s e t t i n g t h e b a r.
s e t t i n g t h e r e c o r d.
2 0 10 A n n u a l R e p o r t
Portfolio Recovery Associates, Inc.
Without the services we provide, the consumer credit
market cannot function. by making disciplined investments
in people, processes and portfolios, Portfolio recovery
associates is achieving record financial and operating
results. by adhering to rigorous standards in the conduct
of our business, we are setting the bar higher for the entire
debt buying and collection industry.
Steve Fredrickson
chairman, President and chief executive officer
Portfolio recovery associates, inc.
Portfolio recovery AssociAtes, inc.,
through its subsidiaries, purchases and manages portfolios of defaulted consumer
receivables. It also provides 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 long-term view of
collections, a commitment to customer service and 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 $54.8 billion
from $5.1 billion in face value, and our earnings have increased to $4.35 per diluted
share from $0.94. At year-end 2010, we employed 2,473 people on a full-time basis in
ten office locations from New Jersey to California.
1
L e t t e r t o S h a r e h oL d e r S
Last year was an exceptional period for our com-
pany. We shattered our previous milestones for cash
collections, revenue and net income, setting new
records. Cash collections in 2010 grew by 44% from
2009, revenue by 33%, and net income by 66%.
Additionally, we completed a successful equity
offering in February; acquired a great new fee-for-
service business, Claims Compensation Bureau,
in March; made a record $367 million in portfolio
purchases throughout the year; and closed on a
new, expanded line of credit (for $407 million) in
December. It was a year of accomplishment like
none before.
Our success in 2010 resulted from a great deal
of work and investment in people, processes and
portfolios during prior years. Besides gaining opera-
tional strength, we have forged an excellent team,
from our collection representatives to our statisti-
cians, analysts and IT professionals to our managers,
supervisors and executives. Our team is not only
strong but deep, with an incredible bench of smart,
committed employees looking to advance our perfor-
mance. With these considerable assets, we expect
to continue producing strong results in the future.
Our 2010 growth was strongly driven by our bank-
ruptcy business, which increased its cash collections
by $100 million, or 116%, from 2009. This success
was no accident. Since entering the bankruptcy
market in 2004, we have invested considerable time
and resources in the business. We have made a
significant commitment to building what we believe
is one of the most robust systems in existence for
efficiently and accurately processing bankruptcy
claims. Even before starting operations in 2004, we
had spent nearly two years working on our models
and processes. We then began to purchase steadily
larger pools of bankrupt accounts, especially after
2007. In 2008 and 2009—when the bankruptcy
market was disrupted by the global financial crisis,
and the disruption was exacerbated by lack of
capital in the financial markets and concerns over
changing rules for bankrupt assets—PRA continued
to bid for bankrupt accounts by carefully analyzing
and underwriting for current and potential risks. As
a result, we won a significant amount of business
when others feared to venture forth. That business
has turned out to be very successful. Last year,
repeating what we did in 2009, we invested more in
bankrupt accounts ($217 million) than in charged-off
accounts ($150 million).
Our core business—buying charged-off consumer
debt—also performed well in 2010. We increased
purchases by 19% from 2009, and achieved a 22%
increase in cash collections. Despite the economy,
our 2009 and 2010 investments look particularly
strong, while our older pools are performing nicely,
aided by ever-improving scoring and collection strat-
egies. In both the bankruptcy and charged-off-debt
markets, we did see prices move up substantially
during 2010 as competition increased and available
inventory remained stable. However, we continue to
enjoy a significant competitive advantage because
of our ability to underwrite accurately and to collect
cash from portfolios efficiently.
During 2010, we began to apply to our fee-for-service
businesses the advanced analytics and sophisticated
operating processes developed in our debt-purchase
business. Our goal is to deliver superior results to our
clients while we realize more net income from every
revenue dollar. Frankly, during 2010, the vehicle lo ca-
tion and government services businesses did not
meet our expectations. We have made numerous
2
Portfolio Recovery Associates, Inc. — 2010 Annual Report
management changes in both businesses, and we
are diligently employing process and technology
resources that have served us well in the debt-
purchase business. Our fee businesses offer oppor-
tunities for solid growth without significant capital
investment, and we are focusing on developing
them into highly profitable, sustainable enterprises
over the long term.
I strongly believe that intelligent diversification is a
key to Portfolio Recovery Associates’ continuing
success. This belief is what led us to enter the
bankruptcy market, though we knew at the onset
that patience would be required to achieve significant
success, and it is what is guiding us now in building
an impressive portfolio of fee-for-service businesses.
Ultimately, building a diverse group of enterprises
selling to different markets and exposed to different
economic and pricing cycles should enable us to
deliver superior long-term results through a wide
variety of conditions.
Regulation and compliance continued to be front-
burner items for us throughout 2010. Although
nothing specific to our industry has yet emerged
from the newly created Consumer Financial Protection
Bureau, it is clear that additional regulation of the
industry is likely. We believe PRA is an industry leader
in the compliant conduct of all aspects of collection
operations, including the litigation process. In handling
and reviewing account documentation, we employ
what we believe are rigorous, industry-leading stan-
dards. We continue to study and refine them, setting
the bar even higher for the industry. During 2010,
this included making a significant investment in
technology that provides sophisticated speech
analytics for all telephone conversations, to ensure
that we’re in compliance with PRA’s policies and
procedures as well as industry standards.
Steve Fredrickson
Chairman, President
and Chief Executive Officer
Unfortunately, the proliferation of blogs and other
social media outlets has spawned a number of
one-sided, often misguided, and frequently unsub-
stantiated posts or stories about the debt-purchase
industry. Some of those posts have mentioned PRA.
The irresponsible, and many times outright inac cu-
rate, views expressed have even leaked into the
traditional press. The fact is that the debt-purchase
business plays a critical role in the consumer credit
industry that is so essential to the health of the U.S.
economy. Without a reasonable and well-run enforce-
ment mechanism, the consumer credit market
cannot function. PRA and firms like it in the collection
industry work every day with defaulted consumers
to voluntarily resolve unpaid bills. Although litigation
is never our first choice for enforcing a debt, when
we go down this path we take great care to ensure
proper service, documentation, balances, and venue.
Our challenge for 2011 is to carry forward the fabu-
lous momentum we developed in 2010. We seek to
strengthen the operations and sales capabilities of
our fee-for-service businesses, while leveraging our
expertise and market position in both bankruptcy
and core debt purchases. Thank you for your con-
tinued support of PRA through your ownership of
our stock. I assure you that the employees at
Portfolio Recovery Associates are working very hard
to maximize your investment and retain your trust.
Sincerely,
Steve Fredrickson
Chairman, President and Chief Executive Officer
3
C o r e a S S e t p u r C h a S i n g
our core Asset Purchasing business
achieved a record number of customer
payments in 2010, reflecting robust pur-
chasing activity and record productivity.
PRA’s Core Asset Purchasing business con-
a 19% increase over our investment in 2009.
sists of buying and collecting upon portfolios
Our collections activities progressed as well.
of non-bankrupt, distressed consumer receiv-
Our amplified call and letter activity yielded
ables that credit grantors have charged off.
4.4 million payments from customers—a
Our collection processes fulfill a dual goal
number that was up 63% from 2009. Fueling
of reaching fair payment solutions for our
this collections success were the skill and
customers and optimizing portfolio value for
dedication of our team, our best-in-class
shareholders. During 2010, PRA signed a
statistical modeling, and our ongoing invest-
record number of core forward flow agree-
ments in key technologies and capabilities,
ments, through which credit grantors sell us
such as our internal legal collections opera-
similar portfolios on a regular basis. This new
tions, that let us capture additional margin
business allowed PRA to invest $150 million
and exert greater control over the quality
in core assets during the year, representing
of work done.
4
Portfolio Recovery Associates, Inc. — 2010 Annual Report
5
B a n k r u p t C y S e r v i C e S
Bankruptcy services set new records
in 2010 with significant increases in both
investment and collections.
A substantial portion of PRA’s debt-purchasing
totaled $187 million, a 116% increase. Both
business consists of the acquisition of bankrupt
totals were new records for the Company.
accounts. The business continues to build
Purchases of bankrupt accounts represented
on extensive experience managing bankrupt
59% of PRA’s total investment in debt last
accounts, leveraging its strong relationships
year, and collections from bankrupt accounts
with bankruptcy trustees and courts, our
represented 35% of total cash collections.
experienced bankruptcy staff, and a fully
Bankrupt accounts that PRA acquires are pri-
integrated proprietary bankrupt account
marily unsecured claims included in Chapter
management system (BMS) to maximize
13 bankruptcy cases. With its recent invest-
the profitability of Bankruptcy Services. Last
ments in purchased portfolios, constantly
year, the Bankruptcy Services business con-
improving underwriting expertise, and opera-
tinued to be a strong growth engine for PRA.
tional efficiency and scale, PRA’s Bankruptcy
Bankruptcy Services’ investment in purchased
Services business is well positioned to pro-
bankrupt accounts totaled $217 million, a
duce con tinued growth in its cash collections
34% increase over the $163 million invested
and income contribution.
in 2009, and the business’s cash collections
6
Portfolio Recovery Associates, Inc. — 2010 Annual Report
7
i g S
iGs continues to be the market leader
in timely and efficient resolution of
the most challenging cases assigned
to asset locators by auto lenders and
insurance companies.
IGS is a fee-for-service business that finds,
coordinating a nationwide network of recov-
recovers and transports vehicles. Clients
ery agents, IGS efficiently performs these
include auto finance and insurance compa-
location and transportation services for cli-
nies that need to secure their collateral or
ents. IGS can customize solutions for individ-
property. Auto finance com panies must locate
ual clients to fit particular needs. The
vehicles—or the borrowers—when borrowers
business plans to further expand its client
have stopped making payments on their
base by identifying other entities that need
loans. Insurance companies need to locate
to find vehicles, and will continue to heavily
vehicles they have underwritten that are sto-
invest in people, processes and technology
len. If the vehicles are in impound yards, lien
to remain the market leader in this field.
holders need to recover them before the vehi-
Bold steps recently were taken to bolster the
cles are sold to pay fines and fees. Using the
vehicle location business and the business
latest data and call center technologies and
was renamed PRA Location Services, LLC.
8
Portfolio Recovery Associates, Inc. — 2010 Annual Report
9
g o v e r n m e n t S e r v i C e S
PrA Government services is an industry-
leading provider of revenue-enhancement
assistance to government clients across
the United states.
PRA Government Services (PRA-GS) helps
information services, and administration of
government clients manage revenue processes
permits and licenses. PRA-GS also helps cli-
that enable them to provide services to their
ents avoid indirect legacy costs, such as out-
constituents. Effective revenue management
dated software, systems and tax administrative
contributes more operating resources to
processes associated with hiring staff, to
governments, helping to avoid raising taxes.
accomplish additional revenue recovery and
PRA-GS, which has more than 760 distinct
ancillary tasks. PRA-GS has processed more
client relationships, can manage all of the
than $800 million in tax revenue annually,
client’s revenue proc esses through its com-
recovered more than $1 billion in new revenue
plete tax management program, or it can
during the past 30 years, and helped public
provide individual services on an ad hoc
sector clients avoid the loss of billions of dollars.
basis. Services include tax compliance and
PRA-GS gives government clients an inex-
auditing, identification and correction of tax
pensive way to attain best-in-class revenue
misallocations, discovery and collection of
administration without incurring the upfront
taxes due, economic development consulting,
costs and the back-end legacy liabilities.
10
Portfolio Recovery Associates, Inc. — 2010 Annual Report
11
C L a i m S C o m p e n S a t i o n B u r e a u , L L C
A pioneer in its field, claims compensation
Bureau, llc specializes in recovering funds
and processing payments due to its clients
under class action claims settlements.
A leading provider of class action claims
settlement funds. CCB then audits recoveries
services to corporate clients, and one of the
and interacts with the claims administrators
only such providers that handle both securi-
to make sure the client receives all amounts
ties and antitrust class action cases, Claims
due. CCB’s process ena bles clients to maxi-
Compen sation Bureau, LLC (CCB) has been
mize settlement recoveries, in many cases
pioneering since its start in 1996. Portfolio
by participating in settlements clients may
Recovery Associates acquired controlling
not have been aware of otherwise. CCB’s
interest in CCB in March 2010. CCB compre-
client base consists of Fortune 500 compa-
hensively monitors class action cases and,
nies and large securities trading firms such
working with the client, identifies those in
as banks, hedge funds and other financial
which the client is eligible to participate. CCB
institutions. If clients choose to monetize their
prepares the filing and submits the claim to
assets, CCB can purchase potential claims
the class action claims administrator charged
from them before the claims are filed or dis-
with processing payments and disbursing
bursements made.
12
Portfolio Recovery Associates, Inc. — 2010 Annual Report
13
F i n a n C i a L h i g h L i g h t S
(in thousands, except per share amounts)
2008
2009
2010
Revenues
Operating income
Net income
Diluted earnings per share
$ 263,275
$ 281,091
$372,706
$ 84,837
$ 80,609
$129,862
$ 45,362
$ 44,306
$ 73,871
$
2.97
$
2.87
$
4.35
Weighted-average shares (diluted)
15,292
15,454
16,885
Operating margin
Net margin
Return on average equity
Finance receivables, net
Total assets
Total debt
Stockholders’ equity
32.2%
17.2%
17.3%
28.7%
15.8%
14.3%
34.8%
19.8%
16.6%
$ 563,830
$ 693,462
$831,330
$ 657,840
$ 794,433
$995,908
$ 268,305
$ 320,799
$302,396
$ 283,863
$ 335,480
$490,516
Portfolio Purchases by Year
($ in millions)
Owned Portfolio Cash Collections
Per Purchase Period ($ in millions)
367
289
280
264
150
112
62
61
42
33
25
19
00
02
04
06
08
10
83
96
12
98
$600
500
400
300
200
100
0
400
350
300
250
200
150
100
50
0
600000
500000
400000
300000
200000
100000
0
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
a96
a97
a98
a99
a00
a01
a02
a03
a04
a05
a06
a07
a08
a09
a10
a96
a97
a98
a99
a00
a01
a02
a03
a04
a05
a06
a07
a08
a09
a10
14
Portfolio Recovery Associates, Inc. — 2010 Annual Report
a10
a09
a08
a07
a06
a05
a04
a03
a02
a01
a00
a99
a98
a97
a96
Cash Receipts
($ in millions)
Return on Equity
(in percent)
Net Finance Receivables
($ in millions)
592
19.8
17.3
16.6
14.3
433
383
298
831
693
564
410
07
08
09
10
07
08
09
10
07
08
09
10
Cash Receipts
($ in millions)
Return on Equity
(in percent)
Net Finance Receivables
($ in millions)
Net Income
($ in millions)
Annual Revenue
($ in millions)
Stockholders’ Equity
($ in millions)
74
373
491
48
45
44
281
263
221
335
284
235
07
08
09
10
07
08
09
10
07
08
09
10
Net Income
($ in millions)
Annual Revenue
($ in millions)
Shareholder’s Equity
($ in millions)
Investment Percentage by Paper Type
600
500
400
300
200
100
0
80
70
60
50
40
30
20
10
0
20
15
10
5
0
400
350
300
250
200
150
100
50
0
1000
800
600
400
200
0
500
400
300
200
100
0
100
80
60
40
20
0
Warehouse
Tertiary
Secondary
Quad/Quint
Primary
Paying
Mixed
Legal/Judgment
Fresh
BK Trustees
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
15
a96
a97
a98
a99
a00
a01
a02
a03
a04
a05
a06
a07
a08
a09
a10
100
80
60
40
20
0
g i v i n g B a C k t o t h e C o m m u n i t y
Portfolio Recovery Associates continued its long-standing
tradition of giving back to the community in 2010, and set
a Company record in the community-involvement area
as well. It was in 2010 that PRA surpassed the $1 million
mark for charitable contributions made since 2004.
“Throughout the years we have been in business, PRA
has demonstrated a commitment to helping others and
enriching the places we call home across the country,”
said Steve Fredrickson, PRA chairman, president and
chief executive officer.
PRA gives back deeply and widely to communities
through monetary giving, corporate sponsorships, a
matching gift program, in-kind donations, executive
appointments to non-profit boards and committees,
and employee volunteerism.
Last year, PRA and its employees contributed to and
participated in events that generated money for more
than 100 organizations, provided nearly 7,300 pounds
of food to food banks, and supplied 410 pints of blood.
PRA and its employees also donated more than $57,000
to the American Red Cross of Southeastern Virginia for
relief efforts in Haiti.
1
2
3
4
5
6
7
1 PRA Tennessee Regional Office employee Mallory Cole installs drywall with Jackson-Madison County Habitat for Humanity in March 2010. 2 In July 2010,
PRA Tennessee Regional Office employee Sean Printy places phone calls to collect money for the St. Jude Children’s Research Hospital. 3 PRA Norfolk Home
Office employees and families participate in the Ocean Conservancy International Coastal Cleanup in October 2010 at the Rudee Inlet near the Virginia Beach
oceanfront. 4 PRA Kansas Regional Office employees load more than 3,000 pounds of food collected for the Food Bank of Reno County in October 2010.
5 IGS employees participate in a food drive benefitting Catholic Charities of Southern Nevada in 2010, as they have done annually. 6 More than 50 PRA
Norfolk Home Office and Hampton Regional Office employees participate in the St. Mary’s Home for Disabled Children 5K Walk held October 2010 in Norfolk.
7 Government Services and PRA Birmingham Regional Office employees prepare food for a luncheon served to the First Light Women’s Shelter, a center for
homeless women and children in the Birmingham area, for Health Day in July 2010.
16
Portfolio Recovery Associates, Inc. — 2010 Annual Report
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 1 0 F i n a n c i a l i n F o r m at i o n
F O R W A R D - L O O K I N G S T A T E M E N T S
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, “Letter to 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 for 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 27, 2011. 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, 2010
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______ to __________
Commission File Number: 000-50058
Portfolio Recovery Associates, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
120 Corporate Boulevard, Norfolk, Virginia
(Address of principal executive offices)
75-3078675
(I.R.S. Employer
Identification No.)
23502
(Zip Code)
Registrant’s telephone number, including area code: (888) 772-7326
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. YES (cid:59) NO (cid:133)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d)
of the Act.
YES (cid:133) NO (cid:59)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.
YES (cid:59) NO (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-
T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
YES (cid:59) NO (cid:133)
such files).
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. (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-
accelerated filer. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company”
Large accelerated filer (cid:59) Accelerated filer (cid:133) Non-accelerated filer (cid:133)
in Rule 12b-2 of the Exchange Act.
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).
YES (cid:133) NO (cid:59)
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2010
was $1,109,804,772 based on the $66.78 closing price as reported on the NASDAQ Global Stock Market.
The number of shares of the registrant’s Common Stock outstanding as of February 18, 2011 was
17,104,930.
Documents incorporated by reference: Portions of the Proxy Statement to be filed by approximately April
20, 2011 for our 2011 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13
and 14 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.
(Removed and Reserved)
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, Executive Officers and Corporate Governance
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, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
Exhibit List
4
18
25
26
26
27
27
29
32
56
57
87
87
90
90
90
90
90
90
91
93
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 materialize or not, 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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
deterioration in the economic or inflationary environment in the United States, including the interest rate
environment, that may have an adverse effect on our collections, results of operations, revenue and
stock price or on the stability of the financial system as a whole;
our ability to purchase defaulted consumer receivables at appropriate prices and to replace our defaulted
consumer receivables with additional receivables portfolios;
our ability to obtain account documents relating to accounts that we acquire and the possibility that
account documents that we obtain could contain errors;
our ability to successfully acquire receivables of new asset types or implement a new pricing structure;
changes in the business practices of credit originators in terms of selling defaulted consumer
receivables;
changes in government regulations that affect our ability to collect sufficient amounts on our defaulted
consumer receivables;
changes in or interpretation of tax laws or adverse results of tax audits;
changes in bankruptcy or collection laws that could negatively affect our business, including by causing
an increase in certain types of bankruptcy filings involving liquidations, which may cause our
collections to decrease;
our ability to employ and retain qualified employees, especially collection personnel, and our senior
management team;
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;
the degree and nature of our competition;
our ability to retain existing clients and obtain new clients for our fee-for-service businesses;
our ability to obtain necessary account documents from sellers of defaulted consumer receivables, which
could negatively impact our collections;
our ability to comply with regulations of the collection industry;
our ability to successfully operate and/or integrate new business acquisitions;
our ability to maintain, renegotiate or replace our credit facility;
3
•
•
•
•
•
•
•
•
our ability to satisfy the restrictive covenants in our debt agreements;
the imposition of additional taxes on us;
the possibility that we could incur significant valuation allowance charges;
our ability to manage growth successfully;
the possibility that we could incur business or technology disruptions, or not adapt to technological
advances;
the possibility that we or our industry could experience negative publicity or reputational attacks;
the sufficiency of our funds generated from operations, existing cash and available borrowings to
finance our current operations; and
the risk factors listed from time to time in our filings with the Securities and Exchange Commission (the
“SEC”).
You should assume that the information appearing in this annual report is accurate only as of the date it was
issued. Our business, financial condition, results of operations and prospects may have changed since that date.
For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments
or results, you should carefully review the “ Risk Factors” 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
Our business focuses upon the detection, collection, and processing of both unpaid and normal-course
accounts receivable originally owed to credit grantors, governments, retailers and others. 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 fee-based services, including collateral-location services for
credit originators via PRA Location Services, LLC (“IGS”), revenue administration, audit and debt
discovery/recovery services for government entities through both PRA Government Services, LLC (“RDS”) and
MuniServices, LLC (“MuniServices”) and class action claims recovery service and related payment processing
via Claims Compensation Bureau, LLC (“CCB”). We believe that the strengths of our business are our
sophisticated approach to portfolio pricing, segmentation and servicing, our emphasis on developing and
retaining our collection personnel, our sophisticated processing systems and procedures and our relationships
with many of the largest consumer lenders in the United States.
4
We use the following terminology throughout our reports:
•
•
•
•
•
•
•
•
•
“Amortization” refers to cash collections applied to principal on finance receivables.
“Amortization Rate” refers to cash collections applied to principal on finance receivables as a
percentage of total cash collections.
“Buybacks” refers to purchase price refunded by the seller due to the return of non-compliant accounts.
“Cash Collections” refers to collections on our owned portfolios only, exclusive of fee income.
“Cash Receipts” refers to collections on our owned portfolios together with fee income.
“Core” accounts or portfolios refer to accounts or portfolios that that are defaulted consumer receivables
and are not in a bankrupt status upon purchase. These accounts are aggregated separately from
purchased bankruptcy accounts.
“Income Recognized on Finance Receivable, Net” refers to income derived from our owned debt
portfolios and is shown net of valuation allowance charges.
“Fee Income” refers to revenues generated from our fee-for-service subsidiaries.
“Purchased bankruptcy” accounts or portfolios refer to accounts or portfolios that are in bankruptcy
when we purchase them and as such are purchased as a pool of bankrupt accounts.
Our debt purchase business specializes 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, 2010, we acquired 2,002 portfolios, representing more than 24 million customer
accounts, with a face value of $54.8 billion for a total purchase price of $1.7 billion. 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. We have one reportable segment, receivables
management, based on similarities among the operating units including homogeneity of services, service delivery
methods and use of technology.
We have achieved strong financial results over the past ten years, with cash collections growing from $30.7
million in 2000 to $529.3 million in 2010. Total revenue has grown from $19.6 million in 2000 to $372.7 million
in 2010, a compound annual growth rate of 34%. Similarly, pro forma net income has grown from $1.6 million
in 2000 to net income of $73.9 million in 2010.
We were initially formed as Portfolio Recovery Associates, L.L.C., a Delaware limited liability company, on
March 20, 1996. 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, our current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. 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.
5
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
We Offer a Compelling Alternative to Debt Owners and Governmental Entities
We offer debt owners the ability to immediately realize value for their charged-off receivables throughout
the post charge-off collection cycle, from receivables that have only been processed internally by the debt owner
to receivables that have been subject to multiple internal and external collection efforts, whether or not subject to
bankruptcy proceedings. This flexibility helps us to meet the needs of debt owners and allows us to become a
trusted resource. Also, through our government services business, we have the ability to service state and local
government’s receivables in various ways. This includes such services as processing tax payments on behalf of
the client and extends to more complicated tax audit and discovery work, as well as additional services that fill
the needs of our clients.
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 more than our
purchase price for defaulted consumer receivables portfolios, which has enabled us to generate increasing profits
and operational cash flow. In order to price core portfolios and forecast the targeted collection results for a
portfolio, we use two separate internally 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 and account characteristic
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. Additionally, we have not sold any accounts since 2002, and
the accounts we sold were primarily in Chapter 13 bankruptcy proceedings. We stopped selling these accounts
as we began the effort to build our own bankruptcy portfolio buying group which started purchasing bankrupt
accounts in 2004. By holding and collecting the accounts over the long-term, we create batch tracking history
that we believe is unique among our peers.
Ability to Hire, Develop and Retain Productive Collectors
We place considerable focus on our ability to hire, develop, motivate 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, where we maintain
offices, 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 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. We have a comprehensive training program
for new owned portfolio collectors and provide continuing advanced training classes which are conducted in our
five 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
6
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 take data security and collection
compliance very seriously. We employ a staff of Quality Control and Compliance employees whose role it is to
monitor calls and observe collection system entries in real time. They additionally monitor and research daily
exception reports that track significant account status movements and account changes. We also employ
sophisticated call and work action recording systems which allow us to better monitor compliance and quality of
our customer contacts. 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. In addition, we do
not sell our purchased defaulted consumer receivables. Instead, we work them over the long-term enhancing our
knowledge of a pool’s long-term performance. 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 and compliant 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. Similarly, if a credit
originator sells a portfolio to a debt buyer who has a reputation for violating industry standard collecting
practices, the reputation of the credit originator can be damaged. We consistently attempt to negotiate reasonable
and mutually acceptable contract terms, resulting in a confident and expeditious closing process for both parties.
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
subsidiary of Household International, now owned by HSBC. As we have grown, the original management team
has been expanded substantially to include a group of experienced, seasoned executives, many coming from the
largest, most sophisticated lenders in the country.
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 have acquired receivables of Visa®, MasterCard® and
other 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, auto finance companies and other debt buyers. In
addition, we make periodic visits to the operating sites of debt sellers and attend numerous industry events in an
effort to develop account purchase opportunities. We also maintain active relationships with brokers of defaulted
consumer receivables.
7
The following chart categorizes our life to date owned portfolios as of December 31, 2010 into the major
asset types represented (amounts in thousands):
Asse t Type
Major Credit Cards
Consumer Finance
No. of Accounts
%
14,414
5,300
Private Label Credit Cards
3,994
Life to Date
Purchased Face
Value (1)
%
O riginal Purchase
Price (2)
%
59%
22%
17%
$ 38,953,302
71% $ 1,376,140
6,353,854
12% 117,555
5,573,155
10% 191,308
Auto Deficiency
588
2%
3,955,414
7% 43,291
80%
7%
10%
3%
Total
24,296
100% $ 54,835,725
100% $ 1,728,294
100%
(1)
The “Life to Date Purchased Face Value” represents the original face amount purchased from sellers and has
not been reduced by any adjustments including payments and buybacks.
(2) The “Original Purchase Price” represents the cash paid to sellers to acquire portfolios of defaulted consumer
receivables.
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 that we acquire 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 the 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 liquidate at lower rates. 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,
charged-off by the credit originator and 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 two to three years 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 Chapter
13 of the U.S. Bankruptcy Code and have an associated payment plan that can range from 3 to 5 years in
duration. 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, 2010, we purchase accounts at various points in the
delinquency cycle (amounts in thousands):
Account Type
No. of Accounts
%
Life to Date
Purchase d Face
Value (1)
%
O riginal Purchase
Price (2)
%
Fresh
Primary
Secondary
T ertiary
BK T rustees
Other
1,450
3,761
3,867
3,973
3,535
7,710
6%
15%
16%
16%
15%
32%
$ 4,369,125
8% $ 385,238
6,458,767
12% 310,830
6,181,804
11% 212,838
5,249,031
10% 72,609
15,686,301
29% 637,837
16,890,697
30% 108,942
22%
18%
12%
4%
37%
7%
Total
24,296
100%
$
54,835,725
100%
$
1,728,294
100%
8
(1) The “Life to Date Purchased Face Value” represents the original face amount purchased from sellers and has
not been reduced by any adjustments including payments and buybacks.
(2) The “Original Purchase Price” represents the cash paid to sellers to acquire portfolios of defaulted consumer
receivables.
We also review the geographic distribution of accounts within a portfolio because we have found that state
specific laws and rules can have an effect on the collectability of accounts located there. 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, 2010 (amounts in thousands):
Geographic Distribution
California
T exas
Florida
New York
Pennsylvania
North Carolina
Illinois
Ohio
Georgia
New Jersey
Michigan
Virginia
T ennessee
Arizona
Massachusetts
South Carolina
Other (3)
No. of Accounts
2,507
3,820
1,913
1,428
846
867
950
843
769
564
644
664
512
413
429
423
6,704
Life to Date
Purchase d Face
Value (1)
$ 7,046,011
6,331,198
5,268,681
3,368,356
2,059,659
1,944,480
1,920,035
1,902,952
1,791,183
1,548,719
1,477,883
1,177,839
1,144,523
1,134,406
1,045,218
974,174
14,700,408
%
10%
16%
8%
6%
3%
4%
4%
3%
3%
2%
3%
3%
2%
2%
2%
2%
27%
%
13%
12%
10%
6%
4%
4%
4%
3%
3%
3%
3%
2%
2%
2%
2%
2%
25%
O riginal Purchase
Price (2)
$ 210,721
159,988
155,024
98,474
66,681
59,122
65,789
71,749
68,417
49,798
53,281
41,297
42,836
33,946
32,289
28,451
490,431
%
12%
9%
9%
6%
4%
3%
4%
4%
4%
3%
3%
2%
2%
2%
2%
2%
29%
Total
24,296
100%
$
54,835,725
100%
$
1,728,294
100%
(1) The “Life to Date Purchased Face Value” represents the original face amount purchased from sellers and
has not been reduced by any adjustments including payments and buybacks.
(2) The “Original Purchase Price” 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.
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 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, generally from three to twelve months. 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 typically 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 initially distributes a computer data file containing ten to fifteen
essential data fields on each receivables account in the portfolio offered for sale. Such fields typically include
but are not limited to the customer'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
9
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 core 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, we obtain a representative file that we use to determine the price of the forward flow agreement.
On a go-forward basis, we receive the actual file to be funded, process it through our models, and compare it to
the representative file noted above to determine if the delivered file meets the expectations of the initial pricing
file. This process allows us to confirm that the accounts we are purchasing are materially consistent with the
accounts we agreed to purchase under the forward flow arrangement. In addition, when purchasing bankrupt
consumer receivables, we utilize a completely separate, 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 these 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 collectability value expressed both in dollars and liquidation percentage
and a detailed expense projection over the portfolio's estimated economic life. We use the total projected
collectability 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. In addition, we do not sell our purchased defaulted consumer
receivables. Instead, we work them over the long-term enhancing our knowledge of a pool’s long-term
performance.
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 collectability and purchase structure, is distributed to members of our
Investment Committee. The approval by the Committee sets a maximum purchase price for the portfolio.
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.
10
Owned Portfolio Collection Operations
Call Center 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 customer behavior attributes and prior
collection work activities. We use this process to focus our work effort on those customers 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 customers; however, letters and legal activity also generate meaningful levels of cash
collections.
The collectability forecast for a newly acquired portfolio will help determine our initial collection strategy.
Accounts that 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 characteristics and 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 the scanned documents relating to the account which
have been received from the seller, which can include the original account application and payment checks,
customer correspondence and other documents. A typical collector work queue may include 300 to 600 accounts
or more. The work queue is depleted and replenished automatically by our computerized work flow system.
On the initial contact call, a customer 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 customer's default in order to
better assess the customer's situation and create a plan for repayment. The collector is incentivized to have the
customer pay the full balance of the account although this occurs very infrequently. 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 customer elects to utilize an installment plan, we have developed a system which enables us to make
withdrawals from a customer's bank account, in accordance with the directions of the customer.
If a collector is unable to establish contact with a customer 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 customer, 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, a process which is significantly supplemented by a series of automated skip tracing
procedures implemented by us on a regular basis.
Legal Recovery
An important component of our collections effort involves our legal recovery 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 customer is not cooperative and for which we can establish garnishable wages or
attachable assets 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 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.
We use a combination of internal staff (attorney and support), as well as external attorneys, to pursue legal
collections under certain circumstances. Over the past several years we have focused on developing our internal
legal collection capability. We anticipate that, over time, collections from our internal legal team will surpass
those of our external collection fee collection attorneys. We have the capability in all 50 states to initiate
lawsuits in amounts up to the jurisdictional limits of the respective courts. Our legal recovery department, using
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external vendors, 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 a nationwide
collections attorney network which is responsible for the preparation and filing of judicial collection proceedings
in multiple jurisdictions, determining the suit criteria, and instituting wage garnishments to satisfy judgments.
This network consists of approximately 65 law firms who work on a contingent fee basis. Legal cash collections
generated by both our in house attorneys and outside independent contingent fee attorneys constituted
approximately 24% of our total cash collections in 2010. 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.
Bankruptcy Operations
Our bankruptcy department manages customer filings under the U.S. Bankruptcy Code on debtor accounts
derived from three sources; 1) the company’s purchased pools of charged off accounts and accounts that have
filed for bankruptcy protection after being acquired by us, 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 bankruptcy department 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 of these objections
may need to be effected by working through our network of local counsel.
Fee-for-Service Businesses
Through our subsidiaries, we provide fee-based services, including collateral location services for credit
originators via our IGS subsidiary; revenue administration, audit, and debt discovery/recovery services for
government entities through our government services business; and class action claims recovery services and
related payment processing through our CCB subsidiary. We previously offered third party contingent fee
collections services through our Anchor Receivables Management subsidiary, which ceased operations during
the second quarter of 2008.
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.
The primary source of income for RDS and MuniServices, which together comprise our government services
business, is derived from servicing taxing authorities in several different ways: processing 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
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audit, based on a contractual billing rate. The gross billing amount based on the aforementioned billing rate is a
component of the line item “Fee income” while the salary 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 “Fee income” and the expense component is included in its appropriate
expense category, generally, “Other operating expenses.”
On March 15, 2010, we acquired 62% of the membership units of CCB. CCB was founded in 1996 and is a
leading provider of class action claims settlement recovery services and related payment processing to corporate
clients. CCB’s process allows clients to maximize settlement recoveries, in many cases participating in
settlements they would otherwise not know existed. The company charges fees for its services and works with
clients to identify, prepare and submit claims to class action administrators charged with disbursing class action
settlement funds.
Competition
We face competition in both of the markets we serve — owned portfolio and fee-for-service receivables
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 receivables
management industry (owned portfolio and contingent fee) remains highly fragmented and competitive. 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. Constrained
investment capital and the need for portfolio evaluation expertise sufficient to price portfolios effectively
constitute significant barriers for entry to new purchased portfolio receivables companies.
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 efficiently and effectively collect on various asset types.
Current or new competitors that have substantially greater financial, personnel and other resources, greater
adaptability to changing market needs, longer operating histories, or more established relationships in our
industry than we currently have, could influence our ability to compete effectively.
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 provide for the protection of our sensitive data. We utilize Intel-based servers running
Microsoft Windows 2000/2003 operating systems. Our desktop PCs run the Windows XP operating system. 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 and continue to meet business objectives
in a changing environment. Our proprietary software systems are being leveraged to manage location
information and operational applications for government services, IGS and CCB.
Network Technology
To provide delivery of our applications, we utilize Intel-based workstations across our entire business
operation. 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.
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Database and Software Systems
The ability to access and utilize data is essential to us being able to operate 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 customers, 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 and financial, customer and sales data. Government Services, IGS and CCB all
maintain unique, proprietary software systems that manage the movement of data, accounts and information
throughout these business units.
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, and 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 call centers, as well as our subsidiary locations in Alabama, California and 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.
Predictive Dialer Technology
The Avaya Proactive Contact Dialer enables our collection staff to focus on certain defaulted consumer
receivables according to our specifications. Its predictive technology takes into account all collection 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.
Display Screens for Real Time Data Utilization
We utilize multiple plasma displays at most of our collection facilities 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.
Employees
As of December 31, 2010, we employed 2,473 persons on a full-time basis, including the following number
of front line operations employees by business: 1,779 working on our owned portfolios and 342 working in our
fee for service subsidiaries. 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.
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Collection Personnel
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 customers. 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 and 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 provide that employees are paid based not only on performance,
but also on consistency and compliance.
A large number of telemarketing, customer-service and reservation phone centers are located near our
Norfolk, 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 which provide us with an excellent source of employees. As a result, we
employ numerous military spouses and retirees. 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. Our
training program begins with lectures on collection techniques, local, state and federal collection laws, systems,
negotiation skills, skip tracing and telephone use. These sessions are then followed by additional weeks of
practical instruction, including 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 five training centers. Our technology
and systems allow us to monitor and record individual employees and then offer additional training in areas of
deficiency to increase productivity and ensure compliance.
Office of General Counsel
Our Office of General Counsel manages general corporate governance; litigation; insurance; 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 insurance coverage; and dispute and complaint resolution. As
a part of its compliance functions, our Office of General Counsel works with our Director of Internal Audit 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 is available at the Investor
Relations page of our website. Our Office of General Counsel also works closely with and provides guidance to
our Quality Control and Compliance department and assists with advising our staff in relevant areas including the
Fair Debt Collection Practices Act and other relevant laws and regulations. Our Office of General Counsel
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 approving all written
communications to account debtors. In addition, our Office of General Counsel 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.
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Regulation
Federal and state statutes establish specific guidelines and procedures which debt collectors must follow
when collecting customer accounts. It is our policy to comply with the provisions of all applicable federal laws
and corresponding state statutes in all of our recovery activities. 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 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
the 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.
• 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 electronic fund transfer 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 and pre-recorded messages to communicate with our consumers. This act and similar state laws place
certain restrictions on telemarketers and users of automated dialing equipment and pre-recorded messages 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.
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• 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. The U.S. Bankruptcy Code also dictates what types of
claims will or will not be allowed in a bankruptcy proceeding and how such claims may be discharged.
• Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21, 2010 the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the Dodd-Frank Act) became law. The Dodd-Frank Act
restructures the regulation and supervision of the financial services industry. Many of the provisions of the
Dodd-Frank Act have extended implementation periods and delayed effective dates and will require extensive
rulemaking by regulatory authorities. As a result, the ultimate impact of the act on our business cannot be
determined at this time.
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 and non-judicial actions may be initiated to collect
consumer accounts.
Although we are not a credit originator, some of the following laws, which apply principally to credit
originators, may occasionally affect our operations because our receivables were originated through credit
transactions:
• Truth in Lending Act;
• Fair Credit Billing Act; and
• Equal Credit Opportunity Act.
Federal laws which regulate credit originators require, among other things, that credit card issuers disclose to
consumers the interest rates, fees, grace periods and balance calculation methods associated with their credit card
accounts. Consumers are entitled under current laws to have payments and credits applied to their accounts
promptly, to receive prescribed notices and to require billing errors to be resolved promptly. Some laws prohibit
discriminatory practices in connection with the extension of credit. Federal statutes further provide that, in some
cases, consumers cannot be held liable for, or their liability is limited with respect to, charges to the credit card
account that were a result of an unauthorized use of the credit card. These laws, among others, may give
consumers a legal cause of action against us, or may limit our ability to recover amounts owing with respect to
the receivables, whether or not we committed any wrongful act or omission in connection with the account. If the
credit originator fails to comply with applicable statutes, rules and regulations, it could create claims and rights
for consumers that could reduce or eliminate their obligations to repay the account and have a possible material
adverse effect on us.
Accordingly, when we acquire defaulted consumer receivables, typically 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.
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We cannot assure you that some of our receivables were not established as a result of identity theft or
unauthorized use of a credit card. In the event that a receivable was established as a result of identity theft or
unauthorized use, 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. Typically 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.
The following are risks related to our business.
A deterioration in the economic or inflationary environment 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 or inflationary conditions in the United States. If the United
States economy deteriorates or if there is a significant rise in inflation, 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. Deteriorating economic conditions could also
adversely impact businesses and governmental entities to which we provide fee-based services, which could
reduce our fee income and cash flow and thereby 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 financial turmoil which affected the banking system and financial markets in recent years has resulted in
a tightening in credit markets. There could be a number of follow-on effects from the financial turmoil on our
business, including a decrease in the value of our financial investments, the insolvency of lending institutions,
including the lenders on our line of credit, resulting in our inability to obtain credit. 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. 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 high levels of consumer debt obligations;
• sales of defaulted receivables portfolios by debt owners; and
• competitive factors affecting potential purchasers and credit originators of receivables.
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 will be able to 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.
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Because of the length of time involved in collecting defaulted consumer receivables on acquired portfolios
and the volatility in the timing of our collections, we may not be able to identify trends and make changes in our
purchasing strategies in a timely manner.
We may not be able to continually replace our defaulted consumer receivables with additional receivables
portfolios sufficient to operate efficiently and profitably.
To operate profitably, we must 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 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
would be 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.
When documents are required to collect on an account, we rely on the seller to fulfill its contractual obligation, if
applicable, to provide them in an accurate and timely fashion. For some of the accounts that we purchase, we
may be unable to obtain these account documents, or the accounts documents that we obtain may contain errors.
Our inability to obtain these documents from the seller may negatively impact the liquidation rate on such
accounts that are subject to judicial collections, or that are located in states in which, by law, no collection
activity may proceed without account documents.
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 accurate and authentic account documents, these courts will deny our
claims. Additionally, our ability to collect non-judicially may be impacted by state laws which require that
certain types of account documentation be in our possession prior to the institution of any collection activities.
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 liquidating receivables that consumers have failed to pay
and that the credit originator has deemed uncollectible and has charged-off. The debt owners have typically
made 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.
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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.
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
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.
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.
Our ability to recover and enforce our finance 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, certain tax laws 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.
Failure to comply with government regulation of the collections industry could result in penalties, litigation,
damage to our reputation or the suspension or termination of our ability to conduct our business.
The collections industry is governed by various U.S. 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, such failure could result in the
suspension, or termination of our ability to conduct collections which would materially adversely affect our
20
results of operations, financial condition and stock price. 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.
Changes in governmental laws and regulations could increase our costs and liabilities or impact our operations.
Changes in laws and regulations or 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. For
example, we know that both federal and state governments are currently reviewing existing law related to debt
collection, in order to determine if any changes are needed. If we become subject to additional costs or liabilities
in the future resulting from changes in laws and regulations, that could adversely effect our results of operations
and financial condition.
We may make acquisitions that prove unsuccessful or strain or divert our resources.
We intend to consider acquisitions of other companies 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 operate the
acquired entity and/or 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 or may result in the incurrence of additional debt and amortization expenses of related
intangible assets, which could reduce our profitability and harm our business.
The loss of IGS, RDS, MuniServices or CCB customers could negatively affect our operations.
With respect to the acquisitions of IGS, RDS, MuniServices and CCB, a significant portion of the valuation
was attributed to existing client and customer relationships. Our customers, in general, may terminate their
relationship with us on 30-90 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.
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, 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.
Our work force could become unionized in the future, which could adversely affect the stability of our operations
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.
21
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 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 in our collector workforce,
excluding those employees that do not complete our multi-week training program was 39% in 2010. 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 may not be able to retain, renegotiate or replace our existing credit facility.
Our credit facility includes an aggregate principal amount available of $407.5 million which consists of a
$50 million fixed rate loan that matures on May 4, 2012, and a $357.5 million revolving facility that matures on
December 20, 2014. The revolving facility will be automatically increased by $50 million upon maturity and
repayment of the fixed rate loan. 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.
Changes in interest rates could increase our interest expense and reduce our net income. Our future 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.
Our revolving credit facility bears interest at a variable rate as of December 31, 2010. Increases in interest
rates could increase our interest expense which would, in turn, lower our earnings. From time to time, we may
enter into hedging transactions to mitigate our interest rate risk on a portion of our credit facility. 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. We had no interest rate
hedge contracts at December 31, 2010.
In addition, hedge accounting in accordance with FASB ASC Topic 815 “Derivatives and Hedging” 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 among the standard-
setting bodies. Our failure to comply with hedge accounting principles and interpretations in the future could
result in the loss of the applicability of hedge accounting which could adversely affect our results of operations
and financial condition.
22
Additional taxes levied on us could harm our financial results.
Our tax filings are subject to audit by tax authorities in most jurisdictions in which we do business. These
audits may result in assessments of additional taxes, adjustments to the timing of taxable income or deductions or
allocations of income among tax jurisdictions. If any such challenges are made and are not resolved in our favor,
they could have an adverse effect on our financial condition and results of operations.
We file income tax returns using the cost recovery method for tax revenue recognition as it relates to our
debt purchasing business. We were notified on June 21, 2007 that we were being examined by the Internal
Revenue Service for the 2005 calendar year. The IRS has concluded its audit and on March 19, 2009 issued
Form 4549-A, Income Tax Examination Changes, for tax years ended December 31, 2007, 2006 and 2005. The
IRS has asserted that cost recovery for tax revenue recognition does not clearly reflect taxable income and that
unused line fees paid on credit facilities should be capitalized and amortized rather than taken as a current
deduction. On April 22, 2009, we filed a formal protest of the findings contained in the examination report
prepared by the IRS. We believe we have sufficient support for the technical merits of our positions and that it is
more-likely-than-not that these positions will ultimately be sustained; therefore, a reserve for uncertain tax
positions is not necessary for these tax positions. If we are unsuccessful in our appeal, we may be required to
further our efforts in United States Tax Court. Additionally if judicial appeals prove unsuccessful, we may
ultimately be required to pay the related deferred taxes and any potential interest, possibly requiring additional
financing from other sources.
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 the incurrence of valuation allowance charges.
We utilize the interest method to determine income recognized on finance receivables under the guidance of
Financial Accounting Standards Board Accounting Standards Codification 310-30, “Loans and Debt Securities
Acquired with Deteriorated Credit Quality” (“ASC 310-30”). Under this method, static pools of receivables we
acquire are modeled upon their projected cash flows. A yield is then established which, when applied to the
unamortized purchase price of the receivables, results in the recognition of income at a constant yield relative to
the remaining balance in the pool. Each static pool is analyzed monthly to assess the actual performance
compared to that expected by the model. Significant increases in actual or projected future cash flows are
recognized prospectively, through an upward adjustment of the yield, over a pool’s estimated remaining life.
Any increase to the yield then becomes the new benchmark for future impairment testing for the pool. Under
ASC 310-30, rather than lowering the estimated yield for significant decreases in actual or projected future cash
flows, a valuation allowance charge is recorded to reduce the carrying value of a pool to maintain the then
current yield and is shown as a reduction in revenues in the consolidated income statements with a corresponding
valuation allowance offsetting finance receivables, net, on the consolidated balance sheets. As a result, if the
accuracy of the modeling process deteriorates or there is a significant decline in anticipated future cash flows, we
could incur reductions in future revenues resulting from additional valuation allowance charges, which could
reduce our profitability in a given period and negatively impact our stock price.
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.
23
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, which
could reduce our profitability or disrupt our operations and harm our business.
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.
We rely on our systems and employees, and certain failures or disruptions could adversely affect the continuity of
our business operations.
We may be subject to disruptions of our operating systems arising from events that are not entirely within
our control. Those events may include, for example, terrorist attacks, war and the outcome of war and threats of
attacks; computer viruses; electrical or telecommunications outages; natural disasters; computer hacking attacks;
malicious employee acts; other intentional destructive human acts; and disease pandemics. Any or all of these
occurrences could have a material adverse effect on our results of operations, financial condition and stock price.
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 the markets we serve 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 receivables management industry is highly fragmented and competitive, consisting of
thousands of 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.
We may not be able to manage our growth effectively.
We have expanded significantly since our formation and we intend to maintain our focus on growth.
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.
24
The market price of our shares of common stock could fluctuate significantly.
Wide fluctuations in the trading price or volume of our shares of common stock could be caused by many
factors, including factors relating to our company or to investor perception of our company (including changes in
financial estimates and recommendations by research analysts), but also factors relating to (or relating to investor
perception of) the receivables management industry or the economy in general.
Negative publicity or reputational attacks could damage our reputation.
From time to time there are negative news stories about our industry or company, especially with respect to
alleged conduct in collecting debt from customers. Negative public opinion about our alleged or actual debt
collection practices or about the debt collection industry, especially that expressed via social media such as blogs,
various websites or newsletters, generally could adversely impact our stock price and our ability to retain and
attract customers and employees.
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 to 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, our 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.
25
Item 2. Properties.
Our principal executive offices and primary operations facility are located in approximately 110,000 square
feet of leased space in three adjacent buildings in Norfolk, Virginia. One of our call centers is also located within
this space. This site can currently accommodate approximately 1,000 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. This facility contains one of our call centers.
We lease a call center facility located in approximately 32,000 square feet of space in Hampton, Virginia
which can accommodate approximately 430 employees.
We lease a property located in Las Vegas, Nevada which houses the employees of our IGS subsidiary as
well as certain owned portfolio call center operations. The leased space is approximately 30,000 square feet and
can accommodate approximately 310 employees.
We lease two facilities in Birmingham, Alabama totaling approximately 18,000 square-feet which can
accommodate approximately 170 employees. The Birmingham facility houses the employees of our RDS
subsidiary as well as PRA call center employees.
We lease a 34,000 square foot building and a nine-acre parcel of land in Jackson, Tennessee, which the
Company originally purchased in 2006 and subsequently conveyed to the Industrial Development Board of the
City of Jackson. We lease back the property from the Industrial Board under a long term Master Industrial Lease
Agreement and have the option to re-purchase the property at any time during the term of the lease. This facility
can accommodate approximately 430 employees. This facility contains one of our call centers.
For our MuniServices subsidiary, we lease approximately 26,000 square feet of office space in several
offices around the country, the majority of which are located in Fresno, California. These offices can
accommodate approximately 140 employees.
We lease a facility located in approximately 6,000 square feet of space in Houston, Texas which can
accommodate approximately 30 employees. Certain employees of our government services business are located
in this facility.
We lease approximately 10,000 square feet of space in Rosemont, Illinois which can accommodate
approximately 30 employees. Certain of our Information Technology Department employees are located in this
facility.
We lease approximately 2,500 square feet of space in Conshohocken, Pennsylvania which can accommodate
approximately 20 employees. This facility houses the employees of our CCB subsidiary.
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.
We are from time to time subject to routine legal claims and proceedings, most of which are incidental to the
ordinary course of our business. We initiate lawsuits against customers and are occasionally countersued by
them in such actions. Also, customers, either individually, as members of a class action, or through a
governmental entity on behalf of customers, may 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. From time to time, other types of
lawsuits are brought against us. While it is not expected that these or any other legal proceedings or claims in
which we are involved will, either individually or in the aggregate, have a material adverse impact on our results
of operations, liquidity or financial condition, it is possible that, due to unexpected future developments, an
unfavorable resolution of a legal proceeding or claim could occur which may be material to our results of
26
operations for a particular period. The matter described below falls outside of the normal parameters of our
routine legal proceedings.
The Attorney General for the State of Missouri filed a purported enforcement action against the Company in
2009 that seeks relief for Missouri customers that have allegedly been injured as a result of certain of our
collection practices. We have vehemently denied any wrongdoing herein and in 2010, the complaint was
dismissed with prejudice. The matter is currently on appeal, and so it is not possible at this time to estimate the
possible loss, if any.
Item 4. (Removed and Reserved).
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.
2009
Quarter ended March 31, 2009
Quarter ended June 30, 2009
Quarter ended September 30, 2009
Quarter ended December 31, 2009
2010
Quarter ended March 31, 2010
Quarter ended June 30, 2010
Quarter ended September 30, 2010
Quarter ended December 31, 2010
High
$34.89
$39.52
$49.01
$50.50
$58.12
$72.80
$71.98
$78.00
Low
$19.41
$26.11
$37.13
$40.89
$41.50
$54.34
$58.82
$62.31
As of February 3, 2011, there were 26 holders of record of the Common Stock. Based on information
provided by our transfer agent and registrar, we believe that there are 21,943 beneficial owners of the Common
Stock.
Stock Performance
The following graph compares from December 31, 2005, to December 31, 2010, the cumulative stockholder
returns assuming an initial investment of $100 on January 1, 2006 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 which includes Encore Capital Group, Inc., Asset
Acceptance Capital Corp., Asta Funding, Inc., Compucredit Holdings Corporation, FTI Consulting Inc. and
EPIQ Systems Inc. Any dividends paid during the five year period are assumed to be reinvested.
27
$180
$160
$140
$120
S
R
A
L
L
O
D
$100
$80
$60
$40
2005
COMPARISON OF CUMULATIVE TOTAL RETURN
Portfolio Recovery Associates, Inc.
NASDAQ Composite Index
NASDAQ U.S. Only
Custom Peer Group
2006
2007
2008
2009
2010
ASSUMES $100 INVESTED ON JAN. 01, 2006
ASSUMES DIVIDEND REINVESTED
As of December 31,
PRAA
NASDAQ Global Market Composite Index
NASDAQ Market Index (U.S.)
Peer Group Index
12/31/2005 12/31/2006 12/31/2007
$87
$123
$122
$95
$100
$100
$100
$100
$101
$110
$113
$96
12/31/2008 12/31/2009 12/31/2010
$165
$126
$121
$66
$98
$107
$104
$70
$74
$71
$72
$64
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.
Dividend Policy
Our board of directors sets our dividend policy. We do not currently pay regular dividends on our Common
Stock and did not pay dividends in 2010 or 2009; however, our board of directors may determine in the future to
declare or pay dividends on our Common Stock. Under the terms of our credit facility, cash dividends may not
exceed $20 million in any fiscal year. Any future determination as to the declaration and payment of dividends
will be at the discretion of our board of directors and will depend on then existing conditions, including our
financial condition, results of operations, contractual restrictions, capital requirements, business prospects and
other factors that our board of directors may consider relevant.
28
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the audited consolidated financial
statements.
INCO ME STATEMENT DATA:
(In thousands, except per share data)
Revenues:
Income recognized on finance receivables, net
Fee income
T otal revenues
Operating expenses:
Compensation and employee services
Legal and agency fees and costs
Outside fees and services
Communications
Rent and occupancy
Depreciation and amortization
Other operating expenses
T otal operating expenses
Income from operations
Interest income
Interest expense
Income before income taxes
Provision for income taxes
Net income
2010
2009
2008
2007
2006
Ye ars Ende d De ce mbe r 31,
$
309,680
63,026
372,706
$
215,612
65,479
281,091
$
206,486
56,789
263,275
$
184,705
36,043
220,748
$
163,357
24,965
188,322
124,077
60,941
12,554
17,226
5,313
12,437
10,296
242,844
129,862
65
(9,052)
120,875
47,004
106,388
46,978
9,570
14,773
4,761
9,213
8,799
200,482
80,609
3
(7,909)
72,703
28,397
88,073
52,869
8,883
10,304
3,908
7,424
6,977
178,438
84,837
60
(11,151)
73,746
28,384
69,022
40,187
7,287
8,531
3,105
5,517
5,915
139,564
81,184
419
(3,704)
77,899
29,658
58,142
33,318
6,821
5,876
2,276
5,131
4,758
116,322
72,000
584
(378)
72,206
27,716
$
73,871
$
44,306
$
45,362
$
48,241
$
44,490
Less net income attributable to redeemable noncontrolling interest
(417)
-
-
-
-
Net income attributable to Portfolio Recovery Associates, Inc.
$
73,454
$
44,306
$
45,362
$
48,241
$
44,490
Net income per share attributable to Portfolio Recovery Associates, Inc:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
O PERATING AND O THER FINANCIAL DATA:
(Dollars in thousands)
Cash collections and fee income (1)
Operating expenses to cash collections and fee income
Return on equity (2)
Acquisitions of finance receivables, at cost (3)
Acquisitions of finance receivables, at face value
Employees at period end:
T otal employees
Ratio of collection personnel to total employees (4)
$
$
4.37
4.35
$
$
2.87
2.87
$
$
2.98
2.97
$
$
3.08
3.06
$
$
2.80
2.77
16,820
16,885
15,420
15,455
15,229
15,292
15,646
15,779
15,911
16,082
$
592,367
41%
$
433,482
46%
$
383,488
47%
$
298,209
47%
$
261,357
45%
17%
14%
17%
20%
20%
$
$
367,443
6,804,952
$
$
288,889
8,109,694
$
$
280,336
4,588,234
$
$
263,809
11,113,830
$
$
112,406
7,788,158
2,473
86%
2,213
86%
2,032
87%
1,677
88%
1,291
88%
(1) Includes both cash collected on finance receivables and fee income 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 buybacks.
(4) Includes all collectors and all first-line collection supervisors at December 31.
Below are listed certain key balance sheet data for the periods presented:
(Dollars in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents
Finance receivables, net
T otal assets
Long-term debt
T otal debt, including obligations under capital lease and line of credit
T otal stockholders' equity
2010
As of De ce mber 31,
2008
2009
2007
2006
$
41,094
831,330
995,908
2,396
302,396
490,516
$
20,265
693,462
794,433
1,499
320,799
335,480
$
13,901
563,830
657,840
-
$
16,730
410,297
476,307
-
268,305
283,863
168,103
235,280
$
25,101
226,447
293,378
690
932
247,278
29
Below are listed the quarterly consolidated income statements for the years ended December 31, 2010 and 2009:
(In thousands, except per share data)
INC O ME STATEMENT DATA:
Revenues:
Income recognized on finance receivables, net
Fee income
T otal revenues
Operating expenses:
Compensation and employee services
Legal and agency fees and costs
Outside fees and services
Communications
Rent and occupancy
Depreciation and amortization
Other operating expenses
T otal operating expenses
Income from operations
Interest income
Interest expense
Income before income taxes
Provision for income taxes
Net income
De c. 31,
2010
Se pt. 30,
2010
June 30, Mar. 31,
2010
2010
Dec. 31,
2009
Sept. 30,
2009
June 30, Mar. 31,
2009
2009
For the Q uarter Ende d
$
84,783
15,972
100,755
$
80,026
15,518
95,544
$
76,920
16,109
93,029
$
67,951
15,427
83,378
$
55,962
17,254
73,216
$
54,336
14,229
68,565
$
54,038
17,069
71,107
$
51,276
16,927
68,203
32,350
17,367
3,100
4,066
1,402
3,387
2,808
64,480
36,275
29
(2,517)
33,787
13,156
31,213
16,748
3,470
4,000
1,362
3,294
2,634
62,721
32,823
-
(2,178)
30,645
11,888
30,872
13,488
3,155
4,102
1,297
3,206
2,580
58,700
34,329
-
(2,177)
32,152
12,474
29,642
13,338
2,829
5,058
1,252
2,550
2,274
56,943
26,435
36
(2,180)
24,291
9,486
26,447
12,518
2,716
3,616
1,245
2,339
2,234
51,115
22,101
-
(2,018)
20,083
7,667
26,844
11,296
2,284
3,472
1,270
2,269
2,341
49,776
18,789
-
(1,964)
16,825
6,729
26,434
11,047
2,459
4,213
1,163
2,330
2,236
49,882
21,225
-
(1,949)
19,276
7,554
26,663
12,118
2,111
3,472
1,082
2,275
1,988
49,709
18,494
3
(1,978)
16,519
6,447
$
20,631
$
18,757
$
19,678
$
14,805
$
12,416
$
10,096
$
11,722
$
10,072
Less net income/(loss) attributable to redeemable noncontrolling interest
(14)
276
150
5
-
-
-
-
Net income attributable to Portfolio Recovery Associates, Inc.
$
20,645
$
18,481
$
19,528
$
14,800
$
12,416
$
10,096
$
11,722
$
10,072
Net income per share attributable to Portfolio Recovery Associates, Inc:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
$
$
1.21
1.20
$
$
1.08
1.08
$
$
1.15
1.14
$
$
0.91
0.91
$
$
0.80
0.80
$
$
0.65
0.65
$
$
0.76
0.76
$
$
0.66
0.66
17,063
17,165
17,058
17,093
16,970
17,080
16,191
16,203
15,505
15,531
15,466
15,502
15,377
15,415
15,334
15,367
Below are listed the quarterly consolidated balance sheets for the years ended December 31, 2010 and 2009:
Dec. 31,
2010
Sept. 30,
2010
June 30,
2010
Mar. 31,
2010
Dec. 31,
2009
Sept. 30,
2009
June 30,
2009
Mar. 31,
2009
Q uarter Ende d
(Dollars in thousands)
BALANCE SHEET DATA:
Assets
Cash and cash equivalents
Finance receivables, net
Accounts receivable, net
Income taxes receivable
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
T otal assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
Accrued expenses
Accrued payroll and bonuses
Deferred tax liability
Line of credit
Long-term debt
Derivative instrument
T otal liabilities
$
$
$
$
$
$
$
$
41,094
831,330
8,932
2,363
24,270
61,678
18,466
7,775
995,908
20,297
807,239
7,789
2,603
22,794
61,665
19,945
5,405
947,737
18,250
775,606
8,159
1,877
23,230
61,665
21,425
4,809
915,021
23,006
742,484
8,752
1,439
21,925
49,053
30,018
5,773
882,450
20,265
693,462
9,169
4,460
21,864
29,299
10,756
5,158
794,433
19,874
660,879
6,909
5,893
22,093
29,299
11,425
3,310
759,682
15,661
624,592
7,315
4,213
22,112
28,815
12,093
4,037
718,838
$
$
$
$
$
$
$
$
16,549
576,600
8,617
3,289
23,106
27,646
12,761
3,755
672,323
$
3,227
4,904
15,445
164,971
300,000
2,396
-
490,943
$
5,739
6,922
10,447
151,638
288,500
998
537
464,781
$
5,445
6,227
9,124
139,111
289,500
1,167
640
451,214
$
5,079
6,264
8,298
126,234
296,300
1,334
809
444,318
$
4,108
4,506
11,633
117,206
319,300
1,499
701
458,953
$
3,957
3,463
11,294
110,333
306,300
1,663
566
437,576
$
3,281
4,797
7,783
102,001
289,800
1,824
215
409,701
$
3,622
3,544
6,696
94,118
266,300
1,983
362
376,625
Redeemable noncontrolling interest
14,449
14,531
15,080
15,328
-
-
-
-
Stockholders' equity
Common stock
Additional paid in capital
Retained earnings
Accumulated other comprehensive (loss),
net of taxes
T otal stockholders' equity
T otal liabilities and stockholders' equity
171
163,538
326,807
-
$
490,516
995,908
171
162,418
306,164
170
161,267
287,681
170
154,975
268,153
155
82,400
253,353
155
81,358
240,939
154
78,274
230,841
153
76,647
219,119
(328)
468,425
947,737
$
(391)
448,727
915,021
$
(494)
422,804
882,450
$
(428)
335,480
794,433
$
(346)
322,106
759,682
$
(132)
309,137
718,838
$
(221)
295,698
672,323
$
30
Below are certain key financial data and ratios for the years ended December 31, 2010, 2009 and 2008:
FINANCIAL HIGHLIGHTS
Years Ended
December 31,
2009
2008
$
215,612
65,479
281,091
200,482
80,609
7,906
44,306
44,306
$
206,486
56,789
263,275
178,438
84,837
11,091
45,362
45,362
$
20,265
693,462
40,055
794,433
319,300
458,953
335,480
$
13,901
563,830
40,975
657,840
268,300
373,977
283,863
$
368,003
124,756
152,391
$
326,699
100,823
120,213
$
41.4%
44.7%
893,716
521,730
1,415,446
$
36.8%
39.4%
848,601
266,964
1,115,565
$
$
$
$
51,255
7.39%
27,635
11.36%
7.51%
23,620
4.19%
19,390
8.58%
5.94%
149,998
3,424,313
217,445
3,380,639
367,442
6,804,952
305
$
126,334
4,435,068
162,470
3,674,626
288,804
8,109,694
407
167,318
3,467,949
113,018
1,120,285
280,336
4,588,234
260
$
$
2.87
15,454
44.85
2.97
15,292
33.84
$
$
14.16%
15.76%
28.68%
46.25%
95.62%
17.27%
17.23%
32.22%
46.53%
94.52%
$
$
$
145
113
87
1,325
2,213
433,483
45,700
$
$
$
$
131
110
75
1,249
2,032
383,488
96,700
$
41.5%
44.8%
974,108
749,410
1,723,518
309,680
63,026
372,706
242,844
129,862
8,987
73,871
73,454
41,094
831,330
80,144
995,908
300,000
490,943
490,516
529,342
194,509
219,662
2010
$
$
$
$
(dollars in thousands)
EARNINGS
Income recognized on finance receivables, net
Fee income
Total revenues
Operating expenses
Income from operations
Net interest expense
Net income
Net income attributable to Portfolio Recovery Associates, Inc.
PERIOD-END BALANCES
Cash and cash equivalents
Finance receivables, net
Goodwill and intangible assets, net
Total assets
Line of credit
Total liabilities
Total equity
FINANCE RECEIVABLE COLLECTIONS
Cash collections
Principal amortization without allowance charges
Principal amortization with allowance charges
Principal amortization w/ allowance charges as % of cash collections:
Including fully amortized pools
Excluding fully amortized pools
Estimated remaining collections - core
Estimated remaining collections - bankruptcy
Estimated remaining collections - total
ALLOWANCE FOR FINANCE RECEIVABLES
Balance at period-end
Balance at period-end to net finance receivables
Allowance charge
Allowance charge to finance receivable income
Allowance charge to cash collections
PURCHASES OF FINANCE RECEIVABLES
Purchase price - core
Face value - core
Purchase price - bankruptcy
Face value - bankruptcy
Purchase price - total
Face value - total
Number of portfolios - total
PER SHARE DATA
Net income per common share - diluted
Weighted average number of shares outstanding - diluted
Closing market price
RATIOS AND OTHER DATA
Return on average equity (1)
Return on revenue (2)
Operating margin (3)
Operating expense to cash receipts (4)
Debt to equity (5)
Cash collections per collector hour paid:
Total
Excluding bankruptcy collections
Excluding bankruptcy and external legal collections
Number of collectors
Number of employees
Cash receipts (4)
Line of credit - unused portion at period end
(1) Calculated as annualized net income divided by average equity for the period
(2) Calculated as net income divided by total revenues
(3) Calculated as income from operations divided by total revenues
(4) "Cash receipts" is defined as cash collections plus fee income
(5) For purposes of this ratio, "debt" equals the line of credit balance plus long-term debt
$
$
$
$
$
$
$
$
$
4.35
16,885
75.20
194
129
100
1,472
2,473
592,367
107,500
76,407
9.19%
25,152
7.51%
4.75%
16.56%
19.82%
34.84%
41.00%
61.65%
31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Overview
Portfolio Recovery Associates is a diversified financial and business services company. We are a leading
company in the business of purchasing and collecting defaulted consumer receivables. Those finance receivables
fall into two general categories: purchased bankruptcy portfolios and core portfolios. Revenue for this part of
our business consists of cash collections received less amounts applied to principal on the Company’s owned
debt portfolios.
Through our subsidiaries, we provide a broad range of fee-based business services. Those services include
collateral location services to credit originators through our IGS subsidiary; revenue administration, discovery,
and compliance services to governmental entities through RDS and MuniServices, our government services
subsidiaries; and class action claims recovery services through our CCB subsidiary.
Portfolio Recovery Associates is headquartered in Norfolk, Virginia, and employs approximately 2,500 team
members. The shares of Portfolio Recovery Associates are traded on the NASDAQ Global Select Market under
the symbol “PRAA.”
Earnings Summary
For the year ended December 31, 2010, net income attributable to Portfolio Recovery Associates, Inc. was
$73.5 million, or $4.35 per diluted share, compared with $44.3 million, or $2.87 per diluted share, for the year
ended December 31, 2009. Total revenue was $372.7 for the year ended December, 31, 2010, up 32.6% from the
same year ago period. Revenue during the year ended December 31, 2010 consisted of $309.7 million in income
recognized on finance receivables, net of allowance charges, and $63.0 million in fee income. Income
recognized on finance receivables, net of allowance charges, increased $94.1 million, or 43.6%, over the same
period in 2009, primarily as a result of a significant increase in cash collections. Cash collections were $529.3
million during the year ended December 31, 2010, up 43.8% over $368.0 million in the same year ago period.
During the year ended December 31, 2010, the Company recorded $25.2 million in net allowance charges,
compared with $27.6 million in the comparable year ago period. The Company’s performance has been
positively impacted by significant increases in portfolio acquisitions and by operational efficiencies surrounding
the cash collections process, including the continued refinement of automated dialer technology and account
scoring analytics. Additionally, the Company has continued to develop its internal legal collection staff
resources, which enables us to place accounts into that channel that otherwise would have been prohibitively
expensive for legal action.
Fee income decreased from $65.5 million for the year ended December 31, 2009 to $63.0 million in the
same period of 2010, mainly as a result of lower revenues generated from our existing fee for service businesses
due primarily to the adverse impact of the economic slowdown on general business growth and governmental tax
revenues. This was offset by an increase in revenue generated as a result of the acquisition of a majority interest
of CCB in March 2010.
Operating expenses were $242.8 million for the year ended December, 31, 2010, up 21.1% over the same
period in 2009, due primarily to increased compensation expense and legal costs. Compensation expense
increased primarily as a result of larger staff sizes. Legal and agency fees and costs increased from $47.0 million
for the year ended December 31, 2009 to $60.9 million for the year ended December, 31, 2010. This increase
was the result of several factors, including growth in the size of our owned debt portfolios, expansion of our
internal legal collection resources, and refinement of our internal scoring methodology that expanded our account
selections for legal action.
Results of Operations
Our business revolves around the detection, collection and processing of both unpaid and normal-course
receivables originally owed to credit grantors, governments, retailers and others. The results of operations
include the financial results of Portfolio Recovery Associates, Inc. and all of our subsidiaries, all of which are in
the receivables management business. Under the guidance of the FASB ASC Topic 280 “Segment Reporting”
32
(“ASC 280”), we have determined that we have several operating segments that meet the aggregation criteria of
ASC 280, and therefore, we have one reportable segment, receivables management, based on similarities among
the operating units including homogeneity of services, service delivery methods and use of technology.
The following table sets forth certain operating data in dollars and as a percentage of total revenues for the
years ended December 31, 2010, 2009 and 2008:
(Dollars in thousands)
Revenues:
Income recognized on finance receivables, net
Fee income
Total revenues
Operating expenses:
Compensation and employee services
Legal and agency fees and costs
Outside fees and services
Communications
Rent and occupancy
Depreciation and amortization
Other operating expenses
Total operating expenses
Income from operations
Interest income
Interest expense
Income before income taxes
Provision for income taxes
Net income
2010
2009
2008
$
309,680
63,026
372,706
124,077
60,941
12,554
17,226
5,313
12,437
10,296
242,844
129,862
65
(9,052)
120,875
47,004
73,871
$
83.1%
16.9
100.0
33.3
16.4
3.4
4.6
1.4
3.3
2.8
65.2
34.8
0.0
(2.4)
32.4
12.6
19.8%
$
215,612
65,479
281,091
106,388
46,978
9,570
14,773
4,761
9,213
8,799
200,482
80,609
3
(7,909)
72,703
28,397
44,306
$
76.7%
23.3
100.0
37.8
16.7
3.4
5.3
1.7
3.3
3.1
71.3
28.7
0.0
(2.8)
25.9
10.1
15.8%
$
206,486
56,789
263,275
88,073
52,869
8,883
10,304
3,908
7,424
6,977
178,438
84,837
60
(11,151)
73,746
28,384
45,362
$
78.4%
21.6
100.0
33.5
20.1
3.4
3.9
1.4
2.8
2.7
67.8
32.2
0.0
(4.2)
28.0
10.8
17.2%
Less net income attributable to redeemable noncontrolling interest
(417)
(0.1)
-
0.0
-
0.0
Net income attributable to Portfolio Recovery Associates, Inc.
$
73,454
19.7%
$
44,306
15.8%
$
45,362
17.2%
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Revenues
Total revenues were $372.7 million for the year ended December 31, 2010, an increase of $91.6 million or
32.6% compared to total revenues of $281.1 million for the year ended December 31, 2009.
Income Recognized on Finance Receivables, net
Income recognized on finance receivables, net was $309.7 million for the year ended December 31, 2010, an
increase of $94.1 million or 43.6% compared to income recognized on finance receivables, net of $215.6 million
for the year ended December 31, 2009. The increase was primarily due to an increase in our cash collections on
our owned finance receivables to $529.3 million for the year ended December 31, 2010 compared to $368.0
million for the year ended December 31, 2009, an increase of $161.3 million or 43.8%. Our finance receivables
amortization rate, including allowance charges, was 41.5% for the year ended December 31, 2010 compared to
41.4% for the year ended December 31, 2009. During the year ended December 31, 2010, we acquired finance
receivables portfolios with an aggregate face value amount of $6.8 billion at a cost of $367.4 million. During the
year ended December 31, 2009, we acquired finance receivable portfolios with an aggregate face value of $8.1
billion at a cost of $288.9 million. In any period, we acquire defaulted consumer receivables that can vary
dramatically in their age, type and ultimate collectability. 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 and for similar time frames, 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 relevant to estimated profitability of a period’s buying.
Income recognized on finance receivables, net is shown net of changes in valuation allowances recognized
under FASB ASC Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC
310-30”), which requires that a valuation allowance be recorded for significant decreases in expected cash flows
33
or change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of
accounts. As such, allowance charges are netted against income recognized on finance receivables in the
Consolidated Income Statements and are included in collections applied to principal on finance receivables in the
Consolidated Statements of Cash Flows. For the year ended December 31, 2010, we recorded net allowance
charges of $25.2 million, the majority of which related to non-bankruptcy portfolios acquired in 2005 through
2007. For the year ended December 31, 2009, we recorded net allowance charges of $27.6 million, the majority
of which related to non-bankruptcy portfolios acquired in 2005 through 2008. In any given period, we may be
required to record valuation allowances due to pools of receivables underperforming our expectations. Factors
that may contribute to the recording of valuation allowances may include both internal as well as external factors.
External factors which may have an impact on the collectability, and subsequently to the overall profitability of
purchased pools of defaulted consumer receivables include: overall market pricing for pools of consumer
receivables (which is driven by both supply and demand), new laws or regulations relating to collections, new
interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which
may have an impact on the collectability, and subsequently the overall profitability of purchased pools of
defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and
modeling estimates, non-optimal operational activities (which relates to the collection and movement of accounts
on both our collection floor and external channels), as well as decreases in productivity related to turnover and
tenure of our collection staff. Due to the extraordinary deterioration of the U.S. economy beginning in the fourth
quarter of 2008, our collection efforts continued to be more challenging in the year ended December 31, 2010,
which exacerbated the typical effects of these external and internal factors for that period. These combined
factors have contributed to the valuation allowances that we recorded during the year ended December 31, 2010.
Fee Income
Fee income was $63.0 million for the year ended December 31, 2010, a decrease of $2.5 million or 3.8%
compared to fee income of $65.5 million for the year ended December 31, 2009. Fee income declined as a result
of a decrease in revenue generated by our MuniServices government processing and collection business and our
IGS fee-for-service business, partially offset by an increase in revenue generated by our RDS government
processing and collection business as well as revenue generated through the acquisition of a 62% controlling
interest in CCB on March 15, 2010. IGS revenues were negatively affected by reduced levels of automotive
financings. MuniServices revenues were negatively impacted by declines in sales and use tax volumes in
California and by reductions in municipal budgets.
Operating Expenses
Total operating expenses were $242.8 million for the year ended December 31, 2010, an increase of $42.3
million or 21.1% compared to total operating expenses of $200.5 million for the year ended December 31, 2009.
Total operating expenses were 41.0% of cash receipts for the year ended December 31, 2010 compared with
46.3% for the same period in 2009.
Compensation and Employee Services
Compensation and employee services expenses were $124.1 million for the year ended December 31, 2010,
an increase of $17.7 million or 16.6% compared to compensation and employee services expenses of $106.4
million for the year ended December 31, 2009. This increase is mainly due to an overall increase in our owned
portfolio collection staff. Compensation and employee services expenses increased as total employees grew
11.7% to 2,473 as of December 31, 2010 from 2,213 as of December 31, 2009. Additionally, existing employees
received normal salary increases. Compensation and employee services expenses as a percentage of cash receipts
decreased to 21.0% for the year ended December 31, 2010 from 24.5% of cash receipts for the same period in
2009.
Legal and Agency Fees and Costs
Legal and agency fees and costs were $60.9 million for the year ended December 31, 2010, an increase of
$13.9 million or 29.6% compared to legal and agency fees and costs of $47.0 million for the year ended
December 31, 2009. Of the $13.9 million increase, $17.6 million was attributable to an increase in legal fees and
costs incurred resulting from accounts referred to both our in house attorneys and outside independent contingent
fee attorneys. This increase was largely due to the refinement of our internal scoring methodology that expanded
34
our account selections for legal action. Growth in the size of our owned debt portfolios and expansion of our
internal legal collection resources were also contributing factors. The increase in legal fees and costs was
partially offset by a $3.7 million decline in agency fees due primarily to reduced business activity associated with
IGS. Total legal fees paid to independent contingent fee attorneys for the year ended December 31, 2010 were
22.3% of external legal cash collections compared to 23.0% for the year ended December 31, 2009. These legal
fees represent the contingent fees for the cash collections generated by our independent third party attorney
network. Total legal costs paid to bring suit on our legal accounts totaled $31.3 million for the year ended
December 31, 2010 up from $11.5 million for the year ended December 31, 2009. As a percentage of total legal
collections, these legal costs were 24.9% and 18.1% for the years ended December 31, 2010 and 2009,
respectively.
Outside Fees and Services
Outside fees and services expenses were $12.6 million for the year ended December 31, 2010, an increase of
$3.0 million or 31.3% compared to outside legal and other fees and services expenses of $9.6 million for the year
ended December 31, 2009. Of the $3.0 million increase, $1.3 million was attributable to an increase in our
corporate legal expenses while the remaining $1.7 million increase was due to increases in other outside fees and
services and accounting fees.
Communications
Communications expenses were $17.2 million for the year ended December 31, 2010, an increase of $2.4
million or 16.2% compared to communications expenses of $14.8 million for the year ended December 31, 2009.
The increase was mainly due to a growth in mailings due to an increase in special letter campaigns. The
remaining increase was attributable to higher telephone expenses driven by a greater number of finance
receivables to work, as well as a significant expansion of our dialer capacity and related calls that are generated
by the dialer. Mailings were responsible for 87.5% or $2.1 million of this increase, while the remaining 12.5% or
$0.3 million was attributable to increased call volumes.
Rent and Occupancy
Rent and occupancy expenses were $5.3 million for the year ended December 31, 2010, an increase of $0.5
million or 10.4% compared to rent and occupancy expenses of $4.8 million for the year ended December 31,
2009. The increase was due to the expansion of our Hampton, Virginia call center, the additional space resulting
from our acquisition of a 62% controlling interest in CCB on March 15, 2010, the relocation of our IGS business
to another location during 2009 and other renewals and expansions, as well as increased utility charges.
Depreciation and Amortization
Depreciation and amortization expenses were $12.4 million for the year ended December 31, 2010, an
increase of $3.2 million or 34.8% compared to depreciation and amortization expenses of $9.2 million for the
year ended December 31, 2009. The increase is mainly due to additional expenses incurred related to the
depreciation and amortization of the tangible and intangible assets acquired in the acquisition of a 62%
controlling interest in CCB on March 15, 2010. Additional increases are the result of continued capital
expenditures on equipment, software and computers related to our growth and systems upgrades.
Other Operating Expenses
Other operating expenses were $10.3 million for the year ended December 31, 2010, an increase of $1.5
million or 17.0% compared to other operating expenses of $8.8 million for the year ended December 31, 2009.
The increase was mainly due to increases in various expenses related to general growth of the Company. No
individual item represents a significant portion of the overall increase.
Interest Income
Interest income was $65,000 for the year ended December 31, 2010, an increase of $61,000 compared to
interest income of $3,000 for the year ended December 31, 2009. This increase is the result of interest earned
and a refund received on the overpayment of federal and state income taxes.
35
Interest Expense
Interest expense was $9.1 million for the year ended December 31, 2010, an increase of $1.2 million or
15.2% compared to interest expense of $7.9 million for the year ended December 31, 2009. The increase was
mainly due to an increase in our average borrowings for the year ended December 31, 2010 compared to the
same period in 2009, and the termination of our interest rate swap during the fourth quarter of 2010, both of
which were partially offset by a decrease in our weighted average variable interest rate which decreased to 2.46%
for the year ended December 31, 2010 as compared to 2.62% for the year ended December 31, 2009.
Provision for Income Taxes
Income tax expense was $47.0 million for the year ended December 31, 2010, an increase of $18.6 million
or 65.5% compared to income tax expense of $28.4 million for the year ended December 31, 2009. The increase
is mainly due to an increase of 66.3% in income before taxes for the year ended December 31, 2010 when
compared to the same period in 2009. This was offset by a slight decrease in the effective tax rate of 38.9% for
the year ended December 31, 2010 compared to 39.1% for the same period in 2009.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues
Total revenues were $281.1 million for the year ended December 31, 2009, an increase of $17.8 million or
6.8% compared to total revenues of $263.3 million for the year ended December 31, 2008.
Income Recognized on Finance Receivables, net
Income recognized on finance receivables, net was $215.6 million for the year ended December 31, 2009, an
increase of $9.1 million or 4.4% compared to income recognized on finance receivables, net of $206.5 million
for the year ended December 31, 2008. The increase was primarily due to an increase in cash collections on our
owned finance receivables to $368.0 million for the year ended December 31, 2009 compared to $326.7 million
for the year ended December 31, 2008, an increase of $41.3 million or 12.6%. This was partially offset by an
increase in our finance receivables amortization rate, including the allowance charge, to 41.4% for the year ended
December 31, 2009 compared to 36.8% for the year ended December 31, 2008. During the year ended
December 31, 2009, we acquired finance receivables portfolios with an aggregate face value amount of $8.1
billion at a cost of $288.9 million. During the year ended December 31, 2008, we acquired finance receivable
portfolios with an aggregate face value of $4.6 billion at a cost of $280.3 million. In any period, we acquire
finance 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. 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 and for
similar time frames, 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 relevant to estimated profitability of a period’s
buying.
Income recognized on finance receivables, net is shown net of changes in valuation allowances recognized
under ASC 310-30, which requires that a valuation allowance be recorded for significant 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. As such, allowance charges are netted against income recognized on finance receivables in the
Consolidated Income Statements and are included in collections applied to principal on finance receivables in the
Consolidated Statements of Cash Flows. For the year ended December 31, 2009, we recorded net allowance
charges of $27,635,000. For the year ended December 31, 2008, we recorded net allowance charges of
$19,390,000. In any given period, we may be required to record valuation allowances due to pools of receivables
underperforming our expectations. Factors that may contribute to the recording of valuation allowances may
include both internal as well as external factors. External factors which may have an impact on the collectability,
and subsequently to the overall profitability of purchased pools of defaulted consumer receivables would include:
overall market pricing for pools of consumer receivables (which is driven by both supply and demand), new laws
or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition
36
of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall
profitability of purchased pools of defaulted consumer receivables would include: necessary revisions to initial
and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relates to the
collection and movement of accounts on both our collection floor and external channels), as well as decreases in
productivity related to turnover and tenure of our collection staff. Due to the extraordinary deterioration of the
U.S. economy beginning in the fourth quarter of 2008, our collection efforts became more challenging in the year
ended December 31, 2009, which exacerbated the typical effects of these external and internal factors for that
period. These combined factors have contributed to the valuation allowances that we recorded during the year
ended December 31, 2009.
Fee Income
Fee income was $65.5 million for the year ended December 31, 2009, an increase of $8.7 million or 15.3%
compared to fee income of $56.8 million for the year ended December 31, 2008. Fee income grew as a result of
the acquisitions of MuniServices on July 1, 2008 and Broussard Partners and Associates, Inc. on August 1,
2008, as well as an increase in revenue generated by our RDS government processing and collection business,
partially offset by a decrease in revenue generated by our IGS fee-for-service business and our Anchor
contingent fee business, which ceased operations in the second quarter of 2008.
Operating Expenses
Total operating expenses were $200.5 million for the year ended December 31, 2009, an increase of $22.1
million or 12.4% compared to total operating expenses of $178.4 million for the year ended December 31, 2008.
Total operating expenses were 46.3% of cash receipts for the year ended December 31, 2009 compared with
46.5% for the same period in 2008.
Compensation and Employee Services
Compensation and employee services expenses were $106.4 million for the year ended December 31, 2009,
an increase of $18.3 million or 20.8% compared to compensation and employee services expenses of $88.1
million for the year ended December 31, 2008. This increase is mainly due to the acquisition of MuniServices on
July 1, 2008, as well as an overall increase in our owned portfolio collection staff. In addition, in conjunction
with the renewal of their employment agreements, our Named Executive Officers and other senior executives
were awarded nonvested shares which vested on January 1, 2009. As a result of the vesting of these shares, we
recorded stock-based compensation expense in connection with these shares, in the amount of approximately
$1.4 million during the first quarter of 2009. Also, we reversed $1.2 million of estimated share-based
compensation costs in the third quarter of 2008, that had been accrued in 2007 and 2008 relating to the 2007
Long Term Incentive Program. Compensation and employee services expenses increased as total employees
grew 8.9% to 2,213 as of December 31, 2009 from 2,032 as of December 31, 2008. Additionally, existing
employees received normal salary increases. Compensation and employee services expenses as a percentage of
cash receipts increased to 24.5% for the year ended December 31, 2009 from 23.0% of cash receipts for the same
period in 2008.
Legal and Agency Fees and Costs
Legal and agency fees and costs expenses were $47.0 million for the year ended December 31, 2009, a
decrease of $5.9 million or 11.2% compared to legal and agency fees and costs of $52.9 million for the year
ended December 31, 2008. Of the $5.9 million decrease, $5.5 million was attributable to a decrease in legal fees
and costs incurred resulting from accounts referred to both our in house attorneys and outside third-party
contingent fee attorneys. The remaining $0.4 million decrease was attributable to a decrease in agency fees
mainly incurred by our IGS subsidiary. Total outside legal expenses paid to third-party contingent fee attorneys
for the year ended December 31, 2009 were 42.3% of legal cash collections generated by contingent fee
attorneys compared to 39.4% for the year ended December 31, 2008. Outside legal fees and costs paid to
independent contingent fee attorneys decreased from $33.3 million for the year ended December 31, 2008 to
$27.6 million, a decrease of $5.7 million or 17.1%, for the year ended December 31, 2009. 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, 2009 were 17.5% of legal cash collections
generated by our in-house attorneys compared to 41.4% for the year ended December 31, 2008. Legal fees and
37
costs incurred by our in-house attorneys increased from $3.5 million for the year ended December 31, 2008 to
$3.8 million, an increase of $0.3 million or 8.6%, for the year ended December 31, 2009.
Outside Fees and Services
Outside fees and services expenses were $9.6 million for the year ended December 31, 2009, an increase of
$0.7 million or 7.9% compared to outside legal and other fees and services expenses of $8.9 million for the year
ended December 31, 2008. The $0.7 million increase was attributable to an increase in other outside fees and
services and corporate legal and accounting.
Communications
Communications expenses were $14.8 million for the year ended December 31, 2009, an increase of $4.5
million or 43.7% compared to communications expenses of $10.3 million for the year ended December 31, 2008.
The increase was mainly due to a growth in mailings due to an increase in special letter campaigns which
increased by $4.3 million for the year ended December 31, 2009 when compared to the year ago period. The
remaining increase was attributable to higher telephone expenses driven by a greater number of finance
receivables to work, as well as a significant expansion of our dialer capacity and related calls that are generated
by the dialer. Mailings were responsible for 95.6% or $4.3 million of this increase, while the remaining 4.4% or
$0.2 million was attributable to increased call volumes.
Rent and Occupancy
Rent and occupancy expenses were $4.8 million for the year ended December 31, 2009, an increase of $0.9
million or 23.1% compared to rent and occupancy expenses of $3.9 million for the year ended December 31,
2008. The increase was primarily due to the acquisition of MuniServices on July 1, 2008 and the relocation of
our IGS business to another location during 2009, as well as increased utility charges.
Depreciation and Amortization
Depreciation and amortization expenses were $9.2 million for the year ended December 31, 2009, an
increase of $1.8 million or 24.3% compared to depreciation and amortization expenses of $7.4 million for the
year ended December 31, 2008. The increase is mainly due to additional expenses incurred related to the
depreciation and amortization of the tangible and intangible assets acquired in the acquisition of MuniServices
and the acquisition of the assets of 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.
Other Operating Expenses
Other operating expenses were $8.8 million for the year ended December 31, 2009, an increase of $1.8
million or 25.7% compared to other operating expenses of $7.0 million for the year ended December 31, 2008.
The increase was due to increases in various expenses mainly as a result of the addition of MuniServices and
BPA. No individual item represents a significant portion of the overall increase.
Interest Income
Interest income was $3,000 for the year ended December 31, 2009, a decrease of $57,000 or 95.0%
compared to interest income of $60,000 for the year ended December 31, 2008. This decrease is mainly due to
lower average invested cash and cash equivalents balances during the year ended December 31, 2009 compared
to the same period in 2008.
Interest Expense
Interest expense was $7.9 million for the year ended December 31, 2009, a decrease of $3.3 million
compared to interest expense of $11.2 million for the year ended December 31, 2008. The decrease was mainly
due to a decrease in our weighted average variable interest rate which decreased to 2.62% for the year ended
December 31, 2009 as compared to 4.60% for the year ended December 31, 2008, partially offset by an increase
in our average borrowings for the year ended December 31, 2009 compared to the same period in 2008.
38
Provision for Income Taxes
Income tax expense was $28.4 million for each of the years ended December 31, 2009 and 2008. Pre-tax
income for the year ending December 31, 2009 decreased by $1.0 million as compared to the year ending
December 31, 2008; however, income tax expense remained the same due to the impact of permanent items, state
tax credits and prior year true-up which resulted in a lower effective tax rate for the year ending December 31,
2008 when compared to the same period in 2009.
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, as well as its
subsets; the portfolio of purchased bankrupt accounts and our core portfolio. The accounts represented in the
purchased bankruptcy tables are those portfolios of accounts that were bankrupt at the time of purchase. This
contrasts with accounts that file bankruptcy after we purchase them, which continue to be tracked in their
corresponding core portfolio.
The purchase price multiples for 2005 through 2010 described in the table below are lower than historical
multiples in previous years. This trend is primarily, but not entirely related to pricing competition. When
competition increases, and or supply decreases so that pricing becomes negatively impacted on a relative basis
(total lifetime collections in relation to purchase price), yields tend to trend lower.
Additionally, however, the way we initially book newly acquired pools of accounts and how we forecast
future estimated collections for any given portfolio of accounts has evolved over the years due to a number of
factors including the current economic situation. Since our revenue recognition under ASC 310-30 is driven by
both the ultimate magnitude of estimated lifetime collections as well as the timing of those collections, we have
progressed towards booking new portfolio purchases using a higher confidence level for both estimated
collection amounts and pace. Subsequent to the initial booking, as we gain collection experience and comfort
with a pool of accounts, we continuously update ERC. Since our inception, these processes have tended to cause
the ratio of collections, including ERC, to purchase price for any given year of buying to gradually increase over
time. As a result, our estimate of lifetime collections to purchase price has shown relatively steady increases as
pools have aged. Thus, all factors being equal in terms of pricing, one would naturally tend to see a higher
collection to purchase price ratio from a pool of accounts that were six years from purchase than say a pool that
was just two years from purchase.
To the extent that lower purchase price multiples are the ultimate result of more competitive pricing and
lower yields, this will generally lead to higher amortization rates (payments applied to principal as a percentage
of cash collections), lower operating margins and ultimately lower profitability. As portfolio pricing becomes
more favorable on a relative basis, our profitability will tend to increase. It is important to consider, however,
that to the extent we can improve our collection operations by collecting additional cash from a discreet quantity
and quality of accounts, and/or by collecting cash at a lower cost structure, we can positively impact the
collection to purchase price ratio and operating margins. During 2008 and continuing through 2010, we made
significant enhancements in our analytical abilities, management personnel and automated dialing capabilities, all
with the intent to collect more cash at lower cost.
39
Information about our owned portfolios as of December 31, 2010 is as follows:
Entire Portfolio ($ in thousands)
Purchase
Period
Purchase
Price(1)
Total Estimated
Collections (2)
Net Finance
Receivable Balance (3)
Life to Date
Reserve
Allowance (4)
Reserve
Allowance to Unamortized
Collections
Estimated
Total Estimated
Allowance to
Purchase Price (5)
Purchase Price and
Reserve Allowance (6)
Including Cash Remaining
Collections (7)
Sales
Collections to
Purchase Price (8)
Percentage of
Percentage of Reserve
Actual Cash
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total
$3,080
$7,685
$11,089
$18,898
$25,020
$33,481
$42,325
$61,448
$59,177
$143,171
$107,713
$258,397
$275,145
$281,583
$361,843
$1,690,055
$10,143
$25,395
$37,002
$68,445
$114,019
$171,214
$190,351
$253,276
$188,291
$310,837
$217,381
$505,826
$538,136
$720,932
$760,876
$4,112,124
$0
$0
$0
$0
$0
$0
$0
$0
$157
$20,756
$25,880
$100,180
$155,587
$198,715
$330,055
$831,330
$0
$0
$0
$0
$0
$0
$0
$0
$1,215
$16,817
$19,415
$18,315
$20,645
$0
$0
$76,407
0%
0%
0%
0%
0%
0%
0%
0%
2%
12%
18%
7%
8%
0%
0%
5%
Purchased Bankruptcy Portfolio ($ in thousands)
0%
0%
0%
0%
0%
0%
0%
0%
2%
11%
15%
7%
7%
0%
0%
4%
$10,043
$25,122
$36,607
$67,165
$110,835
$166,673
$184,432
$243,452
$178,628
$270,650
$168,966
$335,138
$269,588
$234,745
$86,562
$2,388,606
$100
$273
$395
$1,280
$3,184
$4,541
$5,919
$9,824
$9,663
$40,187
$48,415
$170,688
$268,548
$486,187
$674,314
$1,723,518
329%
330%
334%
362%
456%
511%
450%
412%
318%
217%
202%
196%
196%
256%
210%
243%
Percentage of
Percentage of Reserve
Actual Cash
Life to Date
Reserve
Allowance to Unamortized
Collections
Estimated
Total Estimated
Purchase
Period
1996-2003
2004
2005
2006
2007
2008
2009
2010
Total
Purchase
Price(1)
Total Estimated
Collections (2)
Net Finance
Receivable Balance (3)
$0
$7,468
$29,301
$17,648
$78,557
$108,615
$156,064
$211,880
$609,533
$0
$14,176
$43,059
$30,973
$111,742
$183,857
$366,721
$389,812
$1,140,340
$0
$2
$222
$218
$26,584
$67,637
$125,270
$199,960
$419,893
Reserve
Allowance (4)
$0
$1,215
$872
$2,380
$1,910
$0
$0
$0
$6,377
Allowance to
Purchase Price (5)
0%
16%
3%
13%
2%
0%
0%
0%
1%
Purchase Price and
Reserve Allowance (6)
0%
14%
3%
12%
2%
0%
0%
0%
1%
Core Portfolio ($ in thousands)
Sales
Including Cash Remaining
Collections (7)
$0
$31
$303
$2,018
$32,461
$95,965
$268,306
$350,326
$749,410
$0
$14,145
$42,756
$28,955
$79,281
$87,892
$98,415
$39,486
$390,930
Collections to
Purchase Price (8)
0%
190%
147%
176%
142%
169%
235%
184%
187%
Purchase
Period
Purchase
Price(1)
Total Estimated
Collections (2)
Net Finance
Receivable Balance (3)
Life to Date
Reserve
Allowance (4)
Reserve
Allowance to Unamortized
Collections
Estimated
Total Estimated
Allowance to
Purchase Price (5)
Purchase Price and
Reserve Allowance (6)
Including Cash Remaining
Collections (7)
Sales
Collections to
Purchase Price (8)
Percentage of
Percentage of Reserve
Actual Cash
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total
$3,080
$7,685
$11,089
$18,898
$25,020
$33,481
$42,325
$61,448
$51,709
$113,870
$90,065
$179,840
$166,530
$125,519
$149,963
$1,080,522
$10,143
$25,395
$37,002
$68,445
$114,019
$171,214
$190,351
$253,276
$174,115
$267,778
$186,408
$394,084
$354,279
$354,211
$371,064
$2,971,784
$0
$0
$0
$0
$0
$0
$0
$0
$155
$20,534
$25,662
$73,596
$87,950
$73,445
$130,095
$411,437
$0
$0
$0
$0
$0
$0
$0
$0
$0
$15,945
$17,035
$16,405
$20,645
$0
$0
$70,030
0%
0%
0%
0%
0%
0%
0%
0%
0%
14%
19%
9%
12%
0%
0%
6%
0%
0%
0%
0%
0%
0%
0%
0%
0%
12%
16%
8%
11%
0%
0%
6%
$10,043
$25,122
$36,607
$67,165
$110,835
$166,673
$184,432
$243,452
$164,483
$227,894
$140,011
$255,857
$181,696
$136,330
$47,076
$1,997,676
$100
$273
$395
$1,280
$3,184
$4,541
$5,919
$9,824
$9,632
$39,884
$46,397
$138,227
$172,583
$217,881
$323,988
$974,108
329%
330%
334%
362%
456%
511%
450%
412%
337%
235%
207%
219%
213%
282%
247%
275%
(1) Purchase price refers to the cash paid to a seller to acquire defaulted consumer receivables, plus certain
capitalized costs, less buybacks.
(2) Total estimated collections refers to actual cash collections, including cash sales, plus estimated
remaining collections.
(3) Net finance receivable balance refers to the purchase price less amortization over the life of the
portfolio.
40
(4) Life to date reserve allowance refers to the total amount of allowance charges incurred on our owned
portfolios net of any reversals.
(5) Percentage of reserve allowance to purchase price refers to the total amount of allowance charges
incurred on our owned portfolios net of any reversals, divided by the purchase price.
(6) Percentage of reserve allowance to unamortized purchase price and reserve allowance refers to the total
amount of allowance charges incurred on our owned portfolios net of any reversals, divided by the sum
of the unamortized purchase price and the life to date reserve allowance.
(7) Estimated remaining collections refers to the sum of all future projected cash collections on our owned
portfolios
(8) Total estimated collections to purchase price refers to the total estimated collections divided by the
purchase price.
The following tables show our net valuation allowances recorded against our investment in finance
receivables.
($ in thousands)
Entire Portfolio
Allow ance Period (1)
Q1 05
Q2 05
Q3 05
Q4 05
Q1 06
Q2 06
Q3 06
Q4 06
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Total
Portfolio Purchases, net
Purchase Period
1996-2003
-
$
-
-
200
-
75
200
-
(245)
90
200
190
120
260
(90)
(400)
(225)
(230)
(25)
(120)
-
-
-
-
$
-
2004
-
$
-
-
-
-
-
-
-
-
-
320
150
650
720
60
(140)
35
(220)
(190)
-
-
(80)
(80)
(10)
1,215
$
2005
-
$
-
-
-
175
125
75
450
610
-
660
615
910
-
325
1,805
1,150
495
1,170
1,375
2,795
1,600
1,650
832
16,817
$
2006
-
$
-
-
-
-
-
-
-
-
-
-
340
1,105
2,330
1,135
2,600
910
765
1,965
1,220
1,175
2,100
2,050
1,720
19,415
$
2007
-
$
-
-
-
-
-
-
-
-
-
-
-
-
650
2,350
4,380
2,300
685
340
110
2,900
700
2,750
1,150
18,315
$
2008
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
620
2,050
2,425
4,750
6,900
-
2,000
150
1,750
20,645
$
2009-2010
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
Total
-
$
-
-
200
175
200
275
450
365
90
1,180
1,295
2,785
3,960
3,780
8,865
6,220
3,920
8,010
9,485
6,870
6,320
6,520
5,442
76,407
$
$
203,026
$
59,177
$
143,171
$
107,713
$
258,397
$
275,145
$
643,426
$
1,690,055
Allow ance
Charge as
% of NFR (2)
0.0%
0.0%
0.0%
0.1%
0.1%
0.1%
0.1%
0.2%
0.1%
0.0%
0.4%
0.3%
0.6%
0.8%
0.7%
1.6%
1.1%
0.6%
1.2%
1.4%
0.9%
0.8%
0.8%
0.7%
(1) Allowance period represents the quarter in which we recorded valuation allowances, net of any
(reversals).
(2) NFR refers to total net finance receivables as of the end of the allowance period presented.
41
($ in thousands)
Purchased BK Portfolio
Purchase Period
Allow ance Period (1)
Q1 05
Q2 05
Q3 05
Q4 05
Q1 06
Q2 06
Q3 06
Q4 06
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Total
1996-2003
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
2004
$
-
-
-
-
-
-
-
-
-
-
320
150
530
15
115
110
10
15
20
-
-
(30)
(30)
(10)
1,215
$
2005
$
-
-
-
-
-
-
-
-
-
-
160
-
60
-
-
315
100
(5)
70
100
95
25
-
(18)
902
$
2006
$
-
-
-
-
-
-
-
-
-
-
-
150
405
450
30
325
50
-
-
70
50
-
(100)
(30)
1,400
$
2007
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
110
1,200
-
600
950
2,860
$
2008
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
2009-2010
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
Total
$
-
-
-
-
-
-
-
-
-
-
480
300
995
465
145
750
160
10
90
280
1,345
(5)
470
892
6,377
$
Portfolio Purchases, net
$
-
$
7,468
$
29,301
$
17,648
$
78,557
$
108,615
$
367,944
$
609,533
($ in thousands)
Core Portfolio
Allow ance Period (1)
Q1 05
Q2 05
Q3 05
Q4 05
Q1 06
Q2 06
Q3 06
Q4 06
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Total
Portfolio Purchases, net
Purchase Period
1996-2003
$
-
-
-
200
-
75
200
-
(245)
90
200
190
120
260
(90)
(400)
(225)
(230)
(25)
(120)
-
-
-
-
$
-
2004
$
-
-
-
-
-
-
-
-
-
-
-
-
120
705
(55)
(250)
25
(235)
(210)
-
-
(50)
(50)
-
$
-
2005
$
-
-
-
-
175
125
75
450
610
-
500
615
850
-
325
1,490
1,050
500
1,100
1,275
2,700
1,575
1,650
850
15,915
$
2006
$
-
-
-
-
-
-
-
-
-
-
-
190
700
1,880
1,105
2,275
860
765
1,965
1,150
1,125
2,100
2,150
1,750
18,015
$
2007
$
-
-
-
-
-
-
-
-
-
-
-
-
-
650
2,350
4,380
2,300
685
340
-
1,700
700
2,150
200
15,455
$
2008
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
620
2,050
2,425
4,750
6,900
-
2,000
150
1,750
20,645
$
2009-2010
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
Total
$
-
-
-
200
175
200
275
450
365
90
700
995
1,790
3,495
3,635
8,115
6,060
3,910
7,920
9,205
5,525
6,325
6,050
4,550
70,030
$
$
203,026
$
51,709
$
113,870
$
90,065
$
179,840
$
166,530
$
275,482
$
1,080,522
Allow ance
Charge as
% of NFR (2)
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
1.3%
0.3%
0.8%
0.3%
0.1%
0.4%
0.1%
0.0%
0.0%
0.1%
0.4%
0.0%
0.1%
0.2%
Allow ance
Charge as
% of NFR (2)
0.0%
0.0%
0.0%
0.1%
0.1%
0.1%
0.2%
0.2%
0.2%
0.0%
0.2%
0.3%
0.5%
0.9%
1.0%
2.1%
1.6%
1.0%
2.0%
2.3%
1.4%
1.6%
1.5%
1.1%
(1) Allowance period represents the quarter in which we recorded valuation allowances, net of any
(reversals).
(2) NFR refers to total net finance receivables as of the end of the allowance period presented.
42
The following graph shows the purchase price of our owned portfolios by year. The purchase price number
represents the cash paid to the seller, plus certain capitalized costs, less buybacks.
Portfolio Purchases by Year
($ in millions)
$350
$300
$250
$200
$150
$100
$50
$0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Core
Purchased Bankruptcy
As shown in the above chart, the composition of our purchased portfolios has shifted in favor of bankrupt
accounts in recent years. We began buying bankrupt accounts during 2004 and slowly increased the volume of
accounts we acquired through 2006 as we tested our models, refined our processes and proved out our operating
assumptions. After observing a high level of modeling confidence in our early purchases, we began increasing
our level of purchases more dramatically during the period from 2007 through 2010.
Our ability to profitably purchase and liquidate pools of bankrupt accounts provides diversity to our
distressed asset acquisition business. Although we generally buy bankrupt assets from many of the same
consumer lenders from whom we acquire Core customer accounts, the volumes and pricing characteristics as
well as the competitors are different. Based upon market dynamics, the profitability of pools purchased in the
bankrupt and Core markets may differ over time. We have found periods when bankrupt accounts were more
profitable and other times when Core accounts were more profitable. From 2004 through 2008, our bankruptcy
buying fluctuated between 13% and 39% of our total portfolio purchasing in those years. In 2009, for the first
time in our history, bankruptcy purchasing exceeded that of our Core buying, finishing at 55% of total portfolio
purchasing for the year and during 2010 this percentage increased to 59%. This occurred as severe dislocations
in the financial markets, coupled with legislative uncertainty, caused pricing in the bankruptcy market to decline
substantially thereby driving our strategy to make advantageous bankruptcy portfolio acquisitions during this
period.
In order to collect our Core portfolios, we generally need to employ relatively higher amounts of labor and
incur additional collection costs to generate each dollar of cash collections as compared with bankruptcy
portfolios. In order to achieve acceptable levels of net return on investment (after direct expenses), we are
generally targeting a total cash collections to purchase price multiple in the 2.5-3.0x range. On the other hand,
bankrupt accounts generate the majority of cash collections through the efforts of the U.S. bankruptcy courts. In
this process, cash is remitted to our Company with no corresponding cost other than the cost of filing claims at
the time of purchase and general administrative costs for monitoring the progress of each account through the
bankruptcy process. As a result, overall collection costs are much lower for us when liquidating a pool of
bankrupt accounts as compared to a pool of Core accounts, but conversely the price we pay for bankrupt
accounts is generally higher than Core accounts. We generally target similar returns on investment (measured
after direct expenses) for bankrupt and Core portfolios at any given point in the market cycles. However,
because of the lower related collection costs, we can pay more for bankrupt portfolios, which causes the
estimated total cash collections to purchase price multiples of bankrupt pools to be in the 1.4-2.0x range
generally. In summary, compared to a pool of Core accounts, to the extent both pools had identical targeted
43
returns on investment (measured after direct expenses), the bankrupt pool would be expected to generate less
revenue, a lower yield, less direct expenses, similar operating income, and a higher operating margin.
In addition, collections on younger, newly filed bankrupt accounts tend to be of a lower magnitude in the
earlier months when compared to Core charge-off accounts. This lower level of early period collections is due to
the fact that 1) we purchase primarily accounts that represent unsecured claims in bankruptcy, and 2) these
unsecured claims are scheduled to begin paying out after payment of the secured and priority claims. As a result
of the administrative processes regarding payout priorities within the court-administered bankruptcy plans,
unsecured creditors do not generally begin receiving meaningful collections on unsecured claims until 12 to 18
months after the bankruptcy filing date. Therefore, to the extent that we purchase portfolios with more recent
bankruptcy filing dates, as we did to a significant extent in 2009 and 2010, we would expect to experience a
delay in cash collections compared with Core charged-off accounts.
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.
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
Purchase
Price
$
($ in thousands)
Purchase
Period
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total
$
3,080
7,685
11,089
18,898
25,020
33,481
42,325
61,448
59,177
143,171
107,713
258,397
275,145
281,583
361,843
1,690,055
1996-2000
7,295
$
15,138
16,981
18,207
6,894
-
-
-
-
-
-
-
-
-
-
64,515
$
2001
$
2002
$
2003
$
2004
$
Cash Collection Period
2005
$
2006
$
2007
$
2008
2009
2010
Total
$
$
$
$
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
398
1,324
2,797
7,336
16,628
28,003
36,258
24,308
-
-
-
-
-
-
-
117,052
285
1,022
2,200
5,615
14,098
26,717
35,742
49,706
18,019
-
-
-
-
-
-
153,404
210
860
1,811
4,352
10,924
22,639
32,497
52,640
46,475
18,968
-
-
-
-
-
191,376
237
597
1,415
3,032
8,067
16,048
24,729
43,728
40,424
75,145
22,971
-
-
-
-
236,393
102
437
882
2,243
5,202
10,011
16,527
30,695
30,750
69,862
53,192
42,263
-
-
-
262,166
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
78
215
397
1,328
3,198
5,299
7,444
13,135
13,677
33,366
29,749
94,805
107,974
57,338
-
368,003
68
216
382
1,139
2,782
4,422
6,375
10,422
9,944
23,733
22,494
83,059
100,337
177,407
86,562
529,342
9,982
24,614
36,581
66,473
110,373
161,182
184,417
243,452
178,628
270,650
168,966
335,138
269,588
234,745
86,562
2,381,351
$
$
$
$
$
$
$
$
$
$
$
Cash Collections By Year, By Year of Purchase – Purchased Bankruptcy Portfolio
Purchase
Price
$
($ in thousands)
Purchase
Period
2004
2005
2006
2007
2008
2009
2010
Total
$
7,468
29,301
17,648
78,557
108,615
156,064
211,880
609,533
1996-2000
-
$
-
-
-
-
-
-
$
-
2001
-
$
-
-
-
-
-
-
$
-
2002
-
$
-
-
-
-
-
-
$
-
2003
-
$
-
-
-
-
-
-
$
-
2004
$
Cash Collection Period
2005
2006
2007
2008
$
$
$
$
2009
$
2010
$
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
496
3,318
4,398
25,630
35,894
16,635
-
86,371
164
1,382
2,972
22,829
37,974
81,780
39,486
186,587
14,145
42,756
28,955
79,281
87,892
98,415
39,486
390,930
$
$
$
$
$
$
$
$
Cash Collections By Year, By Year of Purchase - Core Portfolio
2001
$
2002
$
2003
$
2004
$
Cash Collection Period
2005
$
2006
$
2007
$
2008
2009
2010
Total
$
$
$
$
Purchase
Price
$
($ in thousands)
Purchase
Period
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total
$
3,080
7,685
11,089
18,898
25,020
33,481
42,325
61,448
51,709
113,870
90,065
179,840
166,530
125,519
149,963
1,080,522
1996-2000
7,295
$
15,138
16,981
18,207
6,894
-
-
-
-
-
-
-
-
-
-
64,515
$
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
398
1,324
2,797
7,336
16,628
28,003
36,258
24,308
-
-
-
-
-
-
-
117,052
285
1,022
2,200
5,615
14,098
26,717
35,742
49,706
17,276
-
-
-
-
-
-
152,661
210
860
1,811
4,352
10,924
22,639
32,497
52,640
41,921
15,191
-
-
-
-
-
183,045
$
44
237
597
1,415
3,032
8,067
16,048
24,729
43,728
36,468
59,645
17,363
-
-
-
-
211,329
102
437
882
2,243
5,202
10,011
16,527
30,695
27,973
57,928
43,737
39,413
-
-
-
235,150
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
78
215
397
1,328
3,198
5,299
7,444
13,135
13,181
30,048
25,351
69,175
72,080
40,703
-
281,632
68
216
382
1,139
2,782
4,422
6,375
10,422
9,780
22,351
19,522
60,230
62,363
95,627
47,076
342,755
9,982
24,614
36,581
66,473
110,373
161,182
184,417
243,452
164,483
227,894
140,011
255,857
181,696
136,330
47,076
1,990,421
$
$
$
$
$
$
$
$
$
$
When we acquire a new pool of finance receivables, our estimates typically result in an 72 - 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, adjusted for buybacks, for the period 2001 through 2010.
Actual Cash Collections and Cash Sales vs. Original Projections
($ in millions)
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
Actual Cash Collections
Original Projections
0
0
-
c
e
D
1
0
-
r
p
A
1
0
-
g
u
A
1
0
-
c
e
D
2
0
-
r
p
A
2
0
-
g
u
A
2
0
-
c
e
D
3
0
-
r
p
A
3
0
-
g
u
A
3
0
-
c
e
D
4
0
-
r
p
A
4
0
-
g
u
A
4
0
-
c
e
D
5
0
-
r
p
A
5
0
-
g
u
A
5
0
-
c
e
D
6
0
-
r
p
A
6
0
-
g
u
A
6
0
-
c
e
D
7
0
-
r
p
A
7
0
-
g
u
A
7
0
-
c
e
D
8
0
-
r
p
A
8
0
-
g
u
A
8
0
-
c
e
D
9
0
-
r
p
A
9
0
-
g
u
A
9
0
-
c
e
D
0
1
-
r
p
A
0
1
-
g
u
A
0
1
-
c
e
D
Primarily as a result of the downturn in the economy, the decline in the availability of consumer credit, our
efforts to help customers establish reasonable payment plans, and improvements in our collections capabilities
which have allowed us to profitably collect on accounts with lower balances or lower quality, our average
payment size has decreased over the past several years. However, due to improved scoring and segmentation,
together with enhanced productivity, we have been able to generate increased amounts of cash collections by
generating enough incremental payments to overcome the decrease in payment size.
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.
Number of Collectors by Tenure
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2005
319
319
324
327
2005
345
330
268
364
2006
331
342
324
340
2006
360
372
402
375
2009
488
587
604
638
2009
621
612
585
676
2010
690
711
742
771
2010
686
681
642
731
One year + (1)
2008
314
348
410
452
2007
340
360
397
327
Less than one year (2)
2008
688
744
631
739
2007
435
481
475
553
45
Q1
Q2
Q3
Q4
2005
664
649
592
691
2006
691
714
726
715
Total (2)
2007
775
841
872
880
2008
1,002
1,092
1,041
1,191
2009
1,109
1,199
1,189
1,314
2010
1,376
1,392
1,384
1,502
(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.”
The tables below contain our most recent six years of collector productivity metrics as defined by calendar
quarter.
Cash Collections per Hour Paid (1)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2005
$136
$138
$135
$126
2005
$96
$92
$88
$82
2005
$132
$132
$129
$120
2005
$92
$85
$82
$77
Total cash collections
2007
$156
$142
$131
$119
2008
$133
$136
$134
$123
Non-legal cash collections (2)
2007
$108
$96
$88
$80
2008
$96
$99
$99
$94
2009
$147
$143
$144
$148
2009
$118
$116
$119
$123
Non-bankruptcy cash collections (3)
2007
$141
$129
$120
$107
2008
$116
$115
$110
$98
2009
$120
$114
$111
$109
2006
$152
$146
$145
$142
2006
$106
$99
$98
$94
2006
$141
$132
$129
$127
Non-legal/non-bankruptcy cash collections (4)
2009
$90
$87
$87
$84
2008
$79
$78
$76
$69
2007
$92
$83
$76
$68
2006
$95
$85
$82
$80
2010
$182
$188
$200
$204
2010
$154
$160
$170
$174
2010
$135
$127
$127
$129
2010
$106
$100
$97
$98
(1) Cash collections (assigned and unassigned) divided by total hours paid (including holiday, vacation and
sick time) to collectors (including those in training).
(2) Represents total cash collections less external legal cash collections.
(3) Represents total cash collections less purchased bankruptcy cash collections from trustee-administered
accounts.
(4) Represents total cash collections less external legal cash collections and less purchased bankruptcy cash
collections from trustee-administered accounts.
46
Cash collections have substantially exceeded revenue in each quarter since our formation. The following
chart illustrates the consistent excess of our cash collections on our owned portfolios over income recognized on
finance receivables on a quarterly basis. The difference between cash collections and income recognized on
finance receivables is referred to as payments applied to principal. It is also referred to as amortization of
purchase price. This amortization is the portion of cash collections that is used to recover the cost of the
portfolio investment represented on the balance sheet.
Cash Collections ⁽¹⁾ vs. Income Recognized on Finance Receivables, net
($ in millions)
Payments applied to principal or amortization of purchase price
Income recognized on finance receivables, net
Cash Collections
$160
$140
$120
$100
$80
$60
$40
$20
$0
1
0
-
1
Q
1
0
-
3
Q
2
0
-
1
Q
2
0
-
3
Q
3
0
-
1
Q
3
0
-
3
Q
4
0
-
1
Q
4
0
-
3
Q
5
0
-
1
Q
5
0
-
3
Q
6
0
-
1
Q
6
0
-
3
Q
7
0
-
1
Q
7
0
-
3
Q
8
0
-
1
Q
8
0
-
3
Q
9
0
-
1
Q
9
0
-
3
Q
0
1
-
1
Q
0
1
-
3
Q
(1) Includes cash collections on finance receivables only and excludes cash proceeds from sales of defaulted
consumer receivables.
Seasonality
Collections tend to be higher in the first and second quarters of the year and lower in the third and fourth
quarters of the year, due to customer payment patterns in connection with seasonal employment trends, income
tax refunds and holiday spending habits. Historically, our growth has partially masked the impact of this
seasonality.
Quarterly Cash Collections ⁽¹⁾
($ in millions)
$150
$140
$130
$120
$110
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
1
0
-
1
Q
1
0
-
2
Q
1
0
-
3
Q
1
0
-
4
Q
2
0
-
1
Q
2
0
-
2
Q
2
0
-
3
Q
2
0
-
4
Q
3
0
-
1
Q
3
0
-
2
Q
3
0
-
3
Q
3
0
-
4
Q
4
0
-
1
Q
4
0
-
2
Q
4
0
-
3
Q
4
0
-
4
Q
5
0
-
1
Q
5
0
-
2
Q
5
0
-
3
Q
5
0
-
4
Q
6
0
-
1
Q
6
0
-
2
Q
6
0
-
3
Q
6
0
-
4
Q
7
0
-
1
Q
7
0
-
2
Q
7
0
-
3
Q
7
0
-
4
Q
8
0
-
1
Q
8
0
-
2
Q
8
0
-
3
Q
8
0
-
4
Q
9
0
-
1
Q
9
0
-
2
Q
9
0
-
3
Q
9
0
-
4
Q
0
1
-
1
Q
0
1
-
2
Q
0
1
-
3
Q
0
1
-
4
Q
(1) Includes cash collections on finance receivables only and excludes cash proceeds from sales of defaulted
consumer receivables.
47
The following table displays our quarterly cash collections by source, for the periods indicated.
Cash Collection Source ($ in thousands)
Call Center & Other Collections
External Legal Collections
Internal Legal Collections
Purchased Bankruptcy Collections
Total
Q42010
$53,775
21,446
12,841
56,301
$144,363
Q32010
$51,711
20,217
12,130
53,319
$137,377
Q22010
$54,477
18,819
11,362
43,748
$128,406
Q12010
$56,987
18,276
10,714
33,219
$119,196
Q42009
$45,365
15,496
7,570
26,855
$95,286
Q32009
$48,590
15,330
6,196
22,251
$92,367
Q22009
$50,052
16,527
4,263
19,637
$90,479
Q12009
$50,914
17,790
3,539
17,628
$89,871
The following table shows the changes in finance receivables, including the amounts paid to acquire new
portfolios, for the years ended December 31, 2010, 2009 and 2008 (amounts in thousands):
2010
2009
2008
Balance at beginning of year
Acquisitions of finance receivables (1)
Cash collections applied to principal on finance receivables (2)
$
693,462
$
563,830
$
410,297
357,530
(219,662)
282,023
(152,391)
273,746
(120,213)
Balance at end of year
$
831,330
$
693,462
$
563,830
Estimated Remaining Collections ("ERC")(3)
$
1,723,518
$
1,415,446
$
1,115,565
(1) Acquisitions of finance receivables is net of buybacks and includes certain capitalized 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.
Liquidity and Capital Resources
Historically, our primary sources of cash have been cash flows from operations, bank borrowings and equity
offerings. Cash has been used for acquisitions of finance receivables, corporate acquisitions, 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.
As of December 31, 2010, cash and cash equivalents totaled $41.1 million, as compared to $20.3 million at
December 31, 2009. Total debt outstanding on our $407.5 million line of credit was $300.0 million as of
December 31, 2010, which represents availability of $107.5 million.
We have in place forward flow commitments for the purchase of defaulted consumer receivables over the
next 12 months of approximately $234.4 million as of December 31, 2010. Additionally we may enter into new
or renewed flow commitments in the next twelve months and close on spot transactions in addition to the
aforementioned flow agreements. We believe that funds generated from operations and from cash collections on
finance receivables, together with existing cash and available borrowings under our credit agreement would be
sufficient to finance our operations, planned capital expenditures, the aforementioned forward flow
commitments, and a material amount of additional portfolio purchasing in excess of the currently committed flow
amounts during the next twelve months.
We are cognizant of the market fundamentals in the debt purchase and company acquisition market which,
because of significant supply and tight capital availability, could cause increased buying opportunities to arise.
Accordingly, we filed a $150 million shelf registration during the third quarter of 2009. We issued $75.5 million
of equity securities under that registration statement during February of 2010 in order to take advantage of
market opportunities while retaining the ability to issue up to an additional $74.5 million of equity or debt
securities under the shelf registration statement in the future. The outcome of any future transaction is subject to
market conditions. In addition, due to these opportunities, we closed on a new and expanded syndicated loan
during the fourth quarter of 2010. The new credit agreement increased our possible availability to $407.5
million. Refer to the “Borrowings” section below for additional information on the line of credit.
48
With the acquisition of a controlling interest in CCB on March 15, 2010, we have the right to call the
noncontrolling interest through February 2015. In addition, the noncontrolling interest has the right to put the
remainder of the shares to us beginning in March 2012 and ending February 2018. The total maximum amount
we would have to pay for the non-controlling interest in CCB in any scenario is $22.8 million.
We file income taxes using the cost recovery method for tax revenue recognition. We were notified on June
21, 2007 that we were being examined by the Internal Revenue Service for the 2005 calendar year. The IRS has
concluded its audit and on March 19, 2009 issued Form 4549-A, Income Tax Examination Changes for tax years
ending December 31, 2007, 2006 and 2005. The IRS has asserted that cost recovery for tax revenue recognition
does not clearly reflect taxable income and that unused line fees paid on credit facilities should be capitalized and
amortized rather than taken as a current deduction. On April 22, 2009, we filed a formal protest of the findings
contained in the examination report prepared by the IRS. We believe we have sufficient support for the technical
merits of our positions and that it is more-likely-than-not that these positions will ultimately be sustained;
therefore, a reserve for uncertain tax positions is not necessary for these tax positions. If we are unsuccessful in
our appeal, we may further our efforts in United States Tax Court. Additionally, if judicial appeals prove
unsuccessful we may ultimately be required to pay the related deferred taxes and any potential interest, possibly
requiring additional financing from other sources.
In forming our tax positions, we consider inputs based on industry practice, tax advice from professionals
and drawing similarities of our facts and circumstances to those in established case law (most notably as it relates
to revenue recognition, Underhill and Liftin). These tax positions deal not only with revenue recognition, but
also with general tax compliance including sales and use, franchise, gross receipts, payroll, property and income
tax issues, including our tax base and apportionment factors.
A diverse group of companies participate in our industry including distressed debt purchasers, Wall Street
hedge funds, small private collection companies and other such investment firms. These participants are diverse
in their structure, processes, and profitability. We base our primary tax revenue recognition policy on the nature
of the assets that we acquire. We, therefore, file income tax returns using the cost recovery method for tax
revenue recognition as it relates to our debt purchasing business.
Cash generated from operations is dependent upon our ability to collect on our finance 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 future cash flows.
Our operating activities provided cash of $143.6 million, $85.3 million and $81.7 million for the years
ended December 31, 2010, 2009 and 2008, respectively. In these periods, cash from operations was generated
primarily from net income earned through cash collections and fee income received for the period. The increase
was due mainly to an increase in net income to $73.9 million for the year ended December 31, 2010, from $44.3
million for the year ended December 31, 2009 and $45.4 million for the year ended December 31, 2008 as well
as an increase in deferred tax expense to $47.5 million for the year ended December 31, 2010, from $28.9 million
for the year ended December 31, 2009 and $30.9 million for the year ended December 31, 2008. The remaining
changes were due to net changes in other accounts related to our operating activities.
Our investing activities used cash of $170.5 million, $134.3 million and $185.7 million for the years ended
December 31, 2010, 2009 and 2008, respectively. 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 finance receivables, purchases of property and equipment and company acquisitions. The
majority of the increase was due to net cash payments for corporate acquisitions totaling $23.1 million for the
year ended December 31, 2010 compared to $100,000 for the year ended December 31, 2009 and $26.0 million
for the year ended December 31, 2008 as well as an increase in acquisitions of finance receivables which
increased to $357.5 million for the year ended December 31, 2010 from $282.0 million for the year ended
December 31, 2009 and $273.7 million for the year ended December 31, 2008. The increase was offset by an
increase in collections applied to principal on finance receivables to $219.7 million for the year ended December
31, 2010 from $152.4 million for the year ended December 31, 2009 and $120.2 million for the year ended
December 31, 2008.
49
Our financing activities provided cash of $47.8 million, $55.3 million and $101.2 million for the years ended
December 31, 2010, 2009 and 2008, respectively. Cash used in financing activities is primarily driven by
payments on our line of credit and principal payments on long-term debt. Cash is provided primarily by draws
on our line of credit and proceeds from stock offerings. The majority of the change was due to a decrease in the
net borrowings on our line of credit. We had net repayments on our line of credit of $19.3 million for the year
ended December 31, 2010, as compared to net draws of $51.0 million and $100.3 million for the years ended
December 31, 2009 and 2008, respectively. The decrease in the net borrowings on our line of credit was offset
by the cash proceeds received from our $75.5 million equity offering during the year ended December 30, 2010
as compared to $0 for both of the prior year periods.
Cash paid for interest was $9.4 million, $8.0 million and $11.3 million for the years ended December 31,
2010, 2009 and 2008, respectively. The majority of interest was paid on our lines of credit, capital lease
obligations and other long-term debt. The increase from the year ended December 31, 2009 as compared to the
year ended December 31, 2010 was mainly due to an increase in our average borrowings which increased to
$244.2 million for the year ended December 31, 2010 from $234.9 million for the year ended December 31,
2009, and the cost to terminate our interest rate swap, partially offset by an decrease in our weighted average
interest rate from 2.46% for the year ended December 31, 2010 compared to 2.62% for the year ended December
31, 2009. The decrease from the year ended December 31, 2008 as compared to the year ended December 31,
2009 was mainly due to a decrease in our weighted average interest rate which decreased to 2.62% for the year
ended December 31, 2009 from 4.60% for the year ended December 31, 2008.
Borrowings
On December 20, 2010, we entered into a credit agreement with Bank of America, N.A., as administrative
agent, and a syndicate of lenders named therein (the “Credit Agreement”). Under the terms of the Credit
Agreement, the credit facility includes an aggregate principal amount available of $407.5 million which consists
of a $50 million fixed rate loan that matures on May 4, 2012, which was transferred from our existing credit
agreement, and a $357.5 million revolving credit facility that matures on December 20, 2014. The revolving
credit facility will be automatically increased by $50 million upon the maturity and repayment of the fixed rate
loan. The fixed rate loan bears interest at a rate of 6.8% per annum, payable monthly in arrears. The revolving
loans accrue interest, at our option, at either the base rate plus 1.75% per annum or the Eurodollar rate (as
defined) for the applicable term plus 2.75% per annum. The base rate is the highest of (a) the Federal Funds Rate
plus 0.50%, (b) Bank of America’s prime rate, and (c) the Eurodollar rate plus 1.00%. Interest is payable on base
rate loans quarterly in arrears and on Eurodollar loans in arrears on the last day of each interest period or if such
interest period exceeds three months, every three months. Our revolving credit facility includes a $20 million
swingline loan sublimit and a $20 million letter of credit sublimit. It also contains an accordion loan feature that
allows us to request an increase of up to $142.5 million in the amount available for borrowing under the
revolving credit facility, whether from existing or new lenders, subject to the terms of the Credit Agreement. No
existing lender is obligated to increase its commitment. The Credit Agreement is secured by a first priority lien
on substantially all of our assets. The Credit Agreement contains restrictive covenants and events of default
include the following:
•
borrowings may not exceed 30% of the ERC of all its eligible asset pools plus 75% of its eligible
accounts receivable;
the consolidated leverage ratio (as defined) cannot exceed 2.0 to 1.0 as of the end of any fiscal quarter;
consolidated Tangible Net Worth (as defined) must equal or exceed $309,452,000 plus 50% of positive
consolidated net income for each fiscal quarter beginning December 31, 2010, plus 50% of the net
proceeds of any equity offering;
capital expenditures during any fiscal year cannot exceed $20 million;
cash dividends and distributions during any fiscal year cannot exceed $20 million;
stock repurchases during the term of the agreement cannot exceed $100 million;
permitted acquisitions (as defined) during any fiscal year cannot exceed $100 million;
•
•
•
•
•
•
50
• we must maintain positive consolidated income from operations during any fiscal quarter; and
•
restrictions on changes in control.
The revolving credit facility also bears an unused commitment fee of 0.375% per annum, payable quarterly
in arrears.
All of our borrowings at December 31, 2010 under our revolving credit facility consisted of 30-day
Eurodollar rate loans, with an annual interest rate as of December 31, 2010 equal to 3.01%.
Our previous credit facility included an aggregate principal amount available of $365.0 million as of
December 31, 2009, which consisted of a $50 million fixed rate loan and a $315 million revolving credit facility.
Borrowings under the revolving credit facility bore interest at a floating rate equal to the one month LIBOR
Market Index Rate plus 1.40%, which equated to 1.63% at December 31, 2009. We also paid an unused line fee
for our previous credit facility equal to 0.30% on any unused portion of the facility. The credit facility was
collateralized by substantially all of our assets and contained certain restrictive covenants.
We had $300.0 million and $319.3 million of borrowings outstanding on our credit facilities as of
December 31, 2010 and December 31, 2009, respectively, of which $50 million was part of the non-revolving
fixed rate loan at both dates.
We were in compliance with all covenants of our credit facilities as of December 31, 2010 and 2009.
Stockholders’ Equity
Stockholders’ equity was $490.5 at December 31, 2010 and $335.5 million at December 31, 2009. The
increase was attributable primarily to $71.7 in net proceeds from a stock offering and $73.5 million in net
income.
Contractual Obligations
The following summarizes our contractual obligations that exist as of December 31, 2010 (amounts in
thousands):
Contractual Obligations
Operating Leases
Line of Credit (1)
Long-term Debt
Purchase Commitments (2) (3)
Employment Agreements
Total
Payments due by period
Less
than 1
year
$
4,323
Total
$
19,372
1 - 3
years
4 - 5
years
$
8,191
$
4,908
More
than 5
years
$
1,950
361,153
2,511
12,004
1,283
29,681
1,228
319,468
-
-
-
261,968
11,890
656,894
$
239,038
10,114
266,762
$
15,330
1,240
55,670
$
7,600
536
332,512
$
-
-
1,950
$
(1) To the extent that a balance is outstanding on our lines of credit, the revolving portion ($250 million) would
be due in December, 2014 and the non-revolving fixed rate sub-limit portion ($50 million) 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. This estimate also assumes that the balance on the line of credit remains
constant from the December 31, 2010 balance of $300.0 million and the balance is paid in full at its 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 $234.4 million.
(3) This amount includes the maximum remaining purchase price of $22.8 million to be paid to acquire the
noncontrolling interest of CCB.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements as of December 31, 2010 as defined by Item 303(a)(4)
of Regulation S-K promulgated under the Securities Exchange Act of 1934.
51
Recent Accounting Pronouncements
In June 2009, the FASB issued guidance on accounting for transfers of financial assets to improve the
reporting for the transfer of financial assets. The guidance must be applied as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited.
We adopted this guidance during the first quarter of 2010, which had no material impact on our consolidated
financial statements.
In June 2009, the FASB issued guidance on consolidation of variable interest entities to improve financial
reporting by enterprises involved with variable interest entities and to provide more relevant and reliable
information to users of financial statements. The guidance is effective as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009 for interim periods within that first
annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited.
We adopted this guidance during the first quarter of 2010, which had no material impact on our consolidated
financial statements.
In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures” (Topic
820): “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), which clarifies and expands
disclosure requirements related to fair value measurements. Disclosures are required for significant transfers
between levels in the fair value hierarchy. Activity in Level 3 fair value measurements is to be presented on a
gross, rather than net, basis. The update clarifies how the appropriate level of disaggregation should be
determined and emphasizes that information sufficient to permit reconciliation between fair value measurements
and line items on the financial statements should be provided. The update is effective for interim and annual
reporting periods beginning after December 15, 2009 except for the expanded disclosures related to activity in
Level 3 fair value measurements which are effective one year later. We adopted ASU 2010-06 during the first
quarter of 2010, which had no material effect on our consolidated financial statements.
In April 2010, the FASB issued ASU No. 2010-18, “Receivables” (Topic 310): “Effect of a Loan
Modification When the Loan Is Part of a Pool that is Accounted for as a Single Asset” (‘ASU 2010-18”), which
clarifies the accounting for acquired loans that have evidence of a deterioration in credit quality since origination
(referred to as “Subtopic 310-30 Loans”). Under ASU 2010-18, an entity may not apply troubled debt
restructuring (“TDR”) accounting guidance to individual Subtopic 310-30 loans that are part of a pool, even if
the modification of those loans would otherwise be considered a troubled debt restructuring. Once a pool is
established, individual loans should not be removed from the pool unless the entity sells, forecloses, or writes off
the loan. Entities would continue to consider whether the pool of loans is impaired if expected cash flows for the
pool change. Subtopic 310-30 loans that are accounted for individually would continue to be subject to TDR
accounting guidance. A one-time election to terminate accounting for loans as a pool, which may be made on a
pool-by-pool basis, is provided upon adoption of ASU 2010-18. ASU 2010-18 is effective for interim or annual
periods ending on or after July 15, 2010. We adopted ASU 2010-18 during the third quarter of 2010, which had
no material effect on our consolidated financial statements.
In July, 2010, the FASB issued ASU No. 2010-20, “Receivables” (Topic 310) “Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”), which requires
significant new disclosures about the allowance for credit losses and the credit quality of financing receivables.
The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and
lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio
segment, while credit quality information, impaired financing receivables and nonaccrual status are to be
presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment
information of troubled debt restructurings will also be required. The disclosures are to be presented at the level
of disaggregation that management uses when assessing and monitoring the portfolio's risk and performance.
ASU 2010-20 is effective for interim and annual reporting periods ending on or after December 15, 2010. We
adopted ASU 2010-20 on December 15, 2010, and have included the required disclosures in the notes to our
consolidated financial statements (see Note 3).
52
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 estimated life of the
account or pool (accretable yield).
We account for our investment in finance receivables under the guidance of ASC Topic 310-30, “Loans and
Debt Securities Acquired with Deteriorated Credit Quality” (ASC 310-30). Under ASC 310-30 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, payments applied to principal and loss provision. Once a static
pool is established for a calendar 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). ASC 310-30 requires that
the excess of the contractual cash flows over expected cash flows, based on our estimates derived from our
proprietary collection models, not be recognized as an adjustment of revenue or expense or on the balance sheet.
ASC 310-30, utilizing the interest method, initially freezes the yield, estimated when the accounts 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 yield, over a portfolio’s remaining life. Any
increase to the yield then becomes the new benchmark for impairment testing. Under ASC 310-30, rather than
lowering the estimated yield 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 yield and is shown as a reduction in revenue
in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables,
net, on the consolidated balance sheets. Income on finance receivables is accrued quarterly based on each static
pool’s effective yield. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the
static pool. This reduction in carrying value is defined as payments applied to principal (also referred to as
finance receivable amortization). Likewise, cash flows that are less than the interest accrual will accrete the
carrying balance. Generally, we do not record accretion in the first six to twelve months of the estimated life of
the pool; accordingly, we utilize either the cost recovery method or cash method when necessary to prevent
accretion as permitted by ASC 310-30. The yield 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
53
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. Under the cash method, revenue is recognized as it
would be under the interest method up to the amount of cash collections. Additionally, we use the cost recovery
method when collections on a particular pool of accounts cannot be reasonably predicted. These cost recovery
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 ASC 310-30 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, 2010 and 2009, we had a valuation allowance of $76.4 million and $51.3 million,
respectively, on our finance receivables.
We implement the accounting for income recognized on finance receivables under ASC 310-30 as follows.
We create each accounting pool using our projections of estimated cash flows and expected economic life. We
then compute the effective yield that fully amortizes the pool to the end of its expected economic life based on
the current projections of estimated cash flows. As actual cash flow results are recorded, we balance those
results to the data contained in our proprietary models to ensure accuracy, then review each accounting pool
watching for trends, actual performance versus projections and curve shape, sometimes re-forecasting future cash
flows utilizing our statistical models. The review process is primarily performed by our finance staff; however,
our operational and statistical staffs may also be involved depending upon actual cash flow results achieved. To
the extent there is overperformance, we will either increase the yield or release the allowance and consider
increasing future cash projections, if persuasive evidence indicates that the overperformance is considered to be a
significant betterment. If the overperformance is considered more of an acceleration of cash flows (a timing
difference), the Company will adjust estimated future cash flows downward which effectively extends the
amortization period, or take no action at all if the amortization period is reasonable and falls within the pools’
expected economic life. In either case, yield may or may not be increased due to the time value of money
(accelerated cash collections). To the extent there is underperformance, we will record an allowance if the
underperformance is significant and will also consider revising estimated future cash flows based on current
period information, or take no action if the pool’s amortization period is reasonable and falls within the currently
projected economic life.
We utilize the provisions ASC Topic 605-45, “Principal Agent Considerations” (“ASC 605-45”), to account
for revenues from our fee for service subsidiaries. ASC 605-45 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.
Our skip tracing subsidiary utilizes both gross and net reporting under ASC 605-45. 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 ASC 605-45 and they are
recorded as such in the line item “Fee income,” primarily because we are primarily liable to the third party
collector. There is a corresponding expense in “Legal and agency fees and costs” for these pass-through items.
We also incur fees to release liens on the repossessed collateral. These lien-release fees are netted in the line
“Legal and agency fees and costs.”
Our government processing and collection business’ 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 component is a billing for the hours incurred on conducting the audit.
This billing is marked up from the actual costs incurred. The gross billing is a component of the line item “Fee
income” and the expense is included in the line item “Compensation and employee services.” The second
component is expenses incurred while conducting the audit. Most jurisdictions will reimburse us for direct
54
expenses incurred for the audit including such items as travel and meals. The billed amounts are included in the
line item “Fee income” and the expense component is included in its appropriate expense category, generally,
“Other operating expenses.”
Our claims administration and payment processing business utilizes net reporting under ASC 605-45. We
generate revenue by filing claims with the class action claims administrator on behalf of our clients and receive
the related settlement payment. Under SEC Staff Accounting Bulletin 104, (“SAB 104”), we have determined
our fee is not earned until we have received the settlement funds. When a payment is received from the claims
administrator for settlement of a lawsuit, we record our fee on a net basis as revenue and include it in the line
item “Fee income.” The balance of the received amounts is recorded as a liability and included in the line item
“Accounts payable.”
Valuation of Acquired Intangibles and Goodwill
In accordance with ASC Topic 350 “Intangibles—Goodwill and Other” (“ASC 350”) 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, at December 31, 2010, 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. There were no such plans in place at December 31, 2010.
Income Taxes
We follow the guidance of FASB ASC Topic 740 “Income Taxes” (“ASC 740”) as it relates to the provision
for income taxes and uncertainty in income taxes. Accordingly, we record a tax provision for the anticipated tax
consequences of the reported results of operations. In accordance with ASC 740 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. The guidance also 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. It also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods and disclosure. The evaluation of a tax position in accordance with the
guidance 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.
55
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 remaining deferred tax assets. In the event that all or part of the deferred tax assets
are determined not to be realizable in the future, a valuation allowance would be established and charged to
earnings in the period such determination is made. Similarly, if we subsequently realize deferred tax assets that
were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in
a positive adjustment to earnings or a decrease in goodwill in the period such determination is made. In addition,
the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the
application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations
could have a material impact on our results of operations and financial position.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Our exposure to market risk relates primarily to interest rate risk with our variable rate credit line. The
average borrowings on our variable rate credit line were $244.2 million and $234.9 million for the years ended
December 31, 2010 and 2009, respectively. Assuming a 200 basis point increase in interest rates, interest
expense would have increased by $5.0 million and $4.8 million for the years ended December 31, 2010 and
2009, respectively. As of December 31, 2009 and 2008, we had $250.0 million and $269.3 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, 2010. 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.
56
Item 8. Financial Statements and Supplementary Data.
See Item 6 for quarterly consolidated financial statements for 2010 and 2009.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
as of December 31, 2010 and 2009
Consolidated Income Statements
for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Changes in Stockholders’ Equity and
Comprehensive Income
for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows
for the years ended December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
Page
58
59
60
61
62
63-86
57
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, 2010 and 2009, and the
related consolidated income statements, and statements of changes in stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year period ended
December 31, 2010. 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, 2010 and 2009, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2010, in conformity with
U.S. generally accepted accounting principles.
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, 2010, 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 25, 2011 expressed an unqualified opinion
on the effectiveness of Portfolio Recovery Associates, Inc.’s internal control over financial
reporting.
Norfolk, Virginia
February 25, 2011
58
Portfolio Recovery Associates, Inc.
Consolidated Balance Sheets
December 31, 2010 and 2009
(Amounts in thousands, except per share amounts)
Assets
2010
2009
Cash and cash equivalents
Finance receivables, net
Accounts receivable, net
Income taxes receivable
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
$
41,094
831,330
8,932
2,363
24,270
61,678
18,466
7,775
$
20,265
693,462
9,169
4,460
21,864
29,299
10,756
5,158
Total assets
$
995,908
$
794,433
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable
Accrued expenses and other liabilities
Accrued payroll and bonuses
Net deferred tax liability
Line of credit
Long-term debt
Derivative instrument
Total liabilities
Commitments and contingencies (Note 19)
Redeemable noncontrolling interest
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,
17,064 issued and outstanding shares at December 31, 2010, and
15,596 issued and 15,514 outstanding shares at December 31, 2009
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of taxes
Total stockholders' equity
$
3,227
4,904
15,445
164,971
300,000
2,396
-
490,943
$
4,108
4,506
11,633
117,206
319,300
1,499
701
458,953
14,449
-
171
163,538
326,807
-
490,516
-
-
155
82,400
253,353
(428)
335,480
Total liabilities and stockholders' equity
$
995,908
$
794,433
The accompanying notes are an integral part of these consolidated financial statements.
59
Portfolio Recovery Associates, Inc.
Consolidated Income Statements
For the years ended December 31, 2010, 2009 and 2008
(Amounts in thousands, except per shares amounts)
Revenues:
Income recognized on finance receivables, net
Fee income
Total revenues
Operating expenses:
Compensation and employee services
Legal and agency fees and costs
Outside fees and services
Communications
Rent and occupancy
Depreciation and amortization
Other operating expenses
Total operating expenses
Income from operations
Other income and (expense):
Interest income
Interest expense
Income before income taxes
Provision for income taxes
Net income
2010
2009
2008
$
309,680
63,026
$
215,612
65,479
$
206,486
56,789
372,706
281,091
263,275
124,077
60,941
12,554
17,226
5,313
12,437
10,296
242,844
129,862
65
(9,052)
120,875
47,004
106,388
46,978
9,570
14,773
4,761
9,213
8,799
200,482
80,609
3
(7,909)
72,703
28,397
88,073
52,869
8,883
10,304
3,908
7,424
6,977
178,438
84,837
60
(11,151)
73,746
28,384
$
73,871
$
44,306
$
45,362
Less net income attributable to redeemable noncontrolling interest
(417)
-
-
Net income attributable to Portfolio Recovery Associates, Inc.
$
73,454
$
44,306
$
45,362
Net income per common share attributable to Portfolio Recovery Associates, Inc:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
$
$
4.37
4.35
$
$
2.87
2.87
$
$
2.98
2.97
16,820
16,885
15,420
15,454
15,229
15,292
The accompanying notes are an integral part of these consolidated financial statements.
60
Portfolio Recovery Associates, Inc.
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income
For the years ended December 31, 2010, 2009 and 2008
(Amounts in thousands)
Balance at December 31, 2007
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
Common Stock
Shares
15,159
Amount
$
152
Additional
Paid-in
Capital
Retained
Earnings
$
71,443
$
163,685
Accumulated Other
Comprehensive Income
(Loss), Net of Taxes
$
-
Total
Stockholders'
Equity
$
235,280
-
-
-
-
-
75
52
-
-
1
-
-
-
-
-
-
606
1,847
141
357
180
45,362
-
-
-
-
-
-
-
89
-
-
-
-
-
45,362
89
45,451
607
1,847
141
357
180
Balance at December 31, 2008
15,286
$
153
$
74,574
$
209,047
$
89
$
283,863
Net income
Net unrealized change in:
Interest rate swap derivative, net of tax
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
-
-
198
30
-
-
-
-
2
-
-
-
-
-
1,913
1,170
3,820
923
44,306
-
-
-
-
-
-
(517)
-
-
-
-
44,306
(517)
43,789
1,915
1,170
3,820
923
Balance at December 31, 2009
15,514
$
155
$
82,400
$
253,353
$
(428)
$
335,480
Net income
Net unrealized change in:
Interest rate swap derivative, net of tax
Comprehensive income
Exercise of stock options and vesting of nonvested shares
Proceeds from stock offering, net of offering costs
Amortization of share-based compensation
Income tax benefit from share-based compensation
Issuance of common stock for acquisition
-
-
38
1,438
-
-
74
-
-
2
14
-
-
-
-
-
55
71,674
4,203
256
4,950
73,454
-
-
-
-
-
-
-
428
-
-
-
-
-
73,454
428
73,882
57
71,688
4,203
256
4,950
Balance at December 31, 2010
17,064
$
171
$
163,538
$
326,807
$
-
$
490,516
The accompanying notes are an integral part of these consolidated financial statements.
61
Portfolio Recovery Associates, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2010, 2009 and 2008
(Amounts in thousands)
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 receivable
Accounts payable
Income taxes receivable
Accrued expenses
Accrued payroll and bonuses
2010
2009
2008
$
73,871
$
44,306
$
45,362
4,203
12,437
47,493
1,204
237
(881)
2,097
(892)
3,812
3,820
9,213
28,927
(1,862)
(891)
670
(873)
192
1,783
141
7,424
30,854
(555)
(1,663)
(1,167)
(385)
(413)
2,120
Net cash provided by operating activities
143,581
85,285
81,718
Cash flows from investing activities:
Purchases of property and equipment
Acquisition of finance receivables, net of buybacks
Collections applied to principal on finance receivables
Business acquisitions, net of cash acquired
Contingent payment made for business acquisition
(9,546)
(357,530)
219,662
(23,000)
(117)
(4,521)
(282,023)
152,391
-
(100)
(6,139)
(273,746)
120,213
(26,041)
-
Net cash used in investing activities
(170,531)
(134,253)
(185,713)
Cash flows from financing activities:
Proceeds from exercise of options
Income tax benefit from share-based compensation
Payment of liability-classified contingent consideration
Proceeds from line of credit
Principal payments on line of credit
Payments of line of credit origination costs and fees
Proceeds from stock offering, net of offering costs
Proceeds from long-term debt
Principal payments on long-term debt
Principal payments on capital lease obligations
Net cash provided by financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
57
256
(2,000)
177,500
(196,800)
(3,819)
71,688
1,569
(672)
-
47,779
20,829
20,265
1,915
923
-
123,500
(72,500)
-
-
2,036
(537)
(5)
607
357
-
171,300
(71,000)
-
-
-
-
(98)
55,332
101,166
6,364
13,901
(2,829)
16,730
Cash and cash equivalents, end of year
$
41,094
$
20,265
$
13,901
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Noncash investing and financing activities:
Common stock issued for acquisition
Net unrealized change in fair value of derivative instrument
Distributions payable relating to noncontrolling interest
$
$
9,398
107
$
$
8,004
365
$
11,322
$
3
$
$
$
4,950
701
1,291
1,170
$
(790)
$
$
-
$
1,847
$
89
$
-
The accompanying notes are an integral part of these consolidated financial statements.
62
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. PRA Inc owns all outstanding
membership units of PRA, PRA Holding I, LLC, PRA Holding II, LLC, PRA Holding III, LLC (“PRA Holding
III”), PRA Receivables Management, LLC (formerly d/b/a Anchor Receivables Management), PRA Location
Services, LLC (d/b/a IGS Nevada), PRA Government Services, LLC (d/b/a RDS) and MuniServices, LLC. On
March 15, 2010, PRA Inc acquired 62% of the membership units of Claims Compensation Bureau, LLC (“CCB”).
The business of PRA Inc, a Delaware corporation, and its subsidiaries (collectively, the “Company”) revolves
around the detection, collection, and processing of both unpaid and normal-course receivables originally owed to
credit grantors, governments, retailers and others. The Company’s primary business is the purchase, collection and
management of portfolios of defaulted consumer receivables. These accounts 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 Litigation 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 customer debts. The Company also provides services for 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 obtaining location information for
clients in support of their collection activities (known as skip tracing), and the management of both delinquent and
non-delinquent receivables for government entities. In addition, through its newly acquired CCB subsidiary, the
Company provides class action claims settlement recovery services and related payment processing to its corporate
clients.
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 ceased 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, is
expanding into surrounding states.
On October 13, 2006, PRA formed a wholly owned subsidiary, PRA Holding II, LLC (“PRA Holding II”), and is
its 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. PRA Holding II originally purchased the real property in 2006 and subsequently
conveyed it to the Industrial Development Board of the City of Jackson. The Company leases back the property
from the Industrial Board under a long term Master Industrial Lease Agreement, and has the option to re-purchase
the property at any time during the term of the lease.
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
63
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
enhancement and related services to state and local governments. The consolidated income statements include the
results of operations of MuniServices for the period from July 1, 2008 through December 31, 2010.
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. The consolidated income statements include the results of operations of BPA for the period
from August 1, 2008 through December 31, 2010.
On October 9, 2009, PRA formed a wholly owned subsidiary, PRA Holding III, LLC (“PRA Holding III”) d/b/a
PRA Cafe. The purpose of PRA Holding III is to own and operate the Company’s employee café located at the
Company’s headquarters on Norfolk, Virginia.
On March 15, 2010, the Company acquired 62% of the membership units of Claims Compensation Bureau, LLC
(“CCB”). CCB is a leading provider of class action claims settlement recovery services and related payment
processing to corporate clients. The consolidated income statements include the results of operations of CCB for
the period from March 15, 2010 through December 31, 2010.
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, PRA Holding III, IGS, RDS, MuniServices and CCB. All significant
intercompany accounts and transactions have been eliminated. Under the guidance of the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 “Segment Reporting” (“ASC
280”), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC
280, and therefore, it has one reportable segment, accounts receivable management, based on similarities among the
operating units including homogeneity of services, service delivery methods and use of technology.
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 $1,457,807 and $1,709,673 at December 31, 2010 and 2009, respectively. There is an
offsetting liability that is included in “Accounts payable” on the accompanying consolidated balance sheets.
Other assets: Other assets consist mainly of prepaid expenses and deposits, line of credit origination costs and
fees and capitalizable internal use software development costs on projects that are in the development stage.
Concentrations of credit risk: Financial instruments, which potentially expose the Company to concentrations
of credit risk, consist primarily of cash, 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 ASC Topic 815 “Derivatives and Hedging” (“ASC 815”), 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 or loss 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
64
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
instruments that are designated and qualify as a cash-flow hedge, the effective portion of the gain or loss on the
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 pools of accounts that have experienced deterioration of credit quality between origination and the
Company's acquisition of the accounts. The amount paid for any pool reflects the Company’s determination that it
is probable the Company will be unable to collect all amounts due according to an 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 aggregates 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 pool's cash flows expected to be collected over the
amount paid, is accreted into income recognized on finance receivables over the remaining estimated life of the pool
(accretable yield).
The Company accounts for its investment in finance receivables under the guidance of FASB ASC Topic 310-30
“Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). Under ASC 310-30, 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, payments applied to principal, and loss provision.
Once a static pool is established for a calendar 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). ASC 310-30
requires that the excess of the contractual cash flows over expected cash flows, based on the Company’s estimates
derived from its proprietary collection models, not be recognized as an adjustment of revenue or expense or on the
balance sheet. ASC 310-30, utilizing the interest method, initially freezes the yield estimated when the accounts 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 yield, over a portfolio’s remaining
life. Any increase to the yield then becomes the new benchmark for impairment testing. Under ASC 310-30, rather
than lowering the estimated yield 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 yield and is shown as a reduction in revenue in
the consolidated income statements with a corresponding valuation allowance offsetting finance receivables, net, on
the consolidated balance sheets. Income on finance receivables is accrued quarterly based on each static pool’s
effective yield. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static
pool. This reduction in carrying value is defined as payments applied to principal (also referred to as finance
receivable amortization). Likewise, cash flows that are less than the interest accrual will increase, or “accrete,” the
carrying balance. The Company generally does not record accretion in the first six to twelve months of the
estimated life of the pool; accordingly, the Company utilizes either the cost recovery method or cash method when
necessary, as permitted by ASC 310-30, to prevent accretion. The yield is estimated and periodically recalculated
65
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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. Under the cash method, revenue is
recognized as it would be under the interest method up to the amount of cash collections. Additionally, the
Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably
predicted. These cost recovery 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, 2010 and 2009, the Company had net finance receivables
balances in pools accounted for under the cost recovery method of $1.6 million and $2.9 million, respectively.
The Company establishes valuation allowances, if necessary, for acquired accounts subject to ASC 310-30 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, 2010 and 2009, the Company had an allowance against its finance
receivables of $76,407,000 and $51,255,000, respectively.
The Company implements the accounting for income recognized on finance receivables under ASC 310-30 as
follows. The Company creates each accounting pool using its projections of estimated cash flows and expected
economic life. The Company then computes the effective yield that fully amortizes the pool to the end of its
expected economic life based on the current projections of estimated cash flows using the interest method. As
actual cash flow results are recorded, the Company balances those results to the data contained in its proprietary
models to ensure accuracy, then reviews each accounting pool watching for trends, actual performance versus
projections and curve shape (a graphical depiction of the timing of cash flows), sometimes re-forecasting future
cash flows utilizing the Company’s statistical models. The review process is primarily performed by the
Company’s finance staff; additionally, the Company’s operational and statistical staffs may also be involved. To
the extent there is overperformance, the Company will either increase the yield or release the allowance and
consider increasing future cash projections, if persuasive evidence indicates that the overperformance is considered
to be a significant betterment. If the overperformance is considered more of an acceleration of cash flows (a timing
difference), the Company will adjust estimated future cash flows downward which effectively extends the
amortization period, or take no action at all if the amortization period is reasonable and falls within the pool’s
expected economic life. In either case, the yield may or may not be increased due to the time value of money
(accelerated cash collections). To the extent there is underperformance, the Company will record an allowance if
the underperformance is significant and will also consider revising estimated future cash flows based on current
period information, or take no action if the pool’s amortization period is reasonable and falls within the currently
projected economic life.
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, 2010,
2009 and 2008 was $3,295,515, $3,231,926 and $3,078,560, respectively. During the years ended December 31,
2010, 2009 and 2008 the Company capitalized $1,073,769, $969,927 and $1,250,940, respectively, of these direct
acquisition fees. During the years ended December 31, 2010, 2009 and 2008 the Company amortized $1,010,180,
$816,561 and $607,296, 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 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.
Fee income: The Company utilizes the provisions ASC Topic 605-45 “Principal Agent Considerations” (“ASC
605-45”) to account for fee income revenue from its contingent fee, skip-tracing and government processing and
collection subsidiaries. ASC 605-45 requires an analysis to be completed to determine if certain revenues should be
66
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
reported gross or reported net of their related operating expense. This analysis includes an assessment of who
retains inventory/credit risk, which 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 subsidiary, the portfolios which are placed for servicing are owned by its
clients and are placed under a contingent fee commission arrangement. The Company’s subsidiary is paid to collect
funds from the client’s debtors and earns a commission generally expressed as a percentage of the gross collection
amount. The “Fee income” line of the income statement reflects the contingent fee amount earned, and not the
gross collection amount. The Company ceased its Anchor contingent fee operation during the second quarter of
2008.
The Company’s skip tracing subsidiary utilizes both gross and net reporting under ASC 605-45. IGS generates
revenue by working an account and successfully locating a customer for its client. An “investigative fee” is
received for these services. In addition, the Company incurs “agent expenses” where it hires a third-party collector
to effectuate repossession. In many cases the Company has an arrangement with its client which allows it to bill the
client for these fees. The Company has determined these fees to be gross revenue based on the criteria in ASC 605-
45 and they are recorded as such in the line item “Fee income,” primarily because the Company is primarily liable
to the third party collector. There is a corresponding expense in “Legal and agency fees and costs” for these pass-
through items. IGS also incurs fees to release liens on the repossessed collateral. These lien-release fees are netted
in the line “Legal and agency fees and costs.”
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 billing for the hours incurred on conducting the audit. This billing is marked up
from the actual costs incurred. The gross billing is a component of the line item “Fee income” 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 “Fee income” and the
expense component is included in its appropriate expense category, generally, “Other operating expenses.”
The Company’s claims administration and payment processing business utilizes net reporting under ASC 605-45.
CCB generates revenue by filing claims with the class action claims administrator on behalf of its clients and
receives the related settlement payment. Under SEC Staff Accounting Bulletin 104, (“SAB 104”), the Company has
determined its fee is not earned until it has received the settlement funds. When a payment is received from the
claims administrator for settlement of a lawsuit, the Company records its fee on a net basis as revenue and includes
it in the line item “Fee income.” The balance of the received amounts is recorded as a liability and included in the
line item “Accounts payable.”
Property and equipment: Property and equipment, including improvements that significantly add to the
productive capacity or extend useful life, are recorded at cost, while maintenance and repairs are expensed
currently. Property and equipment are depreciated over their useful lives using the straight-line method of
depreciation. Software and computer equipment are 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 term 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: In connection with the Company’s business acquisitions, the Company recorded certain
tangible and intangible assets. Intangible assets recorded include client and customer relationships, non-compete
agreements, trademarks and goodwill. In accordance FASB ASC Topic 350 “Intangibles-Goodwill and Other”
(“ASC 350”), the Company amortizes intangible assets over their estimated useful lives. In addition, Goodwill,
pursuant to ASC 350, is not amortized but rather is reviewed at least annually for impairment. See Note 8 for
additional disclosure.
67
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Income taxes: The Company records a tax provision for the anticipated tax consequences of the reported results
of operations. In accordance with FASB ASC Topic 740 “Income Taxes” (“ASC 740”), 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. The Company recognizes the effect of income tax positions only if
those positions are more likely than not to be 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. The Company records interest and penalties related to unrecognized
tax benefits as a component of income tax expense.
Effective with the Company’s 2002 tax filings, the Company adopted the cost recovery method of income
recognition for tax purposes. The Company believes cost recovery to be an acceptable tax revenue recognition
method for companies in the bad debt purchasing industry and results in the reduction of current taxable income as,
for tax purposes, collections on finance receivables are applied first to principal to reduce the finance receivables to
zero before any income is recognized.
The Company believes that it is more likely than not that forecasted income, including income that may be
generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities,
will be sufficient to fully recover the 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 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
FASB ASC Topic 840 “Leases” (“ASC 840”). 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.
Share-based compensation: The Company accounts for share-based compensation in accordance with the
provisions of FASB ASC Topic 718 “Compensation-Stock Compensation” (“ASC 718”). ASC 718 requires that
compensation expense associated with stock options and nonvested share awards be recognized in the income
statement. Based on historical experience, the Company assumes a forfeiture rate for most option and nonvested
share grants. Most options and nonvested share awards generally vest between one and five years from the grant
date and are expensed on a straight-line basis over the vesting period. See Note 15 for additional disclosure.
Use of estimates: The preparation of the consolidated 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 consolidated
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
68
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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 provision of FASB ASC Topic 820
“Fair Value Measurements and Disclosures” (“ASC 820”). ASC 820 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. ASC 820 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. See Note 14 for additional
disclosure.
Recent Accounting Pronouncements: In June 2009, the FASB issued guidance on accounting for transfers of
financial assets to improve the reporting for the transfer of financial assets. The guidance must be applied as of the
beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Company adopted the guidance during the first quarter of 2010, which had no
material impact on its consolidated financial statements.
In June 2009, the FASB issued guidance on consolidation of variable interest entities to improve financial
reporting by enterprises involved with variable interest entities and to provide more relevant and reliable
information to users of financial statements. The guidance is effective as of the beginning of each reporting entity’s
first annual reporting period that begins after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The
Company adopted the guidance during the first quarter of 2010, which had no material impact on its consolidated
financial statements.
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value
Measurements and Disclosures” (Topic 820): “Improving Disclosures about Fair Value Measurements” (“ASU
2010-06”), which clarifies and expands disclosure requirements related to fair value measurements. Disclosures are
required for significant transfers between levels in the fair value hierarchy. Activity in Level 3 fair value
measurements is to be presented on a gross, rather than net, basis. The update clarifies how the appropriate level of
disaggregation should be determined and emphasizes that information sufficient to permit reconciliation between
fair value measurements and line items on the financial statements should be provided. The update is effective for
interim and annual reporting periods beginning after December 15, 2009, except for the expanded disclosures
related to activity in Level 3 fair value measurements, which are effective one year later. The Company adopted
ASU 2010-06 during the first quarter of 2010, which had no material effect on its consolidated financial statements.
In April 2010, the FASB issued ASU No. 2010-18, “Receivables” (Topic 310): “Effect of a Loan Modification
When the Loan Is Part of a Pool that is Accounted for as a Single Asset” (‘ASU 2010-18”), which clarifies the
accounting for acquired loans that have evidence of a deterioration in credit quality since origination (referred to as
“Subtopic 310-30 Loans”). Under ASU 2010-18, an entity may not apply troubled debt restructuring (“TDR”)
accounting guidance to individual Subtopic 310-30 loans that are part of a pool, even if the modification of those
loans would otherwise be considered a troubled debt restructuring. Once a pool is established, individual loans
should not be removed from the pool unless the entity sells, forecloses, or writes off the loan. Entities would
continue to consider whether the pool of loans is impaired if expected cash flows for the pool change. Subtopic
310-30 loans that are accounted for individually would continue to be subject to TDR accounting guidance. A one-
time election to terminate accounting for loans as a pool, which may be made on a pool-by-pool basis, is provided
upon adoption of ASU 2010-18. ASU 2010-18 is effective for interim or annual periods ending on or after July 15,
2010. The Company adopted ASU 2010-18 during the third quarter of 2010, which had no material effect on its
consolidated financial statements.
In July 2010, the FASB issued ASU No. 2010-20, “Receivables” (Topic 310) “Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”), which requires
significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The
requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease
69
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio
segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented
by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information
of troubled debt restructurings will also be required. The disclosures are to be presented at the level of
disaggregation that management uses when assessing and monitoring the portfolio's risk and performance. ASU
2010-20 is effective for interim and annual reporting periods ending on or after December 15, 2010. The Company
adopted ASU 2010-20 on December 15, 2010, and has included the required disclosures in the notes to its
consolidated financial statements (see Note 3).
3.
Finance Receivables, net:
Changes in finance receivables, net for the years ended December 31, 2010 and 2009, were as follows (amounts
in thousands):
2010
2009
Balance at beginning of year
Acquisitions of finance receivables, net of buybacks
$
693,462
357,530
$
563,830
282,023
Cash collections
Income recognized on finance receivables, net
Cash collections applied to principal
(529,342)
309,680
(219,662)
(368,003)
215,612
(152,391)
Balance at end of year
$
831,330
$
693,462
At the time of acquisition, the life of each pool is generally estimated to be between 72 to 96 months based on
projected amounts and timing of future cash collections using the proprietary models of the Company. As of
December 31, 2010, the Company had $831.3 million in finance receivables, net included in the consolidated
balance sheet. Based upon current projections, cash collections applied to principal are estimated to be as follows
for the following years ending December 31, (amounts in thousands):
December 31, 2011
December 31, 2012
December 31, 2013
December 31, 2014
December 31, 2015
December 31, 2016
$
$
221,841
219,962
212,298
137,253
37,040
2,936
831,330
During the year ended December 31, 2010, the Company purchased $6.8 billion of face value of finance
receivables. During the year ended December 31, 2009, the Company purchased $8.1 billion of face value of
finance receivables. At December 31, 2010, the estimated remaining collections on the receivables purchased
during 2010 and 2009 were $674.3 million and $486.2 million, respectively. There were no sales of finance
receivables during the years ended December 31, 2010 and 2009.
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 the balance
sheet date. Additions represent the original expected accretable yield to be earned by the Company based on its
proprietary buying models. 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 result from the Company’s decrease in its estimates of future cash flows and 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, 2010 and 2009 were as follows (amounts in thousands):
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Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
2010
2009
Balance at beginning of year
Income recognized on finance receivables, net
Additions
Reclassifications from/(to) nonaccretable difference
Balance at end of year
$
$
721,984
(309,680)
403,252
76,632
892,188
551,735
(215,612)
408,935
(23,074)
721,984
$
$
ASC 310-30 requires that a valuation allowance be recorded for significant 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.
In any given period, the Company may be required to record valuation allowances due to pools of receivables
underperforming expectations. Factors that may contribute to the recording of valuation allowances may include
both internal as well as external factors. External factors which may have an impact on the collectability, and
subsequently to the overall profitability of purchased pools of defaulted consumer receivables would include:
overall market pricing for pools of consumer receivables (which is driven by both supply and demand), new laws or
regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of
the economy. Internal factors which may have an impact on the collectability, and subsequently the overall
profitability of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and
post-acquisition scoring and modeling estimates, non-optimal operational activities (which relates to the collection
and movement of accounts on both the collection floor of the Company and external channels), as well as decreases
in productivity related to turnover and tenure of the Company’s collection staff. The following is a summary of
activity within the Company’s valuation allowance account for the years ended December 31, 2010, 2009 and 2008
(amounts in thousands):
Valuation allowance - finanace receivables:
Beginnning balance
Allowance charges
Reversal of previous recorded allowance charges
Net allowance charge
2010
Purchased
Bankruptcy Portfolio
Total
Core Portfolio
$
47,580
$
3,675
$
51,255
23,350
(900)
22,450
2,975
(273)
2,702
26,325
(1,173)
25,152
Ending balance: loans acquired with deteriorated credit quality
$
70,030
$
6,377
$
76,407
Finance receivables, net:
$
411,437
$
419,893
$
831,330
Valuation allowance - finanace receivables:
Beginnning balance
Allowance charges
Reversal of previous recorded allowance charges
Net allowance charge
2009
Purchased
Bankruptcy Portfolio
Total
Core Portfolio
$
20,485
$
3,135
$
23,620
28,145
(1,050)
27,095
620
(80)
540
28,765
(1,130)
27,635
Ending balance: loans acquired with deteriorated credit quality
$
47,580
$
3,675
$
51,255
Finance receivables, net:
$
403,432
$
290,030
$
693,462
71
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Core Portfolio
2008
Purchased
Bankruptcy Portfolio
Total
Valuation allowance - finanace receivables:
Beginnning balance
Allowance charges
Reversal of previous recorded allowance charges
Net allowance charge
$
3,450
$
780
$
4,230
18,030
(995)
17,035
2,375
(20)
2,355
20,405
(1,015)
19,390
Ending balance: loans acquired with deteriorated credit quality
$
20,485
$
3,135
$
23,620
Finance receivables, net:
$
389,736
$
174,094
$
563,830
4.
Accounts Receivable, net:
Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on
accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash
flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts
receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take
into account current market conditions and its customers’ financial condition, the amount of receivables in dispute,
and the current receivables aging and current payment patterns. The Company reviews its allowance for doubtful
accounts monthly. Account balances are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The balance of the allowance for doubtful accounts at
December 31, 2010 and 2009 was $2.5 million and $2.9 million, respectively. The Company does not have any off
balance sheet credit exposure related to its customers.
5. Operating Leases:
The Company leases office space and equipment under operating leases. Rental expense was $4,299,513,
$3,755,478 and $3,060,710 for the years ended December 31, 2010, 2009 and 2008, respectively.
Future minimum lease payments for operating leases at December 31, 2010, are as follows (amounts in
thousands):
2011
2012
2013
2014
2015
Thereafter
$
4,323
4,121
4,070
2,611
2,297
1,950
Total future minimum lease payments
$
19,372
6.
Business Acquisitions:
On March 15, 2010, the Company acquired 62% of the membership units of Claims Compensation Bureau, LLC
(“CCB”). The remaining 38% of the membership units were acquired by Claims Compensation Bureau, Inc.,
CCB’s predecessor. Claims Compensation Bureau, Inc. was founded in 1996 and is a leading provider of class
action claims settlement recovery services and related payment processing to corporate clients. CCB’s process
allows clients to maximize settlement recoveries, in many cases participating in settlements they would otherwise
not know existed. The company charges fees for its services and works with clients to identify, prepare and submit
claims to class action administrators charged with dispersing class action settlement funds. In connection with the
acquisition, the president and founder of CCB, as well as another member of its senior management, entered into
72
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
long-term employment agreements with the Company. The consolidated income statement for the year ended
December 31, 2010 includes the results of operations of CCB from March 15, 2010 through December 31, 2010.
The Company’s initial investment for the 62% ownership of CCB was paid for with $23.0 million in cash plus
$2.0 million in deferred payments which were paid during 2010. As part of the agreement, the Company has the
right through February 28, 2015 to purchase the remaining 38% of CCB at certain multiples of EBITDA (earnings
before interest, taxes, depreciation and amortization). In addition, beginning March 1, 2012 and ending February
28, 2018, the noncontrolling interest can require the Company to purchase its units at pre-defined multiples of
EBITDA, as defined (see Note 7). Any future acquisitions by the Company of the noncontrolling interest will be
accounted for as an equity transaction.
The Company accounted for this purchase in accordance with ASC Topic 805, “Business Combinations.” Under
this guidance, an entity is required to recognize the assets acquired, liabilities assumed, any noncontrolling interest
in the acquiree, and the consideration given at their fair value on the acquisition date. The following tables
summarize the fair value of the consideration given for CCB, as well as the fair value of the assets acquired,
liabilities assumed, and the noncontrolling interest in the acquiree as of the March 15, 2010 acquisition date
(amounts in thousands):
Purchase price consideration given:
Cash
Contingent consideration arrangement
Fair value of total consideration given
$
$
23,000
2,000
25,000
Recognized amounts of identifiable assets are as follows (amounts in thousands):
Contractual relationships
Tradenames
Non-compete agreements
Cash
Software
Other assets
Total identifiable net assets acquired
Goodwill
Estimated fair value of acquired business
Redeemable noncontrolling interest in CCB
Purchase price consideration given
$
$
12,000
400
500
500
67
2
13,469
26,854
40,323
15,323
25,000
The estimated fair value of the noncontrolling interest in CCB was determined as the percentage of the
noncontrolling interest multiplied by the fair value of all assets which were derived from the acquisition of CCB on
March 15, 2010.
On June 11, 2010, the Company’s wholly-owned subsidiary, RDS, acquired substantially all the assets of Tax
Return, Inc. for $500,000. The purchase price was allocated to a non-competition agreement, fixed assets and
goodwill, all of which are included as assets of RDS. There is no contingent consideration associated with this
acquisition.
The acquisition of CCB levers the Company’s competency in payment and administrative processing, while
broadening its scope of services. The acquisition of Tax Return, Inc. further expands the audit expertise and
capacity of the Company’s government services business.
73
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
7.
Redeemable Noncontrolling Interest:
In accordance with ASC 810, the Company has consolidated all financial statement accounts of CCB in its
consolidated balance sheet at December 31, 2010 and its consolidated income statement for the year ended
December 31, 2010. The redeemable noncontrolling interest amount is separately stated on the consolidated
balance sheet and represents the 38% interest in CCB not owned by the Company. In addition, net income
attributable to the noncontrolling interest is stated separately in the consolidated income statement.
The Company has the right through February 28, 2015 to purchase the remaining 38% of CCB at certain
multiples of EBITDA. In addition, beginning March 1, 2012 and ending February 28, 2018, the noncontrolling
interest can require the Company to purchase its units at pre-defined multiples of EBITDA.
The Company applies the provisions of FASB ASC Topic 480-10-S99 ’Distinguishing Liabilities from Equity”
(“ASC 480-10-S99”) which provides guidance on the accounting for equity securities that are subject to mandatory
redemption requirements or whose redemption is outside the control of the issuer. The noncontrolling interest “put”
arrangement is accounted for under ASC 480-10-S99, as redemption under the “put” arrangement is outside the
control of the Company. As such, the redeemable noncontrolling interest is recorded outside of “permanent” equity.
Although the noncontrolling interest was redeemable by the Company as of the reporting date, it was not yet
redeemable by the holder of the “put” option. The Company measures the redeemable noncontrolling interest at the
greater of its ASC 480-10-S99 measurement amount (estimated redemption value of the “put” option embedded in
the noncontrolling interest) or its measurement amount under the guidance of ASC 810. The ASC 810
measurement amount includes adjustments for the noncontrolling interest’s pro-rata share of earnings, losses and
distributions, pursuant to the limited liability company agreement. Adjustments to the measurement amount are
recorded to stockholders’ equity. The Company used a present value calculation to estimate the redemption value
of the “put” option as of the reporting date. If material, the Company adjusts the numerator of earnings per share
calculations for the current period change in the excess of the noncontrolling interest’s ASC 480-10-S99
measurement amount over the greater of its ASC 810 measurement amount or the estimated fair value of the
noncontrolling interest. The estimated redemption value of the noncontrolling interest, as if it were currently
redeemable by the holder of the put option under the terms of the put arrangement, was $22.8 million at December
31, 2010.
The following table represents the changes in the redeemable noncontrolling interest for the period from March
15, 2010 to December 31, 2010 (amounts in thousands):
Acquisition date fair value of redeemable noncontrolling interest
Net income attributable to redeemable noncontrolling interest
Distributions payable
Redeemable noncontrolling interest at December 31, 2010
$
$
15,323
417
(1,291)
14,449
8. Goodwill and Intangible Assets, net:
Intangible assets consist of the following at December 31, 2010 and 2009 (amounts in thousands):
2010
2009
$
$
29,823
3,053
2,500
(16,910)
18,466
17,823
2,527
2,100
(11,694)
10,756
$
$
Client and customer relationships
Non-compete agreements
Trademarks
Accumulated amortization
Intangible assets, net
74
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
In accordance with ASC 350, the Company is amortizing the following intangible assets over the estimated
useful lives as indicated:
IGS
RDS (2)
The Palmer Group (2)
MuniServices (2)
BPA (2)
CCB
Tax Return, Inc. (2)
Acquisition Date
Client and Customer
Relationships
October 1, 2004
7 years
July 29, 2005
July 25, 2007
July 1, 2008
August 1, 2008
March 15, 2010
June 11, 2010
10 years
2.4 years (1)
11 years
10 years
4-7 years
-
Non-Compete Agreements
3 years (1)
3 years (1)
-
3 years
2.4 years
3 years
3.5 years
Trademarks
-
-
-
14 years
-
14 years
-
(1) These intangible assets are fully amortized with no expense recognized during 2010.
(2) Operates as part of the Company’s government services group.
The combined original weighted average amortization period is 8.1 years. The Company reviews these
relationships at least annually for impairment. Total amortization expense for the years ended December 31, 2010,
2009 and 2008 was $5,215,679, $2,673,108 and $2,140,942, respectively.
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, BPA and CCB 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, MuniServices and CCB 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
and CCB acquisitions. 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 original expected
cash flows.
The future amortization of these intangible assets is estimated to be as follows as of December 31, 2010 (amounts
in thousands):
2011
2012
2013
2014
2015
Thereafter
$
4,813
3,690
3,021
2,267
1,797
2,878
18,466
$
In addition, Goodwill, pursuant to ASC 350, is not amortized but rather is reviewed at least annually for
impairment. During the fourth quarter of 2010, the Company underwent its annual review of goodwill. Based upon
the results of this review, which was conducted as of October 1, 2010, 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, 2010, that would indicate a triggering event and
thereby necessitate an impairment charge to goodwill or the other intangible assets. At December 31, 2010 and
2009, the carrying value of goodwill was $61.7 million and $29.3 million, respectively. The $32.4 million increase
in the carrying value of goodwill during the year ended December 31, 2010 mainly relates to the purchase of CCB
on March 15, 2010 (see Note 6) and additional contingent purchase price of $5.0 million paid in stock relating to the
achievement of the earn-out provisions of the MuniServices acquisition. The $1.8 million increase in the carrying
value of goodwill during the year ended December 31, 2009 relates to additional purchase price consideration paid
for the acquisitions of MuniServices and BPA.
75
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
9.
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 $1,302,510, $1,141,785 and $959,902 for the years ended December 31, 2010, 2009 and 2008,
respectively.
10. Line of Credit:
On December 20, 2010, the Company entered into a credit agreement with Bank of America, N.A., as
administrative agent, and a syndicate of lenders named therein (the “Credit Agreement”). Under the terms of the
Credit Agreement, the credit facility includes an aggregate principal amount available of $407.5 million which
consists of a $50 million fixed rate loan that matures on May 4, 2012, which was transferred from the Company’s
existing credit agreement, and a $357.5 million revolving credit facility that matures on December 20, 2014. The
revolving credit facility will be automatically increased by $50 million upon the maturity and repayment of the fixed
rate loan. The fixed rate loan bears interest at a rate of 6.8% per annum, payable monthly in arrears. The revolving
loans accrue interest, at the option of the Company, at either the base rate plus 1.75% per annum or the Eurodollar
rate (as defined) for the applicable term plus 2.75% per annum. The base rate is the highest of (a) the Federal Funds
Rate plus 0.50%, (b) Bank of America’s prime rate, and (c) the Eurodollar rate plus 1.00%. Interest is payable on
base rate loans quarterly in arrears and on Eurodollar loans in arrears on the last day of each interest period or if
such interest period exceeds three months, every three months. The Company’s revolving credit facility includes a
$20 million swingline loan sublimit and a $20 million letter of credit sublimit. It also contains an accordion loan
feature that allows the Company to request an increase of up to $142.5 million in the amount available for
borrowing under the revolving credit facility, whether from existing or new lenders, subject to terms of the Credit
Agreement. No existing lender is obligated to increase its commitment. The Credit Agreement is secured by a first
priority lien on substantially all of the Company’s assets. The Credit Agreement contains restrictive covenants and
events of default include the following:
•
borrowings may not exceed 30% of the ERC of all its eligible asset pools plus 75% of its eligible accounts
receivable;
•
•
•
•
•
•
•
the consolidated leverage ratio (as defined) cannot exceed 2.0 to 1.0 as of the end of any fiscal quarter;
consolidated Tangible Net Worth (as defined) must equal or exceed $309,452,000 plus 50% of positive
consolidated net income for each fiscal quarter beginning December 31, 2010, plus 50% of the net
proceeds of any equity offering;
capital expenditures during any fiscal year cannot exceed $20 million;
cash dividends and distributions during any fiscal year cannot exceed $20 million;
stock repurchases during the term of the agreement cannot exceed $100 million;
permitted acquisitions (as defined) during any fiscal year cannot exceed $100 million;
the Company must maintain positive consolidated income from operations (as defined) during any fiscal
quarter; and
•
restrictions on changes in control.
The revolving credit facility also bears an unused commitment fee of 0.375% per annum, payable quarterly in
arrears.
76
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
All of the Company’s borrowings at December 31, 2010 under its revolving credit facility consisted of 30-day
Eurodollar rate loans, with an annual interest rate as of December 31, 2010 equal to 3.01%.
The Company’s previous credit facility included an aggregate principal amount available of $365.0 million as of
December 31, 2009, which consisted of a $50 million fixed rate loan and a $315 million revolving credit facility.
Borrowings under the revolving credit facility bore interest at a floating rate equal to the one month LIBOR Market
Index Rate plus 1.40%, which equated to 1.63% at December 31, 2009. The Company also paid an unused line fee
for its previous credit facility equal to 0.30% on any unused portion of the facility. The credit facility was
collateralized by substantially all of the Company’s assets and contained certain restrictive covenants.
The Company had $300.0 million and $319.3 million of borrowings outstanding on its credit facilities as of
December 31, 2010 and 2009, respectively, of which $50 million was part of the non-revolving fixed rate loan at
both dates.
The Company was in compliance with all covenants of its credit facilities as of December 31, 2010 and 2009.
11. 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. Counterparty default would expose the Company to fluctuations in
variable interest rates. Based on the guidance of ASC 815, the Company records derivative financial instruments at
fair value in the consolidated balance sheets.
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 (“JP Morgan”) pursuant to an ISDA Master Agreement which
contains customary representations, warranties and covenants. The Swap had an effective date of January 1, 2010,
with a notional amount of $50.0 million. Under the Swap, the Company received a floating interest rate based on
one-month LIBOR Market Index Rate and paid a fixed interest rate of 1.89%. The Swap was scheduled to mature
on May 1, 2011. On November 10, 2010, the Company terminated its interest rate swap agreement. As a result of
the termination, the Company and JP Morgan released each other from all obligations under the Swap, including,
without limitation, the obligation to make periodic payments thereunder, and the Swap was canceled and
terminated. The Company paid a $416,000 termination payment to JP Morgan on November 15, 2010, representing
the approximate present value of the expected remaining monthly settlement payments that otherwise were to have
been due to JP Morgan thereafter.
The Company’s financial derivative instrument was designated and qualified as a cash flow hedge, and the
effective portion of the gain or loss on such hedge was reported as a component of other comprehensive
income/(loss) in the consolidated financial statements of the Company. To the extent that the hedging relationship
was not effective, the ineffective portion of the change in fair value of the derivative would have been recorded in
other income (expense). The hedge was considered effective for the period from December 16, 2008 through the
termination of the Swap on November 10, 2010. Therefore, no amount has been recorded in the consolidated
income statements related to the hedge’s ineffectiveness during 2008, 2009 or 2010. Hedges that receive designated
hedge accounting treatment are evaluated for effectiveness at the time that they are designated, as well as
throughout the hedging period.
The following table sets forth the fair value amounts of derivative instruments held by the Company as of the
dates indicated (amounts in thousands):
Derivative designated as a hedging instrument under ASC 815:
Interest rate swap contract
Asset Derivative
$
-
Liability Derivative
$
-
Asset Derivative
$
-
Liability Derivative
$
701
December 31, 2010
December 31, 2009
Total derivative
$
-
$
-
$
-
$
701
77
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Liability derivatives are recorded in the liability section of the accompanying consolidated balance sheets.
The following table sets forth the (loss) recorded in Accumulated Other Comprehensive Loss (“AOCL”), net of
tax, for the years ended December 31, 2010 and 2009, for derivatives held by the Company as well as any (loss)
reclassified from AOCL into expense (amounts in thousands):
Amount of Loss
2010
Recognized in Other
Location of Loss
Comprehensive Loss
Reclassified from
Amount of Loss
Reclassified from
on Derivative
AOCL into Expense
AOCL into Expense
Derivative designated as hedging instruments under ASC 815:
(Effective Portion)
(Effective Portion)
(Effective Portion)
Interest rate swap contract
$
(242)
interest expense
$
(1,097)
Total derivative
$
(242)
$
(1,097)
Amount of Loss
2009
Recognized in Other
Location of Loss
Comprehensive Loss
Reclassified from
Amount of Loss
Reclassified from
on Derivative
AOCL into Expense
AOCL into Expense
Derivative designated as hedging instruments under ASC 815:
(Effective Portion)
(Effective Portion)
(Effective Portion)
Interest rate swap contract
$
(517)
interest expense
$
-
Total derivative
$
(517)
$
-
Amounts in accumulated other comprehensive loss are 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. Due
to the termination of the Swap on November 10, 2010, the Company paid a $416,000 termination payment which
represented the then current amount included in accumulated other comprehensive loss, net of taxes, which was
reclassed into interest expense in the consolidated income statement for the year ended December 31, 2010. The
Company has no further obligation under the Swap.
12. Property and equipment, net:
Property and equipment, at cost, consist of the following as of December 31, 2010 and 2009 (amounts in
thousands):
2010
2009
Software
Computer equipment
Furniture and fixtures
Equipment
Leasehold improvements
Building and improvements
Land
Accumulated depreciation and amortization
Property and equipment, net
$
$
21,014
10,697
6,147
7,498
4,574
6,045
992
(32,697)
24,270
16,542
8,869
5,624
6,040
3,277
6,045
992
(25,525)
21,864
$
$
Depreciation and amortization expense, relating to property and equipment, for the years ended December 31,
2010, 2009 and 2008 was $7,221,355, $6,539,823 and $5,283,058, respectively.
78
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Beginning in July 2006 upon initiation of certain internally developed software projects, in accordance with the
guidance of FASB ASC Topic 350-40 “Internal-Use Software” (“ASC 350-40”), the Company began capitalizing
qualifying computer software costs incurred during the application development stage and amortizing them over
their estimated useful life of three to seven 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, 2010 and 2009, the
Company has incurred and capitalized $4,188,160 and $2,774,444, respectively, of these direct payroll costs related
to software developed for internal use. As of December 31, 2010 and 2009, $1,314,667 and $1,514,489,
respectively, of these costs 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, 2010 were $435,201 and $2,199,673,
respectively. Amortization expense and remaining unamortized costs relating to this internally developed software
as of and for the year ended December 31, 2009 were $128,622 and $1,021,336, respectively.
13. Long-Term Debt:
On February 6, 2009, the Company entered into a commercial loan agreement to finance computer software and
equipment purchases in the amount of $2,036,114. The loan is collateralized by the related computer software and
equipment. The loan is a three year loan with a fixed rate of 4.78% with monthly installments, including interest, of
$60,823 beginning on March 31, 2009, and it matures on February 28, 2012.
On December 15, 2010, the Company entered into a commercial loan agreement to finance computer software
and equipment purchases in the amount of $1,569,016. The loan is collateralized by the related computer software
and equipment. The loan is a three year loan with a fixed rate of 3.69% with monthly installments, including
interest, of $46,108 beginning on January 15, 2011, and it matures on December 15, 2013.
14. Fair Value Measurements and Disclosures:
(a) Disclosures about Fair Value of Financial Instruments:
In accordance with the disclosure requirements of FASB ASC Topic 825, “Financial Instruments” (“ASC 825”),
the table below summarizes fair value estimates for the Company’s financial instruments. The total of the fair value
calculations presented does not represent, and should not be construed to represent, the underlying value of the
Company. The carrying amounts in the table are recorded in the consolidated balance sheets under the indicated
captions as of December 31, 2010 and 2009 (amounts in thousands):
2010
2009
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Financial assets:
Cash and cash equivalents
$
41,094
$
41,094
$
20,265
$
20,265
Finance receivables, net
831,330
1,126,340
693,462
839,417
Financial liabilities:
Line of credit
Long-tern debt
Derivative instrument
$
300,000
$
300,000
$
319,300
$
319,300
2,396
-
2,396
-
1,499
701
1,499
701
79
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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 Company computed the estimated fair value of these
receivables using proprietary pricing models that the Company utilizes to make portfolio purchase decisions.
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.
Long-term debt: 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 interest rate swap was recorded at estimated fair value, which was determined
using pricing models developed based on the LIBOR swap rate and other observable market data, adjusted for non-
performance risk of both the counterparty and the Company.
(b) Fair Value Hierarchy:
The Company recorded its derivative instrument at estimated fair value on a recurring basis. The accompanying
consolidated financial statements include estimated fair value information regarding its derivative instrument as of
December 31, 2009, as required by FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC
820”). There were no derivative instruments at December 31, 2010. ASC 820 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. ASC 820 also requires the consideration of differing levels of inputs in the determination
of fair values. Those levels of input are summarized as follows:
•
•
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs other than Level 1 quote prices, such as quoted prices for similar instruments
in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are observable in the market.
•
Level 3 – Unobservable inputs that are supported by little or no market activity. Level 3 assets and
liabilities include financial instruments whose value is determined using pricing models, discounted cash flow
methodologies, or similar techniques as well as instruments for which the determination of fair value requires
significant management judgment or estimation.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the
lowest level input that is significant to the fair value measurement in its entirety.
The placement in the fair value hierarchy of the Company’s interest rate swap derivative instrument as of
December 31, 2010 and December 31, 2009 is Level 2 based on the Level 2 inputs described in section (a) above.
Refer to Note 11 for further information regarding the terminated derivative instrument.
15. Share-Based Compensation:
The Company has a stock option and nonvested share plan. The Company created the 2002 Stock Option Plan
(the “Plan”) on November 7, 2002. The Plan was amended in 2004 (the “Amended Plan”) to enable the Company
to issue nonvested shares of stock to its employees and directors. The Amended Plan was approved by the
Company’s shareholders at its Annual Meeting on May 12, 2004. On March 19, 2010, the Company adopted a
2010 Stock Plan, which was approved by its shareholders at the 2010 Annual Meeting. The 2010 Stock Plan is a
further amendment to the Amended Plan, and contains, among other things, specific performance metrics with
respect to performance-based stock awards. Up to 2,000,000 shares of common stock may be issued under the 2010
Stock Plan. The 2010 Stock Plan expires November 7, 2012.
80
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
The Company accounts for share-based compensation in accordance with the provisions of ASC 718. As of
December 31, 2010, total future compensation costs related to nonvested awards of nonvested shares (not including
nonvested shares granted under the Long-Term Incentive Program) is estimated to be $3.0 million with a weighted
average remaining life of 2.4 years (not including nonvested shares granted under the Long-Term Incentive
Programs). As of December 31, 2010, there is no future compensation cost related to stock options and the
remaining vested stock options have a weighted average remaining life of 0.1 years. Based upon historical data, the
Company used an annual forfeiture rate of 14% for stock options and 15-40% 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.
Total share-based compensation expense was $4,203,154, $3,819,915 and $140,590 for the years ended
December 31, 2010, 2009 and 2008, respectively. The Company, in conjunction with the renewal of employment
agreements with its Named Executive Officers and other senior executives, awarded nonvested shares which vested
on January 1, 2009. As a result of the vesting of these shares, the Company recorded stock-based compensation
expense in connection with these shares, in the amount of approximately $1.4 million during the first quarter of
2009. Tax benefits resulting from tax deductions in excess of share-based compensation expense recognized under
the fair value recognition provisions of ASC 718 (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, $2.2 million and $0.9 million for the years
ended December 31, 2010, 2009 and 2008, respectively.
Stock Options
All options issued under the Amended Plan vest ratably over five years. Granted options expire seven years
from grant date. The remaining outstanding stock options expire on January 16, 2011. Options granted to a single
person cannot exceed 200,000 in a single year. As of December 31, 2010, 895,000 options have been granted under
the Amended Plan, of which 118,955 have been cancelled and are eligible for regrant. All expenses for 2010, 2009
and 2008 are included in earnings as a component of compensation and employee services expense.
The following summarizes all option related transactions from December 31, 2007 through December 31, 2010
(amounts in thousands, except per share amounts):
December 31, 2007
Exercised
Cancelled
December 31, 2008
Exercised
December 31, 2009
Exercised
December 31, 2010
Options
Outstanding
163
(38)
(2)
Weighted-Average
Exercise Price Per Share
16.97
$
15.87
21.50
Weighted-Average
Fair Value Per Share
3.25
$
3.31
4.60
123
(116)
7
(2)
5
17.24
16.51
29.41
3.21
3.24
2.70
$
28.45
29.79
$
2.92
2.62
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 2010, 2009 or 2008. The total intrinsic value of options exercised during the years ended December 31,
2010, 2009 and 2008, was approximately $0.1 million, $2.7 million, and $0.9 million, respectively.
81
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
The following information is as of December 31, 2010 (amounts in thousands except per share amounts):
Exercise
Price
Number
Outstanding
Average Remaining
Contractual Life
Weighted-Average
Exercise Price Per
Share
Aggregate
Intrinsic Value
Number
Exercisable
Options Outstanding
Options Exercisable
Weighted-
Average Exercise
Price Per Share
Aggregate
Intrinsic Value
$ 29.79
Total as of December 31, 2010
5
5
0.1
0.1
$
$
29.79
29.79
$
$
227
227
5
5
$
$
29.79
29.79
$
$
227
227
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
With the exception of the awards made pursuant to the Long-Term Incentive Program and a few employee and
director grants, the terms of the nonvested share awards are similar to those of the stock option awards, wherein the
nonvested shares vest ratably over three to five years and are expensed over their vesting period. In addition, in
conjunction with the renewal of their employment agreements, the Company’s Named Executive Officers and other
senior executives were awarded nonvested shares which vested on January 1, 2009. As a result of the vesting of
these shares, the Company recorded share-based compensation expense in connection with these shares, in the
amount of approximately $1.4 million during the first quarter of 2009.
The following summarizes all nonvested share transactions, excluding those related to the Long-Term Incentive
Program, from December 31, 2007 through December 31, 2010 (amounts in thousands except per share amounts):
Nonvested Shares
Outstanding
Weighted-Average
Price at Grant Date
December 31, 2007
Granted
Vested
Cancelled
December 31, 2008
Granted
Vested
Cancelled
December 31, 2009
Granted
Vested
Cancelled
December 31, 2010
123
27
(37)
(15)
98
70
(82)
(5)
81
57
(37)
(10)
91
$
41.72
37.47
39.55
40.05
41.60
34.22
36.62
42.20
40.24
53.06
41.46
39.61
$
47.89
The total grant date fair value of shares vested during the years ended December 31, 2010, 2009 and 2008, was
$1,514,036, $3,014,339 and $1,446,897, respectively.
82
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Long-Term Incentive Programs
Pursuant to the Amended Plan, on March 30, 2007, January 4, 2008, January 20, 2009 and January 14, 2010, the
Compensation Committee approved the grant of 96,550, 80,000, 108,720 and 53,656 performance-based nonvested
shares, respectively. All shares granted under the LTI Programs were granted to key employees of the Company.
For both the 2007 and 2008 grants, no estimated compensation costs have been accrued or recognized because the
achievements of the performance targets of the programs were not met. The 2009 grant is performance and market
based and cliff vests after the requisite service period of two to three years if certain financial and market related
goals are met. The goals are based upon diluted earnings per share (“EPS”) totals for 2009, the return on owners’
equity for the three year period beginning on January 1, 2009 and ending December 31, 2011, and the relative total
shareholder return as compared to a peer group for the same three year period. The number of shares vested can
double if the financial goals are exceeded and no shares will vest if the financial goals are not met. The Company is
expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1,
2009. If the Company believes that the number of shares granted will be more or less than originally projected, an
adjustment to the expense will be made at that time based on the probable outcome. The EPS component of the
2009 plan was not achieved and therefore no compensation expense was recognized during 2009 or 2010 related to
the 2009 grants. The 2010 grant is performance and market based and cliff vests after the requisite service period of
two to three years if certain financial and market related goals are met. The goals are based upon diluted EPS totals
for 2010, the return on owners’ equity for the three year period beginning on January 1, 2010 and ending December
31, 2012, and the relative total shareholder return as compared to a peer group for the same three year period. The
number of shares that will be ultimately vest are based on a sliding scale and can double if the financial goals are
exceeded or no shares will vest if the financial goals are not met. The Company is expensing the nonvested share
grant over the requisite service period of two to three years beginning on January 1, 2010. If the Company believes
that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be
made at that time based on the probable outcome. At December 31, 2010, total future compensation costs related to
nonvested share awards granted under the 2009 and 2010 LTI Programs are estimated to be approximately $3.3
million. The Company assumed a 7.5% forfeiture rate for these grants and the remaining shares have a weighted
average life of 1.42 years at December 31, 2010.
16. Earnings per Share:
Basic 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, 2010, 2009 and 2008 (amounts in thousands, except per share amounts):
For the years ended December 31,
2010
2009
2008
Weighted Average
Weighted Average
Weighted Average
Net Income Common Shares
EPS
Net Income Common Shares
EPS
Net Income Common Shares EPS
Basic EPS
$73,454
16,820
$4.37
$44,306
15,420
$2.87
$45,362
15,229 $2.98
Dilutive effect of stock options
and nonvested share awards
65
34
63
Diluted EPS
$73,454
16,885
$4.35
$44,306
15,454
$2.87
$45,362
15,292 $2.97
As of December 31, 2010, 2009 and 2008, there were no antidilutive options outstanding.
83
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
17. Stockholders’ Equity:
Stock Offering:
On February 22, 2010, the Company closed on a public stock offering filed under a shelf registration statement
that was filed during the third quarter of 2009. As a result of the filing, the Company sold a total of 1,437,500
shares of its common stock at a price to the public of $52.50 per share. The Company received net proceeds from
the offering of approximately $71.7 million, after deducting the underwriting discounts and commissions and
offering expenses. The Company used the net proceeds of the offering primarily to repay a portion of the debt
outstanding under its then existing $365 million revolving credit facility.
18.
Income Taxes:
The Company records an income tax provision for the anticipated tax consequences of the reported results of
operations. In accordance with ASC 740, 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 and liabilities are expected to be
realized or settled.
The guidance of ASC 740 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. It 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 the guidance 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.
There were no unrecognized tax benefits as of December 31, 2010 and 2009.
The Company was notified on June 21, 2007 that it was being examined by the Internal Revenue Service for the
2005 calendar year. The IRS has concluded its audit and on March 19, 2009 issued Form 4549-A, Income Tax
Examination Changes for tax years ending December 31, 2007, 2006 and 2005. The IRS has proposed that cost
recovery for tax revenue recognition does not clearly reflect taxable income and that unused line fees paid on credit
facilities should be capitalized and amortized rather than taken as a current deduction. On April 22, 2009, the
Company filed a formal protest of the findings contained in the examination report prepared by the IRS. The
Company believes it has sufficient support for the technical merits of its positions and that it is more-likely-than-not
these positions will ultimately be sustained; therefore, a reserve for uncertain tax positions is not necessary. If the
Company is unsuccessful in its appeal, it might ultimately be required to pay the related deferred taxes and any
potential interest, possibly requiring additional financing from other sources.
As of December 31, 2010, the tax years subject to examination by the major taxing jurisdictions, including the
Internal Revenue Service, are 2003, 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. The
2005, 2006, and 2007 tax years are extended through December 31, 2011.
84
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
ASC 740 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. No interest or penalties were accrued in 2010 or 2009.
The income tax expense recognized for the years ended December 31, 2010, 2009 and 2008 is comprised of the
following (amounts in thousands):
For the year ended December 31, 2010
For the year ended December 31, 2009
Federal
State
Total
For the year ended December 31, 2008
Federal
State
Total
Federal
State
Total
$
$
$
$
$
$
$
$
$
$
$
$
(8)
7,330
7,322
177
4,282
4,459
(362)
4,440
4,078
(489)
47,493
47,004
(530)
28,927
28,397
(2,470)
30,854
28,384
$
$
$
$
$
$
(481)
40,163
39,682
(707)
24,645
23,938
(2,108)
26,414
24,306
Current tax benefit
Deferred tax expense
Total income tax expense
Current tax (benefit)/expense
Deferred tax expense
Total income tax expense
Current tax benefit
Deferred tax expense
Total income tax expense
The Company has recognized a net deferred tax liability of $164,971,005 and $117,206,100 as of December 31,
2010 and 2009, respectively. The components of the net deferred tax liability are as follows (amounts in
thousands):
Deferred tax assets:
Employee compensation
Allowance for doubtful accounts
Federal and state tax credit carryforward
Federal and state net operating loss carryforward
Accrued liabilities
Guaranteed payments
Intangible assets and goodwill
Section 467 leases
Other
Total deferred tax assets
Deferred tax liabilities:
Depreciation expense
Intangible assets and goodwill
Prepaid expenses
Cost recovery
Total deferred tax liability
Net deferred tax liability
2010
2009
$
1,794
879
774
2,564
864
243
-
350
420
7,888
$
749
760
714
158
1,171
-
525
373
243
4,693
2,352
77
776
169,654
172,859
1,058
-
687
120,154
121,899
$
164,971
$
117,206
A valuation allowance has not been provided at December 31, 2010 or 2009 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 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
85
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
material impact on the Company's results of operations and financial position. At December 31, 2010, 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 2010, 2009
and 2008 of approximately $2.5 million, $2.0 million and $1.9 million, respectively, of which approximately
$161,000 will begin to expire starting in the year ending December 31, 2013 and the remainder starting in the year
ending December 31, 2018.
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, 2010 and 2009.
A reconciliation of the Company’s expected tax expense at statutory tax rates to actual tax expense for the years
ended December 31, 2010, 2009 and 2008 consists of the following components (amounts in thousands):
2010
2009
2008
Federal tax at statutory rates
State tax expense, net of federal benefit
Other
Total income tax expense
19. Commitments and Contingencies:
Employment Agreements:
$
$
$
42,306
4,759
(61)
47,004
25,446
2,706
245
28,397
25,811
2,651
(78)
28,384
$
$
$
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 $11.9 million. The agreements also contain confidentiality and non-
compete provisions.
Litigation:
The Company is from time to time subject to routine legal claims and proceedings, most of which are incidental
to the ordinary course of its business. The Company initiates lawsuits against customers and are occasionally
countersued by them in such actions. Also, customers, either individually, as members of a class action, or through
a governmental entity on behalf of customers, may 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. From time to time, other
types of lawsuits are brought against the Company. While it is not expected that these or any other legal
proceedings or claims in which the Company is involved will, either individually or in the aggregate, have a
material adverse impact on the Company’s results of operations, liquidity or financial condition, it is possible that,
due to unexpected future developments, an unfavorable resolution of a legal proceeding or claim could occur which
may be material to the Company’s results of operations for a particular period. The matter described below falls
outside of the normal parameters of the Company’s routine legal proceedings.
The Attorney General for the State of Missouri filed a purported enforcement action against PRA in 2009 that
seeks relief for Missouri customers that have allegedly been injured as a result of certain collection practices of
PRA. PRA has vehemently denied any wrongdoing herein and in 2010, the complaint was dismissed with
prejudice. The matter is currently on appeal, and so it is not possible at this time to estimate the possible loss, if
any.
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, 2010 is approximately $234.4 million.
86
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, 2010, our disclosure controls and procedures were effective.
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, 2010 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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, 2010, 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, 2010, which is included herein.
The scope of management’s assessment of internal controls over financial reporting did not include our recently
acquired subsidiary, CCB, 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, 2010.
87
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, 2010, 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 Portfolio Recovery Associates, Inc.’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, 2010, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
88
Portfolio Recovery Associates, Inc. acquired a controlling interest in Claims Compensation
Bureau, LLC (CCB) during 2010, and management excluded from its assessment of the
effectiveness of Portfolio Recovery Associates, Inc.’s internal control over financial reporting as
of December 31, 2010, CCB’s 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,
2010. 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 CCB.
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 as of December 31, 2010 and 2009, and the related consolidated
income statements, and statements of changes in stockholders’ equity and comprehensive
income, and cash flows for each of the years in the three-year period ended December 31, 2010,
and our report dated February 25, 2011 expressed an unqualified opinion on those consolidated
financial statements.
Norfolk, Virginia
February 25, 2011
89
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 10 is incorporated herein by reference to the sections labeled “Section 16(a)
Beneficial Ownership Reporting Compliance,”
“Board of Directors,” “Executive Officers,” “Corporate
Governance,” “Committees of the Board” and “Audit Committee Report” in the Company’s definitive Proxy
Statement in connection with the Company’s 2011 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 2011 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 2011 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 2011 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 is incorporated herein by reference to the sections labeled “Review and
Approval of Related Party Transactions” and “Director Independence” in the Company’s definitive Proxy Statement
in connection with the Company’s 2011 Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services.
The information required by Item 14 is incorporated herein by reference to the section labeled “Principal
Accountant Fees and Services” in the Company’s definitive Proxy Statement in connection with the Company’s
2011 Annual Meeting of Stockholders.
90
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:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Income Statements
for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Changes in Stockholders’ Equity
and Comprehensive Income
for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows
for the years ended December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
(b) Exhibits.
Page
58
59
60
61
62
63-86
2.1
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
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).
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).
Second Amended and Restated By-Laws of Portfolio Recovery Associates, Inc. (Incorporated by
reference to Exhibit 3.2 of the Form 10-K for the period ended December 31, 2009).
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).
Amendment to Employment Agreement, dated December 31, 2008, by and between Steven D.
Fredrickson and Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.5 of
the Form 10-K for the period ended December 31, 2009).
Amendment to Employment Agreement, dated December 31, 2008, by and between Kevin P.
Stevenson and Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.6 of
the Form 10-K for the period ended December 31, 2009).
Amendment to Employment Agreement, dated December 30, 2008, by and between Craig A.
Grube and Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.7 of the
Form 10-K for the period ended December 31, 2009).
91
10.8
10.9
Amendment to Employment Agreement, dated December 31, 2008, by and between Judith S.
Scott and Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 10.8 of the
Form 10-K for the period ended December 31, 2009).
Portfolio Recovery Associates 2010 Stock Plan (Incorporated by reference to Exhibit 10.9 of the
Form 8-K filed June 9, 2010).
10.10 Portfolio Recovery Associates, Inc., Annual Bonus Plan (Incorporated by reference to Exhibit
10.10 of the Form 8-K filed June 9, 2010).
10.11 Credit Agreement, dated as of December 20, 2010, by and among Portfolio Recovery Associates,
Inc., Portfolio Recovery Associates, LLC, PRA Holding I, LLC, PRA Location Services, LLC,
PRA Government Services, LLC, PRA Receivables Management, LLC, PRA Holding II, LLC,
PRA Holding III, LLC, MuniServices, LLC, Bank of America, N.A., as administrative agent,
Wells Fargo Bank, N.A., as syndication agent, SunTrust Bank, as documentation agent, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC, as joint lead
arrangers and joint book managers, and the lenders party thereto (Incorporated by reference to
Exhibit 10.1 of the Form 8-K filed December 22, 2010).
21.1 Subsidiaries of Portfolio Recovery Associates, Inc.
23.1
24.1
31.1
31.2
32.1 Section 906 Certifications of Chief Executive Officer and Chief Financial Officer
Consent of KPMG LLP
Powers of Attorney (included on signature page).
Section 302 Certifications of Chief Executive Officer
Section 302 Certifications of Chief Financial Officer
92
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 25, 2011
Dated: February 25, 2011
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 25, 2011
Dated: February 25, 2011
Dated: February 25, 2011
Dated: February 25, 2011
Dated: February 25, 2011
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/ John H. Fain
John H. Fain
Director
By:/s/ John E. Fuller
John E. Fuller
Director
By:/s/ Penelope W. Kyle
Penelope W. Kyle
Director
93
Dated: February 25, 2011
Dated: February 25, 2011
Dated: February 25, 2011
By:/s/ David N. Roberts
David N. Roberts
Director
By:/s/ Scott M. Tabakin
Scott M. Tabakin
Director
By:/s/ James M. Voss
James M. Voss
Director
94
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 Holding III, LLC – Virginia (Doing business as PRA Café)
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 (Doing business as PRA Government Services)
Claims Compensation Bureau, LLC – Delaware (The Registrant owns 62% of this subsidiary)
95
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 and the registration statement (No. 333-162224) on Form S-3 of Portfolio
Recovery Associates, Inc. of our reports dated February 25, 2011, with respect to the consolidated
balance sheets of Portfolio Recovery Associates, Inc. and subsidiaries (the Company) as of December 31,
2010 and 2009, and the related consolidated income statements, and statements of changes in
stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2010, and the effectiveness of internal control over financial reporting as of
December 31, 2010, which reports appear in the December 31, 2010 annual report on Form 10-K of
Portfolio Recovery Associates, Inc.
Our report dated February 25, 2011, on the effectiveness of internal control over financial reporting as of
December 31, 2010, contains an explanatory paragraph that states that Portfolio Recovery Associates, Inc.
acquired a controlling interest in Claims Compensation Bureau, LLC (CCB) during 2010, and
management excluded from its assessment of the effectiveness of Portfolio Recovery Associates, Inc.’s
internal control over financial reporting as of December 31, 2010, CCB’s 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, 2010. 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 CCB.
Norfolk, Virginia
February 25, 2011
96
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 our 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 25, 2011
By: /s/ Steven D. Fredrickson
Steven D. Fredrickson
Chief Executive Officer, President and
Chairman of the Board of Directors
(Principal Executive Officer)
97
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 our 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 25, 2011
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)
98
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, 2010 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 25, 2011
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, 2010 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 25, 2011
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)
99
C o r p o r a t e I n f o r m a t I o n
Stock Exchange Listing
Portfolio Recovery Associates’ common stock
trades on the NASDAQ Global Select Market under
the symbol “PRAA.” Price information for the
common stock appears daily in major newspapers.
Financial Publications/
Investor Inquiries
Shareholders may acquire copies of the 2010
Annual Report or Form 10-K, and other filed
documents by visiting the Company’s website at
www.portfoliorecovery.com or by writing to us at:
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
Portfolio Recovery Associates, Inc.
Attn.: Investor Relations
120 Corporate Blvd., Suite 100
Norfolk, Virginia 23502
Price Range of Common Stock
The following table sets forth the high and low sales
price for the Company’s common stock for the year
ended December 31, 2010.
2010
High
Low
$78.00
$41.50
As of February 3, 2011, there were 26 holders of
record of the common stock. Based on information
provided by our transfer agent and registrar, we
believe that there are 21,943 beneficial owners of
the common stock.
O p e r a t i n g p r i n c i p l e s
F O R T H E M A N A G E M E N T O F
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
While the economy steadied in 2010 after more than two years of
volatility, the business world continued to experience the residual
effects of the downturn. Pra, however, achieved breakthrough results
due to its sustainable business model and its reliance on well-established
operating Principles. these ideals have guided our actions through
good and bad economic times. as we have done in each of our annual
reports since going public in 2002, we present our operating Principles
for your reference.
Disclose.
Be honest and open with shareholders.
Let them know what is going on.
Invest carefully.
Build a diverse portfolio. Never bet the ranch.
Make sure each investment, be it a portfolio
or a business, has been reviewed, judged
objectively, and priced to achieve appropriate
profit hurdles.
Keep the business simple.
Operate fewer, larger call centers.
Keep costs low and productivity high.
Develop and retain great employees. Keep
support staff as small as possible, while
providing excellent service to the collection
operation.
Maintain a conservative capital structure.
Allow room for error. Keep debt levels low.
When borrowing is required because of oppor-
tunity, use low-cost, non-participating debt.
Build an integrated business.
Portfolio buying and collections must be under
the same roof.
Employ steady, controlled growth.
We operate process- and people-intensive
businesses. Experienced employees are
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.
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 sub-
stantial stock ownership positions—common
stock, not just options—throughout their terms
of employment.
Develop and support employees.
Provide and support ongoing employee skill
development to help create ever-increasing
levels of individual potential with high levels
of performance for continuing personal and
Company growth.
PRA employees were used for photographs throughout the Annual Report.
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
C o R P o R A t e G o v e R n A n C e
M A N A g e M e N t
Steve Fredrickson
Chairman, President and
Chief executive officer
Craig Grube
executive Vice President,
Portfolio Acquisitions
Neal Stern
Senior Vice President,
Chief operations officer—owned Portfolios
Kevin Stevenson
executive Vice President,
Chief financial and Administrative officer,
treasurer and Assistant Secretary
Judith Scott
executive Vice President,
general Counsel and Secretary
Mike Petit
President, Bankruptcy Services
Kent McCammon
President, Revenue enhancement Services
and Business Development
B o A R D o f D i R e C t o R S
James Voss
Director
Steve Fredrickson
Chairman of the Board
Penelope Kyle
Director
John Fain
Director
Scott Tabakin
Director
John Fuller
Director
David Roberts
Lead Director
Portfolio Recovery Associates, Inc.
Portfolio Recovery Associates, Inc.
Riverside Commerce Center
120 Corporate Blvd., Suite 100
Norfolk, Virginia 23502