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, 2011

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

For the transition period from to .

COMMISSION FILE NUMBER: 000-26489

ENCORE CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware		48-1090909
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

3111 Camino Del Rio North, Suite 1300 San Diego, California		92108
(Address of principal executive offices)		(Zip code)

(877) 445 - 4581

(Registrant’s telephone number, including area code)

8875 Aero Drive, Suite 200, San Diego, California 92123

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨		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 18, 2011
Common Stock, $0.01 par value		24,452,519 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		18

Item 3 – Quantitative and Qualitative Disclosures About Market Risk		37

Item 4 – Controls and Procedures		37

PART II – OTHER INFORMATION		38

Item 1 – Legal Proceedings		38

Item 1A – Risk Factors		39

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		45

Item 6 – Exhibits		46

SIGNATURES		47

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, 2011		December 31, 2010
Assets
Cash and cash equivalents	$	14,660	$	10,905
Accounts receivable, net		2,998		3,331
Investment in receivable portfolios, net		657,783		644,753
Deferred court costs, net		36,068		32,158
Property and equipment, net		14,830		13,658
Prepaid income tax		6,324		1,629
Other assets		13,727		13,301
Goodwill		15,985		15,985
Identifiable intangible assets, net		605		748

Total assets	$	762,980	$	736,468

Liabilities and stockholders’ equity
Liabilities:
Accounts payable and accrued liabilities	$	25,942	$	26,539
Deferred tax liabilities, net		17,464		17,626
Debt		378,172		385,264
Other liabilities		4,128		4,342

Total liabilities		425,706		433,771

Commitments and contingencies
Stockholders’ equity:
Convertible preferred stock, $.01 par value, 5,000 shares authorized, no shares issued and outstanding		—		—
Common stock, $.01 par value, 50,000 shares authorized, 24,448 shares and 24,011 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively		244		240
Additional paid-in capital		119,560		113,412
Accumulated earnings		217,348		188,894
Accumulated other comprehensive income		122		151

Total stockholders’ equity		337,274		302,697

Total liabilities and stockholders’ equity	$	762,980	$	736,468

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,
	2011			2010			2011			2010
Revenue
Revenue from receivable portfolios, net	$	111,093		$	91,845		$	216,419		$	174,752
Servicing fees and other related revenue		4,737			4,386			9,714			8,817

Total revenue		115,830			96,231			226,133			183,569

Operating expenses
Salaries and employee benefits (excluding stock-based compensation expense)		20,212			16,484			39,252			31,969
Stock-based compensation expense		1,810			1,446			3,575			3,207
Cost of legal collections		40,686			31,235			77,195			57,668
Other operating expenses		9,191			9,027			19,287			18,141
Collection agency commissions		3,596			6,413			7,510			11,709
General and administrative expenses		9,623			7,425			19,792			14,304
Depreciation and amortization		1,105			752			2,158			1,425

Total operating expenses		86,223			72,782			168,769			138,423

Income from operations		29,607			23,449			57,364			45,146

Other (expense) income
Interest expense		(5,369	)		(4,880	)		(10,962	)		(9,418	)
Other income (expense)		23			(90	)		139			102

Total other expense		(5,346	)		(4,970	)		(10,823	)		(9,316	)

Income before income taxes		24,261			18,479			46,541			35,830
Provision for income taxes		(9,486	)		(6,749	)		(18,087	)		(13,239	)

Net income	$	14,775		$	11,730		$	28,454		$	22,591

Weighted average shares outstanding:
Basic		24,433			23,713			24,384			23,673
Diluted		25,610			24,958			25,594			24,897
Earnings per share:
Basic	$	0.60		$	0.49		$	1.17		$	0.95
Diluted	$	0.58		$	0.47		$	1.11		$	0.91

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
Balance at December 31, 2010		24,011	$	240	$	113,412		$	188,894	$	151		$	302,697		$	—

Net income		—		—		—			28,454		—			28,454			28,454
Other comprehensive gain:
Unrealized loss on cash flow hedge, net of tax		—		—		—			—		(29	)		(29	)		(29	)
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes		437		4		(2,146	)		—		—			(2,142	)		—
Stock-based compensation		—		—		3,575			—		—			3,575			—
Tax benefit related to stock-based compensation		—		—		4,719			—		—			4,719			—

Balance at June 30, 2011		24,448	$	244	$	119,560		$	217,348	$	122		$	337,274		$	28,425

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,
	2011			2010
Operating activities:
Net income	$	28,454		$	22,591
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,158			1,425
Amortization of loan costs and debt discount		901			2,194
Stock-based compensation expense		3,575			3,207
Deferred income tax benefit		(162	)		(22	)
Excess tax benefit from stock-based payment arrangements		(4,727	)		(1,813	)
Provision for allowances on receivable portfolios, net		6,504			10,720
Changes in operating assets and liabilities
Other assets		(233	)		39
Deferred court costs		(3,910	)		3
Prepaid income tax and income taxes payable		24			(3,027	)
Accounts payable, accrued liabilities and other liabilities		(841	)		(494	)

Net cash provided by operating activities		31,743			34,823

Investing activities:
Purchases of receivable portfolios		(184,376	)		(164,968	)
Collections applied to investment in receivable portfolios, net		163,144			112,446
Proceeds from put-backs of receivable portfolios		1,698			1,864
Purchases of property and equipment		(1,461	)		(1,647	)

Net cash used in investing activities		(20,995	)		(52,305	)

Financing activities:
Payment of loan costs		(814	)		(4,660	)
Proceeds from senior secured notes		25,000			—
Proceeds from notes payable and other borrowings		55,000			53,000
Repayment of notes payable and other borrowings		(87,000	)		(31,000	)
Proceeds from net settlement of certain call options		—			524
Proceeds from exercise of stock options		1,248			1,688
Taxes paid related to net share settlement of equity awards		(3,388	)		(1,251	)
Excess tax benefit from stock-based payment arrangements		4,727			1,813
Repayment of capital lease obligations		(1,766	)		(618	)

Net cash (used in) provided by financing activities		(6,993	)		19,496

Net increase in cash and cash equivalents		3,755			2,014
Cash and cash equivalents, beginning of period		10,905			8,388

Cash and cash equivalents, end of period	$	14,660		$	10,402

Supplemental disclosures of cash flow information:
Cash paid for interest	$	9,718		$	6,994
Cash paid for income taxes	$	17,814		$	16,544
Supplemental schedule of non-cash investing and financing activities:
Fixed assets acquired through capital lease	$	1,726		$	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 leader in consumer debt buying and recovery. The Company purchases portfolios of defaulted consumer receivables and manages them by partnering with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial retailers, auto finance companies and telecommunication companies, which the Company purchases at deep discounts. Defaulted receivables also include receivables subject to bankruptcy proceedings or consumer bankruptcy receivables.

The Company purchases receivables based on robust, account-level valuation methods and employs a suite of proprietary statistical and behavioral models across the full extent of its operations. These investments allow the Company to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with its methods or goals and precisely align the accounts it purchases with its operational channels to maximize future collections. As a result, the Company has been able to realize significant returns from the receivables it acquires. The Company maintains strong relationships with many of the largest credit providers in the United States, and possesses one of the industry’s best collection staff retention rates.

The Company expands upon the insights created during its purchasing process when building account collection strategies. The Company’s proprietary consumer-level collectability analysis is the primary determinant of whether an account is actively serviced post-purchase. Throughout the Company’s ownership period, it continuously refines this analysis to determine the most effective collection strategy to pursue for each account. After the Company’s preliminary analysis, it seeks to collect on only a fraction of the accounts it purchases, through one or more of its collection channels. The channel identification process is analogous to a funneling system where the Company first differentiates those consumers who are not able to pay, from those who are able to pay. Consumers who the Company believes are financially incapable of making any payments, are facing extenuating circumstances or hardships (such as medical issues), are serving in the military, or are currently receiving social security as their only means of financial sustenance are excluded from the next step of its collection process and are designated as inactive. The remaining pool of accounts in the funnel then receives further evaluation. At that point, the Company analyzes and determines a consumer’s willingness to pay. Based on that analysis, the Company will pursue collections through letters and / or phone calls to its consumers. Despite its efforts to reach consumers and work out a settlement option, only a small number of consumers who are contacted choose to engage with the Company. Those who do are often offered deep discounts on their obligations, or are presented with payment plans which are better suited to meet their daily cash flow needs. The majority of contacted consumers, however, ignore both the Company’s calls and letters, and therefore the Company must then make the difficult decision to pursue collections through legal means.

In addition, the Company provides bankruptcy support services to some of the largest companies in the financial services industry through its 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.

Financial Statement Preparation

The accompanying interim condensed consolidated financial statements have been prepared by Encore, without audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the 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 financial position, results of operations and cash flows. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. Actual results could materially differ from those estimates.

Principles of Consolidation

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

Reclassification

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

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,
	2011		2010		2011		2010
Net income available for common stockholders (A)	$	14,775	$	11,730	$	28,454	$	22,591

Weighted average outstanding shares of common stock (B)		24,433		23,713		24,384		23,673
Dilutive effect of stock-based awards		1,177		1,245		1,210		1,224

Common stock and common stock equivalents (C)		25,610		24,958		25,594		24,897

Earnings per share:
Basic (A/B)	$	0.60	$	0.49	$	1.17	$	0.95
Diluted (A/C)	$	0.58	$	0.47	$	1.11	$	0.91

Employee stock options to purchase approximately 209,000 and 125,000 shares of common stock during the three and six months ended June 30, 2011, respectively, and 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, 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 Company accounts for certain assets and liabilities at fair value. The authoritative guidance for fair value measurements defines fair value as the price that would be received upon the 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.

The Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2011 are summarized below (in thousands):


	Level 1		Level 2			Level 3		Total
Assets
Interest rate swap agreements	$	—	$	68		$	—	$	68
Foreign exchange contracts	$	—	$	723		$	—	$	723
Liabilities
Interest rate swap agreements	$	—	$	(577	)	$	—	$	(577	)

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, 2011, 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. For investment in receivable portfolios, there is no active market or observable inputs for the fair value estimation. The Company does not consider it 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, 2011, the Company had six interest rate swap agreements outstanding with a total notional amount of $150.0 million. Under the swap agreements, the Company receives floating interest rate payments based on one-month reserve-adjusted LIBOR and makes interest payments based on fixed interest rates. The Company intends to continue electing the one-month reserve-adjusted LIBOR as the benchmark interest rate on the debt being hedged through its term. No credit spread was hedged. The Company designates its interest rate swap instruments as cash flow hedges.

The authoritative guidance requires companies to recognize derivative instruments as either an asset or liability measured at fair value in the statement of financial position. The effective portion of the change in fair value of the derivative instrument is recorded in other comprehensive income (“OCI”). 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 has operations in India, which exposes the Company to foreign currency exchange rate fluctuations due to transactions denominated in Indian Rupees, such as employee salaries and rent expenditures. To mitigate this risk, the Company enters into derivative financial instruments, principally forward contracts, which are designated as cash flow hedges to mitigate fluctuations in the cash payments of future forecasted transactions in Indian Rupees for up to 24 months. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and the Company reviews all exposures and derivative positions on an ongoing basis.

Gains and losses on cash flow hedges are recorded in accumulated other comprehensive income (loss) until the hedged transaction is recorded in the consolidated financial statements. Once the underlying transaction is recorded in the consolidated financial statements, the Company reclassifies the accumulated other comprehensive income or loss on the derivative into earnings. If all or a portion of the forecasted transaction was cancelled, this would render all or a portion of the cash flow hedge ineffective and the Company would reclassify the ineffective portion of the hedge into earnings. The Company generally does not experience ineffectiveness of the hedge relationship and the accompanying consolidated financial statements do not include any such gains or losses.

As of June 30, 2011, the total notional amount of the forward contracts to buy Indian rupees in exchange for U.S. dollars was $20.5 million. All outstanding contracts qualified for hedge accounting treatment as of June 30, 2011. The Company estimates that approximately $0.4 million of net derivative gain included in OCI will be reclassified into earnings within the next 12 months. No gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur since the inception of the hedge.

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, 2011

December 31, 2010

Balance Sheet
Location

Fair Value

Balance Sheet
Location

Fair Value

Derivatives designated as hedging instruments:

Interest rate swaps

Other assets

542

Interest rate swaps

Other liabilities

(577

)

Other liabilities

(485

)

Foreign exchange contracts

Other assets

723

Other assets

209

The following tables summarize the effects of derivatives in cash flow hedging relationships on the Company’s statements of income during the three and six months ended June 30, 2011 and 2010 (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,
	2011			2010				2011		2010			2011		2010
Interest rate swaps	$	(1,072	)	$	374		Interest expense	$	—	$	—	Other (expense) income	$	—	$	—
Foreign exchange contracts	$	242		$	(381	)	Salaries and employee benefits	$	94	$	9	Other (expense) income	$	—	$	—
Foreign exchange contracts	$	57		$	(78	)	General and administrative expenses	$	20	$	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,
	2011			2010				2011		2010			2011		2010
Interest rate swaps	$	(566	)	$	845		Interest expense	$	—	$	—	Other (expense) income	$	—	$	—
Foreign exchange contracts	$	597		$	113		Salaries and employee benefits	$	167	$	12	Other (expense) income	$	—	$	—
Foreign exchange contracts	$	122		$	26		General and administrative expenses	$	38	$	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 benefit provided under these plans is 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 three months ended June 30, 2011 and 2010 was $1.8 million and $1.4 million, respectively. Total compensation expense during the six months ended June 30, 2011 and 2010 was $3.6 million and $3.2 million, respectively.

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

Stock Options

The 2005 Plan permits the granting of stock options to certain employees and directors of the Company. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of issuance. They generally vest over three to five years of continuous service, and have ten-year contractual terms.

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,
	2011			2010
Weighted average fair value of options granted	$	13.26		$	9.70
Risk free interest rate		2.0	%		2.3	%
Dividend yield		0.0	%		0.0	%
Volatility factor of the expected market price of the Company’s common stock		61.0	%		62.0	%
Weighted-average expected life of options		5 Years			5 Years

Unrecognized compensation cost related to stock options as of June 30, 2011, was $4.1 million. The weighted-average remaining expense period, based on the unamortized value of these outstanding stock options, was approximately 2.1 years.

A summary of the Company’s stock option activity as of June 30, 2011, and changes during the six months ended, is presented below:


	Number of Shares			Option Price Per Share		Weighted Average Exercise Price		Aggregate Intrinsic Value *(in thousands)*
Outstanding at December 31, 2010		2,437,062		$	0.51 – $20.09	$	10.74
Granted		209,000			24.65		24.65
Cancelled/forfeited		(21,498	)		2.89 – 17.90		10.34
Exercised		(396,716	)		0.51 – 17.90		5.76

Outstanding at June 30, 2011		2,227,848		$	0.51 – $24.65	$	12.94	$	39,621

Exercisable at June 30, 2011		1,240,853		$	0.51 – $24.65	$	11.28	$	24,117

The total intrinsic value of options exercised during the six months ended June 30, 2011 and 2010 was $9.9 million and $3.2 million, respectively. As of June 30, 2011, the weighted-average remaining contractual life of options outstanding and options exercisable was 6.3 years and 4.7 years, respectively.

Non-Vested Shares

Under the Company’s 2005 Plan, employees, officers, 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, 2011, 37,662 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, 2011. The remaining 616,239 non-vested shares are not performance-based, and will vest over approximately one to three years of continuous service.

A summary of the status of the Company’s restricted stock units as of June 30, 2011, and changes during the six months ended, is presented below:


	Non-Vested Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2010		614,370		$	13.08
Awarded		281,290		$	25.11
Vested		(211,171	)	$	12.87
Cancelled/forfeited		(30,588	)	$	16.56

Non-vested at June 30, 2011		653,901		$	18.16

Unrecognized compensation expense related to non-vested shares as of June 30, 2011, was $8.0 million. The weighted-average remaining expense period, based on the unamortized value of these outstanding non-vested shares, was approximately 2.3 years. The fair value of restricted stock units and restricted stock awards vested during the six months ended June 30, 2011 and 2010 was $5.6 million and $3.5 million, respectively.

Note 6: Investment in Receivable Portfolios, Net

In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality, discrete receivable portfolio purchases during a quarter are aggregated into pools based on common risk characteristics. Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The purchase cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.

In compliance with the authoritative guidance, the Company accounts for its investments in consumer receivable portfolios using either the interest method or the cost recovery method. The interest method applies an internal rate of return (“IRR”) to the cost basis of the pool, which remains unchanged throughout the life of the pool, unless there is an increase in subsequent expected cash flows. Subsequent increases in expected cash flows are generally recognized prospectively through an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash flows do not change the IRR, but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of income as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition.

The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios and for provision for loss or allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances.

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 period presented (in thousands):


	Accretable Yield			Estimate of Zero Basis Cash Flows			Total
Balance at December 31, 2010	$	739,785		$	4,274		$	744,059
Revenue recognized, net		(101,709	)		(3,617	)		(105,326	)
Net additions to existing portfolios		18,715			2,948			21,663
Additions for current purchases		93,098			—			93,098

Balance at March 31, 2011	$	749,889		$	3,605		$	753,494
Revenue recognized, net		(106,961	)		(4,132	)		(111,093	)
Net additions to existing portfolios		15,575			3,900			19,475
Additions for current purchases		95,532			—			95,532

Balance at June 30, 2011	$	754,035		$	3,373		$	757,408


	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

During the three months ended June 30, 2011, the Company purchased receivable portfolios with a face value of $3.0 billion for $93.7 million, or a purchase cost of 3.1% of face value. The estimated future collections at acquisition for these portfolios amounted to $185.9 million. During the six months ended June 30, 2011, the Company purchased receivable portfolios with a face value of $5.9 billion for $184.4 million, or a purchase cost of 3.1% of face value. The estimated future collections at acquisition for these portfolios amounted to $364.3 million.

All collections realized after the net book value of a portfolio has been fully recovered are recorded as revenue (“Zero Basis Revenue”). During the three months ended June 30, 2011 and 2010, Zero Basis Revenue was approximately $2.9 million and $2.4 million, respectively. During the six months ended June 30, 2011 and 2010, approximately $5.9 million and $4.4 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, 2011
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	648,820		$	—		$	—		$	648,820
Purchases of receivable portfolios		93,701			—			—			93,701
Gross collections⁽¹⁾		(190,901	)		—			(4,132	)		(195,033	)
Put-backs and recalls⁽²⁾		(798	)		—			—			(798	)
Revenue recognized⁽³⁾		109,185			—			2,914			112,099
(Portfolio allowances) portfolio allowance reversals, net		(2,224	)		—			1,218			(1,006	)

Balance, end of period	$	657,783		$	—		$	—		$	657,783

Revenue as a percentage of collections⁽⁴⁾		57.2	%		0.0	%		70.5	%		57.5	%


	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) portfolio allowance reversals, 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	%


	Six Months Ended June 30, 2011
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	644,753		$	—		$	—		$	644,753
Purchases of receivable portfolios		184,376			—			—			184,376
Gross collections⁽¹⁾		(378,318	)		—			(7,749	)		(386,067	)
Put-backs and recalls⁽²⁾		(1,698	)		—			—			(1,698	)
Revenue recognized⁽³⁾		216,989			—			5,934			222,923
(Portfolio allowances) portfolio allowance reversals, net		(8,319	)		—			1,815			(6,504	)

Balance, end of period	$	657,783		$	—		$	—		$	657,783

Revenue as a percentage of collections⁽⁴⁾		57.4	%		0.0	%		76.6	%		57.7	%


	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	%

⁽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 portfolio purchase agreement (“Put-Backs”). Recalls represent accounts that are recalled by the seller in accordance with the respective portfolio 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,
	2011			2010			2011			2010
Balance at beginning of period	$	104,169		$	84,343		$	98,671		$	76,462
Provision for portfolio allowances		2,553			4,659			8,648			14,389
Reversal of prior allowance		(1,547	)		(1,820	)		(2,144	)		(3,669	)

Balance at end of period	$	105,175		$	87,182		$	105,175		$	87,182

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Legal collections	$	98,084	$	68,049	$	186,572	$	125,222
Collection sites		84,576		66,619		173,117		132,424
Collection agencies		12,421		21,960		26,411		39,712
Other		—		161		54		698

	$	195,081	$	156,789	$	386,154	$	298,056

Note 7: Deferred Court Costs, Net

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, 2011			December 31, 2010
Court costs advanced	$	213,997		$	194,612
Court costs recovered		(55,009	)		(49,215	)
Court costs reserve		(122,920	)		(113,239	)

	$	36,068		$	32,158

Note 8: Other Assets

Other assets consist of the following (in thousands):


	June 30, 2011		December 31, 2010
Debt issuance costs, net of amortization	$	5,198	$	5,286
Prepaid expenses		5,299		5,052
Security deposit—building lease		1,459		1,370
Deferred compensation assets		781		776
Other		990		817

	$	13,727	$	13,301

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, 2011		December 31, 2010
Revolving credit facility	$	295,000	$	327,000
Senior secured notes		75,000		50,000
Capital lease obligations and other		8,172		8,264

	$	378,172	$	385,264

Revolving Credit Facility

On February 11, 2011, the Company obtained an additional $50.0 million in commitments from lenders and exercised a portion of its $100.0 million accordion feature, thereby increasing its revolving credit facility to $410.5 million from $360.5 million.

Loan fees and other loan costs associated with the above transactions amounted to approximately $0.5 million during the six months ended June 30, 2011. These costs are included in other assets in the Company’s consolidated statements of financial condition and are being amortized over the term of the agreement.

Provisions of the 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 (1) the lesser of (i) 30% of eligible estimated remaining collections and (ii) the product of the net book value of all receivable portfolios acquired on or after January 1, 2005 multiplied by 95%, minus (2) the aggregate principal amount outstanding in respect of the senior secured notes;

•

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

•

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

•

A change of control definition which excludes acquisitions of stock by Red Mountain Capital Partners LLC, JCF FPK I LP and their respective affiliates of up to 50% of the outstanding shares of the Company’s voting stock;

•

Events of default which, upon occurrence, may permit the lenders to terminate the 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.

At June 30, 2011, of the $410.5 million borrowing capacity, the outstanding balance on the revolving credit facility was $295.0 million, which bore a weighted average interest rate of 4.47% and 4.54% for the three and six months ended June 30, 2011, respectively. The aggregate borrowing base was $349.6 million, of which $54.6 million was available for future borrowings.

Subject to compliance with the revolving credit facility, the Company is authorized by its Board of Directors to repurchase up to $50.0 million of its common stock.

Senior Secured Notes

On February 10, 2011, the Company issued an additional $25.0 million in senior secured notes (“2011 Senior Secured Notes”) to certain affiliates of Prudential Capital Group through an amended and restated note purchase agreement. These 2011 Senior Secured Notes bear an annual interest rate of 7.375% and mature in 2018 with principal amortization beginning in May 2013. Interest on the 2011 Senior Secured Notes is payable quarterly on February 10, May 10, August 10 and November 10 of each year. Principal payments of $1.25 million are payable on May 10, 2013 and on each August 10, November 10, February 10 and May 10 thereafter. Loan fees and other loan costs associated with the above transactions were approximately $0.4 million during the six months ended June 30, 2011. These costs are included in other assets in the Company’s consolidated statements of financial condition and are being amortized over the term of the agreement.

In addition to the above 2011 Senior Secured Notes, the Company had $50.0 million outstanding in senior secured notes (the “2010 Senior Secured Notes”) payable to certain affiliates of Prudential Capital Group. The 2010 Senior Secured Notes bear an annual interest rate of 7.75% and mature in 2017 with principal amortization beginning in December 2012. Interest on the 2010 Senior Secured Notes is payable quarterly on March 17, June 17, September 17 and December 17 of each year. Principal payments of $2.5 million are payable on December 17, 2012 and on each March 17, June 17, September 17 and December 17 thereafter.

The 2010 and 2011 Senior Secured Notes are guaranteed in full by certain of the Company’s subsidiaries and are collateralized by all assets of the Company. The 2010 and 2011 Senior Secured Notes may be accelerated and become automatically and immediately due and payable upon certain events of default, including certain events related to insolvency, bankruptcy or liquidation. Additionally, the 2010 and 2011 Senior Secured Notes may be accelerated at the election of the holder or holders of a majority in principal amount of the 2010 and 2011 Senior Secured Notes upon certain events of default by the Company, including breach of affirmative covenants regarding guarantors, collateral, most favored lender treatment or minimum revolving credit facility commitment or the breach of any negative covenant. If the Company prepays the 2010 or 2011 Senior Secured Notes at any time for any reason, payment will be at the higher of par or the present value of the remaining scheduled payments of principal and interest on the portion being prepaid. The discount rate used to determine the present value will be 50 basis points over the then current Treasury Rate corresponding to the remaining average life. The covenants are substantially similar to those in the revolving credit facility. Prudential Capital Group and the administrative agent for the lenders of the revolving credit facility have an inter-creditor agreement related to collateral, actionable default, powers and duties and remedies, among other topics.

Pursuant to Securities and Exchange Commission rules, the Company has concluded that separate financial statements or condensed consolidating financial information are not required, as the guarantees related to the senior secured notes are full and unconditional and joint and severable, and the subsidiary of the parent company other than the subsidiary guarantors is minor.

Capital Lease Obligations

The Company has capital lease obligations primarily for certain computer equipment. As of June 30, 2011, the Company’s combined obligations for these computer equipment leases were approximately $7.4 million. These lease obligations require monthly or quarterly payments through June 2016 and have implicit interest rates that range from zero to approximately 7.7%.

Note 10: Income Taxes

The Company recorded an income tax provision of $9.5 million, reflecting an effective rate of 39.1% of pretax income during the three months ended June 30, 2011. The effective tax rate for the three months ended June 30, 2011 primarily consisted of a provision for federal income taxes of 32.5% (which is net of a benefit for state taxes of 2.5%), a blended provision for state taxes of 7.0%, and a net benefit for permanent book versus tax differences of 0.4%. 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, primarily consisted 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 for permanent book versus tax differences of 1.5%, and a benefit for an Internal Revenue Service (“IRS”) refund of 1.7%.

The Company recorded an income tax provision of $18.1 million, reflecting an effective rate of 38.9% of pretax income during the six months ended June 30, 2011. The effective tax rate for the six months ended June 30, 2011, primarily consisted of a provision for federal income taxes of 32.5% (which is net of a benefit for state taxes of 2.5%), a provision for state taxes of 7.0% and a benefit for permanent book versus tax differences of 0.6%. 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, primarily consisted 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 for permanent book versus tax differences of 1.9%, and a benefit for an IRS refund of 0.9%.

The increase in the overall effective tax rates from three and six months ended June 30, 2010 to June 30, 2011 was primarily attributable to an increase in the effective tax rate in India. The Company’s operations in India benefited from a tax holiday, which expired on March 31, 2011. Accounting guidance requires the impact of the expiration of the tax holiday to be spread throughout the year ended December 31, 2011. Accordingly, the impact of the expiration was reflected in the effective tax rates for three and six months ended June 30, 2011.

As of June 30, 2011, the Company had a gross unrecognized tax benefit of $1.2 million that, if recognized, would result in a net tax benefit of approximately $0.8 million and would have a positive effect on the Company’s effective tax rate. During the three and six months ended June 30, 2011, there were no material changes to the unrecognized tax benefit.

For the three and six months ended June 30, 2011, 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, 2011, were approximately $0.8 million and $2.8 million, respectively. Such undistributed earnings are considered permanently reinvested.

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, 2011
	Cost			%
Seller 1	$	46,545			25.2	%
Seller 2		44,424			24.1	%
Seller 3		18,428			10.0	%
Seller 4		13,199			7.2	%
Seller 5		10,006			5.4	%
Other sellers		51,774			28.1	%

	$	184,376			100.0	%
Adjustments⁽¹⁾		(206	)

Purchases, net	$	184,170

⁽¹⁾	Adjusted for Put-backs and Recalls.

Note 12: Commitments and Contingencies

Litigation

The Company is involved in disputes and legal actions from time to time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions based on the Fair Debt Collection Practices Act, or FDCPA, comparable state statutes, the Telephone Consumer Protection Act, state and federal unfair competition statutes, and common law causes of action. The violations of law alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to collect debts on which the statute of limitations has run, has made inaccurate assertions of fact in support of its collection actions, and / or has acted improperly in connection with its efforts to contact consumers. These cases are frequently styled as putative class actions.

On May 19, 2008, an action captioned Brent v. Midland Credit Management, Inc et. al was filed in the United States District Court for the Northern District of Ohio Western Division, in which the plaintiff, Andrea Brent, has filed a class action counter-claim against the Company’s subsidiaries 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. On November 4, 2010, the court granted in part, and denied in part, plaintiff’s motion for class certification of a statewide class. On February 10, 2011, the parties reached an agreement in principal to settle this lawsuit, as well as two other pending lawsuits in the Northern District of Ohio – Franklin v. Midland Funding LLC and Vassalle v. Midland Funding LLC, on a national class basis, subject to entering into a definitive settlement agreement and obtaining court approval after notice to the class. On March 9, 2011, the parties entered into a final settlement agreement, which was preliminarily approved by the court on March 11, 2011. On July 11, 2011, the court held a final approval hearing with respect to the settlement, and the parties are awaiting the court’s decision.

In addition, from time to time, the Company is subject to various governmental litigation, investigations, inquiries and other actions relating to its collection activities.

On March 28, 2011, the Office of the Attorney General of the State of Minnesota filed a motion in the United States District Court for the Northern District of Ohio, seeking clarification of an order granting preliminary injunction against parallel litigation (the “Order”) issued by that court in connection with the case captioned Brent v. Midland Credit Management, Inc et. al. The Minnesota Attorney General sought a ruling clarifying that the Order did not prevent it from filing a complaint against the Company in Minnesota state court concerning its debt collection practices and related topics. On May 17, 2011, the District Court in Ohio ruled that the Order did not apply to the State of Minnesota. On May 19, 2011, the State of Minnesota filed a complaint against the Company in Hennepin County District Court alleging, among other things, contempt of court and violations of Minnesota’s Collection Agencies Act based on the Company’s debt collection and related practices in the State of Minnesota. The complaint seeks civil penalties, disgorgement of profits, injunctive relief, and attorney’s fees. The Company intends to vigorously defend the allegations set forth in the complaint.

On January 12, 2011, the Office of the Attorney General of the State of Texas issued a civil investigative demand to the Company to produce documents in an investigation of its methods of collecting consumer debts in the State of Texas and related topics. On July 8, 2011, the Texas Attorney General filed a petition in the District Court of Harris County, Texas against the Company alleging violations of the Texas Deceptive Trade Practices Act and the Texas Debt Collection Act, based on the Company’s debt collection and related practices in the State of Texas. The complaint seeks civil penalties, disgorgement of profits, injunctive relief and attorney’s fees. The Company intends to vigorously defend the allegations set forth in the complaint. On May 2, 2011, the Department of Justice of the State of Oregon issued an investigative demand to the Company to produce documents and answer interrogatories concerning the Company’s debt collection practices in the State of Oregon and related topics. The Company has and intends to continue to cooperate fully with the State of Oregon in response to this subpoena, subject to applicable law. In addition, on June 28, 2011, the Office of the Attorney General of the State of New York issued a subpoena to the Company to produce documents concerning the Company’s debt collection practices in the State of New York and related topics. The Company intends to cooperate fully with the State of New York in response to this subpoena, subject to applicable law.

In certain legal proceedings, the Company may have recourse to insurance or third party contractual indemnities to cover all or portions of its litigation expenses, judgments or settlements. In accordance with authoritative guidance, the Company has recorded loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated.

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, 2011, the Company has entered into agreements to purchase receivable portfolios with a face value of approximately $2.6 billion for a purchase price of approximately $70.0 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.

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

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the securities laws. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “will,” “may” and similar expressions often characterize forward-looking statements. These statements may include, but are not limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services and financing needs or plans, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors, including but not limited to those set forth in this Quarterly Report on Form 10-Q under “Part II, Item 1A. Risk Factors,” could cause our actual results, performance, achievements or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties.

Introduction

We are a leader in consumer debt buying and recovery. We purchase portfolios of defaulted consumer receivables at deep discounts to face value based on robust, account-level valuation methods, and employ a suite of proprietary statistical and behavioral models when building account collection strategies. We use a variety of operational channels to maximize our collections from the portfolios that we purchase, including seeking to partner with individuals as they repay their obligations and work toward financial recovery. In addition, we provide bankruptcy support services to some of the largest companies in the financial services industry through our wholly owned subsidiary, Ascension Capital Group, Inc. (“Ascension”).

While seasonality does not have a material impact on our business, collections are generally strongest in our first calendar quarter, slower in the second and third calendar quarters, and slowest in the fourth calendar quarter. Relatively higher collections in the first quarter could result in a lower cost-to-collect ratio compared to the other quarters, as our fixed costs would be constant and applied against a larger collection base. The seasonal impact on our business may be influenced by our purchasing levels, the types of portfolios we purchase, and our operating strategies.

Collection seasonality can also impact our revenue recognition rate. Generally, revenue for each pool group declines steadily over time, whereas collections can fluctuate from quarter to quarter based on seasonality, as described above. In quarters with lower collections (like the fourth calendar quarter), revenue as a percentage of collections can be higher than in quarters with higher collections (like the first calendar quarter).

In addition, seasonality could have an impact on the relative level of quarterly earnings. In quarters with stronger collections, total costs are higher, as a result of the additional efforts required to generate those collections. Since revenue for each pool group declines steadily over time, in quarters with stronger collections and higher costs (like the first calendar quarter), all else being equal, earnings could be lower than in quarters with slower collections and lower costs (like the fourth calendar quarter). Additionally, in quarters where a greater percentage of collections come from our legal and agency outsourcing channels, cost to collect will be higher than if there were more collections from our internal collection sites.

Market Overview

While there has been some improvement in macroeconomic indicators during the last six months, including stronger manufacturing and corporate profit metrics, a broad economic recovery has yet to fully materialize for the U.S. consumer. Minimal job growth, uncertainty over state and federal taxes and limited credit availability continue to challenge U.S. consumers, as demonstrated by weak consumer spending and volatile but rising consumer confidence levels. Within the credit card space, we continue to see mixed signals. Although charge-off rates remain high, delinquency levels have improved at a rate that may indicate a fundamental improvement in consumer financial strength. However, related measures, like personal bankruptcies and home foreclosures, remain elevated and indicate continued near-term pressure on the average consumer.

Despite this macroeconomic uncertainty through the second quarter of 2011, most of our internal collection metrics were consistent with, or better than, what we observed during the same period in 2009 and 2010. To illustrate, payer rates and average payment size, adjusted for changes in the mix of settlements-in-full versus payment plans, 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.”

The rate at which consumers are honoring their obligations and completing their payment plans has continued to increase over the last twelve months. We believe this is the result of two factors: our commitment to partner effectively with consumers during their recovery process and 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.

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

Purchases and Collections

Purchases by Type

The following table summarizes the types of charged-off consumer receivable portfolios we purchased for the periods presented (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Credit card		$88,257		$79,911		$176,248		$161,542
Telecom		5,248		3,426		6,484		3,426
Consumer bankruptcy receivables⁽¹⁾		196		—		1,644		—

		$93,701		$83,337		$184,376		$164,968

⁽¹⁾	Represents portfolio receivables subject to Chapter 13 and Chapter 7 bankruptcy proceedings acquired from issuers.

During the three months ended June 30, 2011, we invested $93.7 million in receivable portfolios, primarily for charged-off credit card portfolios with face values aggregating $3.0 billion, for an average purchase price of 3.1% of the face value of the purchased receivables. This is a $10.4 million increase, or 12.5%, in the amount invested, compared to the $83.3 million invested during the three months ended June 30, 2010, to acquire receivable portfolios, primarily consisting of charged-off credit card portfolios, with a face value aggregating $2.2 billion for an average purchase price of 3.7% of the face value of the purchased receivables.

During the six months ended June 30, 2011, we invested $184.4 million in receivable portfolios, primarily for charged-off credit card portfolios with face values aggregating $5.9 billion, for an average purchase price of 3.1% of the face value of the purchased receivables. This is a $19.4 million increase, or 11.8%, in the amount invested, compared to the $165.0 million invested during the six months ended June 30, 2010, to acquire receivable portfolios, primarily consisting of charged-off credit card portfolios, with a face value aggregating $4.4 billion for an average purchase price of 3.8% 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 utilized 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,
	2011		2010		2011		2010
Legal collections	$	98,084	$	68,049	$	186,572	$	125,222
Collection sites		84,576		66,619		173,117		132,424
Collection agencies		12,421		21,960		26,411		39,712
Other		—		161		54		698

	$	195,081	$	156,789	$	386,154	$	298,056

Gross collections increased $38.3 million, or 24.4%, to $195.1 million during the three months ended June 30, 2011, from $156.8 million during the three months ended June 30, 2010. Gross collections increased $88.1 million, or 29.6%, to $386.2 million during the six months ended June 30, 2011, from $298.1 million during the six months ended June 30, 2010.

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,
	2011					2010
Revenue
Revenue from receivable portfolios, net	$	111,093		95.9	%	$	91,845		95.4	%
Servicing fees and related revenue		4,737		4.1	%		4,386		4.6	%

Total revenue		115,830		100.0	%		96,231		100.0	%

Operating expenses
Salaries and employee benefits		20,212		17.4	%		16,484		17.1	%
Stock-based compensation expense		1,810		1.6	%		1,446		1.5	%
Cost of legal collections		40,686		35.1	%		31,235		32.4	%
Other operating expenses		9,191		7.9	%		9,027		9.4	%
Collection agency commissions		3,596		3.1	%		6,413		6.7	%
General and administrative expenses		9,623		8.3	%		7,425		7.7	%
Depreciation and amortization		1,105		1.0	%		752		0.8	%

Total operating expenses		86,223		74.4	%		72,782		75.6	%

Income from operations		29,607		25.6	%		23,449		24.4	%

Other (expense) income
Interest expense		(5,369	)	(4.6	)%		(4,880	)	(5.1	)%
Other income (expense)		23		0.0	%		(90	)	(0.1	)%

Total other expense		(5,346	)	(4.6	)%		(4,970	)	(5.2	)%

Income before income taxes		24,261		21.0	%		18,479		19.2	%
Provision for income taxes		(9,486	)	(8.2	)%		(6,749	)	(7.0	)%

Net income	$	14,775		12.8	%	$	11,730		12.2	%


	Six Months Ended June 30,
	2011					2010
Revenue
Revenue from receivable portfolios, net	$	216,419		95.7	%	$	174,752		95.2	%
Servicing fees and related revenue		9,714		4.3	%		8,817		4.8	%

Total revenue		226,133		100.0	%		183,569		100.0	%

Operating expenses
Salaries and employee benefits		39,252		17.4	%		31,969		17.4	%
Stock-based compensation expense		3,575		1.6	%		3,207		1.7	%
Cost of legal collections		77,195		34.1	%		57,668		31.4	%
Other operating expenses		19,287		8.5	%		18,141		9.9	%
Collection agency commissions		7,510		3.3	%		11,709		6.4	%
General and administrative expenses		19,792		8.7	%		14,304		7.8	%
Depreciation and amortization		2,158		1.0	%		1,425		0.8	%

Total operating expenses		168,769		74.6	%		138,423		75.4	%

Income from operations		57,364		25.4	%		45,146		24.6	%

Other (expense) income
Interest expense		(10,962	)	(4.9	)%		(9,418	)	(5.2	)%
Other income		139		0.1	%		102		0.1	%

Total other expense		(10,823	)	(4.8	)%		(9,316	)	(5.1	)%

Income before income taxes		46,541		20.6	%		35,830		19.5	%
Provision for income taxes		(18,087	)	(8.0	)%		(13,239	)	(7.2	)%

Net income	$	28,454		12.6	%	$	22,591		12.3	%

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, 2011													As of June 30, 2011
	Collections⁽¹⁾		Gross Revenue⁽²⁾		Revenue Recognition Rate⁽³⁾			Net (Portfolio Allowance) Reversal			Revenue % of Total Revenue			Unamortized Balances		Monthly IRR
ZBA⁽⁴⁾	$	4,132	$	2,914		70.5	%	$	1,218			2.6	%	$	—		—
2004		359		16		4.5	%		102			0.0	%		—		0.0	%
2005		5,080		2,201		43.3	%		(54	)		2.0	%		11,050		5.6	%
2006		5,048		3,674		72.8	%		(1,205	)		3.3	%		22,661		5.1	%
2007		12,170		7,333		60.3	%		(381	)		6.5	%		26,710		6.9	%
2008		23,760		13,132		55.3	%		(686	)		11.7	%		75,471		5.3	%
2009		44,107		27,426		62.2	%		—			24.5	%		110,723		7.5	%
2010		78,271		42,872		54.8	%		—			38.2	%		240,543		5.4	%
2011		22,106		12,531		56.7	%		—			11.2	%		170,625		3.7	%

Total	$	195,033	$	112,099		57.5	%	$	(1,006	)		100.0	%	$	657,783		5.3	%


	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⁽⁴⁾	$	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	%


	Six Months Ended June 30, 2011													As of June 30, 2011
	Collections⁽¹⁾		Gross Revenue⁽²⁾		Revenue Recognition Rate⁽³⁾			Net Reversal (Portfolio Allowance)			Revenue % of Total Revenue			Unamortized Balances		Monthly IRR
ZBA⁽⁴⁾	$	7,749	$	5,934		76.6	%	$	1,815			2.7	%	$	—		—
2004		1,462		196		13.4	%		102			0.0	%		—		0.0	%
2005		10,551		4,942		46.8	%		(657	)		2.2	%		11,050		5.6	%
2006		10,361		7,819		75.5	%		(3,686	)		3.5	%		22,661		5.1	%
2007		25,628		16,051		62.6	%		(1,844	)		7.2	%		26,710		6.9	%
2008		50,185		28,113		56.0	%		(2,234	)		12.6	%		75,471		5.3	%
2009		93,773		56,736		60.5	%		—			25.5	%		110,723		7.5	%
2010		155,990		85,991		55.1	%		—			38.6	%		240,543		5.4	%
2011		30,368		17,141		56.4	%		—			7.7	%		170,625		3.7	%

Total	$	386,067	$	222,923		57.7	%	$	(6,504	)		100.0	%	$	657,783		5.3	%

		Collections(1)		Collections(1)		Collections(1)			Collections(1)			Collections(1)			Collections(1)		Collections(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⁾	$	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	%

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

⁽²⁾	Gross revenue excludes the effects of net portfolio allowances or net portfolio allowance reversals.

⁽³⁾	Revenue recognition rate excludes the effects of net portfolio allowances or net portfolio allowance reversals.

⁽⁴⁾

ZBA revenue typically has a 100% revenue recognition rate. However, collections on ZBA pool groups where a valuation allowance remains, must first be recorded as an allowance reversal until the allowance for that pool group is zero. Once the valuation allowance is reversed, the revenue recognition rate will become 100%.

Total revenue was $115.8 million for the three months ended June 30, 2011, an increase of $19.6 million, or 20.4%, compared to total revenue of $96.2 million for the three months ended June 30, 2010. Portfolio revenue was $111.1 million for the three months ended June 30, 2011, an increase of $19.3 million, or 21.0%, compared to portfolio revenue of $91.8 million for the three months ended June 30, 2010.

Total revenue was $226.1 million for the six months ended June 30, 2011, an increase of $42.6 million, or 23.2%, compared to total revenue of $183.6 million for the six months ended June 30, 2010. Portfolio revenue was $216.4 million for the six months ended June 30, 2011, an increase of $41.7 million, or 23.8%, compared to portfolio revenue of $174.7 million for the three months ended June 30, 2010.

The increase in portfolio revenue during the three and six months ended June 30, 2011, was primarily the result of additional accretion revenue associated with a higher portfolio balance during the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010. During the three months ended June 30, 2011, we recorded a net portfolio allowance provision of $1.0 million, compared to a net portfolio allowance provision of $2.8 million in the same period of the prior year. During the six months ended June 30, 2011, we recorded a net portfolio allowance provision of $6.5 million, compared to a net portfolio allowance provision of $10.7 million in the same period of the prior year. The net provision for portfolio allowances for the three and six months ended June 30, 2011 and 2010 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 weak 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 $4.5 million for the three months ended June 30, 2011, slightly higher than the revenue of $4.4 million for the three months ended June 30, 2010. Revenue associated with bankruptcy servicing fees earned from Ascension was $9.4 million for the six months ended June 30, 2011, an increase of $0.6 million, or 6.6%, compared to revenue of $8.8 million for the three months ended June 30, 2010.

Operating Expenses

Total operating expenses were $86.2 million for the three months ended June 30, 2011, an increase of $13.4 million, or 18.5%, compared to total operating expenses of $72.8 million for the three months ended June 30, 2010.

Total operating expenses were $168.8 million for the six months ended June 30, 2011, an increase of $30.4 million, or 21.9%, compared to total operating expenses of $138.4 million for the six months ended June 30, 2010.

Operating expenses are explained in more detail as follows:

Salaries and employee benefits

Total salaries and employee benefits increased $3.7 million, or 22.6%, to $20.2 million during the three months ended June 30, 2011, from $16.5 million during the three months ended June 30, 2010. Total salaries and employee benefits increased $7.3 million, or 22.8%, to $39.3 million during the six months ended June 30, 2011, from $32.0 million during the six months ended June 30, 2010. The increase was primarily the result of increases in headcount and related compensation expenses to support our growth, including growth in our internal legal channel. Salaries and employee benefits related to our internal legal channel were approximately $0.6 million and $0.8 million for the three and six months ended June 30, 2011, respectively.

Stock-based compensation expenses

Stock-based compensation increased $0.4 million, or 25.2%, to $1.8 million during the three months ended June 30, 2011, from $1.4 million during the three months ended June 30, 2010. 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 $0.4 million, or 11.5%, to $3.6 million during the six months ended June 30, 2011, from $3.2 million during the six months ended June 30, 2010. This increase was primarily attributable to 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 $9.5 million, or 30.3%, to $40.7 million during the three months ended June 30, 2011, compared to $31.2 million during the three months ended June 30, 2010. 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 $7.7 million in contingent fees paid to our network of attorneys related to an increase of $30.1 million, or 44.1%, in gross collections through our legal channel in addition to an increase of $1.9 million in upfront litigation costs expensed during the period. Gross legal collections amounted to $98.1 million during the three months ended June 30, 2011, up from $68.0 million collected during the three months ended June 30, 2010. The cost of legal collections decreased as a percent of gross collections through this channel to 41.5% during the three months ended June 30, 2011, from 45.9% during the three months ended June 30, 2010, primarily due to a more targeted placement volume as part of an initiative to primarily focus our legal collections on higher quality accounts.

The cost of legal collections increased $19.5 million, or 33.9%, to $77.2 million during the six months ended June 30, 2011, compared to $57.7 million during the six months ended June 30, 2010. 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 $14.8 million in contingent fees paid to our network of attorneys related to an increase of $61.4 million, or 49.0%, in gross collections through our legal channel in addition to an increase of $5.1 million in upfront litigation costs expensed during the period. Gross legal collections amounted to $186.6 million during the six months ended June 30, 2011, up from $125.2 million collected during the six months ended June 30, 2010. The cost of legal collections decreased as a percent of gross collections through this channel to 41.4% during the six months ended June 30, 2011, from 46.1% during the six months ended June 30, 2010, primarily due to a more targeted placement volume as part of an initiative to primarily focus our legal collections on higher quality accounts.

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,
	2011					2010					2011					2010
Collections⁽¹⁾	$	98,084		100.0	%	$	68,049		100.0	%	$	186,572		100.0	%	$	125,222		100.0	%

Court costs advanced		24,354		24.8	%		18,479		27.2	%		47,653		25.5	%		31,800		25.4	%
Court costs deferred		(11,038	)	(11.3	)%		(7,054	)	(10.4	)%		(22,629	)	(12.1	)%		(11,843	)	(9.5	)%

Court cost expense⁽²⁾		13,316		13.6	%		11,425		16.8	%		25,024		13.4	%		19,957		15.9	%
Other⁽³⁾		421		0.4	%		593		0.9	%		915		0.5	%		1,214		1.0	%
Commissions		26,949		27.5	%		19,217		28.2	%		51,256		27.5	%		36,497		29.2	%

Total Costs	$	40,686		41.5	%	$	31,235		45.9	%	$	77,195		41.4	%	$	57,668		46.1	%

⁽¹⁾	Collections include approximately $0.2 million and $0.3 million from our internal legal channel for the three and six months ended June 30, 2011, respectively.

⁽²⁾

In connection with our agreement with contracted attorneys, we advance certain out-of-pocket court costs. We capitalize these costs in our consolidated financial statements and provide a reserve and corresponding court cost expense for the costs that we believe will be ultimately uncollectible. This amount includes changes in our anticipated recovery rate of court costs expensed. This amount also includes court costs expensed through our internal legal channel of approximately $0.2 million and $0.3 million for the three and six months ended June 30, 2011, respectively.

⁽³⁾	Other costs consist of costs related to counter claims and legal network subscription fees.

Other operating expenses

Other operating expenses increased $0.2 million, or 1.8%, to $9.2 million during the three months ended June 30, 2011, from $9.0 million during the three months ended June 30, 2010. Other operating expenses increased $1.2 million, or 6.3%, to $19.3 million during the six months ended June 30, 2011, from $18.1 million during the six months ended June 30, 2010. The increases were primarily the result of increases in various other operating expenses to support our growth.

Collection agency commissions

During the three months ended June 30, 2011, we incurred $3.6 million in commissions to third party collection agencies, or 29.0%, of the related gross collections of $12.4 million, compared to $6.4 million in commissions, or 29.2% of the related gross collections of $22.0 million during the three months ended June 30, 2010. The decline in commissions and collections in this channel is part of our strategy to place more accounts internally to reduce our overall cost to collect. The decrease in commissions was due to the decrease in collections through this channel and 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.

During the six months ended June 30, 2011, we incurred $7.5 million in commissions to third party collection agencies, or 28.4%, of the related gross collections of $26.4 million, compared to $11.7 million in commissions, or 29.5%, of the related gross collections of $39.7 million during the six months ended June 30, 2010. The decline in commissions and collections in this channel is part of our strategy to place more accounts internally to reduce our overall cost to collect. The decrease in commissions was due to the decrease in collections through this channel and 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.

General and administrative expenses

General and administrative expenses increased $2.2 million, or 29.6%, to $9.6 million during the three months ended June 30, 2011, from $7.4 million during the three months ended June 30, 2010. The increase was primarily the result of an increase of $0.9 million in litigation and corporate legal expenses, an increase of $0.4 million in system maintenance costs, an increase of $0.3 million in building rent, and a net increase in other general and administrative expenses of $1.2 million. The increase was partially offset by a decrease of $0.6 million in corporate settlements.

General and administrative expenses increased $5.5 million, or 38.4%, to $19.8 million during the six months ended June 30, 2011, from $14.3 million during the six months ended June 30, 2010. The increase was primarily the result of an increase of $2.7 million in litigation and corporate legal expenses, an increase of $0.5 million in building rent, an increase of $0.5 million in system maintenance costs, and a net increase in other general and administrative expenses of $1.8 million. The legal expenses associated with responding to governmental requests and litigation are expected to continue to be elevated in the near-term.

Cost per Dollar Collected

The following tables summarize our cost per dollar collected (in thousands, except percentages):


	Three Months Ended June 30,
	2011											2010
	Collections		Cost			Cost Per Channel Dollar Collected			Cost Per Total Dollar Collected			Collections		Cost			Cost Per Channel Dollar Collected			Cost Per Total Dollar Collected
Legal networks⁽¹⁾	$	98,084	$	40,686			41.5	%		20.9	%	$	68,049	$	31,235			45.9	%		19.9	%
Collection sites⁽²⁾		84,576		7,070			8.4	%		3.6	%		66,619		6,346			9.5	%		4.0	%
Collection agency outsourcing		12,421		3,596			29.0	%		1.8	%		21,960		6,413			29.2	%		4.1	%
Other		—		—			—			—			161		—			—			—
Other indirect costs⁽³⁾		—		28,356			—			14.5	%		—		24,042			—			15.4	%

Total	$	195,081	$	79,708	⁽⁴⁾					40.9	%	$	156,789	$	68,036	⁽⁴⁾					43.4	%


	Six Months Ended June 30,
	2011											2010
	Collections		Cost			Cost Per Channel Dollar Collected			Cost Per Total Dollar Collected			Collections		Cost			Cost Per Channel Dollar Collected			Cost Per Total Dollar Collected
Legal networks⁽¹⁾	$	186,572	$	77,195			41.4	%		20.0	%	$	125,222	$	57,668			46.1	%		19.3	%
Collection sites⁽²⁾		173,117		14,116			8.2	%		3.7	%		132,424		12,368			9.3	%		4.2	%
Collection agency outsourcing		26,411		7,510			28.4	%		1.9	%		39,712		11,709			29.5	%		3.9	%
Other		54		—			—			—			698		—			—			—
Other indirect costs⁽³⁾		—		57,349			—			14.9	%		—		46,860			—			15.7	%

Total	$	386,154	$	156,170	⁽⁴⁾					40.4	%	$	298,056	$	128,605	⁽⁴⁾					43.1	%

⁽¹⁾

Collections include approximately $0.2 million and $0.3 million from our internal legal channel for the three and six months ended June 30, 2011, respectively. Court costs expensed through our internal legal channel were approximately $0.2 million and $0.3 million for the three and six months ended June 30, 2011, respectively.

⁽²⁾	Cost in collection sites represents only account manager salaries, variable compensation and employee benefits.

⁽³⁾

Other indirect costs represent non collection salaries and employee benefits, general and administrative expenses, other operating expenses, and depreciation and amortization. Included in other indirect costs were costs related to our internal collection channel of approximately $0.8 million and $1.1 million for the three and six months ended June 30, 2011, respectively.

⁽⁴⁾

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

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
GAAP total operating expenses, as reported	$	86,223		$	72,782		$	168,769		$	138,423
Stock-based compensation expense		(1,810	)		(1,446	)		(3,575	)		(3,207	)
Bankruptcy servicing operating expenses		(4,705	)		(3,300	)		(9,024	)		(6,611	)

During the three months ended June 30, 2011, cost per dollar collected decreased by 250 basis points to 40.9% of gross collections from 43.4% of gross collections during the three months ended June 30, 2010. This decrease was due to several factors, including:

•

Collection agency commissions, as a percentage of total collections, decreased to 1.8% during the three months ended June 30, 2011 from 4.1% during the three months ended June 30, 2010. The decrease in the percentage of commissions to total collections was due to our strategy to place more accounts internally, resulting in a significant decline in collections through this channel. Commissions as a percentage of channel collections also declined slightly to 29.0% during the three months ended June 30, 2011, as compared to 29.2% during the same period in the prior year.

•

The costs from our collection sites, account manager salaries, variable compensation and employee benefits, as a percentage of total collections, decreased to 3.6% during the three months ended June 30, 2011 from 4.0% during the three months ended June 30, 2010 and, as a percentage of our site collections, decreased to 8.4% during the three months ended June 30, 2011 from 9.5% during the three months ended June 30, 2010. The decrease was primarily due to the continued growth of our collection workforce in India.

•

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 collections to 14.5% during the three months ended June 30, 2011 from 15.3% during the three months ended June 30, 2010. 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, as we continue to leverage our costs across our higher collections, resulting in a reduction in other indirect costs as a percent of total collections.

The decrease was offset by:

•

An increase in cost of legal collections, as a percent of total collections, to 20.9% during the three months ended June 30, 2011 from 19.9% during the three months ended June 30, 2010. The increase in the cost of legal collections to total collections is due to collections in our legal channel growing at a rate faster than total collections. Cost per dollar collected in this channel declined to 41.5% during the three months ended June 30, 2011, from 45.9% during the same period in the prior year. This was primarily a result of our strategy to focus our legal collections on better quality accounts in this channel (see “Cost of legal collections” section above for details).

During the six months ended June 30, 2011, cost per dollar collected decreased by 270 basis points to 40.4% of gross collections from 43.1% of gross collections during the six months ended June 30, 2010. This decrease was due to several factors, including:

•

Collection agency commissions, as a percentage of total collections, decreased to 1.9% during the six months ended June 30, 2011 from 3.9% during the six months ended June 30, 2010. The decrease in the percentage of commissions to total collections was due to our strategy to place more accounts internally, resulting in a significant decline in collections through this channel. Commissions as a percentage of channel collections also declined to 28.4% during the six months ended June 30, 2011, as compared to 29.5% during the same period in the prior year due to the mix of accounts placed in this channel.

•

The costs from our collection sites, account manager salaries, variable compensation and employee benefits, as a percentage of total collections, decreased to 3.7% during the six months ended June 30, 2011 from 4.1% during the six months ended June 30, 2010 and, as a percentage of our site collections, decreased to 8.2% during the six months ended June 30, 2011 from 9.3% during the six months ended June 30, 2010. The decrease was primarily due to the continued growth of our collection workforce in India.

•

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 collections to 14.9% during the six months ended June 30, 2011 from 15.7% during the six months ended June 30, 2010. 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, as we continue to leverage our costs across our higher collections, resulting in a reduction in other indirect costs as a percent of total collections.

The decrease was offset by:

•

An increase in cost of legal collections, as a percent of total collections, to 20.0% during the six months ended June 30, 2011 from 19.3% during the six months ended June 30, 2010. The increase in the cost of legal collections to total collections is due to collections in our legal channel growing at a rate faster than total collections. Cost per dollar collected in this channel declined to 41.4% during the six months ended June 30, 2011, from 46.1% during the same period in the prior year. This was primarily a result of our strategy to focus our legal collections on better quality accounts in this channel (see “Cost of legal collections” section above for details).

Interest Expense

Interest expense increased $0.5 million, or 10.0%, to $5.4 million during the three months ended June 30, 2011, from $4.9 million during the three months ended June 30, 2010. Interest expense increased $1.6 million, or 16.4%, to $11.0 million during the six months ended June 30, 2011, from $9.4 million during the six months ended June 30, 2010.

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


	Three Months Ended June 30,
	2011		2010		$ Change			% Change
Stated interest on debt obligations	$	4,908	$	3,749	$	1,159			30.9	%
Amortization of loan fees and other loan costs		461		425		36			8.5	%
Amortization of debt discount—convertible notes		—		706		(706	)		(100.0	)%

Total interest expense	$	5,369	$	4,880	$	489			10.0	%


	Six Months Ended June 30,
	2011		2010		$ Change			% Change
Stated interest on debt obligations	$	10,061	$	7,224	$	2,837			39.3	%
Amortization of loan fees and other loan costs		901		809		92			11.4	%
Amortization of debt discount—convertible notes		—		1,385		(1,385	)		(100.0	)%

Total interest expense	$	10,962	$	9,418	$	1,544			16.4	%

Stated interest on debt obligations increased $1.2 million during the three months ended June 30, 2011, compared to the same period of the prior year. Stated interest on debt obligations increased $2.8 million during the six months ended June 30, 2011, 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, 2011, were primarily due to higher interest rates on our senior secured notes, offset by lower outstanding loan balances under our revolving credit facility.

Provision for Income Taxes

During the three months ended June 30, 2011, we recorded an income tax provision of $9.5 million, reflecting an effective rate of 39.1% of pretax income. The effective tax rate for the three months ended June 30, 2011 primarily consisted of a provision for federal income taxes of 32.5% (which is net of a benefit for state taxes of 2.5%), a blended provision for state taxes of 7.0% and a benefit for permanent book versus tax differences of 0.4%. 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 primarily consisted 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 permanent book versus tax differences of 1.5%, and a benefit for an Internal Revenue Service (“IRS”) refund of 1.7%.

During the six months ended June 30, 2011, we recorded an income tax provision of $18.1 million, reflecting an effective rate of 38.9% of pretax income. The effective tax rate for the six months ended June 30, 2011 primarily consisted of a provision for federal income taxes of 32.5% (which is net of a benefit for state taxes of 2.5%), a blended provision for state taxes of 7.0% and a benefit for permanent book versus tax differences of 0.6%. 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 primarily consisted 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 for an IRS refund of 0.9%.

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):


Year of Purchase	Purchase Price⁽¹⁾			Cumulative Collections through June 30, 2011
Year of Purchase	Purchase Price⁽¹⁾			<2005		2005		2006		2007		2008		2009		2010		2011		Total⁽²⁾		CCM⁽³⁾
<2005	$	385,478	⁽⁴⁾	$	749,791	$	224,620	$	164,211	$	85,333	$	45,893	$	27,708	$	19,986	$	8,479	$	1,326,021		3.4
2005		192,585			—		66,491		129,809		109,078		67,346		42,387		27,210		10,633		452,954		2.4
2006		141,028			—		—		42,354		92,265		70,743		44,553		26,201		10,367		286,483		2.0
2007		204,106			—		—		—		68,048		145,272		111,117		70,572		25,631		420,640		2.1
2008		227,872			—		—		—		—		69,049		165,164		127,799		50,634		412,646		1.8
2009		253,414			—		—		—		—		—		96,529		206,773		93,905		397,207		1.6
2010		359,305			—		—		—		—		—		—		125,853		156,051		281,904		0.8
2011		183,853			—		—		—		—		—		—		—		30,368		30,368		0.2

Total	$	1,947,641		$	749,791	$	291,111	$	336,374	$	354,724	$	398,303	$	487,458	$	604,394	$	386,068	$	3,608,223		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, 2011, excluding collections on behalf of others.

⁽³⁾	Cumulative Collections Multiple (“CCM”) through June 30, 2011—collections as a multiple of purchase price.

⁽⁴⁾	From inception through December 31, 2004.

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
<2005	$	385,478	⁽³⁾	$	1,326,021	$	824	$	1,326,845		3.4
2005		192,585			452,954		15,432		468,386		2.4
2006		141,028			286,483		39,226		325,709		2.3
2007		204,106			420,640		54,762		475,402		2.3
2008		227,872			412,646		151,471		564,117		2.5
2009		253,414			397,207		272,289		669,496		2.6
2010		359,305			281,904		538,803		820,707		2.3
2011		183,853			30,368		342,384		372,752		2.0

Total	$	1,947,641		$	3,608,223	$	1,415,191	$	5,023,414		2.6

⁽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, 2011, excluding collections on behalf of others.

⁽³⁾	From inception through December 31, 2004.

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
	2011		2012		2013		2014		2015		2016		2017		2018		Total
<2005⁽¹⁾	$	824	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	824
2005		8,566		6,849		17		—		—		—		—		—		15,432
2006		10,773		19,189		9,264		—		—		—		—		—		39,226
2007		15,843		22,348		12,750		3,821		—		—		—		—		54,762
2008		39,197		54,221		33,330		18,227		6,496		—		—		—		151,471
2009		68,112		102,539		53,702		28,920		13,939		5,077		—		—		272,289
2010		111,649		184,814		111,073		64,659		37,512		20,755		8,341		—		538,803
2011		52,019		110,297		79,948		45,313		27,408		15,736		9,485		2,178		342,384

Total	$	306,983	$	500,257	$	300,084	$	160,940	$	85,355	$	41,568	$	17,826	$	2,178	$	1,415,191

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

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):

		Purchase Price(1)		Purchase Price(1)		Purchase Price(1)			Purchase Price(1)
	Unamortized Balance as of June 30, 2011		Purchase Price⁽¹⁾		Unamortized Balance as a Percentage of Purchase Price			Unamortized Balance as a Percentage of Total
2005	$	11,050	$	192,585		5.7	%		1.7	%
2006		22,661		141,028		16.1	%		3.4	%
2007		26,710		204,106		13.1	%		4.1	%
2008		75,471		227,872		33.1	%		11.5	%
2009		110,723		253,414		43.7	%		16.8	%
2010		240,543		359,305		66.9	%		36.6	%
2011		170,625		183,853		92.8	%		25.9	%

Total	$	657,783	$	1,562,163		42.1	%		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, 2011
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	648,820		$	—		$	—		$	648,820
Purchases of receivable portfolios		93,701			—			—			93,701
Gross collections⁽¹⁾		(190,901	)		—			(4,132	)		(195,033	)
Put-backs and recalls		(798	)		—			—			(798	)
Revenue recognized⁽²⁾		109,185			—			2,914			112,099
(Portfolio allowances) portfolio allowance reversals, net		(2,224	)		—			1,218			(1,006	)

Balance, end of period	$	657,783		$	—		$	—		$	657,783

Revenue as a percentage of collections⁽³⁾		57.2	%		0.0	%		70.5	%		57.5	%


	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

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents