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EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - ENCORE CAPITAL GROUP INCdex321.htm
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EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - ENCORE CAPITAL GROUP INCdex312.htm
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 September 30, 2010

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.)

8875 Aero Drive, Suite 200

San Diego, California

  92123
(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  ¨    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  ¨    Accelerated filer  x    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 October 21, 2010

Common Stock, $0.01 par value   23,928,726 shares

 

 

 


Table of Contents

 

ENCORE CAPITAL GROUP, INC.

INDEX TO FORM 10-Q

 

     Page  

PART I – FINANCIAL INFORMATION

     1   

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

     1   

Condensed Consolidated Statements of Financial Condition

     1   

Condensed Consolidated Statements of Income

     2   

Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income

     3   

Condensed Consolidated Statements of Cash Flows

     4   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     5   

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

     18   

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

     39   

Item 4 – Controls and Procedures

     39   

PART II – OTHER INFORMATION

     39   

Item 1 – Legal Proceedings

     39   

Item 1A – Risk Factors

     39   

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

     48   

Item 3 – Defaults Upon Senior Securities

     48   

Item 4 – Removed and Reserved

     48   

Item 5 – Other Information

     48   

Item 6 – Exhibits

     49   

SIGNATURES

     50   


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)

 

     September 30,
2010
    December 31,
2009
 

Assets

    

Cash and cash equivalents

   $ 11,531      $ 8,388   

Accounts receivable, net

     2,983        3,134   

Investment in receivable portfolios, net

     580,154        526,877   

Deferred court costs, net

     26,530        25,957   

Property and equipment, net

     11,599        9,427   

Prepaid income tax

     2,662        —     

Other assets

     11,784        4,252   

Goodwill

     15,985        15,985   

Identifiable intangible assets, net

     846        1,139   
                

Total assets

   $ 664,074      $ 595,159   
                

Liabilities and stockholders’ equity

    

Liabilities:

    

Accounts payable and accrued liabilities

   $ 20,606      $ 21,815   

Income taxes payable

     —          2,681   

Deferred tax liabilities, net

     16,772        16,980   

Deferred revenue

     4,228        5,481   

Debt

     334,922        303,075   

Other liabilities

     1,033        2,036   
                

Total liabilities

     377,561        352,068   
                

Commitments and contingencies

    

Stockholders’ 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, 23,905 shares and 23,359 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively

     239        234   

Additional paid-in capital

     112,081        104,261   

Accumulated earnings

     174,723        139,842   

Accumulated other comprehensive loss

     (530     (1,246
                

Total stockholders’ equity

     286,513        243,091   
                

Total liabilities and stockholders’ equity

   $ 664,074      $ 595,159   
                

See accompanying notes to condensed consolidated financial statements

 

1


Table of Contents

 

ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Income

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Revenue

        

Revenue from receivable portfolios, net

   $ 93,822      $ 76,448      $ 268,574      $ 222,688   

Servicing fees and other related revenue

     4,145        3,938        12,962        12,179   
                                

Total revenue

     97,967        80,386        281,536        234,867   
                                

Operating expenses

        

Salaries and employee benefits (excluding stock-based compensation expense)

     16,166        14,411        48,135        43,130   

Stock-based compensation expense

     1,549        1,261        4,756        3,335   

Cost of legal collections

     33,851        26,092        91,519        84,665   

Other operating expenses

     9,512        6,034        27,653        18,612   

Collection agency commissions

     5,389        5,795        17,098        13,483   

General and administrative expenses

     6,982        7,280        21,286        20,074   

Depreciation and amortization

     816        652        2,241        1,895   
                                

Total operating expenses

     74,265        61,525        212,688        185,194   
                                

Income before other (expense) income and income taxes

     23,702        18,861        68,848        49,673   
                                

Other (expense) income

        

Interest expense

     (4,928     (3,970     (14,346     (12,201

Gain on repurchase of convertible notes, net

     —          —          —          3,268   

Other income (expense)

     148        61        250        (11
                                

Total other expense

     (4,780     (3,909     (14,096     (8,944
                                

Income before income taxes

     18,922        14,952        54,752        40,729   

Provision for income taxes

     (6,632     (5,948     (19,871     (16,087
                                

Net income

   $ 12,290      $ 9,004      $ 34,881      $ 24,642   
                                

Weighted average shares outstanding:

        

Basic

     23,947        23,225        23,793        23,177   

Diluted

     25,154        24,199        25,012        23,936   

Earnings per share:

        

Basic

   $ 0.51      $ 0.39      $ 1.47      $ 1.06   

Diluted

   $ 0.49      $ 0.37      $ 1.39      $ 1.03   

See accompanying notes to condensed consolidated financial statements

 

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Table of Contents

 

ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income

(Unaudited, In Thousands)

 

     Common Stock      Additional
Paid-In
Capital
     Accumulated
Earnings
     Accumulated
Other
Comprehensive
Income (loss)
    Total
Equity
     Comprehensive
Income
 
   Shares      Par                

Balance at December 31, 2009

     23,359       $ 234       $ 104,261       $ 139,842       $ (1,246   $ 243,091       $ —     
                         

Net income

     —           —           —           34,881         —          34,881         34,881   

Other comprehensive gain:

                   

Unrealized gain on cash flow hedges, net of tax

     —           —           —           —           716        716         716   

Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes

     546         5         12         —           —          17         —     

Stock-based compensation

     —           —           4,756         —           —          4,756         —     

Settlement of call options and warrants associated with convertible notes, net

     —           —           524         —           —          524         —     

Tax benefit related to stock-based compensation

     —           —           2,528         —           —          2,528         —     
                                                             

Balance at September 30, 2010

     23,905       $ 239       $ 112,081       $ 174,723       $ (530   $ 286,513       $ 35,597   
                                                             

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)

 

     Nine Months Ended
September 30,
 
     2010     2009  

Operating activities:

    

Net income

   $ 34,881      $ 24,642   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     2,241        1,895   

Amortization of loan costs and debt discount

     3,270        3,100   

Stock-based compensation expense

     4,756        3,335   

Gain on repurchase of convertible notes, net

     —          (3,268

Deferred income tax expense

     (208     437   

Excess tax benefit from stock-based payment arrangements

     (2,667     (47

Provision for allowances on receivable portfolios, net

     16,777        14,323   

Changes in operating assets and liabilities

    

Other assets

     (763     (1,623

Deferred court costs

     (573     625   

Prepaid income tax and income taxes payable

     (2,815     11,149   

Deferred revenue

     (1,253     472   

Accounts payable, accrued liabilities and other liabilities

     (2,900     840   
                

Net cash provided by operating activities

     50,746        55,880   
                

Investing activities:

    

Purchases of receivable portfolios, net of forward flow allocation

     (242,857     (205,378

Collections applied to investment in receivable portfolios, net

     169,896        126,019   

Proceeds from put-backs of receivable portfolios

     2,907        2,028   

Purchases of property and equipment

     (1,723     (3,626
                

Net cash used in investing activities

     (71,777     (80,957
                

Financing activities:

    

Payment of loan costs

     (6,248     —     

Proceeds from senior secured notes

     50,000        —     

Proceeds from revolving credit facility

     111,644        85,500   

Repayment of revolving credit facility

     (92,144     (41,500

Repayment of convertible notes

     (42,920     —     

Repurchase of convertible notes

     —          (22,262

Proceeds from net settlement of certain call options

     524        —     

Proceeds from exercise of stock options

     1,773        123   

Excess tax benefit from stock-based payment arrangements

     2,667        47   

Repayment of capital lease obligations

     (1,122     (232
                

Net cash provided by financing activities

     24,174        21,676   
                

Net increase (decrease) in cash and cash equivalents

     3,143        (3,401

Cash and cash equivalents, beginning of period

     8,388        10,341   
                

Cash and cash equivalents, end of period

   $ 11,531      $ 6,940   
                

Supplemental disclosures of cash flow information:

    

Cash paid for interest

   $ 7,369      $ 9,568   

Cash paid for income taxes

   $ 22,895      $ 4,859   

Supplemental schedule of non-cash investing and financing activities:

    

Fixed assets acquired through capital lease

   $ 2,398      $ 224   

See accompanying notes to condensed consolidated financial statements

 

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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 a leader in consumer debt buying and recovery and, through its wholly owned subsidiary Ascension Capital Group, Inc. (“Ascension”), a provider of bankruptcy services to the finance industry. The Company purchases portfolios of defaulted consumer receivables 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, auto finance companies and telecommunication companies, which the Company purchases at deep discounts. Defaulted receivables include receivables subject to bankruptcy proceedings, or consumer bankruptcy receivables. The Company’s success hinges on it understanding, measuring, and predicting the distressed consumer’s behavior. The Company has invested heavily to build one of the industry’s strongest analytic platforms. The Company purchases receivables based on account-level valuation methods, and employs a suite of proprietary statistical models across the full extent of its operations. Moreover, the Company has one of the industry’s largest distressed consumer databases, comprised of approximately 20 million consumer accounts. As a result, the Company has been able to historically realize significant returns from the receivables it acquires. The Company’s performance derives from its sophisticated and widespread use of analytics, its investments in data and consumer intelligence, its cost leadership position (based on the Company’s enterprise-wide, account-level cost database as well as its India facility), and its commitment to see principled intent drive every consumer interaction. The Company maintains strong relationships with many of the largest credit providers in the United States, and possesses one of the industry’s best collection staff retention rates.

In addition, the Company provides bankruptcy support services to some of the largest companies in the financial services industry through its Ascension subsidiary. Leveraging a proprietary software platform dedicated to bankruptcy servicing, Ascension’s operational platform integrates lenders, trustees, and consumers across the bankruptcy lifecycle.

Acquisitions of receivable portfolios are financed by operations and by borrowings from third parties. See Note 9 for further discussion of the Company’s debt.

Financial Statement Preparation

The accompanying interim condensed consolidated financial statements have been prepared by Encore, without audit, in accordance with the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.

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 results of operations, financial position 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, 2009. 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 accounting principles generally accepted in the United States 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.

Principles of Consolidation

The Company’s condensed consolidated financial statements include the assets, liabilities and operating results of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Reclassification

Certain reclassifications have been made to the condensed consolidated financial statements to conform to the current year’s presentation.

 

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Table of Contents

 

Note 2: Earnings per Share

Basic earnings per share is calculated by dividing net earnings available to common stockholders 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 and restricted stock units.

The components of basic and diluted earnings per share are as follows (in thousands, except earnings per share):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

Net income available for common shareholders

   $ 12,290       $ 9,004       $ 34,881       $ 24,642   
                                   

Weighted average outstanding shares of common stock

     23,947         23,225         23,793         23,177   

Dilutive effect of stock-based awards

     1,207         894         1,219         759   
                                   

Common stock and common stock equivalents

     25,154         24,199         25,012         23,936   
                                   

Earnings per share:

           

Basic(1)

   $ 0.51       $ 0.39       $ 1.47       $ 1.06   

Diluted(2)

   $ 0.49       $ 0.37       $ 1.39       $ 1.03   

 

(1)

Represents net income available for common shareholders divided by the weighted average outstanding shares of common stock.

 

(2)

Represents net income available for common shareholders divided by common stock and common stock equivalents.

Employee stock options to purchase approximately 199,000 and 219,000 shares of common stock during the three and nine months ended September 30, 2010, respectively, and employee stock options to purchase approximately 995,000 and 1,484,000 shares of common stock during the three and nine months ended September 30, 2009, respectively, were outstanding but not included in the computation of diluted earnings per share because the effect on diluted earnings per share would be anti-dilutive.

Note 3: 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 that reflect the reporting entity’s own assumptions.

Assets and liabilities measured at fair value on a recurring basis at September 30, 2010 are summarized below (in thousands):

 

     Level 1      Level 2     Level 3      Total  

Assets

          

Foreign exchange contracts

   $ —         $ 182      $ —         $ 182   

Liabilities

          

Interest rate swap agreements

   $ —         $ (1,033   $ —         $ (1,033

Fair values of derivative instruments included in Level 2 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 exchange rates, and forward and spot prices for currencies. As of September 30, 2010, the Company did not have any financial instruments carried at fair value that required Level 3 measurement.

 

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Financial instruments not required to be carried at fair value

Borrowings under the Company’s revolving credit facility are carried at historical cost, adjusted for additional borrowings less principal repayments, which approximates fair value. For investment in receivable portfolios, there is no active market or observable inputs for the fair value estimation. The Company considers it not practical to attempt to estimate the fair value of such financial instruments due to the excessive costs that would be incurred in doing so.

Note 4: Derivatives and Hedging Instruments

The Company uses derivative instruments to manage risks related to interest rates and foreign currency. The Company’s outstanding interest rate swap contracts and foreign exchange contracts qualify for hedge accounting treatment under the authoritative guidance for derivatives and hedging.

Interest Rate Swaps

The Company may periodically enter into derivative financial instruments, typically interest rate swap agreements, to reduce its exposure to fluctuations in interest rates on variable interest rate debt and their impact on earnings and cash flows. During the quarter ended September 30, 2010, the company entered into two interest rate swap agreements with a combined notional amount of $50.0 million. As of September 30, 2010, the Company has three interest rate swap agreements outstanding with a total notional amount of $75.0 million. Under the swap agreements, the Company receives floating interest rate payments based on one-month reserve-adjusted LIBOR and makes interest payments based on fixed interest rates. The Company intends to continue electing the one-month reserve-adjusted LIBOR as the benchmark interest rate on the debt being hedged through its term. No credit spread was hedged. The Company designates its interest rate swap instruments as cash flow hedges.

The authoritative guidance requires companies to recognize derivative instruments as either an asset or liability measured at fair value in the statement of financial position. The effective portion of the change in fair value of the derivative instrument is recorded in other comprehensive income. The ineffective portion of the change in fair value of the derivative instrument, if any, is recognized in interest expense in the period of change. From the inception of the hedging program, the Company has determined that the hedging instruments are highly effective.

Foreign Exchange Contracts

The Company conducts business in a currency other than the U.S. dollar, in connection with its international subsidiary in India. As a result, India’s forecasted expenditures expose the Company to foreign currency risk. 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 24 months. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and the Company reviews all exposures and derivative positions on an ongoing basis.

Gains and losses on cash flow hedges are recorded in accumulated other comprehensive income (loss) 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 accumulated other comprehensive income or loss on the derivative into earnings. If all or a portion of the forecasted transaction was 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 September 30, 2010, the total notional amount of the forward contracts to buy Indian rupees in exchange for U.S. dollars was $11.2 million. All outstanding contracts qualified for hedge accounting treatment as of September 30, 2010. The Company estimates that approximately $0.2 million of net derivative gain 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 three and nine months ended September 30, 2010.

The Company does not enter into derivative instruments for trading or speculative purposes.

 

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The following table summarizes the fair value of derivative instruments as recorded in the Company’s consolidated statements of financial position (in thousands):

 

     September 30, 2010      December 31, 2009  
   Balance Sheet
Location
     Fair Value      Balance Sheet
Location
     Fair Value  

Derivatives designated as hedging instruments:

           

Interest rate swaps

     Other liabilities       $ 1,033         Other liabilities       $ 1,791   

Foreign exchange contracts

     Other assets       $ 182         Other liabilities       $ 245   

The following tables summarize the effects of derivatives in cash flow hedging relationships on the Company’s statements of income for the three and nine months ended September 30, 2010 and 2009 (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
September 30,
          Three Months
Ended
September 30,
          Three Months
Ended
September 30,
 
     2010     2009           2010      2009           2010      2009  

Interest rate swaps

   $ (87   $ 342       Interest expense    $ —         $ —         Other (expense) income    $ —         $ —     

Foreign exchange contracts

   $ 253      $ —         Salaries and employee benefits    $ 2       $ —         Other (expense) income    $ —         $ —     

Foreign exchange contracts

   $ 52      $ —         General and administrative expenses    $ —         $ —         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
 
     Nine Months
Ended
September 30,
          Nine Months
Ended
September 30,
          Nine Months
Ended
September 30,
 
     2010     2009           2010      2009           2010      2009  

Interest rate swaps

   $ 758      $ 1,177       Interest expense    $ —         $ —         Other (expense) income    $ —         $ —     

Foreign exchange contracts

   $ 365      $ —         Salaries and employee benefits    $ 14       $ —         Other (expense) income    $ —         $ —     

Foreign exchange contracts

   $ 78      $ —         General and administrative expenses    $ 2       $ —         Other (expense) income    $ —         $ —     

 

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Note 5: Stock-Based Compensation

On March 9, 2009, the Board of Directors approved an amendment and restatement of the 2005 Stock Incentive Plan (“2005 Plan”), which was originally adopted on March 30, 2005, for Board members, employees, officers, and executives of, and consultants and advisors to, the Company. The amendment and restatement of the 2005 Plan increased by 2,000,000 shares the maximum number of shares of the Company’s common stock that may be issued or be subject to awards under the plan, established a new 10-year term for the plan and made certain other amendments. The 2005 Plan amendment was approved by the Company’s stockholders on June 9, 2009. The 2005 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, and performance-based awards to eligible individuals. As amended, the 2005 Plan allows the granting of an aggregate of 3,500,000 shares of the Company’s common stock for awards, plus the number of shares of stock that were available for future awards under the prior 1999 Equity Participation Plan (“1999 Plan”). In addition, shares subject to options granted under either the 1999 Plan or the 2005 Plan that terminate or expire without being exercised will become available for grant under the 2005 Plan. The benefits provided under these plans are compensation subject to authoritative guidance for stock-based compensation.

In accordance with authoritative guidance for stock-based compensation, compensation expense is recognized only for those shares expected to vest, based on the Company’s historical experience and future expectations. Total compensation expense during the nine months ended September 30, 2010 and 2009 was $4.8 million and $3.3 million, respectively.

The Company’s stock-based compensation arrangements are described below:

Stock Options

The 2005 Plan permits the granting of stock options to employees, officers and executives, and directors of, and consultants and advisors to, the Company. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards. All options are amortized ratably over the requisite service periods of the awards, which are generally the vesting periods.

The fair value for options granted was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:

 

     Nine Months Ended
September 30,
 
     2010     2009  

Weighted average fair value of options granted

   $ 9.70      $ 4.91   

Risk free interest rate

     2.3     2.1

Dividend yield

     0.0     0.0

Volatility factor of the expected market price of the Company’s common stock

     62.0     57.0

Weighted-average expected life of options

     5 Years        5 Years   

Unrecognized compensation cost related to stock options as of September 30, 2010 was $3.7 million. The weighted-average remaining expense period, based on the unamortized value of these outstanding stock options was approximately 2.1 years.

A summary of the Company’s stock option activity as of September 30, 2010, and changes during the nine months then ended, is presented below:

 

     Number of
Shares
    Option Price
Per Share
     Weighted
Average
Exercise
Price
     Aggregate
Intrinsic
Value
(in thousands)
 

Outstanding at December 31, 2009

     2,667,137      $ 0.35 – $20.09       $ 9.28      

Granted

     215,000        17.90         17.90      

Cancelled/forfeited

     (39,333     2.89 – 17.90         11.13      

Exercised

     (325,813     0.35 – 16.19         5.44      
                            

Outstanding at September 30, 2010

     2,516,991      $ 0.35 – $20.09       $ 10.48       $ 19,093   
                            

Exercisable at September 30, 2010

     1,549,927      $ 0.35 – $20.09       $ 9.58       $ 13,201   
                            

 

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The total intrinsic value of options exercised during the nine months ended September 30, 2010 and 2009 was $4.9 million and $0.1 million, respectively. As of September 30, 2010, the weighted-average remaining contractual life of options outstanding and options exercisable was 6.2 years and 4.6 years, respectively.

Non-Vested Shares

Under the Company’s 2005 Plan, employees, officers and executives and directors of, and consultants and advisors to, the Company are eligible to receive restricted stock units and restricted stock awards. In accordance with the authoritative guidance, the fair value of these non-vested shares is equal to the closing sale price of the Company’s common stock on the date of issuance. The total number of these awards expected to vest is adjusted by estimated forfeiture rates. As of September 30, 2010, 88,825 of the non-vested shares are expected to vest over approximately one to two years based on certain performance goals (“Performance-Based Awards”). The fair value of the Performance-Based Awards is expensed over the expected vesting period, net of estimated forfeitures. If performance goals are not expected to be met, the compensation expense previously recognized would be reversed. No reversals of compensation expense related to the Performance-Based Awards have been made as of September 30, 2010. The remaining 621,157 non-vested shares are not performance-based, and will vest over approximately one to five years of continuous service.

A summary of the status of the Company’s non-vested shares as of September 30, 2010, and changes during the nine months then ended, is presented below:

 

Non-Vested Shares

   Non-Vested
Shares
    Weighted Average
Grant Date
Fair Value
 

Non-vested at December 31, 2009

     675,790      $ 9.27   

Awarded

     343,582      $ 17.87   

Vested

     (275,725   $ 10.47   

Cancelled/forfeited

     (33,665   $ 14.27   
          

Non-vested at September 30, 2010

     709,982      $ 12.73   
          

Unrecognized compensation expense related to non-vested shares as of September 30, 2010, was $5.2 million. The weighted-average remaining expense period, based on the unamortized value of these outstanding non-vested shares was approximately 2.5 years. The fair value of vested shares during the nine months ended September 30, 2010 and 2009 was $4.8 million and $1.1 million, respectively.

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 consumer 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 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 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.

 

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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 income 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.

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 current period (in thousands):

 

     Accretable
Yield
    Estimate of
Zero Basis
Cash Flows
    Total  

Balance at December 31, 2009

   $ 628,439      $ 4,695      $ 633,134   

Revenue recognized, net

     (80,851     (2,056     (82,907

Net additions to existing portfolios

     45,179        1,702        46,881   

Additions for current purchases

     93,430        —          93,430   
                        

Balance at March 31, 2010

   $ 686,197      $ 4,341      $ 690,538   
                        

Revenue recognized, net

     (89,490     (2,355     (91,845

Additions to existing portfolios, net

     16,481        1,960        18,441   

Additions for current purchases

     95,862        —          95,862   
                        

Balance at June 30, 2010

   $ 709,050      $ 3,946      $ 712,996   
                        

Revenue recognized, net

     (90,744     (3,078     (93,822

(Reductions) additions to existing portfolios, net

     (3,783     2,814        (969

Additions for current purchases

     93,907        —          93,907   
                        

Balance at September 30, 2010

   $ 708,430      $ 3,682      $ 712,112   
                        

 

     Accretable
Yield
    Estimate of
Zero Basis
Cash Flows
    Total  

Balance at December 31, 2008

   $ 592,825      $ 8,337      $ 601,162   

Revenue recognized, net

     (69,775     (2,500     (72,275

Net additions to existing portfolios

     5,715        1,032        6,747   

Additions for current purchases

     81,917        —          81,917   
                        

Balance at March 31, 2009

   $ 610,682      $ 6,869      $ 617,551   
                        

Revenue recognized, net

     (71,576     (2,389     (73,965

(Reductions) additions to existing portfolios, net

     (15,399     2,614        (12,785

Additions for current purchases

     106,771        —          106,771   
                        

Balance at June 30, 2009

   $ 630,478      $ 7,094      $ 637,572   
                        

Revenue recognized, net

     (74,335     (2,113     (76,448

(Reductions) additions to existing portfolios, net

     (12,805     511        (12,294

Additions for current purchases

     104,569        —          104,569   
                        

Balance at September 30, 2009

   $ 647,907      $ 5,492      $ 653,399   
                        

During the three months ended September 30, 2010, the Company purchased receivable portfolios with a face value of $2.6 billion for $77.9 million, or a purchase cost of 3.0% of face value. The estimated future collections at acquisition for these portfolios amounted to $166.2 million. During the nine months ended September 30, 2010, the Company purchased receivable portfolios with a face value of $7.0 billion for $242.9 million, or a purchase cost of 3.5% of face value. The estimated future collections at acquisition for these portfolios amounted to $513.9 million.

 

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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”) or allowance reversal if applicable. Zero Basis Revenue was $2.6 million (net of allowance reversals of $0.5 million) and $2.1 million during the three months ended September 30, 2010 and 2009, respectively. Zero Basis Revenue was $7.5 million (net of allowance reversals of $0.5 million) and $7.0 million during the nine months ended September 30, 2010 and 2009, respectively.

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 September 30, 2010  
     Accrual Basis
Portfolios
    Cost Recovery
Portfolios
    Zero Basis
Portfolios
    Total  

Balance, beginning of period

   $ 566,815      $ —        $ —        $ 566,815   

Purchases of receivable portfolios

     77,889        —          —          77,889   

Gross collections(1)

     (154,251     —          (3,078     (157,329

Put-backs and recalls(2)

     (1,043     —          —          (1,043

Revenue recognized(3)

     97,247        —          2,632        99,879   

(Portfolio allowances) portfolio allowance reversals, net

     (6,503     —          446        (6,057
                                

Balance, end of period

   $ 580,154      $ —        $ —        $ 580,154   
                                

Revenue as a percentage of collections(4)

     63.0     0.0     85.5     63.5
                                

 

     Three Months Ended September 30, 2009  
     Accrual Basis
Portfolios
    Cost Recovery
Portfolios
    Zero Basis
Portfolios
    Total  

Balance, beginning of period

   $ 506,155      $ 553      $ —        $ 506,708   

Purchases of receivable portfolios

     77,734        —          —          77,734   

Gross collections(1)

     (123,498     (25     (2,113     (125,636

Put-backs and recalls(2)

     (598     —          —          (598

Revenue recognized(3)

     78,680        —          2,100        80,780   

(Portfolio allowances) portfolio allowance reversals, net

     (4,345     —          13        (4,332
                                

Balance, end of period

   $ 534,128      $ 528      $ —        $ 534,656   
                                

Revenue as a percentage of collections(4)

     63.7     0.0     99.4     64.3
                                

 

     Nine Months Ended September 30, 2010  
     Accrual Basis
Portfolios
    Cost Recovery
Portfolios
    Zero Basis
Portfolios
    Total  

Balance, beginning of period

   $ 526,366      $ 511      $ —        $ 526,877   

Purchases of receivable portfolios

     242,857        —          —          242,857   

Gross collections(1)

     (447,702     (55     (7,490     (455,247

Put-backs and recalls(2)

     (2,907     —          —          (2,907

Revenue recognized(3)

     278,308        —          7,043        285,351   

(Portfolio allowances) portfolio allowance reversals, net

     (16,768     (456     447        (16,777
                                

Balance, end of period

   $ 580,154      $ —        $ —        $ 580,154   
                                

Revenue as a percentage of collections(4)

     62.2     0.0     94.0     62.7
                                

 

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     Nine Months Ended September 30, 2009  
     Accrual Basis
Portfolios
    Cost Recovery
Portfolios
    Zero Basis
Portfolios
    Total  

Balance, beginning of period

   $ 460,598      $ 748      $ —        $ 461,346   

Purchases of receivable portfolios

     215,680        —          —          215,680   

Gross collections(1)

     (355,812     (220     (6,998     (363,030

Put-backs and recalls(2)

     (2,024     —          (4     (2,028

Revenue recognized(3)

     230,054        —          6,957        237,011   

(Portfolio allowances) portfolio allowance reversals, net

     (14,368     —          45        (14,323
                                

Balance, end of period

   $ 534,128      $ 528      $ —        $ 534,656   
                                

Revenue as a percentage of collections(4)

     64.7     0.0     99.4     65.3
                                

 

(1)

Does not include amounts collected on behalf of others.

 

(2)

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”).

 

(3)

Includes retained interest.

 

(4)

Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.

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
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Balance at beginning of period

   $ 87,182      $ 67,143      $ 76,462      $ 57,152   

Provision for portfolio allowances

     7,690        4,855        22,079        15,157   

Reversal of prior allowances

     (1,633     (523     (5,302     (834
                                

Balance at end of period

   $ 93,239      $ 71,475      $ 93,239      $ 71,475   
                                

The Company currently utilizes various business channels for the collection of its receivables. The following table summarizes the collections by collection channel (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2010      2009      2010      2009  

Collection sites

   $ 67,089       $ 45,122       $ 199,513       $ 140,144   

Legal collections

     71,773         55,584         196,995         173,451   

Collection agencies

     18,065         19,705         57,777         42,878   

Sales

     —           5,299         —           6,843   

Other

     445         —           1,143         —     
                                   
   $ 157,372       $ 125,710       $ 455,428       $ 363,316   
                                   

Note 7: Deferred Court Costs

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 debtor 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 advanced and those that have been recovered. Deferred Court Costs not recovered within three years of placement are fully written off. Collections received from these debtors are first applied against related court costs with the balance applied to the debtors’ account.

 

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Deferred Court Costs for the three-year deferral period consist of the following as of the dates presented (in thousands):

 

     September 30,
2010
    December 31,
2009
 

Court costs advanced

   $ 186,390      $ 172,488   

Court costs recovered

     (47,897     (44,980

Court costs reserve

     (111,963     (101,551
                
   $ 26,530      $ 25,957   
                

Note 8: Other Assets

Other assets consist of the following (in thousands):

 

     September 30,
2010
     December 31,
2009
 

Debt issuance costs, net of amortization

   $ 5,536       $ 553   

Prepaid expenses

     3,286         1,728   

Security deposit – India building lease

     1,042         1,013   

Deferred compensation assets

     772         758   

Other

     1,148         200   
                 
   $ 11,784       $ 4,252   
                 

Deferred compensation assets represent monies held in a trust associated with the Company’s deferred compensation plan.

Note 9: Debt

The Company is obligated under borrowings, as follows (in thousands):

 

     September 30,
2010
     December 31,
2009
 

Convertible notes

   $ —         $ 42,920   

Less: Debt discount

     —           (2,013

Senior secured notes

     50,000         —     

Revolving credit facility

     279,500         260,000   

Capital lease obligations

     5,422         2,168   
                 
   $ 334,922       $ 303,075   
                 

Convertible Senior Notes

The Company’s Convertible Notes matured on September 20, 2010. On that date, the Company repaid the remaining $42.9 million balance outstanding under the notes.

In accordance with applicable accounting literature, the Company was required to separately account for the liability and equity components of its Convertible Notes in a manner that reflected the Company’s nonconvertible debt borrowing rate. The effective interest rate on the liability component of the Convertible Notes was 10.38%. Interest expense related to the Convertible Notes was as follows (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2010      2009      2010      2009  

Interest expense – stated coupon rate

   $ 314       $ 369       $ 1,038       $ 908   

Interest expense – amortization of debt discount

     628         650         2,013         1,560   
                                   

Total interest expense – convertible notes

   $ 942       $ 1,019       $ 3,051       $ 2,468   
                                   

 

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Senior Secured Notes

On September 20, 2010, the Company issued $50.0 million in senior secured notes (the “Senior Secured Notes”) to certain affiliates of Prudential Capital Group (“Prudential Capital Group”) through a private placement transaction. The Senior Secured Notes bear an annual interest rate of 7.75% and mature in 2017 with principal amortization beginning in December 2012. Interest on the Senior Secured Notes is payable quarterly on March 17, June 17, September 17 and December 17 of each year. Principal payments of $2.5 million are payable on December 17, 2012 and on each March 17, June 17, September 17 and December 17 thereafter, up to and including June 17, 2017 (or a lesser amount as may be outstanding). The Senior Secured Notes are guaranteed in full by certain of the Companies’ subsidiaries and are collateralized by all assets of the Company. 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 the Company, including breach of affirmative covenants regarding guarantors, collateral, most favored lender treatment or minimum revolving credit facility commitment, or the breach of any negative covenant. If the Company 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 shall be 50 basis points over the then current Treasury Rate corresponding to the remaining average life. The covenants are substantially similar to those in the Revolving Credit Facility and the parties have an intercreditor agreement related to collateral. The proceeds from the Senior Secured Notes have been used to reduce aggregate outstanding borrowings under the Company’s existing Revolving Credit Facility, including borrowings incurred to repay the remaining $42.9 million of Convertible Notes that matured September 20, 2010.

Pursuant to Securities and Exchange Committee rules, the Company has concluded that separate financial statements or condensed consolidating financial information are not required as the guarantees related to the Senior Secured Notes are full and unconditional and joint and several, and the subsidiary of the parent company other than the subsidiary guarantors are minor.

Revolving Credit Facility

On February 8, 2010, the Company entered into a new $327.5 million revolving credit facility (“2010 Revolving Credit Facility”) to be used for the purpose of purchasing receivable portfolios and for general working capital needs. The 2010 Revolving Credit Facility expires on December 31, 2013.

The 2010 Revolving Credit Facility contains an accordion feature which allows the Company, on or subsequent to closing, at its option, and subject to customary conditions, to request an increase in the facility of up to $100.0 million by obtaining one or more commitments from one or more lenders or other entities with the consent of the administrative agent, but without the consent of any other lenders.

On July 15, 2010, the Company obtained an additional $33.0 million in commitments from lenders and exercised a portion of its $100.0 million accordion feature.

On September 20 and 21, 2010, the Company amended its Revolving Credit Facility. The amendments allow for the addition of the $50.0 million in Senior Secured Notes and include a feature that would allow the Company to issue up to $25 million of additional notes to Prudential Capital Group under terms equivalent to the Senior Secured Notes. The accordion feature of the facility was also reset to $100 million, increasing the facility maximum from $427.5 million to $460.5 million and the maturity of the facility was extended from May 3, 2013 to December 31, 2013.

Provisions of the 2010 Revolving Credit Facility include:

 

   

Interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR plus a spread that ranges from 350 to 400 basis points, depending on the Company’s leverage; or (2) Alternate Base Rate (“ABR”) plus a spread that ranges from 250 to 300 basis points, depending on the Company’s leverage. ABR, as defined in the agreement, means the highest of (i) the rate of interest publicly announced by JP Morgan Chase Bank as its prime rate in effect at its principal office in New York City, (ii) the federal funds effective rate from time to time plus 0.5% and (iii) reserved adjusted LIBOR for a one month interest period on the applicable date plus 1%;

 

   

$10.0 million sub-limits for swingline loans and letters of credit;

 

   

A borrowing base equal to (i) the lesser of (1) 30% of eligible estimated remaining collections and (2) the product of the net book value of all receivable portfolios acquired on or after January 1, 2005 multiplied by 95%, minus (ii) the aggregate principal amount outstanding in respect of the Senior Secured Notes;

 

   

Restrictions and covenants, which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens;

 

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Repurchases of up to $50.0 million of the Company’s common stock, 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 I LP and their respective affiliates of up to 50% of the outstanding shares of the Company’s voting stock;

 

   

Events of default which, upon occurrence, may permit the lenders to terminate the 2010 Revolving Credit Facility and declare all amounts outstanding to be immediately due and payable;

 

   

An annual capital expenditure maximum of $12.5 million;

 

   

An annual rental expense maximum of $12.5 million;

 

   

An outstanding capital lease maximum of $12.5 million;

 

   

An acquisition limit of $100.0 million; and

 

   

Collateralization by all assets of the Company.

As of September 30, 2010, the outstanding balance on the 2010 Revolving Credit Facility was $279.5 million, which bore a weighted average interest rate of 4.68% and 4.65% for the three and nine months ended September 30, 2010, respectively. As of September 30, 2010, the aggregate borrowing base under the Revolving Credit Facility was $360.5 million, of which $81.0 million was available for future borrowings. The Company is in compliance with all covenants under its financing arrangements.

Capital Lease Obligations

The Company has capital lease obligations for certain computer equipment. As of September 30, 2010, the Company’s combined obligation was approximately $4.2 million. These lease obligations require monthly or quarterly payments through September 2013 and have implicit interest rates that range from approximately 5.9% to 7.7%.

The Company has financed certain leasehold improvement projects with its lessors in its Phoenix and St. Cloud facilities. As of September 30, 2010, the Company’s combined obligation was approximately $0.8 million. These financing agreements require monthly principal and interest payments, accrue interest at 8% to 9% per annum and will mature in June and September 2013.

Note 10: Income Taxes

During the three months ended September 30, 2010, the Company recorded an income tax provision of $6.6 million, reflecting an effective rate of 35.0% of pretax income. The effective tax rate for the three months ended September 30, 2010, consisted of a provision for federal income taxes of 32.8% (which is net of a benefit for state taxes of 2.2%), a provision for state taxes of 6.4%, a benefit of permanent book versus tax differences of 1.6%, a benefit of an Internal Revenue Service (“IRS”) refund of interest of 0.5%, a benefit from a state refund of 0.3%, and a benefit for the reduction in the state effective tax rate and the applicable true-up of the state and federal tax accounts of 1.8%. During the three months ended September 30, 2009, the Company recorded an income tax provision of $5.9 million, reflecting an effective rate of 39.8% of pretax income. The effective tax rate for the three months ended September 30, 2009, primarily consisted of a provision for federal income taxes of 32.3% (which is net of a benefit for state taxes of 2.7%), a provision for state taxes of 7.8%, a benefit of permanent book versus tax differences of 0.6% and a provision for the true-up of the state and federal tax accounts of 0.3%.

During the nine months ended September 30, 2010, the Company recorded an income tax provision of $19.9 million, reflecting an effective rate of 36.3% of pretax income. The effective tax rate for the nine months ended September 30, 2010, consisted of a provision for federal income taxes of 32.8% (which is net of a benefit for state taxes of 2.2%), a provision for state taxes of 6.4%, a benefit of permanent book versus tax differences of 1.8%, a benefit of an IRS tax refund including interest of 0.7%, a benefit from a state tax refund of 0.1%, and a benefit for the reduction in the state effective tax rate and the applicable true-up of the state and federal tax accounts of 0.3% . During the nine months ended September 30, 2009, the Company recorded an income tax provision of $16.1 million, reflecting an effective rate of 39.5% of pretax income. The effective tax rate for the nine months ended September 30, 2009, primarily consisted of a provision for federal income taxes of 32.3% (which is net of a benefit for state taxes of 2.7%), a provision for state taxes of 7.8%, and a benefit of permanent book versus tax differences of 0.6%.

As of September 30, 2010, the Company had a gross unrecognized tax benefit of $0.7 million that, if recognized, would result in a net tax benefit of approximately $0.5 million and would reduce the Company’s effective tax rate. During the three months ended September 30, 2010, the Company recorded a $0.3 million tax benefit, which was the result of an amended and current Michigan state tax return.

 

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For the three and nine months ended September 30, 2010, the Company has not provided for the United States income taxes or foreign withholding taxes on the quarterly undistributed earnings from continuing operations of its subsidiary operating outside of the United States. Undistributed earnings of the subsidiary for the three and nine months ended September 30, 2010, were approximately $0.8 million and $3.3 million, respectively. Such undistributed earnings are considered permanently reinvested.

The Company’s subsidiary operating outside of the United States is currently operating under a tax holiday in India. The tax holiday is due to expire on March 31, 2011. The impact of the tax holiday on the Company’s consolidated financial statements is not material.

Note 11: Purchase Concentrations

The following table summarizes the concentration of initial purchase cost by seller sorted by total aggregate costs (in thousands, except percentages):

 

     Nine Months Ended
September 30, 2010
 
   Cost     %  

Seller 1

   $ 45,580        18.7

Seller 2

     37,610        15.5

Seller 3

     36,241        14.9

Seller 4

     33,658        13.9

Seller 5

     29,517        12.2

Other sellers

     60,251        24.8
                
   $ 242,857        100.0

Adjustments(1)

     (771  
          

Purchases, net

   $ 242,086     
          

 

(1)

Adjusted for Put-backs and Recalls.

Note 12: Commitments and Contingencies

Litigation

The Company, along with others in its industry, is subject to legal actions based on the Fair Debt Collection Practices Act, (“FDCPA”), and comparable state statutes, which could have a material adverse effect on it due to the remedies available under these statutes, including punitive damages. 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, and has made inaccurate assertions of fact in support of its collection actions. A number of these cases are styled as class actions and a class has been certified in several of these cases. Many of these cases present novel issues on which there is no clear legal precedent. As a result, the Company is unable to predict the range of possible outcomes.

There are a number of other lawsuits, claims and counterclaims pending or threatened against the Company. In general, these lawsuits, claims or counterclaims have arisen in the ordinary course of business and involve claims for damages arising from a variety of alleged misconduct or improper reporting of credit information by the Company or its employees or agents. In addition, from time to time, the Company is subject to various regulatory investigations, inquiries and other actions, relating to its collection activities.

The Company has established loss provisions only for matters in which losses are probable and can be reasonably estimated. Some of the matters pending against the Company involve potential compensatory, punitive damage claims, fines or sanctions that, if granted, could require it to pay damages or make other expenditures in amounts that could have a material adverse effect on its financial position or results of operations. Although litigation is inherently uncertain, at this time, based on past experience, the information currently available and the possible availability of insurance and/or indemnification in some cases, the Company does not believe that the resolution of these matters will have a material adverse effect on its consolidated financial position or its results of operations.

Purchase Commitments

In the normal course of business, the Company enters into forward flow purchase agreements and other purchase commitment agreements. As of September 30, 2010, the Company has entered into agreements to purchase receivable portfolios with a face value of approximately $1.9 billion for a purchase price of approximately $66.6 million. Certain of these agreements allow the Company to terminate the commitment with 60 days notice or by paying a one-time cancellation fee. The Company does not anticipate cancelling any of these commitments at this time. The Company has no purchase commitments extending past one year.

 

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

Special Note on Forward-Looking Statements

The following discussion contains, in addition to historical information, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements that are other than historical information are forward-looking statements. For example, statements relating to our beliefs, expectations and plans are forward-looking statements, as are statements that certain actions, conditions or circumstances will continue. Forward-looking statements involve risks and uncertainties, which are difficult to predict and many of which are beyond our control. Therefore, actual results could differ materially and adversely from those expressed in any forward-looking statements. For additional information regarding factors that may affect our actual financial condition and results of operations, see the information under the caption “Risk Factors” in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2009 and herein. We undertake no obligation to revise or update any forward-looking statements for any reason.

Introduction

We purchase portfolios of defaulted consumer receivables and manage 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, auto finance companies and telecommunication companies which we purchase at deep discounts. Defaulted receivables include receivables subject to bankruptcy proceedings, or consumer bankruptcy receivables. Success in our business hinges on understanding, measuring, and predicting distressed consumer behavior, and we have invested heavily to build one of the industry’s strongest analytic platforms. We purchase receivables based on account-level valuation methods, and employ a suite of proprietary statistical models across the full extent of our operations. Moreover, we have one of the industry’s largest distressed consumer databases, comprised of approximately 20 million accounts. As a result, we have been able to historically realize significant returns from receivables we acquire. Our performance derives from our sophisticated and widespread use of analytics, our investments in data and consumer intelligence, our cost leadership position (based on our enterprise-wide, account-level cost database as well as our India facility), and our commitment to see principled intent drive every consumer interaction. We maintain strong relationships with many of the largest credit providers in the United States, and possess one of the industry’s best collection staff retention rates.

In addition, we provide bankruptcy support services to some of the largest companies in the financial services industry through our wholly-owned subsidiary Ascension Capital Group, Inc. (“Ascension”). Leveraging a proprietary software platform dedicated to bankruptcy servicing, Ascension’s operational platform integrates lenders, trustees, and consumers across the bankruptcy lifecycle.

Market Overview

While there has been some improvement in macroeconomic indicators during 2010, a broad economic recovery has yet to take hold. Minimal new jobs’ growth and limited credit availability continue to challenge U.S. consumers as demonstrated by weak consumer spending and volatile consumer confidence levels. Within the credit card space, we find mixed signals. Although charge-off rates remain at historic highs, delinquency levels have improved at a rate that may indicate a fundamental improvement in consumer financial strength. However, related measures, like personal bankruptcies and home foreclosures, remain elevated and indicate continued near-term pressure on the average consumer.

Despite this macroeconomic volatility, through the first three quarters of 2010, most of our internal collection metrics were consistent with, or better than, what we observed in 2008 and 2009. To illustrate, payer rates and average payment size, adjusted for changes in settlement-in-full vs. payment plan mix, remained constant. However, more of our consumers are opting to settle their debt obligations through payment plans as opposed to one-time settlements. Settlements made through payment plans impact our recoveries in two ways. First, the delay in cash flows from payments received over extended time periods may result in a provision for portfolio allowance. When a long-term payment stream (as compared to a one-time payment of the same amount) is discounted using a pool group’s internal rate of return, or IRR, the net present value is lower. In other words, despite the absolute value of total cash received being identical in both scenarios, accounting for the timing of cash flows in a payment plan yields a lower net present value which, in turn, can result in a provision for portfolio allowance. Second, payment plans inherently contain the possibility of consumers failing to complete all scheduled payments, which we term a “broken payer.”

 

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Despite the generally negative broad macroeconomic environment, the rate at which consumers are honoring their obligations and completing their payment plans has increased in 2010 when compared to 2009. We believe this is the result of two factors. The first is our commitment to partner effectively with consumers during their recovery process. The second is the strength of our analytic platform, which allows us to make accurate and timely decisions about how best to maximize our portfolio returns. Nevertheless, payment plans may still produce broken payers that fail to fulfill all scheduled payments. When this happens, we are often successful in getting the consumer back on plan, but this is not always the case and in those instances where we are unable to do so, we experience a shortfall in recoveries as compared to our initial forecasts. Please refer to “Management’s Discussion and Analysis—Revenue” below for a more detailed explanation of the provision for portfolio allowances for the three and nine months ended September 30, 2010.

Throughout the credit crisis, we strategically invested in receivable portfolio as credit card charge-offs increased to historic levels and we believe that some of our competitors were (i) caught owning receivables with low yields as a result of purchasing certain portfolios at elevated pricing levels between 2005 and 2008 and (ii) faced with constrained access to capital to fund portfolio purchases due to depressed capital markets. These dynamics resulted in a recent supply-demand gap that dramatically reduced pricing of available portfolios, beginning in early 2009. For example, prices for freshly charged-off assets (i.e., receivables sold within thirty days of charge-off by the credit issuers) declined from a range of 8% – 13% in 2008 to a range of 5% – 9% in 2009 and early 2010. Similar price reductions were apparent across a broad range of defaulted consumer receivable asset classes (including credit cards and other consumer loans), balance ranges, and ages. After such a dramatic decline, pricing over the last few months has started to increase incrementally, but remains favorable when compared to 2005 through 2008 levels. In response to the price declines in 2009 and 2010, some issuers have opted not to sell all of their receivable portfolio and, instead, have pursued internal liquidation strategies or partnering with third party agencies. We believe that as pricing increases, these issuers will sell a greater percentage of their charged-off portfolios.

In light of the uncertainties presented by current market conditions, we believe we are employing a conservative approach to portfolio valuation as well as to forecasting recoveries. Furthermore, while we believe that consumers who have recently defaulted on their credit card debt (i.e., during bad economic conditions) are more likely to recover faster than consumers who have defaulted during earlier, stronger economic times, we have not factored this perspective into our forecasts.

When evaluating the long-term returns of our business, we believe that the benefits arising from the abovementioned conditions will outweigh the potential negative impact to recoveries stemming from additional consumer distress. However, our returns could be negatively impacted if the current environment re-attracts significant capital to our industry, causing prices to increase, or if the ability of consumers to repay their debt deteriorates further.

Purchases and Collections

Purchases

The following table summarizes the types of receivable portfolios we purchased for the three and nine months ended September 30, 2010 and 2009 (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

Credit card

   $ 65,600       $ 77,734       $ 227,091       $ 215,680   

Consumer bankruptcy receivables(1)

     7,924         —           7,924         —     

Telecom

     4,365         —           7,842         —     
                                   
   $ 77,889       $ 77,734       $ 242,857       $ 215,680   
                                   

 

 

(1)

Represents portfolio receivables subject to Chapter 13 and Chapter 7 bankruptcy proceedings acquired from issuers.

During the three months ended September 30, 2010, we invested $77.9 million in receivable portfolios, primarily for charged-off credit card, telecom and bankruptcy portfolios, with face values aggregating $2.6 billion, for an average purchase price of 3.0% of the face value of the purchased receivables. This is a $0.2 million increase, or 0.2%, in the amount invested, compared with the $77.7 million invested during the three months ended September 30, 2009, to acquire receivable portfolios, primarily consisting of charged-off credit card portfolios, with a face value aggregating $2.2 billion for an average purchase price of 3.6% of the face value of the purchased receivables.

 

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During the nine months ended September 30, 2010, we invested $242.9 million in receivable portfolios, primarily for charged-off credit card, telecom and bankruptcy portfolios with face values aggregating $7.0 billion, for an average purchase price of 3.5% of the face value of the purchased receivables. This is a $27.2 million increase, or 7.0%, in the amount invested, compared with the $215.7 million invested during the nine months ended September 30, 2009, to acquire receivable portfolios, primarily consisting of charged-off credit card portfolios, with a face value aggregating $5.5 billion for an average purchase price of 4.0% of the face value of the purchased receivables.

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.

Collections by Channel

We utilize numerous business channels for the collection of charged-off credit card receivables and other charged-off receivables. The following table summarizes gross collections by collection channel in the respective periods (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

Collection sites

   $ 67,089       $ 45,122       $ 199,513       $ 140,144   

Legal collections

     71,773         55,584         196,995         173,451   

Collection agencies

     18,065         19,705         57,777         42,878   

Sales

     —           5,299         —           6,843   

Other

     445         —           1,143         —     
                                   
   $ 157,372       $ 125,710       $ 455,428       $ 363,316   
                                   

Gross collections increased $31.7 million, or 25.2%, to $157.4 million during the three months ended September 30, 2010, from $125.7 million during the three months ended September 30, 2009. Gross collections increased $92.1 million, or 25.4%, to $455.4 million during the nine months ended September 30, 2010, from $363.3 million during the nine months ended September 30, 2009.

A portion of our collections comes from the weekly remittances we receive from our law firm and agency partners. Typically there are 13 remittances in each quarter; however, there were 14 remittances during the three months ended September 30, 2010, 12 remittances during the three months ended March 31, 2010 and the typical 13 remittances during the three months ended June 30, 2010. As our average weekly remittances have grown to approximately $6.5 million, our collections for the three months ended September 30, 2010 were positively affected by the one additional weekly remittance. There were 13 remittances in each quarter during each of the three months ended March 31, 2009, June 30, 2009 and September 2009. The fourth quarter of 2010 will have the typical 13 weekly remittances. Our business typically experiences seasonality where collections decline in the third and fourth quarters. As a result of seasonality and the impact of weekly remittances described above, we anticipate that collections in the fourth quarter of 2010 will decrease from the third quarter of 2010.

 

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Results of Operations

Results of operations in dollars and as a percentage of total revenue were as follows (in thousands, except percentages):

 

     Three Months Ended September 30,  
     2010     2009  

Revenue

        

Revenue from receivable portfolios, net

   $ 93,822        95.8   $ 76,448        95.1

Servicing fees and related revenue

     4,145        4.2     3,938        4.9
                                

Total revenue

     97,967        100.0     80,386        100.0
                                

Operating expenses

        

Salaries and employee benefits

     16,166        16.5     14,411        17.9

Stock-based compensation expense

     1,549        1.6     1,261        1.6

Cost of legal collections

     33,851        34.6     26,092        32.5

Other operating expenses

     9,512        9.7     6,034        7.5

Collection agency commissions

     5,389        5.5     5,795        7.2

General and administrative expenses

     6,982        7.1     7,280        9.1

Depreciation and amortization

     816        0.8     652        0.8
                                

Total operating expenses

     74,265        75.8     61,525        76.6
                                

Income before other (expense) income and income taxes

     23,702        24.2     18,861        23.4
                                

Other (expense) income

        

Interest expense

     (4,928     (5.0 )%      (3,970     (4.9 )% 

Other income

     148        0.1     61        0.1
                                

Total other expense

     (4,780     (4.9 )%      (3,909     (4.8 )% 
                                

Income before income taxes

     18,922        19.3     14,952        18.6

Provision for income taxes

     (6,632     (6.8 )%      (5,948     (7.4 )% 
                                

Net income

   $ 12,290        12.5   $ 9,004        11.2
                                

 

     Nine Months Ended September 30,  
     2010     2009  

Revenue

        

Revenue from receivable portfolios, net

   $ 268,574        95.2   $ 222,688        94.8

Servicing fees and related revenue

     12,962        4.8     12,179        5.2
                                

Total revenue

     281,536        100.0     234,867        100.0
                                

Operating expenses

        

Salaries and employee benefits

     48,135        17.1     43,130        18.4

Stock-based compensation expense

     4,756        1.7     3,335        1.4

Cost of legal collections

     91,519        32.5     84,665        36.1

Other operating expenses

     27,653        9.8     18,612        7.9

Collection agency commissions

     17,098        6.1     13,483        5.7

General and administrative expenses

     21,286        7.5     20,074        8.6

Depreciation and amortization

     2,241        0.8     1,895        0.8
                                

Total operating expenses

     212,688        75.5     185,194        78.9
                                

Income before other (expense) income and income taxes

     68,848        24.5     49,673        21.1
                                

Other (expense) income

        

Interest expense

     (14,346     (5.1 )%      (12,201     (5.2 )% 

Gain on repurchase of convertible notes, net

     —          0.0     3,268        1.4

Other income (expense)

     250        0.1     (11     (0.0 )% 
                                

Total other expense

     (14,096     (5.0 )%      (8,944     (3.8 )% 
                                

Income before income taxes

     54,752        19.5     40,729        17.3

Provision for income taxes

     (19,871     (7.1 )%      (16,087     (6.8 )% 
                                

Net income

   $ 34,881        12.4   $ 24,642        10.5
                                

 

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Comparison of Results of Operations

Revenue

Our revenue consists primarily of portfolio revenue and bankruptcy servicing revenue. 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 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 or allowance reversal if applicable. 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. Servicing fee revenue is revenue primarily associated with bankruptcy servicing fees earned from our Ascension subsidiary, a provider of bankruptcy services to the finance industry.

The following tables summarize collections, revenue, end of period receivable balance and other related supplemental data, by year of purchase (in thousands, except percentages):

 

     Three Months Ended September 30, 2010     As of
September 30, 2010
 
     Collections(1)      Gross
Revenue(2)
     Revenue
Recognition
Rate(3)
    Net
Reversal

(Portfolio
Allowance)
    Revenue
%  of

Total
Revenue
    Unamortized
Balances
     Monthly
IRR(4)
 

ZBA

   $ 3,078       $ 2,632         85.5   $ 446        2.6   $ —           —     

2003

     490         8         1.6     457        0.0     —           30.3

2004

     2,020         574         28.4     624        0.6     1,964         6.7

2005

     6,708         3,804         56.7     (403     3.8     20,555         5.6

2006

     6,439         5,055         78.5     (2,533     5.1     31,326         5.1

2007

     17,033         10,435         61.3     (1,240     10.5     42,900         7.0

2008

     31,095         18,406         59.2     (3,408     18.4     111,207         5.1

2009

     50,958         33,477         65.7     —          33.5     163,442         6.4

2010

     39,508         25,488         64.5     —          25.5     208,760         4.5
                                                           

Total

   $ 157,329       $ 99,879         63.5   $ (6,057     100.0   $ 580,154         5.4
                                                           
     Three Months Ended September 30, 2009     As of
September 30, 2009
 
     Collections(1)      Gross
Revenue(2)
     Revenue
Recognition
Rate(3)
    Net
Reversal

(Portfolio
Allowance)
    Revenue
%  of

Total
Revenue
    Unamortized
Balances
     Monthly
IRR(4)
 

ZBA

   $ 2,100       $ 2,100         100.0   $ —          2.6   $ —           —     

2002

     630         31         4.9     511        0.0     —           0.0

2003

     1,770         1,240         70.1     (86     1.5     967         31.2

2004

     2,648         1,571         59.3     (147     1.9     5,688         8.2

2005

     10,729         6,223         58.0     (403     7.7     33,805         5.6

2006

     12,274         7,698         62.7     (59     9.5     46,932         5.1

2007

     25,659         14,727         57.4     (2,247     18.3     79,562         5.6

2008

     38,715         26,861         69.4     (1,901     33.3     170,640         5.0

2009

     31,111         20,329         65.3     —          25.2     197,062         4.3
                                                           

Total

   $ 125,636       $ 80,780         64.3   $ (4,332     100.0   $ 534,656         5.0
                                                           

 

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     Nine Months Ended September 30, 2010     As of
September 30, 2010
 
     Collections(1)      Gross
Revenue(2)
     Revenue
Recognition
Rate(3)
    Net
Reversal

(Portfolio
Allowance)
    Revenue
%  of

Total
Revenue
    Unamortized
Balances
     Monthly
IRR(4)
 

ZBA

   $ 7,489       $ 7,043         94.0   $ 447        2.5   $ —           —     

2002

     417         —           0.0     417        0.0     —           —     

2003

     3,215         759         23.6     1,829        0.3     —           30.3

2004

     6,369         2,479         38.9     1,260        0.9     1,964         6.7

2005

     21,735         13,072         60.1     (1,585     4.6     20,555         5.6

2006

     20,986         17,009         81.0     (7,797     6.0     31,326         5.1

2007

     57,311         34,595         60.4     (3,108     12.1     42,900         7.0

2008

     100,560         62,247         61.9     (8,240     21.7     111,207         5.1

2009

     160,066         104,365         65.2     —          36.6     163,442         6.4

2010

     77,099         43,782         56.8     —          15.3     208,760         4.5
                                                           

Total

   $ 455,247       $ 285,351         62.7   $ (16,777     100.0   $ 580,154         5.4
                                                           

 

     Nine Months Ended September 30, 2009     As of
September 30, 2009
 
     Collections(1)      Gross
Revenue(2)
     Revenue
Recognition
Rate(3)
    Net
Reversal

(Portfolio
Allowance)
    Revenue
%  of

Total
Revenue
    Unamortized
Balances
     Monthly
IRR(4)
 

ZBA

   $ 6,957       $ 6,957         100.0   $ —          2.9   $ —           —     

2002

     2,341         903         38.6     764        0.4     —           0.0

2003

     6,366         5,169         81.2     (495     2.2     967         31.2

2004

     8,964         5,626         62.8     (644     2.4     5,688         8.2

2005

     33,892         20,901         61.7     (1,816     8.8     33,805         5.6

2006

     36,406         24,949         68.5     (2,953     10.5     46,932         5.1

2007

     89,090         50,704         56.9     (4,228     21.4     79,562         5.6

2008

     127,048         87,789         69.1     (4,951     37.0     170,640         5.0

2009

     51,966         34,013         65.5     —          14.4     197,062         4.3
                                                           

Total

   $ 363,030       $ 237,011         65.3   $ (14,323     100.0   $ 534,656         5.0
                                                           

 

(1)

Does not include amounts collected on behalf of others.

 

(2)

Gross revenue excludes the effects of net portfolio allowances or net portfolio allowance reversals.

 

(3)

Revenue recognition rate excludes the effects of net portfolio allowances or net portfolio allowance reversals.

 

(4)

Our monthly IRR is calculated based on the weighted average of each pool’s IRR relative to each pool’s percentage of the unamortized balance for each year of purchase. Therefore, it is possible for the monthly IRR to be lower than that reported in the prior quarter due to this weighted average calculations.

Total revenue was $98.0 million for the three months ended September 30, 2010, an increase of $17.6 million, or 21.9%, compared to total revenue of $80.4 million for the three months ended September 30, 2009. Portfolio revenue was $93.8 million for the three months ended September 30, 2010, an increase of $17.4 million, or 22.7%, compared to portfolio revenue of $76.4 million for the three months ended September 30, 2009.

Total revenue was $281.5 million for the nine months ended September 30, 2010, an increase of $46.6 million, or 19.9%, compared to total revenue of $234.9 million for the nine months ended September 30, 2009. Portfolio revenue was $268.6 million for the nine months ended September 30, 2010, an increase of $45.9 million, or 20.6%, compared to portfolio revenue of $222.7 million for the three months ended September 30, 2009.

 

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The increase in portfolio revenue for the three and nine months ended September 30, 2010, was primarily the result of additional accretion revenue associated with a higher portfolio balance during the three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009, respectively and an increase in the IRRs for pool groups where we have continued to collect more than our forecasts. During the three months ended September 30, 2010, we recorded a net portfolio allowance provision of $6.1 million, compared to a net portfolio allowance provision of $4.3 million in the same period of the prior year. During the nine months ended September 30, 2010, we recorded a net portfolio allowance provision of $16.8 million, compared to a net portfolio allowance provision of $14.3 million in the same period of the prior year. The net provision for portfolio allowances for the three and nine months ended September 30, 2010 and 2009 was largely due to a shortfall in collections in certain pool groups as compared to our forecast. While our total collections exceeded our forecast, there was variability at the pool group level between our actual collections and our forecasts, primarily in our 2005 through 2008 vintage portfolios. This is the result of several factors, including pressure on the consumer due to a weakened economy, changes in internal operating strategy, shifts in consumer payment patterns, and the inherent challenge of forecasting collections at the pool group level.

Revenue associated with bankruptcy servicing fees earned from Ascension was $4.1 million for the three months ended September 30, 2010, an increase of $0.2 million, or 5.2%, compared to revenue of $3.9 million for the three months ended September 30, 2009. Revenue associated with bankruptcy servicing fees earned from Ascension was $12.9 million for the nine months ended September 30, 2010, an increase of $0.8 million, or 6.7%, compared to revenue of $12.1 million for the three months ended September 30, 2009. The increase in Ascension revenue was due to the recognition of previously deferred servicing revenue.

Operating Expenses

Total operating expenses were $74.3 million for the three months ended September 30, 2010, an increase of $12.8 million, or 20.7%, compared to total operating expenses of $61.5 million for the three months ended September 30, 2009.

Total operating expenses were $212.7 million for the nine months ended September 30, 2010, an increase of $27.5 million, or 14.9%, compared to total operating expenses of $185.2 million for the nine months ended September 30, 2009.

Operating expenses are explained in more detail as follows:

Salaries and employee benefits

Total salaries and employee benefits increased $1.8 million, or 12.2%, to $16.2 million during the three months ended September 30, 2010, from $14.4 million during the three months ended September 30, 2009. Total salaries and employee benefits increased $5.0 million, or 11.6%, to $48.1 million during the nine months ended September 30, 2010, from $43.1 million during the nine months ended September 30, 2009. The increase was primarily the result of increases in headcount and related compensation expense to support our growth.

Stock-based compensation expenses

Stock-based compensation increased $0.3 million, or 22.8%, to $1.5 million during the three months ended September 30, 2010, from $1.3 million during the three months ended September 30, 2009. 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.

Stock-based compensation increased $1.5 million, or 42.6%, to $4.8 million during the nine months ended September 30, 2010, from $3.3 million during the nine months ended September 30, 2009. This increase was primarily attributable to awards granted to our senior management team in the three months ended March 31, 2010 and the higher fair value of equity awards granted in recent periods due to an increase in our stock price.

 

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Cost of legal collections

The cost of legal collections increased $7.8 million, or 29.7%, to $33.9 million during the three months ended September 30, 2010, compared to $26.1 million during the three months ended September 30, 2009. These costs represent contingent fees paid to our nationwide network of attorneys and costs of litigation. The increase in the cost of legal collections was primarily the result of an increase of $16.2 million, or 29.1%, in gross collections through our legal channel and upfront litigation costs. Gross legal collections amounted to $71.8 million during the three months ended September 30, 2010, up from $55.6 million collected during the three months ended September 30, 2009. The cost of legal collections increased as a percent of gross collections through this channel to 47.2% during the three months ended September 30, 2010, from 46.9% during the three months ended September 30, 2009, primarily due to increased volume of accounts placed in the legal channel, offset by the impact of the reversal in September 2009 of court costs previously deferred in connection with our settled arbitration with Jefferson Capital, and a reduction in the commissions percentage in 2010 compared to 2009.

The cost of legal collections increased $6.8 million, or 8.1%, to $91.5 million during the nine months ended September 30, 2010, compared to $84.7 million during the nine months ended September 30, 2009. These costs represent contingent fees paid to our nationwide network of attorneys and costs of litigation. The increase in the cost of legal collections was primarily the result of an increase of $23.5 million, or 13.6%, in gross collections through our legal channel and upfront litigation costs. Gross legal collections amounted to $197.0 million during the nine months ended September 30, 2010, up from $173.5 million collected during the nine months ended September 30, 2009. The cost of legal collections as a percent of gross collections through this channel decreased to 46.5% during the nine months ended September 30, 2010, from 48.8% during the nine months ended September 30, 2009, primarily due to more targeted account placements and the effect of the deferred court cost reversal in September 2009 related to our settled arbitration with Jefferson Capital.

The following table summarizes our legal collection channel performance and related direct costs (in thousands, except percentages):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

Collections

   $ 71,773        100.0   $ 55,584        100.0   $ 196,995        100.0   $ 173,451        100.0
                                                                

Court costs advanced

     20,961        29.2     14,038        25.3     52,761        26.8     50,390        29.0

Court costs deferred

     (7,850     (10.9 )%      (6,056     (10.9 )%      (19,693     (10.0 )%      (18,552     (10.7 )% 

Deferred court costs reversal(1)

     —          —          1,696        3.0     —          —          1,696        1.0
                                                                

Court cost expense(2)

     13,111        18.3     9,678        17.4     33,068        16.8     33,534        19.3

Other(3)

     661        0.9     590        1.0     1,875        1.0     1,618        0.9

Commissions

     20,079        28.0     15,824        28.5     56,576        28.7     49,512        28.6
                                                                

Total Costs

   $ 33,851        47.2   $ 26,092        46.9   $ 91,519        46.5   $ 84,664        48.8
                                                                

 

(1)

Primarily related to our settled arbitration with Jefferson Capital in September 2009. As part of the settlement with Jefferson Capital, we returned accounts that were subject to Jefferson Capital’s settlement with the FTC. A portion of those accounts were in our legal channel and, when these were returned, resulted in the reversal of court costs previously deferred.

 

(2)

In connection with our agreement with contracted attorneys, we advance certain out-of-pocket court costs. We 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.

 

(3)

Other costs consist of costs related to counter claims and legal network subscription fees.

Other operating expenses

Other operating expenses increased $3.5 million, or 57.6%, to $9.5 million during the three months ended September 30, 2010, from $6.0 million during the three months ended September 30, 2009. The increase was primarily the result of an increase of $1.4 million in direct mail campaign expenses, an increase of $0.6 million in media-related expenses, an increase of $0.3 million in telephone expenses, and a net increase in various other operating expenses of $1.2 million, all to support our growth.

Other operating expenses increased $9.1 million, or 48.6%, to $27.7 million during the nine months ended September 30, 2010, from $18.6 million during the nine months ended September 30, 2009. The increase was primarily the result of an increase of $2.8 million in direct mail campaign expenses, an increase of $1.7 million in media-related expenses, an increase of $1.8 million in telephone expenses, an increase of $0.8 million in skip tracing expenses, and a net increase in various other operating expenses of $2.0 million, all to support our growth.

 

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Table of Contents

 

Collection agency commissions

During the three months ended September 30, 2010, we incurred $5.4 million in commissions to third party collection agencies, or 29.8%, of the related gross collections of $18.1 million, compared to $5.8 million in commissions, or 29.4%, of the related gross collections of $19.7 million during the three months ended September 30, 2009. The decrease in commissions was primarily due to the decrease in collections through this channel, offset by a higher net commission rate due to the mix of accounts placed with the agencies. Commissions, as a percentage of collections through this channel, vary from period to period depending on, among other things, the time from charge-off of the accounts placed with an agency. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time. During the three months ended September 30, 2010, we placed fewer freshly charged-off accounts with the agencies as compared to the same period in the prior year.

During the nine months ended September 30, 2010, we incurred $17.1 million in commissions to third party collection agencies, or 29.6%, of the related gross collections of $57.8 million, compared to $13.5 million in commissions, or 31.4%, of the related gross collections of $42.9 million during the nine months ended September 30, 2009. The increase in commissions was due to the increase in collections through this channel, offset by a lower net commission rate. The decrease in the net commission rate as a percentage of the related gross collections was primarily due to the mix of accounts placed with the agencies. Commissions, as a percentage of collections through this channel, vary from period to period depending on, among other things, the time from charge-off of the accounts placed with an agency. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time. During the nine months ended September 30, 2010, we placed more freshly charged-off accounts with the agencies as compared to the same period in the prior year.

General and administrative expenses

General and administrative expenses decreased $0.3 million, or 4.1%, to $7.0 million during the three months ended September 30, 2010, from $7.3 million during the three months ended September 30, 2009. The decrease was primarily the result of a decrease of $1.7 million in corporate legal expenses due to incurring significant legal expenses in 2009 in connection with our settled arbitration with Jefferson Capital. The decrease was offset by an increase of $0.3 million in legal settlements, an increase of $0.4 million in system maintenance costs, and a net increase in other general and administrative expenses of $0.7 million.

General and administrative expenses increased $1.2 million, or 6.0%, to $21.3 million during the nine months ended September 30, 2010, from $20.1 million during the nine months ended September 30, 2009. The increase was primarily the result of an increase of $1.6 million in legal settlements, an increase of $0.3 million in consulting fees, an increase of $1.0 million in system maintenance costs, and a net increase in other general and administrative expenses of $2.3 million. The increase was offset by a decrease of $4.0 million in corporate legal expenses due to incurring significant legal expenses in 2009 in connection with our settled arbitration with Jefferson Capital.

Cost per Dollar Collected

The following table summarizes our cost per dollar collected (in thousands, except percentages):

 

     Three Months Ended September 30,  
     2010     2009  
     Collections      Cost     Cost Per
Channel
Dollar
Collected
    Cost Per
Total
Dollar
Collected
    Collections      Cost     Cost Per
Channel
Dollar
Collected
    Cost Per
Total
Dollar
Collected
 

Collection sites

   $ 67,089       $ 6,210 (1)      9.3     4.0   $ 45,122       $ 5,670 (1)      12.6     4.5

Legal networks

     71,773         33,851        47.2     21.5     55,584         26,092        46.9     20.8

Collection agency outsourcing

     18,065         5,389        29.8     3.4     19,705         5,795        29.4     4.6

Sales and other

     445         —          —          —          5,299         —          —          —     

Other indirect costs(2)

     —           23,604        —          15.0     —           19,469        —          15.5
                                                      

Total

   $ 157,372       $ 69,054 (3)        43.9   $ 125,710       $ 57,026 (3)        45.4
                                                      

 

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     Nine Months Ended September 30,  
     2010     2009  
     Collections      Cost     Cost Per
Channel
Dollar
Collected
    Cost Per
Total
Dollar
Collected
    Collections      Cost     Cost Per
Channel
Dollar
Collected
    Cost Per
Total
Dollar
Collected
 

Collection sites

   $ 199,513       $ 18,578 (1)      9.3     4.1   $ 140,144       $ 17,150 (1)      12.2     4.7

Legal networks

     196,995         91,519        46.5     20.1     173,451         84,665        48.8     23.3

Collection agency outsourcing

     57,777         17,098        29.6     3.7     42,878         13,483        31.4     3.7

Sales and other

     1,143         —          —          —          6,843         —          —          —     

Other indirect costs(2)

     —           70,464        —          15.5     —           56,483        —          15.6
                                                      

Total

   $ 455,428       $ 197,659 (3)        43.4   $ 363,316       $ 171,781 (3)        47.3
                                                      

 

(1)

Represents only account manager salaries, variable compensation and employee benefits.

 

(2)

Other indirect costs represent non collection salaries and employee benefits, general and administrative expenses, other operating expenses, and depreciation and amortization.

 

(3)

Represents all operating expenses excluding stock-based compensation expense and bankruptcy servicing 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 reconciliation of operating expenses, excluding stock-based compensation expense and bankruptcy servicing operating expenses to GAAP total operating expenses in the table below.

During the three months ended September 30, 2010, cost per dollar collected decreased by 150 basis points to 43.9% of gross collections from 45.4% of gross collections during the three months ended September 30, 2009. This decrease was due to several factors, including:

 

   

The cost from our collection sites, account manager salaries, variable compensation and employee benefits, as a percentage of total collections, decreased to 4.0% in three months ended September 30, 2010 from 4.5% in the three months ended September 30, 2009 and, as a percentage of our site collections, decreased to 9.3% in three months ended September 30, 2010 from 12.6% in the three months ended September 30, 2009. These decreases were primarily due to the growth of our collection workforce in India.

 

   

The cost of collection agency commissions, as a percentage of total collections, decreased to 3.4% in the three months ended September 30, 2010 from 4.6% in the three months ended September 30, 2009. This decrease was due to a reduction in collection agency collections in the three months ended September 30, 2010 when compared to the three months ended September 30, 2009. The cost of collection agency commissions, as a percentage of collection agency channel collections, increased from 29.4% in the three months ended September 30, 2009 to 29.8% in three months ended September 30, 2010. This was the result of a change in the mix of accounts placed into this channel. Freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time. During the three months ended September 30, 2010, we placed fewer freshly charged-off accounts with our agencies as compared to the same period in the prior year.

 

   

Other costs, not directly attributable to specific channel collections, including non collection salaries and employee benefits, general and administrative expenses, other operating expenses, and depreciation and amortization, decreased as a percentage of total collection to 15.0% in the three months ended September 30, 2010 from 15.5% in the three months ended September 30, 2009. While in dollar terms these costs increased in order to support the growth of our business, our collections grew at a faster rate, resulting in a reduction in other indirect costs as a percent of total collections.

The decrease was offset by:

 

   

An increase in the cost of legal collections, as a percent of total collections, to 21.5% in the three months ended September 30, 2010 from 20.8% in the three months ended September 30, 2009. This increase was due to an increase in commissions and court cost expense due to growth in the legal channel. The cost of legal collections, as a percentage of legal collections, increased to 47.2% in the three months ended September 30, 2010 from 46.9% in the three months ended September 30, 2009. The increase was primarily a result of increased upfront court costs associated with our pursuit of legal collections, offset by a reduction in the commissions percentage in 2010 compared to 2009.

 

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During the nine months ended September 30, 2010, cost per dollar collected decreased by 390 basis points to 43.4% of gross collections from 47.3% of gross collections during the nine months ended September 30, 2009. This decrease was due to several factors, including:

 

   

The cost from our collection sites, account manager salaries, variable compensation and employee benefits, as a percentage of total collections, decreased to 4.1% in nine months ended September 30, 2010 from 4.7% in the nine months ended September 30, 2009 and, as a percentage of our site collections, decreased to 9.3% in nine months ended September 30, 2010 from 12.2% in the nine months ended September 30, 2009. The decrease was primarily due to in the growth of our collection workforce in India and a change in our domestic compensation plan structure.

 

   

The cost of legal collections as a percent of total collections decreased to 20.1% in the nine months ended September 30, 2010 from 23.3% in the nine months ended September 30, 2009 and, as a percentage of legal collections, decreased to 46.5% in nine months ended September 30, 2010 from 48.8% in the nine months ended September 30, 2009. The decrease was primarily due to more targeted placement volumes as part of an initiative to sue higher quality accounts and the effect of the deferred court cost reversal related to our Jefferson Capital settlement in September 2009.

 

   

The cost of collection agency commissions, as a percentage of total collections, remained constant at 3.7% in the nine months ended September 30, 2010 and 2009. The cost in collection agency commissions, as a percentage of channel collections, decreased to 29.6% in the nine months ended September 30, 2010 from 31.4% in nine months ended September 30, 2009. This decrease was the result of a change in the mix of accounts placed into this channel. Freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time. During the nine months ended September 30, 2010, we placed more freshly charged-off accounts with our agencies as compared to the same period in the prior year.

 

   

Other costs not directly attributable to specific channel collections, including non collection salaries and employee benefits, general and administrative expenses, other operating expenses, and depreciation and amortization, decreased slightly as a percentage of total collection to 15.5% in the nine months ended September 30, 2010 from 15.6% in the nine months ended September 30, 2009. While in dollar terms these costs increased in order to support the growth of our business, our collections grew at a faster rate, resulting in a slight reduction in other indirect costs as a percent of total collections.

Cost per dollar collected can fluctuate based on the contribution by each collection channel and our overall collection volume.

The following table provides a reconciliation of operating expenses, excluding stock-based compensation expense and bankruptcy servicing operating expenses to GAAP total operating expenses, (in thousands):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
             2010                     2009                     2010                     2009          

GAAP total operating expenses, as reported

   $ 74,265      $ 61,525      $ 212,688      $ 185,194   

Stock-based compensation expense

     (1,549     (1,261     (4,756     (3,335

Bankruptcy servicing operating expenses

     (3,662     (3,238     (10,273     (10,078
                                

Operating expenses, excluding stock-based compensation expense and bankruptcy servicing operating expenses

   $ 69,054      $ 57,026      $ 197,659      $ 171,781   
                                

India Expansion

Due to the continued strong performance of our team in India and our ability to reduce our overall site cost to collect through the expansion of our offshore collection efforts, we have negotiated a lease for an additional space in India. This space is located adjacent to our current site in Gurgaon, India and will allow us to expand our collector headcount up to an additional 200 account managers throughout 2011.

Interest Expense

Interest expense increased $0.9 million, or 24.1%, to $4.9 million during the three months ended September 30, 2010, from $4.0 million during the three months ended September 30, 2009. Interest expense increased $2.1 million, or 17.6%, to $14.3 million during the nine months ended September 30, 2010, from $12.2 million during the nine months ended September 30, 2009.

 

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The following table summarizes our interest expense (in thousands):

 

     Three Months Ended September 30,  
     2010      2009      $ Change     % Change  

Stated interest on debt obligations

   $ 3,851       $ 3,029       $ 822        27.1

Amortization of loan fees and other loan costs

     448         290         158        54.5

Amortization of debt discount – convertible notes

     629         651         (22     (3.4 )% 
                                  

Total interest expense

   $ 4,928       $ 3,970       $ 958        24.1
                            

 

     Nine Months Ended September 30,  
     2010      2009      $ Change     % Change  

Stated interest on debt obligations

   $ 11,076       $ 9,101       $ 1,975        21.7

Amortization of loan fees and other loan costs

     1,257         889         368        41.4

Amortization of debt discount – convertible notes

     2,013         2,211         (198     (9.0 )% 
                                  

Total interest expense

   $ 14,346       $ 12,201       $ 2,145        17.6
                            

Stated interest on debt obligations increased $0.8 million during the three months ended September 30, 2010, compared to the same period of the prior year. Stated interest on debt obligations increased $2.0 million during the nine months ended September 30, 2010, compared to the same period of the prior year. The increases in stated interest on debt obligations for the three and nine months ended September 30, 2010, were primarily due to an increase in our outstanding loan balances and an increase in the credit spread required under our new 2010 Revolving Credit Facility.

Provision for Income Taxes

During the three months ended September 30, 2010, we recorded an income tax provision of $6.6 million, reflecting an effective rate of 35.0% of pretax income. The effective tax rate for the three months ended September 30, 2010, consisted of a provision for federal income taxes of 32.8% (which is net of a benefit for state taxes of 2.2%), a blended provision for state taxes of 6.4%, a benefit of permanent book versus tax differences of 1.6%, a benefit of an Internal Revenue Service (“IRS”) interest refund of 0.5%, a benefit from a state refund of 0.3%, and a benefit for the reduction in the state effective tax rate and the applicable true up of the state and federal tax accounts of 1.8%. During the three months ended September 30, 2009, we recorded an income tax provision of $5.9 million, reflecting an effective rate of 39.8% of pretax income. Our effective tax rate for the three months ended September 30, 2009, primarily consisted of a provision for federal income taxes of 32.3% (which is net of a benefit for state taxes of 2.7%), a provision for state taxes of 7.8%, a benefit of permanent book versus tax differences of 0.6%, and a provision for the true-up of the state and federal tax accounts of 0.3%.

During the nine months ended September 30, 2010, we recorded an income tax provision of $19.9 million, reflecting an effective rate of 36.3% of pretax income. The effective tax rate for the nine months ended September 30, 2010 consisted of a provision for federal income taxes of 32.8% (which is net of a benefit for state taxes of 2.2%), a blended provision for state taxes of 6.4%, a benefit for the effect of permanent book versus tax differences of 1.8%, a benefit of an IRS tax and interest refund of 0.7%, a benefit from a state refund of 0.1%, and a benefit for the reduction in the state tax effective rate and the applicable true up of the state and federal tax accounts of 0.3% . During the nine months ended September 30, 2009, we recorded an income tax provision of $16.1 million, reflecting an effective rate of 39.5% of pretax income. Our effective tax rate for the nine months ended September 30, 2009, primarily consisted of a provision for federal income taxes of 32.3% (which is net of a benefit for state taxes of 2.7%), a provision for state taxes of 7.8%, and a benefit of permanent book versus tax differences of 0.6%.

 

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Supplemental Performance Data

Cumulative Collections to Purchase Price Multiple

The following table summarizes our purchases and related gross collections by year of purchase (in thousands, except multiples):

 

      Cumulative Collections through September 30, 2010  
Year of
Purchase
   Purchase
Price(1)
    <2004      2004      2005      2006      2007      2008      2009      2010      Total(2)      CCM(3)  

<2004

   $ 284,161 (4)    $ 517,451       $ 192,940       $ 144,775       $ 109,379       $ 50,708       $ 26,777       $ 16,345       $ 9,477       $ 1,067,852         3.8   

   2004

     101,324        —           39,400         79,845         54,832         34,625         19,116         11,363         6,369         245,550         2.4   

   2005

     192,590        —           —           66,491         129,809         109,078         67,346         42,387         21,870         436,981         2.3   

   2006

     141,041        —           —           —           42,354         92,265         70,743         44,553         20,994         270,909         1.9   

   2007

     204,292        —           —           —           —           68,048         145,272         111,117         57,311         381,748         1.9   

   2008

     227,912        —           —           —           —           —           69,049         165,164         101,648         335,861         1.5   

   2009

     253,533        —           —           —           —           —           —           96,529         160,399         256,928         1.0   

   2010

     242,083        —           —           —           —           —           —           —           77,179         77,179         0.3   
                                                                                                 

   Total

   $ 1,646,936      $ 517,451       $ 232,340       $ 291,111       $ 336,374       $ 354,724       $ 398,303       $ 487,458       $ 455,247       $ 3,073,008         1.9   
                                                                                                 

 

(1)

Adjusted for put-backs, account recalls, purchase price rescissions, and the impact of an acquisition in 2000. Put-backs represent accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”). Recalls represents accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”).

 

(2)

Cumulative collections from inception through September 30, 2010, excluding collections on behalf of others.

 

(3)

Cumulative Collections Multiple (“CCM”) through September 30, 2010 – collections as a multiple of purchase price.

 

(4)

From inception through December 31, 2003.

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
     Total Estimated
Gross Collections
     Total Estimated Gross
Collections to Purchase

Price
 

<2004

   $ 284,161 (3)    $ 1,067,852       $ 35       $ 1,067,887         3.8   

   2004

     101,324        245,550         2,914         248,464         2.5   

   2005

     192,590        436,981         33,549         470,530         2.4   

   2006

     141,041        270,909         61,319         332,228         2.4   

   2007

     204,292        381,748         94,588         476,336         2.3   

   2008

     227,912        335,861         233,459         569,320         2.5   

   2009

     253,533        256,928         396,296         653,224         2.6   

   2010

     242,083        77,179         470,106         547,285         2.3   
                                           

   Total

   $ 1,646,936      $ 3,073,008       $ 1,292,266       $ 4,365,274         2.7   
                                           

 

(1)

Adjusted for Put-Backs, Recalls, purchase price rescissions, and the impact of an acquisition in 2000.

 

(2)

Cumulative collections from inception through September 30, 2010, excluding collections on behalf of others.

 

(3)

From inception through December 31, 2003.

 

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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  
     2010(2)      2011      2012      2013      2014      2015