Edgar Filing: ENCORE CAPITAL GROUP INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

COMMISSION FILE NUMBER: 000-26489

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 July 27, 2010
Common Stock, $0.01 par value		23,805,717 shares

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		19

Item 3 – Quantitative and Qualitative Disclosures About Market Risk		38

Item 4 – Controls and Procedures		38

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		47

Item 3 – Defaults Upon Senior Securities		47

Item 4 – Removed and Reserved		47

Item 5 – Other Information		47

Item 6 – Exhibits		48

SIGNATURES		49

PART I. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Financial Condition

(In Thousands, Except Par Value Amounts)

(Unaudited)


	June 30, 2010			December 31, 2009
Assets
Cash and cash equivalents	$	10,402		$	8,388
Accounts receivable, net		2,478			3,134
Investment in receivable portfolios, net		566,815			526,877
Deferred court costs		25,954			25,957
Property and equipment, net		11,234			9,427
Prepaid income tax		2,039			—
Other assets		9,793			4,252
Goodwill		15,985			15,985
Identifiable intangible assets, net		943			1,139

Total assets	$	645,643		$	595,159

Liabilities and stockholders’ equity
Liabilities:
Accounts payable and accrued liabilities	$	22,028		$	21,815
Income taxes payable		—			2,681
Deferred tax liabilities, net		16,958			16,980
Deferred revenue		4,808			5,481
Debt		328,656			303,075
Other liabilities		1,066			2,036

Total liabilities		373,516			352,068

Commitments and contingencies and subsequent events
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, 23,785 shares and 23,359 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively		238			234
Additional paid-in capital		110,117			104,261
Accumulated earnings		162,433			139,842
Accumulated other comprehensive loss		(661	)		(1,246	)

Total stockholders’ equity		272,127			243,091

Total liabilities and stockholders’ equity	$	645,643		$	595,159

See accompanying notes to condensed consolidated financial statements

ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Income

(In Thousands, Except Per Share Amounts)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenue
Revenue from receivable portfolios, net	$	91,845		$	73,965		$	174,752		$	146,240
Servicing fees and other related revenue		4,386			4,070			8,817			8,241

Total revenue		96,231			78,035			183,569			154,481

Operating expenses
Salaries and employee benefits (excluding stock-based compensation expense)		16,484			14,762			31,969			28,719
Stock-based compensation expense		1,446			994			3,207			2,074
Cost of legal collections		31,235			28,626			57,668			58,573
Other operating expenses		9,027			6,598			18,141			12,578
Collection agency commissions		6,413			4,797			11,709			7,688
General and administrative expenses		7,425			7,097			14,304			12,794
Depreciation and amortization		752			620			1,425			1,243

Total operating expenses		72,782			63,494			138,423			123,669

Income before other (expense) income and income taxes		23,449			14,541			45,146			30,812

Other (expense) income
Interest expense		(4,880	)		(3,958	)		(9,418	)		(8,231	)
Gain on repurchase of convertible notes, net		—			215			—			3,268
Other (expense) income		(90	)		9			102			(72	)

Total other expense		(4,970	)		(3,734	)		(9,316	)		(5,035	)

Income before income taxes		18,479			10,807			35,830			25,777
Provision for income taxes		(6,749	)		(4,166	)		(13,239	)		(10,139	)

Net income	$	11,730		$	6,641		$	22,591		$	15,638

Weighted average shares outstanding:
Basic		23,713			23,168			23,673			23,145
Diluted		24,958			23,971			24,897			23,811
Earnings per share:
Basic	$	0.49		$	0.29		$	0.95		$	0.68
Diluted	$	0.47		$	0.28		$	0.91		$	0.66

See accompanying notes to condensed consolidated financial statements

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		Additional Paid-In Capital		Accumulated Earnings		Accumulated Other Comprehensive Income (loss)			Total Equity		Comprehensive Income
Balance at December 31, 2009	23,359	$	234	$	104,261	$	139,842	$	(1,246	)	$	243,091	$	—

Net income	—		—		—		22,591		—			22,591		22,591
Other comprehensive gain:
Unrealized gain on cash flow hedge, net of tax	—		—		—		—		585			585		585
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes	426		4		432		—		—			436		—
Stock-based compensation	—		—		3,207		—		—			3,207		—
Settlement of call options and warrants associated with convertible notes, net	—		—		524		—		—			524		—
Tax benefit related to stock-based compensation	—		—		1,693		—		—			1,693		—

Balance at June 30, 2010	23,785	$	238	$	110,117	$	162,433	$	(661	)	$	272,127	$	23,176

See accompanying notes to condensed consolidated financial statements

ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, In Thousands)


	Six Months Ended June 30,
	2010			2009
Operating activities:
Net income	$	22,591		$	15,638
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,425			1,243
Amortization of loan costs and debt discount		2,194			2,160
Stock-based compensation expense		3,207			2,074
Gain on repurchase of convertible notes, net		—			(3,268	)
Deferred income tax expense		(22	)		360
Excess tax benefit from stock-based payment arrangements		(1,813	)		(28	)
Provision for allowances on receivable portfolios, net		10,720			9,991
Changes in operating assets and liabilities
Other assets		39			(2,456	)
Deferred court costs		3			(1,425	)
Prepaid income tax and income taxes payable		(3,027	)		8,577
Deferred revenue		(673	)		197
Accounts payable, accrued liabilities and other liabilities		(1,072	)		611

Net cash provided by operating activities		33,572			33,674

Investing activities:
Purchases of receivable portfolios		(164,968	)		(137,946	)
Collections applied to investment in receivable portfolios, net		112,446			81,163
Proceeds from put-backs of receivable portfolios		1,864			1,430
Purchases of property and equipment		(1,647	)		(1,400	)

Net cash used in investing activities		(52,305	)		(56,753	)

Financing activities:
Payment of loan costs		(4,660	)		—
Proceeds from revolving credit facility		53,000			62,500
Repayment of revolving credit facility		(31,000	)		(21,500	)
Repurchase of convertible notes		—			(22,262	)
Proceeds from net settlement of certain call options		524			—
Proceeds from exercise of stock options		1,688			29
Excess tax benefit from stock-based payment arrangements		1,813			28
Repayment of capital lease obligations		(618	)		(122	)

Net cash provided by financing activities		20,747			18,673

Net increase (decrease) in cash and cash equivalents		2,014			(4,406	)
Cash and cash equivalents, beginning of period		8,388			10,341

Cash and cash equivalents, end of period	$	10,402		$	5,935

Supplemental disclosures of cash flow information:
Cash paid for interest	$	6,994		$	6,435
Cash paid for income taxes	$	16,544		$	1,626
Supplemental schedule of non-cash investing and financing activities:
Fixed assets acquired through capital lease	$	1,389		$	—

See accompanying notes to condensed consolidated financial statements

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 systems-driven purchaser and manager of charged-off consumer receivable portfolios 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. 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.

New Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board issued Accounting Standards Update No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force,” which establishes a selling price hierarchy for determining the selling price of a deliverable, and eliminates the residual method of allocation. This update requires the arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. This update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently analyzing the impact of this update, if any, to its consolidated financial statements.

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 June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Net income available for common shareholders	$	11,730	$	6,641	$	22,591	$	15,638

Weighted average outstanding shares of common stock		23,713		23,168		23,673		23,145
Dilutive effect of stock-based awards		1,245		803		1,224		666

Common stock and common stock equivalents		24,958		23,971		24,897		23,811


Earnings per share:
Basic⁽¹⁾	$	0.49	$	0.29	$	0.95	$	0.68
Diluted⁽ ² ⁾	$	0.47	$	0.28	$	0.91	$	0.66

⁽¹⁾	Represents net income available for common shareholders divided by 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 259,000 and 264,000 shares of common stock during the three and six months ended June 30, 2010, respectively, and employee stock options to purchase approximately 1,346,000 shares of common stock during the three and six months ended June 30, 2009, 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.

Liabilities measured at fair value on a recurring basis at June 30, 2010 are summarized below (in thousands):


	Level 1		Level 2		Level 3		Total
Liabilities
Foreign exchange contracts	$	—	$	120	$	—	$	120
Interest rate swap agreements	$	—	$	946	$	—	$	946

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 June 30, 2010, the Company did not have any financial instruments carried at fair value that required Level 3 measurement.

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. The Company’s Convertible Notes are carried at historical cost, adjusted for repurchases and debt discount. The fair value estimate for these notes incorporates quoted market prices at the balance sheet date, which was determined to be approximately equal to book value as of June 30, 2010 and December 31, 2009. 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. As of June 30, 2010, the Company has one interest rate swap agreement outstanding with a notional amount of $25.0 million and an expiration date of April 2011. Under the swap agreement, the Company receives floating interest rate payments and makes interest payments based on a fixed interest rate of 5.01%. 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, associated 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 gain 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 June 30, 2010, the total notional amount of the forward contracts to buy Indian rupees in exchange for U.S. dollars was $13.3 million. All outstanding contracts qualified for hedge accounting treatment as of June 30, 2010. The Company estimates that approximately $0.1 million of net derivative loss included in OCI will be reclassified into earnings within the next 12 months. No gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the three and six months ended June 30, 2010.

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

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


	June 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	$	946	Other liabilities	$	1,791
Foreign exchange contracts	Other liabilities	$	120	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 six months ended June 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 June 30,						Three Months Ended June 30,					Three Months Ended June 30,
	2010			2009			2010		2009			2010		2009
Interest rate swaps	$	374		$	528	Interest expense	$	—	$	—	Other (expense) income	$	—	$	—

Foreign exchange contracts	$	(381	)	$	—	Salaries and employee benefits	$	9	$	—	Other (expense) income	$	—	$	—

Foreign exchange contracts	$	(78	)	$	—	General and administrative expenses	$	3	$	—	Other (expense) income	$	—	$	—

	Gain or (Loss) Recognized in OCI- Effective Portion					Location of Gain or (Loss) Reclassified from OCI into Income - Effective Portion	Gain or (Loss) Reclassified from OCI into Income - Effective Portion				Location of Gain or (Loss) Recognized - Ineffective Portion and Amount Excluded from Effectiveness Testing	Amount of Gain or (Loss) Recognized - Ineffective Portion and Amount Excluded from Effectiveness Testing
	Six Months Ended June 30,						Six Months Ended June 30,					Six Months Ended June 30,
	2010			2009			2010		2009			2010		2009
Interest rate swaps	$	845		$	835	Interest expense	$	—	$	—	Other (expense) income	$	—	$	—

Foreign exchange contracts	$	113		$	—	Salaries and employee benefits	$	12	$	—	Other (expense) income	$	—	$	—

Foreign exchange contracts	$	26		$	—	General and administrative expenses	$	2	$	—	Other (expense) income	$	—	$	—

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 six months ended June 30, 2010 and 2009 was $3.2 million and $2.1 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:


	Six Months Ended June 30,
	2010			2009
Weighted average fair value of options granted	$	9.70		$	1.36
Risk free interest rate		2.3	%		1.9	%
Dividend yield		0.0	%		0.0	%
Volatility factor of the expected market price of the Company’s common stock		62.0	%		52.8	%
Weighted-average expected life of options		5 Years			5 Years

Unrecognized compensation cost related to stock options as of June 30, 2010 was $4.3 million. The weighted-average remaining expense period, based on the unamortized value of these outstanding stock options was approximately 2.3 years.

A summary of the Company’s stock option activity as of June 30, 2010, and changes during the six 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	(242,038	)		0.35 – 16.19		6.97

Outstanding at June 30, 2010	2,600,766		$	0.35 – $20.09	$	10.18	$	27,129

Exercisable at June 30, 2010	1,518,487		$	0.35 – $20.09	$	8.95	$	17,708

The total intrinsic value of options exercised during the six months ended June 30, 2010 and 2009 was $3.2 million and $0.1 million, respectively. As of June 30, 2010, the weighted-average remaining contractual life of options outstanding and options exercisable was 6.3 years and 4.5 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 June 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 June 30, 2010. The remaining 718,482 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 June 30, 2010, and changes during the six 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	335,169		$	17.81
Vested	(184,987	)	$	9.85
Cancelled/forfeited	(18,665	)	$	11.33

Non-vested at June 30, 2010	807,307		$	12.63

Unrecognized compensation expense related to non-vested shares as of June 30, 2010, was $5.9 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 six months ended June 30, 2010 and 2009 was $3.5 million and $1.0 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 effective interest rate, or 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.

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		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


	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		(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

During the three months ended June 30, 2010, the Company purchased receivable portfolios with a face value of $2.2 billion for $83.3 million, or a purchase cost of 3.7% of face value. The estimated future collections at acquisition for these portfolios amounted to $174.5 million. During the six months ended June 30, 2010, the Company purchased receivable portfolios with a face value of $4.4 billion for $165.0 million, or a purchase cost of 3.8% of face value. The estimated future collections at acquisition for these portfolios amounted to $347.8 million.

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”). Zero Basis Revenue remained consistent at $2.4 million during the three months ended June 30, 2010 and 2009. During the six months ended June 30, 2010 and 2009, approximately $4.4 million and $4.9 million were recognized as Zero Basis Revenue, 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 June 30, 2010
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	549,180		$	480		$	—		$	549,660
Purchases of receivable portfolios		83,336			—			—			83,336
Gross collections⁽¹⁾		(154,367	)		(24	)		(2,355	)		(156,746	)
Put-backs and recalls⁽²⁾		(1,280	)		—			—			(1,280	)
Revenue recognized⁽³⁾		92,329			—			2,355			94,684
Portfolio allowances, net		(2,383	)		(456	)		—			(2,839	)

Balance, end of period	$	566,815		$	—		$	—		$	566,815

Revenue as a percentage of collections⁽⁴⁾		59.8	%		0.0	%		100.0	%		60.4	%


	Three Months Ended June 30, 2009
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	472,875		$	609		$	—		$	473,484
Purchases of receivable portfolios		82,033			—			—			82,033
Gross collections⁽¹ ⁾		(119,823	)		(56	)		(2,389	)		(122,268	)
Put-backs and recalls⁽² ⁾		(506	)		—			—			(506	)
Revenue recognized⁽³ ⁾		76,172			—			2,357			78,529
(Portfolio allowances) portfolio allowance reversals, net		(4,596	)		—			32			(4,564	)

Balance, end of period	$	506,155		$	553		$	—		$	506,708

Revenue as a percentage of collections⁽⁴ ⁾		63.6	%		0.0	%		98.7	%		64.2	%


	Six Months Ended June 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		164,968			—			—			164,968
Gross collections⁽¹⁾		(293,451	)		(55	)		(4,412	)		(297,918	)
Put-backs and recalls⁽²⁾		(1,864	)		—			—			(1,864	)
Revenue recognized⁽³⁾		181,061			—			4,411			185,472
(Portfolio allowances) portfolio allowance reversals, net		(10,265	)		(456	)		1			(10,720	)

Balance, end of period	$	566,815		$	—		$	—		$	566,815

Revenue as a percentage of collections⁽⁴⁾		61.7	%		0.0	%		100.0	%		62.3	%


	Six Months Ended June 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		137,946			—			—			137,946
Gross collections⁽¹⁾		(232,314	)		(195	)		(4,885	)		(237,394	)
Put-backs and recalls⁽²⁾		(1,426	)		—			(4	)		(1,430	)
Revenue recognized⁽³⁾		151,374			—			4,857			156,231
(Portfolio allowances) portfolio allowance reversals, net		(10,023	)		—			32			(9,991	)

Balance, end of period	$	506,155		$	553		$	—		$	506,708

Revenue as a percentage of collections⁽⁴⁾		65.2	%		0.0	%		99.4	%		65.8	%

⁽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 June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Balance at beginning of period	$	84,343		$	62,579		$	76,462		$	57,152
Provision for portfolio allowances		4,659			4,722			14,389			10,302
Reversal of prior allowance		(1,820	)		(158	)		(3,669	)		(311	)

Balance at end of period	$	87,182		$	67,143		$	87,182		$	67,143

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 June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Collection sites	$	66,619	$	44,680	$	132,424	$	95,022
Legal collections		68,049		61,460		125,222		117,867
Collection agencies		21,960		15,506		39,712		23,173
Sales and other		161		727		698		1,544

	$	156,789	$	122,373	$	298,056	$	237,606

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.

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


	June 30, 2010			December 31, 2009
Court costs advanced	$	178,882		$	172,488
Court costs recovered		(46,164	)		(44,980	)
Court costs reserve		(106,764	)		(101,551	)

	$	25,954		$	25,957

Note 8: Other Assets

Other assets consist of the following (in thousands):


	June 30, 2010		December 31, 2009
Debt issuance costs, net of amortization	$	4,422	$	553
Prepaid expenses		3,198		1,728
Security deposit – India building lease		1,018		1,013
Deferred compensation assets		707		758
Other		448		200

	$	9,793	$	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):


	June 30, 2010			December 31, 2009
Convertible notes	$	42,920		$	42,920
Less: Debt discount		(629	)		(2,013	)
Revolving credit facility		282,000			260,000
Capital lease obligations		4,365			2,168

	$	328,656		$	303,075

Convertible Senior Notes

In 2005, the Company issued $100.0 million of 3.375% Convertible Notes due September 19, 2010. Interest on the Convertible Notes is payable semi-annually, in arrears, on March 19 and September 19 of each year. The Convertible Notes rank equally with the Company’s existing and future senior indebtedness and are senior to the Company’s potential future subordinated indebtedness. Prior to the implementation of the net-share settlement feature discussed below, the Convertible Notes were convertible, prior to maturity, subject to certain conditions described below, into shares of the Company’s common stock at an initial conversion rate of 44.7678 per $1,000 principal amount of notes, which represented an initial conversion price of approximately $22.34 per share, subject to adjustment.

In October 2005, the Company obtained stockholder approval of a net-share settlement feature that allows the Company to settle conversion of the Convertible Notes through a combination of cash and stock. The net-settlement feature is accounted for as convertible debt and is not subject to derivative accounting treatment. As a result of the net-settlement feature, the Company will be able to substantially reduce the number of shares issuable in the event of conversion of the Convertible Notes by repaying principal in cash instead of issuing shares of common stock for that amount. Additionally, the Company will not be required to include the underlying shares of common stock in the calculation of its diluted weighted average shares outstanding for earnings per share until the Company’s common stock price exceeds $22.34.

Effective January 1, 2009, the Company retrospectively adopted the authoritative guidance for debt with conversion and other options. The authoritative guidance requires that issuers of convertible debt instruments that, upon conversion, may be settled fully or partially in cash, must separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively.

In accordance with the authoritative guidance, the Company determined that the fair value of the Convertible Notes at issuance in 2005 was approximately $73.2 million, and designated the residual value of approximately $26.8 million as the equity component. Additionally, the Company allocated approximately $2.5 million of the $3.4 million original Convertible Notes issuance cost as debt issuance cost and the remaining $0.9 million as equity issuance cost.

The balances of the liability and equity components as of each period presented are as follows (in thousands):


	June 30, 2010			December 31, 2009
Liability component – principal amount	$	42,920		$	42,920
Unamortized debt discount		(629	)		(2,013	)

Liability component – net carrying amount		42,291			40,907
Equity component		25,878			25,878

The remaining debt discount is being amortized into interest expense over the remaining life of the Convertible Notes using the effective interest rate. The Convertible Notes are due on September 19, 2010. The effective interest rate on the liability component was 10.38%.

Interest expense related to the Convertible Notes was as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Interest expense – stated coupon rate	$	362	$	369	$	724	$	908
Interest expense – amortization of debt discount		706		650		1,385		1,560

Total interest expense – convertible notes	$	1,068	$	1,019	$	2,109	$	2,468

As of June 30, 2010, the Company is making the required interest payments on the Convertible Notes and no other changes in the balance or structure of the Convertible Notes has occurred.

The Convertible Notes also contain a restricted convertibility feature that does not affect the conversion price of the Convertible Notes but, instead, places restrictions on a holder’s ability to convert their Convertible Notes into shares of the Company’s common stock. Prior to March 19, 2010, a holder of the Convertible Notes, under certain criteria defined in the agreement, had the ability to convert the Convertible Notes into shares of the Company’s common stock. None of the criteria were met and therefore no such conversions took place.

Holders may surrender their Convertible Notes for conversion anytime on or after March 19, 2010, until the close of business on the trading day immediately preceding September 19, 2010.

Convertible Notes Hedge Strategy. Concurrent with the sale of the Convertible Notes, the Company purchased call options to purchase from the counterparties an aggregate of 4,476,780 shares of the Company’s common stock at a price of $22.34 per share. The cost of the call options totaled $27.4 million. The Company also sold warrants to the same counterparties to purchase from the Company an aggregate of 3,984,334 shares of the Company’s common stock at a price of $29.04 per share and received net proceeds from the sale of these warrants of $11.6 million. Taken together, the call option and warrant agreements have the effect of increasing the effective conversion price of the Convertible Notes to $29.04 per share. The call options and warrants must be settled in net shares, except in connection with certain termination events, in which case they would be settled in cash based on the fair market value of the instruments. On the date of settlement, if the market price per share of the Company’s common stock is above $29.04 per share, the Company will be required to deliver shares of its common stock representing the value of the call options and warrants in excess of $29.04 per share.

The warrants have a strike price of $29.04 and are generally exercisable at any time. The Company issued and sold the warrants in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, because the offer and sale did not involve a public offering. There were no underwriting commissions or discounts in connection with the sale of the warrants. In accordance with the authoritative guidance for equity securities, the Company recorded the net call options and warrants as a reduction in additional paid in capital as of December 31, 2005, and will not recognize subsequent changes in the fair value of the call options and warrants in its consolidated financial statements.

As of June 30, 2010, the Company had outstanding call options to purchase from the counterparties an aggregate of 3,133,746 shares of the Company’s common stock at a price of $22.34 per share and outstanding warrants to the same counterparties to purchase from the Company an aggregate of 2,789,035 shares of the Company’s common stock at a price of $29.04 per share.

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 in May 2013. The 2010 Revolving Credit Facility replaced the Company’s previous revolving credit facility which was due to expire in May 2010.

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, (not to exceed a total facility of $427.5 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. The Company thereby increased its revolving credit facility to $360.5 million from $327.5 million, leaving $67.0 million available under the accordion feather. Upon exercise of the accordion, there was $78.5 million in available capacity under the facility, subject to borrowing base and applicable debt covenants.

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 the lesser of (1) 30% of eligible estimated remaining collections minus, to the extent the borrowing base is being calculated on or after June 19, 2010, and so long as the Convertible Notes are outstanding, the aggregate outstanding principal amount of the Convertible Notes plus the aggregate amount of the Company’s unrestricted and unencumbered cash and cash equivalent investments (not to exceed the aggregate outstanding principal amount of the Convertible Notes) and (2) the product of the net book value of all receivable portfolios acquired on or after January 1, 2005 multiplied by 95%;

•

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

•

Repurchases of up to $50.0 million in any combination of the Company’s common stock and Convertible Notes, subject to compliance with certain covenants and available borrowing capacity;

•

A change of control definition which excludes acquisitions of stock by Red Mountain, JCF FPK and their respective affiliates;

•

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.

In conjunction with the 2010 Revolving Credit Facility, the Company incurred loan fees and other loan costs of approximately $4.7 million. These costs will be amortized over the term of the agreement.

As of June 30, 2010, the outstanding balance on the 2010 Revolving Credit Facility was $282.0 million, which bore a weighted average interest rate of 4.70% and 4.63% for the three and six months ended June 30, 2010, respectively. The aggregate borrowing base was $327.5 million, of which $45.5 million was available for future borrowings. As discussed above, effective July 15, 2010, the 2010 Revolving Credit Facility was increased to $360.5 million. Accordingly, the amount available for future borrowings increased by $33.0 million. 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 June 30, 2010, the Company’s combined obligation was approximately $3.4 million. These lease obligations require monthly payments that range from approximately $1,000 to $20,000 through June 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 June 30, 2010, the Company’s combined obligation was approximately $1.0 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

The Company recorded an income tax provision of $6.7 million, reflecting an effective rate of 36.5% of pretax income during the three months ended June 30, 2010. The effective tax rate for the three months ended June 30, 2010, consists primarily of a provision for federal income taxes of 32.4% (which is net of a benefit for state taxes of 2.6%), a provision for state taxes of 7.3%, a benefit of permanent book versus tax differences of 1.5%, and a benefit of an Internal Revenue Service (“IRS”) refund of 1.7%. The Company recorded an income tax provision of $4.2 million, reflecting an effective rate of 38.5% of pretax income during the three months ended June 30, 2009. The effective tax rate for the three months ended June 30, 2009, consists primarily 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%, the benefit of permanent book versus tax differences and a state refund 1.6%.

The Company recorded an income tax provision of $13.2 million, reflecting an effective rate of 36.9% of pretax income during the six months ended June 30, 2010. The effective tax rate for the six months ended June 30, 2010, consists primarily of a provision for federal income taxes of 32.4% (which is net of a benefit for state taxes of 2.6%), a provision for state taxes of 7.3%, a benefit of permanent book versus tax differences of 1.9%, and a benefit of an IRS refund of 0.9%. The Company recorded an income tax provision of $10.1 million, reflecting an effective rate of 39.3% of pretax income during the six months ended June 30, 2009. The effective tax rate for the six months ended June 30, 2009, consists primarily 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%, the benefit of permanent book versus tax differences and a state refund of 0.8%.

As of June 30, 2010, the Company had a gross unrecognized tax benefit of $0.6 million that, if recognized, would result in a net tax benefit of approximately $0.4 million and would reduce the Company’s effective tax rate. During the three months ended June 30, 2010, the Company recognized a $0.3 million tax benefit which was a result of an IRS refund.

For the three and six months ended June 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 six months ended June 30, 2010, were approximately $1.8 million and $2.5 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):


	Six Months Ended June 30, 2010
	Cost			%
Seller 1	$	39,531		23.9	%
Seller 2		29,360		17.8	%
Seller 3		26,881		16.3	%
Seller 4		24,606		14.9	%
Seller 5		15,136		9.2	%
Other sellers		29,454		17.9	%

	$	164,968		100.0	%
Adjustments⁽¹⁾		(95	)

Purchases, net	$	164,873

⁽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, or 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.

In one such action, captioned Brent v. Midland Credit Management, Inc et. al, filed on May 19, 2008, in the United States District Court for the Northern District of Ohio [Western Division], the plaintiff has filed a class action counter-claim against Midland Credit Management, Inc. and Midland Funding LLC (the “Midland Defendants”). The complaint alleges that the Midland Defendants’ business practices violated consumers’ rights under the FDCPA and the Ohio Consumer Sales Practices Act. The plaintiff is seeking actual and statutory damages for the class of Ohio residents, plus attorney’s fees and costs of class notice and class administration. On August 11, 2009, the court issued an order partially granting plaintiff’s motion for summary judgment and entering findings adverse to the Midland Defendants on certain of plaintiff’s claims. The Midland Defendants subsequently moved the court to reconsider the order and were partially successful. However, because the court did not completely reverse the August 11 order, certain portions of the order remain subject to reversal only on appeal. On February 22, 2010, the District Court denied Plaintiff’s attempts to enlarge the case to include a national class of consumers, and ordered the parties to brief issues relating to whether a statewide class should be certified. No class has been certified to date.

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 June 30, 2010, the Company has entered into agreements to purchase receivable portfolios with a face value of approximately $2.3 billion for a purchase price of approximately $89.9 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.

Note 13: Subsequent Event

The Company’s 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, (not to exceed a total facility of $427.5 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 increasing its revolving credit facility to $360.5 million from $327.5 million.

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. 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 business 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 the first half of 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 foreclosure filings, remain elevated and indicate continued near-term pressure on the average consumer.

Despite this macroeconomic volatility, during the first half 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.”

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 six months ended June 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 a 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% over the last eighteen months. 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 in 2010 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 unless pricing recovers more fully. These issuers are currently pursuing internal liquidation strategies or partnering with third party agencies.

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, if the pricing environment re-attracts significant capital to our industry and increases demand and, therefore, price, or if the ability of consumers to repay their debt deteriorates further, our returns may be negatively impacted.

Purchases and Collections

Purchases

During the three months ended June 30, 2010, we invested $83.3 million in receivable portfolios, primarily for charged-off credit card portfolios with face values aggregating $2.2 billion, for an average purchase price of 3.7% of the face value of the purchased receivables. This is a $1.3 million increase, or 1.6%, in the amount invested, compared with the $82.0 million invested during the three months ended June 30, 2009, to acquire receivable portfolios, primarily consisting of charged-off credit card portfolios, with a face value aggregating $1.9 billion for an average purchase price of 4.2% of the face value of the purchased receivables.

During the six months ended June 30, 2010, we invested $165.0 million in receivable portfolios, primarily for charged-off credit card portfolios with face values aggregating $4.4 billion, for an average purchase price of 3.8% of the face value of the purchased receivables. This is a $27.1 million increase, or 19.6%, in the amount invested, compared with the $137.9 million invested during the six months ended June 30, 2009, to acquire receivable portfolios, primarily consisting of charged-off credit card portfolios, with a face value aggregating $3.3 billion for an average purchase price of 4.2% 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 June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Collection sites	$	66,619	$	44,680	$	132,424	$	95,022
Legal collections		68,049		61,460		125,222		117,867
Collection agencies		21,960		15,506		39,712		23,173
Sales and other		161		727		698		1,544

	$	156,789	$	122,373	$	298,056	$	237,606

Gross collections increased $34.4 million, or 28.1%, to $156.8 million during the three months ended June 30, 2010, from $122.4 million during the three months ended June 30, 2009. Gross collections increased $60.5 million, or 25.4%, to $298.1 million during the six months ended June 30, 2010, from $237.6 million during the six months ended June 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 only 12 remittances during the three months ended March 31, 2010. As our average weekly remittances have grown to approximately $8.0 million, our collections for the six months ended June 30, 2010 were negatively affected by the one fewer weekly remittance. There were 13 remittances in each quarter during the three and six months ended March 31, 2009 and June 30, 2009. The third quarter of 2010 will have 14 remittances and the fourth quarter will have a typical 13 remittances.

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 June 30,
	2010					2009
Revenue
Revenue from receivable portfolios, net	$	91,845		95.4	%	$	73,965		94.8	%
Servicing fees and related revenue		4,386		4.6	%		4,070		5.2	%

Total revenue		96,231		100.0	%		78,035		100.0	%

Operating expenses
Salaries and employee benefits		16,484		17.1	%		14,762		18.9	%
Stock-based compensation expense		1,446		1.5	%		994		1.3	%
Cost of legal collections		31,235		32.4	%		28,626		36.7	%
Other operating expenses		9,027		9.4	%		6,598		8.5	%
Collection agency commissions		6,413		6.7	%		4,797		6.1	%
General and administrative expenses		7,425		7.7	%		7,097		9.1	%
Depreciation and amortization		752		0.8	%		620		0.8	%

Total operating expenses		72,782		75.6	%		63,494		81.4	%

Income before other (expense) income and income taxes		23,449		24.4	%		14,541		18.6	%

Other (expense) income
Interest expense		(4,880	)	(5.1	)%		(3,958	)	(5.1	)%
Gain on repurchase of convertible notes, net		—		0.0	%		215		0.3	%
Other (expense) income		(90	)	(0.1	)%		9		0.0	%

Total other expense		(4,970	)	(5.2	)%		(3,734	)	(4.8	)%

Income before income taxes		18,479		19.2	%		10,807		13.8	%
Provision for income taxes		(6,749	)	(7.0	)%		(4,166	)	(5.3	)%

Net income	$	11,730		12.2	%	$	6,641		8.5	%


	Six Months Ended June 30,
	2010					2009
Revenue
Revenue from receivable portfolios, net	$	174,752		95.2	%	$	146,240		94.7	%
Servicing fees and related revenue		8,817		4.8	%		8,241		5.3	%

Total revenue		183,569		100.0	%		154,481		100.0	%

Operating expenses
Salaries and employee benefits		31,969		17.4	%		28,719		18.6	%
Stock-based compensation expense		3,207		1.7	%		2,074		1.3	%
Cost of legal collections		57,668		31.4	%		58,573		37.9	%
Other operating expenses		18,141		9.9	%		12,578		8.1	%
Collection agency commissions		11,709		6.4	%		7,688		5.0	%
General and administrative expenses		14,304		7.8	%		12,794		8.3	%
Depreciation and amortization		1,425		0.8	%		1,243		0.8	%

Total operating expenses		138,423		75.4	%		123,669		80.0	%

Income before other (expense) income and income taxes		45,146		24.6	%		30,812		20.0	%


	Six Months Ended June 30,
	2010					2009
Other (expense) income
Interest expense		(9,418	)	(5.2	)%		(8,231	)	(5.4	)%
Gain on repurchase of convertible notes, net		—		0.0	%		3,268		2.1	%
Other income (expense)		102		0.1	%		(72	)	0.0	%

Total other expense		(9,316	)	(5.1	)%		(5,035	)	(3.3	)%

Income before income taxes		35,830		19.5	%		25,777		16.7	%
Provision for income taxes		(13,239	)	(7.2	)%		(10,139	)	(6.7	)%

Net income	$	22,591		12.3	%	$	15,638		10.0	%

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. 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 June 30, 2010											As of June 30, 2010
	Collections⁽¹⁾		Gross Revenue⁽²⁾		Revenue Recognition Rate⁽³⁾		Net Reversal (Portfolio Allowance)			Revenue % of Total Revenue		Unamortized Balances		Monthly IRR
ZBA	$	2,355	$	2,355	100.0	%	$	—		2.5	%	$	—	—
2002		164		—	0.0	%		164		0.0	%		—	—
2003		1,247		218	17.5	%		668		0.2	%		26	30.3	%
2004		2,209		826	37.4	%		469		0.9	%		2,787	7.5	%
2005		7,364		4,324	58.7	%		(411	)	4.6	%		23,863	5.6	%
2006		7,122		5,691	79.9	%		(942	)	6.0	%		35,243	5.1	%
2007		19,390		11,617	59.9	%		(977	)	12.3	%		50,741	6.8	%
2008		34,324		20,770	60.5	%		(1,810	)	21.9	%		127,313	5.1	%
2009		53,321		33,887	63.6	%		—		35.8	%		181,270	5.8	%
2010		29,250		14,996	51.3	%		—		15.8	%		145,572	4.3	%

Total	$	156,746	$	94,684	60.4	%	$	(2,839	)	100.0	%	$	566,815	6.0	%


	Three Months Ended June 30, 2009											As of June 30, 2009
	Collections⁽¹⁾		Gross Revenue⁽²⁾		Revenue Recognition Rate⁽³⁾		Net Reversal (Portfolio Allowance)			Revenue % of Total Revenue		Unamortized Balances		Monthly IRR
ZBA	$	2,357	$	2,357	100.0	%	$	—		3.0	%	$	—	—
2002		802		302	37.7	%		100		0.4	%		90	—
2003		2,247		1,744	77.6	%		—		2.2	%		1,585	34.8	%
2004		2,941		1,844	62.7	%		(60	)	2.3	%		6,914	30.8	%
2005		11,129		6,896	62.0	%		(156	)	8.8	%		38,714	8.1	%
2006		11,348		8,202	72.3	%		(1,904	)	10.5	%		51,585	5.6	%
2007		30,210		16,892	55.9	%		(1,133	)	21.5	%		92,755	5.1	%
2008		43,389		29,121	67.1	%		(1,411	)	37.1	%		184,676	5.5	%
2009		17,845		11,171	62.6	%		—		14.2	%		130,389	5.0	%

Total	$	122,268	$	78,529	64.2	%	$	(4,564	)	100.0	%	$	506,708	5.1	%


	Six Months Ended June 30, 2010											As of June 30, 2010
	Collections⁽¹⁾		Gross Revenue⁽²⁾		Revenue Recognition Rate⁽³⁾		Net Reversal (Portfolio Allowance)			Revenue % of Total Revenue		Unamortized Balances		Monthly IRR
ZBA	$	4,412	$	4,411	100.0	%	$	1		2.4	%	$	—	—
2002		417		—	0.0	%		418		0.0	%		—	—
2003		2,724		751	27.6	%		1,371		0.5	%		26	30.3	%
2004		4,349		1,905	43.8	%		636		1.0	%		2,787	7.5	%
2005		15,027		9,268	61.7	%		(1,182	)	5.0	%		23,863	5.6	%
2006		14,547		11,954	82.2	%		(5,264	)	6.4	%		35,243	5.1	%
2007		40,278		24,160	60.0	%		(1,869	)	13.0	%		50,741	6.8	%
2008		69,465		43,841	63.1	%		(4,831	)	23.6	%		127,313	5.1	%
2009		109,108		70,888	65.0	%		—		38.2	%		181,270	5.8	%
2010		37,591		18,294	48.7	%		—		9.9	%		145,572	4.3	%

Total	$	297,918	$	185,472	62.3	%	$	(10,720	)	100.0	%	$	566,815	6.0	%


	Six Months Ended June 30, 2009											As of June 30, 2009
	Collections⁽¹⁾		Gross Revenue⁽²⁾		Revenue Recognition Rate⁽³⁾		Net Reversal (Portfolio Allowance)			Revenue % of Total Revenue		Unamortized Balances		Monthly IRR
ZBA	$	4,857	$	4,857	100.0	%	$	—		3.1	%	$	—	—
2002		1,711		872	51.0	%		253		0.6	%		90	34.8	%
2003		4,596		3,929	85.5	%		(409	)	2.5	%		1,585	30.8	%
2004		6,316		4,055	64.2	%		(497	)	2.6	%		6,914	8.1	%
2005		23,163		14,678	63.4	%		(1,413	)	9.4	%		38,714	5.6	%
2006		24,132		17,251	71.5	%		(2,894	)	11.0	%		51,585	5.1	%
2007		63,431		35,977	56.7	%		(1,981	)	23.0	%		92,755	5.5	%
2008		88,333		60,928	69.0	%		(3,050	)	39.0	%		184,676	5.0	%
2009		20,855		13,684	65.6	%		—		8.8	%		130,389	4.3	%

Total	$	237,394	$	156,231	65.8	%	$	(9,991	)	100.0	%	$	506,708	5.1	%

⁽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.

Total revenue was $96.2 million for the three months ended June 30, 2010, an increase of $18.2 million, or 23.3%, compared to total revenue of $78.0 million for the three months ended June 30, 2009. Portfolio revenue was $91.8 million for the three months ended June 30, 2010, an increase of $17.8 million, or 24.2%, compared to portfolio revenue of $74.0 million for the three months ended June 30, 2009.

Total revenue was $183.6 million for the six months ended June 30, 2010, an increase of $29.1 million, or 18.8%, compared to total revenue of $154.5 million for the six months ended June 30, 2009. Portfolio revenue was $174.7 million for the six months ended June 30, 2010, an increase of $28.5 million, or 19.5%, compared to portfolio revenue of $146.2 million for the three months ended June 30, 2009.

The increase in portfolio revenue for the three and six months ended June 30, 2010, was primarily the result of additional accretion revenue associated with a higher portfolio balance during the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009, respectively. During the three months ended June 30, 2010, we recorded a net portfolio allowance provision of $2.8 million, compared to a net portfolio allowance provision of $4.6 million in the same period of the prior year. During the six months ended June 30, 2010, we recorded a net portfolio allowance provision of $10.7 million, compared to a net portfolio allowance provision of $10.0 million in the same period of the prior year. The net provision for portfolio allowances for the three and six months ended June 30, 2010 and 2009 was largely due to a shortfall in collections in certain pool groups against our forecast. While our total collections exceeded our forecast, there is often variability at the pool group level between our actual collections and our forecasts, primarily 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 $4.4 million for the three months ended June 30, 2010, an increase of $0.3 million, or 8.1%, compared to revenue of $4.1 million for the three months ended June 30, 2009. Revenue associated with bankruptcy servicing fees earned from Ascension was $8.8 million for the six months ended June 30, 2010, an increase of $0.6 million, or 7.2%, compared to revenue of $8.2 million for the three months ended June 30, 2009. The increase in Ascension revenue was due to a higher volume of bankruptcy placements in 2010.

Operating Expenses

Total operating expenses were $72.8 million for the three months ended June 30, 2010, an increase of $9.3 million, or 14.6%, compared to total operating expenses of $63.5 million for the three months ended June 30, 2009.

Total operating expenses were $138.4 million for the six months ended June 30, 2010, an increase of $14.7 million, or 11.9%, compared to total operating expenses of $123.7 million for the six months ended June 30, 2009.

Operating expenses are explained in more detail as follows:

Salaries and employee benefits

Total salaries and employee benefits increased $1.7 million, or 11.7%, to $16.5 million during the three months ended June 30, 2010, from $14.8 million during the three months ended June 30, 2009. Total salaries and employee benefits increased $3.3 million, or 11.3%, to $32.0 million during the six months ended June 30, 2010, from $28.7 million during the six months ended June 30, 2009. The increase was primarily the result of increases in headcount and related compensation expenses to support our growth.

Stock-based compensation expenses

Stock-based compensation increased $0.4 million, or 45.5%, to $1.4 million during the three months ended June 30, 2010, from $1.0 million during the three months ended June 30, 2009. This increase was primarily attributable to higher fair value of equity awards granted in recent periods due to an increase in our stock price.

Stock-based compensation increased $1.1 million, or 54.6%, to $3.2 million during the six months ended June 30, 2010, from $2.1 million during the six months ended June 30, 2009. This increase was primarily attributable to awards granted to our senior management team in the three months ended March 31, 2010 and higher fair value of equity awards granted in recent periods due to an increase in our stock price and higher fair value of equity awards granted in recent periods due to an increase in our stock price.

Cost of legal collections

The cost of legal collections increased $2.6 million, or 9.1%, to $31.2 million during the three months ended June 30, 2010, compared to $28.6 million during the three months ended June 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 $6.5 million, or 10.7%, in gross collections through our legal channel and upfront litigation costs. Gross legal collections amounted to $68.0 million during the three months ended June 30, 2010, up from $61.5 million collected during the three months ended June 30, 2009. The cost of legal collections decreased as a percent of gross collections through this channel to 45.9% during the three months ended June 30, 2010, from 46.6% during the three months ended June 30, 2009, primarily due to a more targeted placement volume as part of an initiative to primarily sue higher quality accounts.

The cost of legal collections decreased $0.9 million, or 1.6%, to $57.7 million during the six months ended June 30, 2010, compared to $58.6 million during the six months ended June 30, 2009. These costs represent contingent fees paid to our nationwide network of attorneys and costs of litigation. The decrease in the cost of legal collections was primarily the result of a decrease in upfront court cost expenses due to more targeted placement volumes as part of an initiative to primarily sue higher quality accounts. Court costs advanced for the six months ended June 30, 2010 decreased to $31.8 million, compared to $35.8 million for the six months ended June 30, 2009. As a result, court cost expense decreased to $20.0 million, or 15.9% as a percent of collections, for the six months ended June 30, 2010, compared to $23.9 million, or 20.2% of collections, for the six months ended June 30, 2009. This decrease was partially offset by an increase in commissions paid on increased collections through our legal channel. For the six months ended June 30, 2010, we paid commissions of $36.5 million, or 29.1%, on legal collections of $125.2 million, compared to commissions of $33.7 million, or 28.6%, on legal collections of $117.9 million for the six months ended June 30, 2009. In addition to a fixed-rate commission, we incentivize certain third-party law firms by paying bonus commissions when a law firm exceeds specific targets. During the six months ended June 30, 2010, certain firms exceeded their targets due to a one-time change in placement volume. Accordingly, the increased bonus commissions resulted in a higher over-all commission rate as compared to the same period in the prior year. As a result of the factors discussed above, the cost of legal collections, as a percent of gross collections through this channel, decreased to 46.1% for the six months ended June 30, 2010 from 49.7% for the six months ended June 30, 2009.

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


	Three Months Ended June 30,										Six Months Ended June 30,
	2010					2009					2010					2009
Collections	$	68,049		100.0	%	$	61,460		100.0	%	$	125,222		100.0	%	$	117,867		100.0	%

Court costs advanced		18,479		27.2	%		15,576		25.3	%		31,800		25.4	%		35,839		30.4	%
Court costs deferred		(7,054	)	(10.4	)%		(5,023	)	(8.1	)%		(11,843	)	(9.5	)%		(11,983	)	(10.2	)%

Court cost expense⁽¹⁾		11,425		16.8	%		10,553		17.2	%		19,957		15.9	%		23,856		20.2	%
Other⁽²⁾		593		0.9	%		484		0.8	%		1,214		1.0	%		1,028		0.9	%
Commissions		19,217		28.2	%		17,589		28.6	%		36,497		29.2	%		33,689		28.6	%

Total Costs	$	31,235		45.9	%	$	28,626		46.6	%	$	57,668		46.1	%	$	58,573		49.7	%

⁽¹⁾

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.

⁽²⁾	Other costs consist of costs related to counter claims and legal network subscription fees.

Other operating expenses

Other operating expenses increased $2.4 million, or 36.8%, to $9.0 million during the three months ended June 30, 2010, from $6.6 million during the three months ended June 30, 2009. The increase was primarily the result of an increase of $0.7 million in telephone expenses, an increase of $0.6 million in direct mail campaign expenses, an increase of $0.4 million in media-related expenses and a net increase in various other operating expenses of $0.7 million to support our growth.

Other operating expenses increased $5.5 million, or 44.2%, to $18.1 million during the six months ended June 30, 2010, from $12.6 million during the six months ended June 30, 2009. The increase was primarily the result of an increase of $1.4 million in telephone expenses, an increase of $0.6 million in skip tracing expenses, an increase of $1.4 million in direct mail campaign expenses, an increase of $1.1 million in media-related expenses and a net increase in various other operating expenses of $1.0 million to support our growth.

Collection agency commissions

During the three months ended June 30, 2010, we incurred $6.4 million in commissions to third party collection agencies, or 29.2%, of the related gross collections of $22.0 million, compared to $4.8 million in commissions, or 30.9%, of the related gross collections of $15.5 million during the three months ended June 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 three months ended June 30, 2010, we placed more freshly charged-off accounts with the agencies as compared to the same period in the prior year.

During the six months ended June 30, 2010, we incurred $11.7 million in commissions to third party collection agencies, or 29.5%, of the related gross collections of $39.7 million, compared to $7.7 million in commissions, or 33.2%, of the related gross collections of $23.2 million during the six months ended June 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 six months ended June 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 increased $0.3 million, or 4.6%, to $7.4 million during the three months ended June 30, 2010, from $7.1 million during the three months ended June 30, 2009. The increase was primarily the result of an increase of $0.9 million in corporate settlements, an increase of $0.3 million in system maintenance costs, and a net increase in other general and administrative expenses of $0.7 million. The increase was offset by a decrease of $1.6 million in corporate legal expenses.

General and administrative expenses increased $1.5 million, or 11.8%, to $14.3 million during the six months ended June 30, 2010, from $12.8 million during the six months ended June 30, 2009. The increase was primarily the result of an increase of $0.3 million in building rent related to our India expansion, an increase of $0.3 million in consulting fees, an increase of $1.2 million in corporate settlements, an increase of $0.7 million in system maintenance costs, and a net increase in other general and administrative expenses of $1.3 million. The increase was offset by a decrease of $2.3 million in corporate legal expenses.

Cost per Dollar Collected

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


	Three Months Ended June 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	$	66,619	$	6,346	⁽¹⁾	9.5	%	4.0	%	$	44,680	$	5,675	⁽¹⁾	12.7	%	4.7	%
Legal networks		68,049		31,235		45.9	%	19.9	%		61,460		28,626		46.6	%	23.4	%
Collection agency outsourcing		21,960		6,413		29.2	%	4.1	%		15,506		4,797		30.9	%	3.9	%
Sales and other		161		—		—		—			727		—		—		—
Other indirect costs⁽²⁾		—		24,042		—		15.4	%		—		19,948		—		16.3	%

Total	$	156,789	$	68,036	⁽³⁾			43.4	%	$	122,373	$	59,046	⁽³⁾			48.3	%


	Six Months Ended June 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	$	132,424	$	12,368	⁽¹⁾	9.3	%	4.2	%	$	95,022	$	11,480	⁽¹⁾	12.1	%	4.8	%
Legal networks		125,222		57,668		46.1	%	19.3	%		117,867		58,573		49.7	%	24.7	%
Collection agency outsourcing		39,712		11,709		29.5	%	3.9	%		23,173		7,688		33.2	%	3.2	%
Sales and other		698		—		—		—			1,544		—		—		—
Other indirect costs⁽²⁾		—		46,860		—		15.7	%		—		37,014		—		15.6	%

Total	$	298,056	$	128,605	⁽³⁾			43.1	%	$	237,606	$	114,755	⁽³⁾			48.3	%

⁽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.

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 June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
GAAP total operating expenses, as reported	$	72,782		$	63,494		$	138,423		$	123,669
Stock-based compensation expense		(1,446	)		(994	)		(3,207	)		(2,074	)
Bankruptcy servicing operating expenses		(3,300	)		(3,454	)		(6,611	)		(6,840	)

Operating expenses, excluding stock-based compensation expense and bankruptcy servicing operating expenses	$	68,036		$	59,046		$	128,605		$	114,755

During the three months ended June 30, 2010, cost per dollar collected decreased by 490 basis points to 43.4% of gross collections from 48.3% of gross collections during the three months ended June 30, 2009. This decrease was due to several factors, including:

•

The cost of legal collections, as a percent of total collections, decreased to 19.9% in three months ended June 30, 2010 from 23.4% in the three months ended June 30, 2009 and, as a percentage of legal collections, decreased to 45.9% in three months ended June 30, 2010 from 46.6% in the three months ended June 30, 2009. The decrease was primarily a result of our strategy to sue better quality accounts in this channel, see “cost of legal collections” section above for details.

•

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 June 30, 2010 from 4.7% in the three months ended June 30, 2009 and, as a percentage of our site collections, decreased to 9.5% in three months ended June 30, 2010 from 12.7% in the three months ended June 30, 2009. The decrease was primarily due to a shift in our collection workforce from the United States to India and a change in our compensation plan structure in the United States.

•

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 15.4% in three months ended June 30, 2010 from 16.3% in the three months ended June 30, 2009 as we continue to leverage our costs across our higher collections. These costs increased in order to support the growth of our business. However, our collections grew at a rate greater than that of the indirect costs resulting in a reduction in other indirect costs as a percent of total collections.

The decrease was offset by:

•

An increase in collection agency commissions, as a percentage of total collections, to 4.1% in three months ended June 30, 2010 from 3.9% in the three months ended June 30, 2009. The increase in the percentage of commissions to total collections is due to collection agency commissions growing at a rate faster than total collections, offset by a decline in our commission rate, resulting in a decline in cost per dollar collected in this channel from 30.9% in the three months ended June 30, 2009 to 29.2% in three months ended June 30, 2010. This was the result of a change in the mix of accounts placed into this channel, primarily freshly charged off accounts. Freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time.

During the six months ended June 30, 2010, cost per dollar collected decreased by 520 basis points to 43.1% of gross collections from 48.3% of gross collections during the six months ended June 30, 2009. This decrease was due to several factors, including:

•

The cost of legal collections as a percent of total collections decreased to 19.3% in six months ended June 30, 2010 from 24.7% in the six months ended June 30, 2009 and, as a percentage of legal collections, decreased to 46.1% in six months ended June 30, 2010 from 49.7% in the six months ended June 30, 2009. The decrease was primarily due to our initiative to primarily sue higher quality accounts resulting in more targeted placement volumes, resulting in less upfront court costs expensed in this channel, as further discussed in the “cost of legal collections” section above.

•

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 six months ended June 30, 2010 from 4.8% in the six months ended June 30, 2009 and, as a percentage of our site collections, decreased to 9.3% in six months ended June 30, 2010 from 12.1% in the six months ended June 30, 2009. The decrease was primarily due to a shift in our collection workforce from the United States to India and a change in our compensation plan structure in the United States.

The decrease was offset by:

•

An increase in collection agency commissions, as a percentage of total collections, to 3.9% in six months ended June 30, 2010 from 3.2% in the six months ended June 30, 2009. The increase in the percentage of commissions to total collections is due to collection agency commissions growing at a rate faster than total collections, offset by a decline in our commission rate, resulting in a decline in cost per dollar collected in this channel from 33.2% in the six months ended June 30, 2009 to 29.5% in six months ended June 30, 2010. This was the result of a change in the mix of accounts placed into this channel, primarily freshly charged off accounts. Freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time.

Interest Expense

Interest expense increased $0.9 million, or 23.3%, to $4.9 million during the three months ended June 30, 2010, from $4.0 million during the three months ended June 30, 2009. Interest expense increased $1.2 million, or 14.4%, to $9.4 million during the six months ended June 30, 2010, from $8.2 million during the six months ended June 30, 2009.

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


	Three Months Ended June 30,
	2010		2009		$ Change			% Change
Stated interest on debt obligations	$	3,749	$	3,019	$	730		24.2	%
Amortization of loan fees and other loan costs		425		289		136		47.1	%
Amortization of debt discount – convertible notes		706		650		56		8.6	%

Total interest expense	$	4,880	$	3,958	$	922		23.3	%


	Six Months Ended June 30,
	2010		2009		$ Change			% Change
Stated interest on debt obligations	$	7,224	$	6,071	$	1,153		19.0	%
Amortization of loan fees and other loan costs		809		600		209		34.8	%
Amortization of debt discount – convertible notes		1,385		1,560		(175	)	(11.2	)%

Total interest expense	$	9,418	$	8,231	$	1,187		14.4	%

Stated interest on debt obligations increased $0.7 million during the three months ended June 30, 2010, compared to the same period of the prior year. Stated interest on debt obligations increased $1.2 million during the six months ended June 30, 2010, compared to the same period of the prior year. The increases in stated interest on debt obligations for the three and six months ended June 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 June 30, 2010, we recorded an income tax provision of $6.7 million, reflecting an effective rate of 36.5% of pretax income. The effective tax rate for the three months ended June 30, 2010 consists primarily of a provision for federal income taxes of 32.4% (which is net of a benefit for state taxes of 2.6%), a blended provision for state taxes of 7.3%, a benefit of permanent book versus tax differences of 1.5%, and a benefit of an Internal Revenue Service (“IRS”) refund of 1.7%. During the three months ended June 30, 2009, we recorded an income tax provision of $4.2 million, reflecting an effective rate of 38.5% of pretax income. Our effective tax rate for the three months ended June 30, 2009, differed from the federal statutory rate, primarily due to the net effect of state taxes, the effect of permanent book versus tax differences and a state tax refund.

During the six months ended June 30, 2010, we recorded an income tax provision of $13.2 million, reflecting an effective rate of 36.9% of pretax income. The effective tax rate for the six months ended June 30, 2010 consists primarily of a provision for federal income taxes of 32.4% (which is net of a benefit for state taxes of 2.6%), a blended provision for state taxes of 7.3%, a benefit for the effect of permanent book versus tax differences of 1.9%, and a benefit of an IRS refund of 0.9%. During the six months ended June 30, 2009, we recorded an income tax provision of $10.1 million, reflecting an effective rate of 39.3% of pretax income. Our effective tax rate for the six months ended June 30, 2009 differed from the federal statutory rate, primarily due to the net effect of state taxes, the effect of permanent book versus tax differences and a state tax refund.

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 June 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	$	6,379	$	1,064,754	3.7
2004		101,325			—		39,400		79,845		54,832		34,625		19,116		11,363		4,348		243,529	2.4
2005		192,591			—		—		66,491		129,809		109,078		67,346		42,387		15,140		430,251	2.2
2006		141,043			—		—		—		42,354		92,265		70,743		44,553		14,547		264,462	1.9
2007		204,295			—		—		—		—		68,048		145,272		111,117		40,278		364,715	1.8
2008		227,922			—		—		—		—		—		69,049		165,164		70,229		304,442	1.3
2009		253,880			—		—		—		—		—		—		96,529		109,366		205,895	0.8
2010		164,873			—		—		—		—		—		—		—		37,631		37,631	0.2

Total	$	1,570,090		$	517,451	$	232,340	$	291,111	$	336,374	$	354,724	$	398,303	$	487,458	$	297,918	$	2,915,679	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 June 30, 2010, excluding collections on behalf of others.

⁽³⁾	Cumulative Collections Multiple (“CCM”) through June 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 ⁾	$	1,064,754	$	148	$	1,064,902	3.7
2004		101,325			243,529		4,253		247,782	2.4
2005		192,591			430,251		40,827		471,078	2.4
2006		141,043			264,462		70,725		335,187	2.4
2007		204,295			364,715		111,778		476,493	2.3
2008		227,922			304,442		268,947		573,389	2.5
2009		253,880			205,895		453,388		659,283	2.6
2010		164,873			37,631		329,745		367,376	2.2

Total	$	1,570,090		$	2,915,679	$	1,279,811	$	4,195,490	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 June 30, 2010, excluding collections on behalf of others.

⁽³⁾	From inception through December 31, 2003.

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		2016		2017		Total
<2004⁽¹⁾	$	148	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	148
2004		2,345		1,908		—		—		—		—		—		—		4,253
2005		13,484		20,312		7,014		17		—		—		—		—		40,827
2006		15,137		27,005		19,283		9,300		—		—		—		—		70,725
2007		29,610		39,379		24,997		14,033		3,759		—		—		—		111,778
2008		62,725		88,953		55,537		35,053		19,739		6,940		—		—		268,947
2009		89,758		150,207		101,627		58,581		32,131		15,551		5,533		—		453,388
2010		51,141		106,521		77,346		44,544		26,037		13,929		8,313		1,914		329,745

Total	$	264,348	$	434,285	$	285,804	$	161,528	$	81,666	$	36,420	$	13,846	$	1,914	$	1,279,811

⁽¹⁾	Estimated remaining collections for Zero Basis Portfolios can extend beyond the 84-month accrual basis collection forecast.

⁽²⁾	2010 amount consists of six months data from July 1, 2010 to December 31, 2010.

Unamortized Balances of Portfolios

The following table summarizes the remaining unamortized balances of our purchased receivable portfolios by year of purchase (in thousands, except percentages):


	Unamortized Balance as of June 30, 2010		Purchase Price⁽¹⁾		Unamortized Balance as a Percentage of Purchase Price		Unamortized Balance as a Percentage of Total
2003	$	26	$	88,501	0.0	%	0.0	%
2004		2,787		101,325	2.8	%	0.5	%
2005		23,863		192,591	12.4	%	4.2	%
2006		35,243		141,043	25.0	%	6.2	%
2007		50,741		204,295	24.8	%	8.9	%
2008		127,313		227,922	55.9	%	22.5	%
2009		181,270		253,880	71.4	%	32.0	%
2010		145,572		164,873	88.3	%	25.7	%

Total	$	566,815	$	1,374,430	41.2	%	100.0	%

⁽¹⁾	Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-Backs, plus an allocation of our forward flow asset (if applicable), and less the purchase price for accounts that were sold at the time of purchase to another debt purchaser.

Changes in the Investment in Receivable Portfolios

Revenue related to our investment in receivable portfolios comprises two groups. First, revenue from those portfolios that have a remaining book value and are accounted for on the accrual basis (“Accrual Basis Portfolios”), and second, revenue from those portfolios that have fully recovered their book value Zero Basis Portfolios and, therefore, every dollar of gross collections is recorded entirely as Zero Basis Revenue. If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, we account for such portfolios on the cost recovery method (“Cost Recovery Portfolios”). No revenue is recognized on Cost Recovery Portfolios until the cost basis has been fully recovered, at which time they become Zero Basis Portfolios.

The following tables summarize the changes in the balance of the investment in receivable portfolios and the proportion of revenue recognized as a percentage of collections (in thousands, except percentages):


	Three Months Ended June 30, 2010
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	549,180		$	480		$	—		$	549,660
Purchases of receivable portfolios		83,336			—			—			83,336
Gross collections⁽¹ ⁾		(154,367	)		(24	)		(2,355	)		(156,746	)
Put-backs and recalls		(1,280	)		—			—			(1,280	)
Revenue recognized⁽² ⁾		92,329			—			2,355			94,684
Portfolio allowances, net		(2,383	)		(456	)		—			(2,839	)

Balance, end of period	$	566,815		$	—		$	—		$	566,815

Revenue as a percentage of collections⁽³ ⁾		59.8	%		0.0	%		100.0	%		60.4	%


	Three Months Ended June 30, 2009
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	472,875		$	609		$	—		$	473,484
Purchases of receivable portfolios		82,033			—			—			82,033
Gross collections⁽¹ ⁾		(119,823	)		(56	)		(2,389	)		(122,268	)
Put-backs and recalls		(506	)		—			—			(506	)
Revenue recognized⁽² ⁾		76,172			—			2,357			78,529
(Portfolio allowances) portfolio allowance reversals, net		(4,596	)		—			32			(4,564	)

Balance, end of period	$	506,155		$	553		$	—		$	506,708

Revenue as a percentage of collections⁽³ ⁾		63.6	%		0.0	%		98.7	%		64.2	%


	Six Months Ended June 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		164,968			—			—			164,968
Gross collections⁽¹ ⁾		(293,451	)		(55	)		(4,412	)		(297,918	)
Put-backs and recalls		(1,864	)		—			—			(1,864	)
Revenue recognized⁽² ⁾		181,061			—			4,411			185,472
(Portfolio allowances) portfolio allowance reversals, net		(10,265	)		(456	)		1			(10,720	)

Balance, end of period	$	566,815		$	—		$	—		$	566,815

Revenue as a percentage of collections⁽³ ⁾		61.7	%		0.0	%		100.0	%		62.3	%


	Six Months Ended June 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		137,946			—			—			137,946
Gross collections⁽¹⁾		(232,314	)		(195	)		(4,885	)		(237,394	)
Put-backs and recalls		(1,426	)		—			(4	)		(1,430	)
Revenue recognized⁽²⁾		151,374			—			4,857			156,231
(Portfolio allowances) portfolio allowance reversals, net		(10,023	)		—			32			(9,991	)

Balance, end of period	$	506,155		$	553		$	—		$	506,708

Revenue as a percentage of collections⁽³⁾		65.2	%		0.0	%		99.4	%		65.8	%

⁽¹⁾	Does not include amounts collected on behalf of others.

⁽²⁾	Includes retained interest.

⁽³⁾	Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.

As of June 30, 2010, we had $566.8 million in investment in receivable portfolios. This balance will be amortized based upon current projections of cash collections in excess of revenue applied to the principal balance. The estimated amortization of the investment in receivable portfolio balance is as follows (in thousands):


Year Ended December 31,	Amortization
2010⁽¹⁾	$	81,215
2011		169,069
2012		143,923
2013		87,533
2014		48,540
2015		23,709
2016		10,989
2017		1,837

Total	$	566,815

⁽¹⁾	2010 amount consists of six months data from July 1, 2010 to December 31, 2010.

Analysis of Changes in Revenue

The following table analyzes the components of the change in revenue from our receivable portfolios (in thousands, except percentages):


	Three Months Ended June 30,
Variance Component	2010			2009			Change			Revenue Variance
Average portfolio balance	$	534,768		$	468,442		$	66,326		$	10,785
Weighted average monthly effective interest rate⁽¹⁾		5.8	%		5.4	%		0.4	%	$	5,371
Zero basis revenue	$	2,355		$	2,357					$	(2	)
Net portfolio allowances	$	(2,838	)	$	(4,564	)				$	1,726

Total variance										$	17,880


	Six Months Ended June 30,
Variance Component	2010			2009			Change			Revenue Variance
Average portfolio balance	$	529,737		$	459,396		$	70,341		$	23,178
Weighted average monthly effective interest rate(1)		5.7	%		5.5	%		0.2	%	$	6,509
Zero basis revenue	$	4,411		$	4,857					$	(446	)
Net portfolio allowances	$	(10,720	)	$	(9,991	)				$	(729	)

Total variance										$	28,512

⁽¹⁾

For accrual basis portfolios, the weighted average monthly effective interest rate is the accrual rate utilized in recognizing revenue on our accrual basis portfolios. This rate represents the monthly internal rate of return. The monthly internal rate of return is determined based on the timing and amounts of actual cash received to date and the anticipated future cash flow projections for each pool. These effective interest rates represent gross rates before the impact of collection and other costs.

Collections by Channel

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Collection sites	$	66,619	$	44,680	$	132,424	$	95,022
Legal collections		68,049		61,460		125,222		117,867
Collection agencies		21,960		15,506		39,712		23,173
Sales and other		161		727		698		1,544

	$	156,789	$	122,373	$	298,056	$	237,606

External Collection Channels and Related Direct Costs

The following tables summarize our external collection channel performance and related direct costs (in thousands, except percentages):

Legal Collections
Three Months Ended June 30,

Collection Agencies
Three Months Ended June 30,

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