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ENCORE CAPITAL GROUP INC - Quarter Report: 2014 June (Form 10-Q)

Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________________________________________ 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
COMMISSION FILE NUMBER: 000-26489
ENCORE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
48-1090909
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
3111 Camino Del Rio North, Suite 1300
San Diego, California
92108
(Address of principal executive offices)
(Zip code)
(877) 445 - 4581
(Registrant’s telephone number, including area code)
(Not Applicable)
(Former name, former address and former fiscal year, if changed since last report)
_______________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x        Accelerated filer   ¨        Non-accelerated filer  ¨        Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at July 29, 2014
Common Stock, $0.01 par value
 
25,631,325 shares


Table of Contents


ENCORE CAPITAL GROUP, INC.
INDEX TO FORM 10-Q
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I – FINANCIAL INFORMATION
Item 1—Condensed Consolidated Financial Statements (Unaudited)
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
(Unaudited)
 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Cash and cash equivalents
$
123,407

 
$
126,213

Investment in receivable portfolios, net
1,987,985

 
1,590,249

Deferred court costs, net
45,577

 
41,219

Receivables secured by property tax liens, net
279,608

 
212,814

Property and equipment, net
58,839

 
55,783

Other assets
217,471

 
154,783

Goodwill
879,910

 
504,213

Total assets
$
3,592,797

 
$
2,685,274

Liabilities and equity
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$
163,958

 
$
137,272

Debt
2,715,866

 
1,850,431

Other liabilities
99,209

 
95,100

Total liabilities
2,979,033

 
2,082,803

Commitments and contingencies


 


Redeemable noncontrolling interest
31,730

 
26,564

Redeemable equity component of convertible senior notes
10,488

 

Equity:
 
 
 
Convertible preferred stock, $.01 par value, 5,000 shares authorized, no shares issued and outstanding

 

Common stock, $.01 par value, 50,000 shares authorized, 25,631 shares and 25,457 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively
256

 
255

Additional paid-in capital
116,037

 
171,819

Accumulated earnings
441,369

 
394,628

Accumulated other comprehensive gain
10,936

 
5,195

Total Encore Capital Group, Inc. stockholders’ equity
568,598

 
571,897

Noncontrolling interest
2,948

 
4,010

Total equity
571,546

 
575,907

Total liabilities, redeemable equity and equity
$
3,592,797

 
$
2,685,274

The following table includes assets that can only be used to settle the liabilities of the Company’s consolidated variable interest entities (“VIEs”). These assets and liabilities are included in the consolidated statements of financial condition above. See Note 11 “Variable Interest Entities” for additional information on the Company’s VIEs.
 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Cash and cash equivalents
$
52,827

 
$
62,403

Investment in receivable portfolios, net
1,002,980

 
620,312

Deferred court costs, net
4,317

 

Receivables secured by property tax liens, net
127,273

 

Property and equipment, net
14,816

 
13,755

Other assets
91,366

 
33,772

Goodwill
728,045

 
376,296

Liabilities
 
 
 
Accounts payable and accrued liabilities
$
80,791

 
$
47,219

Debt
1,699,343

 
846,676

Other liabilities
7,261

 
1,897

See accompanying notes to condensed consolidated financial statements

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Table of Contents

ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Revenue from receivable portfolios, net
$
248,231

 
$
152,024

 
$
485,799

 
$
292,707

Other revenues
14,149

 
380

 
25,498

 
681

Net interest income
6,815

 
3,717

 
11,639

 
7,319

Total revenues
269,195

 
156,121

 
522,936

 
300,707

Operating expenses
 
 
 
 
 
 
 
Salaries and employee benefits
64,355

 
32,969

 
122,492

 
61,801

Cost of legal collections
50,029

 
44,483

 
99,854

 
86,741

Other operating expenses
22,041

 
13,797

 
48,464

 
27,062

Collection agency commissions
9,153

 
5,230

 
17,429

 
8,559

General and administrative expenses
38,282

 
27,601

 
74,976

 
43,943

Depreciation and amortization
6,829

 
2,158

 
12,946

 
4,004

Total operating expenses
190,689

 
126,238

 
376,161

 
232,110

Income from operations
78,506

 
29,883

 
146,775

 
68,597

Other (expense) income
 
 
 
 
 
 
 
Interest expense
(43,218
)
 
(7,482
)
 
(81,180
)
 
(14,336
)
Other income (expense)
75

 
(4,122
)
 
340

 
(3,963
)
Total other expense
(43,143
)
 
(11,604
)
 
(80,840
)
 
(18,299
)
Income before income taxes
35,363

 
18,279

 
65,935

 
50,298

Provision for income taxes
(14,010
)
 
(7,267
)
 
(25,752
)
 
(19,838
)
Net income
21,353

 
11,012

 
40,183

 
30,460

Net loss attributable to noncontrolling interest
2,208

 

 
6,558

 

Net income attributable to Encore Capital Group, Inc. stockholders
$
23,561

 
$
11,012

 
$
46,741

 
$
30,460

 
 
 
 
 
 
 
 
Earnings per share attributable to Encore Capital Group, Inc.:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.91

 
$
0.46

 
$
1.81

 
$
1.28

Diluted
$
0.86

 
$
0.44

 
$
1.68

 
$
1.24

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
25,798

 
23,966

 
25,774

 
23,707

Diluted
27,492

 
24,855

 
27,790

 
24,652

See accompanying notes to condensed consolidated financial statements


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ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, In Thousands)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
21,353

 
$
11,012

 
$
40,183

 
$
30,460

Other comprehensive gain (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on derivative instruments
480

 
(1,574
)
 
2,068

 
(954
)
Unrealized gain (loss) on foreign currency translation
3,525

 
(583
)
 
3,674

 
(697
)
Other comprehensive gain (loss), net of tax
4,005

 
(2,157
)
 
5,742

 
(1,651
)
Comprehensive income
25,358

 
8,855

 
45,925

 
28,809

Comprehensive loss attributable to noncontrolling interest:
 
 
 
 
 
 
 
Net loss
2,208

 

 
6,558

 

Unrealized gain on foreign currency translation
(618
)
 

 
(470
)
 

Comprehensive loss attributable to noncontrolling interests
1,590

 

 
6,088

 

Comprehensive income attributable to Encore Capital Group, Inc. stockholders
$
26,948

 
$
8,855

 
$
52,013

 
$
28,809

See accompanying notes to condensed consolidated financial statements

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ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 
Six Months Ended 
 June 30,
 
2014
 
2013
Operating activities:
 
 
 
Net income
$
40,183

 
$
30,460

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,946

 
4,004

Other non-cash interest expense
13,974

 
3,550

Stock-based compensation expense
9,551

 
5,180

Recognized loss on termination of derivative contract

 
3,630

Deferred income taxes
9,616

 
(3,297
)
Excess tax benefit from stock-based payment arrangements
(10,756
)
 
(3,848
)
Reversal of allowances on receivable portfolios, net
(6,652
)
 
(4,680
)
Changes in operating assets and liabilities
 
 
 
Deferred court costs and other assets
(23,801
)
 
(7,010
)
Prepaid income tax and income taxes payable
(9,038
)
 
(19,559
)
Accounts payable, accrued liabilities and other liabilities
1,574

 
2,821

Net cash provided by operating activities
37,597

 
11,251

Investing activities:
 
 
 
Cash paid for acquisitions, net of cash acquired
(303,532
)
 
(293,329
)
Purchases of receivable portfolios, net of put-backs
(475,121
)
 
(98,196
)
Collections applied to investment in receivable portfolios, net
325,451

 
260,531

Originations and purchases of receivables secured by tax liens
(85,014
)
 
(87,961
)
Collections applied to receivables secured by tax liens
53,216

 
27,097

Purchases of property and equipment
(8,943
)
 
(5,335
)
Other

 
(5,530
)
Net cash used in investing activities
(493,943
)
 
(202,723
)
Financing activities:
 
 
 
Payment of loan costs
(14,673
)
 
(11,846
)
Proceeds from credit facilities
679,872

 
514,065

Repayment of credit facilities
(732,857
)
 
(228,175
)
Proceeds from senior secured notes
288,645

 

Repayment of senior secured notes
(7,500
)
 
(6,250
)
Proceeds from issuance of convertible senior notes
161,000

 
150,000

Proceeds from issuance of securitized notes
134,000

 

Repayment of securitized notes
(8,793
)
 

Proceeds from issuance of preferred equity certificates
20,596

 

Repayment of preferred equity certificates
(6,297
)
 

Purchases of convertible hedge instruments
(33,576
)
 
(15,750
)
Repurchase of common stock
(16,815
)
 
(729
)
Taxes paid related to net share settlement of equity awards
(18,375
)
 
(8,420
)
Excess tax benefit from stock-based payment arrangements
10,756

 
3,848

Other, net
1,859

 
(610
)
Net cash provided by financing activities
457,842

 
396,133

Net increase in cash and cash equivalents
1,496

 
204,661

Effect of exchange rate changes on cash
(4,302
)
 

Cash and cash equivalents, beginning of period
126,213

 
17,510

Cash and cash equivalents, end of period
$
123,407

 
$
222,171

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
54,672

 
$
12,537

Cash paid for income taxes
37,805

 
40,513

Supplemental schedule of non-cash investing and financing activities:
 
 
 
Fixed assets acquired through capital lease
$
3,766

 
$
1,189

See accompanying notes to condensed consolidated financial statements

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Table of Contents

ENCORE CAPITAL GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies
Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively, the “Company”), is an international specialty finance company providing debt recovery solutions for consumers and property owners across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by partnering with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy proceedings. Encore, through certain subsidiaries, is a market leader in portfolio purchasing and recovery in the United States. Encore’s subsidiary, Janus Holdings Luxembourg S.a.r.l. (“Janus Holdings”), through its indirectly held United Kingdom-based subsidiary Cabot Credit Management Limited (“Cabot”), is a market leader in debt management in the United Kingdom, historically specializing in higher balance, semi-performing accounts. Cabot’s February 2014 acquisition of Marlin Financial Group Limited (“Marlin”) provides Cabot with substantial litigation-enhanced collections capabilities for non-performing accounts. Encore’s majority-owned subsidiary, Grove Holdings (“Grove”), through its subsidiaries, is a leading specialty investment firm focused on consumer non-performing loans, including insolvencies (in particular, individual voluntary arrangements, or IVAs) in the United Kingdom and bank and non-bank receivables in Spain. Encore’s majority-owned subsidiary, Refinancia S.A. (“Refinancia”), through its subsidiaries, is one of the market leaders in debt collection and management in Colombia and Peru. In addition, through Encore’s subsidiary, Propel Financial Services, LLC (“Propel”), the Company assists property owners who are delinquent on their property taxes by structuring affordable monthly payment plans and purchases delinquent tax liens directly from selected taxing authorities.
Portfolio Purchasing and Recovery
United States. The Company purchases receivable portfolios based on robust, account-level valuation methods and employs a suite of proprietary statistical and behavioral models across the full extent of its operations. These investments allow the Company to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with its methods or goals and precisely align the accounts it purchases with its operational channels to maximize future collections. As a result, the Company has been able to realize significant returns from the receivables it acquires. The Company maintains strong relationships with many of the largest credit and telecommunication providers, and possesses one of the industry’s best collection staff retention rates.
The Company uses insights discovered during its purchasing process to build account collection strategies. The Company’s proprietary consumer-level collectability analysis is the primary determinant of whether an account will be actively serviced post-purchase. The Company continuously refines this analysis to determine the most effective collection strategy to pursue for each account it owns. After the Company’s preliminary analysis, it seeks to collect on only a fraction of the accounts it purchases, through one or more of its collection channels. The channel identification process is analogous to a funneling system, where the Company first differentiates those consumers who it believes are not able to pay from those who are able to pay. Consumers who the Company believes are financially incapable of making any payments, facing extenuating circumstances or hardships (such as medical issues), serving in the military, or currently receiving social security as their only source of income are excluded from the next step of its collection process and are designated as inactive. The remaining pool of accounts in the funnel then receives further evaluation. At that point, the Company analyzes and determines a consumer’s perceived willingness to pay. Based on that analysis, the Company will pursue collections through letters and/or phone calls to its consumers. Despite its efforts to reach consumers and work out a settlement option, only a small number of consumers who are contacted choose to engage with the Company. Those who do are often offered deep discounts on their obligations, or are presented with payment plans that are better suited to meet their daily cash flow needs. The majority of contacted consumers, however, ignore both the Company’s calls and letters, and therefore the Company must then make the difficult decision whether or not to pursue collections through legal means.
The Company continually monitors applicable changes to laws governing statutes of limitations and disclosures to consumers. The Company maintains policies, system controls, and processes designed to ensure that accounts past the applicable statute of limitations do not get placed into legal collections. Additionally, in written and verbal communications with consumers, the Company provides disclosures to the consumer that the account is past its applicable statute of limitations and, therefore, the Company will not pursue collections through legal means.
United Kingdom. Through Cabot, portfolio receivables are purchased using a proprietary pricing model. This model allows Cabot to value portfolios with a high degree of accuracy and quantify portfolio performance in order to maximize future

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collections. As a result, Cabot has been able to realize significant returns from the assets it has acquired. Cabot maintains strong relationships with many of the largest financial service providers in the United Kingdom.
Cabot also uses insights discovered during its purchasing process to build account collection strategies. Cabot’s proprietary consumer-level collectability analysis is the primary determinant of how an account will be serviced post-purchase. Cabot continuously refines this analysis to determine the most effective collection strategy to pursue for each account it owns. In recent years, Cabot has concentrated on buying portfolios that are defined as semi-performing, in which over 50% of the accounts in a portfolio have made a payment in three of the last four months immediately prior to the portfolio purchase. Cabot will try to establish contact with these consumers, in order to transfer payment arrangements and gauge the willingness of these consumers to pay. Consumers who Cabot believes are financially incapable of making any payments, those having negative disposable income, or those experiencing hardships (such as medical issues or mental incapacity), are managed outside of normal collection routines.
The remaining pool of accounts then receives further evaluation. Cabot analyzes and estimates a consumer’s perceived willingness to pay. Based on that analysis, Cabot pursues collections through letters and/or phone calls to its consumers. Where contact is made and consumers indicate a willingness to pay, a patient approach of forbearance is applied using regulatory protocols within the United Kingdom to assess affordability and ensure that plans are fair and balanced and therefore, sustainable.
Where consumers are not locatable or refuse to engage in a constructive dialogue, Cabot will pass these accounts through a litigation scorecard and rule set in order to assess suitability for legal action. Through Cabot’s newly acquired subsidiary, Marlin, a leading acquirer of non-performing consumer debt in the United Kingdom, Cabot has a competitive advantage in the use of litigation-enhanced collections for non-paying financial services receivables.
On April 1, 2014, the Company completed the acquisition of a controlling equity ownership interest in Grove. Grove, through its subsidiaries, is a leading specialty investment firm focused on consumer non-performing loans, including insolvencies (in particular, individual voluntary arrangements, or IVAs) in the United Kingdom and bank and non-bank receivables in Spain.
Colombia and Peru. Refinancia is one of the market leaders in the management of non-performing loans in Colombia and Peru. In addition to purchasing defaulted receivables, Refinancia offers portfolio management services to banks for non-performing loans. Refinancia also specializes in non-traditional niches in the geographic areas in which it operates, including providing financial solutions to individuals with defaulted credit records, payment plan guarantee services through merchants and loan guarantee services to financial institutions.
Tax Lien Business
Propel’s principal activities are the acquisition and servicing of residential and commercial tax liens on real property. These liens take priority over most other liens. By funding tax liens, Propel provides state and local taxing authorities and governments with much needed tax revenue. To the extent permitted by local law, Propel works with property owners to structure affordable payment plans designed to allow them to keep their property while paying their property tax obligation over time. Propel maintains a foreclosure rate of less than one-half of one percent.
Propel’s receivables secured by property tax liens include Texas tax liens, Nevada tax liens, and tax lien certificates in various other states (collectively, “Tax Liens”). With Texas and Nevada Tax Liens, Texas or Nevada property owners choose to have the taxing authority transfer their tax lien to Propel. Propel pays their tax lien obligation to the taxing authority and the property owner pays Propel over time at a lower interest rate than would be assessed by the taxing authority. Propel’s arrangements with Texas and Nevada property owners provide them with repayment plans that are both affordable and flexible when compared with other payment options. Propel also purchases Tax Liens in various other states directly from taxing authorities, securing rights to outstanding property tax payments, interest and penalties. In most cases, such Tax Liens continue to be serviced by the taxing authority. When the taxing authority is paid, it repays Propel the outstanding balance of the lien plus interest, which is established by statute or negotiated at the time of the purchase.
Financial Statement Preparation and Presentation
The accompanying interim condensed consolidated financial statements have been prepared by Encore, without audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“GAAP”).

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In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position, results of operations, and cash flows. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. Actual results could materially differ from those estimates.
Basis of Consolidation
The consolidated financial statements have been prepared in conformity with GAAP, and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company also consolidates VIEs, for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits. Refer to Note 11, “Variable Interest Entities,” for further details. All intercompany transactions and balances have been eliminated in consolidation.
On June 13, 2013, the Company completed its merger with Asset Acceptance Capital Corp. (“AACC”), on July 1, 2013, the Company completed its acquisition of Cabot (the “Cabot Acquisition”), and on February 7, 2014, Cabot acquired Marlin. The condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2013 only include the results of operations of AACC since the closing date of the merger with AACC and do not include the results of operations of Cabot, as the acquisition was not completed until after June 30, 2013. The condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2014 includes the results of the operations of Marlin since the date of the acquisition.
Translation of Foreign Currencies
The financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the functional currency. Assets and liabilities are translated as of the balance sheet date and revenue and expenses are translated at an average rate over the period. Currency translation adjustments are recorded as a component of other comprehensive income. Transaction gains and losses are included in other income or expense.
Reclassifications
Certain reclassifications have been made to the condensed consolidated financial statements to conform to the current year’s presentation.
Recent Accounting Pronouncements
In May 2014, the FASB issued a comprehensive new revenue recognition standard “Revenue from Contracts with Customers.” This new standard supersedes the existing revenue recognition guidance under GAAP, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new standard, which does not apply to financial instruments, is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is in the process of evaluating the impact of the adoption of the standard on its financial statements.
Note 2: Business Combinations
Marlin Acquisition
On February 7, 2014, Cabot, through its subsidiary Cabot Financial Holdings Group Limited (“Cabot Financial Holdings”), entered into a Share Sale and Purchase Agreement (the “Marlin Purchase Agreement”), pursuant to which Cabot acquired (a) the entire issued share capital of Marlin, and (b) certain subordinated fixed rate loan notes of Marlin Financial Intermediate Limited, which is a direct wholly-owned subsidiary of Marlin (the “Marlin Acquisition”), from funds managed by Duke Street LLP and certain individuals, including certain executive management of Marlin (collectively, the “Sellers”).
Pursuant to the terms and conditions of the Marlin Purchase Agreement and certain ancillary agreements, Cabot Financial Holdings purchased from the Sellers all of the issued and outstanding equity securities of Marlin and certain subordinated fixed rate loan notes of Marlin Financial Intermediate Limited and assumed substantially all of the outstanding debt of Marlin

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Intermediate Holdings plc, a subsidiary of Marlin. The purchase price consisted of £166.8 million (approximately $274.1 million) in cash consideration, of which £44.8 million (approximately $73.7 million) was used to pay off Marlin’s fixed rate loan notes. In addition, Cabot assumed £150.0 million (approximately $246.5 million) of Marlin’s outstanding senior secured notes. The Marlin Acquisition was financed with borrowings under Cabot’s existing revolving credit facility and under Cabot’s new senior secured bridge facilities. Refer to Note 10, “Debt” for further details of Cabot’s revolving credit facility and senior secured bridge facilities.
The Marlin Acquisition was accounted for using the acquisition method of accounting and, accordingly, the tangible and intangible assets acquired and liabilities assumed were recorded at their estimated fair values as of the date of the acquisition. Fair value measurements have been applied based on assumptions that market participants would use in the pricing of the respective assets and liabilities. As of the date of this Quarterly Report on Form 10-Q, the Company is still finalizing the allocation of the purchase price. The initial purchase price allocation presented below was based on the preliminary assessment of assets acquired and liabilities assumed, which is subject to change based on the final valuation study that is expected to be completed by the fourth quarter of 2014.
The components of the preliminary purchase price allocation for the Marlin Acquisition are as follows (in thousands):
Purchase price:
 
Cash paid at acquisition
$
274,068

Allocation of purchase price:
 
Cash
$
16,342

Investment in receivable portfolios
208,450

Deferred court costs
914

Property and equipment
1,508

Other assets
18,091

Liabilities assumed
(301,180
)
Identifiable intangible assets
1,819

Goodwill
328,124

Total net assets acquired
$
274,068

The goodwill recognized is primarily attributable to (i) the ability to utilize Marlin’s proven competitive advantage in the use of litigation-enhanced collections for non-paying financial services receivables and (ii) synergies that are expected to be achieved by applying Cabot’s scoring model to Marlin’s portfolio. The Company is still finalizing its analysis of the effects of these synergies which, when finalized, will be incorporated into Marlin and Cabot’s estimated remaining collections. The entire goodwill of $328.1 million related to the Marlin Acquisition is not deductible for income tax purposes.
Total acquisition and integration costs related to the Marlin Acquisition were approximately $9.8 million for the six months ended June 30, 2014, and have been expensed in the accompanying condensed consolidated statements of income within general and administrative expenses.
Pro forma financial information for the Marlin Acquisition has not been included as the computation of such information is impracticable.
Other Acquisitions
In addition to the business combination transaction discussed above, the Company completed certain other acquisitions in 2013, including the acquisition of Refinancia in December 2013. On April 1, 2014, the Company completed the acquisition of approximately 68.2% of the equity ownership interest in Grove. On May 2, 2014, Propel completed the acquisition of a portfolio of tax liens and other assets in a transaction valued at approximately $43.0 million. These acquisitions were immaterial to the Company’s financial statements individually and in the aggregate.

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Note 3: Earnings Per Share
Basic earnings per share is calculated by dividing net earnings attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock, warrants, and the dilutive effect of convertible senior notes.
On April 24, 2014, the Company’s Board of Directors approved a $50.0 million share repurchase program. Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through solicited or unsolicited privately negotiated transactions or otherwise. During the three months ended June 30, 2014, the Company has repurchased 400,000 shares of its common stock for approximately $16.8 million. The program does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion.
A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Weighted average common shares outstanding—basic
25,798

 
23,966

 
25,774

 
23,707

Dilutive effect of stock-based awards
651

 
849

 
800

 
945

Dilutive effect of convertible senior notes
1,043

 
40

 
1,195

 

Dilutive effect of warrants

 

 
21

 

Weighted average common shares outstanding—diluted
27,492

 
24,855

 
27,790

 
24,652

No anti-dilutive employee stock options were outstanding during the three and six months ended June 30, 2014 or 2013.
The Company has the following convertible senior notes outstanding: $115.0 million convertible senior notes due 2017 at a conversion price equivalent to approximately $31.56 per share of the Company’s common stock (the “2017 Convertible Notes”), $172.5 million convertible senior notes due 2020 at a conversion price equivalent to approximately $45.72 per share of the Company’s common stock (the “2020 Convertible Notes”), and $161.0 million convertible senior notes due 2021 at a conversion price equivalent to approximately $59.39 per share of the Company’s common stock (the “2021 Convertible Notes”).
In the event of conversion, the 2017 Convertible Notes are convertible into cash up to the aggregate principal amount and permit the excess conversion premium to be settled in cash or shares of Company’s common stock. For the 2020 Convertible Notes and 2021 Convertible Notes, the Company has the option to pay cash, issue shares of common stock or any combination thereof for the aggregate amount due upon conversion. The Company’s intent is to settle the principal amount of the 2020 and 2021 Convertible Notes in cash upon conversion. As a result, upon conversion of all the convertible senior notes, only the amounts payable in excess of the principal amounts are considered in diluted earnings per share under the treasury stock method. For the three months ended June 30, 2014 and 2013, diluted earnings per share includes the effect of the common shares issuable upon conversion of the 2017 Convertible Notes because the average stock price exceeded the conversion price of these notes. For the six months ended June 30, 2014, diluted earnings per share includes the effect of the common shares issuable upon conversion of the 2017 Convertible Notes and the 2020 Convertible Notes because the average stock price exceeded the conversion price of these notes. However, as described in Note 10, “Debt—Encore Convertible Senior Notes,” the Company entered into certain hedge transactions that have the effect of increasing the effective conversion price of the 2017 Convertible Notes to $60.00 and the 2020 Convertible Notes to $61.55. On January 2, 2014, the 2017 Convertible Notes became convertible as certain conditions for conversion were met in the immediately preceding calendar quarter as defined in the applicable indenture. However, none of the 2017 Convertible Notes were converted during the three and six months ended June 30, 2014.
In conjunction with the issuance of the 2017 Convertible Notes, the Company entered into privately negotiated transactions with certain counterparties and sold warrants to purchase approximately 3.6 million shares of its common stock. The warrants had an exercise price of $44.19. On December 16, 2013, the Company entered into amendments with the same counterparties to exchange the original warrants with new warrants with an exercise price of $60.00. All other terms and settlement provisions remain unchanged. The warrant restrike transaction was completed on February 6, 2014. Diluted earnings per share includes the effect of these warrants for the six months ended June 30, 2014. The effect of the warrants was anti-

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dilutive for the three months ended June 30, 2014 and 2013, and six months ended June 30, 2013. Refer to Note 10, “Debt—Encore Convertible Senior Notes—2017 Convertible Senior Notes” for further details of the warrant restrike transaction.
Note 4: Fair Value Measurements
The authoritative guidance for fair value measurements defines fair value as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The guidance utilizes a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.
Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 
Fair Value Measurements as of
June 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Foreign currency exchange contracts
$

 
$
978

 
$

 
$
978

Interest rate cap contracts

 
22

 

 
22

Liabilities
 
 
 
 
 
 
 
Foreign currency exchange contracts

 
(1,418
)
 

 
(1,418
)
Temporary Equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests

 

 
(31,730
)
 
(31,730
)
 
Fair Value Measurements as of
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Foreign currency exchange contracts
$

 
$
46

 
$

 
$
46

Interest rate cap contracts

 
202

 

 
202

Liabilities
 
 
 
 
 
 
 
Foreign currency exchange contracts

 
(4,123
)
 

 
(4,123
)
Temporary Equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests

 

 
(26,564
)
 
(26,564
)
Derivative Contracts:
The Company uses derivative instruments to minimize its exposure to fluctuations in interest rates and foreign currency exchange rates. The Company’s derivative instruments primarily include interest rate swap agreements, interest rate cap contracts, and foreign currency exchange contracts. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.
Redeemable Noncontrolling Interests:
Some minority shareholders in certain subsidiaries of the Company have the right, at certain times, to require the Company to acquire their ownership interest in those entities at fair value, while others have the right to force a sale of the subsidiary if the Company chooses not to purchase their interests at fair value. The noncontrolling interests subject to these

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arrangements are included in temporary equity as redeemable noncontrolling interests, and are adjusted to their estimated redemption amounts each reporting period with a corresponding adjustment to additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments do not affect the calculation of earnings per share.
The components of the change in the redeemable noncontrolling interests for the period ended June 30, 2014 are presented in the following table:
 
Amount
Balance at December 31, 2013
$
26,564

Initial redeemable noncontrolling interest related to business combinations
4,753

Net loss attributable to redeemable noncontrolling interests
(5,001
)
Adjustment of the redeemable noncontrolling interests to fair value
4,957

Effect of foreign currency translation attributable to redeemable noncontrolling interests
457

Balance at June 30, 2014
$
31,730

Financial Instruments Not Required To Be Carried At Fair Value
Investment in Receivable Portfolios:
The Company records its investment in receivable portfolios at cost, which represents a significant discount from the contractual receivable balances due. The Company computes the fair value of its investment in receivable portfolios by discounting the estimated future cash flows generated by its proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. In accordance with authoritative guidance related to fair value measurements, the Company estimates the average cost to collect and discount rates based on its estimate of what a market participant might use in valuing these portfolios. The determination of such inputs requires significant judgment, including assessing the assumed buyer’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.
In the Company’s current analysis, the estimated blended market participant cost to collect and discount rate is approximately 50.3% and 12.0%, respectively, for United States portfolios, and approximately 30.2% and 19.5%, respectively, for United Kingdom portfolios. Using this method, the fair value of investment in receivable portfolios approximates the carrying value as of June 30, 2014 and December 31, 2013. A 100 basis point fluctuation in the cost to collect and discount rate used would result in an increase or decrease in the fair value of United States and United Kingdom portfolios by approximately $38.0 million and $34.3 million, respectively, as of June 30, 2014. This fair value calculation does not represent, and should not be construed to represent, the underlying value of the Company or the amount which could be realized if its investment in receivable portfolios were sold. The carrying value of the investment in receivable portfolios was $2.0 billion and $1.6 billion as of June 30, 2014 and December 31, 2013, respectively.
Deferred Court Costs:
The Company capitalizes deferred court costs and provides a reserve for those costs that it believes will ultimately be uncollectible. The carrying value of net deferred court costs approximates fair value.
Receivables Secured By Property Tax Liens:
The fair value of receivables secured by property tax liens is estimated by discounting the future cash flows of the portfolio using a discount rate equivalent to the current rate at which similar portfolios would be originated. For tax liens purchased directly from taxing authorities, the fair value is estimated by discounting the expected future cash flows of the portfolio using a discount rate equivalent to the interest rate expected when acquiring these tax liens. The carrying value of receivables secured by property tax liens approximates fair value. Additionally, the carrying value of the related interest receivable also approximates fair value.
Debt:
Encore’s senior secured notes and borrowings under its revolving credit and term loan facilities are carried at historical amounts, adjusted for additional borrowings less principal repayments, which approximate fair value.

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Encore’s convertible senior notes are carried at historical cost, adjusted for the debt discount. The carrying value of the convertible senior notes was $448.5 million, net of debt discount of $55.7 million as of June 30, 2014, and $287.5 million, net of debt discount of $42.2 million as of December 31, 2013, respectively. The fair value estimate for these convertible senior notes, which incorporates quoted market prices, was approximately $552.9 million and $412.4 million as of June 30, 2014 and December 31, 2013, respectively.
Propel’s borrowings under its revolving credit facilities, term loan facility, and securitized notes are carried at historical amounts, adjusted for additional borrowings less principal repayments, which approximate fair value.
Cabot’s senior secured notes due 2019 are carried at the fair value determined at the time of the Cabot Acquisition, adjusted by the accretion of debt premium. Cabot’s senior secured notes due 2020 and 2021 are carried at historical cost. Marlin’s senior secured notes due 2020 are carried at the fair value determined at the time of the Marlin Acquisition, adjusted by the accretion of debt premium. The carrying value of all the above senior secured notes then outstanding for the Company was $1.3 billion, including debt premium of $79.4 million, as of June 30, 2014, and $646.9 million, including debt premium of $43.6 million, as of December 31, 2013. The fair value estimate for these senior notes, which incorporates quoted market prices, was approximately $1.3 billion and $680.7 million as of June 30, 2014 and December 31, 2013, respectively.
The Company’s preferred equity certificates are legal obligations to the noncontrolling shareholders at its Janus Holdings and Cabot Holdings subsidiaries. They are carried at the face amount, plus any accrued interest. The Company determined, at the time of the Cabot Acquisition and at June 30, 2014, that the carrying value of these preferred equity certificates approximates fair value.
Note 5: Derivatives and Hedging Instruments
The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency. Most of the Company’s derivative financial instruments qualify for hedge accounting treatment under the authoritative guidance for derivatives and hedging. The Company’s Cabot subsidiary also holds interest rate cap contracts with an aggregated notional amount of £125.0 million (approximately $213.7 million) that are used to manage its risk related to interest rate fluctuations. The Company does not apply hedge accounting on the interest rate cap contracts. The impact of the interest rate cap contracts to the Company’s consolidated financial statements for the three and six months ended June 30, 2014, was immaterial.
Interest Rate Swaps
As of June 30, 2014, the Company had no outstanding interest rate swap agreements. During the three and six months ended June 30, 2013, the Company utilized interest rate swap contracts to manage risks related to interest rate fluctuation. These derivatives were designated as cash flow hedges in accordance with authoritative accounting guidance. The hedging instruments had been highly effective since the inception of the hedge program, therefore no gains or losses were reclassified from other comprehensive income (“OCI”) into earnings as a result of hedge ineffectiveness.
Foreign Currency Exchange Contracts
The Company has operations in foreign countries, which exposes the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies, including Indian rupees. To mitigate this risk, the Company enters into derivative financial instruments, principally forward contracts, which are designated as cash flow hedges, to mitigate fluctuations in the cash payments of future forecasted transactions in Indian rupees for up to 36 months. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative positions on an ongoing basis.
Gains and losses on cash flow hedges are recorded in OCI until the hedged transaction is recorded in the consolidated financial statements. Once the underlying transaction is recorded in the consolidated financial statements, the Company reclassifies the OCI on the derivative into earnings. If all or a portion of the forecasted transaction is cancelled, this would render all or a portion of the cash flow hedge ineffective and the Company would reclassify the ineffective portion of the hedge into earnings. The Company generally does not experience ineffectiveness of the hedge relationship and the accompanying consolidated financial statements do not include any such gains or losses.
As of June 30, 2014, the total notional amount of the forward contracts to buy Indian rupees in exchange for United States dollars was $48.2 million. As of June 30, 2014, all outstanding contracts qualified for hedge accounting treatment. The Company estimates that approximately $1.0 million of net derivative loss included in OCI will be reclassified into earnings within the next 12 months. No gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the six months ended June 30, 2014, and 2013.

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The Company does not enter into derivative instruments for trading or speculative purposes.
The following table summarizes the fair value of derivative instruments as recorded in the Company’s condensed consolidated statements of financial condition (in thousands):
 
June 30, 2014
 
December 31, 2013
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other liabilities
 
$
(1,418
)
 
Other liabilities
 
$
(4,123
)
Foreign currency exchange contracts
Other assets
 
978

 
Other assets
 
46

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate cap
Other assets
 
22

 
Other assets
 
202

The following table summarizes the effects of derivatives in cash flow hedging relationships on the Company’s condensed consolidated statements of income for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
Gain or (Loss)
Recognized in OCI-
Effective Portion
 
Location of Gain
or (Loss)
Reclassified from
OCI into
Income - Effective
Portion
 
Gain or (Loss)
Reclassified
from OCI into
Income -  Effective
Portion
 
Location of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
 
Amount of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
 
Three Months Ended
 
 
 
Three Months Ended
 
 
 
Three Months Ended
 
2014
 
2013
 
 
 
2014
 
2013
 
 
 
2014
 
2013
Interest rate swaps
$

 
$
151

 
Interest expense
 
$

 
$

 
Other (expense)
income
 
$

 
$

Foreign currency exchange contracts
760

 
(2,540
)
 
Salaries and
employee
benefits
 
(219
)
 
(219
)
 
Other (expense)
income
 

 

Foreign currency exchange contracts
134

 
(531
)
 
General and
administrative
expenses
 
(40
)
 
(44
)
 
Other (expense)
income
 

 

 
Gain or (Loss)
Recognized in OCI-
Effective Portion
 
Location of Gain
or (Loss)
Reclassified from
OCI into
Income - Effective
Portion
 
Gain or (Loss)
Reclassified
from OCI into
Income -  Effective
Portion
 
Location of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
 
Amount of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
 
Six Months Ended
 
 
 
Six Months Ended
 
 
 
Six Months Ended
 
2014
 
2013
 
 
 
2014
 
2013
 
 
 
2014
 
2013
Interest rate swaps
$

 
$
374

 
Interest expense
 
$

 
$

 
Other (expense)
income
 
$

 
$

Foreign currency exchange contracts
2,645

 
(1,938
)
 
Salaries and
employee
benefits
 
(575
)
 
(268
)
 
Other (expense)
income
 

 

Foreign currency exchange contracts
321

 
(428
)
 
General and
administrative
expenses
 
(97
)
 
(52
)
 
Other (expense)
income
 

 


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Note 6: Investment in Receivable Portfolios, Net
In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality, discrete receivable portfolio purchases during a quarter are aggregated into pools based on common risk characteristics. Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The purchase cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.
In compliance with the authoritative guidance, the Company accounts for its investments in receivable portfolios using either the interest method or the cost recovery method. The interest method applies an internal rate of return (“IRR”) to the cost basis of the pool, which remains unchanged throughout the life of the pool, unless there is an increase in subsequent expected cash flows. Subsequent increases in expected cash flows are generally recognized prospectively through an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash flows do not change the IRR, but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of comprehensive income as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition.
The Company utilizes its proprietary forecasting models to continuously evaluate the economic life of each pool. The collection forecast of each pool is generally estimated to be between 84 to 96 months based on the expected collection period of each pool (up to 120 months for Cabot’s semi-performing pools). The Company often experiences collections beyond the 84 to 96 month collection forecast. As of June 30, 2014, the total estimated remaining collections beyond the 84 to 96 month collection forecast, which are not included in the calculation of the Company’s IRRs, were $145.5 million. The collection forecast estimates for Cabot include a 120 month collection period which is included in its estimated remaining collections and is used for calculating its IRRs.
The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios, and for provision for loss or allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances.
If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, the Company accounts for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue is recognized until the purchase price of a Cost Recovery Portfolio has been fully recovered.
Accretable yield represents the amount of revenue the Company expects to generate over the remaining life of its existing investment in receivable portfolios based on estimated future cash flows. Total accretable yield is the difference between future estimated collections and the current carrying value of a portfolio. All estimated cash flows on portfolios where the cost basis has been fully recovered are classified as zero basis cash flows.

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The following table summarizes the Company’s accretable yield and an estimate of zero basis future cash flows at the beginning and end of the period presented (in thousands):
 
Accretable
Yield
 
Estimate of
Zero Basis
Cash Flows
 
Total
Balance at December 31, 2013
$
2,391,471

 
$
8,465

 
$
2,399,936

Revenue recognized, net
(231,057
)
 
(6,511
)
 
(237,568
)
Net additions on existing portfolios(1)
92,325

 
8,555

 
100,880

Additions for current purchases(1)(2)
591,205

 

 
591,205

Balance at March 31, 2014
2,843,944

 
10,509

 
2,854,453

Revenue recognized, net
(241,523
)
 
(6,708
)
 
(248,231
)
Net additions on existing portfolios(1)
80,582

 
6,135

 
86,717

Additions for current purchases(1)
218,047

 

 
218,047

Balance at June 30, 2014
$
2,901,050

 
$
9,936

 
$
2,910,986

 
Accretable
Yield
 
Estimate of
Zero Basis
Cash Flows
 
Total
Balance at December 31, 2012
$
984,944

 
$
17,366

 
$
1,002,310

Revenue recognized, net
(135,072
)
 
(5,611
)
 
(140,683
)
Net additions on existing portfolios(1)
173,634

 
7,061

 
180,695

Additions for current purchases(1)
66,808

 

 
66,808

Balance at March 31, 2013
1,090,314

 
18,816

 
1,109,130

Revenue recognized, net
(144,186
)
 
(7,838
)
 
(152,024
)
Net additions on existing portfolios(1)
30,458

 
10,784

 
41,242

Additions for current purchases(1)(3)
645,865

 

 
645,865

Balance at June 30, 2013
$
1,622,451

 
$
21,762

 
$
1,644,213

________________________
(1)
Estimated remaining collections and accretable yield include anticipated collections beyond the 84 to 96 month collection forecast for United States portfolios.
(2)
Includes $208.5 million of portfolios acquired in connection with the Marlin Acquisition discussed in Note 2, “Business Combinations.”
(3)
Includes $383.4 million of portfolios acquired in connection with the merger with AACC.
During the three months ended June 30, 2014, the Company purchased receivable portfolios with a face value of $3.1 billion for $225.8 million, or a purchase cost of 7.3% of face value. The estimated future collections at acquisition for all portfolios purchased during the quarter amounted to $0.4 billion. During the three months ended June 30, 2013, the Company purchased receivable portfolios with a face value of $68.9 billion for $423.1 million, or a purchase cost of 0.6% of face value. Included in this amount is the purchase of receivables related to AACC of $383.4 million with a face value of $68.2 billion or a purchase cost of 0.6% of face value. The lower purchase rate for the AACC portfolio is due to the Company’s purchase of AACC which included all portfolios owned, including accounts that have no value. No value accounts would typically not be included in a portfolio purchase transaction, as the sellers would remove them from the accounts being sold to the Company prior to sale.
During the six months ended June 30, 2014, the Company purchased receivable portfolios with a face value of $7.4 billion for $693.3 million, or a purchase cost of 9.4% of face value. Purchases of charged-off credit card portfolios include $208.5 million of receivables acquired in conjunction with the Marlin Acquisition. The estimated future collections at acquisition for all portfolios purchased during the period amounted to $1.4 billion. During the six months ended June 30, 2013, the Company purchased receivable portfolios with a face value of $70.5 billion for $481.9 million, or a purchase cost of 0.7% of face value. As discussed above, included in this amount is the purchase of receivables related to our merger with AACC.
All collections realized after the net book value of a portfolio has been fully recovered (“Zero Basis Portfolios”) are recorded as revenue (“Zero Basis Revenue”). During the three months ended June 30, 2014 and 2013, Zero Basis Revenue was approximately $3.4 million and $4.7 million, respectively. During the six months ended June 30, 2014 and 2013, Zero Basis Revenue was approximately $7 million and $9.4 million, respectively.

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The following tables summarize the changes in the balance of the investment in receivable portfolios during the following periods (in thousands, except percentages):
 
Three Months Ended June 30, 2014
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
1,900,177

 
$
3,853

 
$

 
$
1,904,030

Purchases of receivable portfolios
225,762

 

 

 
225,762

Transfer of portfolios
(7,163
)
 
7,163

 

 

Gross collections(1)
(400,983
)
 
(1,589
)
 
(6,708
)
 
(409,280
)
Put-backs and recalls
(5,588
)
 
(254
)
 

 
(5,842
)
Foreign currency adjustments
24,765

 
319

 

 
25,084

Revenue recognized
241,407

 

 
3,402

 
244,809

Portfolio allowance reversals, net
116

 

 
3,306

 
3,422

Balance, end of period
$
1,978,493

 
$
9,492

 
$

 
$
1,987,985

Revenue as a percentage of collections(2)
60.2
%
 
%
 
50.7
%
 
59.8
%
 
Three Months Ended June 30, 2013
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
801,525

 
$

 
$

 
$
801,525

Purchases of receivable portfolios
423,113

 

 

 
423,113

Transfer of portfolios
(6,649
)
 
6,649

 

 

Gross collections(1)
(269,710
)
 
(842
)
 
(7,836
)
 
(278,388
)
Put-backs and recalls
(1,543
)
 
(31
)
 
(2
)
 
(1,576
)
Revenue recognized
143,607

 

 
4,743

 
148,350

Portfolio allowance reversals, net
579

 

 
3,095

 
3,674

Balance, end of period
$
1,090,922

 
$
5,776

 
$

 
$
1,096,698

Revenue as a percentage of collections(2)
53.2
%
 
%
 
60.5
%
 
53.3
%


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Six Months Ended June 30, 2014
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
1,585,587

 
$
4,662

 
$

 
$
1,590,249

Purchases of receivable portfolios(3)
693,327

 

 

 
693,327

Transfer of portfolios
(7,163
)
 
7,163

 

 

Gross collections(1)
(790,486
)
 
(2,249
)
 
(13,219
)
 
(805,954
)
Put-backs and recalls
(8,823
)
 
(403
)
 

 
(9,226
)
Foreign currency adjustments
33,471

 
319

 

 
33,790

Revenue recognized
472,154

 

 
6,993

 
479,147

Portfolio allowance reversals, net
426

 

 
6,226

 
6,652

Balance, end of period
$
1,978,493

 
$
9,492

 
$

 
$
1,987,985

Revenue as a percentage of collections(2)
59.7
%
 
%
 
52.9
%
 
59.5
%
 
Six Months Ended June 30, 2013
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
873,119

 
$

 
$

 
$
873,119

Purchases of receivable portfolios (4)
481,884

 

 

 
481,884

Transfer of portfolios
(6,649
)
 
6,649

 

 

Gross collections(1)
(534,269
)
 
(842
)
 
(13,447
)
 
(548,558
)
Put-backs and recalls
(2,421
)
 
(31
)
 
(2
)
 
(2,454
)
Revenue recognized
278,622

 

 
9,405

 
288,027

Portfolio allowance reversals, net
636

 

 
4,044

 
4,680

Balance, end of period
$
1,090,922

 
$
5,776

 
$

 
$
1,096,698

Revenue as a percentage of collections(2)
52.2
%
 
%
 
69.9
%
 
52.5
%
________________________
(1)
Does not include amounts collected on behalf of others.
(2)
Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.
(3)
Purchases of portfolio receivables include $208.5 million acquired in connection with the Marlin Acquisition in February 2014 discussed in Note 2, “Business Combinations.”
(4)
Includes $383.4 million of portfolios acquired in connection with the merger with AACC.
The following table summarizes the change in the valuation allowance for investment in receivable portfolios during the periods presented (in thousands):
 
Valuation Allowance
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
89,850

 
$
104,267

 
$
93,080

 
$
105,273

Provision for portfolio allowances

 

 

 
479

Reversal of prior allowances
(3,422
)
 
(3,674
)
 
(6,652
)
 
(5,159
)
Balance at end of period
$
86,428

 
$
100,593

 
$
86,428

 
$
100,593

Note 7: Deferred Court Costs, Net
Within the United States, the Company contracts with a nationwide network of attorneys that specialize in collection matters. The Company generally refers charged-off accounts to its contracted attorneys when it believes the related consumer has sufficient assets to repay the indebtedness and has, to date, been unwilling to pay. In connection with the Company’s agreement with the contracted attorneys, it advances certain out-of-pocket court costs (“Deferred Court Costs”). The Company capitalizes Deferred Court Costs in its consolidated financial statements and provides a reserve for those costs that it believes will ultimately be uncollectible. The Company determines the reserve based on its analysis of court costs that have been

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advanced and those that have been recovered. Historically, the Company wrote off Deferred Court Costs not recovered within three years of placement. However, as a result of a history of court cost recoveries beyond three years, the Company has determined that court costs are recovered over a longer period of time. As a result, in January 2013, on a prospective basis, the Company began increasing its deferral period from three years to five years. Collections received from debtors are first applied against related court costs with the balance applied to the debtors’ account balance.
Deferred Court Costs consist of the following as of the dates presented (in thousands):
 
June 30,
2014
 
December 31,
2013
Court costs advanced
$
465,258

 
$
399,274

Court costs recovered
(175,849
)
 
(147,166
)
Court costs reserve
(243,832
)
 
(210,889
)
 
$
45,577

 
$
41,219

A roll forward of the Company’s court cost reserve is as follows (in thousands):
 
Court Cost Reserve
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
(227,275
)
 
$
(162,500
)
 
$
(210,889
)
 
$
(149,080
)
Provision for court costs
(16,557
)
 
(13,594
)
 
(32,943
)
 
(27,014
)
Balance at end of period
$
(243,832
)
 
$
(176,094
)
 
$
(243,832
)
 
$
(176,094
)
Note 8: Receivables Secured by Property Tax Liens, Net
Propel’s receivables are secured by property tax liens. Repayment of the property tax liens is generally dependent on the property owner but can also come through payments from other lien holders or foreclosure on the properties. Propel records these receivables secured by property tax liens at their outstanding principal balances, adjusted for, if any, charge-offs, allowance for losses, deferred fees or costs, and unamortized premiums or discounts. Interest income is reported on the interest method and includes amortization of net deferred fees and costs over the term of the agreements. Propel accrues interest on all past due receivables secured by tax liens as the receivables are collateralized by tax liens that are in a priority position over most other liens on the properties. If there is doubt about the ultimate collection of the accrued interest on a specific portfolio, it would be placed on non-accrual basis and, at that time, all accrued interest would be reversed. No receivables secured by property tax liens have been placed on a non-accrual basis. The typical redemption period for receivables secured by property tax liens is within 84 months.
On May 6, 2014, Propel, through its subsidiaries, completed the securitization of a pool of approximately $141.5 million in receivables secured by property tax liens on real property located in the State of Texas. In connection with the securitization, investors purchased approximately $134.0 million in aggregate principal amount of 1.44% notes collateralized by these property tax liens. The special purpose entity that is used for the securitization is consolidated by the Company as a VIE. The receivables recognized as a result of consolidating this VIE do not represent assets that can be used to satisfy claims against the Company’s general assets.
At June 30, 2014, the Company had approximately $279.6 million in receivables secured by property tax liens, of which $127.3 million was carried at the VIE.

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Note 9: Other Assets
Other assets consist of the following (in thousands):
 
June 30,
2014
 
December 31,
2013
Debt issuance costs, net of amortization
$
43,164

 
$
28,066

Prepaid income taxes
34,565

 
5,009

Deferred tax assets
21,475

 
13,974

Prepaid expenses
20,119

 
23,487

Funds held in escrow
18,965

 

Identifiable intangible assets, net
18,224

 
23,549

Security deposits
10,831

 
2,500

Service fee receivables
9,329

 
8,954

Interest receivable
9,043

 
7,956

Other financial receivables
7,374

 
7,962

Recoverable legal fees
2,883

 
3,049

Other
21,499

 
30,277

 
$
217,471

 
$
154,783

Note 10: Debt
The Company is in compliance with all covenants under its financing arrangements. The components of the Company’s consolidated debt and capital lease obligations are as follows (in thousands):
 
June 30,
2014
 
December 31,
2013
Encore revolving credit facility
$
274,000

 
$
356,000

Encore term loan facility
149,906

 
140,625

Encore senior secured notes
51,250

 
58,750

Encore convertible notes
448,500

 
287,500

Less: Debt discount
(55,689
)
 
(42,240
)
Propel facilities
112,288

 
170,630

Propel securitized notes
125,207

 

Cabot senior secured notes
1,179,693

 
603,272

Add: Debt premium
79,384

 
43,583

Cabot senior revolving credit facility
82,066

 

Preferred equity certificates
217,858

 
199,821

Capital lease obligations
13,551

 
12,219

Other
37,852

 
20,271

 
$
2,715,866

 
$
1,850,431

Encore Revolving Credit Facility and Term Loan Facility
On February 25, 2014, Encore amended its revolving credit facility and term loan facility (the “Credit Facility”) pursuant to a Second Amended and Restated Credit Agreement. On August 1, 2014, Encore further amended the Credit Facility pursuant to Amendment No. 1 to the Second Amended and Restated Credit Agreement (as amended, the “Restated Credit Agreement”). The Restated Credit Agreement includes a revolving credit facility tranche of $692.6 million, a term loan facility tranche of $153.8 million, and an accordion feature that would allow the Company to increase the revolving credit facility by an additional $250.0 million. Including the accordion feature, the maximum amount that can be borrowed under the Credit Facility is $1.1 billion. The Restated Credit Agreement has a five-year maturity, expiring in February 2019, except with respect to two

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subtranches of the term loan facility of $60.0 million and $6.3 million, maturing in February 2017 and November 2017, respectively.
Provisions of the Restated Credit Agreement include, but are not limited to:
A revolving loan of $692.6 million, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted London Interbank Offered Rate (“LIBOR”), plus a spread that ranges from 250 to 300 basis points depending on the Company’s cash flow leverage ratio; or (2) Alternate Base Rate, plus a spread that ranges from 150 to 200 basis points depending on the Company’s cash flow leverage ratio. “Alternate Base Rate,” as defined in the agreement, means the highest of (i) the per annum rate which the administrative agent publicly announces from time to time as its prime lending rate, (ii) the federal funds effective rate from time to time, plus 0.5% per annum and (iii) reserved adjusted LIBOR determined on a daily basis for a one month interest period, plus 1.0% per annum;
An $87.5 million five-year term loan, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the Company’s cash flow leverage ratio; or (2) Alternate Base Rate, plus a spread that ranges from 150 to 200 basis points, depending on the Company’s cash flow leverage ratio. Principal amortizes $4.4 million in 2014, $4.4 million in 2015, $6.6 million in 2016, $8.8 million in 2017, and $8.8 million in 2018 with the remaining principal due at the end of the term;
A $60.0 million term loan maturing on February 25, 2017, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 200 to 250 basis points, depending on the Company’s cash flow leverage ratio; or (2) Alternate Base Rate, plus a spread that ranges from 100 to 150 basis points, depending on the Company’s cash flow leverage ratio. Principal amortizes $3.0 million in 2014, $3.0 million in 2015, and $4.5 million in 2016 with the remaining principal due at the end of the term;
A $6.3 million term loan maturing on November 3, 2017, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the Company’s cash flow leverage ratio; or (2) Alternate Base Rate, plus a spread that ranges from 150 to 200 basis points, depending on the Company’s cash flow leverage ratio. Principal amortizes $0.4 million in 2014, $0.5 million in 2015, $0.6 million in 2016 and $0.5 million in 2017 with the remaining principal due at the end of the term;
A borrowing base equal to (1) the lesser of (i) 30%35% (depending on the Company’s trailing 12-month cost per dollar collected) of all eligible non-bankruptcy estimated remaining collections, initially set at 33%, plus 55% of eligible estimated remaining collections for consumer receivables subject to bankruptcy, and (ii) the product of the net book value of all receivable portfolios acquired on or after January 1, 2005 multiplied by 95%, minus (2) the sum of the aggregate principal amount outstanding of Encore’s Senior Secured Notes (as defined below) plus the aggregate principal amount outstanding under the term loans;
The allowance of additional unsecured or subordinated indebtedness not to exceed $750.0 million;
Restrictions and covenants, which limit the payment of dividends and the incurrence of additional indebtedness and liens, among other limitations;
Repurchases of up to $50.0 million of Encore’s common stock after February 25, 2014, subject to compliance with certain covenants and available borrowing capacity;
A change of control definition, which excludes acquisitions of stock by Red Mountain Capital Partners LLC, JCF FPK LLP and their respective affiliates of up to 50% of the outstanding shares of Encore’s voting stock;
Events of default which, upon occurrence, may permit the lenders to terminate the facility and declare all amounts outstanding to be immediately due and payable;
A pre-approved acquisition limit of $225.0 million in the aggregate, for acquisitions after August 1, 2014;
A basket to allow for investments in unrestricted subsidiaries of $250.0 million;
A basket to allow for investments in certain subsidiaries of Propel of $200.0 million;
An annual foreign portfolio investment basket of $150.0 million; and
Collateralization by all assets of the Company, other than the assets of unrestricted subsidiaries as defined in the Restated Credit Agreement.

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At June 30, 2014, the outstanding balance under the Restated Credit Agreement was $423.9 million. The weighted average interest rate was 2.89% and 3.20% for the three months ended June 30, 2014 and 2013, respectively, and 2.90% and 3.17% for the six months ended June 30, 2014 and 2013, respectively.
Encore Senior Secured Notes
In 2010 and 2011 Encore entered into an aggregate of $75.0 million in senior secured notes with certain affiliates of Prudential Capital Group (the “Senior Secured Notes”). $25.0 million of the Senior Secured Notes bear an annual interest rate of 7.375%, mature in 2018 and require quarterly principal payments of $1.25 million. Prior to May 2013, these notes required quarterly payments of interest only. The remaining $50.0 million of Senior Secured Notes bear an annual interest rate of 7.75%, mature in 2017 and require quarterly principal payments of $2.5 million. Prior to December 2012 these notes required quarterly interest only payments. As of June 30, 2014, $51.3 million is outstanding under these obligations.
The Senior Secured Notes are guaranteed in full by certain of Encore’s subsidiaries. Similar to, and pari passu with, Encore’s credit facility, the Senior Secured Notes are also collateralized by all of the assets of the Company other than the assets of unrestricted subsidiaries as defined in the Restated Credit Agreement. The Senior Secured Notes may be accelerated and become automatically and immediately due and payable upon certain events of default, including certain events related to insolvency, bankruptcy, or liquidation. Additionally, the Senior Secured Notes may be accelerated at the election of the holder or holders of a majority in principal amount of the Senior Secured Notes upon certain events of default by Encore, including the breach of affirmative covenants regarding guarantors, collateral, most favored lender treatment, minimum revolving credit facility commitment or the breach of any negative covenant. If Encore prepays the Senior Secured Notes at any time for any reason, payment will be at the higher of par or the present value of the remaining scheduled payments of principal and interest on the portion being prepaid. The discount rate used to determine the present value is 50 basis points over the then current Treasury Rate corresponding to the remaining average life of the senior secured notes. The covenants are substantially similar to those in the Restated Credit Agreement. Prudential Capital Group and the administrative agent for the lenders of the Restated Credit Agreement have an intercreditor agreement related to their pro rata rights to the collateral, actionable default, powers and duties and remedies, among other topics. The terms of the Senior Secured Notes were amended in connection with the Restated Credit Agreement in order to properly align certain provisions between the two agreements.
Encore Convertible Senior Notes
2017 Convertible Senior Notes
On November 27, 2012, Encore sold $100.0 million in aggregate principal amount of 3.0% convertible senior notes due November 27, 2017 in a private placement transaction. On December 6, 2012, the initial purchasers exercised, in full, their option to purchase an additional $15.0 million of the convertible senior notes, which resulted in an aggregate principal amount of $115.0 million of the convertible senior notes outstanding (collectively, the “2017 Convertible Notes”). Interest on the 2017 Convertible Notes is payable semi-annually, in arrears, on May 27 and November 27 of each year, beginning on May 27, 2013. The 2017 Convertible Notes are the Company’s general unsecured obligations. In the event of conversion, the 2017 Convertible Notes are convertible into cash up to the aggregate principal amount and permits the excess conversion premium to be settled in cash or shares of the Company’s common stock. The 2017 Convertible Notes are convertible at an initial conversion rate of 31.6832 shares of the Company’s common stock per $1,000 principal amount of the 2017 Convertible Notes, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $31.56 per share of the Company’s common stock.
Authoritative guidance related to debt with conversion and other options requires that issuers of convertible debt instruments that, upon conversion, may be settled fully or partially in cash, must separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively.
The Company determined that the fair value of the 2017 Convertible Notes was approximately $100.3 million, and designated the residual value of approximately $14.7 million as the equity component. Additionally, the Company allocated approximately $3.3 million of the $3.8 million original Convertible Notes issuance cost as debt issuance cost and the remaining $0.5 million as equity issuance cost.
During the quarter ending December 31, 2013, the closing price of the Company’s common stock exceeded 130% of the conversion price of the 2017 Convertible Notes for more than 20 trading days during a 30 consecutive trading day period, thereby satisfying one of the early conversion events. As a result, the 2017 Convertible Notes became convertible on demand effective January 2, 2014, and the holders were notified that they could elect to submit their 2017 Convertible Notes for conversion. The carrying value of the 2017 Convertible Notes continues to be reported as debt as the Company intends to draw

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on the Credit Facility or use cash on hand to settle the principal amount of any such conversions in cash. No gain or loss was recognized when the debt became convertible. The estimated fair value of the 2017 Convertible Notes was approximately $185.0 million as of June 30, 2014. In addition, upon becoming convertible, a portion of the equity component that was recorded at the time of the issuance of the 2017 Convertible Notes was considered redeemable and that portion of the equity was reclassified to temporary equity in the Company’s condensed consolidated statements of financial condition. Such amount was determined based on the cash consideration to be paid upon conversion and the carrying amount of the debt. Upon conversion, the holders of the 2017 Convertible Notes will be paid in cash for the principal amount and issued shares or a combination of cash and shares for the remaining value of the 2017 Convertible Notes. As a result, the Company reclassified $10.5 million of the equity component to temporary equity as of June 30, 2014. If a conversion event takes place, this temporary equity balance will be recalculated based on the difference between the 2017 Convertible Notes principal and the debt carrying value. If the 2017 Convertible Notes are settled, an amount equal to the fair value of the liability component, immediately prior to the settlement, will be deducted from the fair value of the total settlement consideration transferred and allocated to the liability component. Any difference between the amount allocated to the liability and the net carrying amount of the 2017 Convertible Notes (including any unamortized debt issue costs and discount) will be recognized in earnings as a gain or loss on debt extinguishment. Any remaining consideration is allocated to the reacquisition of the equity component and will be recognized as a reduction in stockholders’ equity.
None of the 2017 Convertible Notes were converted during the three and six months ended June 30, 2014.
In accordance with authoritative guidance related to derivatives and hedging and earnings per share calculation, only the conversion spread of the 2017 Convertible Notes is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company’s common stock during any quarter exceeds $31.56. The average share price of the Company’s common stock for the three and six months ended June 30, 2014 and three months ended June 30, 2013 exceeded $31.56. The dilutive effect from the 2017 Convertible Notes was approximately 1.0 million, 1.2 million, and less than 0.1 million shares for the three and six months ended June 30, 2014, and three months ended June 30, 2013, respectively. The effect of the 2017 Convertible Notes was anti-dilutive during the six months ended June 30, 2013. See Note 3, “Earnings Per Share” for additional information.
Concurrent with the pricing of the 2017 Convertible Notes, the Company entered into privately negotiated convertible note hedge transactions (together, the “Convertible Note Hedge Transactions”) with certain counterparties. The Convertible Note Hedge Transactions collectively cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock underlying the 2017 Convertible Notes, as described below. Concurrently with entering into the Convertible Note Hedge Transactions, the Company also entered into separate, privately negotiated warrant transactions (together, the “Warrant Transactions”) with the same counterparties, whereby the Company sold to the counterparties warrants to purchase, collectively, subject to customary anti-dilution adjustments, up to the same number of shares of the Company’s common stock as in the Convertible Note Hedge Transactions. Subject to certain conditions, the Company may settle the warrants in cash or on a net-share basis.
The Convertible Note Hedge Transactions are expected generally to reduce the potential dilution and/or offset the potential cash payments the Company is required to make in excess of the principal amount upon conversion of the 2017 Convertible Notes in the event that the market price per share of the Company’s common stock, is greater than the strike price of the Convertible Note Hedge Transactions, which initially corresponds to the conversion price of the 2017 Convertible Notes and is subject to anti-dilution adjustments. However, if the market price per share of the Company’s common stock, as measured under the terms of the Warrant Transactions, exceeds the strike price of the warrants, there would nevertheless be dilution to the extent that such market price exceeds the strike price of the warrants, unless the Company elects, subject to certain conditions, to settle the Warrant Transactions in cash. The strike price of the Warrant Transactions was initially $44.19 per share of the Company’s common stock and was subject to certain adjustments under the terms of the Warrant Transactions. Taken together, the Convertible Note Hedge Transactions and the Warrant Transactions had the effect of increasing the effective conversion price of the 2017 Convertible Notes to $44.19 per share.
On December 16, 2013, the Company entered into amendments to the warrants to increase the strike price from $44.19 to $60.00. All other terms and settlement provisions of the warrants remained unchanged. Warrants representing approximately 358,000 shares of common stock were modified as of December 31, 2013. The remaining 3.3 million shares represented by the warrants were modified between January 1, 2014 and February 6, 2014. The Company paid the holders of the warrants approximately $7.66 per warrant, or approximately $27.9 million in total in consideration for amending the warrants. The Company recorded the payment as a reduction of shareholders’ equity in the condensed consolidated statements of financial condition because, prior to being amended, the warrants were classified in permanent equity. The amended warrants meet the definition of derivatives; however, because these instruments have been determined to be indexed to the Company’s own stock and meet the criteria for equity classification, the amended warrants have also been recorded in shareholders’ equity in the

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condensed consolidated statements of financial condition. The costs for the warrant restrike completed in 2013 and 2014 were approximately $2.7 million and $25.2 million, respectively.
2020 Convertible Senior Notes
On June 24, 2013, Encore sold $150.0 million in aggregate principal amount of 3.0% convertible senior notes due July 1, 2020 in a private placement transaction. On July 18, 2013, the initial purchasers exercised, in full, their option to purchase an additional $22.5 million of the convertible senior notes, which resulted in an aggregate principal amount of $172.5 million of the convertible senior notes outstanding (collectively, the “2020 Convertible Notes”). The 2020 Convertible Notes are general unsecured obligations of the Company. Interest on the 2020 Convertible Notes is payable semi-annually, in arrears, on January 1 and July 1 of each year, beginning on January 1, 2014. Prior to January 1, 2020, the 2020 Convertible Notes will be convertible only during specified periods, if certain conditions are met. On or after January 1, 2020, the 2020 Convertible Notes will be convertible regardless of these conditions. Upon conversion, holders will receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The conversion rate for the 2020 Convertible Notes is 21.8718 shares per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $45.72 per share of common stock. As of June 30, 2014, none of the conditions allowing holders of the 2020 Convertible Notes to convert their notes had occurred.
As noted above, upon conversion, holders of the Company’s 2020 Convertible Notes will receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. However, the Company’s current intent is to settle conversions through combination settlement (i.e., convertible into cash up to the aggregate principal amount, and shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, for the remainder). As a result, and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company’s common stock during any quarter exceeds $45.72. The average share price of the Company’s common stock for the six months ended June 30, 2014 exceeded $45.72. The dilutive effect from the 2020 Convertible Notes was less than 0.1 million shares for the six months ended June 30, 2014. The effect of the 2020 Convertible notes was anti-dilutive for the three months ended June 30, 2014, and the three and six months ended June 30, 2013. See Note 3, “Earnings Per Share” for additional information.
In connection with the pricing of the 2020 Convertible Notes, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with one or more of the initial purchasers (or their affiliates) and one or more other financial institutions (the “Option Counterparties”). The Capped Call Transactions cover, collectively, the number of shares of the Company’s common stock underlying the 2020 Convertible Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2020 Convertible Notes. The cost of the Capped Call Transactions was approximately $18.1 million. In accordance with authoritative guidance, the Company recorded the net cost of the Capped Call Transactions as a reduction in additional paid in capital, and will not recognize subsequent changes in fair value of these financial instruments in its consolidated financial statements.
The Capped Call Transactions are expected generally to reduce the potential dilution and/or offset the cash payments the Company is required to make in excess of the principal amount upon conversion of the 2020 Convertible Notes in the event that the market price of the Company’s common stock is greater than the strike price of the Capped Call Transactions (which initially corresponds to the initial conversion price of the 2020 Convertible Notes and is subject to certain adjustments under the terms of the Capped Call Transactions), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Transactions. The cap price of the Capped Call Transactions is $61.5475 per share, and is subject to certain adjustments under the terms of the Capped Call Transactions.
The Capped Call Transactions are separate transactions, in each case, entered into by the Company with the Option Counterparties, and are not part of the terms of the 2020 Convertible Notes and will not affect any holder’s rights under the 2020 Convertible Notes. Holders of the 2020 Convertible Notes do not have any rights with respect to the Capped Call Transactions.
The net proceeds from the issuance of the 2020 Convertible Notes were approximately $167.4 million, after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses paid by the Company. The Company used approximately $18.1 million of the net proceeds from this offering to pay the cost of the Capped Call Transactions and used the remainder of the net proceeds from this offering to pay a portion of the purchase price for the Cabot Acquisition and for general corporate purposes.
The Company determined that the fair value of the 2020 Convertible Notes at the date of issuance was approximately $140.2 million, and designated the residual value of approximately $32.3 million as the equity component. Additionally, the

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Company allocated approximately $4.9 million of the $6.0 million original 2020 Convertible Notes issuance cost as debt issuance costs and the remaining $1.1 million as equity issuance costs.
2021 Convertible Senior Notes
On March 5, 2014, Encore sold $140.0 million in aggregate principal amount of 2.875% convertible senior notes due March 15, 2021 in a private placement transaction. On March 6, 2014, the initial purchasers exercised, in full, their option to purchase an additional $21.0 million of the convertible senior notes, which resulted in an aggregate principal amount of $161.0 million of the convertible senior notes outstanding (collectively, the “2021 Convertible Notes”). The 2021 Convertible Notes are general unsecured obligations of the Company. Interest on the 2021 Convertible Notes is payable semi-annually, in arrears, on March 15 and September 15 of each year, beginning on September 15, 2014. Prior to September 15, 2020, the 2021 Convertible Notes will be convertible only during specified periods, if certain conditions are met. On or after September 15, 2020, the 2021 Convertible Notes will be convertible regardless of these conditions. Upon conversion, holders will receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The conversion rate for the 2021 Convertible Notes is 16.8386 shares per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $59.39 per share of common stock. As of June 30, 2014, none of the conditions allowing holders of the 2021 Convertible Notes to convert their notes had occurred.
As noted above, upon conversion, holders of the Company’s 2021 Convertible Notes will receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. However, the Company’s current intent is to settle conversions through combination settlement (i.e., convertible into cash up to the aggregate principal amount, and shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, for the remainder). As a result, and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company’s common stock during any quarter exceeds $59.39.
In connection with the pricing of the 2021 Convertible Notes, the Company entered into privately negotiated capped call transactions (the “2014 Capped Call Transactions”) with one or more of the initial purchasers (or their affiliates) and one or more other financial institutions (the “2014 Option Counterparties”). The Capped Call Transactions cover, collectively, the number of shares of the Company’s common stock underlying the 2021 Convertible Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2021 Convertible Notes. The cost of the 2014 Capped Call Transactions was approximately $19.5 million. In accordance with authoritative guidance, the Company recorded the cost of the 2014 Capped Call Transactions as a reduction in additional paid in capital, and will not recognize subsequent changes in fair value of these financial instruments in its consolidated financial statements.
The 2014 Capped Call Transactions are expected generally to reduce the potential dilution and/or offset the cash payments the Company is required to make in excess of the principal amount upon conversion of the 2021 Convertible Notes in the event that the market price of the Company’s common stock is greater than the strike price of the 2014 Capped Call Transactions (which initially corresponds to the initial conversion price of the 2021 Convertible Notes and is subject to certain adjustments under the terms of the 2014 Capped Call Transactions), with such reduction and/or offset subject to a cap based on the cap price of the 2014 Capped Call Transactions. The cap price of the Capped Call Transactions is $83.1425 per share, and is subject to certain adjustments under the terms of the 2014 Capped Call Transactions.
The 2014 Capped Call Transactions are separate transactions, in each case, entered into by the Company with the 2014 Option Counterparties, and are not part of the terms of the 2021 Convertible Notes and will not affect any holder’s rights under the 2021 Convertible Notes. Holders of the 2021 Convertible Notes do not have any rights with respect to the 2014 Capped Call Transactions.
The net proceeds from the sale of the 2021 Convertible Notes were approximately $155.7 million, after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses paid by the Company. The Company used approximately $19.5 million of the net proceeds from this offering to pay the cost of the 2014 Capped Call Transactions and used the remainder of the net proceeds from this offering to pay for general corporate purposes, including working capital.
The Company determined that the fair value of the 2021 Convertible Notes at the date of issuance was approximately $143.6 million, and designated the residual value of approximately $17.4 million as the equity component. Additionally, the Company allocated approximately $4.7 million of the $5.3 million original 2021 Convertible Notes issuance cost as debt issuance costs and the remaining $0.6 million as equity issuance costs.

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The balances of the liability and equity components of all of the convertible senior notes outstanding were as follows (in thousands):
 
June 30,
2014
 
December 31,
2013
Liability component—principal amount
$
448,500

 
$
287,500

Unamortized debt discount
(55,689
)
 
(42,240
)
Liability component—net carrying amount
$
392,811

 
$
245,260

Equity component
$
53,821

 
$
46,954

The debt discount is being amortized into interest expense over the remaining life of the convertible notes using the effective interest rates, which are 6.00%, 6.35%, and 4.70% for the 2017, 2020, and 2021 Convertible Notes, respectively.
Interest expense related to the convertible notes was as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Interest expense—stated coupon rate
$
3,308

 
$
948

 
$
5,764

 
$
1,806

Interest expense—amortization of debt discount
2,181

 
710

 
3,936

 
1,317

Total interest expense—convertible notes
$
5,489

 
$
1,658

 
$
9,700

 
$
3,123

Propel Facilities
Propel Facility I
Propel has a $200.0 million syndicated loan facility (the “Propel Facility I”). The Propel Facility I is used to originate or purchase tax lien assets related to properties in Texas and Arizona.
The Propel Facility I expires in May 2015 and includes the following key provisions:
Interest at Propel’s option, at either: (1) LIBOR, plus a spread that ranges from 300 to 375 basis points, depending on Propel’s cash flow leverage ratio; or (2) Prime Rate, which is defined in the agreement as the rate of interest per annum equal to the sum of (a) the interest rate quoted in the “Money Rates” section of The Wall Street Journal from time to time and designated as the “Prime Rate” plus (b) the Prime Rate Margin, which is a spread that ranges from 0 to 75 basis points, depending on Propel’s cash flow leverage ratio;
A borrowing base of 90% of the face value of the tax lien collateralized payment arrangements;
Interest payable monthly; principal and interest due at maturity;
Restrictions and covenants, which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens; and
Events of default which, upon occurrence, may permit the lender to terminate the Propel Facility I and declare all amounts outstanding to be immediately due and payable.
The Propel Facility I is primarily collateralized by the Tax Liens in Texas and requires Propel to maintain various financial covenants, including a minimum interest coverage ratio and a maximum cash flow leverage ratio.
At June 30, 2014, the outstanding balance on the Propel Facility I was $32.3 million. The weighted average interest rate was 4.37% and 3.51% for the three months ended June 30, 2014 and 2013, respectively, and 3.90% and 3.53% for the six months ended June 30, 2014 and 2013, respectively.
Propel Facility II
On May 9, 2013, the Company, through affiliates of Propel, entered into a $100.0 million revolving credit facility (the “Propel Facility II”). The Propel Facility II is used to purchase tax liens from taxing authorities in various states.

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The Propel Facility II expires in May 2017 and includes the following key provisions:
During the first two years of the four-year term, the committed amount can be drawn on a revolving basis. During the following two years, no additional draws are permitted, and all proceeds from the tax liens are used to repay any amounts outstanding under the facility. After the four-year period ends, if any amounts are still outstanding, an alternate interest rate applies until all amounts owed are repaid;
Prior to the expiration of the four-year term, interest at a per annum floating rate equal to LIBOR plus a spread of 325 basis points;
Following the expiration of the four-year term or upon the occurrence of an event of default, interest at 400 basis points plus the greater of (i) a per annum floating rate equal to LIBOR plus a spread of 325 basis points, or (ii) Prime Rate, which is defined in the agreement as the rate most recently announced by the lender at its branch in San Francisco, California, from time to time as its prime commercial rate for United States dollar-denominated loans made in the United States;
Proceeds from the tax liens are applied to pay interest, principal and other obligations incurred in connection with the Propel Facility II on a monthly basis as defined in the agreement;
Special purpose entity covenants designed to protect the bankruptcy-remoteness of the borrowers and additional restrictions and covenants, which limit, among other things, the payment of certain dividends, the occurrence of additional indebtedness and liens and use of the collections proceeds from the certain Tax Liens; and
Events of default which, upon occurrence, may permit the lender to terminate the Propel Facility II and declare all amounts outstanding to be immediately due and payable.
The Propel Facility II is collateralized by the Tax Liens acquired under the Propel Facility II. At June 30, 2014, the outstanding balance on the Propel Facility II was $49.3 million. The weighted average interest rate was 5.60% and 5.17% for the three months ended June 30, 2014 and 2013, respectively, and 6.36% and 5.17% the six months ended June 30, 2014 and 2013.
On May 6, 2014, the Propel Facility II was amended by the parties to provide for the following changes:
The commitment amount was increased from $100.0 million to the following: (a) during the period from July 1, 2014 to and including September 30, 2014, $190.0 million or (b) at any other time, $150.0 million;
Termination of the revolving period for purchasing tax liens from taxing authorities was extended for a period of two years to May 15, 2017 (unless terminated earlier in accordance with the terms of the facility);
The maturity date was extended two years to May 10, 2019;
The amended facility allows for (a) the funding of tax liens in both Texas and Nevada in an aggregate amount up to $80.0 million (in addition to allowing for the purchase of tax liens in states other than Texas and Nevada) and (b) the right to finance vacant land in an amount equal to 5% of eligible assets (collectively the “Additional Assets”);
The applicable interest rate for advances related to tax liens in Texas is LIBOR plus 2.50%;
In connection with the Additional Assets, the amended facility provides for certain technical changes throughout the governing tax lien loan and security agreement (e.g., definitions, waterfall mechanics, representations and warranties) which were required to facilitate the addition of the Additional Assets; and
The amended Propel Facility II increases the advance rate for certain states.
Propel Term Loan Facility
On May 2, 2014, the Company, through affiliates of Propel, entered into a $31.9 million term loan facility (the “Propel Term Loan Facility”). The Propel Term Loan Facility was entered into to fund the acquisition of a portfolio of tax liens and other assets in a transaction valued at approximately $43.0 million and matures in October 2016.
At June 30, 2014, the outstanding balance on the Propel Term Loan Facility was $30.7 million, and the weighted average interest rate was 5.55% for the three months ended June 30, 2014.

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Propel Securitized Notes
On May 6, 2014, Propel, through its affiliates, completed the securitization of a pool of approximately $141.5 million in payment agreements and contracts relating to unpaid real property taxes, assessments, and other charges secured by liens on real property located in the State of Texas (the “Texas Tax Liens”). In connection with the securitization, investors purchased in a private placement approximately $134.0 million in aggregate principal amount of 1.44% notes collateralized by the Texas Tax Liens (the “Propel Securitized Notes”), due May 15, 2029. The payment agreements and contracts will continue to be serviced by Propel.
The Propel Securitized Notes are payable solely from the collateral and represent non-recourse obligations of the consolidated securitization entity PFS Tax Lien Trust 2014-1, a Delaware statutory trust and an affiliate of Propel. Interest accrues monthly at the rate of 1.44% per annum. Principal and interest on the Propel Securitized Notes are payable on the 15th day of each calendar month, commencing on June 16, 2014. Propel used the net proceeds to pay down borrowings under the Propel Facility I.
At June 30, 2014, the outstanding balance on the Propel Securitized Notes was $125.2 million.
Cabot Senior Secured Notes
On September 20, 2012, Cabot Financial (Luxembourg) S.A. (“Cabot Financial”), an indirect subsidiary of Janus Holdings, issued £265.0 million (approximately $438.4 million) in aggregate principal amount of 10.375% Senior Secured Notes due 2019 (the “Cabot 2019 Notes”). Interest on the Cabot 2019 Notes is payable semi-annually, in arrears, on April 1 and October 1 of each year.
On August 2, 2013, Cabot Financial issued £100 million (approximately $151.7 million) in aggregate principal amount of 8.375% Senior Secured Notes due 2020 (the “Cabot 2020 Notes”). Interest on the Cabot 2020 Notes is payable semi-annually, in arrears, on February 1 and August 1 of each year, beginning on February 1, 2014.
Of the proceeds from the issuance of the Cabot 2020 Notes, approximately £75.0 million (approximately $113.8 million) was used to repay all amounts outstanding under the senior credit facilities of Cabot Financial (UK) Limited (“Cabot Financial UK”), an indirect subsidiary of Janus Holdings, and £25.0 million (approximately $37.9 million) was used to partially repay a portion of the J Bridge PECs to an affiliate of J.C. Flowers & Co. LLC (“J.C. Flowers”) in connection to the Cabot Acquisition.
On March 27, 2014, Cabot Financial issued £175.0 million (approximately $291.8 million) in aggregate principal amount of 6.5% Senior Secured Notes due 2021 (the “Cabot 2021 Notes” and, together with the Cabot 2019 Notes and Cabot 2020 Notes, the “Cabot Notes”). Interest on the Cabot 2021 Notes is payable semi-annually, in arrears, on April 1 and October 1 of each year, beginning on October 1, 2014. The total debt issuance cost associated with the Cabot 2021 Notes was approximately $4.4 million.
Of the proceeds from the issuance of the Cabot 2021 Notes, approximately £105.0 million (approximately $174.8 million) was used to repay all amounts outstanding under the Senior Secured Bridge Facilities described below.
The Cabot Notes are fully and unconditionally guaranteed on a senior secured basis by the following indirect subsidiaries of the Company: Cabot, Cabot Financial Limited, and all material subsidiaries of Cabot Financial Limited (other than Cabot Financial and Marlin Intermediate Holdings plc). The Cabot Notes are secured by a first ranking security interest in all the outstanding shares of Cabot Financial and the guarantors (other than Cabot) and substantially all the assets of Cabot Financial and the guarantors (other than Cabot).
On July 25, 2013, Marlin Intermediate Holdings plc, a subsidiary of Marlin, issued £150.0 million (approximately $246.5 million) in aggregate principal amount of 10.5% Senior Secured Notes due 2020 (the “Marlin Bonds”). Interest on the Marlin Bonds is payable semi-annually, in arrears, on February 1 and August 1 of each year. Cabot assumed the Marlin Bonds as a result of the Marlin Acquisition. The carrying value of the Marlin Bonds was adjusted to approximately $284.2 million to reflect the fair value of the Marlin Bonds at the time of acquisition.
The Marlin Bonds are fully and unconditionally guaranteed on a senior secured basis by Cabot Financial Limited and each of Cabot Financial Limited’s material subsidiaries other than Marlin Intermediate Holdings plc, each of which is an indirect subsidiary of the Company.

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Interest expense related to the Cabot Notes and Marlin Bonds was as follows (in thousands):
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
Interest expense—stated coupon rate
$
26,605

 
$
45,860

Interest income—accretion of debt premium
(2,573
)
 
(4,805
)
Total interest expense—Cabot Notes and Marlin Bonds
$
24,032

 
$
41,055

Cabot Senior Revolving Credit Facility
On September 20, 2012, Cabot Financial UK entered into an agreement for a senior committed revolving credit facility of £50.0 million (approximately $82.7 million) (the “Cabot Credit Agreement”). This agreement was amended and restated on June 28, 2013 to increase the size of the revolving credit facility to £85.0 million (approximately $140.6 million) (the “Cabot Credit Facility”).
The Cabot Credit Facility has a five-year term expiring in September 2017, and includes the following key provisions:
Interest at LIBOR plus a maximum of 4.0% depending on the loan to value (“LTV”) ratio determined quarterly, calculated as being the ratio of the net financial indebtedness of Cabot (as defined in the Cabot Credit Agreement) to Cabot’s estimated remaining collections capped at 84-months;
A restrictive covenant that limits the LTV ratio to 0.75;
Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens; and
Events of default which, upon occurrence, may permit the lenders to terminate the Cabot Credit Facility and declare all amounts outstanding to be immediately due and payable.
The Cabot Credit Facility is unconditionally guaranteed by the following indirect subsidiaries of the Company: Cabot, Cabot Financial Limited, and all material subsidiaries of Cabot Financial Limited. The Cabot Credit Facility is secured by a first ranking security interest in all the outstanding shares of Cabot Financial UK and the guarantors (other than Cabot) and substantially all the assets of Cabot Financial UK and the guarantors (other than Cabot).
On February 7, 2014, Cabot Financial UK acquired all of the equity interest of Marlin, a leading acquirer of non-performing consumer debt in the United Kingdom, for an aggregate purchase price of approximately £166.8 million (approximately $274.1 million). The Marlin Acquisition was financed with £75.0 million (approximately $122.3 million) in borrowings under the Cabot Credit Facility and under the Senior Secured Bridge Facilities described below.
At June 30, 2014, the outstanding borrowings under the Cabot Credit Facility were approximately $82.1 million. The weighted average interest rate was 3.09% and 3.41% for the three and six months ended June 30, 2014, respectively.
Senior Secured Bridge Facilities
The Marlin Acquisition was financed with borrowings under the existing Cabot Credit Facility and under new senior secured bridge facilities (the “Senior Secured Bridge Facilities”) that Cabot Financial Limited entered into on February 7, 2014 pursuant to a Senior Secured Bridge Facilities Agreement. The Senior Secured Bridge Facilities were paid off in full by using proceeds from borrowings under the £175.0 million (approximately $291.8 million) Cabot 2021 Notes issued on March 21, 2014.
The Senior Secured Bridge Facilities Agreement provided for (a) a senior secured bridge facility in an aggregate principal amount of up to £105.0 million (“Bridge Facility A”) and (b) a senior secured bridge facility in an aggregate principal amount of up to £151.5 million (“Bridge Facility B,” and together with Bridge Facility A, the “Bridge Facilities”). The purpose of Bridge Facility A was to provide funding for the financing, in full or in part, of the purchase price for the Marlin Acquisition and the payment of costs, fees and expenses in connection with the Marlin Acquisition, and was fully drawn on as of the closing of the Marlin Acquisition. The purpose of Bridge Facility B was to finance, in full or in part, the repurchase of any bonds tendered in any change of control offer required to be made to the holders of the Marlin Bonds and the premium payable thereon. Bridge Facility B was intended to be utilized only to the extent that any holders of the Marlin Bonds elected to tender their Marlin Bonds within a defined period. No Marlin Bonds were tendered during the defined period and Bridge Facility B expired without drawdown. The Senior Secured Bridge Facilities Agreement also provided for uncommitted incremental facilities in an amount of up to £80.0 million for the purposes of financing future debt portfolio acquisitions. The Senior

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Secured Bridge Facilities had an initial term of one year and an extended term of 6.5 years if they were not repaid during the first year of issuance.
Prior to their initial maturity date, the rate of interest payable under the Senior Secured Bridge Facilities was the aggregate, per annum, of (i) LIBOR, plus (ii) an initial spread of 6.00% per annum (such spread stepping up by 50 basis points for each three-month period that the Senior Secured Bridge Facilities remained outstanding), not to exceed total caps set forth in the Senior Secured Bridge Facilities Agreement.
Loan fees associated with the Senior Secured Bridge Facilities were approximately $2.0 million. These fees were originally recorded as debt issuance costs and were written off at the time of repayment and termination of the agreement. This $2.0 million was charged to interest expense in the Company’s condensed consolidated financial statements for the six months ended June 30, 2014.
Preferred Equity Certificates
On July 1, 2013, the Company, through its wholly owned subsidiary Encore Europe Holdings, S.a.r.l. (“Encore Europe”), completed the Cabot Acquisition by acquiring 50.1% of the equity interest in Janus Holdings, the indirect holding company of United Kingdom based Cabot from certain funds advised by J.C. Flowers & Co. LLC (“J.C. Flowers”). Encore Europe purchased from J.C. Flowers: (i) E Bridge preferred equity certificates issued by Janus Holdings, with a face value of £10,218,574 (approximately $15.5 million) (and any accrued interest thereof) (the “E Bridge PECs”), (ii) E preferred equity certificates issued by Janus Holdings with a face value of £96,729,661 (approximately $147.1 million) (and any accrued interest thereof) (the “E PECs”), (iii) 3,498,563 E shares of Janus Holdings (the “E Shares”), and (iv) 100 A shares of Cabot Holdings S.a.r.l. (“Cabot Holdings”), the direct subsidiary of Janus Holdings, for an aggregate purchase price of approximately £115.1 million (approximately $175.0 million). The E Bridge PECs, E PECs, and E Shares represent 50.1% of all of the issued and outstanding equity and debt securities of Janus Holdings. The remaining 49.9% of Janus Holdings’ equity and debt securities are owned by J.C. Flowers and include: (a) J Bridge preferred equity certificates with a face value of £10,177,781 (approximately $15.5 million) (the “J Bridge PECs”), (b) J preferred equity certificates with a face value of £96,343,515 (approximately $146.5 million) (the “J PECs”), (c) 3,484,597 J shares of Janus Holdings (the “J Shares”), and (d) 100 A shares of Cabot Holdings.
All of the PECs accrue interest at 12% per annum. In accordance with authoritative guidance related to debt and equity securities, the J Bridge PECs, J PECs and any accrued interests thereof are classified as liabilities and are included in debt in the Company’s accompanying condensed consolidated statements of financial condition. In addition, certain other minority owners hold PECs at the Cabot Holdings level (the “Management PECs”). These PECs are also included in debt in the Company’s accompanying condensed consolidated statements of financial condition. The E Bridge PECs and E PECs held by the Company, and their related interest eliminate in consolidation and therefore are not included in debt. The J Bridge PECs, J PECs, and the Management PECs do not require the payment of cash interest expense as they have characteristics similar to equity with a preferred return. The ultimate payment of the accumulated interest would be satisfied only in connection with the disposition of the noncontrolling interests of J.C. Flowers and management.
On June 20, 2014, Encore Europe converted all of its E Bridge PECs into E Shares and E PECs, and J.C. Flowers converted all of its J Bridge PECs into J Shares and J PECs, respectively, in proportion to the number of E Shares and E PECs, or J Shares and J PECs, as applicable, outstanding on the closing date of the Cabot Acquisition.
As of June 30, 2014, the outstanding balance of the PECs and their accrued interests was approximately $217.9 million.
Capital Lease Obligations
The Company has capital lease obligations primarily for computer equipment. As of June 30, 2014, the Company’s combined obligations for these equipment leases were approximately $13.6 million. These lease obligations require monthly or quarterly payments through 2018 and have implicit interest rates that range from zero to approximately 8.97%.
Note 11: Variable Interest Entities
A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb losses, or the right to receive the expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially be significant to the VIE.

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The Company’s VIEs include its subsidiary Janus Holdings and its special purpose entity used for the Propel securitization.
Janus Holdings is the immediate parent company of Cabot. The Company has determined that Janus Holdings is a VIE and the Company is the primary beneficiary of the VIE. The key activities that affect Cabot’s economic performance include, but are not limited to, operational budgets and purchasing decisions. Through its control of the board of directors of Janus Holdings, the Company controls the key operating activities at Cabot.
Propel uses a special purpose entity to issue asset-backed securities to investors. The Company has determined that the special purpose entity is a VIE and Propel is the primary beneficiary of the VIE. Propel has the power to direct the activities of the VIE because it has the ability to exercise discretion in the servicing of the financial assets and add assets to revolving structures.
Assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against our general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs.
The Company evaluates its relationships with the VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary.
Note 12: Income Taxes
During the three months ended June 30, 2014, and 2013, the Company recorded income tax provisions of $14.0 million and $7.3 million, respectively. During the six months ended June 30, 2014, and 2013, the Company recorded income tax provisions of $25.8 million and $19.8 million, respectively.
The effective tax rates for the respective periods are shown below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Federal provision
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
State provision
5.8
 %
 
6.6
 %
 
5.8
 %
 
6.6
 %
State benefit
(2.0
)%
 
(2.3
)%
 
(2.0
)%
 
(2.3
)%
International benefit(1)
(1.9
)%
 
 %
 
(3.4
)%
 
 %
Permanent items(2)
3.5
 %
 
0.5
 %
 
3.7
 %
 
0.1
 %
Other
(0.8
)%
 
 %
 
(0.1
)%
 
 %
Effective rate
39.6
 %
 
39.8
 %
 
39.0
 %
 
39.4
 %
________________________
(1)
Relates primarily to the lower tax rate on the income attributable to international operations.
(2)
Represents a provision for nondeductible items.
The Company’s subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2018 and a 50% tax holiday for the subsequent four years. The impact of the tax holiday in Costa Rica for the three and six months ended June 30, 2014 was immaterial.
As of June 30, 2014, the Company had a gross unrecognized tax benefit of $88.2 million primarily related to an uncertain tax position associated with AACC’s tax revenue recognition policy. This uncertain tax position, if recognized, would result in a net tax benefit of $18.7 million and would have a favorable effect on the Company’s effective tax rate. There was no material change to the unrecognized tax benefit during the three months ended June 30, 2014. The uncertain tax benefit is included in “Other liabilities” in the Company’s condensed consolidated statements of financial condition.
During the three and six months ended June 30, 2014, the Company did not provide for United States income taxes or foreign withholding taxes on the quarterly undistributed earnings from operations of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries during the three and six months ended June 30, 2014, was approximately $6.0 million and $3.6 million, respectively.

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Note 13: Commitments and Contingencies
Litigation and Regulatory
The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions based on the Fair Debt Collection Practices Act (“FDCPA”), comparable state statutes, the Telephone Consumer Protection Act (“TCPA”), state and federal unfair competition statutes, and common law causes of action. The violations of law alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to collect debts on which the statute of limitations has run, has made inaccurate assertions of fact in support of its collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and regulatory actions involve potential compensatory or punitive damage claims, fines, sanctions, or injunctive relief. Many continue on for some length of time and involve substantial litigation, effort, and negotiation before a result is achieved, and during the process the Company often cannot determine the substance or timing of any eventual outcome.
There have been no material developments in any of the legal proceedings disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
In certain legal proceedings, the Company may have recourse to insurance or third party contractual indemnities to cover all or portions of its litigation expenses, judgments, or settlements. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. The Company continuously assesses the potential liability related to its pending litigation and revises its estimates when additional information becomes available. As of June 30, 2014, the Company has no material reserves for litigation. Additionally, based on the current status of litigation matters, either the estimate of exposure is immaterial to the Company’s financial statements or an estimate cannot yet be determined. The Company’s legal costs are recorded to expense as incurred.
Purchase Commitments
In the normal course of business, the Company enters into forward flow purchase agreements and other purchase commitment agreements. As of June 30, 2014, the Company has entered into agreements to purchase receivable portfolios with a face value of approximately $0.7 billion for a purchase price of approximately $81.0 million. Most of these purchase commitments do not extend past one year.
Note 14: Segment Information
The Company conducts business primarily through two reportable segments: portfolio purchasing and recovery and tax lien business. The Company’s management relies on internal management reporting processes that provide segment revenue, segment operating income, and segment asset information in order to make financial decisions and allocate resources. The operating results from the Company’s tax lien business segment are immaterial to the Company’s total consolidated operating results. However, total assets from the tax lien business segment are significant as compared to the Company’s total consolidated assets. As a result, in accordance with authoritative guidance on segment reporting, the Company’s tax lien business segment is determined to be a reportable segment.

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Segment operating income includes income from operations before depreciation, amortization of intangible assets, and stock-based compensation expense. The following table provides a reconciliation of revenue and segment operating income by reportable segment to consolidated results and was derived from the segments’ internal financial information as used for corporate management purposes (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Portfolio purchasing and recovery
$
262,087

 
$
152,091

 
$
510,676

 
$
292,774

Tax lien business
7,108

 
4,030

 
12,260

 
7,933

 
$
269,195

 
$
156,121

 
$
522,936

 
$
300,707

Operating income:
 
 
 
 
 
 
 
Portfolio purchasing and recovery
$
87,718

 
$
33,478

 
$
165,286

 
$
76,158

Tax lien business
2,332

 
742

 
3,986

 
1,623

 
90,050

 
34,220

 
169,272

 
77,781

Depreciation and amortization
(6,829
)
 
(2,158
)
 
(12,946
)
 
(4,004
)
Stock-based compensation
(4,715
)
 
(2,179
)
 
(9,551
)
 
(5,180
)
Other expense
(43,143
)
 
(11,604
)
 
(80,840
)
 
(18,299
)
Income from operations before income taxes
$
35,363

 
$
18,279

 
$
65,935

 
$
50,298

Additionally, assets are allocated to operating segments for management review. As of June 30, 2014, total segment assets were $3.2 billion and $391.9 million for the portfolio purchasing and recovery segment and tax lien business segment, respectively.
The following presents information about geographic areas in which the Company operates (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenues(1) :
 
 
 
 
 
 
 
Domestic
$
189,012

 
$
156,121

 
$
374,553

 
$
300,707

International
80,183

 

 
148,383

 

 
$
269,195

 
$
156,121

 
$
522,936

 
$
300,707

________________________
(1)
Revenues are attributed to countries based on location of customer.
Note 15: Goodwill and Identifiable Intangible Assets
In accordance with authoritative guidance, goodwill is tested at the reporting unit level annually for impairment and in interim periods if certain events occur that indicate the fair value of a reporting unit may be below its carrying value. Goodwill was allocable to reporting units included in the Company’s reportable segments, as follows (in thousands):
 
Portfolio
Purchasing  and
Recovery
 
Tax Lien
Business
 
Total
Balance, December 31, 2013
$
454,936

 
$
49,277

 
$
504,213

Goodwill acquired
352,177

 

 
352,177

Effect of foreign currency translation
23,520

 

 
23,520

Balance, June 30, 2014
$
830,633

 
$
49,277

 
$
879,910


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The Company’s acquired intangible assets are summarized as follows (in thousands):
 
As of June 30, 2014
 
As of December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
6,225

 
$
(320
)
 
$
5,905

 
$
1,975

 
$
(74
)
 
$
1,901

Developed technologies
7,519

 
(1,209
)
 
6,310

 
4,909

 
(468
)
 
4,441

Trade name and other
4,904

 
(857
)
 
4,047

 
15,631

 
(386
)
 
15,245

Other intangibles—indefinite lived
1,962

 

 
1,962

 
1,962

 

 
1,962

Total intangible assets
$
20,610

 
$
(2,386
)
 
$
18,224

 
$
24,477

 
$
(928
)
 
$
23,549

Note 16: Subsequent Events
Acquisition of Atlantic
On August 6, 2014, the Company acquired all of the outstanding equity interests of Atlantic Credit & Finance, Inc. (“Atlantic”) for approximately $70.0 million in cash pursuant to a Stock Purchase Agreement dated August 1, 2014 by and among the Company, Atlantic and the sellers. Atlantic acquires and liquidates consumer finance receivables originated and charged off by national financial institutions. At the closing of the transaction, the Company made additional payments totaling approximately $126.1 million to retire certain indebtedness and other obligations of Atlantic. The Company financed the acquisition through borrowings under its Restated Credit Agreement and cash on hand.
The Company will account for this acquisition using the acquisition method of accounting and, accordingly, the tangible and intangible assets acquired and liabilities assumed will be recorded at their estimated fair values as of the date of the acquisition. The results of operations of Atlantic will be consolidated with those of the Company beginning on the date of the acquisition. As of the date of this Quarterly Report on Form 10-Q, the Company has not completed its preliminary purchase price allocation because the Company has not had sufficient time.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” relating to Encore Capital Group, Inc. (“Encore”) and its subsidiaries (which we may collectively refer to as the “Company,” “we,” “our,” or “us”) within the meaning of the securities laws. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “will,” “may,” and similar expressions often characterize forward-looking statements. These statements may include, but are not limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services and financing needs or plans, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings, or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors, including but not limited to those set forth in our Annual Report on Form 10-K under “Part I, Item 1A. Risk Factors” and those set forth in our subsequent Quarterly Reports on Form 10-Q under “Part II, Item 1A, Risk Factors,” could cause our actual results, performance, achievements, or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition, or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties.
Our Business and Operating Segments
We are an international specialty finance company providing debt recovery solutions for consumers and property owners across a broad range of financial assets. We purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy proceedings. Through certain subsidiaries, we are a market leader in portfolio purchasing and recovery in the United States. Our subsidiary, Janus Holdings Luxembourg S.a.r.l. (“Janus Holdings”), through its indirectly held United Kingdom-based subsidiary Cabot Credit Management Limited and its subsidiaries (“Cabot”), is a market leader in debt management in the United Kingdom historically specializing in portfolios consisting of higher balance, semi-performing accounts (i.e., debt portfolios in which over 50% of accounts have made a payment in three of the last four months immediately prior to the portfolio purchase). Cabot’s February 2014 acquisition of Marlin Financial Group Limited (“Marlin”) provides Cabot with substantial litigation-enhanced collections capabilities for non-performing accounts. Our majority-owned subsidiary, Grove Holdings (“Grove”), is a U.K.-based leading specialty investment firm focused on consumer non-performing loans, including insolvencies (in particular, individual voluntary arrangements, or IVAs) in the United Kingdom and bank and non-bank receivables in Spain. Our majority-owned subsidiary, Refinancia S.A. (“Refinancia”), is a market leader in management of non-performing loans in Colombia and Peru. In addition, through our subsidiary, Propel Financial Services, LLC and its subsidiaries (collectively, “Propel”), we assist property owners who are delinquent on their property taxes by structuring affordable monthly payment plans and purchase delinquent tax liens directly from selected taxing authorities.
We conduct business through two reportable segments: portfolio purchasing and recovery and tax lien business. The operating results from our tax lien business segment are immaterial to our total consolidated operating results. However, the total segment assets are significant as compared to our total consolidated assets. As a result, in accordance with authoritative guidance on segment reporting, our tax lien business segment is determined to be a reportable segment.
Our long-term growth strategy involves extending our knowledge about financially distressed consumers, growing our core portfolio purchase and recovery business, expanding into new asset classes and geographic areas, utilizing our core capabilities to align our business, investor and financial strategies to drive shareholder return, and investing in initiatives to safeguard and promote consumer financial health.
Portfolio Purchasing and Recovery
United States. Our portfolio purchasing and recovery segment purchases receivables based on robust, account-level valuation methods and employs proprietary statistical and behavioral models across the full extent of our U.S. operations.

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These investments allow us to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with our methods or goals, and align the accounts we purchase with our business channels to maximize future collections. As a result, we have been able to realize significant returns from the receivables we acquire. We maintain strong relationships with many of the largest credit and telecommunication providers in the United States and believe we possess one of the industry’s best collection staff retention rates.
While seasonality does not have a material impact on our portfolio purchasing and recovery segment, collections are generally strongest in our first calendar quarter, slower in the second and third calendar quarters, and slowest in the fourth calendar quarter. Relatively higher collections in the first quarter could result in a lower cost-to-collect ratio compared to the other quarters, as our fixed costs are relatively constant and applied against a larger collection base. The seasonal impact on our business may also be influenced by our purchasing levels, the types of portfolios we purchase, and our operating strategies.
Collection seasonality with respect to our portfolio purchasing and recovery segment can also affect revenue as a percentage of collections, also referred to as our revenue recognition rate. Generally, revenue for each pool group declines steadily over time, whereas collections can fluctuate from quarter to quarter based on seasonality, as described above. In quarters with lower collections (e.g., the fourth calendar quarter), the revenue recognition rate can be higher than in quarters with higher collections (e.g., the first calendar quarter).
In addition, seasonality could have an impact on the relative level of quarterly earnings. In quarters with stronger collections, total costs are higher as a result of the additional efforts required to generate those collections. Since revenue for each pool group declines steadily over time, in quarters with higher collections and higher costs (e.g., the first calendar quarter), all else being equal, earnings could be lower than in quarters with lower collections and lower costs (e.g., the fourth calendar quarter). Additionally, in quarters where a greater percentage of collections come from our legal and agency outsourcing channels, cost to collect will be higher than if there were more collections from our internal collection sites.
United Kingdom. Through Cabot, we purchase receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model allows Cabot to value portfolios accurately and quantify portfolio performance in order to maximize future collections. As a result, Cabot has been able to realize significant returns from the assets it has acquired. Cabot maintains strong relationships with many of the largest financial service providers in the United Kingdom.
On February 7, 2014, Cabot acquired Marlin (the “Marlin Acquisition”), a leading acquirer of non-performing consumer debt in the United Kingdom. Marlin is differentiated by its proven competitive advantage in the use of litigation-enhanced collections for non-paying financial services receivables. We expect Marlin’s litigation capabilities will benefit Cabot’s existing portfolio of non-performing accounts. Similarly, we believe that there may be further synergies by applying Cabot’s scoring model to Marlin’s portfolio.
While seasonality does not have a material impact on Cabot’s operations, collections are generally strongest in the second and third calendar quarters and slower in the first and fourth quarters, largely driven by the impact of the December holiday season and the New Year holiday, and the related impact on its customers’ ability to repay their balances. This drives a higher level of plan defaults over this period, which are typically repaired across the first quarter of the following year. The August vacation season in the United Kingdom also has an unfavorable effect on the level of collections, but this is traditionally compensated for by higher collections in July and September.
On April 1, 2014, we completed the acquisition of a controlling equity ownership interest in Grove. Grove, through its subsidiaries, is a leading specialty investment firm focused on consumer non-performing loans, including insolvencies (in particular, individual voluntary arrangements, or IVAs) in the United Kingdom and bank and non-bank receivables in Spain.
Colombia and Peru. In December 2013, we acquired a majority ownership interest in Refinancia, a market leader in the management of non-performing loans in Colombia and Peru. In addition to purchasing defaulted receivables, Refinancia offers portfolio management services to banks for non-performing loans. Refinancia also specializes in non-traditional niches in the geographic areas in which it operates, including providing financial solutions to individuals who have previously defaulted on their obligations, payment plan guarantee services to merchants, and loan guarantee services to financial institutions.
Tax Lien Business
Our tax lien business segment focuses on the property tax financing industry. Propel’s principal activities are the acquisition and servicing of residential and commercial tax liens on real property. Propel’s receivables secured by property tax liens include Texas tax liens, Nevada tax liens, and tax lien certificates (collectively, “Tax Liens”). With Texas and Nevada Tax Liens, Texas or Nevada property owners choose to have the taxing authority transfer their tax lien to Propel. Propel pays their

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tax lien obligation to the taxing authority and the property owner pays Propel over time at a lower interest rate than is being assessed by the taxing authority. Propel’s arrangements with Texas and Nevada property owners provide them with repayment plans that are both affordable and flexible when compared with other payment options. Propel also purchases Tax Liens in various other states directly from taxing authorities, securing rights to outstanding property tax payments, interest and penalties. In most cases, such Tax Liens continue to be serviced by the taxing authority. When the taxing authority is paid, it repays Propel the outstanding balance of the lien plus interest, which is established by statute or negotiated at the time of the purchase. During the three months ended June 30, 2014, Propel acquired a portfolio of tax liens and other assets in a transaction valued at approximately $43.0 million. The transaction strengthened Propel’s established servicing platform and expanded Propel’s operations to 22 states.
Revenue from our tax lien business segment comprised 3% and 2% of total consolidated revenues for the three and six months ended June 30, 2014, respectively, and 3% for each of the three and six months ended June 30, 2013. Operating income from our tax lien business segment comprised 3% and 2% of our total consolidated operating income for the three and six months ended June 30, 2014, respectively, and 2% for each of the three and six months ended June 30, 2013.
Purchases and Collections
Portfolio Pricing, Supply and Demand
United States Markets
Prices for portfolios offered for sale directly from credit issuers continued to remain elevated during the first half of 2014, especially for fresh portfolios, although pricing has stabilized. Fresh portfolios are portfolios that are generally transacted within six months of the consumer’s account being charged-off by the financial institution. We believe this elevated pricing is due to a reduction in the supply of charged-off accounts and continued demand in the marketplace. We believe that the reduction in supply is partially due to shifts in underwriting standards by financial institutions, which have resulted in lower volumes of charged-off accounts. We believe that this reduction in supply is also the result of certain financial institutions temporarily halting their sales of charged-off accounts while they conduct audits of debt management and recovery companies, including Encore. Although we have seen moderation in certain instances, we expect pricing will remain at elevated levels for some period of time.
We believe that smaller competitors are facing difficulties in the portfolio purchasing market because of the high cost to operate due to regulatory pressure and because the issuers are being more selective with buyers in the marketplace, resulting in consolidation within the portfolio purchasing and recovery industry. We believe this favors larger participants in this market, such as us, because the larger market participants are better able to adapt to these pressures. Furthermore, as smaller competitors limit their participation in or exit the market, it may provide additional opportunities for us to purchase portfolios from competitors or to acquire competitors directly.
United Kingdom Markets
While prices for portfolios offered for sale directly from credit issuers in the United Kingdom remain at levels higher than historical averages, as a result of a backlog caused by issuers reducing their sales volumes during the 2008-2010 time period, we believe that the supply of debt sold to debt purchasers has increased and is expected to increase further in the coming year. Additionally, over the last few years, portfolios are being sold earlier in the life cycle, and therefore, include a higher proportion of paying accounts. We expect that as a result of an increase in available funding to industry participants and lower return requirements for certain debt purchasers, pricing will remain elevated. However, we also believe that as Cabot’s business increases in scale, and with anticipated improvements in the rate of collections and improved efficiencies in collections, Cabot’s margins will remain competitive. Additionally, the acquisition of Marlin resulted in a new channel of liquidation through litigation in the United Kingdom, which will enable Cabot to collect from consumers who have the ability to pay, but are unwilling to do so. This further complements Cabot’s success with collecting on semi-performing debt, where consumers have a greater willingness to pay. We believe that the combined companies will have an enhanced ability to compete for portfolios.

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Purchases by Type
The following table summarizes the types of charged-off consumer receivable portfolios we purchased for the periods presented (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Credit card—United Kingdom(1)
$
59,061

 
$

 
$
410,380

 
$

Credit card—United States(2), (3)
166,701

 
380,423

 
282,947

 
423,837

Consumer bankruptcy receivables—United States(2)

 
39,897

 

 
39,897

Telecom—United States

 
2,793

 

 
18,150

 
$
225,762

 
$
423,113

 
$
693,327

 
$
481,884

________________________
(1)
Purchases of consumer portfolio receivables in the United Kingdom for the six months ended June 30, 2014 include $208.5 million acquired in connection with the Marlin Acquisition.
(2)
Purchases of consumer portfolio receivables for the three and six month periods ended June 30, 2013 include $383.4 million acquired in connection with the merger with Asset Acceptance Capital Corp. (“AACC”) ($347.7 million for credit card and $35.7 million for consumer bankruptcy receivables).
(3)
Purchases of consumer portfolio receivables in the United States include immaterial portfolios purchased in Latin America.
During the three months ended June 30, 2014, we invested $225.8 million to acquire portfolios, primarily charged-off credit card portfolios, with face values aggregating $3.1 billion, for an average purchase price of 7.3% of face value. This is a $197.4 million decrease in the amount invested, compared with the $423.1 million invested during the three months ended June 30, 2013, to acquire charged-off credit card, consumer bankruptcy and telecom portfolios with face values aggregating $68.9 billion, for an average purchase price of 0.6% of face value. Purchases during the three months ended June 30, 2013 included $383.4 million with a face value of $68.2 billion, for a purchase cost of 0.6% of face value, acquired in conjunction with our June 13, 2013 merger with Asset Acceptance Capital Corp. (the “AACC Merger”). The period-over-period decrease in purchases and increase in the percentage of face value was primarily related to the purchase of portfolios acquired through the AACC Merger, as described in greater detail below.
During the six months ended June 30, 2014, we invested $693.3 million to acquire portfolios, primarily charged-off credit card portfolios, with face values aggregating $7.4 billion, for an average purchase price of 9.4% of face value. Purchases of charged-off credit card portfolios include $208.5 million of portfolios acquired in conjunction with the Marlin Acquisition. During the six months ended June 30, 2013, we invested $481.9 million to acquire portfolios, primarily charged-off credit card portfolios, with face values aggregating $70.5 billion, for an average purchase price of 0.7% of face value. Purchases during the six months ended June 30, 2013 included $383.4 million with a face value of $68.2 billion, for a purchase cost of 0.6% of face value, acquired in conjunction with the AACC Merger.
Average purchase price, as a percentage of face value, varies from period to period depending on, among other things, the quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios. The increase in purchase price as a percentage of face value for the three and six months ended June 30, 2014 was primarily related to the portfolios we acquired through the AACC Merger, our acquisition of a higher percentage of fresh portfolios, and a general increase in the price of portfolios offered for sale directly from credit issuers. The lower purchase rate for the AACC portfolios is due to our acquisition of all portfolios owned by AACC, including accounts that have no value. No value accounts would typically not be included in a portfolio purchase transaction, as the sellers would remove them from the accounts being sold to us prior to sale.

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Collections by Channel
We currently utilize various business channels for the collection of our receivables. The following table summarizes the total collections by collection channel and geographic areas (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
United States:
 
 
 
 
 
 
 
Legal collections
$
155,503

 
$
133,682

 
$
306,532

 
$
255,955

Collection sites
130,788

 
116,853

 
267,313

 
243,415

Collection agencies(1)
19,512

 
27,853

 
41,413

 
49,188

Subtotal
305,803

 
278,388

 
615,258

 
548,558

United Kingdom:
 
 
 
 
 
 
 
Collection sites
54,716

 

 
100,577

 

Collection agencies
29,473

 

 
57,395

 

Legal collections
12,484

 

 
20,082

 

Subtotal
96,673

 

 
178,054

 

Other geographies:
 
 
 
 
 
 
 
Collection sites
6,804

 

 
12,642

 

Total collections
$
409,280

 
$
278,388

 
$
805,954

 
$
548,558

________________________
(1)
Collections through our collection agency channel in the United States include accounts subject to bankruptcy filings collected by others. Additionally, collection agency collections often include accounts purchased from a competitor where we maintain the collection agency servicing until the accounts can be recalled and placed in our collection channels.
Gross collections increased $130.9 million, or 47.0%, to $409.3 million during the three months ended June 30, 2014, from $278.4 million during the three months ended June 30, 2013, primarily due to collections on portfolios acquired through the AACC Merger, our July 1, 2013 acquisition of a controlling interest in Cabot (the “Cabot Acquisition”), and the Marlin Acquisition. Gross collections increased $257.4 million, or 46.9%, to $806.0 million during the six months ended June 30, 2014, from $548.6 million during the six months ended June 30, 2013, primarily due to collections on portfolios acquired through the AACC Merger, the Cabot Acquisition, and the Marlin Acquisition.
Results of Operations
On June 13, 2013, we completed the AACC Merger, on July 1, 2013, we completed the Cabot Acquisition, and on February 7, 2014, Cabot acquired Marlin. The results of operations presented below for the three and six months ended June 30, 2013 only include the results of operations of AACC since the closing date of the AACC Merger and do not include the results of operations of Cabot, as the acquisition was not completed until after June 30, 2013. The results of operations presented below for the three and six months ended June 30, 2014 include the results of the operations of Marlin since the date of the acquisition.

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Results of operations, in dollars and as a percentage of total revenue, were as follows (in thousands, except percentages):
 
Three Months Ended June 30,
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Revenue from receivable portfolios, net
$
248,231

 
92.2
 %
 
$
152,024

 
97.4
 %
Other revenues
14,149

 
5.3
 %
 
380

 
0.2
 %
Net interest income
6,815

 
2.5
 %
 
3,717

 
2.4
 %
Total revenues
269,195

 
100.0
 %
 
156,121

 
100.0
 %
Operating expenses
 
 
 
 
 
 
 
Salaries and employee benefits
64,355

 
23.9
 %
 
32,969

 
21.1
 %
Cost of legal collections
50,029

 
18.6
 %
 
44,483

 
28.5
 %
Other operating expenses
22,041

 
8.2
 %
 
13,797

 
8.9
 %
Collection agency commissions
9,153

 
3.4
 %
 
5,230

 
3.3
 %
General and administrative expenses
38,282

 
14.2
 %
 
27,601

 
17.7
 %
Depreciation and amortization
6,829

 
2.5
 %
 
2,158

 
1.4
 %
Total operating expenses
190,689

 
70.8
 %
 
126,238

 
80.9
 %
Income from operations
78,506

 
29.2
 %
 
29,883

 
19.1
 %
Other (expense) income
 
 
 
 
 
 
 
Interest expense
(43,218
)
 
(16.1
)%
 
(7,482
)
 
(4.8
)%
Other income (expense)
75

 
 %
 
(4,122
)
 
(2.6
)%
Total other expense
(43,143
)
 
(16.1
)%
 
(11,604
)
 
(7.4
)%
Income before income taxes
35,363

 
13.1
 %
 
18,279

 
11.7
 %
Provision for income taxes
(14,010
)
 
(5.2
)%
 
(7,267
)
 
(4.6
)%
Net income
21,353

 
7.9
 %
 
11,012

 
7.1
 %
Net loss attributable to noncontrolling interest
2,208

 
0.9
 %
 

 
 %
Net income attributable to Encore shareholders
$
23,561

 
8.8
 %
 
$
11,012

 
7.1
 %


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Six Months Ended June 30,
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Revenue from receivable portfolios, net
$
485,799

 
92.9
 %
 
$
292,707

 
97.4
 %
Other revenues
25,498

 
4.9
 %
 
681

 
0.2
 %
Net interest income
11,639

 
2.2
 %
 
7,319

 
2.4
 %
Total revenues
522,936

 
100.0
 %
 
300,707

 
100.0
 %
Operating expenses
 
 
 
 
 
 
 
Salaries and employee benefits
122,492

 
23.4
 %
 
61,801

 
20.6
 %
Cost of legal collections
99,854

 
19.1
 %
 
86,741

 
28.8
 %
Other operating expenses
48,464

 
9.3
 %
 
27,062

 
9.0
 %
Collection agency commissions
17,429

 
3.3
 %
 
8,559

 
2.9
 %
General and administrative expenses
74,976

 
14.3
 %
 
43,943

 
14.6
 %
Depreciation and amortization
12,946

 
2.5
 %
 
4,004

 
1.3
 %
Total operating expenses
376,161

 
71.9
 %
 
232,110

 
77.2
 %
Income from operations
146,775

 
28.1
 %
 
68,597

 
22.8
 %
Other (expense) income
 
 
 
 
 
 
 
Interest expense
(81,180
)
 
(15.5
)%
 
(14,336
)
 
(4.8
)%
Other income (expense)
340

 
 %
 
(3,963
)
 
(1.3
)%
Total other expense
(80,840
)
 
(15.5
)%
 
(18,299
)
 
(6.1
)%
Income before income taxes
65,935

 
12.6
 %
 
50,298

 
16.7
 %
Provision for income taxes
(25,752
)
 
(4.9
)%
 
(19,838
)
 
(6.6
)%
Net income
40,183

 
7.7
 %
 
30,460

 
10.1
 %
Net loss attributable to noncontrolling interest
6,558

 
1.2
 %
 

 
 %
Net income attributable to Encore shareholders
$
46,741

 
8.9
 %
 
$
30,460

 
10.1
 %
Results of Operations—Cabot
The amount of revenue and net income included in our condensed consolidated statement of income directly related to Cabot was $73.4 million and $4.2 million, respectively, for the three months ended June 30, 2014, and $135.9 million and $6.2 million, respectively, for the six months ended June 30, 2014. The revenue and loss at Janus Holdings was $73.4 million and $2.5 million, respectively, for the three months ended June 30, 2014, and $135.9 million and $9.0 million, respectively, for the six months ended June 30, 2014. The net losses recognized at Janus Holdings during the respective periods were due to the fact that Janus Holdings recognizes all interest expense related to the outstanding preferred equity certificates (“PECs”) owed to Encore and other minority shareholders, while the interest income from PECs owed to Encore is recognized at Janus Holdings’ parent company, Encore Europe Holdings, S.a.r.l. (“Encore Europe”), which is a wholly-owned subsidiary of Encore. The losses attributable to noncontrolling interests included in our condensed consolidated statement of income for the three and six months ended June 30, 2014 represent the total loss at Janus Holdings multiplied by the noncontrolling ownership interest in each period.

42

Table of Contents

The following table summarizes the operating results contributed by Cabot during the periods presented (in thousands):
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
 
Janus Holdings
 
Encore Europe (1)
 
Consolidated
 
Janus Holdings
 
Encore Europe(1)
 
Consolidated
Total revenues
$
73,385

 
$

 
$
73,385

 
$
135,905

 
$

 
$
135,905

Total operating expenses
(36,629
)
 

 
(36,629
)
 
(76,206
)
 

 
(76,206
)
Income from operations
36,756

 

 
36,756

 
59,699

 

 
59,699

Interest expense-non-PEC
(25,628
)
 

 
(25,628
)
 
(47,404
)
 

 
(47,404
)
PEC interest (expense) income
(11,051
)
 
5,391

 
(5,660
)
 
(22,093
)
 
10,758

 
(11,335
)
Other income
44

 

 
44

 
119

 

 
119

Income (loss) before income taxes
121

 
5,391

 
5,512

 
(9,679
)
 
10,758

 
1,079

Provision for income taxes
(2,992
)
 

 
(2,992
)
 
(846
)
 

 
(846
)
Net (loss) income
(2,871
)
 
5,391

 
2,520

 
(10,525
)
 
10,758

 
233

Net loss attributable to noncontrolling interests
412

 
1,227

 
1,639

 
1,510

 
4,499

 
6,009

Net (loss) income attributable to Encore
$
(2,459
)
 
$
6,618

 
$
4,159

 
$
(9,015
)
 
$
15,257

 
$
6,242

________________________
(1)
Includes only the results of operations related to Janus Holdings and therefore does not represent the complete financial performance of Encore Europe.
Non-GAAP Disclosure
In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles (“GAAP”), we provide certain historical non-GAAP financial information. Management believes that the presentation of such non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.
Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provide a more complete understanding of our financial performance, competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of these measures for comparative purposes.
Adjusted Income Per Share. Management uses non-GAAP adjusted income and adjusted income per share (which we also refer to from time to time as adjusted earnings per share), to assess operating performance, in order to highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. Adjusted income attributable to Encore excludes non-cash interest and issuance cost amortization relating to our convertible notes, one-time charges and acquisition and integration related expenses, all net of tax. The following table provides a reconciliation between income and diluted income per share attributable to Encore calculated in accordance with GAAP to adjusted income and adjusted income per share attributable to Encore, respectively. In addition, as described in Note 3, “Earnings Per Share” in the notes to our condensed consolidated financial statements, GAAP diluted earnings per share for the three and six months ended June 30, 2014, includes the effect of approximately 1.0 million and 1.2 million common shares, respectively, that are issuable upon conversion of certain convertible senior notes because the average stock price during the respective periods exceeded the conversion price of these notes. However, as described in Note 10, “Debt—Encore Convertible Senior Notes,” in the notes to our condensed consolidated financial statements, we have certain hedging transactions in place that have the effect of increasing the effective conversion price of these notes. Accordingly, while these common shares are included in our diluted earnings per share, the hedge transactions will offset the impact of this dilution and no shares will be issued unless our stock price exceeds the effective conversion price, thereby creating a discrepancy between the accounting effect of those notes under GAAP and their economic impact. We have presented the following metrics both including and excluding the dilutive effect of these convertible senior notes to better illustrate the economic impact of those notes and the related hedging transactions to shareholders, under the “Per Diluted Share-Accounting” and “Per Diluted Share-Economic” columns, respectively (in thousands, except per share data):

43

Table of Contents

 
Three Months Ended June 30,
 
2014
 
2013
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
GAAP net income attributable to Encore, as reported
$
23,561

 
$
0.86

 
$
0.89

 
$
11,012

 
$
0.44

 
$
0.44

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Convertible notes non-cash interest and issuance cost amortization, net of tax
1,694

 
0.06

 
0.06

 
529

 
0.02

 
0.02

Acquisition and integration related expenses, net of tax
3,836

 
0.14

 
0.15

 
7,509

 
0.30

 
0.30

Acquisition related other expenses, net of tax

 

 

 
2,198

 
0.09

 
0.09

Adjusted income attributable to Encore
$
29,091

 
$
1.06

 
$
1.10

 
$
21,248

 
$
0.85

 
$
0.85

 
Six Months Ended June 30,
 
2014
 
2013
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
GAAP net income attributable to Encore, as reported
$
46,741

 
$
1.68

 
$
1.76

 
$
30,460

 
$
1.24

 
$
1.24

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Convertible notes non-cash interest and issuance cost amortization, net of tax
2,985

 
0.11

 
0.11

 
1,000

 
0.04

 
0.04

Acquisition and integration related expenses, net of tax
8,194

 
0.29

 
0.31

 
8,284

 
0.33

 
0.33

Acquisition related other expenses, net of tax

 

 

 
2,198

 
0.09

 
0.09

Adjusted income attributable to Encore
$
57,920

 
$
2.08

 
$
2.18

 
$
41,942

 
$
1.70

 
$
1.70

Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before interest, taxes, depreciation and amortization, stock-based compensation expenses, portfolio amortization, one-time charges, and acquisition and integration related expenses), which is materially similar to a financial measure contained in covenants used in the Encore revolving credit and term loan facility, in the evaluation of our operations and believes that this measure is a useful indicator of our ability to generate cash collections in excess of operating expenses through the liquidation of our receivable portfolios. Adjusted EBITDA for the periods presented is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2014
 
2013
 
2014
 
2013
GAAP net income, as reported
$
21,353

 
$
11,012

 
$
40,183

 
$
30,460

Adjustments:
 
 
 
 
 
 
 
Interest expense
43,218

 
7,482

 
81,180

 
14,336

Provision for income taxes
14,010

 
7,267

 
25,752

 
19,838

Depreciation and amortization
6,829

 
2,158

 
12,946

 
4,004

Amount applied to principal on receivable portfolios
161,048

 
126,364

 
320,154

 
255,851

Stock-based compensation expense
4,715

 
2,179

 
9,551

 
5,180

Acquisition and integration related expenses
4,645

 
12,403

 
15,726

 
13,679

Acquisition related other expenses

 
3,630

 

 
3,630

Adjusted EBITDA
$
255,818

 
$
172,495

 
$
505,492

 
$
346,978


44

Table of Contents

Adjusted Operating Expenses. Management utilizes adjusted operating expenses in order to facilitate a comparison of approximate cash costs to cash collections for the portfolio purchasing and recovery business. Adjusted operating expenses for our portfolio purchasing and recovery business are calculated by starting with GAAP total operating expenses and backing out stock-based compensation expense, operating expenses related to non-portfolio purchasing and recovery business, one-time charges, and acquisition and integration related operating expenses. Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from our tax lien business and other non-reportable operating segments, as well as corporate overhead not related to our portfolio purchasing and recovery business. Adjusted operating expenses related to our portfolio purchasing and recovery business for the periods presented are as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2014
 
2013
 
2014
 
2013
GAAP total operating expenses, as reported
$
190,689

 
$
126,238

 
$
376,161

 
$
232,110

Adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
(4,715
)
 
(2,179
)
 
(9,551
)
 
(5,180
)
Operating expenses related to non-portfolio purchasing and recovery business
(26,409
)
 
(6,367
)
 
(46,241
)
 
(11,641
)
Acquisition and integration related expenses
(4,645
)
 
(12,403
)
 
(15,726
)
 
(13,679
)
Adjusted operating expenses
$
154,920

 
$
105,289

 
$
304,643

 
$
201,610

Comparison of Results of Operations
Revenues
Our revenues consist primarily of portfolio revenue, contingent fee income, and net interest income from our tax lien business.
Portfolio revenue consists of accretion revenue and zero basis revenue. Accretion revenue represents revenue derived from pools (quarterly groupings of purchased receivable portfolios) with a cost basis that has not been fully amortized. Revenue from pools with a remaining unamortized cost basis is accrued based on each pool’s effective interest rate applied to each pool’s remaining unamortized cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances. The effective interest rate is the Internal Rate of Return (“IRR”) derived from the timing and amounts of actual cash received and anticipated future cash flow projections for each pool. All collections realized after the net book value of a portfolio has been fully recovered, or Zero Basis Portfolios, are recorded as revenue, or Zero Basis Revenue. We account for our investment in receivable portfolios utilizing the interest method in accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality. We incur allowance charges when actual cash flows from our receivable portfolios underperform compared to our expectations. Factors that may contribute to underperformance and to the recording of valuation allowances may include both internal as well as external factors. External factors that may have an impact on our collections include new laws or regulations, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors that may have an impact on our collections include operational activities such as the productivity of our collection staff.
Interest income, net of related interest expense represents net interest income on receivables secured by property tax liens.

45

Table of Contents

The following tables summarize collections, revenue, end of period receivable balance and other related supplemental data, by year of purchase from our portfolio purchasing and recovery segment (in thousands, except percentages):
 
Three Months Ended June 30, 2014
 
As of
June 30, 2014
 
Collections(1)
 
Gross
Revenue(2)
 
Revenue
Recognition
Rate(3)
 
Net
Portfolio
Allowance Reversal
 
Revenue
% of Total
Revenue
 
Unamortized
Balances
 
Monthly
IRR
United States (4):
 
 
 
 
 
 
 
 
 
 
 
 
 
ZBA (5)
$
6,708

 
$
3,402

 
50.7
%
 
$
3,306

 
1.4
%
 
$

 

2006
1,019

 
198

 
19.4
%
 

 
0.1
%
 
695

 
5.3
%
2007
2,294

 
953

 
41.5
%
 
116

 
0.4
%
 
3,317

 
7.3
%
2008
7,893

 
3,889

 
49.3
%
 

 
1.6
%
 
10,604

 
9.5
%
2009
15,841

 
11,671

 
73.7
%
 

 
4.8
%
 
13,046

 
23.8
%
2010
30,451

 
23,049

 
75.7
%
 

 
9.4
%
 
32,753

 
20.5
%
2011
42,145

 
29,046

 
68.9
%
 

 
11.9
%
 
73,385

 
11.8
%
2012
70,871

 
36,343

 
51.3
%
 

 
14.8
%
 
200,479

 
5.4
%
2013
113,300

 
59,641

 
52.6
%
 

 
24.4
%
 
381,923

 
4.8
%
2014
22,085

 
10,574

 
47.9
%
 

 
4.3
%
 
268,803

 
2.2
%
Subtotal
312,607

 
178,766

 
57.2
%
 
3,422

 
73.0
%
 
985,005

 
5.0
%
United Kingdom:
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
63,135

 
42,563

 
67.4
%
 

 
17.4
%
 
598,966

 
2.4
%
2014
33,538

 
23,480

 
70.0
%
 

 
9.6
%
 
404,014

 
2.2
%
Subtotal
96,673

 
66,043

 
68.3
%
 

 
27.0
%
 
1,002,980

 
2.3
%
Total
$
409,280

 
$
244,809

 
59.8
%
 
$
3,422

 
100.0
%
 
$
1,987,985

 
3.6
%

46

Table of Contents

 
Three Months Ended June 30, 2013
 
As of
June 30, 2013
 
Collections(1)
 
Gross
Revenue(2)
 
Revenue
Recognition
Rate(3)
 
Net
Portfolio
Allowance Reversal
 
Revenue
% of Total
Revenue
 
Unamortized
Balances
 
Monthly
IRR
ZBA(5)
$
7,836

 
$
4,743

 
60.5
%
 
$
3,095

 
3.2
%
 
$

 

2005
114

 
6

 
5.3
%
 

 
%
 

 
5.7
%
2006
2,518

 
902

 
35.8
%
 
57

 
0.6
%
 
4,856

 
5.1
%
2007
3,270

 
1,400

 
42.8
%
 
237

 
0.9
%
 
7,333

 
5.5
%
2008
11,525

 
6,415

 
55.7
%
 
285

 
4.3
%
 
24,565

 
7.6
%
2009
21,698

 
13,684

 
63.1
%
 

 
9.2
%
 
30,658

 
12.7
%
2010
42,374

 
26,205

 
61.8
%
 

 
17.7
%
 
71,433

 
10.6
%
2011
60,511

 
34,535

 
57.1
%
 

 
23.3
%
 
138,462

 
7.4
%
2012
93,093

 
42,142

 
45.3
%
 

 
28.4
%
 
357,596

 
3.6
%
2013
35,449

 
18,318

 
51.7
%
 

 
12.4
%
 
461,795

 
4.2
%
Total
$
278,388

 
$
148,350

 
53.3
%
 
$
3,674

 
100.0
%
 
$
1,096,698

 
5.1
%
 
Six Months Ended June 30, 2014
 
As of
June 30, 2014
 
Collections(1)
 
Gross
Revenue(2)
 
Revenue
Recognition
Rate(3)
 
Net
Portfolio
Allowance Reversal
 
Revenue
% of Total
Revenue
 
Unamortized
Balances
 
Monthly
IRR
United States (4):
 
 
 
 
 
 
 
 
 
 
 
 
 
ZBA (5)
$
13,219

 
$
6,993

 
52.9
%
 
$
6,226

 
1.5
%
 
$

 

2006
2,306

 
536

 
23.2
%
 

 
0.1
%
 
695

 
5.3
%
2007
4,632

 
2,180

 
47.1
%
 
116

 
0.4
%
 
3,317

 
7.3
%
2008
16,266

 
8,951

 
55.0
%
 

 
1.9
%
 
10,604

 
9.5
%
2009
32,341

 
24,411

 
75.5
%
 
310

 
5.1
%
 
13,046

 
23.8
%
2010
62,414

 
45,187

 
72.4
%
 

 
9.4
%
 
32,753

 
20.5
%
2011
87,794

 
58,291

 
66.4
%
 

 
12.2
%
 
73,385

 
11.8
%
2012
149,729

 
73,700

 
49.2
%
 

 
15.4
%
 
200,479

 
5.4
%
2013
233,072

 
124,078

 
53.2
%
 

 
25.9
%
 
381,923

 
4.8
%
2014
26,127

 
12,547

 
48.0
%
 

 
2.6
%
 
268,803

 
2.2
%
Subtotal
627,900

 
356,874

 
56.8
%
 
6,652

 
74.5
%
 
985,005

 
5.0
%
United Kingdom:
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
126,729

 
85,936

 
67.8
%
 

 
17.9
%
 
598,966

 
2.4
%
2014
51,325

 
36,337

 
70.8
%
 

 
7.6
%
 
404,014

 
2.2
%
Subtotal
178,054

 
122,273

 
68.7
%
 

 
25.5
%
 
1,002,980

 
2.3
%
Total
$
805,954

 
$
479,147

 
59.5
%
 
$
6,652

 
100.0
%
 
$
1,987,985

 
3.6
%

47

Table of Contents

 
Six Months Ended June 30, 2013
 
As of
June 30, 2013
 
Collections(1)
 
Gross
Revenue(2)
 
Revenue
Recognition
Rate(3)
 
Net
Reversal
(Portfolio
Allowance)
 
Revenue
% of Total
Revenue
 
Unamortized
Balances
 
Monthly
IRR
ZBA(5)
$
13,448

 
$
9,405

 
69.9
%
 
$
4,044

 
3.3
%
 
$

 

2005
2,364

 
239

 
10.1
%
 
10

 
0.1
%
 

 
5.7
%
2006
5,021

 
2,042

 
40.7
%
 
(402
)
 
0.7
%
 
4,856

 
5.1
%
2007
6,648

 
2,954

 
44.4
%
 
580

 
1.0
%
 
7,333

 
5.5
%
2008
23,639

 
13,446

 
56.9
%
 
448

 
4.7
%
 
24,565

 
7.6
%
2009
44,930

 
28,379

 
63.2
%
 

 
9.8
%
 
30,658

 
12.7
%
2010
87,598

 
54,597

 
62.3
%
 

 
18.9
%
 
71,433

 
10.6
%
2011
127,747

 
70,883

 
55.5
%
 

 
24.6
%
 
138,462

 
7.4
%
2012
197,265

 
85,437

 
43.3
%
 

 
29.7
%
 
357,596

 
3.6
%
2013
39,898

 
20,645

 
51.7
%
 

 
7.2
%
 
461,795

 
4.2
%
Total
$
548,558

 
$
288,027

 
52.5
%
 
$
4,680

 
100.0
%
 
$
1,096,698

 
5.1
%
________________________
(1)
Does not include amounts collected on behalf of others.
(2)
Gross revenue excludes the effects of net portfolio allowance or net portfolio allowance reversals.
(3)
Revenue recognition rate excludes the effects of net portfolio allowance or net portfolio allowance reversals.
(4)
United States data includes immaterial results from Latin America.
(5)
ZBA revenue typically has a 100% revenue recognition rate. However, collections on ZBA pool groups where a valuation allowance remains must first be recorded as an allowance reversal until the allowance for that pool group is zero. Once the entire valuation allowance is reversed, the revenue recognition rate will become 100%.
Total revenues were $269.2 million during the three months ended June 30, 2014, an increase of $113.1 million, or 72.4%, compared to total revenues of $156.1 million during the three months ended June 30, 2013. Total revenues were $522.9 million during the six months ended June 30, 2014, an increase of $222.2 million, or 73.9%, compared to total revenues of $300.7 million during the six months ended June 30, 2013.
Accretion revenue from our portfolio purchasing and recovery segment was $248.2 million during the three months ended June 30, 2014, an increase of $96.2 million, or 63.3%, compared to revenue of $152.0 million during the three months ended June 30, 2013. Accretion revenue from our portfolio purchasing and recovery segment was $485.8 million during the six months ended June 30, 2014, an increase of $193.1 million, or 66.0%, compared to revenue of $292.7 million during the six months ended June 30, 2013. The increase in portfolio purchase and recovery revenue during the three and six months ended June 30, 2014 compared to 2013 was due to additional accretion revenue associated with a higher portfolio balance, primarily associated with portfolios acquired through the Cabot Acquisition, the AACC Merger and the Marlin Acquisition, and increases in yields on certain pool groups due to over-performance, offset by lower yields on recently formed pool groups.
During the three months ended June 30, 2014, we recorded a portfolio allowance reversal of $3.4 million, compared to a portfolio allowance reversal of $3.7 million during the three months ended June 30, 2013. During the six months ended June 30, 2014, we recorded a portfolio allowance reversal of $6.7 million, compared to a net portfolio allowance reversal of $4.7 million during the six months ended June 30, 2013. The recording of net allowance charge reversals during the three and six months ended June 30, 2014 and 2013 was primarily due to increased collections on our ZBA portfolios as a result of an improving economy in addition to operational improvements which allowed us to assist our customers to repay their obligations. Additionally, our refined valuation methodologies have limited the amount of valuation charges necessary during recent periods.
Other revenues primarily represent contingent fee income at our Cabot subsidiary and Refinancia subsidiary earned on accounts collected on behalf of others, primarily credit originators. This contingent fee-based revenue was $14.1 million and $25.5 million for the three and six months ended June 30, 2014, respectively.
Net interest income from our tax lien business segment was $6.8 million and $11.6 million for the three and six months ended June 30, 2014, respectively. Net interest income from our tax lien business segment was $3.7 million and $7.3 million for the three and six months ended June 30, 2013, respectively. The increase in revenue for both the three and six month periods was due to an increase in the balance of receivables secured by property tax liens.

48

Table of Contents

Operating Expenses
Total operating expenses were $190.7 million during the three months ended June 30, 2014, an increase of $64.5 million, or 51.1%, compared to total operating expenses of $126.2 million during the three months ended June 30, 2013.
Total operating expenses were $376.2 million during the six months ended June 30, 2014, an increase of $144.1 million, or 62.1%, compared to total operating expenses of $232.1 million during the six months ended June 30, 2013.
Operating expenses are explained in more detail as follows:
Salaries and Employee Benefits
Salaries and employee benefits increased $31.4 million, or 95.2%, to $64.4 million during the three months ended June 30, 2014, from $33.0 million during the three months ended June 30, 2013. The increase was primarily the result of increases in headcount as a result of the Cabot Acquisition, the AACC Merger, the Marlin Acquisition and increases in headcount and related compensation expense to support our growth. Salaries and employee benefits related to our internal legal channel in the United States were approximately $6.0 million and $3.3 million for the three months June 30, 2014 and 2013, respectively. The increase was a result of our deliberate efforts to expand our internal legal operations.
Salaries and employee benefits increased $60.7 million, or 98.2%, to $122.5 million during the six months ended June 30, 2014, from $61.8 million during the six months ended June 30, 2013. The increase was primarily the result of increases in headcount as a result of the Cabot Acquisition, the AACC Merger, the Marlin Acquisition and increases in headcount and related compensation expense to support our growth. Salaries and employee benefits related to our internal legal channel in the United States were approximately $11.8 million and $6.1 million for the six months ended June 30, 2014 and 2013, respectively. The increase was a result of our deliberate efforts to expand our internal legal operations.
Stock-based compensation increased $2.0 million, or 91.6% to $4.2 million during the three months ended June 30, 2014, from $2.2 million during the three months ended June 30, 2013. This increase was primarily attributable to the higher fair value of equity awards granted in recent periods due to an increase in our stock price and an increase in the number of shares granted.
Stock-based compensation increased $4.4 million, or 84.4% to $9.6 million during the six months ended June 30, 2014, from $5.2 million during the six months ended June 30, 2013. This increase was primarily attributable to the higher fair value of equity awards granted in recent periods due to an increase in our stock price and an increase in the number of shares granted.
Salaries and employee benefits broken down between the reportable segments are as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Salaries and employee benefits:
 
 
 
 
 
 
 
Portfolio purchasing and recovery
$
62,744

 
$
31,534

 
$
119,142

 
$
58,948

Tax lien business
1,611

 
1,435

 
3,350

 
2,853

 
$
64,355

 
$
32,969

 
$
122,492

 
$
61,801

Cost of Legal Collections—Portfolio Purchasing and Recovery
The cost of legal collections increased $5.5 million, or 12.5%, to $50.0 million during the three months ended June 30, 2014, compared to $44.5 million during the three months ended June 30, 2013. These costs represent contingent fees paid to our nationwide network of attorneys and costs of litigation in the United States. The increase in the cost of legal collections was primarily the result of an increase of $34.3 million, or 25.7%, in gross collections through our legal channels. Gross legal collections were $168.0 million during the three months ended June 30, 2014, up from $133.7 million collected during the three months ended June 30, 2013. The cost of legal collections decreased as a percentage of gross collections through this channel to 29.8% during the three months ended June 30, 2014 from 33.3% during the same period in the prior year. This decrease was primarily due to increased collections as a result of our deliberate efforts to expand our internal legal channel, for which we do not pay a commission. Additionally, the decrease was partially attributable to the lower cost of legal collections through Marlin, our indirectly owned subsidiary in the United Kingdom.
The cost of legal collections increased $13.1 million, or 15.1%, to $99.9 million during the six months ended June 30, 2014, compared to $86.7 million during the six months ended June 30, 2013. These costs represent contingent fees paid to our nationwide network of attorneys and costs of litigation in the United States. The increase in the cost of legal collections was primarily the result of an increase of $70.7 million, or 27.6%, in gross collections through our legal channels. Gross legal

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collections were $326.6 million during the six months ended June 30, 2014, up from $256.0 million collected during the six months ended June 30, 2013. The cost of legal collections decreased as a percentage of gross collections through this channel to 30.6% during the six months ended June 30, 2014 from 33.9% during the same period in the prior year. This decrease was primarily due to increased collections as a result of our deliberate efforts to expand our internal legal channel, for which we do not pay a commission. Additionally, the decrease was partially attributable to the lower cost of legal collections through Marlin, our indirectly owned subsidiary in the United Kingdom.
The following table summarizes our legal collection channel performance and related direct costs (in thousands, except percentages):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
United States:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collections:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collections - legal outsourcing
$
125,564

 
80.7
%
 
$
116,187

 
86.9
%
 
$
245,297

 
80.0
%
 
$
228,829

 
89.4
%
Collections - internal legal
29,939

 
19.3
%
 
17,495

 
13.1
%
 
61,235

 
20.0
%
 
27,126

 
10.6
%
Collections - legal networks
$
155,503

 
100.0
%
 
$
133,682

 
100.0
%
 
$
306,532

 
100.0
%
 
$
255,955

 
100.0
%
Costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commissions - legal outsourcing
$
31,791

 
25.3
%
 
$
30,340

 
26.1
%
 
$
62,419

 
25.4
%
 
$
59,150

 
25.8
%
Court cost expense - legal outsourcing(1)
11,001

 
8.8
%
 
9,344

 
8.0
%
 
23,633

 
9.6
%
 
19,359

 
8.5
%
Direct legal cost - internal legal
3,964

 
 
 
4,209

 
 
 
8,322

 

 
6,877

 
 
Other(2)
801

 
 
 
590

 
 
 
1,551

 

 
1,355

 
 
Direct costs - legal networks
47,557

 
30.6
%
 
44,483

 
33.3
%
 
95,925

 
31.3
%
 
86,741

 
33.9
%
United Kingdom:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collections - legal networks
12,484

 
 
 

 
 
 
20,082

 


 

 
 
Direct cost - legal networks
2,472

 
19.8
%
 

 

 
3,929

 
19.6
%
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total collections - legal networks
$
167,987

 
 
 
$
133,682

 
 
 
$
326,614

 
 
 
$
255,955

 
 
Total direct costs - legal networks(3)
$
50,029

 
29.8
%
 
$
44,483

 
33.3
%
 
$
99,854

 
30.6
%
 
$
86,741

 
33.9
%
________________________
(1)
We advance certain out-of-pocket court costs and capitalize these costs in our consolidated financial statements and provide a reserve and corresponding court cost expense for the costs that we believe will be ultimately uncollectible. This amount includes changes in our anticipated recovery rate of court costs expensed.
(2)
Other costs consist of costs related to counter claims and legal network subscription fees.
(3)
Total direct costs—legal networks does not include internal legal channel employee salaries and benefits and other related direct operating expenses. These expenses were $8.1 million and $5.0 million for the three months ended June 30, 2014 and 2013, respectively, and $15.9 million and $9.0 million for the six months ended June 30, 2014 and 2013, respectively.
Other Operating Expenses
Other operating expenses increased $8.2 million, or 59.8%, to $22.0 million during the three months ended June 30, 2014, from $13.8 million during the three months ended June 30, 2013. The increase was primarily the result of costs associated with the AACC Merger, the Cabot Acquisition, and the Marlin Acquisition.
Other operating expenses increased $21.4 million, or 79.1%, to $48.5 million during the six months ended June 30, 2014, from $27.1 million during the six months ended June 30, 2013. The increase was primarily the result of costs associated with the AACC Merger, the Cabot Acquisition, and the Marlin Acquisition.

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Other operating expenses broken down between the reportable segments are as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Other operating expenses:
 
 
 
 
 
 
 
Portfolio purchasing and recovery
$
20,524

 
$
12,681

 
$
45,820

 
$
24,992

Tax lien business
1,517

 
1,116

 
2,644

 
2,070

 
$
22,041

 
$
13,797

 
$
48,464

 
$
27,062

Collection Agency Commissions—Portfolio Purchasing and Recovery
During the three months ended June 30, 2014, we incurred $9.2 million in commissions to third-party collection agencies, or 18.7% of the related gross collections of $49.0 million. During the period, the commission rate as a percentage of related gross collections was 22.5% and 16.2% for our collection outsourcing channels in the United States and United Kingdom, respectively. During the three months ended June 30, 2013, we incurred $5.2 million in commissions, or 18.8%, of the related gross collections of $27.9 million in the United States. The increase in the net commission rate as a percentage of the related gross collections in the United States from the prior period was primarily due to the lower commission rates on purchased bankruptcy receivable portfolios which, during the three months ended June 30, 2013, represented a higher percentage of our third-party collections. The lower overall net commission rate during the three months ended June 30, 2014 was driven by lower commission rates for collection agency outsourcing in the United Kingdom as compared to the commission rates in the United States.
During the six months ended June 30, 2014, we incurred $17.4 million in commissions to third-party collection agencies, or 17.6% of the related gross collections of $98.8 million. During the period, the commission rate as a percentage of related gross collections was 19.5% and 16.3% for our collection outsourcing channels in the United States and United Kingdom, respectively. During the six months ended June 30, 2013, we incurred $8.6 million in commissions, or 17.4%, of the related gross collections of $49.2 million in the United States. The increase in the net commission rate as a percentage of the related gross collections in the United States from the prior period was primarily due to the lower commission rates on purchased bankruptcy receivable portfolios which, during the six months ended June 30, 2013, represented a higher percentage of our third-party collections. The lower overall net commission rate during the six months ended June 30, 2014 was driven by lower commission rates for collection agency outsourcing in the United Kingdom as compared to the commission rates in the United States.
General and Administrative Expenses
General and administrative expenses increased $10.7 million, or 38.7%, to $38.3 million during the three months ended June 30, 2014, from $27.6 million during the three months ended June 30, 2013. The increase was primarily the result of costs associated with the AACC Merger, the Cabot Acquisition, the Marlin Acquisition, and general increases in expenses in order to support our growth. General and administrative expenses include one-time acquisition and integration related costs of $4.6 million and $12.4 million for the three months ended June 30, 2014 and 2013, respectively.
General and administrative expenses increased $31.0 million, or 70.6%, to $75.0 million during the six months ended June 30, 2014, from $43.9 million during the six months ended June 30, 2013. The increase was primarily the result of costs associated with the AACC Merger, the Cabot Acquisition, the Marlin Acquisition, and general increases in expenses in order to support our growth. General and administrative expenses include one-time acquisition and integration related costs of $15.7 million and $13.7 million for the six months ended June 30, 2014 and 2013, respectively.
General and administrative expenses broken down between the reportable segments are as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
General and administrative expenses:
 
 
 
 
 
 
 
Portfolio purchasing and recovery
$
36,634

 
$
26,864

 
$
72,696

 
$
42,556

Tax lien business
1,648

 
737

 
2,280

 
1,387

 
$
38,282

 
$
27,601

 
$
74,976

 
$
43,943


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Depreciation and Amortization
Depreciation and amortization expense increased $4.7 million, or 216.5%, to $6.8 million during the three months ended June 30, 2014, from $2.2 million during the three months ended June 30, 2013. The increase during the three months ended June 30, 2013 was primarily related to increased depreciation expense resulting from the acquisition of fixed assets in the current and prior years and additional depreciation and amortization expenses resulting from the AACC Merger, the Cabot Acquisition, and the Marlin Acquisition.
Depreciation and amortization expense increased $8.9 million, or 223.3%, to $12.9 million during the six months ended June 30, 2014, from $4.0 million during the six months ended June 30, 2013. The increase during the six months ended June 30, 2013 was primarily related to increased depreciation expense resulting from the acquisition of fixed assets in the current and prior years and additional depreciation and amortization expenses resulting from the AACC Merger, the Cabot Acquisition, and the Marlin Acquisition.
Cost per Dollar Collected—Portfolio Purchasing and Recovery
The following tables summarize our cost per dollar collected (in thousands, except percentages):
 
Three Months Ended June 30,
 
2014
 
2013
 
Collections
 
Cost
 
Cost Per
Channel
Dollar
Collected
 
Cost Per
Total
Dollar
Collected
 
Collections
 
Cost
 
Cost Per
Channel
Dollar
Collected
 
Cost Per
Total
Dollar
Collected
United States:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collection sites(1)
$
130,788

 
$
8,330

 
6.4
%
 
2.7
%
 
$
116,853

 
$
7,173

 
6.1
%
 
2.5
%
Legal outsourcing
125,564

 
43,595

 
34.7
%
 
14.3
%
 
116,187

 
40,309

 
34.7
%
 
14.5
%
Internal legal(2)
29,939

 
12,064

 
40.3
%
 
3.9
%
 
17,495

 
8,873

 
50.7
%
 
3.2
%
Collection agencies
19,512

 
4,388

 
22.5
%
 
1.4
%
 
27,853

 
5,230

 
18.8
%
 
1.9
%
Other indirect costs(3)

 
55,173

 

 
18.1
%
 

 
43,704

 

 
15.7
%
Subtotal
305,803

 
123,550

 
 
 
40.4
%
 
278,388

 
105,289

 
 
 
37.8
%
United Kingdom:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collection sites(1)
54,716

 
3,773

 
6.9
%
 
3.9
%
 

 

 

 

Legal outsourcing
12,484

 
2,470

 
19.8
%
 
2.6
%
 

 

 

 

Collection agencies
29,473

 
4,765

 
16.2
%
 
4.9
%
 

 

 

 

Other indirect costs(3)

 
18,280

 

 
18.9
%
 

 

 

 

Subtotal
96,673

 
29,288

 
 
 
30.3
%
 

 

 
 
 

Other geographies:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collection sites(1)
6,804

 
815

 
12.0
%
 
12.0
%
 

 

 

 

Other indirect costs(3)

 
1,267

 

 
18.6
%
 

 

 

 

Subtotal
6,804

 
2,082

 
 
 
30.6
%
 

 

 
 
 

Total(4)
$
409,280

 
$
154,920

 
 
 
37.9
%
 
$
278,388

 
$
105,289

 
 
 
37.8
%

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Table of Contents

 
Six Months Ended June 30,
 
2014
 
2013
 
Collections
 
Cost
 
Cost Per
Channel
Dollar
Collected
 
Cost Per
Total
Dollar
Collected
 
Collections
 
Cost
 
Cost Per
Channel
Dollar
Collected
 
Cost Per
Total
Dollar
Collected
United States:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collection sites(1)
$
267,313

 
$
16,740

 
6.3
%
 
2.7
%
 
$
243,415

 
$
14,416

 
5.9
%
 
2.6
%
Legal outsourcing
245,297

 
87,605

 
35.7
%
 
14.2
%
 
228,829

 
79,899

 
34.9
%
 
14.6
%
Internal legal(2)
61,235

 
24,253

 
39.6
%
 
3.9
%
 
27,126

 
15,439

 
56.9
%
 
2.8
%
Collection agencies
41,413

 
8,094

 
19.5
%
 
1.3
%
 
49,188

 
8,559

 
17.4
%
 
1.6
%
Other indirect costs(3)

 
111,217

 

 
18.2
%
 

 
83,297

 

 
15.2
%
Subtotal
615,258

 
247,909

 
 
 
40.3
%
 
548,558

 
201,610

 
 
 
36.8
%
United Kingdom:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collection sites(1)
100,577

 
6,496

 
6.5
%
 
3.6
%
 

 

 

 

Legal outsourcing
20,082

 
3,927

 
19.6
%
 
2.2
%
 

 

 

 

Collection agencies
57,395

 
9,335

 
16.3
%
 
5.2
%
 

 

 

 

Other indirect costs(3)


 
33,019

 

 
18.5
%
 

 

 

 

Subtotal
178,054

 
52,777

 
 
 
29.6
%
 

 

 


 

Other geographies:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collection sites(1)
12,642

 
1,679

 
13.3
%
 
13.3
%
 

 

 

 

Other indirect costs(3)


 
2,278

 

 
18.0
%
 

 

 

 

Subtotal
12,642

 
3,957

 
 
 
31.3
%
 

 

 
 
 

Total(4)
$
805,954

 
$
304,643

 
 
 
37.8
%
 
$
548,558

 
$
201,610

 
 
 
36.8
%
________________________
(1)
Cost in collection sites represents only account managers and their supervisors’ salaries, variable compensation, and employee benefits. Collection sites in the United States include collection site expenses for our India and Costa Rica call centers.
(2)
Cost in internal legal channel represents court costs expensed, internal legal channel employee salaries and benefits, and other related direct operating expenses.
(3)
Other indirect costs represent non-collection site salaries and employee benefits, general and administrative expenses, other operating expenses and depreciation and amortization.
(4)
Total cost represents all operating expenses, excluding stock-based compensation expense, operating expenses related to non-portfolio purchasing and recovery business, one-time charges, and acquisition and integration related operating expenses. We include this information in order to facilitate a comparison of approximate cash costs to cash collections for the debt purchasing business in the periods presented. Refer to the “Non-GAAP Disclosure” section for further details.
During the three months ended June 30, 2014, overall cost per dollar collected increased slightly by 10 basis points to 37.9% of gross collections from 37.8% of gross collections during the three months ended June 30, 2013. This increase was primarily due to the increased cost to collect in the United States, offset by lower cost to collect at our Cabot subsidiary in the United Kingdom. During the same periods, cost to collect in the United States increased to 40.4% from 37.8%. Over time, we expect our cost to collect to remain competitive, but also expect that it will fluctuate from quarter to quarter based on seasonality, acquisitions, the cost of investments in new operating initiatives, and the ongoing management of the changing regulatory and legislative environment.
The increase in total cost to collect in the United States was due to several factors, including:
The cost from our collection sites, which includes account manager salaries, variable compensation, and employee benefits, as a percentage of total collections in the United States, increased slightly to 2.7% during the three months ended June 30, 2014 from 2.5% during the three months ended June 30, 2013 and, as a percentage of our site collections, increased to 6.4% during the three months ended June 30, 2014, from 6.1% during the three months ended June 30, 2013. The increase in cost as a percentage of site collections, through our collection sites in the United States, was primarily due to the higher cost to collect attributable to AACC portfolio, which is only included in the prior year’s calculation since the completion of the AACC Merger on June 13, 2013.
The cost of legal collections through our internal legal channel, as a percentage of total collections in the United States, increased to 3.9% during the three months ended June 30, 2014, from 3.2% during the three months ended June 30,

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2013 and, as a percentage of channel collections, decreased to 40.3% during the three months ended June 30, 2014, from 50.7% during the three months ended June 30, 2013. This increase in cost as a percentage of total collections was primarily due to increased collections as a result of our continued expansion of our internal legal channel. The decrease in cost as a percentage of channel collections was primarily due to increased productivity in our internal legal platform, which we expect to continue as the channel matures.
Other costs not directly attributable to specific channel collections (other indirect costs) increased to 18.1% for the three months ended June 30, 2014, from 15.7% for the three months ended June 30, 2013. These costs include non-collection site salaries and employee benefits, general and administrative expenses, other operating expenses, and depreciation and amortization. The dollar increase, and the increase in cost per dollar collected, were due to several factors, including increases in corporate legal expense, headcount, and general and administrative expenses necessary to support our growth in addition to investments in initiatives relating to the evolving regulatory environment.
The increase in cost per dollar collected in the United States was partially offset due to the following factors:
The cost of legal collections through our legal outsourcing channel, as a percentage of total collections in the United States, decreased to 14.3% during the three months ended June 30, 2014, from 14.5% during the three months ended June 30, 2013 and, as a percentage of channel collections, remained consistent at 34.7%. The decrease in the cost of legal collections as a percentage of total collections was primarily due to a decrease in this channel’s collections as a percentage of total collections as a result of increased reliance on our internal legal channel.
Collection agency commissions, as a percentage of total collections in the United States, decreased to 1.4% during the three months ended June 30, 2014, from 1.9% during the same period in the prior year. Our collection agency commission rate increased to 22.5% during the three months ended June 30, 2014, from 18.8% during the same period in the prior year. The decrease in the collection agency commissions as a percentage of total collections was primarily related to a decrease in this channel’s collections as a percentage of total collections. The increase in commission rates was attributable to lower commission rates in the prior year. During the three months ended June 30, 2013, we experienced an increase in collection agency collections as a result of increased purchases of bankruptcy portfolios, which are primarily serviced by an outside service provider. Commission rates for bankruptcy portfolios are lower than commission rates on non-bankruptcy portfolios.
During the six months ended June 30, 2014, overall cost per dollar collected increased by 100 basis points to 37.8% of gross collections from 36.8% of gross collections during the six months ended June 30, 2013. This increase was primarily due to the increased cost to collect in the United States, offset by lower cost to collect at our Cabot subsidiary in the United Kingdom. During the same periods, cost to collect in the United States increased to 40.3% from 36.8%. Over time, we expect our cost to collect to remain competitive, but also expect that it will fluctuate from quarter to quarter based on seasonality, acquisitions, the cost of investments in new operating initiatives, and the ongoing management of the changing regulatory and legislative environment.
The increase in total cost to collect in the United States was due to several factors, including:
The cost from our collection sites, which includes account manager salaries, variable compensation, and employee benefits, as a percentage of total collections in the United States, increased slightly to 2.7% during the six months ended June 30, 2014 from 2.6% during the six months ended June 30, 2013 and, as a percentage of our site collections, increased to 6.3% during the six months ended June 30, 2014, from 5.9% during the six months ended June 30, 2013. The increase in cost as a percentage of site collections, through our collection sites in the United States, was primarily due to the higher cost to collect attributable to AACC which is only included in the prior year’s calculation since the completion of the AACC Merger on June 13, 2013.
The cost of legal collections through our internal legal channel, as a percentage of total collections in the United States, increased to 3.9% during the six months ended June 30, 2014, from 2.8% during the six months ended June 30, 2013 and, as a percentage of channel collections, decreased to 39.6% during the six months ended June 30, 2014, from 56.9% during the six months ended June 30, 2013. This increase in cost as a percentage of total collections was primarily due to increased collections as a result of our continued expansion of our internal legal channel. The decrease in cost as a percentage of channel collections was primarily due to increased productivity in our internal legal platform, which we expect to continue as the channel matures.
Other costs not directly attributable to specific channel collections (other indirect costs) increased to 18.2% for the six months ended June 30, 2014, from 15.2% for the six months ended June 30, 2013. These costs include non-collection site salaries and employee benefits, general and administrative expenses, other operating expenses, and depreciation and amortization. The dollar increase, and the increase in cost per dollar collected, were due to several factors, including increases in corporate legal expense, headcount, and general and administrative expenses necessary to support our growth in addition to investments in initiatives relating to the evolving regulatory environment.

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The increase in cost per dollar collected in the United States was partially offset due to the following factors:
The cost of legal collections through our legal outsourcing channel, as a percentage of total collections in the United States, decreased to 14.2% during the six months ended June 30, 2014, from 14.6% during the six months ended June 30, 2013 and, as a percentage of channel collections, increased to 35.7% from 34.9% compared to the same period in the prior year. The decrease in the cost of legal collections as a percentage of total collections was primarily related to a decrease in this channel’s collections as a percentage of total collections as a result of increased reliance on our internal legal channel. The increase in the cost of legal collections as a percentage of channel collections was due to a higher cost to collect through the legal channel at our AACC subsidiary.
Collection agency commissions, as a percentage of total collections in the United States, decreased to 1.3% during the six months ended June 30, 2014, from 1.6% during the same period in the prior year. Our collection agency commission rate increased to 19.5% during the six months ended June 30, 2014, from 17.4% during the same period in the prior year. The decrease in collection agency commissions as a percentage of total collections was primarily related to a decrease in this channel’s collections as a percentage of total collections. The increase in commission rates was attributable to lower commission rates in the prior year. During the six months ended June 30, 2013, we experienced an increase in collection agency collections as a result of increased purchases of bankruptcy portfolios, which are primarily serviced by an outside service provider. Commission rates for bankruptcy portfolios are lower than commission rates on non-bankruptcy portfolios.
Interest Expense—Portfolio Purchasing and Recovery
Interest expense increased $35.7 million to $43.2 million during the three months ended June 30, 2014, from $7.5 million during the three months ended June 30, 2013. Interest expense increased $66.8 million to $81.2 million during the six months ended June 30, 2014, from $14.3 million during the six months ended June 30, 2013.
The following table summarizes our interest expense (in thousands, except percentages):
 
Three Months Ended June 30,
 
2014
 
2013
 
$ Change
 
% Change
Stated interest on debt obligations
$
36,184

 
$
5,759

 
$
30,425

 
528.3
 %
Interest expense on preferred equity certificates
5,660

 

 
5,660

 

Amortization of loan fees and other loan costs
1,766

 
1,012

 
754

 
74.5
 %
(Accretion of debt premium), net of amortization of debt discount
(392
)
 
711

 
(1,103
)
 
(155.1
)%
Total interest expense
$
43,218

 
$
7,482

 
$
35,736

 
477.6
 %
 
Six Months Ended June 30,
 
2014
 
2013
 
$ Change
 
% Change
Stated interest on debt obligations
$
65,516

 
$
11,237

 
$
54,279

 
483.0
 %
Interest expense on preferred equity certificates
11,335

 

 
11,335

 

Amortization of loan fees and other loan costs
5,198

 
1,782

 
3,416

 
191.7
 %
(Accretion of debt premium), net of amortization of debt discount
(869
)
 
1,317

 
(2,186
)
 
(166.0
)%
Total interest expense
$
81,180

 
$
14,336

 
$
66,844

 
466.3
 %
The payment of the accumulated interest on the preferred equity certificates issued in connection with the Cabot Acquisition will only be satisfied in connection with the disposition of the noncontrolling interests of J.C. Flowers and management.
The increase in interest expense was primarily attributable to interest expense incurred at Cabot during the three and six months ended June 30, 2014 of $31.3 million and $58.7 million, respectively, including $5.7 million and $11.3 million, respectively, of interest expense on the preferred equity certificates. The increase was also a result of increased interest expense related to additional borrowings to finance the AACC Merger, the Cabot Acquisition, and the Marlin Acquisition.

55

Table of Contents

Provision for Income Taxes
During the three months ended June 30, 2014 and 2013, we recorded income tax provisions of $14.0 million and $7.3 million, respectively. During the six months ended June 30, 2014 and 2013, we recorded income tax provisions of $25.8 million and $19.8 million, respectively.
The effective tax rates for the respective periods are shown below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Federal provision
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
State provision
5.8
 %
 
6.6
 %
 
5.8
 %
 
6.6
 %
State benefit
(2.0
)%
 
(2.3
)%
 
(2.0
)%
 
(2.3
)%
International benefit(1)
(1.9
)%
 
 %
 
(3.4
)%
 
 %
Permanent items(2)
3.5
 %
 
0.5
 %
 
3.7
 %
 
0.1
 %
Other
(0.8
)%
 
 %
 
(0.1
)%
 
 %
Effective rate
39.6
 %
 
39.8
 %
 
39.0
 %
 
39.4
 %
________________________
(1)
Represents reserves taken for certain tax position adopted by the Company.
(2)
Represents a provision for nondeductible items.
Our subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2018 and a 50% tax holiday for the subsequent four years. The impact of the tax holiday in Costa Rica for the three and six months ended June 30, 2014 and 2013 was immaterial.
As of June 30, 2014, we had a gross unrecognized tax benefit of $88.2 million primarily related to an uncertain tax position in connection with AACC’s tax revenue recognition policy. This uncertain tax position, if recognized, would result in a net tax benefit of $18.7 million and would have a favorable effect on our effective tax rate. There was no material change to the unrecognized tax benefit during the three months ended June 30, 2014.
During the three and six months ended June 30, 2014, we did not provide for United States income taxes or foreign withholding taxes on the quarterly undistributed earnings of our subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries during the three and six months ended June 30, 2014 was approximately $6.0 million and $3.6 million, respectively.

56

Table of Contents

Supplemental Performance Data—Portfolio purchasing and recovery
Cumulative Collections to Purchase Price Multiple
The following table summarizes our purchases and related gross collections by year of purchase (in thousands, except multiples):
Year of
Purchase
 
Purchase
Price(1)
 
Cumulative Collections though June 30, 2014
<2004
 
2004
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
 
Total(2)
 
CCM(3)
Charged-off consumer receivables:
United States(4):
<1999
 
$
41,117

 
$
133,727

 
$
4,202

 
$
2,042

 
$
1,513

 
$
989

 
$
501

 
$
406

 
$
296

 
$
207

 
$
128

 
$
100

 
$
51

 
$
144,162

 
3.5

1999
 
48,712

 
76,104

 
8,654

 
5,157

 
3,513

 
1,954

 
1,149

 
885

 
590

 
487

 
345

 
256

 
108

 
99,202

 
2.0

2000
 
6,153

 
21,580

 
2,293

 
1,323

 
1,007

 
566

 
324

 
239

 
181

 
115

 
103

 
96

 
34

 
27,861

 
4.5

2001
 
38,185

 
108,453

 
28,551

 
20,622

 
14,521

 
5,644

 
2,984

 
2,005

 
1,411

 
1,139

 
991

 
731

 
304

 
187,356

 
4.9

2002
 
61,490

 
118,549

 
62,282

 
45,699

 
33,694

 
14,902

 
7,922

 
4,778

 
3,575

 
2,795

 
1,983

 
1,715

 
680

 
298,574

 
4.9

2003
 
88,496

 
59,038

 
86,958

 
69,932

 
55,131

 
26,653

 
13,897

 
8,032

 
5,871

 
4,577

 
3,582

 
2,882

 
1,256

 
337,809

 
3.8

2004
 
101,316

 

 
39,400

 
79,845

 
54,832

 
34,625

 
19,116

 
11,363

 
8,062

 
5,860

 
4,329

 
3,442

 
1,435

 
262,309

 
2.6

2005
 
192,585

 

 

 
66,491

 
129,809

 
109,078

 
67,346

 
42,387

 
27,210

 
18,651

 
12,669

 
9,552

 
3,987

 
487,180

 
2.5

2006
 
141,026

 

 

 

 
42,354

 
92,265

 
70,743

 
44,553

 
26,201

 
18,306

 
12,825

 
9,468

 
3,802

 
320,517

 
2.3

2007
 
204,064

 

 

 

 

 
68,048

 
145,272

 
111,117

 
70,572

 
44,035

 
29,619

 
20,812

 
8,053

 
497,528

 
2.4

2008
 
227,768

 

 

 

 

 

 
69,049

 
165,164

 
127,799

 
87,850

 
59,507

 
41,773

 
16,360

 
567,502

 
2.5

2009
 
253,257

 

 

 

 

 

 

 
96,529

 
206,773

 
164,605

 
111,569

 
80,443

 
32,403

 
692,322

 
2.7

2010
 
345,811

 

 

 

 

 

 

 

 
125,465

 
284,541

 
215,088

 
150,558

 
59,362

 
835,014

 
2.4

2011
 
382,554

 

 

 

 

 

 

 

 

 
122,224

 
300,536

 
225,451

 
87,734

 
735,945

 
1.9

2012
 
474,557

 

 

 

 

 

 

 

 

 

 
186,472

 
322,962

 
135,799

 
645,233

 
1.4

2013
 
543,978

 

 

 

 

 

 

 

 

 

 

 
223,862

 
220,535

 
444,397

 
0.8

2014
 
282,814

 

 

 

 

 

 

 

 

 

 

 

 
26,127

 
26,127

 
0.1

Subtotal
 
3,433,883

 
517,451

 
232,340

 
291,111

 
336,374

 
354,724

 
398,303

 
487,458

 
604,006

 
755,392

 
939,746

 
1,094,103

 
598,030

 
6,609,038

 
1.9

United Kingdom:
2013
 
620,900

 

 

 

 

 

 

 

 

 

 

 
134,259

 
126,729

 
260,988

 
0.4

2014
 
410,380

 

 

 

 

 

 

 

 

 

 

 

 
51,325

 
51,325

 
0.1

Subtotal
 
1,031,280

 

 

 

 

 

 

 

 

 

 

 
134,259

 
178,054

 
312,313

 
0.3

Purchased bankruptcy receivables:
2010
 
11,971

 

 

 

 

 

 

 

 
388

 
4,247

 
5,598

 
6,248

 
3,061

 
19,542

 
1.6

2011
 
1,642

 

 

 

 

 

 

 

 

 
1,372

 
1,413

 
1,070

 
189

 
4,044

 
2.5

2012
 
83,436

 

 

 

 

 

 

 

 

 

 
1,249

 
31,020

 
13,930

 
46,199

 
0.6

2013
 
39,883

 

 

 

 

 

 

 

 

 

 

 
12,806

 
12,690

 
25,496

 
0.6

Subtotal
 
136,932

 

 

 

 

 

 

 

 
388

 
5,619

 
8,260

 
51,144

 
29,870

 
95,281

 
0.7

Total
 
$
4,602,095

 
$
517,451

 
$
232,340

 
$
291,111

 
$
336,374

 
$
354,724

 
$
398,303

 
$
487,458

 
$
604,394

 
$
761,011

 
$
948,006

 
$
1,279,506

 
$
805,954

 
$
7,016,632

 
1.5

________________________
(1)
Adjusted for put-backs and account recalls. Put-backs represent accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”). Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”).
(2)
Cumulative collections from inception through June 30, 2014, excluding collections on behalf of others.
(3)
Cumulative Collections Multiple (“CCM”) through June 30, 2014 refers to collections as a multiple of purchase price.
(4)
United States data includes immaterial results from Latin America.

57

Table of Contents

Total Estimated Collections to Purchase Price Multiple
The following table summarizes our purchases, resulting historical gross collections, and estimated remaining gross collections, by year of purchase (in thousands, except multiples):
 
Purchase  Price(1)
 
Historical
Collections(2)
 
Estimated
Remaining
Collections (3), (4)
 
Total Estimated
Gross Collections
 
Total Estimated Gross
Collections to
Purchase Price
Charged-off consumer receivables:
 
 
 
 
 
 
United States (5):
 
 
 
 
 
 
 
 
 
<2005
$
385,469

 
$
1,357,273

 
$
344

 
$
1,357,617

 
3.5

2005
192,585

 
487,180

 
639

 
487,819

 
2.5

2006
141,026

 
320,517

 
5,956

 
326,473

 
2.3

2007
204,064

 
497,528

 
15,620

 
513,148

 
2.5

2008
227,768

 
567,502

 
30,648

 
598,150

 
2.6

2009
253,257

 
692,322

 
72,559

 
764,881

 
3.0

2010
345,811

 
835,014

 
180,257

 
1,015,271

 
2.9

2011
382,554

 
735,945

 
286,004

 
1,021,949

 
2.7

2012
474,557

 
645,233

 
426,764

 
1,071,997

 
2.3

2013
543,978

 
444,397

 
924,583

 
1,368,980

 
2.5

2014
282,814

 
26,127

 
497,454

 
523,581

 
1.9

Subtotal
3,433,883

 
6,609,038

 
2,440,828

 
9,049,866

 
2.6

United Kingdom:
 
 
 
 
 
 
 
 
 
2013
620,900

 
260,988

 
1,427,937

 
1,688,925

 
2.7

2014
410,380

 
51,325

 
938,750

 
990,075

 
2.4

Subtotal
1,031,280

 
312,313

 
2,366,687

 
2,679,000

 
2.6

Purchased bankruptcy receivables:
 
 
 
 
 
 
2010
11,971

 
19,542

 
2,946

 
22,488

 
1.9

2011
1,642

 
4,044

 
76

 
4,120

 
2.5

2012
83,436

 
46,199

 
52,853

 
99,052

 
1.2

2013
39,883

 
25,496

 
35,581

 
61,077

 
1.5

Subtotal
136,932

 
95,281

 
91,456

 
186,737

 
1.4

Total
$
4,602,095

 
$
7,016,632

 
$
4,898,971

 
$
11,915,603

 
2.6

________________________
(1)
Adjusted for Put-Backs and Recalls.
(2)
Cumulative collections from inception through June 30, 2014, excluding collections on behalf of others.
(3)
Estimated remaining collections (“ERC”) for charged off consumer receivables includes $120.7 million related to accounts that converted to bankruptcy after purchase.
(4)
The collection forecast of each pool is generally estimated to be between 84 to 96 months based on the expected collection period of each pool in the United States and up to 120 months in the United Kingdom. Expected collections beyond the 84 to 96 month collection forecast in the United States are included in ERC but are not included in the calculation of IRRs.
(5)
United States data includes immaterial results from Latin America.

58

Table of Contents

Estimated Remaining Gross Collections by Year of Purchase
The following table summarizes our estimated remaining gross collections by year of purchase (in thousands):
 
Estimated Remaining Gross Collections by Year of Purchase(1), (2), (3)
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
 
2020
 
2021
 
2022
 
>2022
 
Total
Charged-off consumer receivables:
United States (4):
<2006
$
331

 
$
361

 
$
188

 
$
83

 
$
20

 
$

 
$

 
$

 
$

 
$

 
$
983

2006
2,502

 
2,478

 
942

 
25

 
9

 

 

 

 

 

 
5,956

2007
5,141

 
6,440

 
3,314

 
689

 
31

 
5

 

 

 

 

 
15,620

2008
9,283

 
9,943

 
5,897

 
3,983

 
1,542

 

 

 

 

 

 
30,648

2009
20,642

 
26,514

 
12,309

 
7,024

 
4,469

 
1,601

 

 

 

 

 
72,559

2010
43,421

 
62,240

 
35,235

 
20,890

 
10,460

 
5,694

 
2,317

 

 

 

 
180,257

2011
63,492

 
94,497

 
55,508

 
33,428

 
21,157

 
10,120

 
5,665

 
2,137

 

 

 
286,004

2012
91,297

 
138,009

 
82,415

 
51,490

 
31,324

 
16,729

 
8,271

 
5,534

 
1,695

 

 
426,764

2013
149,524

 
259,317

 
180,580

 
119,302

 
80,347

 
53,811

 
36,288

 
23,197

 
14,417

 
7,800

 
924,583

2014
72,887

 
124,753

 
96,461

 
70,626

 
50,412

 
35,886

 
28,548

 
14,176

 
2,253

 
1,452

 
497,454

Subtotal
458,520

 
724,552

 
472,849

 
307,540

 
199,771

 
123,846

 
81,089

 
45,044

 
18,365

 
9,252

 
2,440,828

United Kingdom:
2013
102,408

 
213,378

 
211,311

 
185,707

 
162,210

 
143,367

 
129,396

 
118,294

 
108,552

 
53,314

 
1,427,937

2014
61,725

 
135,045

 
134,514

 
117,922

 
103,430

 
92,107

 
83,179

 
75,083

 
65,840

 
69,905

 
938,750

Subtotal
164,133

 
348,423

 
345,825

 
303,629

 
265,640

 
235,474

 
212,575

 
193,377

 
174,392

 
123,219

 
2,366,687

Purchased bankruptcy receivables:
2010
1,254

 
1,314

 
378

 

 

 

 

 

 

 

 
2,946

2011
29

 
29

 
17

 
1

 

 

 

 

 

 

 
76

2012
11,651

 
19,748

 
12,855

 
6,599

 
2,000

 

 

 

 

 

 
52,853

2013
8,947

 
15,115

 
8,755

 
2,652

 
112

 

 

 

 

 

 
35,581

Subtotal
21,881

 
36,206

 
22,005

 
9,252

 
2,112

 

 

 

 

 

 
91,456

Total
$
644,534

 
$
1,109,181

 
$
840,679

 
$
620,421

 
$
467,523

 
$
359,320

 
$
293,664

 
$
238,421

 
$
192,757

 
$
132,471

 
$
4,898,971

________________________
(1)
ERC for Zero Basis Portfolios can extend beyond our collection forecasts.
(2)
ERC for charged off consumer receivables includes $120.7 million related to accounts that converted to bankruptcy after purchase.
(3)
The collection forecast of each pool is generally estimated to be between 84 to 96 months based on the expected collection period of each pool in the United States and up to 120 months in the United Kingdom. Expected collections beyond the 84 to 96 month collection forecast in the United States are included in ERC but are not included in the calculation of IRRs.
(4)
United States data includes immaterial results from Latin America.

59

Table of Contents

Unamortized Balances of Portfolios
The following table summarizes the remaining unamortized balances of our purchased receivable portfolios by year of purchase (in thousands, except percentages):
 
Unamortized
Balance as of
June 30, 2014
 
Purchase
Price(1)
 
Unamortized
Balance as a
Percentage of
Purchase Price
 
Unamortized
Balance as a
Percentage
of Total
Charged-off consumer receivables:
 
 
 
 
 
 
 
United States (2):
 
 
 
 
 
 
 
2006
$
695

 
$
141,026

 
0.5
%
 
0.1
%
2007
3,317

 
204,064

 
1.6
%
 
0.4
%
2008
10,604

 
227,768

 
4.7
%
 
1.2
%
2009
13,046

 
253,257

 
5.2
%
 
1.4
%
2010
30,929

 
345,811

 
8.9
%
 
3.4
%
2011
73,354

 
382,554

 
19.2
%
 
8.0
%
2012
154,411

 
474,557

 
32.5
%
 
16.9
%
2013
357,956

 
543,978

 
65.8
%
 
39.2
%
2014
268,803

 
282,814

 
95.0
%
 
29.4
%
Subtotal
913,115

 
2,855,829

 
32.0
%
 
100.0
%
United Kingdom:
 
 
 
 
 
 
 
2013
598,966

 
620,900

 
96.5
%
 
59.7
%
2014
404,014

 
410,380

 
98.4
%
 
40.3
%
Subtotal
1,002,980

 
1,031,280

 
97.3
%
 
100.0
%
Purchased bankruptcy receivables:
 
 
 
 
 
 
 
2010
1,824

 
11,971

 
15.2
%
 
2.5
%
2011
31

 
1,642

 
1.9
%
 
%
2012
46,068

 
83,436

 
55.2
%
 
64.2
%
2013
23,967

 
39,883

 
60.1
%
 
33.3
%
Subtotal
71,890

 
136,932

 
52.5
%
 
100.0
%
Total
$
1,987,985

 
$
4,024,041

 
49.4
%
 
100.0
%
________________________
(1)
Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-Backs, Recalls, and other adjustments.
(2)
United States data includes immaterial results from Latin America.

60

Table of Contents

Estimated Future Amortization of Portfolios
As of June 30, 2014, we had $2.0 billion in investment in receivable portfolios. This balance will be amortized based upon current projections of cash collections in excess of revenue applied to the principal balance. The estimated amortization of the investment in receivable portfolios balance is as follows (in thousands):
Years Ending December 31,
Charged-off
Consumer
Receivables
United States
 
Charged-off
Consumer
Receivables
United Kingdom
 
Purchased
Bankruptcy
Receivables
 
Total
Amortization
2014(1)
$
123,812

 
$
29,078

 
$
15,285

 
$
168,175

2015
258,970

 
91,797

 
27,640

 
378,407

2016
187,393

 
120,985

 
18,527

 
326,905

2017
132,563

 
110,462

 
8,380

 
251,405

2018
100,708

 
101,488

 
2,057

 
204,253

2019
69,074

 
98,411

 

 
167,485

2020
35,712

 
102,761

 

 
138,473

2021
4,807

 
112,787

 

 
117,594

2022
77

 
126,251

 

 
126,328

2023

 
98,690

 

 
98,690

2024

 
10,270

 

 
10,270

Total
$
913,116

 
$
1,002,980

 
$
71,889

 
$
1,987,985

________________________
(1)
2014 amount consists of six months data from July 1, 2014 to December 31, 2014.
Headcount by Function by Geographical Location
The following table summarizes our headcount by function by geographical location:
 
Headcount as of June 30,
 
2014
 
2013
 
Domestic
 
International
 
Domestic
 
International
General & Administrative
951

 
1,601

 
1,075

 
608

Internal Legal Account Manager
52

 
56

 
80

 
27

Account Manager
230

 
2,384

 
402

 
1,338

 
1,233

 
4,041

 
1,557

 
1,973


61

Table of Contents

Gross Collections by Account Manager
The following table summarizes our collection performance by account manager (in thousands, except headcount):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
United States(1):
 
 
 
 
 
 
 
Gross collections—collection sites
$
130,788

 
$
116,853

 
$
267,313

 
$
243,415

Average active Account Manager
1,586

 
1,583

 
1,627

 
1,584

Collections per average active Account Manager
$
82.5

 
$
73.8

 
$
164.3

 
$
153.7

United Kingdom:
 
 
 
 
 
 
 
Gross collections—collection sites
$
54,716

 
$

 
$
100,577

 
$

Average active Account Manager
542

 

 
478

 

Collections per average active Account Manager
$
101.0

 
$

 
$
210.4

 
$

Overall:
 
 
 
 
 
 
 
Collections per average active Account Manager
$
87.2

 
$
73.8

 
$
174.8

 
$
153.7

________________________
(1)
United States represents account manager statistics for United States portfolios and includes collection statistics for our India and Costa Rica call centers.

Gross Collections per Hour Paid
The following table summarizes our gross collections per hour paid to account managers (in thousands, except gross collections per hour paid):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
United States(1):
 
 
 
 
 
 
 
Gross collections—collection sites
$
130,788

 
$
116,853

 
$
267,313

 
$
243,415

Total hours paid
776

 
719

 
1,518

 
1,447

Collections per hour paid
$
168.5

 
$
162.5

 
$
176.1

 
$
168.2

United Kingdom:
 
 
 
 
 
 
 
Gross collections—collection sites
$
54,716

 
$

 
$
100,577

 
$

Total hours paid
149

 

 
266

 

Collections per hour paid
$
367.2

 
$

 
$
378.1

 
$

Overall:
 
 
 
 
 
 
 
Collections per hour paid
$
200.5

 
$
162.5

 
$
206.2

 
$
168.2

________________________
(1)
United States represents account manager statistics for United States portfolios and includes collection statistics for our India and Costa Rica call centers.


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Collection Sites Direct Cost per Dollar Collected
The following table summarizes our gross collections in collection sites and the related direct cost (in thousands, except percentages):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
United States(1):
 
 
 
 
 
 
 
Gross collections—collection sites
$
130,788

 
$
116,853

 
$
267,313

 
$
243,415

Direct cost(2)
$
8,330

 
$
7,173

 
$
16,740

 
$
14,416

Cost per dollar collected(3)
6.4
%
 
6.1
%
 
6.3
%
 
5.9
%
United Kingdom:
 
 
 
 
 
 
 
Gross collections—collection sites
$
54,716

 
$

 
$
100,577

 
$

Direct cost(2)
$
3,773

 
$

 
$
6,496

 
$

Cost per dollar collected
6.9
%
 

 
6.5
%
 

Overall:
 
 
 
 
 
 
 
Cost per dollar collected
6.5
%
 
6.1
%
 
6.3
%
 
5.9
%
________________________
(1)
United States statistics include gross collections and direct costs for our India and Costa Rica call centers.
(2)
Represent account managers and their supervisors’ salaries, variable compensation, and employee benefits.
(3)
The increase in cost as a percentage of total collections, through our collection sites in the United States, was primarily due to the higher cost to collect attributable to our AACC subsidiary.

Salaries and Employee Benefits by Function
The following table summarizes our salaries and employee benefits by function (excluding stock-based compensation) (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Portfolio purchasing and recovery activities
 
 
 
 
 
 
 
Collection site salaries and employee benefits(1)
$
12,918

 
$
7,173

 
$
24,915

 
$
14,416

Non-collection site salaries and employee benefits(2)
44,565

 
22,182

 
84,131

 
39,352

Subtotal
57,483

 
29,355

 
109,046

 
53,768

Non portfolio purchasing and recovery
2,157

 
1,435

 
3,895

 
2,853

 
$
59,640

 
$
30,790

 
$
112,941

 
$
56,621

________________________
(1)
Represent account managers and their supervisors’ salaries, variable compensation, and employee benefits.
(2)
Includes internal legal channel salaries and employee benefits of $6.0 million and $3.3 million for the three months ended June 30, 2014 and 2013, respectively, and $11.8 million and $6.1 million for the six months ended June 30, 2014 and 2013, respectively.

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Purchases by Quarter
The following table summarizes the charged-off consumer receivable portfolios we purchased by quarter, and the respective purchase prices (in thousands):
Quarter
# of
Accounts
 
Face Value
 
Purchase 
Price
Q1 2012
2,132

 
$
2,902,409

 
$
130,463

Q2 2012
3,679

 
6,034,499

 
230,983

Q3 2012
1,037

 
1,052,191

 
47,311

Q4 2012
3,125

 
8,467,400

 
153,578

Q1 2013
1,678

 
1,615,214

 
58,771

Q2 2013(1)
23,887

 
68,906,743

 
423,113

Q3 2013(2)
4,232

 
13,437,807

 
617,852

Q4 2013
614

 
1,032,472

 
105,043

Q1 2014(3)
1,104

 
4,288,159

 
467,565

Q2 2014
1,210

 
3,075,343

 
225,762

________________________
(1)
Includes $383.4 million of portfolios acquired with a face value of approximately $68.2 billion in connection with the AACC Merger.
(2)
Includes $559.0 million of portfolios acquired with a face value of approximately $12.8 billion in connection with the Cabot Acquisition.
(3)
Includes $208.5 million of portfolios acquired with a face value of approximately $2.4 billion in connection with the Marlin Acquisition.
Liquidity and Capital Resources
Historically, we have met our cash requirements by utilizing our cash flows from operations, bank borrowings, convertible debt offerings, and equity offerings. Our primary cash requirements have included the purchase of receivable portfolios, the acquisition of U.S. and international entities, operating expenses, the payment of interest and principal on borrowings, and the payment of income taxes.
The following table summarizes our cash flows by category for the periods presented (in thousands):
 
Six Months Ended 
 June 30,
 
2014
 
2013
Net cash provided by operating activities
$
37,597

 
$
11,251

Net cash used in investing activities
(493,943
)
 
(202,723
)
Net cash provided by financing activities
457,842

 
396,133

On February 25, 2014, we amended our revolving credit facility and term loan facility (the “Credit Facility”) pursuant to a Second Amended and Restated Credit Agreement. On August 1, 2014, we further amended the Credit Facility pursuant to Amendment No. 1 to the Second Amended and Restated Credit Agreement (as amended, the “Restated Credit Agreement”). Under the Restated Credit Agreement, we have a revolving credit facility tranche of $692.6 million, a term loan facility tranche of $153.8 million, and an accordion feature that allows us to increase the revolving credit facility by an additional $250.0 million. Including the accordion feature, the maximum amount that can be borrowed under the Restated Credit Agreement is $1.1 billion. The Restated Credit Agreement has a five-year maturity, expiring in February 2019, except with respect to two subtranches of the term loan facility of $60.0 million and $6.3 million, expiring in February 2017 and November 2017, respectively. As of June 30, 2014, we had $423.9 million outstanding, $418.6 million in borrowing capacity and $391.8 million in borrowing base availability under the Credit Facility, excluding the $250.0 million accordion.
On March 5, 2014, we sold $140.0 million in aggregate principal amount of 2.875% convertible senior notes due March 15, 2021 in a private placement transaction. On March 6, 2014, the initial purchasers exercised, in full, their option to purchase an additional $21.0 million of the convertible senior notes, which resulted in an aggregate principal amount of $161.0 million of the convertible senior notes outstanding (collectively, the “2021 Convertible Notes”). The 2021 Convertible Notes are general unsecured obligations of Encore. The net proceeds from the sale of the 2021 Convertible Notes were approximately $155.7 million, after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses paid by the Company. The Company used approximately $19.5 million of the net proceeds from this offering to pay the cost of the

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capped call transactions entered into in connection with the 2021 Convertible Notes and used the remainder of the net proceeds from this offering for general corporate purposes, including working capital.
Through Cabot Financial (UK) Limited (“Cabot Financial UK”), an indirect subsidiary, we have a revolving credit facility of £85.0 million (the “Cabot Credit Facility”). As of June 30, 2014, there was £48.0 million (approximately $82.1 million) outstanding and we had £37.0 million (approximately $63.3 million) available for borrowing. On February 7, 2014, in connection to the acquisition of Marlin, Cabot Financial UK borrowed £75.0 million (approximately $122.3 million) under this facility and used the proceeds to pay for a portion of the purchase price.
The Marlin Acquisition was financed with the £75.0 million (approximately $122.3 million) Cabot Credit Facility draw discussed above, and with borrowings under two senior secured bridge facilities (the “Senior Secured Bridge Facilities”) entered into on February 7, 2014. On March 21, 2014, Cabot Financial issued £175.0 million (approximately $291.8 million) in aggregate principal amount of 6.5% Senior Secured Notes due 2021 (the “Cabot 2021 Notes”). The Senior Secured Bridge Facilities were paid in full using proceeds from borrowings under the Cabot 2021 Notes.
Propel has a $200.0 million syndicated loan facility (the “Propel Facility I”). The Propel Facility I is used to fund tax liens in Texas and Arizona. As of June 30, 2014, there was $32.3 million outstanding and $167.7 million of availability under our Propel Facility I.
Subsidiaries of Propel have a revolving credit facility (the “Propel Facility II”) that is used to purchase tax liens in various states directly from taxing authorities. On May 6, 2014, we amended the Propel Facility II and increased the commitment amount from $100.0 million to the following: (a) during the period from July 1, 2014 to and including September 30, 2014, $190.0 million or (b) at any other time, $150.0 million. As of June 30, 2014, there was $49.3 million outstanding and $100.7 million of availability under our Propel Facility II. Refer to Note 10, “Debt - Propel Facilities” in the notes to our condensed consolidated financial statements for detailed information related to the Propel Facility II and the amendment.
On May 6, 2014, Propel, through its subsidiaries, completed the securitization of a pool of approximately $141.5 million in payment agreements and contracts relating to unpaid real property taxes, assessments, and other charges secured by liens on real property located in the State of Texas. In connection with the securitization, investors purchased approximately $134.0 million in aggregate principal amount of 1.44% notes collateralized by these receivables (the “Propel Securitized Notes”), due 2029. Proceeds from the sale of the Propel Securitized Notes were used to pay down borrowings on the Propel Facility I, pay certain expenses incurred in connection with the issuance of the Propel Securitized Notes and fund certain reserves.
On April 24, 2014, our Board of Directors approved a $50.0 million share repurchase program. Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through solicited or unsolicited privately negotiated transactions or otherwise. During the three months ended June 30, 2014, we repurchased 400,000 shares of our common stock for approximately $16.8 million. The program does not obligate us to acquire any particular amount of common stock, and it may be modified or suspended at any time at our discretion.
Currently, all of our portfolio purchases are funded with cash from operations and borrowings under our Restated Credit Agreement and our Cabot Credit Facility. All of our purchases for receivables secured by property tax liens are funded with cash from Propel’s operations and borrowings under our Propel Facility I, Propel Facility II, and Propel Securitized Notes.
See Note 10, “Debt” to our condensed consolidated financial statements for a further discussion of our debt.
Operating Cash Flows
Net cash provided by operating activities was $37.6 million and $11.3 million during the six months ended June 30, 2014 and 2013, respectively.
Cash provided by operating activities during the six months ended June 30, 2014 was primarily related to a net income of $40.2 million, various non-cash add backs in operating activities, and changes in operating assets and liabilities. Cash provided by operating activities during the six months ended June 30, 2013 was primarily related to net income of $30.5 million, various non-cash add backs in operating activities, and changes in operating assets and liabilities.
Investing Cash Flows
Net cash used in investing activities was $493.9 million and $202.7 million during the six months ended June 30, 2014 and 2013, respectively.
The cash flows used in investing activities during the six months ended June 30, 2014 were primarily related to cash paid for acquisitions, net of cash acquired, of $303.5 million, receivable portfolio purchases (excluding the portfolios acquired from

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the acquisition of Marlin of $208.5 million) of $475.1 million, offset by collection proceeds applied to the principal of our receivable portfolios in the amount of $325.5 million. The cash flows used in investing activities during the six months ended June 30, 2013 were primarily related to cash paid for the AACC Merger, net of cash acquired of $293.3 million, receivable portfolio purchases (excluding the portfolios acquired from the AACC Merger of $383.4 million) of $98.2 million, and originations of receivables secured by tax liens of $88.0 million, offset by collection proceeds applied to the principal of our receivable portfolios in the amount of $260.5 million and collections applied to our receivables secured by tax liens of $27.1 million.
Capital expenditures for fixed assets acquired with internal cash flow were $8.9 million and $5.3 million for six months ended June 30, 2014 and 2013, respectively.
Financing Cash Flows
Net cash provided by financing activities was $457.8 million and $396.1 million during the six months ended June 30, 2014 and 2013, respectively.
The cash provided by financing activities during the six months ended June 30, 2014 primarily reflects $679.9 million in borrowings under our Restated Credit Agreement, $288.6 million of proceeds from Cabot’s senior secured notes due 2021, $161.0 million of proceeds from the issuance of the 2021 Convertible Notes, and $134.0 million of proceeds from the issuance of Propel’s securitized notes, offset by $732.9 million in repayments of amounts outstanding under our Restated Credit Agreement and $33.6 million in purchases of convertible hedge instruments, including the payment for our warrant restrike transaction. The cash provided by financing activities during the six months ended June 30, 2013 primarily reflects $514.1 million in borrowings under our Restated Credit Agreement and Propel Facilities and $150.0 million in borrowings under our 2013 Convertible Senior Notes, offset by $228.2 million in repayments of amounts outstanding under our Restated Credit Agreement and Propel Facilities.
We are in compliance with all covenants under our financing arrangements. We believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, our cash and cash equivalents of $123.4 million as of June 30, 2014 (approximately $44.1 million of which were held at our Cabot subsidiary), our access to capital markets, and availability under our credit facilities.
Our future cash needs will depend on our acquisitions of portfolios and businesses.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Rates. At June 30, 2014, there had not been a material change in any of the foreign currency risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Interest Rates. At June 30, 2014, there had not been a material change in the interest rate risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Item 4 – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”) and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and accordingly, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on their most recent evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act are effective.

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Changes in Internal Control over Financial Reporting
Except as disclosed in the following paragraph, there was no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We continue to monitor and test Cabot’s system of internal control over financial reporting as part of management’s annual evaluation of internal control over financial reporting in 2014. We completed the Marlin Acquisition during the first quarter of 2014. As part of management’s annual assessment of internal control over financial reporting, beginning in 2015, Marlin’s system will be evaluated.

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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
Information with respect to this item may be found in Note 13, “Commitments and Contingencies,” to the condensed consolidated financial statements.
Item 1A – Risk Factors
There is no material change in the information reported under “Part I—Item 1A—Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and “Part II, Item 1A—Risk Factors” in our subsequent Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Repurchases of Equity Securities
The following table presents information with respect to purchases of common stock of the Company during the three months ended June 30, 2014, by the Company or an “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Exchange Act :
Period
Total Number of Shares Purchased 
 
Average
Price Paid
Per Share 
 
Total Number of
Shares  Purchased
as Part of Publicly
Announced Plans
or Programs(1)
 
Maximum Number
of Shares (or
Approximate Dollar
Value) That May
Yet Be Purchased
Under the Publicly
Announced Plans
or Programs
April 1, 2014 to April 30, 2014

 
$

 

 
$

May 1, 2014 to May 31, 2014
400,000

 
42.04

 
400,000

 
33,178,915

June 1, 2014 to June 30, 2014

 

 

 

Total
400,000

 
$
42.04

 
400,000

 
$
33,178,915

________________________
(1)
On April 24, 2014, we publicly announced that our Board of Directors had authorized a stock repurchase program for the Company to purchase $50.0 million of our Company’s common stock. This column discloses the number of shares purchased pursuant to the program during the indicated time periods.

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Item 5 - Other Information
Acquisition of Atlantic Credit & Finance, Inc. and Amendments to Credit Documents
On August 1, 2014, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Atlantic Credit & Finance, Inc. (“Atlantic”) and the sellers named therein. Pursuant to the Purchase Agreement, the Company acquired all of the outstanding equity interests of Atlantic for approximately $70.0 million in cash (the “Acquisition”). Atlantic acquires and liquidates consumer finance receivables originated and charged off by national financial institutions. At the closing of the Acquisition, the Company made additional payments totaling approximately $126.1 million to retire certain indebtedness and other obligations of Atlantic. The Company financed the acquisition through borrowings under the Restated Credit Agreement and cash on hand.
On August 1, 2014, the Company amended the Restated Credit Agreement to, among other things, (i) modify the permitted investment provisions in the Restated Credit Agreement to allow investments of up to $205 million for the purpose of consummating the Acquisition, (ii) increase the Company’s ability to incur additional unsecured or subordinated indebtedness from $450 million to $750 million, (iii) increase the basket of investments permitted in unrestricted subsidiaries from $200 million to $250 million, and (iv) add a basket to allow for investments in certain Propel subsidiaries of $200 million. On August 1, 2014, the Company amended the Second Amended and Restated Senior Secured Note Purchase Agreement dated as of May 9, 2013 (as amended, the “Note Purchase Agreement”) by and between the Company, on the one hand, and The Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement Insurance and Annuity Company and Prudential Annuities Life Assurance Corporations, on the other hand, for purposes of aligning the covenants in the Note Purchase Agreement with the modified covenants in the Restated Credit Agreement. Refer to Note 10, “Debt” in the notes to our condensed consolidated financial statements for a detailed description of the current terms of the Restated Credit Facility and the Note Purchase Agreement.
The foregoing summary of the Purchase Agreement and the amendments to the Restated Credit Agreement and the Note Purchase Agreement do not purport to be complete and are qualified in their entirety by reference to the complete text of the documents, copies of which will are filed as exhibits to this Quarterly Report on Form 10-Q.
Appointment of Michael P. Monaco to the Board of Directors
On August 6, 2014, the Company’s Board of Directors, upon the recommendation of the Board’s Nominating and Corporate Governance Committee, appointed Michael P. Monaco to the Board, effective immediately. The Board has affirmatively determined that Mr. Monaco qualifies as independent director under the NASDAQ listing standards. In addition, Mr. Monaco was appointed to the Audit and Risk Committee and Compensation Committee of the Board.
Mr. Monaco is a Senior Managing Director at CDG Group, LLC, and his past experience includes his service as Chairman and Chief Executive Officer of Accelerator, LLC and as the Executive Vice President and Chief Financial Officer of the American Express Company.
For his service as a non-employee director, Mr. Monaco will be eligible for the same retainer fees as other non-employee directors. He will also receive an initial equity award of $50,000 in shares of Company common stock, consistent with the Company’s compensation program for non-employee directors.

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Item 6 – Exhibits
2.1
 
Stock Purchase Agreement, dated August 1, 2014, by and among Encore Capital Group, Inc., the sellers party thereto, Atlantic Credit & Finance, Inc. and Richard Woolwine as the sellers’ representative (filed herewith)
 
 
 
4.1
  
First Supplemental Indenture, dated March 14, 2014, by and among Cabot Financial (Luxembourg) S.A., Cabot Financial Limited, Cabot Credit Management Limited, as guarantor, and Citibank, N.A., London Branch, as trustee (filed herewith)
 
 
4.2
 
Third Supplemental Indenture, dated May 19, 2014, by and among Cabot Financial (Luxembourg) S.A., Cabot Financial Limited, Citibank, N.A., London Branch, as trustee, and the guarantors party thereto (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on May 20, 2014)
 
 
 
4.3
 
Second Supplemental Indenture, dated May 19, 2014, by and among Cabot Financial (Luxembourg) S.A., Cabot Financial Limited, Citibank, N.A., London Branch, as trustee, and the guarantors party thereto (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on May 20, 2014)
 
 
 
4.4
 
Third Supplemental Indenture, dated May 19, 2014, by and among Marlin Intermediate Holdings plc, Cabot Financial Limited, The Bank of New York Mellon, London Branch, as trustee, and the guarantors party thereto (incorporated by reference to Exhibit 4.3 of the Company’s Current Report on Form 8-K filed on May 20, 2014)
 
 
 
10.1
 
Amendment No. 1 to Second Amended and Restated Credit Agreement, dated August 1, 2014, by and among Encore Capital Group, Inc., the several banks and other financial institutions and lenders from time to time party thereto and listed on the signature pages thereof, and SunTrust Bank, as administrative agent and collateral agent (filed herewith)
 
 
 
10.2
 
Amendment No. 3, dated August 1, 2014, to Second Amended and Restated Senior Secured Note Purchase Agreement, dated May 9, 2013, by and between Encore Capital Group, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement Insurance and Annuity Company and Prudential Annuities Life Assurance Corporations (filed herewith)
 
 
 
31.1
  
Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
31.2
  
Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
32.1
  
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
 
 
101
  
The following financial information from the Encore Capital Group, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Financial Condition; (ii) Condensed Consolidated Statements of Income; (iii) Condensed Consolidated Statements of Comprehensive Income; (iv) Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ENCORE CAPITAL GROUP, INC.
 
 
 
 
By:
 
/s/ Paul Grinberg
 
 
 
Paul Grinberg
 
 
 
Executive Vice President,
 
 
 
Chief Financial Officer and Treasurer
Date: August 7, 2014


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