UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Portfolio Recovery Associates, Inc.

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value per share

     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.

YESYES    X     þNO ___o

     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.o

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

YESþ NOo

     The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 12, 200416, 2005 was $229,374,131.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes     X     No ____$428,781,004.

     The number of shares of the registrant’s Common Stock outstanding as of February 12, 200416, 2005 was 15,299,676.15,504,210.

     Documents incorporated by reference: Portions of the Proxy Statement to be filed by April 30, 20042005 for the Company’s 2004our 2005 Annual Meeting of Stockholders are incorporated by reference into Items 11, 12 and 13 of Part III of this Form 10-K.

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Table of Contents

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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 theour results of the Company (as hereinafter defined) to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:

     • changes in the business practices of debt owners

	•	our ability to purchase defaulted consumer receivables at appropriate prices;
	•	changes in the business practices of credit originators in terms of selling defaulted consumer receivables or outsourcing defaulted consumer receivables to third-party contingent fee collection agencies;
	•	changes in government regulations that affect our ability to collect sufficient amounts on our acquired or serviced receivables;
	•	our ability to employ and retain qualified employees, especially collection personnel;
	•	changes in the credit or capital markets, which affect our ability to borrow money or raise capital to purchase or service defaulted consumer receivables;
	•	the degree and nature of our competition;
	•	our ability to comply with the provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder;
	•	our ability to successfully integrate our newly acquired subsidiary, IGS Nevada (“IGS”), into our business operations;
	•	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.

     • 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.

PART I

Item 1. Business.

General

     Portfolio Recovery Associates, Inc., together with its subsidiaries (collectively, the “Company”), isWe are a full-service provider of outsourced receivables management. The Company purchases, collectsmanagement and managesrelated services. We purchase, collect and manage portfolios of defaulted consumer receivables.receivables which includes providing collateral location services for credit originators and other debt owners. Defaulted consumer receivables are the unpaid obligations of individuals to credit originators, including banks, credit unions, consumer and auto finance companies, retail merchants and other providers of goods and services. We believe that the strengths of our business are our sophisticated approach to portfolio pricing and servicing, our emphasis on developing and retaining our collection personnel, our sophisticated collections systems and procedures and our relationships with many of the largest consumer lenders in the United States. Our proven ability to service defaulted consumer receivables allows us to offer debt owners a complete outsourced solution to address their defaulted consumer receivables. The defaulted consumer receivables the Company collectswe collect are generally either purchased from sellers of defaulted consumer debt (“Debt Sellers”) or are collected on behalf of debt owners on a commission fee basis. On October 1, 2004, we acquired the assets of IGS Nevada, Inc., which specializes in the location of collateral, securing primarily automobile loans. We believe that

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this acquisition is highly complementary and inherently related to our collection activities and broadens the services we can offer to our clients. We intend to continue to build on our strengths and grow our business through the disciplined approach that has contributed to our success to date.

     The Company usesWe use the following terminology throughout its reports.our reports: “Cash Receipts” refers to all collections of cash, regardless of the source. “Cash Collections” refers to collections on the Company’sour owned portfolios only, exclusive of commission income and sales of finance receivables. “Amortization Rate” refers to cash collections applied to principal as a percentage of total cash collections. “Cash Sales of Finance Receivables” refers to the sales of the Company’sour owned portfolios. “Commissions” refers to fee income generated from the Company’sour wholly-owned contingent fee subsidiary.and fee-for-service subsidiaries. Prior to the Company’sour initial public offering on November 8, 2002 the Company was(our “IPO”), we were organized as a limited liability company with all income taxes charged to the partners of the partnership. Pro forma adjustments have been made to show the impact of corporate taxes for all periods prior to the Company’sour conversion to a corporation.

     The Company specializesWe specialize in receivables that have been charged-off by the credit originator. Since the Debt Seller hascredit originator and/or other debt servicing companies have unsuccessfully attempted to collect these receivables, the Company iswe are able to purchase them at a substantial discount to their face value. From itsour 1996 inception through December 31, 2003, the Company2004, we acquired 417514 portfolios with a face value of $7.78$11.1 billion for $204.6$265.8 million, or 2.63%2.39% of face value, representing more than 4.16.2 million customer accounts. The success of the Companyour business depends on itsour ability to purchase

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portfolios of defaulted consumer receivables at appropriate valuations and to collect on those receivables effectively and efficiently. To date, the Company has consistentlywe have been able to collect at a rate of 2.5 to 3.0 times itsour purchase price for defaulted consumer receivables portfolios, as measured over a five to seveneight year period, which has enabled the Companyus to generate increasing profits and positive cash flow.

     The Company hasWe have achieved strong financial results since itsour formation, with cash collections growing from $10.9 million in 1998 to $117.1$153.4 million in 2003.2004. Total revenue has grown from $6.8 million in 1998 to $84.9$113.4 million in 2003,2004, a compound annual growth rate of 66%60%. Similarly, pro forma net income has grown from $402,000 in 1998 to net income of $20.7$27.5 million in 2003.2004. Excluding the impact of proceeds from occasional portfolio sales, cash collections have increased every quarter since the Company’sour formation.

     The Company wasWe were initially formed as Portfolio Recovery Associates, L.L.C., a Delaware limited liability company, on March 20, 1996. Prior to the formation of the Company, foundingPortfolio Recovery Associates, Inc., members of theour current management team played key roles in the development of a defaulted consumer receivables acquisition and divestiture operation for Household Recovery Services, a subsidiary of Household International.International, now owned by HSBC. In connection with an initial public offering, which commenced on November 8, 2002 (the “IPO”),our IPO, all of the membership units of Portfolio Recovery Associates, L.L.C. were exchanged, simultaneously with the effectiveness of the Company’sour registration statement, for a single class of the common stock of Portfolio Recovery Associates, Inc., a new Delaware corporation formed on August 7, 2002. Accordingly, the members of Portfolio Recovery Associates, L.L.C. became the common stockholders of Portfolio Recovery Associates, Inc., which became the parent company of Portfolio Recovery Associates, L.L.C. and its subsidiaries.

     Shares of common stock that were received in exchange for the membership interests of Portfolio Recovery Associates, L.L.C. as a result of this reorganization, which were not registered by the Company’s initial public offering were deemed to have a new “holding period” for purposes of Rule 144 under the Securities Act of 1933, as amended, and therefore could not be sold before November 6, 2003 unless registered under the Securities Act of 1933, as amended, or sold under an available exemption from registration, as in an organized stock offering. The “holding period” with respect to these shares has expired; therefore, these shares may now be traded pursuant to Rule 144, which imposes certain limitations on the manner of sale, notice requirements and the availability of the Company’s current public information.

     A secondary offering of shares of common stock of the Company was completed on May 21, 2003, in which 4,025,000 shares were sold. After this transaction, the holders of 6,865,261 shares of the Company’s common stock which were not sold in the secondary offering agreed to a 180-day “lock-up” with respect to these shares. This generally means that holders of these shares were unable sell these shares during the 180 days following the date of the prospectus, or until November 21, 2003. These shares may now be sold in accordance with the provisions of the federal securities laws, including Rule 144.

Competitive Strengths

Complete Outsourced Solution for Debt Owners

     The Company offersWe offer debt owners a complete outsourced solution to address their defaulted consumer receivables. Depending on a debt owner’s timing and needs, the Companywe can either purchase from the debt owner their defaulted consumer receivables, providing immediate cash, or service those receivables on their behalf for either a fee-for-service or a commission fee based on a percentage of itsour collections. Furthermore, the CompanyWe can purchase or service receivables throughout the entire delinquency cycle, from receivables that have only been processed for collection internally by the debt owner to receivables that have been subject to multiple internal and external collection efforts. This flexibility helps the Companyus meet the needs of debt owners and allows itus to become a trusted resource. Furthermore, the Company’sour strength across multiple transaction and asset types provides the opportunity to cross-sell itsour services to debt owners, building on successful engagements. Our acquisition of IGS further broadens the services we can offer to debt owners to include skip tracing and asset location.

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Disciplined and Proprietary Underwriting Process

     One of the key components of the Company’sour growth has been itsour ability to price portfolio acquisitions at levels that have generated profitable returns on investment. To date, the Company has consistentlywe have been able to collect at a rate of 2.5 to 3.0 times itsour purchase price for defaulted consumer receivables portfolios, as measured

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over a five to seveneight year period, which has enabled the Companyus to generate increasing profits and cash flow. In order to price portfolios and forecast the targeted collection results for a portfolio, the Company useswe use two separate statistical models developed internally that are oftenmay be supplemented with on-site due diligence of the Debt Seller’sdebt owner’s collection process and loan files. One model analyzes the portfolio as one unit based on demographic comparisons while the second model analyzes each account in a portfolio using variables in a regression analysis. As the Company collectswe collect on itsour portfolios, the results are input back into the models in an ongoing process which the Company believeswe believe increases their accuracy. Through December 31, 2003 the Company has2004 we have acquired 417514 portfolios with a face value of $7.78$11.1 billion.

Ability to Hire, Develop and Retain Productive Collectors

     In an industry characterized by high turnover, the Company’sWe place considerable focus on our ability to hire, develop and retain effective collectors is awho are key to itsour 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 Company hasHutchinson, Kansas and Las Vegas, Nevada areas also provide a sufficient potential workforce of eligible personnel. We have found that tenure is a primary driver of itsour collector effectiveness. The Company offers itsWe offer our collectors a competitive wage with the opportunity to receive unlimited incentive compensation based on performance, as well as an attractive benefits package, a comfortable working environment and the ability to work on a flexible schedule. Stock options were awarded to many of the Company’sour collectors at the time of the IPOinitial public offering in 2002. The Company has2002, and many tenured collectors were awarded nonvested shares in 2004. Most IGS employees were awarded nonvested shares at the time of our purchase of IGS in October 2004. We have a comprehensive six week training program for new owned portfolio collectors and providesprovide continuing advanced training classes which are conducted in itsour four training centers. Recognizing the demands of the job, the Company’sour management team has endeavored to create a professional and supportive environment for collectors. Furthermore, several large military bases and numerous telemarketing, customer service and reservation phone centers are located near the Company’s headquarters and regional offices in Virginia, providing access to a large poolall of trained personnel. The Company has also found the Hutchinson, Kansas area to provide a sufficient potential workforce of trained personnel.our employees.

Established Systems and Infrastructure

     The Company hasWe have devoted significant effort to developing itsour systems, including statistical models, databases and reporting packages, to optimize itsour portfolio purchases and collection efforts. In addition, the Company’sour technology infrastructure is flexible, secure, reliable and redundant to ensure the protection of itsour sensitive data and to ensure minimal exposure to systems failure or unauthorized access. The Company believesWe believe that itsour systems and infrastructure give itus meaningful advantages over itsour competitors. The Company hasWe have developed financial models and systems for pricing portfolio acquisitions, managing the collections process and monitoring operating results. The Company performsWe perform a static pool analysis monthly on each of itsour portfolios, inputting actual results back into itsour acquisition models, to enhance their accuracy. The Company monitorsWe monitor collection results continuously, seeking to identify and resolve negative trends immediately. The Company’sOur comprehensive management reporting package is designed to fully inform the Company’sour management team so that itthey may make timely operating decisions. This combination of hardware, software and proprietary modeling and systems has been developed by the Company’sour management team through years of experience in this industry and the Company believeswe believe provides itus with an important competitive advantage from the acquisition process all the way through collection operations.

Strong Relationships with Major Credit Originators

     The Company hasWe have done business with most of the top consumer lenders in the United States. The Company maintainsWe maintain an extensive marketing effort and itsour senior management team is in contact with known and prospective credit originators. The Company believesWe believe that it haswe have earned a reputation as a reliable purchaser of defaulted consumer receivables portfolios and as responsible collectors. Furthermore, from the perspective of the selling credit originator, the failure to close on a negotiated sale of a portfolio consumes valuable time and expense and can have an adverse effect on pricing when the portfolio is re-marketed. The Company hasWe have never failed to close on a transaction. Similarly, if a credit originator sells a portfolio to a group that violates industry standard collecting practices, it can taint the reputation of the credit originator. The Company goesWe go to great lengths to collect from consumers in a responsible, professional and compliant manner. The Company believes itsWe believe our strong relationships with major credit

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originators provide itus with access to quality opportunities for portfolio purchases and contingent fee collection placements.

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Experienced Management Team

     The Company hasWe have an experienced management team with considerable expertise in the accounts receivable management industry. Prior to the Company’sour formation, the firm’sour 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.International, now owned by HSBC. As the Company haswe have grown, the management team has been expanded with a group of successful, seasoned executives.

Risks Related to the Company’sOur Business

     To the extent not described elsewhere in this Annual Report, the following are risks related to the Company’sour business.

We may not be able to purchase defaulted consumer receivables at appropriate prices, and a decrease in our ability to purchase portfolios of receivables could adversely affect our ability to generate revenue

     If we are unable to purchase defaulted receivables from debt owners at appropriate prices, or one or more debt owners stop selling defaulted receivables to us, we could lose a potential source of income and our business may be harmed.

The Companyavailability of receivables portfolios at prices which generate an appropriate return on our investment depends on a number of factors both within and outside of our control, including the following:

	•	the continuation of current growth trends in the levels of consumer obligations;
	•	sales of receivables portfolios by debt owners; and
	•	competitive factors affecting potential purchasers and credit originators of receivables.

     Because of the length of time involved in collecting defaulted consumer receivables on acquired portfolios and the volatility in the timing of our collections, we may not be able to identify trends and make changes in our purchasing strategies in a timely manner.

We may not be able to collect sufficient amounts on itsour defaulted consumer receivables to fund itsour operations

     The Company’sOur business consists of acquiring and servicing receivables that consumers have failed to pay and that the Debt Sellers havecredit originator has deemed uncollectible.uncollectible and has generally charged-off. The Debt Sellersdebt owners generally make numerous attempts to recover on their defaulted consumer receivables, often using a combination of in-house recovery efforts and third-party collection agencies. These defaulted consumer receivables are difficult to collect and the Companywe may not collect a sufficient amount to cover itsour investment associated with purchasing the defaulted consumer receivables and the costs of running itsour business.

The Company’s contingent fee collections operations have a limited operating history

     The Company’s contingent fee collections operations commenced in March 2001. These operations are in the early stages of development. Accordingly, these operations have a limited operating history and their prospects must be considered in light of the risks and uncertainties facing early-stage companies. As of December 31, 2003, the Company has entered into contingent fee collection arrangements with 9 clients. Although the Company is currently generating positive operating income from its contingent fee collections operations, the Company’s limited operating history makes prediction of future results difficult.

The Company may not be able to purchase defaulted consumer receivables at appropriate prices, and a decrease in its ability to purchase portfolios of receivables could adversely affect its ability to generate revenue

     If one or more Debt Sellers stops selling defaulted receivables to the Company and it is otherwise unable to purchase defaulted receivables at appropriate prices, the Company could lose a potential source of income and its business may be harmed.

     The availability of receivables portfolios at prices which generate an appropriate return on the Company’s investment depends on a number of factors both within and outside of its control, including the following:

     • the continuation of current growth trends in the levels of consumer obligations;

     • sales of receivables portfolios by Debt Sellers; and

     • competitive factors affecting potential purchasers and Debt Sellers of receivables.

     Because of the length of time involved in collecting defaulted consumer receivables on acquired portfolios and the volatility in the timing of the Company’s collections, the Company may not be able to identify trends and make changes in its purchasing strategies in a timely manner.

The Company experiencesWe experience high employee turnover rates and itwe may not be able to hire and retain enough sufficiently trained employees to support itsour operations

     The accounts receivables management industry is very labor intensive and, similar to other companies in the Company’sour industry, the Companywe typically experiencesexperience a high rate of employee turnover. The Company’s

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Our annual turnover rate, excluding those employees that do not complete itsour six week training program, was 37%46% in 2003. The Company competes2004. We compete for qualified personnel with companies in itsour industry and in other industries. The Company’sOur growth requires that itwe continually hire and train new collectors. A higher turnover rate among itsour collectors will increase the Company’sour recruiting and training costs and limit the number of experienced collection personnel available to service itsour defaulted consumer receivables. If this were to occur, the Companywe would not be able to service itsour defaulted consumer receivables effectively and this would reduce itsour ability to continue itsour growth and operate profitability.

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The Company servesWe serve markets that are highly competitive, and itwe may be unable to compete with businesses that may have greater resources than it haswe have

     The Company facesWe face competition in both of the markets it serveswe serve — owned portfolio and contingent fee based accounts receivable management — from new and existing providers of outsourced receivables management services, including other purchasers of defaulted consumer receivables portfolios, third-party contingent fee collection agencies and debt sellersowners that manage their own defaulted consumer receivables rather than outsourcing them. The accounts receivable management industry is highly fragmented and competitive, consisting of approximately 6,000 consumer and commercial agencies, most of which compete in the contingent fee business.

     The Company facesWe face bidding competition in itsour acquisition of defaulted consumer receivables and in itsour placement of contingent fee based receivables, and the Companywe also competescompete on the basis of reputation, industry experience and performance. Some of the Company’sour 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 itsour industry than itwe currently has.have. In the future, the Companywe may not have the resources or ability to compete successfully. As there are few significant barriers for entry to new providers of contingent fee based receivables management services, there can be no assurance that additional competitors with greater resources than the Company’sours will not enter itsthe market. Moreover, there can be no assurance that the Company’sour existing or potential clients will continue to outsource their defaulted consumer receivables at recent levels or at all, or that itwe may continue to offer competitive bids for defaulted consumer receivables portfolios. If the Company iswe are unable to develop and expand itsour business or adapt to changing market needs as well as itsour current or future competitors are able to do, the Companywe may experience reduced access to defaulted consumer receivables portfolios at appropriate prices and reduced profitability.

The CompanyWe may not be successful at acquiring receivables of new asset types or in implementing a new pricing structure

     The CompanyWe may pursue the acquisition of receivables portfolios of asset types in which it haswe have little current experience. The CompanyWe may not be successful in completing any acquisitions of receivables of these asset types and itsour limited experience in these asset types may impair itsour ability to collect on these receivables. This may cause the Companyus to pay too much for these receivables and consequently, itwe may not generate a profit from these receivables portfolio acquisitions.

     In addition, the Companywe may in the future provide a service to debt owners in which debt owners will place consumer receivables with itus for a specific period of time for a flat fee. This fee may be based on the number of collectors assigned to the collection of these receivables, the amount of receivables placed or other bases. The CompanyWe may not be successful in determining and implementing the appropriate pricing for this pricing structure, which may cause itus to be unable to generate a profit from this business.

The Company’sOur collections may decrease if certain types of bankruptcy filings involving liquidations increase

     During times ofVarious economic recession, the amount of defaulted consumer receivables generally increases, which contributestrends 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 the Company serviceswe service are generally unsecured itwe often would not be able to collect on those receivables. The CompanyWe cannot ensure that itsour collection experience would not decline with an increase in personal bankruptcy filings.filings or a change in bankruptcy regulations or practices. If the Company’sour actual collection experience with respect to a defaulted bankrupt consumer receivables portfolio is significantly lower than it

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we projected when itwe purchased the portfolio, the Company’sour financial condition and results of operations could deteriorate.

The CompanyWe may make acquisitions that prove unsuccessful or strain or divert itsour resources

     The Company intendsWe intend to consider acquisitions of other companies in itsour industry that could complement itsour business, including the acquisition of entities offering greater access and expertise in other asset types and markets that the Company doesare related but that we do not currently serve. The Company hasWe have little experience in completing acquisitions of other businesses, and it may not be able to successfully complete an acquisition.businesses. If the Company doeswe do acquire other businesses, itwe may not be able to successfully integrate these businesses with itsour own and the Companywe may be unable to maintain itsour standards, controls and policies. Further, acquisitions may place additional constraints on the Company’sour resources by diverting the attention of itsour management from other business concerns. Through acquisitions, the Companywe may enter markets in which it haswe have no or limited experience. Moreover,

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any acquisition may result in a potentially dilutive issuance of equity securities, the incurrence of additional debt and amortization expenses of related intangible assets, all of which could reduce the Company’sour profitability and harm itsour business.

The Companyloss of IGS customers could negatively affect our operations

     On October 1, we acquired substantially all of the assets of IGS for consideration of $14 million. A significant portion of the valuation was tied to existing client relationships. Our customers, in general, may terminate their relationship with us on 90 days’ prior notice. In the event a customer or customers terminate or significantly cut back any relationship with us, it could reduce our profitability and harm our business and could potentially give rise to an impairment charge related to an intangible asset specifically ascribed to existing client relationships.

We may not be able to continually replace itsour defaulted consumer receivables with additional receivables portfolios sufficient to operate efficiently and profitably

     To operate profitably, the Companywe must continually acquire and service a sufficient amount of defaulted consumer receivables to generate revenue that exceeds itsour expenses. Fixed costs such as salaries and lease or other facility costs constitute a significant portion of the Company’sour overhead and, if it doeswe do not continually replace the defaulted consumer receivables portfolios the Company serviceswe service with additional portfolios, itwe may have to reduce the number of itsour collection personnel. The CompanyWe would then have to rehire collection staff as it obtainswe obtain additional defaulted consumer receivables portfolios. These practices could lead to:

     • low employee morale;

     • fewer experienced employees;

     • higher training costs;

     • disruptions in the Company’s operations;

     • loss of efficiency; and

     • excess costs associated with unused space in the Company’s

	•	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 Sellers. The Companydebt owners. We cannot predict how itsour ability to identify and purchase receivables and the quality of those receivables would be affected if there is a shift in consumer lending practices, whether caused by changes in the regulations or accounting practices applicable to debt owners, a sustained economic downturn or otherwise.

The CompanyWe may not be able to manage itsour growth effectively

     The Company hasWe have expanded significantly since itsour formation and intendswe intend to maintain itsour growth focus. However, the Company’sour growth will place additional demands on itsour resources and the Companywe cannot ensure that itwe will be able to manage itsour growth effectively. In order to successfully manage itsour growth, the Companywe may need to:

     • expand and enhance its administrative infrastructure;

     • continue to improve its management, financial and information systems and controls; and

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     • recruit, train, manage and retain its

	•	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 the Company’sour management, operations and financial resources. The CompanyWe cannot ensure that itsour infrastructure, facilities and personnel will be adequate to support itsour future operations or to

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effectively adapt to future growth. If the Companywe cannot manage itsour growth effectively, itsour results of operations may be adversely affected.

The Company’sOur operations could suffer from telecommunications or technology downtime or increased costs

     The Company’sOur success depends in large part on sophisticated telecommunications and computer systems. The temporary or permanent loss of itsour computer and telecommunications equipment and software systems, through casualty or operating malfunction, could disrupt the Company’sour operations. In the normal course of itsour business, the Companywe must record and process significant amounts of data quickly and accurately to access, maintain and expand the databases it useswe use for itsour collection activities. Any failure of the Company’sour information systems or software and itsour backup systems would interrupt itsour business operations and harm itsour business. The Company’sOur headquarters isare located in a region that is susceptible to hurricane damage, which may increase the risk of disruption of information systems and telephone service for sustained periods.

     Further, the Company’sour 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 itsour profitability or disrupt itsour operations and harm the Company’sour business.

The CompanyWe may not be able to successfully anticipate, manage or adopt technological advances within itsour industry

     The Company’sOur business relies on computer and telecommunications technologies and itsour ability to integrate these technologies into itsour business is essential to the Company’sour competitive position and itsour success. Computer and telecommunications technologies are evolving rapidly and are characterized by short product life cycles. The CompanyWe may not be successful in anticipating, managing or adopting technological changes on a timely basis.

     While the Company believeswe believe that itsour existing information systems are sufficient to meet itsour current demands and continued expansion, the Company’sour future growth may require additional investment in these systems. The Company dependsWe depend on having the capital resources necessary to invest in new technologies to acquire and service defaulted consumer receivables. The CompanyWe cannot ensure that adequate capital resources will be available to itus at the appropriate time.

The Company’sOur senior management team is important to itsour continued success and the loss of one or more members of senior management could negatively affect the Company’sour operations

     The loss of the services of one or more of the Company’sour key executive officers or key employees could disrupt itsour operations. The Company hasWe have employment agreements with Steve Fredrickson, itsour president, chief executive officer and chairman of itsour board of directors, Kevin Stevenson, the Company’sour executive vice president and chief financial officer, Craig Grube, our executive vice president of portfolio acquisitions, and most of itsour other senior executives. The current agreements contain non-compete provisions that survive termination of employment. However, these agreements do not and will not assure the continued services of these officers and the Companywe cannot ensure that the non-compete provisions will be enforceable. The Company’sOur success depends on the continued service and performance of itsour key executive officers, and itwe cannot guarantee that itwe will be able to retain those individuals. The loss of the services of Mr. Fredrickson, Mr. Stevenson, Mr. Grube or one or more of the Company’sour other key executive officers could seriously impair itsour ability to continue to acquire or collect on defaulted consumer receivables and to manage and expand itsour business. The Company maintainsUnder one of our credit agreements, if both Mr. Fredrickson and Mr. Stevenson cease to be president and chief financial officer, respectively, it would constitute a default unless we have a replacement acceptable to our lenders within ten days. We maintain key man life insurance on SteveMr. Fredrickson.

The Company’sOur ability to recover and enforce itsour defaulted consumer receivables may be limited under federal and state laws

     Federal and state laws may limit the Company’sour ability to recover and enforce itsour defaulted consumer receivables regardless of any act or omission on itsour part. Some laws and regulations applicable to credit issuers may preclude the Companyus from collecting on defaulted consumer receivables it purchaseswe purchase if the credit

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issuer previously failed to comply with applicable laws in generating or servicing those receivables. Collection laws and regulations also directly apply to the Company’sour business. Additional consumer protection and privacy protection laws may be enacted that would impose additional requirements on the enforcement of and collection on consumer credit receivables. Any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection

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laws, may adversely affect the Company’sour ability to collect on itsour defaulted consumer receivables and may harm itsour business. In addition, federal and state governmental bodies are considering, and may consider in the future, other legislative proposals that would regulate the collection of the Company’sour defaulted consumer receivables. Additionally, new tax law changes such as Internal Revenue Code Section 6050P (requiring 1099-C returns to be filed on discharge of indebtedness in excess of $600.00) could negatively impact our ability to collect or cause us to incur additional expenses. Although the Companywe cannot predict if or how any future legislation would impact itsour business, itsour failure to comply with any current or future laws or regulations applicable to itus could limit itsour ability to collect on itsour defaulted consumer receivables, which could reduce itsour profitability and harm the Company’sour business.

The Company utilizesOur ability to recover on portfolios of bankrupt consumer receivables may be impacted by changes in federal laws or the change in administrative practices of the various bankruptcy courts

     We recover on consumer receivables that have filed for bankruptcy protection under available U.S. bankruptcy legislation. We recover on consumer receivables that have filed for bankruptcy protection after we acquired them, and we also purchase accounts that are currently in bankruptcy proceedings. If this legislation is amended, or the process in which the various bankruptcy courts administer bankruptcy plans is changed, our ability to recover on bankrupt consumer receivables may be negatively affected.

We utilize the interest method of revenue recognition for determining itsour income recognized on finance receivables, which is based on an analysis of projected cash flows that may prove to be less than anticipated and could lead to reductions in future revenues or impairment charges

     The Company utilizesWe utilize the interest method to determine income recognized on finance receivables. Under this method, each static poolpools of receivables it acquires iswe acquire are modeled upon itstheir projected cash flows. A yield is then established which, when applied to the unamortized purchase price of the receivables, results in the recognition of income at a constant yield relative to the remaining balance in the pool of defaulted consumer receivables. Each static pool is analyzed monthly to assess the actual performance compared to that expected by the model. If differences are noted, the yield is adjusted prospectively to reflect the revised estimate of cash flows. If the accuracy of the modeling process deteriorates or there is a decline in anticipated cash flows, the Companywe would suffer reductions in future revenues or a decline in the carrying value of itsour receivables portfolios or impairment charges, which in eitherany case would result in lower earnings in future periods and could negatively impact the Company’sour stock price.

We may be required to incur impairment charges as a result of the application of the new American Institute of Certified Public Accountants Statement of Position 03-03

     In October 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer.” The SOP provides guidance on accounting for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004 and amends Practice Bulletin 6 which remains in effect for loans acquired prior to the SOP effective date. The SOP limits the revenue that may be accrued to the excess of the estimate of expected future cash flows over a portfolio’s initial cost of accounts receivable acquired. The SOP requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue, expense, or on the balance sheet. The SOP initially freezes the internal rate of return, referred to as IRR, originally estimated when the accounts receivable are purchased for subsequent impairment testing. Rather than lower the estimated IRR if the original collection estimates are not received, effective January 1, 2005, the carrying value of a portfolio will be written down to maintain the then-current IRR. The SOP also amends Practice Bulletin 6 in a similar manner and applies to all loans acquired prior to January 1, 2005. Increases in expected future cash flows can be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increased yield then becomes the new benchmark for impairment testing. The SOP provides that previously issued annual financial statements would not need to be restated. Historically, as we have applied the guidance of Practice Bulletin 6, we have moved yields upward and downward as appropriate under that guidance. However, since the new SOP guidance does not permit yields to be lowered, under either the revised Practice Bulletin 6 or SOP 03-03, it will increase the probability of us having to incur impairment charges in the future, which could reduce our profitability in a given period and could negatively impact our stock price.

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We incur increased costs as a result of recently enacted and proposed changes in laws and regulations

     Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the SEC and by the Nasdaq Stock Market, have resulted in increased costs to us as we evaluate the implications of any new rules and respond to and implement their requirements. The new rules could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we will incur or the timing of such costs.

The future impact on us of Section 404 of the Sarbanes-Oxley Act of 2002 relating to financial controls is unclear at this time

     As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report by management on the company’s internal control over financial reporting in our annual reports on Form 10-K. This report is required to contain an assessment by management of the effectiveness of such company’s internal controls over financial reporting. In addition, the public accounting firm auditing a public company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. As is the case with many public companies, at this time the long-term impact of Section 404 on us is unclear. In the future, if we are unable to comply with the requirements of Section 404 in a timely manner, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our internal controls over financial reporting, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations.

The market price of our shares of common stock could fluctuate significantly

     Wide fluctuations in the trading price or volume of our shares of common stock could be caused by many factors, including factors relating to our company or to investor perception of our company (including changes in financial estimates and recommendations by research analysts), but also factors relating to (or relating to investor perception of) the accounts receivable management industry or the economy in general.

Our certificate of incorporation, by-laws and Delaware law contain provisions that may prevent or delay a change of control or that may otherwise be in the best interest of our stockholders

     Our certificate of incorporation and by-laws contain provisions that may make it more difficult, expensive or otherwise discourage a tender offer or a change in control or takeover attempt by a third-party, even if such a transaction would be beneficial to our stockholders. The existence of these provisions may have a negative impact on the price of our common stock by discouraging third-party investors from purchasing our common stock. In particular, our certificate of incorporation and by-laws include provisions that:

	•	classify our board of directors into three groups, each of which, after an initial transition period, 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;

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	•	permit a special meeting of our stockholders be called only by approval of a majority of the directors, the chairman of the board of directors, the chief executive officer, the president or the written request of holders owning at least 30% of our common stock;
	•	permit our board of directors to issue, without approval of our stockholders, preferred stock with such terms as our board of directors may determine;
	•	permit the authorized number of directors to be changed only by a resolution of the board of directors; and
	•	require the vote of the holders of a majority of our voting shares for stockholder amendments to our by-laws.

     In addition, we are subject to Section 203 of the Delaware General Corporation Law which provides certain restrictions on business combinations between us and any party acquiring a 15% or greater interest in our voting stock other than in a transaction approved by our board of directors and, in certain cases, by our stockholders. These provisions of our certificate of incorporation and by-laws and Delaware law could delay or prevent a change in control, even if our stockholders support such proposals. Moreover, these provisions could diminish the opportunities for stockholders to participate in certain tender offers, including tender offers at prices above the then-current market value of our common stock, and may also inhibit increases in the trading price of our common stock that could result from takeover attempts or speculation.

Portfolio Acquisitions

     The Company’s     Our portfolio of defaulted consumer receivables includes a diverse set of accounts that can be segmentedcategorized by asset type, age and size of account, level of previous collection efforts and geography. To identify attractive buying opportunities, the Company maintainswe maintain an extensive marketing effort with itsour senior officers contacting known and prospective sellers of defaulted consumer receivables. The Company acquiresWe acquire receivables of Visa®Visa^®, MasterCard®MasterCard^® and Discover®Discover^® credit cards, private label credit cards, installment loans, lines of credit, bankrupt, deficiency balances of various types, and legal judgments, and trade payables, all from a variety of Debt Sellers.debt owners. These Debt Sellersdebt owners include major banks, credit unions, consumer finance companies, telecommunication providers, retailers, utilities, insurance companies, other debt buyers and auto finance companies. In addition, the Company exhibitswe exhibit at trade shows, advertisesadvertise in a variety of trade publications and attendsattend industry events in an effort to develop account purchase opportunities. The CompanyWe also maintainsmaintain active relationships with brokers of defaulted consumer receivables.

     The following chart categorizes the Company’sour life to date owned portfolios as of December 31, 20032004 into the major asset types represented.

defaulted consumer receivables portfolio ranges from $5$1 million to $75$150 million in face value and contains defaulted consumer receivables from diverse geographic locations with average initial individual account balances of $1,000$400 to $7,000.

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     The age of a defaulted consumer receivables portfolio (i.e., the(the time since an account has been charged-off) is an important factor in determining the maximum price at which the Companywe will purchase a receivables portfolio. Generally, there is an inverse relationship between the age of a portfolio and the price that the Companyat which we will purchase the portfolio. This relationship is due to the fact that older receivables typically are more difficult to collect. The accounts receivables management industry places receivables into categories depending on the number of collection agencies that have previously attempted to collect on the receivables. Fresh accounts are typically past due 120 to 270 days and charged-off by the credit originator, that are either being sold prior to any post-charge-off collection activity or are placed with a third-party for the first time. These accounts typically sell for the highest purchase price. Primary accounts are typically 270 to 360 days past charge-off,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 360 days past charge-off,due and charged-off, have been placed with two or three contingent fee servicers and receive even lower purchase prices.

     As shown in the following chart, as of December 31, 2003,2004, a majority of the Company’s portfoliosour accounts are secondary and tertiary accounts, but it purchaseswe purchase or servicesservice accounts at any point in the delinquency cycle.

     As the     The following chart illustrates, as of December 31, 2003 the Company’ssets forth our overall life to date portfolio of defaulted consumer receivables is generally balanced geographically.geographically as of December 31, 2004:

     In order to determine a maximum purchase price for a portfolio, the Company useswe use two separate computer models developed internally that often aremay be supplemented with on-site due diligence of the seller’s collection operation and/or a review of their loan origination files, collection notes and work processes. The Company analyzesWe analyze the portfolio using itsour proprietary multiple regression model, which analyzes each account of the portfolio using variables in the regression model. In addition, the Company analyzeswe analyze the portfolio using an

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adjustment model, which uses an appropriate cash flow model depending upon whether it is a purchase of fresh, primary, secondary or tertiary accounts. Then, adjustments can be made to the cash flow model to compensate for demographic attributes supported by a detailed analysis of demographic data. This process yields the Company’sFrom these models we derive our quantitative purchasing analysis which is used to help price transactions. The multiple regression model is also used to prioritize collection work efforts subsequent to purchase. With respect to prospective forward flow contracts and other long-term relationships, in addition to the procedures outlined above, as we receive new flows under the Companyaforementionened contract we may obtain a representative test portfolio to evaluate and compare the performance of the portfolio to the projections the Companywe developed in itsour purchasing analysis. In addition, when purchasing bankrupt consumer receivables, we utilize a specifically designed pricing model.

     The Company’sOur due diligence and portfolio review results in a comprehensive analysis of the proposed portfolio. This analysis compares defaulted consumer receivables in the prospective portfolio with the Company’sour collection history in similar portfolios. The CompanyWe then uses itsuse our multiple regression model to value each account. Using the two valuation approaches, the Company determineswe determine cash collections over the life of the portfolio. The CompanyWe then summarizessummarize all anticipated cash collections and associated direct expenses and projectsproject a collectibility value expressed both in dollars and liquidation percentage and a detailed expense projection over the portfolio’s estimated fivesix to seven year economic life. The Company usesWe use the total projected collectibility value to determine an appropriate purchase price.

     The Company maintainsWe maintain a detailed static pool analysis on each portfolio that it haswe have acquired, capturing all demographic data and revenue and expense items for further analysis. The Company usesWe use the static pool analysis to refine the underwriting models that it useswe use to price future portfolio purchases. The results of the static pool analysis are input back into the Company’sour models, increasing the accuracy of the models as the data set increases with every portfolio purchase and each day’s collection efforts.

     The quantitative and qualitative data derived in the Company’sour due diligence is evaluated together with itsour knowledge of the current defaulted consumer receivables market and any subjective factors that management may know about the portfolio or the Debt Seller.debt owner. A portfolio acquisition approval memorandum is prepared for each prospective portfolio before a purchase price is submitted to the seller.debt owner. This approval memorandum, which outlines the portfolio’s anticipated collectibility and purchase structure, is distributed to members of the Company’sour investment committee. The approval by the committee sets a maximum purchase price for the portfolio. The investment committee is currently comprised of Steve Fredrickson, CEO and President, Kevin Stevenson, CFO and Craig Grube, EVPExecutive Vice President — Acquisitions.

     Once a portfolio purchase has been approved by the Company’sour investment committee and the terms of the sale have been agreed to with the seller,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 sellerdebt owner either agrees to repurchase these accounts or replace them with acceptable replacement accounts within certain time frames.

Owned Collection Operations

     The Company’sOur work flow management system places, recalls and prioritizes accounts in collectors’ work queues, based on the Company’sour analyses of itsour accounts and other demographic, credit and prior work collection attributes. The Company usesWe use this process to focus itsour work effort on those consumers most likely to pay on their accounts and to rotate to other collectors the non-paying but most likely to pay accounts from which other collectors have been unsuccessful in receiving payment. The majority of the Company’sour collections occur as a result of telephone contact with consumers.

     The collectibility forecast for a newly acquired portfolio will help determine collection strategy. Accounts which are determined to have the highest predicted collectibilitycollection 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

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dialer or other passive, low cost method. All newly purchasedSome accounts are campaign dialed formay be worked using a period of time for maximum penetration prior to distribution to collector queues. At such time, only those accounts with acceptable minimum scores are distributed to collection queues. The Companyletter and/or settlement strategy. We may obtain credit reports for the most collectiblevarious accounts after the collection process begins.

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     When a collector establishes contact with a consumer, the account information is placed automatically in the collector’s work queue. The Company’sOur computer system allows each collector to view all the scanned documents relating to the consumer’s account, which can include the original account application and payment checks. A typical collector work queue may include 650 to 1,000 accounts or more, depending on the skill level and tenure of the collector. The work queue is depleted and replenished automatically by the Company’sour computerized work flow system.

     On the initial contact call, the consumer is given a standardized presentation regarding the benefits of resolving his or her account with the Company.us. Emphasis is placed on determining the reason for the consumer’s default in order to better assess the consumer’s situation and create a plan for repayment. The collector is incentivized to have the consumer pay the full balance of the account. If the collector cannot obtain payment of the full balance, the collector will suggest a repayment plan which generally includes an approximate 20% down payment with the balance to be repaid over an agreed upon period. At times, when determined to be appropriate, and in many cases with management approval, a reduced lump-sum settlement may be agreed upon. If the consumer elects to utilize an installment plan, the Company haswe have developed a system to make monthly withdrawals from a consumer’s bank account.

     If a collector is unable to establish contact with a consumer based on information received, the collector must undertake skip tracing procedures to develop important account information. Skip tracing is the process of developing new phone, address, job or asset information on a consumer. Each collector does his or her own skip tracing using a number of computer applications available at his or her workstation, as well as a series of automated skip tracing procedures implemented by the Companyus on a regular basis.

     Accounts for which the consumer has the likely ability, but not the willingness, to resolve their obligations are reviewed for legal action. Depending on the balance of the defaulted consumer receivable and the applicable state collection laws, the Company determineswe 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.

     The Company’sOur legal recovery department oversees and coordinates an independent nationwide collections attorney network which is responsible for the preparation and filing of judicial collection proceedings in multiple jurisdictions, determining the suit criteria, coordinating sales of property and instituting wage garnishments to satisfy judgments. This network consists of approximately 70 independent law firms who work on a contingent fee basis. The Company’sLegal cash collections currently constitute approximately 30% of our total cash collections. As our portfolio matures, a larger number of accounts will be directed to our legal recovery department for judicial collection; consequently, we anticipate that legal cash collections will grow commensurately and comprise a larger percentage of our total cash collections. During 2004, we began using staff attorneys to pursue legal collections in certain states and under certain circumstances. This practice is currently very limited, but is expected to grow over time.

     Our bankruptcy department also processes proofs of claims for recovery on receivables which are included in consumer bankruptcies filed under Chapter 13 of the U.S. Bankruptcy Code, and submits claims against estates in cases involving deceased debtors having assets at the time of death. Legal cash collections currently constitute approximately 26%Proposed amendments to federal bankruptcy laws, if passed, could have an impact upon our operations. The amendments, which, among other things, propose to establish income criteria for the filing of a Chapter 7 bankruptcy petition, are expected to cause more debtors to file bankruptcy petitions under Chapter 13, rather than Chapter 7 of the Company’s total cash collections. AsU.S. Bankruptcy Code. Consequently, if this legislation is passed, we expect that fewer debtors will be able to have their obligations completely discharged in Chapter 7 bankruptcy actions, and will instead resort to filing bankruptcy petitions under Chapter 13, which requires that the Company’s portfolio matures,debtor establish a payment plan. We expect that this will enable us to generate recoveries from a larger number of accounts will be directed to its legal recovery department for judicial collection; consequently,bankrupt debtors through the Company anticipates that legal cash collections will grow commensurately and comprise a larger percentagefiling of its total cash collections.proofs of claims with the trustees of bankruptcy courts.

Contingent FeeFee-for-Service Collections Operations

     In order to provide debt owners with alternative collection solutions and to capitalize on common competencies between a contingent feefee-for-service collections operation and an acquired receivables portfolio business, the Company we

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commenced itsour third-party contingent fee collections operations in March 2001. In a contingent fee arrangement, debt owners typically place defaulted receivables with an outsourced providera third party collection agency once they have ceased their recovery efforts. The debt owners then pay the third-party agency a commission fee based upon the amount actually collected from the consumer. A contingent fee placement of defaulted consumer receivables is usually for a fixed time frame, typically four to six months, or as long as nine months or more if there have been previous collection efforts.months. At the end of this fixed period, the third-party agency will return the uncollected defaulted consumer receivables to the debt owner, which may then place the defaulted consumer receivables with another collection agency or sell the portfolio of receivables.

     The determination of the commission fee to be paid for third-party collections is generally based upon the age and potential collectibility of the defaulted consumer receivables being assigned for placement. For example, if there has been no prior third-party collection activity with respect to the defaulted consumer receivables, the

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commission fee would be lower than if there had been one or more previous collection agencies attempting to collect on the receivables. The earlier the placement of defaulted consumer receivables in the collection process, the higher the probability of receiving a cash collection and, therefore, the lower the cost to collect and the lower the commission fee. Other factors, such as the location of the consumers, the size of the defaulted consumer receivables, competition among third party agencies, and the clients’ collection procedures and work standards also contribute to establishing a commission fee.

     Once a defaulted consumer receivable has been placed with the Company, the collection process operates in a slightly different manner than with its portfolio acquisition business. Servicing time limitations imposed by the debt owner requires a greater emphasis on immediate settlements and larger down payments, compared to much longer term repayment plans common with the Company’s owned portfolios of defaulted consumer receivables. In addition work standards are often dictated by the debt owner. While the Company’sto our historical contingent fee collections operations utilize their own collectorsbusiness as described above, revenues from our new IGS business are accounted for as commission revenue. IGS performs skip tracing services for auto finance companies for a fee. The fee earned is generally determined by whether the debtor was located, we coordinate repossession of the collateral, we coordinate payment between the client and collection system, the Company has beencustomer or if the debtor is found. For example, if the debtor is not found, our fee is less than if the debtor is found and we are able to leverage the portfolio acquisition business’ infrastructure, existing facilities and skill set of its management teamarrange for an agent to provide support for this business operation. The leveraged competenciestake possession of the portfolio acquisition business include its sophisticated technology systems, account and portfolio scoring abilities, and training techniques.collateral securing the loan.

Competition

     The Company facesWe face competition in both of the markets it serveswe serve — owned portfolio and contingent feefee-for-service accounts receivable management — from new and existing providers of outsourced receivables management services, including other purchasers of defaulted consumer receivables portfolios, third-party contingent fee collection agencies and debt owners that manage their own defaulted consumer receivables rather than outsourcing them. The accounts receivable management industry (owned portfolio and contingent fee) is highly fragmented and competitive, consisting of approximately 6,000 consumer and commercial agencies. The Company estimatesWe estimate that more than 90% of these agencies compete in the contingent fee market. There are few significant barriers for entry to new providers of contingent fee receivables management services and, consequently, the number of agencies serving the contingent fee market may continue to grow. Greater capital needs and the need for portfolio evaluation expertise sufficient to price portfolios effectively constitute significant barriers for entry to new providers of owned portfolio receivables management services.

     The Company facesWe face bidding competition in itsour acquisition of defaulted consumer receivables and in obtaining placement of contingent feefee-for-service receivables. The CompanyWe also competescompete on the basis of reputation, industry experience and performance. Among the positive factors which the Company believeswe believe influence itsour ability to compete effectively in this market are itsour ability to bid on portfolios at appropriate prices, itsour reputation from previous transactions regarding itsour ability to close transactions in a timely fashion, itsour relationships with originators of defaulted consumer receivables, itsour team of well-trained collectors who provide quality customer service and compliance with applicable collections laws, itsour ability to collect on various asset types and itsour ability to provide both purchased and contingent fee solutions to debt owners. Among the negative factors which the Company believeswe believe could influence itsour ability to compete effectively in this market are that some of itsour 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 itsour industry than the Companywe currently has.have.

Information Technology

Technology Operating Systems and Server Platform

     The scalability of the Company’sour systems provides itus with a technology system that is flexible, secure, reliable and redundant to ensure the protection of itsour sensitive data. The Company utilizesWe utilize Intel-based servers running industry standard

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open systems coupled with Microsoft Windows 2000/2003 and NT Server operating systems. In addition, the Company utilizeswe utilize a blend of purchased and proprietary software systems tailored to the needs of itsour business. These systems are designed to eliminate inefficiencies in the Company’sour collections, continue to meet business objectives in a changing environment and meet compliance obligations with regulatory entities. The Company believesWe believe that itsour combination of purchased and proprietary software packages provide collections automation that is superior to itsour competitors. Our proprietary hardware and software systems are being leveraged to manage location information, phone and operational applications for IGS. We believe our custom solutions will enhance the overall investigative capabilities of this business while meeting compliance obligations with regulatory entities.

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Network Technology

     To provide delivery of the Company’sour applications, it utilizeswe utilize Intel-based workstations across itsour entire business operations. The environment is configured to provide speeds of 100 megabytes to the desktops of itsour collections and administration staff. The Company’sOur one gigabyte server network architecture supports high-speed data transport. The Company’sOur network system is designed to be scalable and meet expansion and inter-building bandwidth and quality of service demands.

Database Systems

     The ability to access and utilize data is essential to the Companyus being able to operate nationwide in a cost-effective manner. The Company’sOur centralized computer-based information systems support the core processing functions of itsour business under a set of integrated databases and are designed to be both replicable and scalable to accommodate itsour internal growth. This integrated approach helps to assure that consistent sources are processed efficiently. The Company usesWe 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 the Company’sour consumers, including on-line access to account information, account status and payment entry. The Company usesWe use a combination of Microsoft, Oracle and Cache database software to manage itsour portfolios, financial, customer and sales data, and the Company believeswe believe these systems will be sufficient for itsour needs for the foreseeable future. The Company’sOur contingent fee collections operations database incorporates an integrated and proprietary predictive dialing platform used with itsour predictive dialer discussed below. For our newly acquired business unit, IGS, we are completing initial development of a proprietary platform that will be enhanced for scalability in the future.

Redundancy, System Backup, Security and Disaster Recovery

     The Company’sOur data centers provide the infrastructure for innovative collection services and uninterrupted support of hardware and server management, server co-location and an all-inclusive server administration for itsour business. The Company believes itsWe 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 and in Kansas in order to help provide redundancy for data and processes should one site be completely disabled. The Company hasWe have a comprehensive disaster recovery plan covering itsour business that is tested on a periodic basis. The combination of the Company’sour locally distributed call control systems provides enterprise-wide call and data distribution between itsour call centers for efficient portfolio collection and business operations. In addition to real-timedata replication of data between the sites, incremental backups of both software and databases are performed on a daily basis and a full system backup is performed weekly. Backup data tapes are stored at an offsite location along with copies of schedules and production control procedures, procedures for recovery using an off-site data center, documentation and other critical information necessary for recovery and continued operation. The Company’sOur Virginia headquarters has two separate power and telecommunications feeds, an uninterruptible power supply and a diesel-generator power plant, that provide a level of redundancy should a power outage or interruption occur. The CompanyWe also employsemploy rigorous physical and electronic security to protect itsour data. The Company’sOur call centers have restricted card key access and appropriate additional physical security measures. Electronic protections include data encryption, firewalls and multi-level access controls. The facility which currently houses IGS features uninterruptible power supply units and electronic protections. Full-scale site power, telecommunication and all of the other systems abilities of our other sites will be installed at IGS during 2005.

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Plasma Displays for Real Time Data Utilization

     The Company utilizesWe utilize plasma displays at its Virginia facilitiesour main facility to aid in recovery of portfolios. The displays provide real-time business-critical information to the Company’sour collection personnel for efficient collection efforts such as telephone, production, employee status, goal trending, training and corporate information.

Dialer Technology

     The Noble Systems Predictive Dialer ensures that the Company’sour collection staff focuses on certain defaulted consumer receivables according to the Company’sour specifications. The Company’sOur predictive dialer takes account of all campaign and dialing parameters and is able to constantly adjust its dialing pace to match changes in campaign conditions and provide the lowest possible wait times.

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Employees

     The CompanyWe employed 798948 persons on a full-time basis, including 590652 collectors on itsour owned portfolios, and an additional 5769 collectors working in itsour contingent fee collections operations and 28 collectors working in our IGS operations, as of December 31, 2003.2004. None of the Company’sour employees are represented by a union or covered by a collective bargaining agreement. The Company believesWe believe that itsour relations with itsour employees are good.

Hiring

     The Company recognizesWe recognize that itsour collectors are critical to the success of itsour business as a majority of the Company’sour collection efforts occur as a result of telephone contact with consumers. The Company hasWe have found that the tenure and productivity of itsour collectors are directly related. Therefore, attracting, hiring, training, retaining and motivating itsour collection personnel is a major focus for the Company. The Company pays itsus. We pay our collectors competitive wages and offersoffer employees a full benefits program which includes comprehensive medical coverage, short and long term disability, life insurance, dental and vision coverage, pre-paid legal plan, an employee assistance program, supplemental indemnity, cancer, hospitalization, accident insurance, a flexible spending account for child care and a matching 401(k) program. In addition to a base wage, the Company provideswe provide collectors with the opportunity to receive unlimited compensation through an incentive compensation program that pays bonuses above a set monthly base, based upon each collector’s collection results. This program is designed to ensure that employees are paid based not only on performance, but also on consistency. The Company hasWe have awarded stock optionsbased compensation to many of the Company’sour tenured collectors. The Company believesWe believe that these practices have enabled it to achieve anhelped us maintain a relatively low annual post-training turnover rate of 37%46% in 2003.2004.

     A large number of telemarketing, customer-service and reservation phone centers are located near the Company’sour Virginia headquarters. The Company believesWe believe that it offerswe offer a competitive and, in many cases, a higher base wage than many local employers and therefore hashave access to a large number of trainedeligible personnel. In addition, there are approximately 100,000 active-duty military personnel in the area. The Company employsWe employ numerous military spouses and retirees and findsfind them to be an excellent source of employees. The Company hasWe have also found the Las Vegas, Nevada and Hutchinson, Kansas areaareas to provide a large potential workforce of trainedeligible personnel.

Training

     The Company providesWe provide a comprehensive six-weeksix week training program for all new owned portfolio collectors. The first three weeks of the training program is comprised of lectures to learn collection techniques, state and federal collection laws, systems, negotiation skills, skip tracing and telephone use. These sessions are then followed by an additional three weeks of practical experience conducting live calls with additional managerial supervision in order to provide employees with confidence and guidance while still contributing to the Company’sour profitability. Each trainee must successfully pass a comprehensive examination before being assigned to the collection floor. In addition, the Company conductswe conduct continuing advanced classes in itsour four training centers. The Company’sOur technology and systems allow itus to monitor individual employees and then offer additional training in areas of deficiency to increase productivity.

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Outsourced Collections Department

Legal Recovery Department

     An important component of the Company’sour collections effort involves its legal recoveryour outsourced collections department and the judicial collection of accounts of customers who have the ability, but not the willingness, to resolve their obligations. Accounts for which the consumer is not cooperative and for which we can establish a garnishable job or attachable asset are reviewed for legal action. Depending on the balance of the defaulted consumer receivable and the applicable state collection laws, we determine whether to commence legal action to collect on the receivable. The Company’slegal process can take an extended period of time, but it also generates cash collections that likely would not have been realized otherwise. Our legal recovery department oversees and coordinates an independent nationwide attorney network which is responsible for the preparation and filing of judicial collection proceedings in multiple jurisdictions, determining the suit criteria, coordinating sales of property and instituting wage garnishments to satisfy judgments. This nationwide collections attorney network consists of approximately 70 independent law firms. The Company’sfirms who work on a contingent fee basis. Legal cash collections currently constitute approximately 30% of our total collections. As our portfolio matures, a larger number of accounts will be directed to our outsourced collections department for judicial collection; consequently, we anticipate that legal recoverycollections will grow commensurately and comprise a larger percentage of our total cash collections. During 2004, we began using staff attorneys to pursue legal collections in certain states and under certain circumstances. This practice is currently very limited, but is expected to grow over time.

Bankruptcy

     Our bankruptcy department also submits claims against estates in cases involving deceased debtors having assets at the time of death, and processes proofs of claims for recovery on accounts which are included in consumer bankruptcies filed under Chapter 13 of the U.S. Bankruptcy Code. Recent proposedProposed amendments to federal bankruptcy laws, if passed, will very likelycould have an impact upon the Company’sour operations. The amendments, which, among other things, propose to establish income criteria for the filing of a Chapter 7

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bankruptcy petition, are expected to cause more debtors to file bankruptcy petitions under Chapter 13, rather than Chapter 7 of the U.S. Bankruptcy Code. Consequently, the Company expectsif this legislation is passed, we expect that fewer debtors will be able to have their obligations completely discharged in Chapter 7 bankruptcy actions, and will instead enter intoresort to filing bankruptcy petitions under Chapter 13, which requires that the debtor establish a payment plans required by Chapter 13. The Company expectsplan. We expect that this will enable itus to generate recoveries from a larger number of bankrupt debtors through the filing of proofs of claims with the trustees of bankruptcy trustees.courts.

Corporate Legal Department

     The Company’sOur corporate legal department manages general corporate legal matters, includingsuch as litigation management, insurance management and risk assessment, contract and document preparation and review, including real estate purchase and lease agreements and portfolio purchase documents, federal securities law and other regulatory and statutory compliance, obtaining and maintaining multi-state licensing, bonding and insurance, and dispute and complaint resolution. As a part of its compliance functions, the Company’sour corporate legal department also provides oversight to our Quality Control Department and assists with training the Company’s staff. The Company providesfor our staff in relevant areas. We provide employees with extensive training on the Fair Debt Collection Practices Act and other relevant laws and regulations. The Company’sOur corporate legal department distributes guidelines and procedures for collection personnel to follow when communicating with a customer,customers, customer’s agents, attorneys and other parties during itsour recovery efforts. In addition, the Company’sour corporate legal department regularly researches, and provides collectioncollections personnel and the training departmentour Training Department with summaries and updates of changes in, federal and state statutes and relevant case law, so that they are aware of newand in compliance with changing laws and judicial interpretations of applicable requirements and lawsdecisions when tracing or collecting an account.accounts.

Regulation

     Federal and state statutes establish specific guidelines and procedures which debt collectors must follow when collecting consumer accounts. It is the Company’sour policy to comply with the provisions of all applicable federal laws and comparable state statutes in all of itsour recovery activities, even in circumstances in which itwe may not be

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specifically subject to these laws. The Company’sOur failure to comply with these laws could have a material adverse effect on itus in the event and to the extent that they apply to some or all of the Company’sour recovery activities. Federal and state consumer protection, privacy and related laws and regulations extensively regulate the relationship between debt collectors and debtors, and the relationship between customers and credit card issuers. Significant federal laws and regulations applicable to the Company’sour business as a debt collector include the following:

     •Fair Debt Collection Practices Act.This act imposes certain obligations and restrictions on the practices of debt collectors, including specific restrictions regarding communications with consumer customers, including the time, place and manner of the communications. This act also gives consumers certain rights, including the right to dispute the validity of their obligations.

     •Fair Credit Reporting Act.This act places certain requirements on credit information providers regarding verification of the accuracy of information provided to credit reporting agencies and investigating consumer disputes concerning the accuracy of such information. The Company providesWe provide information concerning itsour accounts to the three major credit reporting agencies, and it is the Company’sour practice to correctly report this information and to investigate credit reporting disputes. The Fair and Accurate Credit Transactions Act amended the Fair Credit Reporting Act to include additional duties applicable to data furnishers with respect to information in the consumer’s credit file that the consumer identifies as resulting from identity theft, and requires that data furnishers have procedures in place as of December 1, 2004 to prevent such information from being furnished to credit reporting agencies. We have instituted measures to effect compliance with these requirements.

     •Gramm-Leach-Bliley Act.This act requires that certain financial institutions, including collection agencies, develop policies to protect the privacy of consumers’ private financial information and provide notices to consumers advising them of their privacy policies. This act also requires that if private personal information concerning a consumer is shared with another unrelated institution, the consumer must be given an opportunity to opt out of having such information shared. Since the Company doeswe do not share consumer information with non-related entities, except as required by law, or except as needed to collect on the receivables, itsour 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

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privacy rights with respect to the transactions, the right to stop payments on a pre-approved fund transfer, and the right to receive certain documentation of the transaction. This act also gives consumers a right to sue institutions which cause financial damages as a result of their failure to comply with its provisions.

     •Telephone Consumer Protection Act.In the process of collecting accounts, the Company useswe use automated predictive dialers to place calls to consumers. This act and similar state laws place certain restrictions on telemarketers and users of automated dialing equipment who place telephone calls to consumers.

     •Servicemembers Civil Relief Act.The Soldiers’ and Sailors’ Civil Relief Act of 1940 was amended in December 2003 as the Servicemembers Civil Relief Act (“SCRA”). The SCRA gives U.S. military service personnel relief from credit obligations they may have incurred prior to entering military service, and may also apply in certain circumstances to obligations and liabilities incurred by a servicemember while serving on active duty. The SCRA prohibits creditors from taking specified actions to collect the defaulted accounts of servicemembers. The SCRA impacts many different types of credit obligations, including installment contracts and court proceedings, and tolls the statute of limitations during the time that the servicemember is engaged in active military service. The SCRA also places a cap on interest bearing obligations of servicemembers to an amount not greater than 6% per year, inclusive of all related charges and fees.

     •Health Insurance Portability and Accountability Act.The Health Insurance Portability and Accountability Act (“HIPAA”) provides standards to protect the confidentiality of patients’ personal healthcare and financial information. Pursuant to HIPAA, business associates of health care providers, such as agencies which collect

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healthcare receivables, must comply with certain privacy standards established by HIPAA to ensure that the information provided will be safeguarded from misuse.

     •U.S. Bankruptcy Code.In order to prevent any collection activity with bankrupt debtors by creditors and collection agencies, the U.S. Bankruptcy Code provides for an automatic stay, which prohibits certain contacts with consumers after the filing of bankruptcy petitions.

     Additionally, there are in some states statutes and regulations comparable to and in some cases more stringent than the above federal laws, and specific licensing requirements which affect the Company’sour operations. State laws may also limit credit account interest rates and the fees, as well as limit the time frame in which judicial actions may be initiated to enforce the collection of consumer accounts.

     Although the Company iswe are not a credit originator, some of these laws directed toward credit originators may occasionally affect itsour operations because itsour receivables were originated through credit transactions, such as the following laws, which apply principally to credit originators:

     • Truth in Lending Act;

     • Fair Credit Billing Act; and

	•	Truth in Lending Act;
	•	Fair Credit Billing Act; and
	•	Equal Credit Opportunity Act.

     Federal laws which regulate credit orginiatorsoriginators 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 credit.the credit card. These laws, among others, may give consumers a legal cause of action against the Company,us, or may limit the Company’sour ability to recover amounts owing with respect to the receivables, whether or not itwe committed any wrongful act or omission in connection with the account. If the credit originator fails to comply with applicable statutes, rules and regulations, it could create claims and rights for consumers that could reduce or eliminate their obligations to repay the account, and have a possible material adverse effect on the Company.us.

     Accordingly, when the Company acquireswe acquire defaulted consumer receivables, itwe contractually requiresrequire credit orginatorsoriginators to indemnify itus against any losses caused by their failure to comply with applicable statutes, rules and regulations relating to the receivables before they are sold to the Company.us.

     The U.S. Congress and several states are currently in the process of enacting and amendinghave 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, or amended, as well as existing consumer protection and privacy protection laws, may adversely affect the Company’sour ability to recover the receivables. In addition, the Company’sour failure to comply with these requirements could adversely affect itsour ability to enforce the receivables.

     The CompanyWe cannot ensureassure you that some of the receivables were not established as a result of identity theft or unauthorized use of a credit card and, accordingly, the Companywe could not recover the amount of the defaulted consumer receivables. As a purchaser of defaulted consumer receivables, the Companywe may acquire receivables subject to legitimate defenses on the part of the consumer. The Company’sOur account purchase contracts allow itus to return to the Debt Sellerdebt owners certain defaulted consumer receivables that may not be collectible, due to these and other

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circumstances. Upon return, the Debt Sellersdebt collectors are required to replace the receivables with similar receivables or repurchase the receivables. These provisions limit to some extent the Company’sour losses on such accounts.

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Item 2. Properties.

     The Company’sOur principal executive offices and primary operations facility are located in approximately 40,00065,000 square feet of leased space in two adjacent buildings in Norfolk, Virginia and the Company rents one administrative facility in Virginia Beach, Virginia that is approximately 2,500 square feet and one storage facility. This space was vacated during January 2004. The Company ownsVirginia. We own a two-acre parcel of land across from itsour headquarters which itwe developed into a parking lot for use by itsour employees. In addition, the Company ownswe own an approximately 15,000 square foot facility in Hutchinson, Kansas, thatand contiguous parcels of land which are used primarily for employee parking. The Hutchinson site can currently accommodate approximately 100 employees. The CompanyWe also leaseslease a facility located in approximately 21,000 square feet of space in Hampton, Virginia towhich can accommodate approximately 285 additional employees. This new facility openedAs a result of the IGS acquisition, since October 1, 2004 we have occupied 5,000 square feet of office space in March 2003. The Company also entered into a new lease for additional space adjacent to its Norfolk, Virginia office. This space became occupied in January 2004 and consists of 25,000 square feet. This space now accommodates all Anchor employees, accounting, outsourced collections and other administrative support personnel. The Company doesLas Vegas, Nevada. We do not consider any specific leased or owned facility to be material to itsour operations. The Company believesWe believe that equally suitable alternative facilities are available in all areas where itwe currently doesdo business.

     During December 2004, we began work on a 4,000 square foot expansion to our Hutchinson, Kansas call center. The expansion will permit us to add approximately 56 collectors and four managers to that facility. In conjunction with the expansion, we acquired an additional 4,000 square foot building and 35,000 square feet of adjacent land in order to secure parking for the expanded facility.

     During January 2005, we signed a new lease for a 13,500 square foot call center in Las Vegas, Nevada. This site is currently undergoing tenant improvements and will house our IGS operation. In the second quarter of 2005, we anticipate moving from the existing 5,000 square foot facility into this new one. Our lease obligation on the existing 5,000 square foot facility will end at that time.

Item 3. Legal Proceedings.

     From time to time, the Company iswe are involved in various legal proceedings which are incidental to the ordinary course of itsour business. The CompanyWe regularly initiatesinitiate lawsuits against consumers and isare occasionally countersued by them in such actions. Also, consumers occasionally initiate litigation against the Company,us, in which they allege that it haswe have violated a state or federal law in the process of collecting on theiran account. The Company doesWe do not believe that these routine matters represent a substantial volume of itsour accounts or that, individually or in the aggregate, they are material to itsour business or financial condition.

     The Company isWe are not a party to any material legal proceedings and it iswe are unaware of any contemplated material actions against it.us.

Item 4. Submission of Matters to a Vote of Securityholders.

     None.

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PART II

Item 5. Market for Registrant’s Common Equity, and Related Stockholder Matters.Matters and Issuer Purchases of Equity Securities.

Price Range of Common Stock

     The Company’s     Our common stock (“Common Stock”) began trading on the Nasdaq National Market under the symbol “PRAA” on November 8, 2002. Prior to that time there was no public trading market for the Company’sour common stock. The following table sets forth the high and low sales price for the Common Stock, as reported by the Nasdaq National Market, for the periods indicated.

Dividend Policy

     The Company’sOur board of directors sets itsour dividend policy. The Company doesWe do not pay dividends on the Common Stock; however, the Company’sour board of directors may determine in the future to declare or pay cash dividends on the Common Stock. Any future determination as to the declaration and payment of dividends will be at the discretion of the Company’sour board of directors and will depend on then existing conditions, including the Company’sour financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that the Company’sour board of directors may consider relevant.

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Item 6. Selected Financial Data.

The following selected financial data should be read in conjunction with the audited financial statements.

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Below is listed some key balance sheet data for the periods presented: