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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

_______________

FORM 10-Q

Portfolio Recovery Associates, Inc.
———————
(Exact name of registrant as specified in its charter)

(888) 772-7326
(Registrant’s telephone number, including area code)

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 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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

PORTFOLIO RECOVERY ASSOCIATES, INC.

INDEX

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PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
March 31, 2003 and December 31, 2002
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OPERATIONS
For the Three Months Ended March 31, 2003 and 2002
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2003 and 2002
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.     Organization and Business:
Portfolio Recovery Associates, Inc. was formed in August 2002. On November 8, 2002, Portfolio Recovery Associates, Inc. completed its initial public offering (“IPO”) of common stock. As a result, all of the membership units and warrants of Portfolio Recovery Associates, LLC (“PRA”) were exchanged on a one to one basis for warrants and shares of a single class of common stock of Portfolio Recovery Associates, Inc. (“PRA Inc”). PRA II, LLC, a special purpose borrowing entity (“PRA II”), was dissolved immediately prior to the IPO. PRA Inc now owns all outstanding membership units of PRA and PRA Receivables Management, LLC (d/b/a Anchor Receivables Management) (“Anchor”). PRA owns all of the membership units of PRA III, LLC, a special purpose borrowing entity (“PRA III”), PRA Funding, LLC, whose name was changed from PRA AG Funding, LLC in February 2003 (“PRA Funding”), and PRA Holding I, LLC, an entity established to hold real property (“PRA Holding I”). PRA Inc, a Delaware corporation and its subsidiaries (collectively, the “Company”), purchases, collects and manages portfolios of defaulted consumer receivables. The defaulted consumer receivables the Company collects are in substantially all cases either purchased from the credit originator or are collected on behalf of clients on a commission fee basis. This is primarily accomplished by maintaining a staff of highly skilled collectors whose purpose is to contact the customers and arrange payment of the debt. Secondarily, PRA has contracted with independent attorneys to allow the Company to undertake legal action to satisfy the outstanding debt.

The consolidated financial statements of the Company include the accounts of PRA, PRA II, PRA Funding, PRA Holding I, Anchor and PRA III.

The accompanying unaudited financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position as of March 31, 2003, its results of operations for the three month periods ended March 31, 2003 and 2002, and its cash flows for the three-month periods ended March 31, 2003 and 2002, respectively. The results of operations of the Company for the three-month periods ended March 31, 2003 and 2002 may not be indicative of future results. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as amended, filed for the year ended December 31, 2002.

2.     Finance Receivables:
The Company accounts for its investment in finance receivables using the interest method under the guidance of Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans.” Static pools of relatively homogenous accounts are established. Once a static pool is established, the receivable accounts in the pool are not changed. Each static pool is recorded at cost, and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Income on finance receivables is accrued monthly based on each static pool’s effective interest rate. This interest rate is estimated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models. Monthly cash flows greater than the interest accrual will reduce the carrying value of the static pool. Likewise, monthly cash flows that are less than the monthly accrual will accrete the carrying balance. Each pool is reviewed monthly and compared to the Company’s models to ensure complete amortization of the carrying balance by the end of each pool’s life.

In the event that cash collections would be inadequate to amortize the carrying balance, an impairment charge would be taken with a corresponding write-off of the receivable balance. Accordingly, we do not maintain an allowance for credit losses.

The agreements to purchase the aforementioned receivables include general representations and warranties from the sellers covering account holder death or bankruptcy, and accounts settled or disputed prior to sale. The representation and warranty period permitting the return of these accounts from the Company to the seller is typically 90 to 180 days.

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PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Changes in finance receivables for the three months ended March 31, 2003 and 2002 were as follows:

At the time of acquisition, the life of each pool is generally set at between 60 and 72 months based upon the proprietary models of the Company. As of March 31, 2003 the Company has $74,418,221 in finance receivables included in the Statement of Financial Position. Based upon current projections, cash collections applied to principal will be as follows for the twelve months in the periods ending:

3. Revolving Lines of Credit:

On September 18, 2001, PRA III arranged with a commercial lender to provide financing under a revolving line of credit of up to $40 million. The agreement was amended on December 18, 2002 to reduce the available credit to $25 million, causing a reduction in the borrowing spread and an increase in the unused line fee. This line of credit is collateralized by all receivables, collections on receivables and assets of PRA III. The agreement expires September 15, 2005. Interest is variable based on LIBOR. No amount was outstanding at March 31, 2003 and December 31, 2002. Restrictive covenants under this agreement include:

	•		restrictions on monthly borrowings in excess of $4 million per month and quarterly borrowings in excess of $10 million;
	•		a maximum leverage ratio, defined as total liabilities less subordinated debt divided by tangible net worth plus subordinated debt, of not greater than 4 to 1 and quarterly net income of at least $0.01, calculated on a consolidated basis;
	•		a restriction on distributions in excess of 75% of the Company’s net income for any year;
	•		compliance with certain special purpose vehicle and corporate separateness covenants; and

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PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

•

restrictions on change of control.

As of March 31, 2003 the Company is in compliance with all of the covenants of this agreement.

In addition, PRA Funding maintains a $2.5 million revolving line of credit with RBC Centura Bank which extends through July 2003. The line of credit bears variable interest based on LIBOR. The terms of this agreement require that the Company maintain a current ratio of 1.6:1.0 or greater, the current ratio being defined to include finance receivables as a current asset and to include the credit facility outstanding balance in place as of March 31, 2003 as a current liability. The agreement further requires that the Company maintain a debt to tangible net worth ratio of 1.5:1.0 or less and a minimum balance sheet cash position at month end of $2 million. Distributions are limited under the terms of the facility to 75% of net income. As of March 31, 2003, the Company is in full compliance with these covenants. This $2.5 million facility had no amounts outstanding as of March 31, 2003 or December 31, 2002.

4.     Property and Equipment:
Property and equipment, at cost, consist of the following as of the dates indicated:

5.     Hedging Activity:

During 2001, the Company entered into an interest rate swap for the purpose of managing exposure to fluctuations in interest rates related to variable rate financing. The interest rate swap effectively fixed the interest rate on $10 million of the Company’s outstanding debt. The swap required payment or receipt of the difference between a fixed rate of 5.33% and a variable rate of interest based on 1-month LIBOR. The unrealized gains and losses associated with the change in market value of the interest rate swap are recognized as other comprehensive income. This swap transaction, which was to expire in May 2004, was paid in full and terminated in September 2002.

Expenses incurred related to the swap agreement were interest expenses of $0 and $85,845 for the three months ending March 31, 2003 and 2002, respectively. The net interest payments are a component of “Interest Expense” on the income statement and a reduction of net income in the cash flow statement.

6.     Long-Term Debt:

In July 2000, the Company purchased a building in Hutchinson, Kansas. The building was financed with a commercial loan for $550,000 with a variable interest rate based on LIBOR. This commercial loan is collateralized by the real estate in Kansas. Interest rates varied between 3.35% and 3.79% in the first three months of 2003 and 3.83% and 4.37% in the first three months of 2002. Monthly principal payments on the loan are $4,583 for an amortized term of 10 years. A balloon payment of $275,000 is due July 21, 2005, which results in a five-year principal payout. The loan matures July 21, 2005.

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PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

On February 9, 2001, the Company purchased a generator for its Norfolk location. The generator was financed with a commercial loan for $107,000 with a fixed rate of 7.9%. This commercial loan is collateralized by the generator. Monthly payments on the loan are $2,170 and the loan matures on February 1, 2006.

On February 20, 2002, the Company completed the construction of a satellite parking lot at its Norfolk location. The parking lot was financed with a commercial loan for $500,000 with a fixed rate of 6.47%. The loan is collateralized by the parking lot. The loan required only interest payments during the first six months. Beginning October 1, 2002, monthly payments on the loan are $9,797 and the loan matures on September 1, 2007.

Annual payments including interest on all loans outstanding as of March 31, 2003 are as follows:

Under each of the commercial loans discussed above, the Company is subject to certain covenants, the most restrictive of which include minimum net worth requirements and the maintenance of certain financial ratios. As of March 31, 2003 and December 31, 2002, the Company was in compliance with all such debt covenants.

7.     Stockholders’ Equity:

As a result of the IPO on November 8, 2002, the Company issued 3,470,000 shares of common stock at a public offering price of $13.00 per share, resulting in net proceeds of $12.09 per share. In addition, another 1,015,000 shares were sold by a non-employee stockholder, PRA Investments, LLC, which did not result in any additional proceeds being received by the Company. Immediately following the IPO, the Company had 13,470,000 shares outstanding, not including any shares issued for reserved options or warrants. The IPO resulted in all outstanding units of PRA, and all outstanding warrants to acquire units of PRA, being exchanged for shares and options in PRA Inc. on a one to one basis.

Prior to the IPO, the PRA management committee was authorized to issue warrants to partners, employees or vendors to purchase membership units. Generally, warrants granted had a term between 5 and 7 years and vest within 3 years. Warrants have been issued at or above the fair market value on the date of grant. Warrants vest and expire according to terms established at the grant date.

The following summarizes all warrant and option related transactions from December 31, 1999 through March 31, 2003:

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PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

At March 31, 2003, the Company had 2,961,850 warrants and options outstanding. The total outstanding was comprised of 2,155,000 warrants and 806,850 options. At March 31, 2003, 2,105,000 warrants were exercisable and none of the 806,850 options outstanding were exercisable. All but 225,000 warrants and options were issued to employees and operating members of the Company. Of the 225,000 warrants and options issued to non-employees, 125,000 warrants were issued to an affiliate of Angelo, Gordon & Company, the Company’s majority stockholder, and 80,000 warrants were issued and vested to SMR Research Corporation, a vendor of the Company in connection with a business agreement to utilize certain software, and 20,000 options to the Board of Directors. Of the 80,000 warrants granted to SMR Research Corporation in 1999, 20,000 vested immediately and 60,000 vested in the following year. The 125,000 warrants granted to AG 1999 in 1999 vested immediately. During the three months ended March 31, 2003 and 2002, no warrants or options were issued. Of the warrants outstanding at the IPO, 50,000 have not vested.

The following information is as of March 31, 2003:

At March 31, 2003, the Company has one stock-based employee compensation plan. Prior to November 8, 2002, the Company accounted for warrants issued under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation

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PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

cost is reflected in pro forma net income for the three months ended March 31, 2002. Effective January 1, 2002, the Company adopted the fair value recognition provisions of FASB Statement No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, prospectively to all employee awards granted, modified, or settled after January 1, 2002. Awards under the company’s plan vest over a five year period. Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2002 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS 123. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

Had compensation cost for warrants granted under the Agreement been determined pursuant to SFAS 123, the Company’s net income would have decreased. Using a fair-value (minimum value calculation), the following assumptions were used:

The fair value model utilizes the risk-free interest rate at grant with an expected exercise date sometime in the future generally assuming an exercise date in the first half of 2005. In addition, warrant valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Prior to the IPO, the Company’s warrants had characteristics significantly different from those of traded warrants, and changes in the subjective input assumptions can materially affect the fair value estimate. Based upon the above assumptions, the weighted average fair value of employee warrants granted during the years ended December 31, 2002, 2001 and 2000 was $1.24, $0.35, and $0.21, respectively.

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PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Effective December 30, 1999, PRA’s management committee issued warrants to acquire 125,000 membership units to an affiliate of Angelo, Gordon & Co. The warrants immediately vested and are exercisable at $3.60 per unit. The warrants are exercisable in whole or in part and expire March 31, 2005. As these warrants are not issued as compensation to an employee or operating member of the Company, an expense of $0 and $4,267 was incurred and recognized during the three months ended March 31, 2003 and 2002, respectively. The value of the warrants was calculated using the fair value approach as designated by SFAS 123, which utilizes a comparison of the discounted value of the underlying units discounted using a risk-free interest rate at the date of grant.

Effective August 18, 1999, PRA’s management committee issued warrants to acquire 200,000 membership units to SMR Research Corporation. The warrants were to vest over a 60 month period and are exercisable at $4.20 per unit. The warrants vested as to 80,000 membership units and the remaining 120,000 membership units were cancelled upon the termination of an agreement between the Company and SMR Research Corporation. The value of the warrants was calculated using the intrinsic method and no expense was recognized on these warrants. The fair value approach was then applied, as designated by SFAS 123, which utilizes a comparison of the discounted value of the underlying units discounted using a risk-free interest rate at the date of grant, these warrants were shown to have a negative present value and as such no expense has been recorded. All warrants have been exercised and none are outstanding as of March 31, 2003.

8.     Commitments and Contingencies:

Employment Agreements:
The Company has eight employment agreements with each of its executive and senior management group, the terms of which expire on March 31, 2004 or December 31, 2005. Such agreements provide for base salary payments as well as bonuses which are based on the attainment of specific management goals. Estimated remaining compensation under these agreements is approximately $3,077,263. The agreements also contain confidentiality and non-compete provisions.

Leases:
The Company is party to various operating and capital leases with respect to its facilities and equipment. Please refer to the Company’s consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K, as amended as filed with the Securities and Exchange Commission for discussion of these leases.

Litigation:
The Company is from time to time subject to routine litigation incidental to its business. The Company believes that the results of any pending legal proceedings will not have a material adverse effect on the financial condition, results of operations or liquidity of the Company.

9.     Income Taxes:

Prior to November 8, 2002, the Company was organized as a limited liability company, taxed as a partnership, and as such was not subject to federal or state income taxes. Immediately before the IPO, the Company was reorganized as a corporation and became subject to income taxes.

The income tax expense recognized for 2003 is composed of the following:

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PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The Company also recognized a net deferred tax liability of $367,583 as of March 31, 2003 and $286,882 as of December 31, 2002. The components of this net liability are:

A valuation allowance has not been provided at March 31, 2003 or December 31, 2002 since management believes it is more likely than not that the deferred tax assets will be realized.

The Company presented pro forma tax information assuming it has been a taxable corporation since inception and assuming tax rates equal to the rates that would have been in effect had it been required to report income tax expense in such years. A reconciliation of the Company’s statutory tax rates to the effective tax rates for the three months ended March 31, 2003 and the pro forma income tax expense for the three months ended March 31, 2002, consists of the following components:

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:

This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause the results of the Company 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, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:

	•		changes in the business practices of credit originators in terms of selling defaulted consumer receivables or outsourcing defaulted consumer receivables to third-party contingent fee collection agencies;
	•		changes in government regulations that affect the Company’s ability to collect sufficient amounts on its acquired or serviced receivables;
	•		the Company’s ability to employ and retain qualified employees, especially collection personnel;
	•		changes in the credit or capital markets, which affect the Company’s ability to borrow money or raise capital to purchase or service defaulted consumer receivables;
	•		the degree and nature of the Company’s competition; and
	•		the risk factors listed from time to time in the Company’s filings with the Securities and Exchange Commission.

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Results of Operations

     The following table sets forth certain operating data as a percentage of total revenue for the periods indicated:

(1)

Until November 8, 2002, the Company was structured as a limited liability company. As a limited liability company the Company was not subject to Federal or state corporate income taxes. For comparison purposes, the Company has presented pro forma net income for the three months ended March 31, 2002, which reflects income taxes assuming the Company had been a corporation since the time of its formation and assuming tax rates equal to the rates that would have been in effect had the Company been required to report tax expense in such years.

Three Months Ended March 31, 2003 Compared To Three Months Ended March 31, 2002

Revenue

     Total revenue was $18.3 million for the three months ended March 31, 2003, an increase of $6.7 million or 57.8% compared to total revenue of $11.6 million for the three months ended March 31, 2002.

Income Recognized on Finance Receivables

     Income recognized on finance receivables was $17.6 million for the three months ended March 31, 2003, an increase of $6.4 million or 57.1% compared to income recognized on finance receivables of $11.2 million for the three months ended March 31, 2002. The majority of the increase was due to an increase in the Company’s cash collections on its owned defaulted consumer receivables to $26.4 million from $18.0 million, an increase of 46.7%. Over the previous 21 months, the Company has experienced an acceleration of the increase in its collector

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productivity resulting in an acceleration of its performance in cash collections compared to projections. This performance has led to lower amortization rates as the Company’s projected multiple of cash collections to purchase price has increased. The Company’s amortization rate on owned portfolio for the three months ended March 31, 2003 was 33.2% while for the three months ended March 31, 2002 it was 37.7%. During the three months ended March 31, 2003, the Company acquired defaulted consumer receivables portfolios with an aggregate face value amount of $831.4 million at a cost of $17.7 million. During the three months ended March 31, 2002, the Company acquired defaulted consumer receivable portfolios with an aggregate face value of $203.6 million at a cost of $5.5 million. The Company’s relative cost of acquiring defaulted consumer receivable portfolios decreased from 2.70% of face value for the three months ended March 31, 2002 to 2.13% of face value for the three months ended March 31, 2003.

Commissions

     Commissions paid to the Company as a result of its contingent fee collection activities were $698,000 for the three months ended March 31, 2003, an increase of $322,000 or 85.6% compared to commissions of $376,000 for the three months ended March 31, 2002. Commissions increased as business volume increased substantially in the Company’s contingent fee collection business.

Operating Expenses

     Total operating expenses were $10.9 million for the three months ended March 31, 2003, an increase of $3.4 million or 45.3% compared to total operating expenses of $7.5 million for the three months ended March 31, 2002. Total operating expenses, including compensation expenses, were 40.1% of cash receipts excluding sales for the three months ended March 31, 2003 compared with 40.9% for the same period in 2002.

Compensation

     Compensation expenses were $6.4 million for the three months ended March 31, 2003, an increase of $1.3 million or 25.5% compared to compensation expenses of $5.1 million for the three months ended March 31, 2002. Compensation expenses increased as total employees grew to 688 at March 31, 2003 from 509 at March 31, 2002. Compensation expenses as a percentage of cash receipts excluding sales decreased to 23.6% for the three months ended March 31, 2003 from 27.6% of cash receipts excluding sales for the same period in 2002.

Legal, Accounting and Outside Fees and Services

     Legal, accounting and outside fees and services expenses were $2.8 million for the three months ended March 31, 2003, an increase of $1.5 million or 115.4% compared to legal, accounting and outside fees and services expenses of $1.3 million for the three months ended March 31, 2002. The increase was attributable to the increased cash collections resulting from the increased number of accounts referred to independent contingent fee attorneys. This increase is consistent with the growth the Company experienced in its portfolio of defaulted consumer receivables, and a portfolio management strategy shift implemented in mid 2002. This strategy resulted in the Company referring to the legal suit process previously unsuccessfully liquidated accounts that have an identified means of repayment but that are nearing their legal statute of limitations.

Communications

     Communications expenses were $634,000 for the three months ended March 31, 2003, an increase of $184,000 or 40.9% compared to communications expenses of $450,000 for the three months ended March 31, 2002. The increase was attributable to growth in mailings and higher telephone expenses incurred to collect on a greater number of defaulted consumer receivables owned and serviced. Mailings were responsible for 47.6% of this increase, while the remaining 52.4% is attributable to higher telephone expenses.

Rent and Occupancy

     Rent and occupancy expenses were $245,000 for the three months ended March 31, 2003, an increase of $72,000 or 41.6% compared to rent and occupancy expenses of $173,000 for the three months ended March 31, 2002. The

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increase was attributable to increased leased space due to the opening of a call center in Hampton, Virginia, a storage facility, an off-site administrative and mail handling site and contractual increases in annual rental rates. The Hampton call center accounted for $30,000 of the increase, the new storage facility accounted for $6,000 of the increase and the administrative/mail site accounted for $8,000 of the increase. The remaining increase was attributable to contractual increases in annual rental rates.

Other Operating Expenses

     Other operating expenses were $473,000 for the three months ended March 31, 2003, an increase of $167,000 or 54.6% compared to other operating expenses of $306,000 for the three months ended March 31, 2002. The increase was due to changes in taxes, fees and licenses, travel and meals and miscellaneous expenses. Taxes, fees and licenses increased by $42,000, travel and meals increased by $58,000 and miscellaneous expenses increased by $67,000.

Depreciation

     Depreciation expenses were $300,000 for the three months ended March 31, 2003, an increase of $89,000 or 42.2% compared to depreciation expenses of $211,000 for the three months ended March 31, 2002. The increase was attributable to continued capital expenditures on equipment, software and computers related to the Company’s continued growth, especially with the March 2003 opening of its new Hampton office and an associated $1.2 million in equipment purchases.

Interest Income

     Interest income was $20,000 for the three months ended March 31, 2003, an increase of $18,000 compared to interest income of $2,000 for the three months ended March 31, 2002. This increase is the result of investing in short term federally tax-exempt Auction Rate Certificates in late 2002 and into 2003, as compared to maintaining cash in the Company’s depository accounts.

Interest Expense

     Interest expense was $76,000 for the three months ended March 31, 2003, a decrease of $452,000 or 85.6% compared to interest expense of $528,000 for the three months ended March 31, 2002. This decrease is primarily the result of having no outstanding debt on the revolving line of credit at March 31, 2003 versus $25 million outstanding during the three months ended March 31, 2002.

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Supplemental Performance Data

Owned Portfolio Performance:

     The following table groups the Company’s portfolio buying activity by year, showing the purchase price, actual cash collections and estimated remaining cash collections as of March 31, 2003.

     When the Company acquires a portfolio of defaulted accounts, it generally does so with a forecast of future total collections to purchase price paid of no more than 2.4 to 2.6 times. Only after the portfolio has established probable and estimable performance in excess of that projection will estimated remaining collections be increased. If actual results are less than the original forecast, the Company moves aggressively to lower estimated remaining collections to appropriate levels.

     The following table, which excludes any proceeds from cash sales of finance receivables, demonstrates the Company’s ability to realize significant multi-year cash collection streams on its owned pools as of March 31, 2003.