December 31, 2007
Federal
State
Total
Current tax benefit
Deferred tax expense
Total income tax expense
Current tax expense
Deferred tax expense
Total income tax expense
$
$
$
$
$
$
$
$
$
$
$
$
(2,108)
26,414
24,306
4,870
21,229
26,099
(362)
4,440
4,078
454
3,105
3,559
2,265
1,543
3,808
(2,470)
30,854
28,384
5,324
24,334
29,658
16,610
11,106
27,716
For the year ended December 31, 2006
Federal
State
Total
Current tax expense
Deferred tax expense
Total income tax expense
$
$
14,345
9,563
23,908
$
$
$
$
The Company has recognized a net deferred tax liability of $88,069,756 and $57,578,782 as of December 31,
2008 and 2007, respectively. The components of this net deferred tax liability are as follows (amounts in
thousands):
Deferred tax assets:
Employee compensation
Allowance for doubtful accounts
State tax credit
Intangible assets and goodwill
Section 467 leases
Other
Total deferred tax assets
Deferred tax liabilities:
Depreciation expense
Prepaid expenses
Cost recovery
Total deferred tax liability
2008
2007
$
529
794
685
379
277
133
2,797
$
898
-
591
501
-
170
2,160
788
658
89,421
90,867
89
418
59,232
59,739
Net deferred tax liabilities
$
88,070
$
57,579
78
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
A valuation allowance has not been provided at December 31, 2008 or 2007 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 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. At
December 31, 2008, the Company had state income tax credit carryforwards of approximately $1.1 million which
will begin to expire starting in the year ending December 31, 2021. The Company also incurred state net operating
loss carryforwards in 2008 of approximately $1.5 million, which will begin to expire starting in the year ending
December 31, 2013.
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 temporary difference from the use of cost recovery for income tax purposes resulted in a
deferred tax liability at December 31, 2008 and 2007.
A reconciliation of the Company’s expected tax expense at statutory tax rates to actual tax expense for the years
ended December 31, 2008, 2007 and 2006 consists of the following components (amounts in thousands):
2008
2007
2006
Federal tax at statutory rates
State tax expense, net of federal benefit
Other
Total income tax expense
$
$
25,811
2,651
(78)
28,384
18.
Commitments and Contingencies:
Employment Agreements:
$
$
27,265
2,313
80
29,658
$
$
25,272
2,475
(31)
27,716
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, 2011. Such agreements provide for base salary
payments as well as bonuses which are based on the attainment of specific management goals. Future compensation
under these agreements is approximately $16.5 million. The agreements also contain confidentiality and non-
compete provisions.
Litigation:
The Company is from time to time subject to routine legal proceedings which are incidental to the ordinary
course of our business. The Company initiates lawsuits against consumers and are occasionally countersued by
them in such actions. Also, consumers occasionally initiate litigation against the Company, in which they allege
that the Company has violated a state or federal law in the process of collecting on an account. 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.
Forward Flow Agreements:
The Company is party to several forward flow agreements that allow for the purchase of defaulted consumer
receivables at pre-established prices. The maximum remaining amount to be purchased under forward flow
agreements at December 31, 2008 is $71.6 million.
79
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, 2008, our disclosure controls and procedures were effective.
Management's Report on Internal Control Over Financial Reporting. We are responsible for establishing and
maintaining effective 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, 2008, 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, KPMG
LLP, has issued an audit report on the effectiveness of our internal control over financial reporting, as of December
31, 2008 which is included herein.
The scope of management’s assessment of internal controls over financial reporting did not include our recently
acquired subsidiary, MuniServices, which was excluded from our evaluation. This business represents less than 5%
of total assets and total revenues reflected in our consolidated financial statements as of and for the year ended
December 31, 2008.
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, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
80
Item 10. Directors and Executive Officers of the Registrant.
PART III
The following table sets forth certain information as of February 11, 2009 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
49
44
48
63
71
61
46
50
66
* 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
81
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. Mr. Tabakin has more than
20 years of public-company experience. Mr. Tabakin has served as Executive Vice President and Chief Financial
Officer of Bravo Health, Inc., a privately owned Medicare managed health care company since 2006. Early in his
career, Mr. Tabakin was an executive with the accounting firm of Ernst & Young. 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. He served as Executive Vice President and CFO of AMERIGROUP Corporation, a managed health-
care company, from May 2001 until October 2003. From November 2003 until July 2006, Mr. Tabakin was an
independent financial consultant. Mr. Tabakin 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.
82
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 2009 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 2009 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 2009 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 2009 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 2009 Annual Meeting of Stockholders.
83
Item 14. Principal Accountant Fees and Services.
The aggregate fees billed or expected to be billed by KPMG LLP for the years ended December 31, 2008 and
2007, respectively, are presented in the table below:
Audit Fees
Annual audit
Tax Fees
Other Fees:
Subscription Fees (1)
2008
2007
$
551,500
$
483,000
14,550
1,500
10,900
1,500
Total Accountant Fees
$
567,550
$
495,400
(1) Subscription fees represent fees paid to KPMG LLP for an annual subscription to their proprietary research tool
during 2008 and 2007, respectively.
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 all audit services and 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 non-audit services is compatible with maintaining the
auditors’ independence.
All the services performed by and fees paid to KPMG LLP were pre-approved by the Audit Committee.
84
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
Reports of Independent Registered Public Accounting Firms 52-55
Consolidated Balance Sheets as of December 31, 2008 and 2007
56
Consolidated Income Statements
for the years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Changes in Stockholders’ Equity
and Comprehensive Income
for the years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
(b) Exhibits.
57
58
59
60-79
2.1
2.2
2.3
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
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 November 14, 2008, by and between Steven D. Fredrickson and
Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.1 of the Form 8-K
dated November 20, 2008).
Employment Agreement, dated November 14, 2008, by and between Kevin P. Stevenson and
Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.2 of the Form 8-K
dated November 20, 2008).
Employment Agreement, dated November 14, 2008, by and between Craig A. Grube and Portfolio
Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.3 of the Form 8-K dated
November 20, 2008).
Employment Agreement, dated November 14, 2008, by and between Judith S. Scott and Portfolio
Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.4 of the Form 8-K dated
November 20, 2008).
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).
85
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).
10.11 Second Amendment to the Amended and Restated Loan and Security Agreement, dated May 4,
2007, 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 7,
2007).
10.12 Loan Document Modification Agreement, dated October 26, 2007, 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 October 29, 2007).
10.13 Third amendment to the Amended and Restated Loan and Security Agreement, dated as of May 2,
2008, by and between Portfolio Recovery Associates, Inc, Bank of America, N.A., Wachovia
Bank, N.A., RBC Centura Bank and SunTrust Bank (Incorporated by reference to Exhibit 10.1 of
the Form 8-K filed May 12, 2008).
10.14 Fourth amendment to the Amended and Restated Loan and Security Agreement, dated as of
September 3, 2008, by and between Portfolio Recovery Associates, Inc, Bank of America, N.A.,
Wachovia Bank, N.A., RBC Centura Bank, SunTrust Bank and JP Morgan Chase Bank N.A.
(Incorporated by reference to Exhibit 10.1 of the Form 8-K filed September 8, 2008).
21.1 Subsidiaries of Portfolio Recovery Associates, Inc.
23.1
23.2
24.1
31.1
31.2
32.1 Section 906 Certifications of Chief Executive Officer and Chief Financial Officer
Consent of KPMG LLP
Consent of PricewaterhouseCoopers LLP
Powers of Attorney (included on signature page).
Section 302 Certifications of Chief Executive Officer
Section 302 Certifications of Chief Financial Officer
86
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: February 27, 2009
Dated: February 27, 2009
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: February 27, 2009
Dated: February 27, 2009
Dated: February 27, 2009
Dated: February 27, 2009
Dated: February 27, 2009
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
87
Dated: February 27, 2009
Dated: February 27, 2009
By:/s/ Scott M. Tabakin
Scott M. Tabakin
Director
By:/s/ James M. Voss
James M. Voss
Director
88
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
PRA Location Services, LLC – Delaware (Doing business as IGS)
PRA Government Services, LLC – Delaware (Doing business as RDS)
MuniServices, LLC - Delaware
89
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Portfolio Recovery Associates, Inc.:
We consent to the incorporation by reference in the registration statements (No. 333-110330 and No. 333-
110331) on Form S-8 of Portfolio Recovery Associates, Inc. of our reports dated February 27, 2009, with
respect to the consolidated balance sheets of Portfolio Recovery Associates, Inc. and subsidiaries (the
Company) as of December 31, 2008 and 2007, and the related consolidated income statements, and
statements of changes in stockholders’ equity and comprehensive income, and cash flows for the years
then ended, and the effectiveness of internal control over financial reporting as of December 31, 2008,
which reports appear in the December 31, 2008 annual report on Form 10-K of Portfolio Recovery
Associates, Inc.
Our report dated Febraury 27, 2009, on the consolidated financial statements of the Company refers to the
Company’s adoption of the provisions of Financial Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainties in Income Taxes, an interpretation of FASB Statement No. 109,
effective January 1, 2007.
Our report dated February 27, 2009, on the effectiveness of internal control over financial reporting as of
December 31, 2008, contains an explanatory paragraph that states that Portfolio Recovery Associates, Inc.
acquired MuniServices, LLC (MuniServices) during 2008, and management excluded from its assessment
of the effectiveness of Portfolio Recovery Associates, Inc.’s internal control over financial reporting as of
December 31, 2008, MuniServices’ internal control over financial reporting associated with less than 5%
of the total assets and total revenues reflected in the consolidated financial statements of the Company as
of and for the year ended December 31, 2008. Our audit of internal control over financial reporting of
Portfolio Recovery Associates, Inc. also excluded an evaluation of the internal control over financial
reporting of MuniServices.
/s/ KPMG LLP
Norfolk, Virginia
February 27, 2009
90
Exhibit 23.2
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, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
McLean, VA
February 27, 2009
91
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: February 27, 2009
By: /s/ Steven D. Fredrickson
Steven D. Fredrickson
Chief Executive Officer, President and
Chairman of the Board of Directors
(Principal Executive Officer)
92
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: February 27, 2009
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)
93
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, 2008 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: February 27, 2009
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, 2008 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: February 27, 2009
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)
94
CoRPoRaTe goVeRNaNCe
mAnAgement
BoARd of dIReCtoRs
Steve Fredrickson
President and
Chief executive officer
Craig Grube
executive Vice President,
acquisitions
Kevin Stevenson
executive Vice President,
Chief financial and
administrative officer,
Treasurer and asst.
Secretary
Judith Scott
executive Vice President,
general Counsel and
Secretary
James Voss
director
William Brophey
director
Steve Fredrickson
Chairman of the Board
Scott Tabakin
director
Penelope Kyle
director
David Roberts
lead 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 & Trust Company
17 Battery Place, 8th floor
New York, New York 10004
Tel: 212-509-4000
fax: 212-509-5150
audiToRS
kPmg llP
Norfolk, Virginia
legal CouNSel
dechert, llP
New York, New York
Designed by Curran & Connors, Inc. / www.curran-connors.com
fiNaNCial PuBliCaTioNS/iNVeSToR iNquiRieS
Shareholders may acquire copies of the 2008 form 10-k, annual
Report and other filed documents by visiting the company’s web-
site 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 2008.
2008
high
low
$52.73
$24.70
as of february 4, 2009, there were 31 holders of record of the
common stock. Based on information provided by our transfer
agent and registrar, we believe that there are approximately 24,183
beneficial owners of the Common Stock.
Portfolio Recovery Associates, Inc.
Riverside Commerce Center
120 Corporate Blvd., Suite 100
Norfolk, Virginia 23502