Encore Capital Group
Annual Report 2015

Plain-text annual report

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2015 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . COMMISSION FILE NUMBER: 000-26489 ENCORE CAPITAL GROUP, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 3111 Camino Del Rio North, Suite 103 San Diego, California (Address of principal executive offices) 48-1090909 (IRS Employer Identification No.) 92108 (Zip code) (877) 445-4581 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $.01 Par Value Per Share Name of Each Exchange on Which Registered The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No 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 past 90 days. Yes 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 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 The aggregate market value of the voting stock held by non-affiliates of the registrant totaling 23,525,676 shares was approximately $1,005,487,392 at June 30, 2015, based on the closing price of the common stock of $42.74 per share on such date, as reported by the NASDAQ Global Select Market. The number of shares of our Common Stock outstanding at February 9, 2016, was 25,288,136. Documents Incorporated by Reference Portions of the registrant’s proxy statement in connection with its annual meeting of stockholders to be held in 2016 are incorporated by reference in Items 10, 11, 12, 13, and 14 of Part III of this Annual Report on Form 10-K for the fiscal year ended December 31, 2015. Table of Contents TABLE OF CONTENTS PART I Item 1—Business Item 1A—Risk Factors Item 1B—Unresolved Staff Comments Item 2—Properties Item 3—Legal Proceedings Item 4—Mine Safety Disclosures PART II Item 5—Market for the Registrant’s Common Equity Securities, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6—Selected Financial Data Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A—Quantitative and Qualitative Disclosures about Market Risk Item 8—Financial Statements and Supplementary Data Item 9—Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9A—Controls and Procedures Item 9B—Other Information PART III Item 10—Directors, Executive Officers and Corporate Governance Item 11—Executive Compensation Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13—Certain Relationships and Related Transactions, and Director Independence Item 14—Principal Accountant Fees and Services PART IV Item 15—Exhibits and Financial Statement Schedules SIGNATURES Page 1 1 13 28 28 28 28 29 29 32 34 68 68 69 69 71 72 72 72 72 72 72 73 73 85 Table of Contents An Overview of Our Business Nature of Our Business PART I Item 1—Business We are an international specialty finance company providing debt recovery solutions for consumers and property owners across a broad range of financial assets. Portfolio Purchasing and Recovery Business We purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy proceedings. United States Through certain subsidiaries, we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico. Europe Through our controlling interest in United Kingdom-based Cabot Credit Management Limited (“Cabot”), we are a market leader in debt management in the United Kingdom and Ireland. Cabot specializes in collecting higher balance, “semi- performing” accounts (i.e., debt portfolios in which over 50% of the accounts have received a payment in three of the last four months immediately prior to the portfolio purchase). In February 2014, Cabot acquired Marlin Financial Group Limited (“Marlin”), a leading acquirer of non-performing consumer debt in the United Kingdom. Marlin is differentiated by its use of litigation-enhanced collections for non-paying financial services receivables, which complements Cabot’s management of semi-performing accounts. On June 1, 2015, Cabot continued to expand in the United Kingdom with its acquisition of Hillesden Securities Ltd and its subsidiaries (“dlc”). We own a majority ownership interest in Grove Holdings (“Grove”). Through its subsidiaries Grove is a leading specialty investment firm focused on consumer non-performing loans, including insolvencies in the United Kingdom (in particular, individual voluntary arrangements, or IVAs) and bank and non-bank receivables in Spain. To date, operating results from Grove have been immaterial to our total consolidated operating results. As a result, descriptions of our international operations in Part I - Item 1 of this Form 10-K will focus substantially on our combined Cabot operations and will not include a detailed discussion of Grove’s operations. Latin America Through our majority ownership interest in Refinancia S.A. (“Refinancia”), we are a market leader in debt collection and management in Colombia and Peru. In addition to purchasing defaulted receivables, Refinancia offers portfolio management services to banks for non-performing loans. Refinancia also specializes in non-traditional niches in the geographic areas in which it operates, including providing financial solutions to individuals who have previously defaulted on their obligations. In addition to operations in Colombia and Peru, we evaluate and purchase non-performing loans in other countries in Latin America, including Mexico and Brazil. Beginning in December 2014, we began investing in non-performing secured residential mortgages in Latin America. To date, operating results from our Latin America operations have not been significant to our total consolidated operating results. As a result, descriptions of our international operations in Part 1 - Item 1 of this Form 10-K will not include a detailed discussion of our Latin American operations. Asia Pacific Through our majority ownership interest in Baycorp Holdings Pty Limited (“Baycorp”), acquired in October 2015, we are one of Australasia's leading debt resolution specialists. Baycorp specializes in the management of non-performing loans in Australia and New Zealand. In addition to purchasing defaulted receivables, Baycorp offers portfolio management services to banks for non-performing loans. To date, Baycorp’s operating results have been immaterial to our total consolidated operating results. As a result, descriptions of our international operations in Part 1 - Item 1 of this Form 10-K will not include a detailed discussion of Baycorp’s operations. Accounts originated in the United States are serviced through our call centers in the United States, India and Costa Rica. Beginning in January 2014, our India call center also began to service Cabot’s United Kingdom accounts. The balance of our accounts is serviced in the country of origin for such accounts. Throughout this Annual Report on Form 10-K, when we refer to our United States operations, we include accounts originated in the United States that are serviced through our call centers in 1 Table of Contents the United States, India and Costa Rica. When we refer to our international operations, we are referring to accounts originated outside of the United States. Tax Lien Business Through our subsidiary, Propel Acquisition, LLC and its subsidiaries and affiliates (collectively, “Propel”), we acquire and service residential and commercial tax liens on real property. To the extent permitted by local law, Propel works directly with property owners to structure affordable payment plans by paying delinquent property taxes on behalf of such property owners in exchange for payment agreements collateralized by tax liens on the related properties and purchases tax liens directly from taxing authorities in several states. In order to improve our overall corporate invested capital returns, reduce our debt, provide liquidity, and allow us to tighten our focus on expanding our market leadership in debt buying and servicing in the U.S. and around the world, on February 19, 2016, we entered into an agreement with certain funds to sell 100% of our membership interests in Propel. The estimated sales price indicated that Propel’s fair value was less than its carrying value at December 31, 2015 and, as a result, goodwill at this reporting unit was impaired. Based on the estimated sales price, we recorded a goodwill impairment charge of $49.3 million for the year ended December 31, 2015. The goodwill impairment charge had no cash flow impact. Refer to Note 17, “Subsequent Event” and Note 15, “Goodwill and Identifiable Intangible Assets” to our consolidated financial statements for further information on the sale of Propel and the goodwill impairment. During the course of our ownership, excluding the non-cash goodwill impairment charge discussed above, Propel contributed $20.6 million of earnings and $35.7 million of EBITDA through December 31, 2015. Including the effect of this non-cash goodwill impairment charge, the cumulative net loss after the benefit for income taxes amounted to approximately $10.5 million. Keys to Success The foundation of our success is our people, our organizational agility, and our integrity. This foundation supports strengths in four key areas, which we refer to as our pillars: • Superior Analytics, including our extensive investments in data and behavioral science and our use of sophisticated predictive modeling techniques; • Operational Scale and Cost Leadership, driven by our specialized call centers, efficient international operations, and the continuing expansion of our internal legal platform; • Strong Capital Stewardship, underpinned by our disciplined ability to raise and deploy capital prudently; and • Extendable Business Model, driven by our scalable platform that supports strategic investment opportunities in new asset classes and geographic areas. Although we have enabled millions of consumers to retire a portion of their outstanding debt, one of the debt collection industry’s most formidable challenges is that many financially distressed consumers will never make a payment, much less retire their total debt obligation. In fact, we generate payments from less than one percent of our accounts every month. To address these challenges, we evaluate portfolios of receivables that are available for purchase using robust, account-level valuation methods, and we employ proprietary statistical and behavioral models across all our operations. We believe these business practices contribute to our ability to value portfolios accurately, avoid buying portfolios that are incompatible with our methods or goals, and align the accounts we purchase with our operational channels to maximize future collections. We also have one of the industry’s largest databases of financially distressed consumers. We believe that our specialized knowledge, along with our investments in data and analytic tools, have enabled us to realize significant returns from the receivables we have acquired. We maintain strong relationships with many of the largest credit providers in the United States. In addition, through our international subsidiaries, we maintain strong relationships with many of the largest credit providers in the European and the Latin American markets we serve. Seasonality United States While seasonality does not have a material impact on our portfolio purchasing and recovery segment, collections are generally strongest in our first calendar quarter, slower in the second and third calendar quarters, and slowest in the fourth calendar quarter. Relatively higher collections in the first quarter could result in a lower cost-to-collect ratio compared to the other quarters, as our fixed costs are relatively constant and applied against a larger collection base. The seasonal impact on our business may also be influenced by our purchasing levels, the types of portfolios we purchase, and our operating strategies. 2 Table of Contents Collection seasonality with respect to our portfolio purchasing and recovery segment can also affect revenue as a percentage of collections, also referred to as our revenue recognition rate. Generally, revenue for each pool group declines steadily over time, whereas collections can fluctuate from quarter to quarter based on seasonality, as described above. In quarters with lower collections (e.g., the fourth calendar quarter), the revenue recognition rate can be higher than in quarters with higher collections (e.g., the first calendar quarter). In addition, seasonality could have an impact on the relative level of quarterly earnings. In quarters with stronger collections, total costs are higher as a result of the additional efforts required to generate those collections. Since revenue for each pool group declines steadily over time, in quarters with higher collections and higher costs (e.g., the first calendar quarter), all else being equal, earnings could be lower than in quarters with lower collections and lower costs (e.g., the fourth calendar quarter). Additionally, in quarters where a greater percentage of collections come from our legal and agency outsourcing channels, cost to collect will be higher than if there were more collections from our internal collection sites. International While seasonality does not have a material impact on Cabot’s operations, collections are generally strongest in the second and third calendar quarters and slower in the first and fourth quarters, largely driven by the impact of the December holiday season and the New Year holiday, and the related impact on customers’ ability to repay their balances. This drives a higher level of plan defaults over this period, which are typically repaired across the first quarter of the following year. The August vacation season in the United Kingdom also has an unfavorable effect on the level of collections, but this is traditionally compensated for by higher collections in July and September. Operating Segments We conduct business through two reportable segments: portfolio purchasing and recovery, and tax lien business. Financial information regarding our operating segments and geographic operations is set forth in Note 14, “Segment Information” to our consolidated financial statements. Company Information We were incorporated in Delaware in 1999. Our headquarters is located at 3111 Camino Del Rio North, Suite 103, San Diego, California 92108 and our telephone number is (877) 445-4581. Investors wishing to obtain more information about us may access the Investors section of our Internet site at http://www.encorecapital.com. The site provides access, free of charge, to relevant investor related information, such as Securities and Exchange Commission (“SEC”) filings, press releases, featured articles, an event calendar, and frequently asked questions. SEC filings are available on our Internet site as soon as reasonably practicable after being filed with, or furnished to, the SEC. Also available on our website are our Standards of Business Conduct and charters for the committees of our board of directors. We intend to disclose any amendment to, or waiver of, a provision of our Standards of Business Conduct on our website. The content of our Internet site is not incorporated by reference into this Annual Report on Form 10-K. Any materials that we filed with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http:// www.sec.gov). Our Competitive Advantages Analytic Strength. We believe that success in our portfolio purchasing and recovery business depends on our ability to establish and maintain an information advantage. Leveraging an industry-leading financially distressed consumer database, our in-house team of statisticians, business analysts, and software programmers have developed, and continually enhance, proprietary behavioral and valuation models, custom software applications, and other business tools that guide our portfolio purchases. Moreover, our collection channels are informed by powerful statistical models specific to each collection activity, and each year we deploy significant capital to purchase credit bureau and customized consumer data that describe demographic, account level, and macroeconomic factors related to credit, savings, and payment behavior. Our recent international expansion has enabled us to collaborate across our operating subsidiaries to employ and enhance our statistical models throughout the markets we service. Consumer Intelligence. At the core of our analytic approach is a focus on characterizing our consumers’ willingness and ability to repay their financial obligations. In this effort, we apply tools and methods from statistics, psychology, economics, and management science across the full extent of our business. During portfolio valuation, we use an internally developed and proprietary family of statistical models that determines the likelihood and expected amount of payment for each consumer within a portfolio. Subsequently, the expectations for each account are aggregated to arrive at a portfolio-level liquidation solution and a valuation for the entire portfolio is determined. During the collection process, we apply a number of proprietary operational frameworks to match our collection approach to an individual consumer’s payment behavior. 3 Table of Contents Cost Leadership. Cost efficiency is central to our collection and purchasing strategies. We experience considerable cost advantages, stemming from our operations in India and Costa Rica, our enterprise-wide, activity-level cost database, and the development and implementation of operational models that enhance profitability. We believe that we are the only company in our industry with a successful, late-stage collection platform in India. This cost-saving, first-mover advantage helps to reduce our call center variable cost-to-collect. Principled Intent. Across the full extent of our operations, we strive to treat consumers with respect, compassion, and integrity. From discounts and payment plans to hardship solutions, we work with our consumers as they attempt to return to financial health. We are committed to dialogue that is honorable and constructive, and hope to play an important and positive role in our consumers’ financial recovery. We believe that our interests, and those of the financial institutions from which we purchase portfolios, are closely aligned with the interests of government agencies seeking to protect consumer rights. In 2011, we unveiled the industry’s first and only Consumer Bill of Rights, which codifies our commitment to respectful consumer treatment. We expect to continue investing in infrastructure and processes that support consumer advocacy and financial literacy while promoting an appropriate balance between corporate and consumer responsibility. Our Strategy We have implemented a business strategy that emphasizes the following three elements: Continue to Invest in our Core Businesses. Our core domestic portfolio purchasing and recovery business remains critical to our success. Supply and demand dynamics within the United States have fluctuated over time and will likely continue to do so. To position ourselves to continue to generate strong risk-adjusted returns in this environment, we continue to make investments in analytics, technology, risk management, compliance, and initiatives to enhance our relationships with consumers and improve liquidation rates on our portfolios. We intend to continue to deploy a meaningful amount of capital in our core domestic markets. Our 2014 acquisition of Atlantic Credit & Finance, Inc. (“Atlantic”) reflects a strategic decision to expand our core domestic portfolio purchasing and recovery presence. Atlantic is a market leader in buying and collecting on freshly charged-off debt, which was not an area of strength for us prior to our acquisition of Atlantic. Combined with our expertise in later stage collections, we believe Atlantic has positioned us to be more competitive in the market. Expand into New Geographies. We believe we are well-positioned to take a leading role, worldwide, in the distressed debt and subprime consumer financial sectors. Our current footprint includes our industry-leading U.S. and U.K. core debt recovery businesses, our presence in Spain, our entrance into the Latin American and Australasian debt markets, and our international operations through our India and Costa Rica locations. In addition, we are constantly evaluating additional investments in, or acquisitions of, complementary businesses in order to expand into new geographic markets. For example, we have announced plans to commence portfolio purchasing and recovery operations in India. As portfolio prices fluctuate and the complexity of our industry continues to increase, we expect that our international operations will continue to provide a significant competitive advantage. Explore Business Model Adjacencies and Expansion. We are working to leverage some of our core competencies, such as our knowledge of financially distressed consumers, in other areas or for new types of defaulted consumer receivables. We believe that our existing underwriting and collection processes can be extended to a variety of consumer receivables. These capabilities may allow us to develop and provide complementary products or services to specified financially distressed consumer segments. Acquisition of Portfolio Purchasing and Recovery Receivables We provide sellers of delinquent receivables liquidity and immediate value through the purchase of charged-off consumer receivables. We believe that we are an appealing partner for these sellers given our financial strength, focus on principled intent, and track record of financial success. United States Identify purchase opportunities. We maintain relationships with some of the largest credit originators and portfolio resellers of charged-off consumer receivables in the United States. We identify purchase opportunities and secure, where possible, exclusive negotiation rights. We believe that we are a valued partner for credit originators and portfolio resellers from whom we purchase portfolios, and our ability to secure exclusive negotiation rights is typically a result of our strong relationships and our purchasing scale. Receivable portfolios are sold either through a general auction, where the seller requests bids from market participants, or through an exclusive negotiation, where the seller and buyer negotiate a sale privately. The sale transaction can be either for a one-time spot purchase or for a “forward flow” contract. A “forward flow” contract is a commitment to purchase receivables over a duration that is typically three to twelve months with specifically defined volume, frequency, and pricing. Typically, these forward flow contracts have provisions that allow for early termination or price re- negotiation should the underlying quality of the portfolio deteriorate over time or if any particular month’s delivery is materially different than the original portfolio used to price the forward flow contract. We generally attempt to secure forward 4 Table of Contents flow contracts for receivables because a consistent volume of receivables over a set duration can allow us more precision in forecasting and planning our operational needs. Evaluate purchase opportunities using account-level analytics. Once a portfolio of interest is identified, we obtain detailed information regarding the portfolio’s accounts, including certain information regarding the consumers themselves. We then purchase additional information for the consumers whose accounts we are contemplating purchasing, including credit, savings, or payment behavior. Our Decision Science team, responsible for asset valuation, statistical analysis, and forecasting, then analyzes this information to determine the expected value of each potential new consumer. Our collection expectations are based on these demographic data, account characteristics, and economic variables, which we use to predict a consumer’s willingness and ability to repay his or her debt. The expected value of collections for each account is aggregated to calculate an overall value for the portfolio. Additional adjustments are made to account for qualitative factors that may affect the payment behavior of our consumers (such as prior collection activities, or the underwriting approach of the seller), and servicing related adjustments to ensure our valuations are aligned with our operations. Formal approval process. Once we have determined the value of the portfolio and have completed our qualitative diligence, we present the purchase opportunity to our investment committee, which either sets the maximum purchase price for the portfolio based on a corporate Internal Rate of Return (“IRR”) or other strategic objectives or declines to bid. Members of the investment committee include our Chief Executive Officer, Chief Financial Officer, other members of our senior management team, and experts, as needed. We believe long-term success is best achieved by combining a diverse asset sourcing approach with an account-level scoring methodology and a disciplined evaluation process. International Through Cabot, we maintain strong relationships with many of the largest financial service providers in the United Kingdom. Cabot primarily acquires receivable portfolios in negotiated spot transactions, but it also participates in auctions on occasion. In addition, Cabot purchases a small number of portfolios by entering into forward flow agreements, although it has substantially moved away from these arrangements. When Cabot identifies a portfolio of interest, it evaluates account-level information and performs due diligence to evaluate certain features of the portfolio. Cabot next applies its proprietary, highly automated portfolio pricing models to further evaluate the portfolio, using separate models depending on the type of account: a paying model for semi-performing accounts and a regression model for non-performing accounts. Using its substantial database of account holder information, Cabot carries out additional statistical analysis that is customized to evaluate specific repayment characteristics to further evaluate the accounts. The results of due diligence and the outputs of the pricing models and data analysis is presented to Cabot’s pricing committee, which then decides whether to make an indicative bid for the portfolio. If, following the indicative bid, Cabot is short-listed by the vendor, it then conducts further due diligence on the portfolio and refines its analysis. Following this additional due diligence, the pricing committee decides whether to submit a final binding offer for the portfolio. All purchases require approval by the pricing committee. Cabot’s pricing committee includes its Chief Executive Officer, Financial Director and Chief Investment Officer. We believe that Cabot’s significant industry and management experience enable it to make informed decisions about the portfolios we acquire through Cabot. Portfolio Purchasing and Recovery Collection Approach United States We expand and build upon the insight developed during our purchase process when developing our account collection strategies for portfolios we have acquired. Our proprietary consumer-level collectability analysis is the primary determinant of whether an account is actively serviced post-purchase. Generally, we pursue collection activities on only a fraction of the accounts we purchase, through one or more of our collection channels. The channel identification process is analogous to a decision tree where we first differentiate those consumers who we believe are unable to pay from those who we believe are able to pay. Consumers who we believe are financially incapable of making any payments, or are facing extenuating circumstances or hardships that would prevent them from making payments, are excluded from our collection process. It is our practice to assess each consumer’s willingness to pay through analytics, phone calls and/or letters. Despite our efforts to reach consumers and work out a settlement plan, only a small number of consumers who we contact choose to engage with us. Those who do are often offered discounts on their obligations or are presented with payment plans that are intended to suit their needs. However, the majority of consumers we contact do not respond to our calls or our letters and we must then make the decision about whether to pursue collections through legal action. Throughout our ownership period, we periodically refine our collection approach to determine the most effective collection strategy to pursue for each account. These strategies consist of: • Inactive. We strive to use our financial resources judiciously and efficiently by not deploying resources on accounts where the prospects of collection are remote based on a consumer’s situation. 5 Table of Contents • Direct Mail. We develop innovative, low-cost mail campaigns offering consumers appropriate discounts to encourage settlement of their accounts. • Call Centers. We maintain domestic collection call centers in Phoenix, Arizona, St. Cloud, Minnesota, Warren, Michigan, and Roanoke, Virginia and international call centers in Gurgaon, India and San Jose, Costa Rica. Call centers generally consist of multiple collection departments. Account managers supervised by group managers are trained and divided into specialty teams. Account managers assess our consumers’ willingness and capacity to pay. They attempt to work with consumers to evaluate sources and means of repayment to achieve a full or negotiated lump sum settlement or develop payment programs customized to the individual’s ability to pay. In cases where a payment plan is developed, account managers encourage consumers to pay through automatic payment arrangements. During our new hire training period, we educate account managers to understand and apply applicable laws and policies that are relevant in the account manager’s daily collection activities. Our ongoing training and monitoring efforts help ensure compliance with applicable laws and policies by account managers. • Skip Tracing. If a consumer’s phone number proves inaccurate when an account manager calls an account, or if current contact information for a consumer is not available at the time of account purchase, then the account could be routed to our skip tracing process. We currently use a number of different skip tracing companies to provide accurate phone numbers and addresses. • Legal Action. We generally refer accounts for legal action where the consumer has not responded to our direct mail efforts or our calls and it appears the consumer is able, but unwilling, to pay his or her obligations. When we decide to pursue legal action, we place the account into our internal legal channel or refer them to our network of retained law firms. If placed to our internal legal channel, attorneys in that channel will evaluate the accounts and make the final determination whether to pursue legal action. If referred to our network of retained law firms, we rely on our law firms’ expertise with respect to applicable debt collection laws to evaluate the accounts placed in that channel in order to make the decision about whether or not to pursue collection litigation. Prior to engaging an external collection firm, we evaluate the firm’s compliance with consumer credit laws and regulations, operations, financial condition, and experience, among other key criteria. The law firms we have hired may also attempt to communicate with the consumers in an attempt to collect their debts prior to initiating litigation. We pay these law firms a contingent fee based on amounts they collect on our behalf. • Third-Party Collection Agencies. We selectively employ a strategy that uses collection agencies. Collection agencies receive a contingent fee for each dollar collected. Generally, we use these agencies on accounts when we believe they can liquidate better or less expensively than we can or to supplement capacity in our internal call centers. We also use agencies to initially provide us a way to scale quickly when large purchases are made and as a challenge to our internal call center collection teams. Prior to engaging a collection agency, we evaluate, among other things, those aspects of the agency’s business that we believe are relevant to its performance and compliance with consumer credit laws and regulations. • Online. We offer an online payment portal that enhances consumer convenience by providing consumers the ability to make payments and submit inquiries online. • Sale. We do not resell accounts to third parties in the ordinary course of our business. International Cabot uses insights developed during its purchasing process to build account collection strategies. Cabot’s proprietary consumer-level collectability analysis is the primary determinant of how an account will be serviced post-purchase. Cabot continuously refines this analysis to determine the most effective collection strategy to pursue for each account it owns. In recent years, Cabot has concentrated on buying high-balance financial services debt, both paying and non-paying. Cabot will attempt to establish contact with these consumers in order to transfer payment arrangements and gauge the willingness of these consumers to pay. Consumers who Cabot believes are financially incapable of making any payments, those having negative disposable income, or those experiencing hardship (such as medical issues or mental incapacity), are handled outside of normal collections processes through dedicated and tailored strategies. The remaining pool of accounts then receives further evaluation through the combined use of Cabot’s and Marlin’s data analytics. At that point, Cabot analyzes and determines a consumer’s perceived willingness to pay. Based on that analysis, Cabot pursues collections through letters and/or phone calls to its consumers. Where contact is made and consumers indicate a willingness to pay, a patient approach of forbearance is applied using regulatory protocols within the United Kingdom to assess affordability and ensure that repayment plans are fair and balanced and therefore sustainable. Where the customer is unwilling to pay, Cabot refers the account to the appropriate escalation point in the collection process, which may include its internal debt 6 Table of Contents collection agency, a third-party collection agency or legal action. Cabot also has robust internal legal collection capabilities, allowing the organization to address consumers across the entire willingness to pay spectrum. Tax Lien Business Propel acquires and services residential and commercial tax liens on real property. These liens take priority over most other liens, including mortgage liens. To the extent permitted by local law, Propel works directly with property owners to structure affordable payment plans designed to allow them to keep their properties while paying their property tax obligations over time. In such cases, Propel pays their tax lien obligations to the taxing authority, and the property owners pay Propel at lower interest rates and/or over a longer period of time than the taxing authorities would ordinarily permit. Propel also purchases tax liens directly from taxing authorities in certain states. In many cases, these tax liens continue to be serviced by the taxing authorities. When a taxing authority receives payment for the outstanding taxes, it pays Propel the outstanding balance of the related lien plus interest, which is either established by statute, negotiated at the time of the purchase, or determined by the bid Propel submitted to acquire the tax lien. On February 19, 2016, we entered into an agreement with certain funds to sell 100% of our membership interests in Propel. The estimated sales price indicated that Propel’s fair value was less than its carrying value at December 31, 2015 and, as a result, goodwill at this reporting unit was impaired. Based on the estimated sales price, we recorded a goodwill impairment charge of $49.3 million for the year ended December 31, 2015. Refer to Note 17, “Subsequent Event” and Note 15, “Goodwill and Identifiable Intangible Assets” to our consolidated financial statements for further information on the sale of Propel and the goodwill impairment. Legal, Compliance and Enterprise Risk Management, Oversight United States Our legal and compliance oversight functions are divided between our legal, compliance and enterprise risk management departments. Our legal department manages regulatory oversight, litigation, corporate transactions, and compliance with our internal ethics policy, while our compliance department tests and monitors adherence to State and Federal regulations and enterprise risk management manages risk and internal audit. The legal department is responsible for interpreting and administering our Standards of Business Conduct (the “Standards”), which apply to all of our directors, officers, and employees and outlines our commitment to a culture of professionalism and ethical behavior. The Standards promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, compliance with applicable laws, rules and regulations, and full and fair disclosure in reports that we file with, or submit to, the SEC and in other public communications made by us. As described in the Standards, we have also established a toll-free Compliance Hotline to allow directors, officers, and employees to report any detected or suspected fraud, misappropriations, or other fiscal irregularities, any good faith concern about our accounting and/or auditing practices, or any other violations of the Standards. We continually monitor applicable changes to laws governing statutes of limitations and disclosures to consumers. We maintain policies, system controls, and processes designed to ensure that accounts past the applicable statute of limitations do not get placed into legal collections. Additionally, in written and verbal communications with consumers, we provide disclosures to the consumer that the account is past its applicable statute of limitations and, therefore, we will not pursue collections through legal means. The compliance department is responsible for promoting compliance with applicable laws and regulations. The compliance department facilitates oversight by our Board of Directors and management, assists in formulating policies and procedures, and engages in training, risk assessments, testing, monitoring and corrective action, complaint response, and compliance audits. The enterprise risk management department is responsible for the development and administration of internal policies, procedures, periodic risk assessments and controls which apply to all of our business units and for performing internal audits to evaluate the level of compliance to both regulations, such as Sarbanes-Oxley 404, and standards of internal control for internal operations. Beyond written policies, one of our core internal goals is the adherence to principled intent as it pertains to all consumer interactions. We believe that it is in our shareholders’ and our employees’ best interest to treat all consumers with the highest standards of integrity. Specifically, we have strict policies and a code of ethics, which guide all dealings with our consumers. To reinforce existing written policies, we have established a number of quality assurance procedures. Through our Quality Assurance program, our Fair Debt Collection Practices Act training for new account managers, our Fair Debt Collection Practices Act recertification program for continuing account managers, and our Consumer Support Services department, we take significant steps to ensure compliance with applicable laws and regulations and seek to promote consumer satisfaction. Our Quality Assurance team aims to enhance the skills of account managers and to drive compliance initiatives through active call monitoring, account manager coaching and mentoring, and the tracking and distribution of company-wide best 7 Table of Contents practices. Finally, our Consumer Support Services department works directly with consumers to seek to resolve incoming consumer inquiries and to respond to consumer disputes as they may arise. International Cabot has established a compliance framework, operational procedures, and governance structures to enable it to conduct business in accordance with applicable rules, regulations, and guidelines. Cabot’s employees undergo comprehensive training on legal and regulatory compliance, and Cabot engages in regular call monitoring checks, data checks, performance reviews, and other operational reviews to ensure compliance with company guidelines. The laws and regulations under which Cabot operates have at their core the fair treatment of consumers, which is embedded within Cabot’s processes and culture. Information Technology Technical Infrastructure. Our internal network has been configured to be redundant in all critical functions, at all sites. This redundancy has been implemented within the local area network switches and the data center network and includes fully redundant Multiprotocol Label Switching (MPLS) networks. We have the capability to handle high transaction volume in our server network architecture with scalability to meet and exceed our future growth plans. Redundancy, coupled with seamless scalability and our high performance infrastructure, will allow for rapid business transformation and growth. Predictive Dialer Technology. Our call centers employ the use of upgraded predictive dialer technology. This technology allows additional call volume capacity and greater efficiency through shorter wait times and an increase in the number of live contacts. This technology helps maximize account manager productivity and further optimizes the yield on our portfolio purchases. Additionally, the use of predictive dialing technology helps us comply with applicable federal and state laws in the United States that restrict the time, place, and manner in which debt collectors can call consumers. Recognizing mobile phone dialing has a different set of legal restrictions, we utilize a distinctly different platform for non-consented mobile phones in order to comply with all laws while providing a framework for us to maximize contact with our consumers. Computer Hardware. We have made significant improvements in our data centers, and now have redundancy in support of continued growth. We use a robust computer platform to perform our daily operations, including the collection efforts of our global workforce. Our custom software applications are integrated within our database server environment allowing us to process transaction loads with speed and efficiency. The computer platform offers us reliability and expansion opportunities. Furthermore, this hardware incorporates state of the art data security protection. We back up our data utilizing a tapeless configuration, and copies are replicated to a secure secondary data center. We also mirror our production data to a remote location to give us full protection in the event of the loss of our primary data center. To ensure the integrity and reliability of our computer platform, we periodically engage outside auditors specializing in information technology and cybersecurity to examine both our operating systems and disaster recovery plans. Process Control. To provide assurance that our entire infrastructure continues to operate efficiently and securely, we have developed a strong process and control environment. These governance, risk management, and control protocols govern all areas of the enterprise: from physical security and cyber security, to change management, data protection, and segregation of duties. Cybersecurity. We divide our cybersecurity and information security functions into the four core tenants that we believe make up a solid information security practice: (1) security strategy and architecture; (2) operational security; (3) vulnerability and threat management; and (4) IT governance, risk and controls. We invest in cybersecurity and advanced technologies, including next generation threat prevention and threat intelligence solutions, to protect our organization and consumer and proprietary data throughout its life cycle. Lastly, we believe that our adoption and implementation of leading security frameworks for the financial services industry and the regulatory environments and geographies in which we operate demonstrates our commitment to cybersecurity and information security. Competition United States The consumer credit recovery industry is highly competitive. We compete with a wide range of collection and financial services companies. We also compete with traditional contingency collection agencies and in-house recovery departments. Competitive pressures affect the availability and pricing of receivable portfolios, as well as the availability and cost of qualified recovery personnel. In addition, some of our competitors may have signed forward flow contracts under which credit originators or portfolio resellers have agreed to transfer charged-off receivables to them in the future, which could restrict those credit originators or portfolio resellers from selling receivables to us. We believe some of our major competitors, which include companies that focus primarily on the purchase of charged-off receivable portfolios, have continued to diversify into third-party agency collections and into offering credit card and other financial services as part of their recovery strategy. 8 Table of Contents When purchasing receivables, we compete primarily on the basis of the price paid for receivable portfolios, the ease of negotiating and closing the prospective portfolio purchases with us, our ability to obtain funding, and our reputation with respect to the quality of services that we provide. We believe that our ability to compete effectively in this market is also dependent upon, among other things, our relationships with credit originators and portfolio resellers of charged-off consumer receivables, and our ability to provide quality collection strategies in compliance with applicable laws. We believe that smaller competitors are facing difficulties in the portfolio purchasing market because of the higher cost to operate due to increased regulatory pressure and because sellers of charged-off consumer receivables are being more selective with buyers in the marketplace, resulting in consolidation within the portfolio purchasing and recovery industry. We believe this favors larger participants in this market, such as the Company, because the larger market participants are better able to adapt to these pressures. As smaller competitors limit their participation in or exit the market, it may provide additional opportunities for us to purchase receivables from competitors or to acquire competitors directly. The tax lien industry is highly competitive and fragmented. In Texas, Propel competes primarily on the basis of interest rate, the ease of negotiating and closing the tax liens with the municipality and the consumer, and the reputation with respect to the quality of services that Propel provides. Outside of Texas, liens are usually sold individually or in bulk to the most competitive bidders, although sometimes the local governments consider non-monetary factors when awarding bulk liens. International When purchasing receivables in the United Kingdom market, Cabot competes on the basis of the price paid for receivable portfolios, the ease of negotiating and closing the prospective portfolio purchases with Cabot, its ability to obtain funding, and its reputation with respect to the quality of services it provides. We believe that Cabot’s ability to compete effectively in this market is also dependent upon, among other things, Cabot’s relationships with credit originators and financial services companies, its ability to segment portfolios effectively, its high level of compliance governance controls, and its ability to provide quality collection strategies in compliance with applicable laws. Similar to certain trends we are observing in the United States, we believe that smaller competitors in the United Kingdom are facing difficulties in the portfolio purchasing market because of the higher cost to operate due to the increased regulatory environment and scrutiny applied by regulators, and also because sellers of charged-off consumer receivables are being more selective with buyers in the marketplace, resulting in consolidation within the portfolio purchasing and recovery industry and the exit of portfolio purchasing and recovery companies from the marketplace. As in the United States, we believe this favors larger participants in the market, such as Cabot, because the larger market participants are better able to adapt to these pressures. As smaller competitors limit their participation in or exit the market, it may provide additional opportunities for us to purchase receivables from competitors or to acquire competitors directly, as we did through Cabot’s acquisition of Marlin in February 2014 and dlc in June 2015. Government Regulation United States Our debt purchasing and collection activities are subject to federal, state, and municipal statutes, rules, regulations, and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts. It is our policy to comply with the provisions of all applicable laws in all of our recovery activities. Our failure to comply with these laws could have a material adverse effect on us to the extent that they limit our recovery activities or subject us to fines or penalties in connection with such activities. The federal Fair Debt Collection Practices Act (“FDCPA”) and comparable state and local laws establish specific guidelines and procedures that debt collectors must follow when communicating with consumers, including the time, place and manner of the communications, and prohibit unfair, deceptive, or abusive debt collection practices. Until 2011, the Federal Trade Commission (“FTC”) administered, and had primary responsibility for the enforcement of, the FDCPA. In July 2011, pursuant to the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (the “Dodd-Frank Act”), Congress transferred the FTC’s role of administering the FDCPA to the Consumer Financial Protection Bureau (“CFPB”), along with certain other federal statutes, and gave the CFPB authority to implement regulations under the FDCPA. The FTC and the CFPB share enforcement responsibilities under the FDCPA. 9 Table of Contents In addition to the FDCPA, the federal laws that apply to our business (including the regulations that implement these laws) include the following: Dodd-Frank Act, including the Consumer Financial Protection Act (Title X of the Dodd-Frank Act, “CFPA”) Electronic Fund Transfer Act Equal Credit Opportunity Act Fair Credit Billing Act Fair Credit Reporting Act (“FCRA”) Federal Trade Commission Act (“FTCA”) Gramm-Leach-Bliley Act Health Insurance Portability and Accountability Act Servicemembers’ Civil Relief Act Telephone Consumer Protection Act Truth In Lending Act U.S. Bankruptcy Code Wire Act Credit CARD Act Foreign Corrupt Practices Act The Dodd-Frank Act was adopted to reform and strengthen regulation and supervision of the U.S. financial services industry. It contains comprehensive provisions governing the oversight of financial institutions, some of which apply to us. Among other things, the Dodd-Frank Act established the CFPB, which has broad authority to implement and enforce “federal consumer financial law,” as well as authority to examine financial institutions, including credit issuers that may be sellers of receivables and debt buyers and collectors such as us, for compliance with federal consumer financial law. The CFPB has authority to prevent unfair, deceptive, or abusive acts or practices by issuing regulations or by using its enforcement authority without first issuing regulations. The Dodd-Frank Act also authorizes state officials to enforce regulations issued by the CFPB and to enforce the CFPA general prohibition against unfair, deceptive, and abusive acts or practices. The CFPB’s authorities include the ability to issue regulations under all significant federal statutes that affect the collection industry, including the FDCPA, FCRA, and others. On November 12, 2013, the CFPB published in the Federal Register an Advance Notice of Proposed Rulemaking seeking comments, data, and information from the public about debt collection practices to help it determine what rules and other CFPB actions, if any, would be useful under the FDCPA and the CFPA. The CFPB has indicated that it expects to move forward with the debt collection rulemaking in 2016, including the possible convening of a panel pursuant to the Small Business Regulatory Enforcement Fairness Act and issuing a Notice of Proposed Rulemaking. The Dodd-Frank Act also gave the CFPB supervisory and examination authority over a variety of institutions that may engage in debt collection, including us. Accordingly, the CFPB is authorized to supervise and conduct examinations of our business practices. The prospect of supervision has increased the potential consequences of noncompliance with federal consumer financial law. The CFPB can conduct hearings, adjudication proceedings, and investigations, either unilaterally or jointly with other state and federal regulators, to determine if federal consumer financial law has been violated. The CFPB has authority to impose monetary penalties for violations of applicable federal consumer financial laws (including the CFPA, FDCPA, and FCRA, among other consumer protection statutes), require remediation of practices, and pursue enforcement actions. The CFPB also has authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief), costs, and monetary penalties ranging from $5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. In addition, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented under Title X of the Dodd-Frank Act, the Dodd-Frank Act empowers state Attorneys General and state regulators to bring civil actions to remedy violations of state law. The CFPB has been active in its supervision, examination and enforcement of financial services companies, including bringing enforcement actions, imposing fines and mandating large refunds to customers of several financial institutions for practices relating to debt collection practices. On September 9, 2015, we entered into a consent order (the “Consent Order”) with the CFPB in which we settled allegations arising from our practices between 2011 and 2015. The Consent Order includes obligations on us to, among other things: (1) follow certain specified operational requirements, substantially all of which are already part of our current operations; (2) submit to the CFPB for review a comprehensive plan designed to ensure that our debt collection practices comply with all applicable federal consumer financial laws and the terms of the Consent Order; (3) pay redress to certain specified groups of consumers; and (4) pay a civil monetary penalty. We will continue to cooperate and engage with the CFPB and work to ensure compliance with the Consent Order. In addition, we are subject to ancillary state attorney general investigations related to similar debt collection practices. We incurred a one-time, after-tax charge of approximately $43 million in the third quarter of 2015. We believe this charge will cover all related impacts of the Consent Order, including civil monetary penalties, restitution, any such ancillary state regulatory matters, legal expenses and portfolio allowance charges on several pool groups due to the impact on our current 10 Table of Contents estimated remaining collections related to our existing receivable portfolios. We anticipate that after this one-time charge, any future earnings impact will be immaterial. In addition, the CFPB has issued guidance in the form of bulletins on debt collection and credit furnishing activities generally, including one that specifically addresses representations regarding credit reports and credit scores during the debt collection process, another that focuses on the application of the CFPA’s prohibition of “unfair, deceptive, or abusive” acts or practices on debt collection and another that discusses the risks that in-person collection of consumer debt may create in violating the FDPCA and CFPA. The CFPB also accepts debt collection consumer complaints and released template letters for consumers to use when corresponding with debt collectors. The CFPB makes publicly available its data on consumer complaints. The Dodd-Frank Act also mandates the submission of multiple studies and reports to Congress by the CFPB, and CFPB staff regularly make speeches on topics related to credit and debt. All of these activities could trigger additional legislative or regulatory action. In addition, the CFPB has recently engaged in enforcement activity in sectors adjacent to our industry, impacting credit originators, collection firms, and payment processors, among others. The CFPB’s enforcement activity in these spaces, especially in the absence of clear rules or regulatory expectations, can be disruptive to third parties as they attempt to define appropriate business practices. As a result, certain commercial relationships we maintain may be disrupted or impacted by changes in third-parties’ business practices or perceptions of elevated risk relating to the debt collection industry. Our activities are also subject to federal and state laws concerning identity theft, privacy, data security, the use of automated dialing equipment, and other laws related to consumers and consumer protection. In response to petitions filed by third parties, in July 2015, the Federal Communications Commission (“FCC”) released a declaratory ruling interpreting the Telephone Consumer Protection Act (“TCPA”), which could impact the way consumers may be contacted on their cellular phones and could impact our operations and financial results. In addition to the federal statutes detailed above, many states have general consumer protection statutes, laws, regulations, or court rules that apply to debt purchasing and collection. In a number of states and cities, we must maintain licenses to perform debt recovery services and must satisfy related bonding requirements. It is our policy to comply with all material licensing and bonding requirements. Our failure to comply with existing licensing requirements, changing interpretations of existing requirements, or adoption of new licensing requirements, could restrict our ability to collect in regions, subject us to increased regulation, increase our costs, or adversely affect our ability to collect our receivables. State laws, among other things, also may limit the interest rate and the fees that a credit originator may impose on our consumers, limit the time in which we may file legal actions to enforce consumer accounts, and require specific account information for certain collection activities. By way of example, the California Fair Debt Buying Practices Act that directly applies to debt buyers, applies to accounts sold after January 1, 2014. The law requires debt buyers operating in the state to have in their possession specific account information before debt collection efforts can begin, among other requirements. Moreover, the New York State Department of Financial Services issued new debt collection regulations, which took effect in September 2015 and established new requirements for collecting debt in the state. In addition, other state and local requirements and court rulings in various jurisdictions may also affect our ability to collect. The relationship between consumers and credit card issuers is also extensively regulated by federal and state consumer protection and related laws and regulations. These laws may affect some of our operations because the majority of our receivables originate through credit card transactions. The laws and regulations applicable to credit card issuers, among other things, impose disclosure requirements when a credit card account is advertised, when it is applied for and when it is opened, at the end of monthly billing cycles, and at year-end. Federal law requires, among other things, that credit card issuers disclose to consumers the interest rates, fees, grace periods, and balance calculation methods associated with their credit card accounts. Some laws prohibit discriminatory practices in connection with the extension of credit. If the originating institution fails to comply with applicable statutes, rules, and regulations, it could create claims and rights for consumers that would reduce or eliminate their obligations related to those receivables. When we acquire receivables, we generally require the credit originator or portfolio reseller to represent that they have complied with applicable statutes, rules, and regulations relating to the origination and collection of the receivables before they were sold to us. Federal statutes further provide that, in some cases, consumers cannot be held liable for, or their liability is limited with respect to, charges to their credit card accounts that resulted from unauthorized use of their credit cards. These laws, among others, may give consumers a legal cause of action against us, or may limit our ability to recover amounts owing with respect to the receivables, whether or not we committed any wrongful act or omission in connection with the account. These laws and regulations, and others similar to the ones listed above, as well as laws applicable to specific types of debt, impose requirements or restrictions on collection methods or our ability to enforce and recover certain of our receivables. Effects of the law, including those described above, and any new or changed laws, rules, or regulations, and reinterpretation of the same, may adversely affect our ability to recover amounts owing with respect to our receivables or the sale of receivables by creditors and resellers. 11 Table of Contents In June 2013, we completed our merger with Asset Acceptance Capital Corp. (“AACC”), another leading provider of debt recovery solutions in the United States. In January 2012, Asset Acceptance, LLC, a subsidiary of AACC, entered into a consent decree with the FTC. The consent decree ended an FTC investigation into Asset Acceptance, LLC’s compliance with the FTCA, FDCPA, and FCRA. As part of the consent decree, Asset Acceptance, LLC agreed to undertake certain consumer protection practices, including, among other things, furnishing additional disclosures to consumers when collecting debt past the statute of limitations, and paid a civil penalty of $2,500,000. These practices continue to apply to the portfolios we purchased as a result of the merger with AACC. We do not expect compliance with the consent decree to have a material effect on our business. In order to conduct the tax lien business in the State of Texas, Propel is subject to regulation and licensing by the State of Texas Office of Consumer Credit Commissioner. Propel is also subject to applicable laws governing the acquisition and servicing of tax liens and tax lien certificates, including but not limited to various consumer protection, privacy laws and regulations. There have been assertions that various provisions of the Truth in Lending Act and its implementing regulations apply to Propel’s business operations in certain states, depending on the method by which the Tax Liens are acquired. Propel believes these assertions are without merit. International As we expand our international footprint, our operations are increasingly affected by foreign statutes, rules and regulations. It is our policy to comply with these laws in all of our recovery activities. For example, debt collection and debt purchase activities in the United Kingdom are highly regulated by a number of different governmental bodies. The regulatory regime to which Cabot is subject is currently experiencing a number of substantial changes. The most significant changes include the transfer of responsibility for the regulation of consumer credit businesses in the United Kingdom from the Office of Fair Trading (“OFT”) to the Financial Conduct Authority (“FCA”) which occurred on April 1, 2014; the proposal to have a dedicated pre-action protocol before commencing debt recovery claims in court; and the proposal by the European Commission that substantial changes be made to the European Union data protection regime. The FCA implemented an interim permission regime whereby businesses that held a consumer credit license were required to register with the FCA for interim permission before March 31, 2014 in order to continue consumer credit activities after April 1, 2014. The interim permission regime is expected to continue until April 1, 2017, and during this time businesses will be called upon at different intervals to apply for authorization to be fully regulated by the FCA. Cabot currently has all regulatory licenses, permissions, registrations, and authorizations in place with the relevant regulatory bodies in order to provide and continue debt purchase and collection activities, including holding interim permission with the FCA. In March 2015, Cabot applied for full authorization of its business with the FCA. The FCA typically has 12 months to consider an application for full authorization. Therefore, Cabot expects the final decision by the FCA regarding its application in March 2016. The FCA may take any one of the following actions with Cabot’s application: (1) the FCA may authorize Cabot to continue debt purchasing, collecting and associated credit activities without further conditions; (2) the FCA may authorize Cabot subject to certain conditions, which will require Cabot to take certain actions to either remediate or comply with the FCA’s conditions; (3) the FCA may require that certain improvements to Cabot’s processes be made as a precursor to authorization, or appoint a skilled person elected by the FCA to investigate, examine and oversee Cabot’s operations, at Cabot’s cost; or (4) the FCA may decline to authorize Cabot. In addition to the application for full authorization of its business with the FCA, Cabot will be required to apply to the FCA to appoint certain individuals who have significant control or influence over the management of the business, known as “Approved Persons,” and who will jointly and severally be liable for the acts and omissions of the company and its business affairs. Approved Persons will be subject to statements of principle and codes of practice established and enforced by the FCA. The FCA may take the following action in connection with the application for Approved Persons: (a) authorize the Approved Person without further conditions; (b) refuse to authorize the Approved Person; (c) request that the applicant undertake further qualifications before it authorizes a person to become an Approved Person; or (d) ban a person from acting as an Approved Person for a period of time or for life. The FCA has adopted detailed rules relating to conducting consumer credit activities, in addition to putting in place high level principles and conditions to which it expects businesses and Approved Persons in the sector to adhere. The FCA has significantly greater powers than the OFT, including, but not limited to, the ability to impose significant fines, ban certain individuals from carrying on trade within the financial services industry, impose requirements on a firm’s permission, and cease certain products from being collected upon. Furthermore, the manner in which court claims are conducted in England and Wales in connection with the recovery of debt may be subject to significant changes. In September 2014, the Civil Procedure Rules Committee (“CPRC”), an advisory public body set up by statute and sponsored by the U.K. Ministry of Justice, issued a consultation on proposals to introduce a designated pre-action protocol for court claims for the recovery of debt. Due to the amount of responses from the industry against the introduction of a dedicated protocol, the CPRC created a dedicated sub-committee with industry and consumer group stakeholders. As a consequence, the CPRC issued an updated consultation in September 2015 in order to seek balance between the interests of the industry and consumer groups. If adopted in its current form, it would require all debt collection 12 Table of Contents entities and law firms instructed and acting on behalf of such entities to disclose significant amounts of information relating to the credit agreement and the state of such credit agreement to a consumer prior to being able to progress a claim to court. In some circumstances, issuers of debt may not be able to provide this information, and as neither Cabot nor its competitors currently maintain such documentation to satisfy such obligations, the protocol may limit Cabot’s ability to commence Court proceedings to recover a debt. Certain other requirements are proposed, which may significantly increase costs and time in order to initiate a court claim. Cabot, together with other key industry representatives and trade bodies who are all affected by the proposals, have issued an updated response to the consultation, which is still under consideration. If the CPRC decides to release an updated protocol, it is anticipated that it will be released during 2016 or 2017. In addition, the regulatory regime in the United Kingdom relating to the protection of consumers from unfair terms and practices is subject to change. In October 2015, the U.K. Parliament introduced new laws that reformed most of the previous U.K. consumer laws and was largely driven by the European Commission’s Directive for Consumer Rights. The U.K. Consumer Rights Act 2015 introduced enhanced consumer measures that can be imposed on businesses and gives greater protection to U.K. consumers from unfair business practices and unfair terms in consumer agreements. Additionally, the Consumer Credit Act of 1974 (and its related regulations) and the U.K. Consumer Rights Act 2015 set forth requirements for the entry into and ongoing management of consumer credit arrangements in the United Kingdom. A failure to comply with these requirements can make agreements unenforceable or can result in a requirement that charged and collected interest be repaid. In addition to these regulations on debt collection and debt purchase activities, Cabot must comply with requirements established by the Data Protection Act of 1998 in relation to processing the personal data of its consumers. The regulatory regime in the Republic of Ireland has been subject to significant changes. In July 2015, the Irish Parliament introduced the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015, which requires credit servicing firms to be regulated by the Central Bank of Ireland to ensure regulatory protection for consumers following loan book sales was published in January 2015. The Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 seeks to address concerns regarding the loss of regulatory protections for borrowers when portfolio of loans are sold and/or serviced to/ by an unregulated entity. Cabot is registered with and regulated by the Central Bank of Ireland for credit servicing activities and its activities are subject to detailed rules on consumer protection. Cabot is undergoing the second stage of the authorization process in which it needs to provide its controls framework on how it ensures regulatory protection for consumers for debt portfolios it has acquired and manages. Cabot is already contractually obligated to ensure compliance with the relevant consumer protection codes through its debt sale and management agreements and is audited on a regular basis against such obligations. In addition, the other markets in which we currently operate are subject to local laws and regulations, and we have implemented compliance programs to facilitate compliance with all applicable laws and regulations in those markets. Our operations outside the United States are subject to the U.S. Foreign Corrupt Practices Act, which prohibits U.S. companies and their agents and employees from providing anything of value to a foreign official for the purposes of influencing any act or decision of these individuals in order to obtain an unfair advantage, to help, obtain, or retain business. Employees As of December 31, 2015, we had approximately 6,700 employees worldwide. None of our employees is represented by a labor union. We believe that our relations with our employees are good. Item 1A—Risk Factors There are risks and uncertainties in our business that could cause our actual results to differ from those anticipated. We urge you to read these risk factors carefully in connection with evaluating our business and in connection with the forward- looking statements and other information contained in this Annual Report on Form 10-K. Any of the risks described herein could affect our business, financial condition, or future results and the actual outcome of matters as to which forward-looking statements are made. The list of risks is not intended to be exhaustive, and the order in which the risks appear is not intended as an indication of their relative weight or importance. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may adversely affect our business, financial condition and/or operating results. Risks Related to Our Business and Industry Financial and economic conditions affect the ability of consumers to pay their obligations, which could harm our financial results. Economic conditions globally and locally directly affect unemployment, credit availability, and real estate values. Adverse conditions, economic changes, and financial disruptions place financial pressure on the consumer, which may reduce our ability to collect on our consumer receivable portfolios and may adversely affect the value of our consumer receivable 13 Table of Contents portfolios. Further, increased financial pressures on the financially distressed consumer may result in additional regulatory requirements or restrictions on our operations and increased litigation filed against us. These conditions could increase our costs and harm our business, financial condition, and operating results. Our operating results may be affected by factors that could cause them to fluctuate significantly in the future. Our operating results will likely vary in the future due to a variety of factors that could affect our revenues and operating expenses. We expect that our operating expenses as a percentage of collections will fluctuate in the future as we expand into new markets, increase our business development efforts, hire additional personnel, and incur increased insurance and regulatory compliance costs. In addition, our operating results have fluctuated and may continue to fluctuate as a result of the factors described below and elsewhere in this Annual Report on Form 10-K: • • • • • the timing and ability of consumers to make payments, including the effects of seasonality and macroeconomic conditions on their ability to pay; any charge to earnings resulting from an allowance against the carrying value of our receivable portfolios; increases in operating expenses associated with the growth or change of our operations or compliance with increased regulatory and other legal requirements; the cost of credit; and the supply of receivables portfolios and tax liens for sale on acceptable terms. Because we recognize revenue on the basis of projected collections on purchased portfolios, we may experience variations in quarterly revenue and earnings due to the timing of portfolio purchases. We may not be able to purchase receivables at favorable prices, which could limit our growth or profitability. Our ability to continue to operate profitably depends upon the continued availability of receivable portfolios that meet our purchasing standards and are cost-effective based upon projected collections exceeding our costs. Due, in part, to fluctuating prices for receivable portfolios and competition within the marketplace, there has been considerable variation in our purchasing volume and pricing from quarter to quarter and we expect that to continue. The volume of our portfolio purchases may be limited when prices are high, and may or may not increase when portfolio pricing is more favorable to us. Further, our rates of return may decline when portfolio prices are high. We do not know how long portfolios will be available for purchase on terms acceptable to us, or at all. The availability of receivable portfolios at favorable prices depends on a number of factors, including: • • • • • • defaults in consumer debt; continued origination of loans by originating institutions at sufficient volumes; continued sale of receivable portfolios by originating institutions and portfolio resellers at sufficient volumes and acceptable price levels; competition in the marketplace; our ability to develop and maintain favorable relationships with key major credit originators and portfolio resellers; our ability to obtain adequate data from credit originators or portfolio resellers to appropriately evaluate the collectability of, estimate the value of, and collect on portfolios; and • changes in laws and regulations governing consumer lending, bankruptcy, and collections. In recent periods, portfolio prices have been elevated above historical levels, particularly for fresh portfolios, which are those portfolios transacted within six months of the consumers’ accounts being charged off by the financial institution. We believe this elevated pricing is due to a reduction in the supply of charged-off accounts and continued strong demand in the marketplace. We believe that the reduction in supply is partially due to shifts in underwriting standards by financial institutions, which have resulted in lower volumes of charged-off accounts. We believe that this reduction in supply is also the result of certain financial institutions temporarily halting or curtailing their sales of charged-off accounts in response to increased regulatory pressure on financial institutions. Although we have seen moderation in certain instances, we expect pricing will remain at elevated levels for some period of time. We are unable to predict the extent to which these financial institutions will re-commence selling charged-off accounts. Financial institutions might not return to selling charged-off accounts at historical 14 Table of Contents levels and certain of them could elect to stop selling charged-off accounts permanently. We are taking measures to improve liquidation rates on our purchased portfolios so that we can achieve satisfactory returns on recently purchased portfolios despite their elevated prices. However, there can be no assurance that these measures will be effective in maintaining returns in line with historical levels, or at all. In addition, because of the length of time involved in collecting charged-off consumer receivables on acquired portfolios and the volatility in the timing of our collections, we may not be able to identify trends and make changes in our purchasing strategies in a timely manner. Ultimately, if we are unable to continually purchase and collect on a sufficient volume of receivables to generate cash collections that exceed our costs or to generate satisfactory returns, our business, financial condition and operating results will be adversely affected. We may experience losses on portfolios consisting of new types of receivables or receivables in new geographies due to our lack of collection experience with these receivables, which could harm our business, financial condition and operating results. We continually look for opportunities to expand the classes of assets that make up the portfolios we acquire. Therefore, we may acquire portfolios consisting of assets with which we have little or no collection experience or portfolios of receivables in new geographies where we do not historically maintain an operational footprint. Our lack of experience with these assets may hinder our ability to generate expected levels of profits from these portfolios. Further, our existing methods of collections may prove ineffective for these new receivables, and we may not be able to collect on these portfolios. Our inexperience with these receivables may have an adverse effect on our business, financial condition and operating results. We may purchase receivable portfolios that are unprofitable or we may not be able to collect sufficient amounts to recover our costs and to fund our operations. We acquire and service charged-off receivables that the obligors have failed to pay and the sellers have deemed uncollectible and have written off. The originating institutions and/or portfolio resellers generally make numerous attempts to recover on these nonperforming receivables, often using a combination of their in-house collection and legal departments, as well as third-party collection agencies. In order to operate profitably over the long term, we must continually purchase and collect on a sufficient volume of charged-off receivables to generate revenue that exceeds our costs. These receivables are difficult to collect, and we may not be successful in collecting amounts sufficient to cover the costs associated with purchasing the receivables and funding our operations. If we are not able to collect on these receivables, collect sufficient amounts to cover our costs or to generate satisfactory returns, this may adversely affect our business, financial condition and operating results. Sellers may deliver portfolios that contain accounts that do not meet our account collection criteria and cannot be returned, which could have an adverse effect on our cash flows and our operations. In the normal course of portfolio acquisitions, some accounts may be included in the portfolios that fail to conform to the terms of the purchase agreements and we may seek to return these accounts to the sellers for refund. However, we generally have a limited time in which to return these accounts to the sellers under the terms of our purchase agreements. In addition, sellers may not be able to meet their contractual obligations to us. Accounts that we are unable to return to sellers may yield no return. If sellers deliver portfolios containing too many accounts that do not conform to the terms of the purchase agreements, we may be unable to collect a sufficient amount and the portfolio purchase could generate lower returns or be unprofitable, which would have an adverse effect on our cash flows and our operations. If cash flows from operations are less than anticipated, our ability to satisfy our debt obligations and purchase new portfolios and, correspondingly, our business, financial condition and operating results, may be adversely affected. A significant portion of our portfolio purchases during any period may be concentrated with a small number of sellers or resellers, which could adversely affect our volume and timing of purchases. A significant percentage of our portfolio purchases for any given fiscal quarter or year may be concentrated with a few large sellers, some of which may also involve forward flow arrangements. We cannot be certain that any of our significant sellers will continue to sell charged-off receivables to us on terms or in quantities acceptable to us, or that we would be able to replace these purchases with purchases from other sellers. A significant decrease in the volume of purchases available from any of our principal sellers on terms acceptable to us would force us to seek alternative sources of charged-off receivables. Further, we have historically complemented our portfolio purchases from credit originators by purchasing portfolios from resellers or through the acquisition of portfolios from competitors looking to exit the market. As consolidation in the market continues, there may be fewer competitors to acquire on favorable terms. In addition, as the regulatory market continues to evolve, increased documentation requirements for collecting on portfolios may make purchasing accounts through resellers more difficult. Several larger issuers have also begun to prohibit resale of portfolios. 15 Table of Contents We may be unable to find alternative sources from which to purchase charged-off receivables, and even if we could successfully replace these purchases, the search could take time and the receivables could be of lower quality, cost more, or both, any of which could adversely affect our business, financial condition and operating results. We face intense competition that could impair our ability to maintain or grow our purchasing volumes. The charged-off receivables purchasing market is highly competitive and fragmented. We compete with a wide range of other purchasers of charged-off consumer receivables. To the extent our competitors are able to better maximize recoveries on their assets or are willing to accept lower rates of return, we may not be able to grow or sustain our purchasing volumes or we may be forced to acquire portfolios at expected rates of return lower than our historical rates of return. Some of our competitors may obtain alternative sources of financing at more favorable rates than those available to us, the proceeds from which may be used to fund expansion and to increase the amount of charged-off receivables they purchase. Barriers to entry into the consumer debt collection industry have traditionally been low. More recently, increased regulatory standards have made entry into the market more difficult and have resulted in sellers of charged-off consumer receivables being more selective with buyers in the marketplace. Companies with greater financial resources than we have may elect at a future date to enter the market for charged-off consumer receivables. We believe that the entrance of new market participants in our industry could lead to additional upward pricing pressure on charged-off consumer receivables as a result of increased demand, but also because new purchasers may pay higher prices for the portfolios than more experienced purchasers would due to a lack of experience, data and analytics necessary to properly assess risks and return potential of the portfolios or a desire to add size to their existing operations. We face bidding competition in our acquisition of charged-off consumer receivables. We believe that successful bids are predominantly awarded based on price and, to a lesser extent, based on service, reputation, and relationships with the sellers of charged-off receivables. Some of our current competitors, and potential new competitors, may have more effective pricing and collection models, greater adaptability to changing market needs, and more established relationships in our industry than we do. Moreover, our competitors may elect to pay prices for portfolios that we determine are not economically sustainable and, in that event, we may not be able to continue to offer competitive bids for charged-off receivables. If we are unable to develop and expand our business or to adapt to changing market needs as well as our current or future competitors, we may experience reduced access to portfolios of charged-off consumer receivables in sufficient face value amounts at appropriate prices, which could adversely affect our business, financial condition and operating results. The statistical models we use to project remaining cash flows from our receivable portfolios may prove to be inaccurate and, if so, our financial results may be adversely affected. For our U.S. accounts, we use our internally developed statistical models to project the remaining cash flows from our receivable portfolios. These models consider known data about our consumers’ accounts, including, among other things, our collection experience and changes in external consumer factors, in addition to data known when we acquired the accounts. However, we may not be able to achieve the collections forecasted by our models. For our accounts serviced by Cabot, we use Cabot’s internally developed models to project the remaining cash flows from its receivable portfolios. If we are not able to achieve the levels of forecasted collection, our revenues will be reduced or we may be required to record an allowance charge, which may adversely affect our business, financial condition and operating results. We may incur allowance charges based on the authoritative accounting guidance for loans and debt securities acquired with deteriorated credit quality. We account for our portfolio revenue in accordance with the authoritative accounting guidance for loans and debt securities acquired with deteriorated credit quality. The authoritative guidance limits the revenue that may be accrued to the excess of the estimate of expected future cash flows over a portfolio’s initial cost and requires that the excess of the contractual cash flows over the expected cash flows not be recognized as an adjustment of revenue, expense, or on the balance sheet. The authoritative accounting guidance also freezes the IRR originally estimated when the receivable portfolios are purchased and, rather than lower the estimated IRR if the expected future cash flow estimates are decreased, the carrying value of our receivable portfolios would be written down to maintain the then-current IRR. Increases in expected future cash flows would be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increased yield then becomes the new benchmark for allowance testing. Since the authoritative accounting guidance does not permit yields to be lowered, there is an increased probability of us having to incur allowance charges in the future, which would adversely affect our business, financial condition and operating results. If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings. As of December 31, 2015, we carry approximately $924.8 million in goodwill and approximately $16.2 million in amortizable intangible assets. Under authoritative guidance, we review our goodwill for potential impairment at least annually, 16 Table of Contents and review our amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that may indicate that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include adverse changes in estimated future cash flows, growth rates and discount rates. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, which could adversely affect our business, financial condition and operating results. Our business is subject to extensive laws and regulations, which have increased and may continue to increase. As noted in detail in “Item 1 - Part 1 - Business - Government Regulation” of this Annual Report on Form 10-K, extensive laws and regulations directly apply to key portions of our business. Our failure or the failure of third-party agencies and attorneys, or the credit originators or portfolio resellers selling receivables to us, to comply with existing or new laws, rules, or regulations could limit our ability to recover on receivables, affect the willingness of financial institutions to sell portfolios to us, cause us to pay damages to consumers or result in fines or penalties, which could reduce our revenues, or increase our expenses, and consequently adversely affect our business, financial condition and operating results. We sometimes purchase accounts in asset classes that are subject to industry-specific and/or issuer-specific restrictions that limit the collection methods that we can use on those accounts. Further, we have seen a trend in laws, rules and regulations requiring increased availability of historic information about receivables in order to collect. If credit originators or portfolio resellers are unable or unwilling to meet these evolving requirements, we may be unable to collect on certain accounts. Our inability to collect sufficient amounts from these accounts, through available collections methods, could adversely affect our business, financial condition and operating results. In addition, the CFPB has recently engaged in enforcement activity in sectors adjacent to our industry, impacting credit originators, collection firms, and payment processors, among others. Enforcement activity in these spaces by the CFPB or others, especially in the absence of clear rules or regulatory expectations, may be disruptive to third parties as they attempt to define appropriate business practices. As a result, certain commercial relationships we maintain may be disrupted or impacted by changes in third-parties’ business practices or perceptions of elevated risk relating to the debt collection industry, which could reduce our revenues, or increase our expenses, and consequently adversely affect our business, financial condition and operating results. Additional consumer protection or privacy laws, rules and regulations may be enacted, or existing laws, rules or regulations may be reinterpreted or enforced in a different manner, imposing additional restrictions or requirements on the collection of receivables or the facilitation of tax liens. For example, there have been assertions that various provisions of the Truth in Lending Act and its implementing regulations apply to Propel’s business operations in certain states, depending on the method by which the Tax Liens are acquired. While Propel believes these assertions are without merit, a determination that the Truth in Lending Act applies to any of Propel’s operations would subject Propel to new regulatory requirements, which could adversely affect Propel’s business, financial condition and operating results. The implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act has subjected and will continue to subject us to substantial additional federal regulation, and we cannot predict the effect of this regulation on our business, financial condition and operating results. Federal and state consumer protection, privacy, and related laws and regulations extensively regulate the relationship between debt collectors and consumers. In addition, federal and state laws may limit our ability to purchase or recover on our consumer receivables regardless of any act or omission on our part. On July 21, 2010, the Dodd-Frank Act was enacted. Title X of the Dodd-Frank Act (also referred to as the Consumer Financial Protection act or “CFPA”) established the CFPB. Pursuant to the Dodd-Frank Act, the CFPB has rulemaking, supervisory, enforcement, and other authorities relating to consumer financial products and services, including debt collection. We generally are subject to the CFPB’s rulemaking, supervisory, and enforcement authority. Given the uncertainty associated with how provisions of the Dodd-Frank Act will be implemented and enforced by the CFPB and various regulatory agencies, the full extent of the impact that these requirements will have on us is unclear. Changes resulting from the Dodd-Frank Act may affect the profitability of business activities, require changes to certain business practices, or otherwise adversely affect our business. In particular, we expect an increase in the cost of operating due to greater regulatory oversight, supervision, and compliance with consumer debt servicing and collection practices. Subject to the provisions of the Dodd-Frank Act, the CFPB has responsibility to implement and enforce “federal consumer financial law,” and to examine regulated entities for compliance with such law Those laws include, among others, (1) Title X itself, which prohibits unfair, deceptive, or abusive acts or practices in connection with consumer financial products and services, and (2) “enumerated consumer laws” (and their implementing regulations), which include the FDCPA, the FCRA, and others. 17 Table of Contents The CFPB’s authorities include the ability to issue regulations under various federal statutes that affect the collection industry, including the FDCPA, FCRA, and others. This means, for example, that the CFPB has the ability to adopt rules that interpret any of the provisions of the FDCPA, potentially affecting all facets of debt collection, and our activities. On November 12, 2013, the CFPB published in the Federal Register an Advance Notice of Proposed Rulemaking seeking comments, data, and information from the public about debt collection practices to help it determine what rules and other CFPB actions, if any, would be useful under the FDCPA and the Dodd-Frank Act’s general prohibition against unfair, deceptive, and abusive acts or practices. In addition, the CFPB has issued guidance in the form of bulletins on debt collection and credit furnishing activities generally, including one that specifically addresses representations regarding credit reports and credit scores during the debt collection process, and another that focuses on the application of the CFPA’s prohibition of “unfair, deceptive, or abusive” acts or practices on debt collection. The CFPB also accepts debt collection consumer complaints and released template letters for consumers to use when corresponding with debt collectors. The CFPB makes publicly available its data on consumer complaints, and consumer complaints against us could result in reputational damage to us. The Dodd-Frank Act also mandates the submission of multiple studies and reports to Congress by the CFPB, and CFPB staff regularly make speeches on topics related to credit and debt. All of these activities could trigger additional legislative or regulatory action. The CFPB is authorized to supervise and conduct examinations of our business practices. The prospect of supervision has increased the potential consequences of noncompliance with federal consumer financial law. The CFPB can also conduct hearings and adjudication proceedings, conduct investigations, either unilaterally or jointly with other state and federal regulators, to determine if federal consumer financial law has been violated. The CFPB has authority to impose monetary penalties for violations of applicable federal consumer financial laws (including Title X of the Dodd-Frank Act, FDCPA, and FCRA, among other consumer protection statutes), require remediation of practices, and pursue enforcement actions. The CFPB also has authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief), costs, and monetary penalties ranging from $5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. In addition, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented under Title X of the Dodd-Frank Act, the Dodd-Frank Act empowers state Attorneys General and state regulators to bring civil actions to remedy violations of state law. The CFPB has been active in its supervision, examination and enforcement of financial services companies, including bringing enforcement actions imposing fines and mandating large refunds to customers of several financial institutions for practices relating to debt collection practices. On September 9, 2015, we entered into a consent order (the “Consent Order”) with the CFPB in which we settled allegations arising from our practices between 2011 and 2015. The Consent Order includes obligations on us to, among other things: (1) follow certain specified operational requirements, substantially all of which are already part of our current operations; (2) submit to the CFPB for review a comprehensive plan designed to ensure that our debt collection practices comply with all applicable federal consumer financial laws and the terms of the Consent Order; (3) pay redress to certain specified groups of consumers; and (4) pay a civil monetary penalty. We will continue to cooperate and engage with the CFPB and work to ensure compliance with the Consent Order. In addition, we are subject to ancillary state attorney general investigations related to similar debt collection practices. We incurred a one-time, after-tax charge of approximately $43 million in the third quarter of 2015. We believe this charge will cover all related impacts of the Consent Order, including civil monetary penalties, restitution, any such ancillary state regulatory matters, legal expenses and portfolio allowance charges on several pool groups due to the impact on our current estimated remaining collections related to our existing receivable portfolios. We anticipate that after this one-time charge, any future earnings impact will be immaterial. If the CFPB, the FTC, acting under the FTCA or other applicable statute such as the FDCPA, or one or more state Attorneys General or state regulators believe that we have violated any of the applicable laws or regulations, they could exercise their enforcement powers in ways that could have an adverse effect on our business, financial condition and operating results. We expect that we will be required to invest significant management attention and resources to continue to evaluate, develop, and make any changes to our policies and procedures necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act or other applicable laws, which may negatively affect our results of operations, cash flows, and our financial condition. However, we cannot predict the scope and substance of the regulations, guidance, and policies ultimately adopted by the CFPB related to our activities. The CFPB continues to initiate rulemakings, issue regulatory guidance and bulletins, and exercise its supervisory and enforcement authority. It is therefore unclear at this time what effect these regulations will have on financial markets generally, original creditors, or our business and service providers; the additional costs associated with compliance with these regulations; or what changes, if any, to our operations may be necessary to comply with the CFPB’s expectations or the Dodd-Frank Act. Any of these factors could have an adverse effect on our business, financial condition and operating results. 18 Table of Contents Failure to comply with government regulation could result in the suspension or termination of our ability to conduct business, may require the payment of significant fines and penalties, or require other significant expenditures. The collections industry is heavily regulated under various federal, state, and local laws, rules, and regulations. Many states and several cities require that we be licensed as a debt collection company. The CFPB, FTC, state Attorneys General and other regulatory bodies have the authority to investigate a variety of matters, including consumer complaints against debt collection companies, and can bring enforcement actions and seek monetary penalties, consumer restitution, and injunctive relief. If we, or our third-party collection agencies or law firms fail to comply with applicable laws, rules, and regulations, including, but not limited to, identity theft, privacy, data security, the use of automated dialing equipment, laws related to consumer protection, debt collection, and laws applicable to specific types of debt, it could result in the suspension or termination of our ability to conduct collection operations, which would adversely affect us. Further, our ability to collect our receivables may be affected by state laws, which require that certain types of account documentation be presented prior to the institution of any collection activities. In addition, new federal, state or local laws or regulations, or changes in the ways these rules or laws are interpreted or enforced, could limit our activities in the future and/or significantly increase the cost of regulatory compliance. Finally, our operations outside the United States are subject to foreign and U.S. laws and regulations that apply to our international operations, including the Foreign Corrupt Practices Act, the U.K. Bribery Act and other local laws prohibiting corrupt payments to government officials. Violations of these laws and regulations could result in fines and penalties, criminal sanctions, prohibitions on the conduct of our business and reputational damage. Any of the foregoing could have an adverse effect on our business, financial condition and operating results. Investigations or enforcement actions by governmental authorities may result in changes to our business practices, negatively affect our portfolio purchasing volume, make collections more difficult or expose us to the risk of fines, penalties, restitution payments and litigation. Our business practices may be subject to review from time to time by various governmental authorities. These reviews may involve governmental authority consideration of individual consumer complaints, or could involve a broader review of our debt collection policies and practices. These investigations could lead to assertions by governmental authorities that we are not complying with applicable laws or regulations, in which case authorities may request or seek to impose a range of remedies that could involve potential compensatory or punitive damage claims, fines, restitutionary payments, sanctions or injunctive relief. Government authorities could also request, or we may agree to change, practices that we believe are compliant with applicable law and regulations in order to respond to the concerns of governmental authorities. In addition, negative publicity relating to investigations or proceedings brought by governmental authorities could have an adverse effect on our reputation, could impair our relationships with industry participants, and could result in financial institutions reducing or eliminating sales of portfolios to us. Further, responding to governmental inquiries and investigations and defending lawsuits or other proceedings could require significant expenditures and could divert management’s attention from our business operations. Any of the foregoing could have an adverse effect on our business, financial condition and operating results. Changes to the regulatory regime to which Cabot is subject may adversely affect our business, financial condition and operating results. Cabot’s operations are subject to substantial regulations, and the regulatory regime to which it is subject may experience changes. The Financial Conduct Authority (“FCA”) implemented an interim permission regime whereby businesses that held a consumer credit license were required to register with the FCA for interim permission before March 31, 2014 in order to continue consumer credit activities after April 1, 2014. The interim permission regime is expected to continue until April 1, 2017, and during this time businesses will be called upon at different intervals to apply for authorization to be fully regulated by the FCA. Cabot currently has all regulatory licenses, permissions, registrations and authorizations in place with the relevant regulatory bodies in order to provide and continue debt purchase and collection activities, including holding interim permission with the FCA. Cabot applied for full authorization of its business with the FCA in March 2015. The FCA typically has 12 months to consider an application for full authorization. Therefore, Cabot expects the final decision by the FCA regarding its application in March 2016. The FCA may take any one of the following actions with Cabot’s application: (1) the FCA may authorize Cabot to continue debt purchasing, collecting and associated credit activities without further conditions; (2) the FCA may authorize Cabot subject to certain conditions, which will require Cabot to take certain actions to either remediate or comply with the FCA’s conditions; (3) the FCA may require that certain improvements to Cabot’s processes be made as a precursor to authorization, or appoint a skilled person elected by the FCA to investigate, examine and oversee Cabot’s operations, at Cabot’s cost; or (4) the FCA may decline to authorize Cabot. In addition to the application for full authorization of its business with the FCA, Cabot will be required to apply to the FCA to appoint certain individuals who have significant control or influence over the management of the business, known as “Approved Persons,” and who will jointly and severally be liable for the acts and omissions of the company and its business affairs. Approved Persons will be subject to statements of principle and codes of practice established and enforced by the FCA. The FCA may take the following action in connection with the application for 19 Table of Contents Approved Persons: (a) authorize the Approved Person without further conditions; (b) refuse to authorize the Approved Person; (c) request that the applicant undertake further qualifications before it authorizes a person to become an Approved Person; or (d) ban a person from acting as an Approved Person for a period of time or for life. The FCA has adopted detailed rules relating to conducting consumer credit activities, in addition to putting in place high level principles and conditions to which it expects businesses and Approved Persons in the sector to adhere. The FCA has significantly greater powers than the OFT, including, but not limited to, the ability to impose significant fines, ban certain individuals from carrying on trade within the financial services industry, impose requirements on a firm’s permission, and cease certain products from being collected upon. Furthermore, the regulatory regime in the United Kingdom relating to the protection of consumers from unfair terms and practices has also undergone changes. In October 2015, the U.K. Parliament introduced new laws, which reformed most of the previous U.K. consumer laws and was largely driven by the European Commission’s Directive for Consumer Rights. The U.K. Consumer Rights Act 2015 provides for enhanced consumer measures that can be imposed on businesses and gives greater protection to U.K. consumers from unfair business practices and unfair terms in consumer agreements. Finally, the manner in which court claims are conducted in England and Wales in connection with the recovery of debt may be subject to significant changes. In September 2014, the Civil Procedure Rules Committee (“CPRC”), an advisory public body set up by statute and sponsored by the U.K. Ministry of Justice, issued a consultation on proposals to introduce a designated pre-action protocol for court claims for the recovery of debt. Due to the amount of responses from the industry against the introduction of a dedicated protocol, the CPRC created a dedicated sub-committee with industry and consumer group stakeholders. As a consequence, the CPRC issued an updated consultation in September 2015 in order to seek balance between the interests of the industry and consumer groups. If adopted in its current form, the consultation would require all debt collection entities and law firms instructed and acting on behalf of such entities to disclose significant amounts of information relating to the credit agreement and the state of such credit agreement to a consumer prior to being able to progress a claim to court. In some circumstances, issuers of debt may not be able to provide this information and, as neither Cabot nor its competitors currently maintain documentation to satisfy such obligations, the protocol may limit Cabot’s ability to commence court proceedings to recover a debt. Certain other requirements are proposed, which may significantly increase the costs and time to initiate a court claim. Cabot, together with other key industry representatives and trade bodies that are all affected by the proposals, has issued an updated response to the consultation, which is still under consideration. If the CPRC decide to release an updated protocol, it is anticipated that such protocol will be released during 2016 or 2017. It is not yet possible to predict the precise impact that the above-referenced changes will have on Cabot. It is likely that the rules and regulations applicable to Cabot, and the burden of regulatory scrutiny to which Cabot is subject, will continue to increase. The FCA’s imposition of additional requirements on Cabot’s operations or failure to authorize Cabot’s collection activities, the addition, reinterpretation or enforcement of any laws, rules, regulations, or protocols , or increased enforcement of existing consumer protection or privacy laws, rules and regulations, may adversely affect our ability to collect on receivables and may increase our costs associated with regulatory compliance, which could adversely affect our business, financial condition and operating results. Our business, financial condition and operating results may be adversely affected if consumer bankruptcy filings increase or if bankruptcy laws change. Our business model may be uniquely vulnerable to an economic recession, which typically results in an increase in the amount of defaulted consumer receivables, thereby contributing to an increase in the amount of personal bankruptcy filings. Under certain bankruptcy filings, a consumer’s assets are sold to repay credit originators, with priority given to holders of secured debt. Since the defaulted consumer receivables we purchase are generally unsecured, we often are not able to collect on those receivables. In addition, since we purchase receivables that may have been delinquent for a long period of time, this may be an indication that many of the consumers from whom we collect will be unable to pay their debts going forward and are more likely to file for bankruptcy in an economic recession. Furthermore, potential changes to existing bankruptcy laws could contribute to an increase in consumer bankruptcy filings. We cannot be certain that our collection experience would not decline with an increase in consumer bankruptcy filings. If our actual collection experience with respect to a defaulted consumer receivable portfolio is significantly lower than we projected when we purchased the portfolio, our business, financial condition and operating results could be adversely affected. We are dependent upon third parties to service a substantial portion of our consumer receivable portfolios. We use outside collection services to collect a substantial portion of our charged-off receivables. We are dependent upon the efforts of third-party collection agencies and attorneys to help service and collect our charged-off receivables. Our third- party collection agencies and attorneys could fail to perform collection services for us adequately, remit those collections to us or otherwise perform their obligations adequately. In addition, one or more of those third-party collection agencies or attorneys could cease operations abruptly or become insolvent, or our relationships with such collection agencies or attorneys may otherwise change adversely. Further, we might not able to secure replacement third-party collection agencies or attorneys or 20 Table of Contents promptly transfer account information to our new third-party collection agencies, attorneys or in-house in the event our agreements with our third-party collection agencies and attorneys were terminated. Any of the foregoing factors could cause our business, financial condition and operating results to be adversely affected. Increases in costs associated with our collections through collection litigation can raise our costs associated with our collection strategies and the individual lawsuits brought against consumers to collect on judgments in our favor. We hire in-house counsel and contract with a nationwide network of attorneys that specialize in collection matters. In connection with collection litigation, we advance certain out-of-pocket court costs, which we refer to as deferred court costs. These court costs may be difficult or impossible to collect, and we may not be successful in collecting amounts sufficient to cover the amounts deferred in our financial statements. If we are not able to recover these court costs, our business, financial condition and operating results may be adversely affected. Further, we have substantial collection activity through our legal channel and, as a consequence, increases in deferred court costs, increases in costs related to counterclaims, and an increase in other court costs may increase our costs in collecting on these accounts, which may have an adverse effect on our business, financial condition and operating results. Our network of third-party agencies and attorneys may not utilize amounts collected on our behalf or amounts we advance for court costs in the manner for which they were intended. In the normal course of operations, our third-party collection agencies and attorneys collect funds on our behalf. These third parties may fail to remit amounts owed to us in a timely manner or at all. Additionally, we advance court costs to our third-party attorneys, which are intended for their use in filing lawsuits on our behalf. These third-party attorneys may misuse some or all of the funds we advance to them. Our ability to recoup our funds may be diminished if these third parties become insolvent or enter into bankruptcy proceedings. If we are not able to recover these funds, our business, financial condition and operating results may be adversely affected. A significant portion of our collections relies upon our success in individual lawsuits brought against consumers and our ability to collect on judgments in our favor. We generate a significant portion of our revenue by collecting on judgments that are granted by courts in lawsuits filed against consumers. A decrease in the willingness of courts to grant these judgments, a change in the requirements for filing these cases or obtaining these judgments, or a decrease in our ability to collect on these judgments could have an adverse effect on our business, financial condition and operating results. As we increase our use of the legal channel for collections, our short- term margins may decrease as a result of an increase in upfront court costs and costs related to counter claims. We may not be able to collect on certain aged accounts because of applicable statutes of limitations and we may be subject to adverse effects of regulatory changes. Further, courts in certain jurisdictions require that a copy of the account statements or applications be attached to the pleadings in order to obtain a judgment against consumers. If we are unable to produce those account documents, these courts could deny our claims, and our business, financial condition and operating results may be adversely affected. We are subject to ongoing risks of regulatory investigations and litigation, including individual and class action lawsuits, under consumer credit, consumer protection, theft, privacy, collections, and other laws, and we may be subject to awards of substantial damages or be required to make other expenditures or change our business practices as a result. We operate in an extremely litigious climate and currently are, and may in the future be, named as defendants in litigation, including individual and class action lawsuits under consumer credit, consumer protection, theft, privacy, data security, automated dialing equipment, debt collections, and other laws. Many of these cases present novel issues on which there is no clear legal precedent, which increases the difficulty in predicting both the potential outcomes and costs of defending these cases. We are subject to ongoing risks of regulatory investigations, inquiries, litigation, and other actions by the CFPB, FTC, state Attorneys General, or other governmental bodies relating to our activities. These litigation and regulatory actions involve potential compensatory or punitive damage claims, fines, costs, sanctions, civil monetary penalties, consumer restitution, or injunctive relief, as well as other forms of relief, that could require us to pay damages, make other expenditures or result in changes to our business practices. Any changes to our business practices could result in lower collections, increased cost to collect or reductions in estimated remaining collections. Actual losses incurred by us in connection with judgments or settlements of these matters may be more than our associated reserves. Further, defending lawsuits and responding to governmental inquiries or investigations, regardless of their merit, could be costly and divert management’s attention from the operation of our business. All of these factors could have an adverse effect on our business, financial condition and operating results. 21 Table of Contents Negative publicity associated with litigation, governmental investigations, regulatory actions, and other public statements could damage our reputation. From time to time there are negative news stories about our industry or company, especially with respect to alleged conduct in collecting debt from consumers. These stories may follow the announcements of litigation or regulatory actions involving us or others in our industry. Negative publicity about our alleged or actual debt collection practices or about the debt collection industry in general could adversely affect our stock price, our position in the marketplace in which we compete, and our ability to purchase charged-off receivables, any of which could have an adverse effect on our business, financial condition and operating results. We may make acquisitions that prove unsuccessful or our time spent on mergers, acquisitions or joint venture activities may strain or divert our resources. From time to time, we may make acquisitions of, or otherwise invest in, other companies that could complement our business, including the acquisition of entities in diverse geographic regions and entities offering greater access to businesses and markets that we do not currently serve. We may not be able to successfully acquire other businesses and the acquisitions we make may be unprofitable or may take some time to achieve profitability. In addition, we may not successfully operate the businesses that we acquire, or may not successfully integrate these businesses with our own, which may result in our inability to maintain our goals, objectives, standards, controls, policies, culture, or profitability. Also, minority shareholders in certain entities that we have acquired have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value, while others have the right to force a sale of the entity if we choose not to purchase their interests at fair value, which could result in additional constraints on our resources. Through acquisitions, we may enter markets in which we have limited or no experience. Any acquisition may result in a potentially dilutive issuance of equity securities, and the incurrence of additional debt which could reduce our profitability. In addition, our time spent on mergers and acquisitions activities and integrating acquired businesses may place additional constraints on our resources and divert the attention of our management from other business concerns, which may adversely affect our business, financial condition and operating results. We are dependent on our management team for the adoption and implementation of our strategies and the loss of its services could have an adverse effect on our business. Our management team has considerable experience in finance, banking, consumer collections, and other industries. We believe that the expertise of our executives obtained by managing businesses across numerous other industries has been critical to the enhancement of our operations. Our management team has created a culture of new ideas and progressive thinking, coupled with increased use of technology and statistical analysis. The management teams at each of our operating subsidiaries are also important to the success of their respective operations. The loss of the services of one or more key members of management could disrupt our collective operations and seriously impair our ability to continue to acquire or collect on portfolios of charged-off receivables and to manage and expand our business, any of which could have an adverse effect on business, financial condition and operating results. Regulatory, political, and economic conditions in the foreign countries in which we operate or may operate in the future expose us to risk, including loss of business. A significant element of our business strategy is to continue to develop and expand operations in countries outside of the United States. While wage costs in certain countries in which we operate or may operate in the future are significantly lower than in the United States, the United Kingdom and other industrialized countries for comparably skilled workers, wages are increasing at a faster rate than in the United States or the United Kingdom, and we experience or may experience higher employee turnover in operations in those countries than is typical in our U.S. or U.K. locations. The continuation of these trends could reduce the cost savings we sought to achieve by establishing a portion of our operations outside of the United States. We may be adversely affected by changes in inflation, exchange rate fluctuations, interest rates, tax provisions, social stability or other political, economic or diplomatic developments in or affecting these countries in the future. Changes in the business or regulatory climate of these countries could have an adverse effect on our business, financial condition and operating results. We may not be able to manage our growth effectively, including the expansion of our foreign operations. We have expanded significantly in recent years. Continued growth will place additional demands on our resources, and we cannot be sure that we will be able to manage our growth effectively. For example, continued growth could place strains on our management, operations, and financial resources that our infrastructure, facilities, and personnel may not be able to adequately support. In addition, the recent expansion of our foreign operations subjects us to a number of additional risks and uncertainties, including: • compliance with and changes in international laws, including regulatory and compliance requirements that could affect our business; 22 Table of Contents • • • • • • • • • increased exposure to U.S. laws that apply abroad, such as the Foreign Corrupt Practices Act and the U.K .Bribery Act; social, political and economic instability or recessions; fluctuations in foreign economies and currency exchange rates; difficulty in hiring, staffing and managing qualified and proficient local employees and advisors to run international operations; the difficulty of managing and operating an international enterprise, including difficulties in maintaining effective communications with employees due to distance, language, and cultural barriers; difficulties implementing and maintaining effective internal controls and risk management and compliance initiatives; potential disagreements with our joint venture business partners; differing labor regulations and business practices; and foreign tax consequences. To support our growth and improve our international operations, we continue to make investments in infrastructure, facilities, and personnel in our operations; however, these additional investments may not be successful or our investments may not produce profitable results. If we cannot manage our growth effectively, our business, financial condition and operating results may be adversely affected. If our technology and telecommunications systems were to fail, or if we are not able to successfully anticipate, invest in, or adopt technological advances within our industry, it could have an adverse effect on our operations. Our success depends in large part on sophisticated computer and telecommunications systems. The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty, operating malfunction, software virus, or service provider failure, could disrupt our operations. In the normal course of our business, we must record and process significant amounts of data quickly and accurately to properly bid on prospective acquisitions of receivable portfolios and to access, maintain, and expand the databases we use for our collection activities. Any simultaneous failure of our information systems and their backup systems would interrupt our business operations. In addition, our business relies on computer and telecommunications technologies, and our ability to integrate new technologies into our business is essential to our competitive position and our success. We may not be successful in anticipating, investing in, or adopting technological changes on a timely or cost-effective basis. Computer and telecommunications technologies are evolving rapidly and are characterized by short product life cycles. We continue to make significant modifications to our information systems to ensure that they continue to be adequate for our current and foreseeable demands and continued expansion, and our future growth may require additional investment in these systems. These system modifications may exceed our cost or time estimates for completion or may be unsuccessful. If we cannot update our information systems effectively, our business, financial condition and operating results may be adversely affected. In the event of a cyber security breach or similar incident, our business and operations could suffer. We rely on information technology networks and systems to process and store electronic information. We collect and store sensitive data, including personally identifiable information of our consumers, on our information technology networks. Despite the implementation of security measures, our information technology networks and systems may be vulnerable to disruptions and shutdowns due to attacks by hackers or breaches due to malfeasance by contractors, employees and others who have access to our networks and systems. The occurrence of any of these cyber security events could compromise our networks and the information stored on our networks could be accessed. Any such access could disrupt our operations or result in legal claims, liability, reputational damage or regulatory penalties under laws protecting the privacy of personal information, any of which could adversely affect our business, financial condition and operating results. 23 Table of Contents We rely on third parties to provide us with services in connection with certain aspects of our business, and any failure by these third parties to perform their obligations, or our inability to arrange for alternative third party providers for such services, could have an adverse effect on our business, financial condition and operating results. We have entered into agreements with third parties to provide us with services in connection with our business, including payment processing, credit card authorization and processing, payroll processing, record keeping for retirement and benefit plans and certain information technology functions. Any failure by a third party to provide us with contracted services on a timely basis or within service level expectations and performance standards may have an adverse effect on our business, financial condition and operating results. In addition, we may be unable to find, or enter into agreements with, suitable replacement third party providers for such services, which could adversely affect our business, financial condition and operating results. We may not be able to adequately protect the intellectual property rights upon which we rely and, as a result, any lack of protection may diminish our competitive advantage. We rely on proprietary software programs and valuation and collection processes and techniques, and we believe that these assets provide us with a competitive advantage. We consider our proprietary software, processes, and techniques to be trade secrets, but they are not protected by patent or registered copyright. We may not be able to protect our technology and data resources adequately, which may diminish our competitive advantage, which may, in turn, adversely affect our business, financial condition and operating results. Exchange rate fluctuations could adversely affect our business, financial condition and operating results. Because we conduct some business in currencies other than U.S. dollars but report our financial results in U.S. dollars, we face exposure to fluctuations in currency exchange rates upon translation of these business results into U.S. dollars. In the normal course of business, we employ various strategies to manage these risks, including the use of derivative instruments. These strategies may not be effective in protecting us against the effects of fluctuations from movements in foreign exchange rates. Fluctuations in the foreign currency exchange rates could adversely affect our business, financial condition and operating results. Taxes could adversely affect our results of operations, cash flows and financial condition. We are subject to taxes in the United States and, increasingly, in foreign jurisdictions. Significant judgment is required in determining our worldwide provision for taxes. We regularly are under audit by tax authorities, and economic and political pressures to increase tax revenues in various jurisdictions may make resolving tax disputes more difficult. The final determination of tax audits and any related litigation could be different from our historical income tax provisions and accruals. In addition, potential adverse tax consequences could limit our ability to repatriate funds held in jurisdictions outside of the United States. Moreover, there may be unfavorable changes in the tax laws (or in the interpretation thereof) in the future. Accordingly, taxes could have an adverse effect on our results of operations, cash flows and financial condition. Risks Related to Our Indebtedness and Common Stock Our significant indebtedness could adversely affect our financial health and could harm our ability to react to changes to our business. As described in greater detail in Note 9, “Debt” to our consolidated financial statements, as of December 31, 2015, our total long-term indebtedness outstanding was approximately $3.2 billion, which includes $1.7 billion of debt at our Cabot subsidiary. Our substantial indebtedness could have important consequences to investors. For example, it could: • • • • • • increase our vulnerability to general economic downturns and industry conditions; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; place us at a competitive disadvantage compared to competitors that have less debt; increase our exposure to market and regulatory changes that could diminish the amount and value of our inventory that we borrow against under our secured credit facilities; and limit, along with the financial and other restrictive covenants contained in the documents governing our indebtedness, our ability to borrow additional funds, make investments and incur liens, among other things. 24 Table of Contents Any of these factors could adversely affect our business, financial condition and operating results. If we do not have sufficient earnings to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money, or sell securities, none of which we can guarantee we will be able to do. Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial indebtedness. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness or to make cash payments in connection with any conversion of our convertible notes depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are unable to generate adequate cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring indebtedness or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at that time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations which could, in turn, adversely affect our business, financial condition and operating results. Despite our current indebtedness levels, we may still incur substantially more indebtedness or take other actions which would intensify the risks discussed above. Despite our current consolidated indebtedness levels, we and our subsidiaries may be able to incur substantial additional indebtedness in the future, some of which may be secured indebtedness under our Second Amended and Restated Credit Agreement (as amended, the “Restated Credit Agreement”), subject to the restrictions contained in our debt instruments. We are not restricted under the terms of the indentures governing our convertible notes from incurring additional indebtedness, securing existing or future indebtedness, recapitalizing our indebtedness or taking a number of other actions that could have the effect of diminishing our ability to make payments on our indebtedness. Although the Restated Credit Agreement and some of our other existing debt currently limit the ability of us and certain of our subsidiaries to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, additional indebtedness incurred in compliance with these restrictions, including additional secured indebtedness, could be substantial. Also, these restrictions will not prevent us from incurring obligations that do not constitute indebtedness. To the extent new indebtedness or other new obligations are added to our current levels, the risks described above could intensify. Moreover, if the facilities under the Restated Credit Agreement are repaid or mature, we may not be subject to similar restrictions under the terms of any subsequent indebtedness. We may not be able to continue to satisfy the covenants in our debt agreements. Our debt agreements impose a number of covenants, including restrictive covenants on how we operate our business. Failure to satisfy any one of these covenants could result in negative consequences including the following, each of which could have an adverse effect on our business, financial condition and operating results: • • • • acceleration of outstanding indebtedness; exercise by our lenders of rights with respect to the collateral pledged under certain of our outstanding indebtedness; our inability to continue to purchase receivables needed to operate our business; or our inability to secure alternative financing on favorable terms, if at all. Increases in interest rates could adversely affect our business, financial condition and operating results. Portions of our outstanding debt bear interest at a variable rate. Increases in interest rates could increase our interest expense which would, in turn, lower our earnings. We may periodically evaluate whether to enter into derivative financial instruments, such as interest rate swap agreements, to reduce our exposure to fluctuations in interest rates on variable interest rate debt and their impact on earnings and cash flows. These strategies may not be effective in protecting us against the effects of fluctuations from movements in interest rates. Increases in interest rates could adversely affect our business, financial condition and operating results. Propel may be unable to securitize additional tax lien assets. On May 6, 2014, Propel, through its subsidiaries, completed the securitization of a pool of approximately $141.5 million in payment agreements and contracts relating to unpaid real property taxes, assessments, and other charges secured by liens on real property located in the State of Texas (the “Texas Tax Liens”). In connection with the securitization, investors purchased approximately $134.0 million in aggregate principal amount of 1.44% notes collateralized by the Texas Tax Liens. 25 Table of Contents The transaction provided capital to Propel at a lower cost than other available financing alternatives. Market conditions or other factors may dictate an inability for Propel to securitize additional tax lien assets in the future, in which case Propel may need to resort to other, more costly, sources of capital to fund its operations which could, in turn, adversely affect Propel’s business, financial condition and operating results. Our common stock price may be subject to significant fluctuations and volatility. The market price of our common stock has been subject to significant fluctuations. Since the beginning of fiscal year 2015, our stock price has ranged from a low of $28.17 on December 14, 2015 to a high of $44.66 on January 2, 2015. More recently, on January 19, 2016 we reached a low of $16.09. These fluctuations could continue. Among the factors that could affect our stock price are: • • • • • • • • • • • our operating and financial performance and prospects; our ability to repay our debt; our access to financial and capital markets to refinance our debt; investor perceptions of us and the industry and markets in which we operate; future sales of equity or equity-related securities; changes in earnings estimates or buy/sell recommendations by analysts; changes in the supply of, demand for or price of portfolios; our acquisition activity, including our expansion into new markets; regulatory changes affecting our industry generally or our business and operations; general financial, domestic, international, economic and other market conditions; and the number of short positions on our stock at any particular time. The stock market in recent years has experienced significant price and volume fluctuations that have often been unrelated to the operating performance of companies. The market price of our common stock could fluctuate significantly for many reasons, including in response to the risks described in this Annual Report on Form 10-K, elsewhere in our filings with the SEC from time to time or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or negative announcements by our customers, competitors or suppliers regarding their own performance, as well as industry conditions and general financial, economic and political instability. The price of our common stock could also be affected by possible sales of our common stock by investors who view our convertible notes as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that we expect to develop involving our common stock. If securities or industry analysts have a negative outlook regarding our stock or our industry, or our operating results do not meet their expectations, our stock price could decline. The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us. If one or more of the analysts who cover our company downgrade our stock or if our operating results do not meet their expectations, our stock price could decline. Future sales of our common stock or the issuance of other equity securities may adversely affect the market price of our common stock. In the future, we may sell additional shares of our common stock or other equity or equity-related securities to raise capital or issue equity securities to finance acquisitions. In addition, a substantial number of shares of our common stock are reserved for issuance upon the exercise of stock options or vesting of restricted stock awards, upon conversion of our convertible notes and the warrant transactions entered into in connection with our convertible senior notes due 2017. We are not restricted from issuing additional common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. The liquidity and trading volume of our common stock is limited. For the three months ended December 31, 2015, the average daily trading volume of our common stock was approximately 318,000 shares. The issuance or sale of substantial amounts of our common stock or other equity or equity-related securities (or the perception that such issuances or sales may occur) could adversely affect the market price of our common stock as well as our ability to raise capital through the sale of additional equity or equity-related securities. We cannot predict the effect that future issuances or sales of our common stock or 26 Table of Contents other equity or equity-related securities would have on the market price of our common stock. We may not have the ability to raise the funds necessary to repurchase our convertible notes upon a fundamental change or to settle conversions in cash, and our future indebtedness may contain limitations on our ability to pay cash upon conversion of our convertible notes. Holders of our convertible notes will have the right to require us to repurchase their convertible notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any. In addition, upon a conversion of convertible notes, unless we elect to deliver solely shares of our common stock to settle the conversion (other than paying cash in lieu of delivering any fractional shares of our common stock), we will be required to make cash payments for each $1,000 in principal amount of convertible notes converted of at least the lesser of $1,000 and the sum of certain daily conversion values. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of convertible notes surrendered therefor or to settle conversions in cash. In addition, our Restated Credit Agreement contains certain restrictive covenants that limit our ability to engage in specified types of transactions, which may affect our ability to repurchase our convertible notes. Further, our ability to repurchase our convertible notes or to pay cash upon conversion may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase convertible notes or to pay cash upon conversion of the convertible notes at a time when the repurchase or cash payment upon conversion is required by any indenture pursuant to which the convertible notes were offered would constitute a default under the relevant indenture. Such default could constitute a default under another indenture, our Restated Credit Agreement or other agreements governing our future indebtedness. If the repayment of any indebtedness were to be accelerated, we may not have sufficient funds to repay such indebtedness and repurchase the convertible notes. The conditional conversion feature of our convertible notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion feature of any of our convertible notes is triggered, holders of those convertible notes will be entitled to convert the convertible notes at any time during specified periods at their option. Even if holders do not elect to convert their convertible notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the relevant series of convertible notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. The accounting method for convertible debt securities that may be settled in cash, such as our convertible notes, could have a material effect on our reported financial results. Under U.S. generally accepted accounting principles, or GAAP, an entity must separately account for the debt component and the embedded conversion option of convertible debt instruments that may be settled entirely or partially in cash upon conversion, such as our convertible notes, in a manner that reflects the issuer’s economic interest cost. The effect of the accounting treatment for such instruments is that the value of such embedded conversion option would be treated as original issue discount for purposes of accounting for the debt component of the convertible notes, and that original issue discount is amortized into interest expense over the term of the convertible notes using an effective yield method. As a result, we will be required to record a greater amount of non-cash interest expense as a consequence of the amortization of the original issue discount to face amount of the convertible notes over the respective terms of the convertible notes and as a consequence of the amortization of the debt issuance costs. Accordingly, we will report lower net income in our financial results because of the recognition of both the current period’s amortization of the debt discount and the coupon interest of the convertible notes, which could adversely affect our reported or future financial results and the trading price of our common stock. Under certain circumstances, convertible debt instruments (such as our convertible notes) that may be settled entirely or partially in cash are evaluated for their impact on earnings per share utilizing the treasury stock method, the effect of which is that any shares issuable upon conversion of the convertible notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the convertible notes exceeds their respective principal amount. Under the treasury stock method, for diluted earnings per share purposes, the convertible debt instrument is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be certain that the accounting standards in the future will continue to permit the use of the treasury stock method, as is currently the case with our convertible notes. If we are unable to use the treasury stock method in accounting for any shares issuable upon conversion of our convertible notes, then our diluted earnings per share could be further adversely affected. In addition, if the conditional conversion feature of our convertible notes is triggered, even if holders of such notes do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of such notes as a current rather than long-term liability, which could result in a reduction of our net working capital. 27 Table of Contents Provisions in our charter documents and Delaware law may delay or prevent acquisition of us, which could decrease the value of shares of our common stock. Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions include advance notice provisions, limitations on actions by our stockholders by written consent and special approval requirements for transactions involving interested stockholders. We are authorized to issue up to five million shares of preferred stock, the relative rights and preferences of which may be fixed by our Board of Directors, subject to the provisions of our articles of incorporation, without stockholder approval. The issuance of preferred stock could be used to dilute the stock ownership of a potential hostile acquirer. The provisions that discourage potential acquisitions of us and adversely affect the voting power of the holders of common stock may adversely affect the price of our common stock and the value of the Convertible Notes. We do not intend to pay dividends on our common stock for the foreseeable future. We have never declared or paid cash dividends on our common stock. In addition, we must comply with the covenants in our credit facilities if we want to pay cash dividends. We currently intend to retain our future earnings, if any, to finance the further development and expansion of our business and do not intend to pay cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend upon our financial condition, operating results, capital requirements, restrictions contained in current or future financing instruments and such other factors as our Board of Directors deems relevant. As a result, receiving a return on an investment in Encore’s common stock may only occur if the trading price of our common stock increases. Item 1B—Unresolved Staff Comments None. We lease the following properties with more than 30,000 square feet: Item 2—Properties Primary use Approximate square footage Location San Diego, CA Phoenix, AZ St. Cloud, MN Gurgaon, India Warren, MI Roanoke, VA Corporate headquarters, internal legal and consumer support services Call center and administrative offices Call center Call center and administrative offices Call center and internal legal Call center and administrative offices San Jose, Costa Rica Call center and administrative offices United Kingdom Cabot corporate office, call center, internal legal and consumer support services Spain Australia Call center Baycorp corporate office, call center, and administrative offices 118,000 31,000 155,000 138,000 100,000 40,000 32,000 364,000 40,000 31,000 The properties listed in the table above are our principal properties and are primarily used in our portfolio purchasing and recovery business. We also lease other immaterial office space in the United States, Ireland, Colombia, Peru, New Zealand, and the Philippines. We believe that our current leased facilities are generally well maintained and in good operating condition. We believe that these facilities are suitable and sufficient for our operational needs. Our policy is to improve, replace, and supplement the facilities as considered appropriate to meet the needs of our operations. Information with respect to this item may be found in Note 13, “Commitments and Contingencies” to the consolidated financial statements in Item 8, which is incorporated herein by reference. Item 3—Legal Proceedings Not applicable. Item 4—Mine Safety Disclosures 28 Table of Contents PART II Item 5—Market for the Registrant’s Common Equity Securities, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is traded on the NASDAQ Global Select Market under the symbol “ECPG.” The high and low sales prices of our common stock, as reported by NASDAQ Global Select Market for each quarter during our two most recent fiscal years, are reported below: Fiscal Year 2015 First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year 2014 First Quarter Second Quarter Third Quarter Fourth Quarter $ $ Market Price High Low 44.66 $ 44.61 44.43 41.44 51.31 $ 46.78 46.40 46.18 36.40 37.89 35.31 28.17 45.05 40.62 42.04 39.62 The closing price of our common stock on February 9, 2016, was $19.91 per share and there were 10 stockholders of record. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our stock represented by these stockholders of record. Performance Graph The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each, as amended, except to the extent that we specifically incorporate it by reference into such filing. The following graph compares the total cumulative stockholder return on our common stock for the period from December 31, 2010 through December 31, 2015, with the cumulative total return of (a) the NASDAQ Composite Index and (b) Asta Funding, Inc. and PRA Group, Inc., which we believe are comparable companies. The comparison assumes that $100 was invested on December 31, 2010, in our common stock and in each of the comparison indices (including reinvestment of dividends). The stock price performance reflected in the following graph is not necessarily indicative of future stock price performance. 29 Table of Contents Encore Capital Group, Inc. NASDAQ Composite Index Peer Group Dividend Policy 12/10 12/11 12/12 12/13 12/14 12/15 $ $ $ 100.00 100.00 100.00 $ $ $ 90.66 100.53 90.61 $ $ $ 130.58 116.92 140.30 $ $ $ 214.33 166.19 202.76 $ $ $ 189.34 188.78 221.83 $ $ $ 124.01 199.95 135.43 As a public company, we have never declared or paid dividends on our common stock. However, the declaration, payment, and amount of future dividends, if any, is subject to the discretion of our board of directors, which may review our dividend policy from time to time in light of the then existing relevant facts and circumstances. Under the terms of our revolving credit facility, we are permitted to declare and pay dividends in an amount not to exceed, during any fiscal year, 20% of our audited consolidated net income for the then most recently completed fiscal year, so long as no default or unmatured default under the facility has occurred and is continuing or would arise as a result of the dividend payment. We may also be subject to additional dividend restrictions under future debt agreements or the terms of securities we may issue in the future. 30 Table of Contents Share Repurchases On April 24, 2014, our Board of Directors approved a $50.0 million share repurchase program. During the year ended December 31, 2015, we repurchased 839,295 shares of our common stock for approximately $33.2 million, which represented the remaining amount allowed under the share repurchase program. On August 12, 2015, our Board of Directors approved a new $50.0 million share repurchase program. Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as determined by the management and our Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements. The program does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion. We did not make any repurchases under the new share repurchase program during the year ended December 31, 2015. 31 Table of Contents Item 6—Selected Financial Data This table presents selected historical financial data of Encore Capital Group, Inc. and its consolidated subsidiaries. This information should be carefully considered in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K, including the acquisitions described therein that materially affected our results. The selected financial data in this section are not intended to replace the consolidated financial statements. The selected financial data (except for “Selected Operating Data”) in the table below, as of December 31, 2013, 2012 and 2011 and for the years ended December 31, 2012 and 2011, were derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. The selected financial data as of December 31, 2015, and 2014 and for the years ended December 31, 2015, 2014, and 2013, were derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The Selected Operating Data were derived from our books and records (in thousands, except per share data): Revenues Revenue from receivable portfolios, net(1) Other revenues Net interest income Total revenues Operating expenses Salaries and employee benefits Cost of legal collections Other operating expenses Collection agency commissions General and administrative expenses Depreciation and amortization Goodwill impairment Total operating expenses Income from operations Other (expense) income Interest expense Other income (expense) Total other expense Income from continuing operations before income taxes Provision for income taxes Income from continuing operations (Loss) income from discontinued operations, net of tax Net income Net (income) loss attributable to noncontrolling interest Net income attributable to Encore Capital Group, Inc. stockholders Amounts attributable to Encore Capital Group, Inc.: Income from continuing operations (Loss) income from discontinued operations, net of tax Net income As of and For The Year Ended December 31, 2015 2014 2013 2012 2011 $ 1,072,436 $ 992,832 $ 744,870 $ 545,412 $ 448,714 60,696 28,440 51,988 27,969 1,161,572 1,072,789 270,334 229,847 98,182 37,858 196,827 33,945 49,277 916,270 245,302 (186,556) 2,235 (184,321) 60,981 (13,597) 47,384 — 47,384 246,247 205,661 93,859 33,343 146,286 27,949 — 753,345 319,444 (166,942) 113 (166,829) 152,615 (52,725) 99,890 (1,612) 98,278 12,588 15,906 773,364 165,040 186,959 66,649 33,097 109,713 13,547 — 575,005 198,359 (73,269) (4,222) (77,491) 120,868 (45,388) 75,480 (1,740) 73,740 905 10,460 556,777 101,084 168,703 48,939 15,332 61,798 5,840 — 401,696 155,081 (25,564) 808 (24,756) 130,325 (51,754) 78,571 (9,094) 69,477 (2,249) 5,448 1,559 — 32 — 448,746 77,805 157,050 35,708 14,162 39,760 4,081 — 328,566 120,180 (21,116) (395) (21,511) 98,669 (38,076) 60,593 365 60,958 — $ 45,135 $ 103,726 $ 75,299 $ 69,477 $ 60,958 45,135 105,338 77,039 78,571 — $ 45,135 $ (1,612) 103,726 $ (1,740) 75,299 $ (9,094) 69,477 $ 60,593 365 60,958 32 Table of Contents Earnings (loss) per share attributable to Encore Capital Group, Inc.: Basic earnings (loss) per share from: Continuing operations Discontinued operations Net basic earnings per share Diluted earnings (loss) per share from: Continuing operations Discontinued operations Net diluted earnings per share Weighted-average shares outstanding: $ $ $ $ $ $ Basic Diluted Selected operating data: Purchases of receivable portfolios, at cost Gross collections for the period Consolidated statements of financial condition data: As of and For The Year Ended December 31, 2015 2014 2013 2012 2011 1.75 $ — $ 1.75 1.69 $ $ — $ 1.69 $ 4.07 $ (0.06) $ $ 4.01 $ 3.83 (0.06) $ $ 3.77 $ 3.12 (0.07) $ $ 3.05 $ 2.94 (0.07) $ $ 2.87 3.16 $ (0.36) $ $ 2.80 $ 3.04 (0.35) $ $ 2.69 2.47 0.01 2.48 2.36 0.01 2.37 25,722 26,647 25,853 27,495 24,659 26,204 24,855 25,836 24,572 25,690 $ 1,023,722 $ 1,251,360 $ 1,204,779 $ 562,335 $ 1,700,725 1,607,497 1,279,506 948,055 Cash and cash equivalents $ 153,593 $ 124,163 $ 126,213 $ 17,510 $ Investment in receivable portfolios, net Total assets Total debt Total liabilities Total Encore equity ________________________ 2,440,669 4,219,852 3,216,572 3,571,364 596,453 2,143,560 3,750,135 2,773,554 3,085,196 623,000 1,590,249 2,685,274 1,850,431 2,082,803 571,897 873,119 1,171,340 706,036 765,524 405,816 (1) Includes net allowance reversal of $6.8 million, $17.4 million, $12.2 million and $4.2 million for the years ended December 31, 2015, 2014, 2013 and 2012, respectively, and net allowance charges of $10.8 million for the year ended December 31, 2011. 33 386,850 761,158 8,047 716,454 812,483 388,950 440,948 371,535 Table of Contents Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations This Annual Report on Form 10-K contains “forward-looking statements” relating to Encore Capital Group, Inc. (“Encore”) and its subsidiaries (which we may collectively refer to as the “Company,” “we,” “our” or “us”) within the meaning of the securities laws. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “will,” “may,” and similar expressions often characterize forward-looking statements. These statements may include, but are not limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services, and financing needs or plans, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward- looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors, including but not limited to, those set forth in this Annual Report on Form 10-K under “Part I, Item 1A. Risk Factors,” could cause our actual results, performance, achievements, or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition, or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties. Our Business and Operating Segments We are an international specialty finance company providing debt recovery solutions for consumers and property owners across a broad range of financial assets. We purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy proceedings. Through certain subsidiaries, we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico. Our subsidiary, Janus Holdings Luxembourg S.a.r.l. (“Janus Holdings”), through its indirectly held U.K.-based subsidiary, Cabot Credit Management Limited and its subsidiaries (collectively, “Cabot”), is a market leader in credit management services in the United Kingdom, historically specializing in portfolios consisting of higher balance, semi-performing accounts (i.e., debt portfolios in which over 50% of the accounts have received a payment in three of the last four months immediately prior to the portfolio purchase). Cabot’s acquisition of Marlin Financial Group Limited (“Marlin”), in February 2014, provides Cabot with substantial litigation-enhanced collection capabilities for non-performing accounts. Cabot continued to expand in the United Kingdom with its acquisition of Hillesden Securities Ltd and its subsidiaries (“dlc”) in June 2015. Our majority-owned subsidiary, Grove Holdings (“Grove”), is a U.K.-based leading specialty investment firm focused on consumer non-performing loans, including insolvencies (in particular, individual voluntary arrangements, or “IVAs”) in the United Kingdom and bank and non-bank receivables in Spain. Our majority-owned subsidiary, Refinancia S.A. (“Refinancia”), through its subsidiaries, is a market leader in debt collection and management in Colombia and Peru. In addition, through our subsidiary, Propel Acquisition, LLC and its subsidiaries and affiliates (collectively, “Propel”), we assist property owners who are delinquent on their property taxes by structuring affordable monthly payment plans and purchase delinquent tax liens directly from taxing authorities. In October 2015, we completed the acquisition of a controlling stake in Baycorp Holdings Pty Limited (“Baycorp”), one of Australasia's leading debt resolution specialists. The acquisition of Baycorp expands our operations into Australia and New Zealand and our global reach into 13 countries. We conduct business through two reportable segments: portfolio purchasing and recovery, and tax lien business. Our long-term growth strategy involves continuing to invest in our core portfolio purchasing and recovery and tax lien businesses, expanding into new geographies, and leveraging our core competencies to explore expansion into adjacent asset classes. Government Regulation As discussed in more detail under “Part I - Item1 - Business” in this Annual Report on Form 10-K, our U.S. debt purchasing business and collection activities are subject to federal, state and municipal statutes, rules, regulations and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and prohibitions on unfair, deceptive or abusive debt collection practices. These rules, regulations, guidelines and procedures are 34 Table of Contents modified from time to time by the relevant authorities charged with their administration which could affect the way we conduct our business. For example, the Consumer Finance Protection Bureau (“CFPB”) may adopt new regulations that may affect our industry and our business. Additionally, the CFPB has supervisory, examination and enforcement authority over our business and is currently examining the collection practices of participants in the consumer debt buying industry. The CFPB has also recently engaged in enforcement activity in sectors adjacent to our industry, impacting credit originators, collection firms, and payment processors, among others. The CFPB’s enforcement activity in these spaces, especially in the absence of clear rules or regulatory expectations, can be disruptive as industry participants attempt to define appropriate business practices. Similarly, in response to petitions filed by third parties, in July 2015, the Federal Communications Commission (“FCC”) released a declaratory ruling interpreting the Telephone Consumer Protection Act (“TCPA”), which could impact the way consumers may be contacted on their cellular phones and could impact our operations and financial results. As a result of the current regulatory environment, certain current practices or commercial relationships we maintain may be disrupted or impacted by changes in our or third-parties’ business practices or perceptions of elevated risk. On September 9, 2015, we entered into a consent order (the “Consent Order”) with the CFPB in which we settled allegations arising from our practices between 2011 and 2015. The Consent Order includes obligations on us to, among other things: (1) follow certain specified operational requirements, substantially all of which are already part of our current operations; (2) submit to the CFPB for review a comprehensive plan designed to ensure that our debt collection practices comply with all applicable federal consumer financial laws and the terms of the Consent Order; (3) pay redress to certain specified groups of consumers; and (4) pay a civil monetary penalty. We will continue to cooperate and engage with the CFPB and work to ensure compliance with the Consent Order. In addition, we are subject to ancillary state attorney general investigations related to similar debt collection practices. We incurred a one-time, after-tax charge of approximately $43 million in the third quarter of 2015. We believe this charge will cover all related impacts of the Consent Order, including civil monetary penalties, restitution, any such ancillary state regulatory matters, legal expenses and portfolio allowance charges on several pool groups due to the impact on our current estimated remaining collections related to our existing receivable portfolios. We anticipate that after this one-time charge, any future earnings impact will be immaterial. Portfolio Purchasing and Recovery United States Our portfolio purchasing and recovery segment purchases receivables based on robust, account-level valuation methods and employs proprietary statistical and behavioral models across our U.S. operations. These methods and models allow us to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with our methods or goals and align the accounts we purchase with our business channels to maximize future collections. As a result, we have been able to realize significant returns from the receivables we acquire. We maintain strong relationships with many of the largest financial service providers in the United States. While seasonality does not have a material impact on our portfolio purchasing and recovery segment, collections are generally strongest in our first calendar quarter, slower in the second and third calendar quarters, and slowest in the fourth calendar quarter. Relatively higher collections in the first quarter could result in a lower cost-to-collect ratio compared to the other quarters, as our fixed costs are relatively constant and applied against a larger collection base. The seasonal impact on our business may also be influenced by our purchasing levels, the types of portfolios we purchase, and our operating strategies. Collection seasonality with respect to our portfolio purchasing and recovery segment can also affect revenue as a percentage of collections, also referred to as our revenue recognition rate. Generally, revenue for each pool group declines steadily over time, whereas collections can fluctuate from quarter to quarter based on seasonality, as described above. In quarters with lower collections (e.g., the fourth calendar quarter), the revenue recognition rate can be higher than in quarters with higher collections (e.g., the first calendar quarter). In addition, seasonality could have an impact on the relative level of quarterly earnings. In quarters with stronger collections, total costs are higher as a result of the additional efforts required to generate those collections. Since revenue for each pool group declines steadily over time, in quarters with higher collections and higher costs (e.g., the first calendar quarter), all else being equal, earnings could be lower than in quarters with lower collections and lower costs (e.g., the fourth calendar quarter). Additionally, in quarters where a greater percentage of collections come from our legal and agency outsourcing channels, cost to collect will be higher than if there were more collections from our internal collection sites. 35 Table of Contents On August 6, 2014, we acquired all of the outstanding equity interests of Atlantic Credit & Finance, Inc. (“Atlantic”) pursuant to a stock purchase agreement (the “Atlantic Acquisition”). Atlantic acquires and liquidates fresh consumer finance receivables originated and charged off by U.S. financial institutions. Europe Cabot: Through Cabot, we purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model allows Cabot to value portfolios with a high degree of accuracy and quantify portfolio performance in order to maximize future collections. As a result, Cabot has been able to realize significant returns from the assets it has acquired. Cabot maintains strong relationships with many of the largest financial services providers in the United Kingdom. While seasonality does not have a material impact on Cabot’s operations, collections are generally strongest in the second and third calendar quarters and slower in the first and fourth quarters, largely driven by the impact of the December holiday season and the New Year holiday, and the related impact on its customers’ ability to repay their balances. This drives a higher level of plan defaults over this period, which are typically repaired across the first quarter of the following year. The August vacation season in the United Kingdom also has an unfavorable effect on the level of collections, but this is traditionally compensated for by higher collections in July and September. On February 7, 2014, Cabot acquired Marlin (the “Marlin Acquisition”), a leading acquirer of non-performing consumer debt in the United Kingdom. Marlin is differentiated by its proven competitive advantage in the use of litigation-enhanced collections for non-paying financial services receivables. Marlin’s litigation capabilities have benefited and will continue to benefit Cabot’s existing portfolio of non-performing accounts. Similarly, we have experienced synergies by applying Cabot’s collection models to Marlin’s portfolio since the acquisition. Cabot continued to expand in the United Kingdom with its acquisition of dlc in June 2015 (the “dlc Acquisition”). Grove: On April 1, 2014, we completed the acquisition of a controlling equity ownership interest in Grove. Grove, through its subsidiaries and affiliates, is a leading specialty investment firm focused on consumer non-performing loans, including insolvencies (in particular, IVAs) in the United Kingdom and bank and non-bank receivables in Spain. Grove purchases portfolio receivables using a proprietary pricing model. This model allows Grove to value portfolios with a high degree of accuracy and quantify portfolio performance in order to maximize future collections. Latin America In December 2013, we acquired a majority ownership interest in Refinancia, a market leader in debt collection and management in Colombia and Peru. In addition to purchasing defaulted receivables, Refinancia offers portfolio management services to banks for non-performing loans. Refinancia also specializes in non-traditional niches in the geographic areas in which it operates, including providing financial solutions to individuals who have previously defaulted on their credit obligations. In addition to operations in Colombia and Peru, we evaluate and purchase non-performing loans in other countries in Latin America, including Mexico and Brazil. Beginning in December 2014 we began investing in non-performing secured residential mortgages in Latin America. Asia Pacific Through our acquisition of a majority ownership interest in Baycorp in October 2015 (the “Baycorp Acquisition”), we are one of Australia’s leading debt resolution specialists. Baycorp specializes in the management of non-performing loans in Australia and New Zealand. In addition to purchasing defaulted receivables, Baycorp offers portfolio management services to banks for non-performing loans. Tax Lien Business Our tax lien business segment focuses on the property tax financing industry. Propel acquires and services residential and commercial tax liens on real property. These liens take priority over most other liens, including mortgage liens. To the extent permitted by local law, Propel works directly with property owners to structure affordable payment plans designed to allow them to keep their properties while paying their property tax obligations over time. In such cases, Propel pays their tax lien obligations to the taxing authorities, and the property owners pay Propel at lower interest rates or over a longer period of time than the taxing authorities would ordinarily permit. Propel also purchases tax liens directly from taxing authorities in certain states. In many cases, these tax liens continue to be serviced by the taxing authorities. When a taxing authority receives payment for the outstanding taxes, it pays Propel the outstanding balance of the related lien plus interest, which is either established by statute, negotiated at the time of the purchase, or determined by the bid Propel submitted to acquire the tax lien. 36 Table of Contents On February 19, 2016, we entered into an agreement to sell 100% of our membership interests in Propel at a price that is lower than Propel’s book value at December 31, 2015. This development, subsequent to year end, indicated that Propel’s fair value was less than its carrying value at December 31, 2015 and, as a result, goodwill at this reporting unit was impaired. Based on the estimated sales price, we recorded a goodwill impairment charge of $49.3 million for the year ended December 31, 2015. The goodwill impairment charge had no cash flow impact. Refer to Note 17, “Subsequent Event” and Note 15, “Goodwill and Identifiable Intangible Assets” to our consolidated financial statements for further information on the sale of Propel and the goodwill impairment. Revenue from our tax lien business segment comprised 3%, 3%, and 2% of total consolidated revenues for each of the years ended December 31, 2015, 2014, and 2013, respectively. Excluding the goodwill impairment charge of $49.3 million discussed above, operating income from our tax lien business segment comprised 4%, 3%, and 2% of our total consolidated operating income for each of the years ended December 31, 2015, 2014, and 2013, respectively. Purchases and Collections Portfolio Pricing, Supply and Demand United States Prices for portfolios offered for sale directly from credit issuers continued to remain elevated during 2015, especially for fresh portfolios. Fresh portfolios are portfolios that are generally transacted within six months of the consumer’s account being charged-off by the financial institution. We believe this elevated pricing is due to a reduction in the supply of charged-off accounts and continued demand in the marketplace. We believe that the reduction in supply is partially due to shifts in underwriting standards by financial institutions, which have resulted in lower volumes of charged-off accounts. We believe that this reduction in supply is also the result of certain financial institutions temporarily halting their sales of charged-off accounts. Although we have seen moderation in certain instances, we expect pricing will remain at elevated levels for some period of time. We believe that smaller competitors continue to face difficulties in the portfolio purchasing market because of the high cost to operate due to regulatory pressure and because issuers are being more selective with buyers in the marketplace, resulting in consolidation within the portfolio purchasing and recovery industry. We believe this favors larger participants in this market, such as Encore, because the larger market participants are better able to adapt to these pressures. Furthermore, as smaller competitors limit their participation in or exit the market, it may provide additional opportunities for Encore to purchase portfolios from competitors or to acquire competitors directly. Europe The U.K. market for charged-off portfolios has grown significantly in recent years driven by a consolidation of sellers and a material backlog of portfolio coming to market from credit issuers who are selling an increasing proportion of their non- performing loans. Prices for portfolios offered for sale directly from credit issuers remain at levels higher than historical averages. We expect that as a result of an increase in available funding to industry participants, and lower return requirements for certain debt purchasers, pricing will remain elevated. The U.K. insolvency market has seen historically low sales volumes from banks in 2015. We expect there will be increased purchasing opportunities once large retail banks start to sell their insolvency portfolios. The Spanish consumer and small and medium enterprise non-performing loan market remains significant, with most of the major banks selling portfolios in 2015. Competition remains strong in large banking trades, but there remains an opportunity for incumbent buyers. 2015 has seen multiple complex sales from consolidated regional banks trading at more favorable returns, as portfolio sale sizes and asset nuances reduce competition. Although pricing has been elevated, we believe that as our U.K. businesses increase in scale and expand to other European markets, and with anticipated improvements in liquidation and improved efficiencies in collections, our margins will remain competitive. Additionally, the acquisition of Marlin resulted in a new liquidation channel for the Company through litigation, which is enabling Cabot to collect from consumers who have the ability to pay, but have so far been unwilling to do so. 37 Table of Contents Purchases by Type and Geographic Location The following table summarizes the types and geographic locations of consumer receivable portfolios we purchased during the periods presented (in thousands): United States: Credit card Consumer bankruptcy receivables Telecom Subtotal Europe: Credit card IVA Telecom Subtotal Other geographies: Credit card Mortgages(1) Subtotal Total purchases Year Ended December 31, 2015 2014 2013 $ 481,759 $ 525,813 $ 24,373 — 506,132 402,424 12,680 8,460 423,564 88,586 5,440 94,026 — — 525,813 622,419 8,015 1,822 632,256 36,537 56,754 93,291 495,473 39,897 18,876 554,246 620,900 — — 620,900 29,633 — 29,633 $ 1,023,722 $ 1,251,360 $ 1,204,779 ________________________ (1) Beginning in December 2014 we began investing in non-performing secured residential mortgages in Latin America. During the year ended December 31, 2015, we invested $1.0 billion to acquire portfolios, primarily charged-off credit card portfolios, with face values aggregating $12.7 billion, for an average purchase price of 8.0% of face value. Purchases of charged-off credit card portfolios in Europe include $216.0 million of receivables acquired in connection with the dlc Acquisition. Purchases of charged-off credit card portfolios in other geographies include $60.3 million acquired in connection with the Baycorp Acquisition. During the year ended December 31, 2014, we invested $1.3 billion to acquire portfolios, primarily charged-off credit card portfolios, with face values aggregating $13.8 billion, for an average purchase price of 9.1% of face value. Purchases of charged-off credit card portfolios in the United States include $105.4 million acquired in connection with the Atlantic Acquisition. Purchases of charged-off credit card portfolios in Europe include $208.5 million in connection with the Marlin Acquisition. During the year ended December 31, 2013, we invested $1.2 billion to acquire portfolios, primarily charged-off credit card portfolios, with face values aggregating $84.9 billion, for an average purchase price of 1.4% of face value. Purchases of consumer portfolio receivables in the United States include $383.4 million ($347.7 million for charged-off credit card portfolios and $35.7 million for consumer bankruptcy receivables) acquired in connection with the merger (the “AACC Merger”) with Asset Acceptance Capital Corp. (“AACC”). Purchases of charged-off credit card portfolios in Europe include $559.0 million in connection with our acquisition of a controlling interest in Janus Holdings (the “Cabot Acquisition”). The average purchase price, as a percentage of face value, varies from period to period depending on, among other things, the quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios. The $384.3 million of portfolios we acquired through the AACC Merger significantly drove down the purchase price as a percentage of face value for portfolios acquired during the year ended December 31, 2013. The lower purchase rate for the AACC portfolios was due to our acquisition of all accounts owned by AACC, including accounts where we ascribed no value and where we are unlikely to attempt to collect. Accounts with no perceived value would typically not be included in a portfolio purchase transaction, as the sellers would remove them from the accounts being sold to us prior to sale. 38 Table of Contents Collections by Channel and Geographic Location We currently utilize various business channels for the collection of our receivables. The following table summarizes the total collections by collection channel and geographic areas (in thousands): United States: Legal collections Collection sites Collection agencies(1) Subtotal Europe: Collection sites Legal collections Collection agencies Subtotal Other geographies: Collection sites Legal collections Collection agencies Subtotal Total collections ________________________ Year Ended December 31, 2015 2014 2013 $ 633,166 $ 610,285 $ 480,485 68,283 1,181,934 502,829 79,699 1,192,813 234,904 92,464 148,758 476,126 38,334 1,145 3,186 42,665 221,771 42,456 120,629 384,856 29,828 — — 29,828 564,645 465,974 104,163 1,134,782 74,916 — 59,343 134,259 — — 10,465 10,465 $ 1,700,725 $ 1,607,497 $ 1,279,506 (1) Collections through our collection agency channel in the United States include accounts subject to bankruptcy filings collected by others. Additionally, collection agency collections often include accounts purchased from a competitor where we maintain the collection agency servicing until the accounts can be recalled and placed in our collection channels. Gross collections increased $93.2 million, or 5.8%, to $1.7 billion during the year ended December 31, 2015, from $1.6 billion during the year ended December 31, 2014. Gross collections increased $328.0 million, or 25.6%, to $1.6 billion during the year ended December 31, 2014, from $1.3 billion during the year ended December 31, 2013. The increases in gross collections were primarily due to increased portfolio purchases in the current and prior years and additional collections from our recently acquired subsidiaries. 39 Table of Contents Results of Operations Results of operations, in dollars and as a percentage of total revenue, were as follows (in thousands, except percentages): 2015 2014 2013 Year Ended December 31, Revenues Revenue from receivable portfolios, net Other revenues Net interest income Total revenues Operating expenses Salaries and employee benefits Cost of legal collections Other operating expenses Collection agency commissions General and administrative expenses Depreciation and amortization Goodwill impairment Total operating expenses Income from operations Other (expense) income Interest expense Other income (expense) Total other expense Income from continuing operations before income taxes Provision for income taxes Income from continuing operations Loss from discontinued operations, net of tax Net income Net (income) loss attributable to noncontrolling interest Net income attributable to Encore Capital Group, Inc. stockholders $ 1,072,436 92.3 % $ 992,832 92.5 % $ 744,870 60,696 28,440 5.2 % 2.5 % 51,988 27,969 4.9 % 2.6 % 12,588 15,906 96.3 % 1.6 % 2.1 % 1,161,572 100.0 % 1,072,789 100.0 % 773,364 100.0 % 270,334 229,847 98,182 37,858 196,827 33,945 49,277 916,270 245,302 23.3 % 19.8 % 8.5 % 3.3 % 16.9 % 2.9 % 4.2 % 78.9 % 21.1 % 246,247 205,661 93,859 33,343 146,286 27,949 — 753,345 319,444 (186,556) (16.1)% 2,235 0.2 % (184,321) (15.9)% (166,942) 113 (166,829) 60,981 (13,597) 47,384 — 47,384 5.2 % (1.1)% 4.1 % 0.0 % 4.1 % 152,615 (52,725) 99,890 (1,612) 98,278 23.0 % 19.2 % 8.7 % 3.1 % 165,040 186,959 66,649 33,097 13.6 % 109,713 2.6 % 0.0 % 70.2 % 29.8 % (15.6)% 0.0 % (15.6)% 14.2 % (4.9)% 9.3 % (0.1)% 9.2 % 13,547 — 575,005 198,359 (73,269) (4,222) (77,491) 120,868 (45,388) 75,480 (1,740) 73,740 (2,249) (0.2)% 5,448 0.5 % 1,559 $ 45,135 3.9 % $ 103,726 9.7 % $ 75,299 21.3 % 24.2 % 8.6 % 4.3 % 14.2 % 1.8 % 0.0 % 74.4 % 25.6 % (9.5)% (0.5)% (10.0)% 15.6 % (5.9)% 9.7 % (0.2)% 9.5 % 0.2 % 9.7 % 40 Table of Contents Results of Operations—Cabot The following tables summarize the operating results contributed by Cabot during the periods presented (in thousands): Year Ended December 31, 2015 Janus Holdings Encore Europe (1) Consolidated Total revenues Total operating expenses Income from operations Interest expense-non-PEC PEC interest (expense) income Other income Income before income taxes Benefit for income taxes Net income Net income attributable to noncontrolling interests Net income attributable to Encore Total revenues Total operating expenses Income from operations Interest expense-non-PEC PEC interest (expense) income Other expense (Loss) income before income taxes Provision for income taxes Net (loss) income Net loss attributable to noncontrolling interests Net (loss) income attributable to Encore $ — $ $ $ 349,379 (188,296) 161,083 (106,318) (48,013) 591 7,343 1,294 8,637 (1,211) 7,426 $ — — — 23,529 — 23,529 — 23,529 (3,705) 19,824 $ 349,379 (188,296) 161,083 (106,318) (24,484) 591 30,872 1,294 32,166 (4,916) 27,250 Year Ended December 31, 2014 Janus Holdings Encore Europe(1) Consolidated $ $ $ 286,630 (150,349) 136,281 (96,419) (43,630) (646) (4,414) (3,241) (7,655) 1,108 (6,547) $ — $ — — — 21,201 — 21,201 — 21,201 3,267 24,468 $ 286,630 (150,349) 136,281 (96,419) (22,429) (646) 16,787 (3,241) 13,546 4,375 17,921 41 Table of Contents Total revenues Total operating expenses Income from operations Interest expense-non-PEC PEC interest (expense) income Other income (Loss) income before income taxes Provision for income taxes Net (loss) income Net loss attributable to noncontrolling interests Net (loss) income attributable to Encore ________________________ Year Ended December 31, 2013 Janus Holdings Encore Europe(1) Consolidated $ $ $ 95,491 (48,890) 46,601 (26,265) (21,616) 98 (1,182) (1,574) (2,756) 392 (2,364) $ — $ — — — 10,235 — 10,235 — 10,235 1,167 11,402 $ 95,491 (48,890) 46,601 (26,265) (11,381) 98 9,053 (1,574) 7,479 1,559 9,038 (1) Includes only the results of operations related to Janus Holdings and therefore does not represent the complete financial performance of Encore Europe. For all periods presented, Janus Holdings recognized all interest expense related to the outstanding preferred equity certificates (“PECs”) owed to Encore and other minority shareholders, while the interest income from PECs owed to Encore was recognized at Janus Holdings’ parent company, Encore Europe Holdings, S.a.r.l. (“Encore Europe”), which is a wholly- owned subsidiary of Encore. Additionally, the net loss recognized at Janus Holdings during the year ended December 31, 2014 was due to Cabot incurring acquisition and integration related charges related to Cabot’s acquisition of Marlin in February 2014. Non-GAAP Disclosure In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles (“GAAP”), we provide historical non-GAAP financial information. Management believes that the presentation of such non- GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provide a more complete understanding of our financial performance, competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of these measures for comparative purposes. Adjusted Income from Continuing Operations Per Share. Management uses non-GAAP adjusted income from continuing operations attributable to Encore and adjusted income from continuing operations per share (which we also refer to from time to time as adjusted earnings per share), to assess operating performance, in order to highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. Adjusted income from continuing operations attributable to Encore excludes non-cash interest and issuance cost amortization relating to our convertible notes, one-time charges, acquisition, integration and restructuring related expenses, and non-cash goodwill impairment charges, all net of tax. The following table provides a reconciliation between income from continuing operations and diluted income from continuing operations per share attributable to Encore calculated in accordance with GAAP to adjusted income from continuing operations and adjusted income from continuing operations per share attributable to Encore, respectively. GAAP diluted earnings per share for the years ended December 31, 2015, 2014, and 2013, includes the effect of approximately 0.7 million, 1.1 million, and 0.6 million, respectively, common shares that are issuable upon conversion of certain convertible senior notes because the average stock price during the respective periods exceeded the conversion price of these notes. However, as described in Note 9, “Debt—Encore Convertible Notes,” in the notes to our consolidated financial statements, we have certain hedging transactions in place that have the effect of increasing the effective conversion price of these notes. Accordingly, while these common shares are included in our diluted earnings per share, the hedge transactions will offset the impact of this dilution and no shares will be issued unless our stock price exceeds the effective conversion price, thereby creating a discrepancy between the accounting effect of those notes under GAAP and their economic impact. We have 42 Table of Contents presented the following metrics both including and excluding the dilutive effect of these convertible senior notes to better illustrate the economic impact of those notes and the related hedging transactions to shareholders, with the GAAP item under the “Per Diluted Share-Accounting” and “Per Diluted Share-Economic” (non-GAAP) columns, respectively (in thousands, except per share data): Year Ended December 31, 2015 Per Diluted Share— Accounting Per Diluted Share— Economic $ 2014 Per Diluted Share— Accounting $ Per Diluted Share— Economic $ 2013 Per Diluted Share— Accounting Per Diluted Share— Economic $ 45,135 $ 1.69 $ 1.74 $ 105,338 $ 3.83 $ 3.99 $ 77,039 $ 2.94 $ 3.01 6,896 0.26 0.26 6,413 0.23 0.24 3,274 0.12 0.13 8,063 0.30 0.31 9,898 0.36 0.37 18,483 0.71 0.72 42,554 1.60 1.64 31,187 1.17 1.20 — — — — — — — — — (2,291) (0.08) (0.08) — — — — — — — — — GAAP net income from continuing operations attributable to Encore, as reported Adjustments: Convertible notes non-cash interest and issuance cost amortization, net of tax Acquisition, integration and restructuring related expenses, net of tax CFPB / regulatory one-time charges, net of tax Goodwill impairment, net of tax Net effect of non- recurring tax adjustments Adjusted income from continuing operations attributable to Encore $133,835 $ 5.02 $ 5.15 $ 119,358 $ 4.34 $ 4.52 $ 98,796 $ 3.77 $ 3.86 Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before interest, taxes, depreciation and amortization, stock-based compensation expenses, portfolio amortization, one-time charges, acquisition, integration and restructuring related expenses, and non-cash goodwill impairment charges), which is materially similar to a financial measure contained in covenants used in the Encore revolving credit and term loan facility, in the evaluation of our operations and believes that this measure is a useful indicator of our ability to generate cash collections in excess of operating expenses through the liquidation of our receivable portfolios. Adjusted EBITDA for the periods presented is as follows (in thousands): 43 Table of Contents GAAP net income, as reported Adjustments: Loss from discontinued operations, net of tax Interest expense Provision for income taxes Depreciation and amortization Amount applied to principal on receivable portfolios Stock-based compensation expense Acquisition, integration and restructuring related expenses CFPB / regulatory one-time charges Goodwill impairment Adjusted EBITDA Year Ended December 31, 2015 2014 2013 $ 47,384 $ 98,278 $ 73,740 — 186,556 13,597 33,945 628,289 22,008 15,553 63,019 49,277 1,612 166,942 52,725 27,949 614,665 17,181 19,299 — — 1,740 73,269 45,388 13,547 534,654 12,649 29,321 — — $ 1,059,628 $ 998,651 $ 784,308 Adjusted Operating Expenses. Management utilizes adjusted operating expenses in order to facilitate a comparison of approximate cash costs to cash collections for our portfolio purchasing and recovery business. Adjusted operating expenses for our portfolio purchasing and recovery business are calculated by starting with GAAP total operating expenses and backing out stock-based compensation expense, operating expenses related to non-portfolio purchasing and recovery business, one-time charges, and acquisition, integration and restructuring related operating expenses. Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from our tax lien business and other non-reportable operating segments, as well as corporate overhead not related to our portfolio purchasing and recovery business. Adjusted operating expenses related to our portfolio purchasing and recovery business for the periods presented are as follows (in thousands): Year Ended December 31, 2015 2014 2013 GAAP total operating expenses, as reported $ 916,270 $ 753,345 $ 575,005 Adjustments: Stock-based compensation expense (22,008) (17,181) (12,649) Operating expenses related to non-portfolio purchasing and recovery business Acquisition, integration and restructuring related operating expenses Operating expenses related to CFPB / regulatory one-time charges Adjusted operating expenses related to portfolio purchasing and recovery business (157,080) (97,165) (36,511) (15,553) (19,299) (25,691) (54,697) — — $ 666,932 $ 619,700 $ 500,154 Comparison of Results of Operations Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 Revenues Our revenues consist primarily of portfolio revenue, contingent fee income, and net interest income from our tax lien business. Portfolio revenue consists of accretion revenue and zero basis revenue. Accretion revenue represents revenue derived from pools (quarterly groupings of purchased receivable portfolios) with a cost basis that has not been fully amortized. Revenue from pools with a remaining unamortized cost basis is accrued based on each pool’s effective interest rate applied to each pool’s remaining unamortized cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances. The effective interest rate is the internal rate of return (“IRR”) derived from the 44 Table of Contents 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 (“ZBA”), are recorded as revenue, or Zero Basis Revenue. We account for our investment in receivable portfolios utilizing the interest method in accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality. We incur allowance charges when actual cash flows from our receivable portfolios underperform compared to our expectations. Factors that may contribute to underperformance and to the recording of valuation allowances may include both internal as well as external factors. Internal factors that may have an impact on our collections include operational activities such as the productivity of our collection staff. External factors that may have an impact on our collections include new laws or regulations, new interpretations of existing laws or regulations, and the overall condition of the economy. We record allowance reversals on pool groups which have historic allowance reserves when actual cash flows from these receivable portfolios outperform our expectations. Allowance reversals are included in portfolio revenue. Interest income, net of related interest expense represents net interest income on receivables secured by property tax liens. Total revenues were $1.2 billion during the year ended December 31, 2015, an increase of $88.8 million, or 8.3%, compared to total revenues of $1.1 billion during the year ended December 31, 2014. The following tables summarize collections, revenue, end of period receivable balance and other related supplemental data, by year of purchase from our portfolio purchasing and recovery segment (in thousands, except percentages): Year Ended December 31, 2015 As of December 31, 2015 Collections (1) Gross Revenue (2) Revenue Recognition Rate (3) Net Reversal (Portfolio Allowance) Revenue % of Total Revenue Unamortized Balances Monthly IRR $ 103,398 $ 91,876 88.9% $ 11,765 8.6% $ United States: ZBA(4) 2007 2008 2009 2010 2011 2012 2013 2014 2015 Impact of CFPB settlement Subtotal Europe: 2013 2014 2015 Subtotal Other geographies: ZBA(4) 2012 2013 2014 2015 3,150 13,529 18,084 42,615 112,753 176,914 298,068 307,814 105,609 — 1,181,934 212,129 198,127 65,870 476,126 4,565 471 6,507 16,062 15,060 1,118 8,665 10,347 25,629 85,303 108,968 176,878 146,583 47,300 — 702,667 171,750 122,490 38,129 332,369 4,571 — 319 19,910 5,837 35.5% 64.0% 57.2% 60.1% 75.7% 61.6% 59.3% 47.6% 44.8% — 59.5% 81.0% 61.8% 57.9% 69.8% 100.1% 0.0% 4.9% 124.0% 38.8% 1,009 2,311 — — — — — — — (8,322) 6,763 — — — — — — — — — — 1,573 5,798 — 3,742 27,257 79,973 161,539 291,402 445,527 — 1,016,811 439,619 444,618 384,231 0.1% 0.8% 1.0% 2.4% 8.0% 10.2% 16.6% 13.8% 4.4% — 65.9% 16.1% 11.5% 3.6% 31.2% 1,268,468 0.4% 0.0% 0.0% 1.9% 0.5% — — 2,480 67,714 85,196 Subtotal Total 42,665 $ 1,700,725 30,637 $ 1,065,673 71.8% 62.7% $ — 6,763 2.9% 155,390 100.0% $ 2,440,669 45 — 4.6% 10.0% — 21.2% 18.5% 8.6% 7.4% 3.6% 1.8% — 4.4% 3.1% 2.1% 1.9% 2.4% — — 0.0% 2.4% 2.9% 2.6% 3.2% Table of Contents Year Ended December 31, 2014 As of December 31, 2014 Collections (1) Gross Revenue (2) Revenue Recognition Rate (3) Net Portfolio Allowance Reversal Revenue % of Total Revenue Unamortized Balances Monthly IRR United States: ZBA(4) $ 34,491 $ 22,271 64.6% $ 12,229 2.3% $ 2006 2007 2008 2009 2010 2011 2012 2013 2014 3,067 7,971 27,715 52,661 111,058 154,930 259,252 397,864 143,804 Subtotal 1,192,813 Europe: 2013 2014 Subtotal Other geographies: 2012 2013 2014 Subtotal Total 249,307 135,549 384,856 2,561 17,615 9,652 29,828 601 3,316 14,939 39,586 82,375 108,167 137,986 220,121 79,585 708,947 160,074 101,285 261,359 — 3,032 2,087 5,119 19.6% 41.6% 53.9% 75.2% 74.2% 69.8% 53.2% 55.3% 55.3% 59.4% 64.2% 74.7% 67.9% 0.0% 17.2% 21.6% 17.2% — 1,612 3,566 — — — — — — 17,407 — — — — — — — 0.1% 0.3% 1.5% 4.1% 8.4% 11.1% 14.1% 22.6% 8.2% 72.7% 16.4% 10.4% 26.8% 0.0% 0.3% 0.2% 0.5% — — 2,603 8,400 7,894 21,180 55,968 150,876 284,819 456,970 988,710 505,213 555,323 1,060,536 505 10,530 83,279 94,314 — — 4.8% 8.6% 25.6% 22.9% 13.5% 6.4% 5.0% 2.7% 5.0% 2.4% 1.9% 2.1% 0.0% 0.0% 1.8% 1.6% 3.1% $ 1,607,497 $ 975,425 60.7% $ 17,407 100.0% $ 2,143,560 ________________________ (1) Does not include amounts collected on behalf of others. (2) Gross revenue excludes the effects of net portfolio allowance or net portfolio allowance reversals. (3) Revenue recognition rate excludes the effects of net portfolio allowance or net portfolio allowance reversals. (4) ZBA revenue typically has a 100% revenue recognition rate. However, collections on ZBA pool groups where a valuation allowance remains must first be recorded as an allowance reversal until the allowance for that pool group is zero. Once the entire valuation allowance is reversed, the revenue recognition rate will become 100%. ZBA gross revenue includes an immaterial amount of accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”). Portfolio revenue from our portfolio purchasing and recovery segment was $1.1 billion during the year ended December 31, 2015, an increase of $79.6 million, or 8.0%, compared to revenue of $992.8 million during the year ended December 31, 2014. The increase in portfolio revenue during the year ended December 31, 2015 compared to 2014 was due to additional accretion revenue associated with a higher portfolio balance, primarily associated with portfolios acquired through our increased level of merger and acquisition related activities and increases in yields on certain pool groups due to over- performance, offset by lower yields on recently formed pool groups. During the year ended December 31, 2015, we recorded a net portfolio allowance reversal of $6.8 million, compared to a net portfolio allowance reversal of $17.4 million during the year ended December 31, 2014. During the year ended December 31, 2015, we recorded a portfolio allowance charge of $8.3 million as a result of a reduction in forecasted cash flows in certain pool groups related to the CFPB Consent Order discussed in the “Government Regulation” section above. Excluding this allowance charge, we recorded portfolio allowance reversals of $15.1 million and $17.4 million during the years ended December 31, 2015 and 2014, respectively. The recording of allowance reversals during the years ended December 31, 2015 and 2014 was primarily due to operational improvements which allowed us to assist our customers to repay their obligations and increased collections on our ZBA portfolios. Additionally, our refined valuation methodologies have limited the amount of valuation charges necessary during recent periods. 46 Table of Contents Other revenues were $60.7 million and $52.0 million for the years ended December 31, 2015 and 2014, respectively. Other revenues primarily represent contingent fee income earned on accounts collected on behalf of others, primarily credit originators. The increase in other revenues was primarily attributable to contingent fee income earned at our recently acquired subsidiaries. Net interest income from our tax lien business segment was relatively consistent at $28.4 million and $28.0 million for the years ended December 31, 2015 and 2014, respectively. Operating Expenses Total operating expenses were $916.3 million during the year ended December 31, 2015, an increase of $163.0 million, or 21.6%, compared to total operating expenses of $753.3 million during the year ended December 31, 2014. Excluding one-time CFPB related settlement charges of $54.7 million recorded in operating expenses and the goodwill impairment charge of $49.3 million at Propel, operating expenses increased $59.0 million, or 7.8%, to $812.3 million during the year ended December 31, 2015, as compared to the prior year. Operating expenses are explained in more detail as follows: Salaries and Employee Benefits Salaries and employee benefits increased $24.1 million, or 9.8%, to $270.3 million during the year ended December 31, 2015, from $246.2 million during the year ended December 31, 2014. The increase was primarily the result of increases in headcount as a result of our recent mergers and acquisitions and increases in headcount and related compensation expense to support our growth. Stock-based compensation increased $4.8 million, or 28.1%, to $22.0 million during the year ended December 31, 2015, from $17.2 million during the year ended December 31, 2014. This increase was primarily attributable to an increase in the number of shares granted and the higher fair value of equity awards granted in recent periods. Salaries and employee benefits broken down between the reportable segments were as follows (in thousands): Salaries and employee benefits: Portfolio purchasing and recovery Tax lien business Year Ended December 31, 2015 2014 $ $ 262,281 8,053 270,334 $ $ 238,942 7,305 246,247 Cost of Legal Collections—Portfolio Purchasing and Recovery The cost of legal collections increased $24.1 million, or 11.8%, to $229.8 million during the year ended December 31, 2015, compared to $205.7 million during the year ended December 31, 2014. The increase reflects an increase in gross legal collections, which were $725.6 million during the year ended December 31, 2015, up from $653.2 million during the year ended December 31, 2014. The cost of legal collections remained stable as a percentage of gross collections through this channel at 31.7% and 31.5% during the years ended December 31, 2015 and 2014, respectively. During the year ended December 31, 2015, the cost of legal collections was 31.9% and 29.9% in the United States and Europe, respectively. During the year ended December 31, 2014, the cost of legal collections was 31.4% and 32.1% in the United States and Europe, respectively. Other Operating Expenses Other operating expenses increased $4.3 million, or 4.6%, to $98.2 million during the year ended December 31, 2015, from $93.9 million during the year ended December 31, 2014. The increases in other operating expenses was primarily the result of additional other operating expenses at our recently acquired subsidiaries. 47 Table of Contents Other operating expenses broken down between the reportable segments were as follows (in thousands): Other operating expenses: Portfolio purchasing and recovery Tax lien business Year Ended December 31, 2015 2014 $ $ 93,211 4,971 98,182 $ $ 89,933 3,926 93,859 Collection Agency Commissions—Portfolio Purchasing and Recovery During the year ended December 31, 2015, we incurred $37.9 million in commissions to third party collection agencies, or 17.2% of the related gross collections of $220.2 million. During the period, the commission rate as a percentage of related gross collections was 14.4% and 18.5% for our collection outsourcing channels in the United States and Europe, respectively. During the year ended December 31, 2014, we incurred $33.3 million in commissions, or 16.6%, of the related gross collections of $200.3 million. During 2014, the commission rate as a percentage of related gross collections was 16.2% and 16.9% for our collection outsourcing channels in the United States and Europe, respectively. Collections through this channel vary from period to period depending on, among other things, the number of accounts placed with an agency versus the number of accounts collected internally. Commissions, as a percentage of collections in this channel, also vary from period to period depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency, the asset class, and the geographic location of the receivables. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time. Additionally, commission rates are lower in the United Kingdom, where most of the receivables in this channel are semi- performing loans and IVAs, and higher in other European countries where most of the receivables in this channel are non- performing loans. General and Administrative Expenses General and administrative expenses increased $50.5 million, or 34.5%, to $196.8 million during the year ended December 31, 2015, from $146.3 million during the year ended December 31, 2014. Excluding one-time acquisition, integration and restructuring costs and CFPB related settlement charges, which collectively amounted to $67.5 million and $19.3 million during the years ended December 31, 2015 and 2014, respectively, general and administrative expenses increased slightly to $129.3 million and $127.0 million during the years ended December 31, 2015 and 2014, respectively due to additional general and administrative expenses at our recently acquired subsidiaries, offset by lower rent expense of $3.6 million during the year ended December 31, 2015. General and administrative expenses broken down between the reportable segments were as follows (in thousands): General and administrative expenses: Portfolio purchasing and recovery Tax lien business Depreciation and Amortization Year Ended December 31, 2015 2014 $ $ 191,357 5,470 196,827 $ $ 139,977 6,309 146,286 Depreciation and amortization expense increased $6.0 million, or 21.5%, to $33.9 million during the year ended December 31, 2015, from $27.9 million during the year ended December 31, 2014. The increase during the year ended December 31, 2015 was primarily related to increased depreciation expense resulting from the acquisition of fixed assets in the current and prior years and additional depreciation and amortization expenses resulting from fixed assets and intangible assets acquired through our recent acquisitions. Goodwill Impairment We recorded a goodwill impairment charge at Propel, our tax lien business reporting unit, of $49.3 million during the year ended December 31, 2015. On February 19, 2016, we entered into an agreement to sell Propel at a price that is lower than Propel’s book value at December 31, 2015, which triggered the goodwill impairment charge. Refer to Note 15, “Goodwill and 48 Table of Contents Identifiable Intangible Assets” to our consolidated financial statements for further information on the goodwill impairment charge. Cost per Dollar Collected—Portfolio Purchasing and Recovery We utilize adjusted operating expenses in order to facilitate a comparison of approximate cash costs to cash collections for our portfolio purchasing and recovery business. The calculation of adjusted operating expenses is illustrated in detail in the “Non-GAAP Disclosure” section. The following table summarizes our overall cost per dollar collected by geographic location during the periods presented: United States Europe Other geographies Overall cost per dollar collected Year Ended December 31, 2015 2014 42.0% 33.0% 32.9% 39.2% 41.7% 29.3% 30.2% 38.6% Our overall cost per dollar collected (or “cost-to-collect”) for the year ended December 31, 2015 was 39.2%, up 60 basis points from 38.6% during the prior period. Cabot’s cost-to-collect continues to trend lower than our overall cost-to-collect because its portfolio includes many consumers who are already on payment plans and historically involves little litigation. As more of Cabot’s accounts are serviced through its legal channel, we expect to see incremental net collections and a higher overall cost to collect. As we continue to grow our presence in the Latin American market, we expect to incur upfront cost in building our collection channels. As a result, cost-to-collect in this region may become elevated in the near term and may fluctuate over time. Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on seasonality, acquisitions, the cost of investments in new operating initiatives, and the changing regulatory and legislative environment. Interest Expense—Portfolio Purchasing and Recovery Interest expense increased $19.6 million to $186.6 million during the year ended December 31, 2015, from $166.9 million during the year ended December 31, 2014. The following table summarizes our interest expense (in thousands, except percentages): Stated interest on debt obligations Interest expense on preferred equity certificates Amortization of loan fees and other loan costs Amortization of debt discount Accretion of debt premium Total interest expense Year Ended December 31, 2015 151,616 24,484 11,792 9,410 (10,746) 186,556 $ $ 2014 137,274 22,429 9,049 8,423 (10,233) 166,942 $ $ $ $ $ Change % Change 14,342 2,055 2,743 987 (513) 19,614 10.4% 9.2% 30.3% 11.7% 5.0% 11.7% The payment of the accumulated interest on the preferred equity certificates (“PECs”) issued in connection with the Cabot Acquisition will only be satisfied in connection with the disposition of the noncontrolling interests of J.C. Flowers & Co. LLC and management. The increase in interest expense was primarily attributable to increased debt levels in the United States and in Europe related to additional borrowings to finance recent acquisitions and portfolio purchases. 49 Table of Contents Other Income Other income consists primarily of foreign currency exchange gains or losses and interest income. Other income was $2.2 million during the year ended December 31, 2015, up from $0.1 million during the year ended December 31, 2014. The increase of other income was primarily attributable to a $1.4 million net change in recognized foreign currency gains and losses. We recognized a net foreign currency exchange gain of $0.3 million during the year ended December 31, 2105 and a net foreign currency exchange loss of $1.1 million during the year ended December 31, 2014. The increase in other income was also a result of an increase in interest income of $0.8 million during the year ended December 31, 2015 as compared to the prior year. Provision for Income Taxes During the years ended December 31, 2015 and 2014, we recorded income tax provisions for income from continuing operations of $13.6 million and $52.7 million, respectively. The effective tax rates for the respective periods are shown below: Federal provision State (benefit) provision(1) Federal expense (benefit) of state International benefit(2) Tax reserves(3) Permanent items(4) Release of valuation allowance Other(5) Effective rate ________________________ Year Ended December 31, 2015 2014 35.0 % (1.2)% 0.4 % (12.5)% (3.3)% 9.6 % (9.1)% 3.4 % 22.3 % 35.0 % 8.2 % (2.9)% (3.6)% 0.0 % 4.3 % 0.0 % (6.4)% 34.6 % (1) Primarily relates to a beneficial settlement with a state tax authority. (2) Relates primarily to the lower tax rate on the income attributable to international operations. (3) Represents a release of reserves for a certain tax position. (4) Represents a provision for nondeductible items, including the CFPB settlement. (5) Includes the effect of discrete items, primarily relates to the recognition of tax benefit as a result of a favorable tax settlement with taxing authorities as discussed below. We recognized tax benefits of approximately $10.5 million and $6.3 million during the year ended December 31, 2015 and 2014, respectively. The tax benefit recognized during the year ended December 31, 2015 was primarily due to a favorable settlement with state and international tax authorities and the release of a valuation reserve at one of our international subsidiaries. The tax benefits recognized during the year ended December 31, 2014 included a net benefit of approximately $6.6 million as a result of a favorable settlement with taxing authorities. Additionally, the effective tax rate for the year ended December 31, 2015 as compared to 2014, decreased as a result of proportionately more earnings realized in countries that have lower statutory tax rates than the U.S. federal rate. The income tax provision also decreased due to agreements reached with tax authorities, which generated benefits and the release of valuation allowances due to continual profitability of a subsidiary. Year Ended December 31, 2014 Compared to Year Ended December 31, 2013 Revenues Total revenues were $1.1 billion during the year ended December 31, 2014, an increase of $299.4 million, or 38.7%, compared to total revenues of $773.4 million during the year ended December 31, 2013. 50 Table of Contents The following tables summarize collections, revenue, end of period receivable balance and other related supplemental data, by year of purchase from our portfolio purchasing and recovery segment (in thousands, except percentages): Year Ended December 31, 2014 As of December 31, 2014 Collections (1) Gross Revenue (2) Revenue Recognition Rate (3) Net Portfolio Allowance Reversal Revenue % of Total Revenue Unamortized Balances Monthly IRR United States: ZBA(4) $ 34,491 $ 22,271 64.6% $ 12,229 2.3% $ 2006 2007 2008 2009 2010 2011 2012 2013 2014 3,067 7,971 27,715 52,661 111,058 154,930 259,252 397,864 143,804 Subtotal 1,192,813 Europe: 2013 2014 Subtotal Other geographies: 2012 2013 2014 Subtotal Total 249,307 135,549 384,856 2,561 17,615 9,652 29,828 601 3,316 14,939 39,586 82,375 108,167 137,986 220,121 79,585 708,947 160,074 101,285 261,359 — 3,032 2,087 5,119 19.6% 41.6% 53.9% 75.2% 74.2% 69.8% 53.2% 55.3% 55.3% 59.4% 64.2% 74.7% 67.9% 0.0% 17.2% 21.6% 17.2% — 1,612 3,566 — — — — — — 17,407 — — — — — — — 0.1% 0.3% 1.5% 4.1% 8.4% 11.1% 14.1% 22.6% 8.2% 72.7% 16.4% 10.4% 26.8% 0.0% 0.3% 0.2% 0.5% — — 2,603 8,400 7,894 21,180 55,968 150,876 284,819 456,970 988,710 505,213 555,323 1,060,536 505 10,530 83,279 94,314 — — 4.8% 8.6% 25.6% 22.9% 13.5% 6.4% 5.0% 2.7% 5.0% 2.4% 1.9% 2.1% 0.0% 0.0% 1.8% 1.6% 3.1% $ 1,607,497 $ 975,425 60.7% $ 17,407 100.0% $ 2,143,560 51 Table of Contents Year Ended December 31, 2013 As of December 31, 2013 Collections (1) Gross Revenue (2) Revenue Recognition Rate (3) Net Reversal (Portfolio Allowance) Revenue % of Total Revenue Unamortized Balances Monthly IRR United States: ZBA(4) $ 27,117 $ 17,201 63.4% $ 2005 2006 2007 2008 2009 2010 2011 2012 2013 2,364 8,780 12,204 41,512 80,311 156,773 225,546 350,134 230,041 Subtotal 1,134,782 239 3,181 5,409 24,377 54,130 102,595 133,396 162,424 140,760 643,712 10.1% 36.2% 44.3% 58.7% 67.4% 65.4% 59.1% 46.4% 61.2% 56.7% Europe: 2013 Other geographies: 2012 2013 Subtotal Total 134,259 84,407 62.9% 3,848 6,617 10,465 1,019 3,521 4,540 26.5% 53.2% 43.4% 9,918 10 (184) 2,001 448 — — — — — 12,193 — — — — 2.3% $ 0.0% 0.4% 0.7% 3.3% 7.4% 14.0% 18.2% 22.2% 19.2% 87.9% — — 2,466 5,654 17,617 21,009 50,230 103,025 274,111 466,268 940,380 11.5% 620,312 0.1% 0.5% 0.6% 3,688 25,869 29,557 — — 5.2% 7.6% 9.5% 18.1% 13.8% 8.9% 4.3% 4.4% 5.7% 2.4% 0.0% 4.4% 3.5% 4.4% $ 1,279,506 $ 732,659 57.3% $ 12,193 100.0% $ 1,590,249 ________________________ (1) Does not include amounts collected on behalf of others. (2) Gross revenue excludes the effects of net portfolio allowance or net portfolio allowance reversals. (3) Revenue recognition rate excludes the effects of net portfolio allowance or net portfolio allowance reversals. (4) ZBA revenue typically has a 100% revenue recognition rate. However, collections on ZBA pool groups where a valuation allowance remains must first be recorded as an allowance reversal until the allowance for that pool group is zero. Once the entire valuation allowance is reversed, the revenue recognition rate will become 100%. ZBA gross revenue includes an immaterial amount of Put-Backs. Portfolio revenue from our portfolio purchasing and recovery segment was $992.8 million during the year ended December 31, 2014, an increase of $248.0 million, or 33.3%, compared to revenue of $744.9 million during the year ended December 31, 2013. The increase in portfolio revenue during the year ended December 31, 2014 compared to 2013 was due to additional accretion revenue associated with a higher portfolio balance, primarily associated with portfolios acquired through our increased level of merger and acquisition related activities and increases in yields on certain pool groups due to over- performance, offset by lower yields on recently formed pool groups. During the year ended December 31, 2014, we recorded a portfolio allowance reversal of $17.4 million, compared to a net portfolio allowance reversal of $12.2 million during the year ended December 31, 2013. The recording of net allowance reversals during the years ended December 31, 2014 and 2013 was primarily due to operational improvements which allowed us to assist our customers to repay their obligations and increased collections on our ZBA portfolios. Additionally, our refined valuation methodologies have limited the amount of valuation charges necessary during recent periods. Other revenues were $52.0 million and $12.6 million for the years ended December 31, 2014 and 2013, respectively. Other revenues primarily represent contingent fee income at our Cabot, Refinancia and Grove subsidiaries earned on accounts collected on behalf of others, primarily credit originators. The increase in other revenues during the year ended December 31, 2014 was primarily due to the acquisition of Cabot in July 2013, Refinancia in December 2013 and Grove in April 2014. Contingent fees from Cabot and Refinancia are only included in the prior year periods since their acquisition dates. Net interest income from our tax lien business segment was $28.0 million and $15.9 million for the years ended December 31, 2014 and 2013, respectively. The increase for the year ended December 31, 2014 was due to an increase in the balance of receivables secured by property tax liens, primarily resulting from Propel’s recent acquisition of a portfolio of tax liens and other assets in a transaction valued at approximately $43.0 million in May 2014. 52 Table of Contents Operating Expenses Total operating expenses were $753.3 million during the year ended December 31, 2014, an increase of $178.3 million, or 31.0%, compared to total operating expenses of $575.0 million during the year ended December 31, 2013. Operating expenses are explained in more detail as follows: Salaries and Employee Benefits Salaries and employee benefits increased $81.2 million, or 49.2%, to $246.2 million during the year ended December 31, 2014, from $165.0 million during the year ended December 31, 2013. The increase was primarily the result of increases in headcount as a result of our recent mergers and acquisitions and increases in headcount and related compensation expense to support our growth. Stock-based compensation increased $4.5 million, or 35.8%, to $17.2 million during the year ended December 31, 2014, from $12.6 million during the year ended December 31, 2013. This increase was primarily attributable to an increase in the number of shares granted and the higher fair value of equity awards granted in recent periods. Salaries and employee benefits broken down between the reportable segments were as follows (in thousands): Salaries and employee benefits: Portfolio purchasing and recovery Tax lien business Year Ended December 31, 2014 2013 $ $ 238,942 7,305 246,247 $ $ 159,318 5,722 165,040 Cost of Legal Collections—Portfolio Purchasing and Recovery The cost of legal collections increased $18.7 million, or 10.0%, to $205.7 million during the year ended December 31, 2014, compared to $187.0 million during the year ended December 31, 2013. These costs represent contingent fees paid to our network of attorneys, internal legal costs and the cost of litigation. Gross legal collections were $653.2 million during the year ended December 31, 2014, up from $564.6 million collected during the year ended December 31, 2013. The increase in the cost of legal collections includes an increase in commissions in the United States, as a result of an increase in gross collections of $45.6 million, or 8.1%, and an increase in commissions in Europe, as a result of an increase in gross collections of $42.9 million. The cost of legal collections decreased as a percentage of gross collections through this channel to 31.5% during the year ended December 31, 2014 from 33.1% during the same period in the prior year. This decrease was primarily due to increased collections from our internal legal channel, for which we do not pay a commission, and to a lesser extent, due to lower litigation costs as a percent of collections in Europe for accounts placed into Marlin’s legal platform. However, as Cabot and Marlin continue to increase the number of consumer accounts placed through Marlin’s legal platform, the cost of legal collections as a percent of collections in Europe will increase, due to an increase in upfront court costs. Other Operating Expenses Other operating expenses increased $27.2 million, or 40.8%, to $93.9 million during the year ended December 31, 2014, from $66.6 million during the year ended December 31, 2013. The increases in other operating expenses was primarily the result of additional other operating expenses at our recently acquired subsidiaries. Other operating expenses broken down between the reportable segments were as follows (in thousands): Other operating expenses: Portfolio purchasing and recovery Tax lien business Year Ended December 31, 2014 2013 $ $ 89,933 3,926 93,859 $ $ 63,228 3,421 66,649 53 Table of Contents Collection Agency Commissions—Portfolio Purchasing and Recovery During the year ended December 31, 2014, we incurred $33.3 million in commissions to third party collection agencies, or 16.6% of the related gross collections of $200.3 million. During the period, the commission rate as a percentage of related gross collections was 16.2% and 16.9% for our collection outsourcing channels in the United States and Europe, respectively. During the year ended December 31, 2013, we incurred $33.1 million in commissions, or 19.0%, of the related gross collections of $174.0 million. Collections through this channel vary from period to period depending on, among other things, the number of accounts placed with agencies versus accounts collected internally. Commissions, as a percentage of collections in this channel, also vary from period to period depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time. General and Administrative Expenses General and administrative expenses increased $36.6 million, or 33.3%, to $146.3 million during the year ended December 31, 2014, from $109.7 million during the year ended December 31, 2013. The increase was primarily the result of additional general and administrative expenses at our newly acquired subsidiaries, and general increases in expenses to support our growth. The increase was partially offset by lower one-time acquisition and integration related costs in our portfolio purchasing and recovery segment. General and administrative expenses include one-time acquisition and integration related costs of $15.9 million and $21.6 million for the years ended December 31, 2014 and 2013, respectively. General and administrative expenses broken down between the reportable segments were as follows (in thousands): General and administrative expenses: Portfolio purchasing and recovery Tax lien business Depreciation and Amortization Year Ended December 31, 2014 2013 $ $ 139,977 6,309 146,286 $ $ 106,814 2,899 109,713 Depreciation and amortization expense increased $14.4 million, or 106.3%, to $27.9 million during the year ended December 31, 2014, from $13.5 million during the year ended December 31, 2013. The increase during the year ended December 31, 2014 was primarily related to increased depreciation expense resulting from the acquisition of fixed assets in the current and prior years and additional depreciation and amortization expenses resulting from fixed assets and intangible assets acquired through our recent acquisitions. Cost per Dollar Collected—Portfolio Purchasing and Recovery We utilize adjusted operating expenses in order to facilitate a comparison of approximate cash costs to cash collections for our portfolio purchasing and recovery business. The calculation of adjusted operating expenses is illustrated in detail in the “Non-GAAP Disclosure” section. The following table summarizes our overall cost per dollar collected by geographic location during the periods presented: United States Europe Other geographies Overall cost per dollar collected Year Ended December 31, 2014 2013 41.7% 29.3% 30.2% 38.6% 40.6% 27.0% 31.3% 39.1% Our overall cost per dollar collected for the year ended December 31, 2014 was 38.6%, down 50 basis points from 39.1% during the prior period. This decrease was primarily due to collections from geographies with a lower cost to collect increasing as a percent of total collections, offset by higher cost to collect in the United States. During the same periods, cost to collect in the United States increased to 41.7% from 40.6%. Over time, we expect our cost to collect to remain competitive, but also 54 Table of Contents expect that it will fluctuate from quarter to quarter based on seasonality, the cost of investments in new operating initiatives, and the ongoing management of the changing regulatory and legislative environment. Interest Expense—Portfolio Purchasing and Recovery Interest expense increased $93.7 million to $166.9 million during the year ended December 31, 2014, from $73.3 million during the year ended December 31, 2013. The following table summarizes our interest expense (in thousands, except percentages): Stated interest on debt obligations Interest expense on preferred equity certificates Amortization of loan fees and other loan costs Amortization of debt discount Accretion of debt premium Total interest expense 2014 137,274 22,429 9,049 8,423 (10,233) 166,942 $ $ $ $ Year Ended December 31, 2013 $ Change % Change 55,703 11,381 4,519 4,492 (2,826) 73,269 $ $ 81,571 11,048 4,530 3,931 (7,407) 93,673 146.4% 97.1% 100.2% 87.5% 262.1% 127.8% The payment of the accumulated interest on the PECs issued in connection with the Cabot Acquisition will only be satisfied in connection with the disposition of the noncontrolling interests of J.C. Flowers and management. The increase in interest expense was primarily attributable to interest expense incurred at Cabot during the year ended December 31, 2014 of $118.8 million, including $22.4 million of interest expense on the preferred equity certificates as compared to $37.6 million for the year ended December 31, 2013 including $11.4 million of interest expense on the preferred equity certificates. The increase was also a result of increased interest expense related to additional borrowings to finance recent acquisitions. Other Income (Expense) We recorded a net other income of $0.1 million and a net other expenses of $4.2 million during the years ended December 31, 2014 and 2013, respectively. The majority of the other expenses recognized during the year ended December 31, 2013 was related to a $3.6 million loss recognized on a foreign currency exchange hedge contract we entered into associated with the Cabot Acquisition. In anticipation of the Cabot Acquisition, on June 7, 2013, we entered into a European style zero- cost collar foreign exchange contract with a notional amount of approximately $206.0 million. Provision for Income Taxes During the years ended December 31, 2014 and 2013, we recorded income tax provisions for income from continuing operations of $52.7 million and $45.4 million, respectively. 55 Table of Contents The effective tax rates for the respective periods are shown below: Federal provision State provision State benefit Changes in state apportionment(1) International provision(2) Permanent items(3) Other(4) Effective rate ________________________ Year Ended December 31, 2014 2013 35.0 % 8.2 % (2.9)% 0.0 % (3.6)% 4.3 % (6.4)% 34.6 % 35.0 % 5.8 % (2.0)% (0.2)% (2.2)% 2.4 % (1.2)% 37.6 % (1) Represents changes in state apportionment methodologies. (2) Relates primarily to the lower tax rate on the income attributable to international operations. (3) Represents a provision for nondeductible items. (4) Includes the effect of discrete items, primarily relates to the recognition of tax benefit as a result of a favorable tax settlement with taxing authorities as discussed below. The effective tax rate decreased from the year ended December 31, 2014 as compared to 2013, primarily due to a net tax benefit of approximately $6.6 million recognized as a result of a favorable settlement with taxing authorities related to a previously uncertain tax position. Additionally, the effective tax rate for the year ended December 31, 2014 as compared to 2013, decreased as a result of proportionately more earnings realized in countries that have lower statutory tax rates than the United States federal rate. Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates. Supplemental Performance Data—Portfolio purchasing and recovery The Company utilizes its proprietary forecasting models to continuously evaluate the economic life of each pool. For purposes of calculating its IRRs, the collection forecast of each pool is estimated to be up to 120 months. 56 Table of Contents 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) <2007 2007 2008 2009 Cumulative Collections through December 31, 2015 2010 2012 2011 2013 2014 2015 Total(2) CCM(3) $ Purchased consumer receivables: United States: <2007 2007 2008 2009 2010 2011 2012 2013 2014 2015 719,080 204,064 227,755 253,081 345,445 382,310 466,772 513,333 517,074 480,195 4,109,109 $ 1,377,276 — — — — — — — — — 1,377,276 Subtotal Europe: 2013 2014 2015 Subtotal 619,079 630,347 423,528 1,672,954 Other geographies: 2012 2013 2014 2015 Subtotal 6,575 29,568 88,227 94,020 218,390 $ $ $ 286,676 68,048 — — — — — — — — 354,724 $ 183,982 145,272 69,049 — — — — — — — 398,303 114,648 111,117 165,164 96,529 — — — — — — 487,458 $ 73,397 70,572 127,799 206,773 125,465 — — — — — 604,006 $ 52,137 44,035 87,850 164,605 284,541 122,224 — — — — 755,392 36,955 29,619 59,507 111,569 215,088 300,536 186,472 — — — 939,746 $ 28,242 20,812 41,773 80,443 150,558 225,451 319,114 217,245 — — 1,083,638 $ 22,012 14,431 29,776 58,345 106,079 154,847 233,045 372,967 144,178 — 1,135,680 $ 18,835 12,002 23,247 42,960 80,051 112,659 155,647 276,552 307,814 105,588 1,135,355 $ 2,194,160 515,908 604,165 761,224 961,782 915,717 894,278 866,764 451,992 105,588 8,271,578 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 134,259 — — 134,259 3,848 6,617 — — 10,465 249,307 135,549 — 384,856 2,561 17,615 9,652 — 29,828 212,129 198,127 65,870 476,126 1,208 10,334 16,062 15,061 42,665 595,695 333,676 65,870 995,241 7,617 34,566 25,714 15,061 82,958 Purchased U.S. bankruptcy receivables: 2010 2011 2012 2013 2014 2015 11,971 1,642 83,159 39,833 — 24,372 160,977 $ 6,161,430 — — — — — — — $ 1,377,276 Subtotal Total — — — — — — — 354,724 $ — — — — — — — 398,303 $ — — — — — — — 487,458 $ 388 — — — — — 388 604,394 $ 4,247 1,372 — — — — 5,619 761,011 $ 5,598 1,413 1,249 — — — 8,260 948,006 6,248 1,070 31,020 12,806 — — 51,144 $ 1,279,506 5,914 333 26,207 24,679 — — 57,133 $ 1,607,497 3,527 247 21,267 21,516 — 22 46,579 $ 1,700,725 25,922 4,435 79,743 59,001 — 22 169,123 $ 9,518,900 $ ________________________ (1) Adjusted for Put-Backs and Recalls. Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”). (2) Cumulative collections from inception through December 31, 2015, excluding collections on behalf of others. (3) Cumulative Collections Multiple (“CCM”) through December 31, 2015 refers to collections as a multiple of purchase price. 57 3.1 2.5 2.7 3.0 2.8 2.4 1.9 1.7 0.9 0.2 2.0 1.0 0.5 0.2 0.6 1.2 1.2 0.3 0.2 0.4 2.2 2.7 1.0 1.5 — — 1.1 1.5 Table of Contents Total Estimated Collections to Purchase Price Multiple The following table summarizes our purchases, resulting historical gross collections, and estimated remaining gross collections, by year of purchase (in thousands, except multiples): Purchase Price(1) Historical Collections(2) Estimated Remaining Collections(3) Total Estimated Gross Collections Total Estimated Gross Collections to Purchase Price $ Purchased consumer receivables: United States: <2006 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 578,054 141,026 204,064 227,755 253,081 345,445 382,310 466,772 513,333 517,074 480,195 4,109,109 Subtotal Europe: 2013 2014 2015 619,079 630,347 423,528 1,672,954 Subtotal Subtotal Other geographies: 2012 2013 2014 2015 6,575 29,568 88,227 94,020 218,390 Purchased U.S. bankruptcy receivables: 11,971 2010 1,642 2011 83,159 2012 39,833 2013 — 2014 24,372 2015 160,977 6,161,430 Subtotal Total $ $ $ $ 1,864,849 329,311 515,908 604,165 761,224 961,782 915,717 894,278 866,764 451,992 105,588 8,271,578 595,695 333,676 65,870 995,241 7,617 34,566 25,714 15,061 82,958 25,922 4,435 79,743 59,001 — 22 169,123 9,518,900 $ 9,216 7,250 17,558 35,567 64,851 126,329 159,331 246,817 524,675 636,056 717,924 2,545,574 1,146,461 921,199 722,764 2,790,424 2,342 13,330 141,507 158,479 315,658 — — 19,398 11,917 — 28,369 59,684 5,711,340 $ $ 1,874,065 336,561 533,466 639,732 826,075 1,088,111 1,075,048 1,141,095 1,391,439 1,088,048 823,512 10,817,152 1,742,156 1,254,875 788,634 3,785,665 9,959 47,896 167,221 173,540 398,616 25,922 4,435 99,141 70,918 — 28,391 228,807 15,230,240 3.2 2.4 2.6 2.8 3.3 3.1 2.8 2.4 2.7 2.1 1.7 2.6 2.8 2.0 1.9 2.3 1.5 1.6 1.9 1.8 1.8 2.2 2.7 1.2 1.8 — 1.2 1.4 2.5 ________________________ (1) Adjusted for Put-Backs and Recalls. (2) Cumulative collections from inception through December 31, 2015, excluding collections on behalf of others. (3) Estimated remaining collections (“ERC”) for charged-off consumer receivables includes $91.9 million related to accounts that converted to bankruptcy after purchase. 58 Table of Contents Estimated Remaining Gross Collections by Year of Purchase The following table summarizes our estimated remaining gross collections by year of purchase (in thousands): 2016 2017 2018 2019 2020 2021 2022 2023 2024 >2024 Total Estimated Remaining Gross Collections by Year of Purchase(1), (2) $ — $ — $ — $ — $ — $ Purchased consumer receivables: United States: <2006 $ 4,206 $ 2,604 $ 1,438 $ 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Subtotal Europe: 2013 2014 2015 Subtotal 3,297 6,778 13,365 26,743 49,096 62,366 90,300 167,312 195,666 186,945 806,074 183,199 144,718 107,894 435,811 1,864 4,677 8,291 14,725 29,249 37,797 59,713 122,041 158,208 1,041 2,655 5,699 9,297 17,320 22,123 35,759 80,615 97,826 189,846 124,381 771 585 1,627 3,435 6,218 11,303 13,464 22,321 53,749 62,482 81,569 $ 197 332 998 2,171 3,308 7,910 8,760 14,335 36,229 41,010 51,917 131 613 1,374 2,081 4,702 6,185 9,352 24,260 26,419 30,256 — 210 871 1,327 3,056 3,521 6,485 15,886 18,854 19,624 69,834 629,015 398,154 257,524 167,167 105,373 197,292 173,733 153,204 136,430 121,102 108,324 158,261 135,508 117,484 103,298 113,372 106,515 89,574 74,305 90,274 63,122 78,759 55,494 468,925 415,756 360,262 314,033 274,498 242,577 192,083 — — 361 844 1,986 2,289 3,525 10,826 13,367 13,957 47,155 73,177 69,971 48,935 Other geographies: 2012 2013 2014 2015 Subtotal 669 4,555 14,805 46,960 66,989 511 3,441 17,586 37,710 59,248 Purchased U.S. bankruptcy receivables: 2012 2013 2014 2015 Subtotal Total 11,782 8,064 — 1,260 21,106 5,845 2,243 — 5,993 14,081 384 2,497 46,040 27,231 76,152 1,771 654 — 7,267 9,692 278 1,464 40,366 19,950 62,058 — 397 — 6,963 7,360 213 1,035 13,562 14,990 29,800 — 258 — 5,510 5,768 179 206 2,162 7,942 10,489 — 169 — 850 1,019 108 113 1,602 2,500 4,323 — 111 — 223 334 — 19 1,592 519 2,130 — 21 — 146 167 — — — 308 1,291 1,488 2,291 5,656 9,773 9,711 — — — — 416 1,338 2,736 8,101 12,451 9,718 9,216 7,250 17,558 35,567 64,851 126,329 159,331 246,817 524,675 636,056 717,924 30,518 34,760 2,545,574 — 19,637 42,885 62,522 — — 3,792 366 4,158 — — — 99 99 — 1,146,461 3,289 20,668 23,957 921,199 722,764 2,790,424 — — — 311 311 — — — 58 58 2,342 13,330 141,507 158,479 315,658 19,398 11,917 — 28,369 59,684 $ 1,329,980 $ 1,171,269 $ 899,754 $ 687,204 $ 516,768 $ 391,379 $ 317,068 $ 241,535 $ 97,297 $ 59,086 $ 5,711,340 ________________________ (1) ERC for Zero Basis Portfolios can extend beyond our collection forecasts. (2) ERC for charged-off consumer receivables includes $91.9 million related to accounts that converted to bankruptcy after purchase. The collection forecast of each pool is generally estimated up to 120 months based on the expected collection period of each pool in the United States and in Europe. Expected collections beyond the 120 month collection forecast in the United States are included in ERC but are not included in the calculation of IRRs. 59 Table of Contents Unamortized Balances of Portfolios The following table summarizes the remaining unamortized balances of our purchased receivable portfolios by year of purchase (in thousands, except percentages): Unamortized Balance as of December 31, 2015 Purchase Price(1) Unamortized Balance as a Percentage of Purchase Price Unamortized Balance as a Percentage of Total Purchased consumer receivables: United States: 2007 2008 2009 2010 2011 2012 2013 2014 2015 Subtotal Europe: 2013 2014 2015 Subtotal Other geographies: 2013 2014 2015 Subtotal Purchased U.S. bankruptcy receivables: 2012 2013 2014 2015 Subtotal Total ________________________ $ $ 1,573 5,798 — 3,742 27,257 62,440 155,875 291,402 420,945 969,032 439,619 444,618 384,231 1,268,468 2,480 67,714 85,196 155,390 17,533 5,664 — 24,582 47,779 2,440,669 $ $ 204,064 227,755 253,081 345,445 382,310 466,772 513,333 517,074 480,195 3,390,029 619,079 630,347 423,528 1,672,954 29,568 88,227 94,020 211,815 83,159 39,833 — 24,372 147,364 5,422,162 0.8% 2.5% 0.0% 1.1% 7.1% 13.4% 30.4% 56.4% 87.7% 28.6% 71.0% 70.5% 90.7% 75.8% 8.4% 76.7% 90.6% 73.4% 21.1% 14.2% — 100.9% 32.4% 45.0% 0.2% 0.6% 0.0% 0.4% 2.8% 6.4% 16.1% 30.1% 43.4% 100.0% 34.6% 35.1% 30.3% 100.0% 1.6% 43.6% 54.8% 100.0% 36.7% 11.9% — 51.4% 100.0% 100.0% (1) Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-Backs, Recalls, and other adjustments. 60 Table of Contents Estimated Future Amortization of Portfolios As of December 31, 2015, we had $2.4 billion in investment in receivable portfolios. This balance will be amortized based upon current projections of cash collections in excess of revenue applied to the principal balance. The estimated amortization of the investment in receivable portfolios balance is as follows (in thousands): Years Ending December 31, 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Purchased Consumer Receivables United States Purchased Consumer Receivables Europe Purchased Consumer Receivables Other Geographies Purchased U.S. Bankruptcy Receivables Total Amortization $ 238,195 $ 103,223 $ 16,397 $ 14,851 $ 263,064 167,795 108,740 72,169 46,276 32,933 23,065 12,731 4,064 — 172,585 164,754 151,237 145,282 146,155 157,958 156,988 51,028 19,132 126 15,966 42,265 43,255 22,239 7,765 6,077 756 250 270 150 11,891 7,635 6,593 5,397 939 206 178 89 — — 372,666 463,506 382,449 309,825 245,087 201,135 197,174 180,987 64,098 23,466 276 Total $ 969,032 $ 1,268,468 $ 155,390 $ 47,779 $ 2,440,669 Headcount by Function by Geographic Location The following table summarizes our headcount by function by geographic location: General & Administrative Internal Legal Account Manager Account Manager Headcount as of December 31, 2015 2014 2013 Domestic International Domestic International Domestic International 944 29 240 1,213 2,198 151 3,103 5,452 1,010 38 313 1,361 1,628 64 2,324 4,016 1,008 63 297 1,368 1,288 61 2,534 3,883 61 Table of Contents Purchases by Quarter The following table summarizes the consumer receivable portfolios and bankruptcy receivables we purchased by quarter, and the respective purchase prices (in thousands): Quarter Q1 2013 Q2 2013(1) Q3 2013(2) Q4 2013 Q1 2014(3) Q2 2014 Q3 2014(4) Q4 2014 Q1 2015 Q2 2015(5) Q3 2015 Q4 2015(6) # of Accounts Face Value Purchase Price 1,678 $ 1,615,214 $ 23,887 4,232 614 1,104 1,210 2,203 859 734 2,970 1,267 2,363 68,906,743 13,437,807 1,032,472 4,288,159 3,075,343 3,970,145 2,422,128 1,041,011 5,544,885 2,085,381 4,068,252 58,771 423,113 617,852 105,043 467,565 225,762 299,509 258,524 125,154 418,780 187,180 292,608 ________________________ (1) (2) (3) (4) (5) (6) Includes $383.4 million of portfolios acquired with a face value of approximately $68.2 billion in connection with the AACC Merger. Includes $559.0 million of portfolios acquired with a face value of approximately $12.8 billion in connection with the Cabot Acquisition. Includes $208.5 million of portfolios acquired with a face value of approximately $2.4 billion in connection with the Marlin Acquisition. Includes $105.4 million of portfolios acquired with a face value of approximately $1.7 billion in connection with the Atlantic Acquisition. Includes $216.0 million of portfolios acquired with a face value of approximately $3.1 billion in connection with the dlc Acquisition. Includes $60.3 million of portfolios acquired with a face value of approximately $1.2 billion in connection with the Baycorp Acquisition. Liquidity and Capital Resources Liquidity The following table summarizes our cash flow activity for the periods presented (in thousands): Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities Operating Cash Flows Year Ended December 31, 2015 2014 2013 $ $ 114,425 (472,709) 401,845 $ 111,544 (755,197) 626,323 74,775 (217,240) 245,980 Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting net income for non-cash operating items such as depreciation and amortization, allowance charges and stock-based compensation charges, and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations. Net cash provided by operating activities was $114.4 million, $111.5 million, and $74.8 million for the years ended December 31, 2015, 2014, and 2013, respectively. Cash provided by operating activities during the year ended December 31, 2015 was primarily related to net income of $47.4 million and a $49.3 million non-cash add back related to a goodwill impairment charge at Propel, in addition to other non-cash add backs in operating activities and changes in operating assets and liabilities. Cash provided by operating activities during the year ended December 31, 2014 was primarily related to net income of $98.3 million and various non-cash add backs in operating activities and changes in operating assets and liabilities. Cash provided by operating activities during the year ended December 31, 2013 was primarily related to net income of $73.7 million and various non-cash add backs in operating activities and changes in operating assets and liabilities. 62 Table of Contents Investing Cash Flows Net cash used in investing activities was $472.7 million, $755.2 million, and $217.2 million for the years ended December 31, 2015, 2014, and 2013, respectively. The cash flows used in investing activities during the year ended December 31, 2015 were primarily related to cash paid for acquisitions, net of cash acquired, of $276.6 million, receivable portfolio purchases (excluding the portfolios acquired from the dlc Acquisition of $216.0 million and from the acquisition of Baycorp of $60.3 million) of $749.8 million, offset by collection proceeds applied to the principal of our receivable portfolios in the amount of $635.9 million. The cash flows used in investing activities during the year ended December 31, 2014 were primarily related to cash paid for acquisitions, net of cash acquired, of $495.8 million, receivable portfolio purchases (excluding the portfolios acquired from the Marlin Acquisition of $208.5 million and from the Atlantic Acquisition of $105.4 million) of $863.0 million, offset by collection proceeds applied to the principal of our receivable portfolios in the amount of $634.0 million. Cash flows used in investing activities during the year ended December 31, 2013 were primarily related to cash paid for acquisitions, net of cash acquired, of $449.0 million, receivable portfolio purchases (excluding the portfolios acquired from the AACC Merger of $383.4 million and from the Cabot Acquisition of $559.0 million) of $249.6 million, and originations or purchases of receivables secured by tax liens of $117.0 million, offset by gross collection proceeds applied to the principal of our receivable portfolios in the amount of $546.4 million. Financing Cash Flows Net cash provided by financing activities was $401.8 million, $626.3 million, and $246.0 million for the years ended December 31, 2015, 2014, and 2013, respectively. The cash provided by financing activities during the year ended December 31, 2015 primarily reflects $1.1 billion in borrowings under our credit facilities and $332.7 million of proceeds from the Cabot Floating Rate Notes, offset by $891.8 million in repayments of amounts outstanding under our credit facilities and $33.2 million in repurchases of our common stock. The cash provided by financing activities during the year ended December 31, 2014 primarily reflects $1.3 billion in borrowings under our credit facilities, $288.6 million of proceeds from Cabot’s senior secured notes due 2021, $161.0 million of proceeds from the issuance of Encore’s convertible senior notes due 2021, and $134.0 million of proceeds from the issuance of Propel’s securitized notes, offset by $1.2 billion in repayments of amounts outstanding under our credit facilities and $33.6 million in purchases of convertible hedge instruments, including the payment for our warrant restrike transaction associated with our 2017 Convertible Notes. The cash provided by financing activities during the year ended December 31, 2013, reflects $659.9 million in borrowings under our credit facilities, the $151.7 million of proceeds from Cabot’s senior secured notes due 2020, and $172.5 million of proceeds from the issuance of our 2020 Convertible Notes, offset by $630.2 million repayments of amounts outstanding under our credit facilities. Capital Resources Historically, we have met our cash requirements by utilizing our cash flows from operations, bank borrowings, convertible debt offerings, and equity offerings. From time to time, depending on the capital markets, we and Cabot consider additional financings to fund our operations and acquisitions. Our primary cash requirements have included the purchase of receivable portfolios, the acquisition of U.S. and international entities, operating expenses, the payment of interest and principal on borrowings, and the payment of income taxes. On July 9, 2015, we amended our revolving credit facility and term loan facility pursuant to Amendment No. 2 to the Second Amended and Restated Credit Agreement (as amended, the “Restated Credit Agreement”). The Restated Credit Agreement includes a revolving credit facility of $742.6 million (the “Revolving Credit Facility”), a term loan facility of $158.8 million (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”), and an accordion feature that allows us to increase the Revolving Credit Facility by an additional $250.0 million ($55.0 million of which was exercised in November 2015). Including the accordion feature, the maximum amount that can be borrowed under the Senior Secured Credit Facilities is $1.1 billion. The Senior Secured Credit Facilities have a five-year maturity, expiring in February 2019, except with respect to two subtranches of the Term Loan Facility of $60.0 million and $6.3 million, expiring in February 2017 and November 2017, respectively. As of December 31, 2015, we had $770.1 million outstanding and $107.1 million of availability under the Senior Secured Credit Facilities, excluding the $195.0 million available under the accordion. Through Cabot Financial (UK) Limited (“Cabot Financial UK”), an indirect subsidiary, we have a revolving credit facility of £200.0 million (the “Cabot Credit Facility”). The Cabot Credit Facility includes an uncommitted accordion facility which will allow the facility to be increased by an additional £50.0 million, subject to obtaining the requisite commitments and compliance with the terms of Cabot Financial UK’s other indebtedness. As of December 31, 2015, we had £36.5 million (approximately $54.1 million) outstanding and £163.5 million (approximately $242.3 million) of availability under the Cabot Credit Facility. 63 Table of Contents On June 1, 2015, Cabot entered into a new senior secured bridge facility (the “2015 Senior Secured Bridge Facility”) that provides an aggregate principal amount of up to £90.0 million. The purpose of the 2015 Senior Secured Bridge Facility was to provide funding for the financing, in full or in part, of the purchase price for the dlc Acquisition and the payment of costs, fees and expenses in connection with the dlc Acquisition, and was fully drawn on as of the closing of the dlc Acquisition. The 2015 Senior Secured Bridge Facility had an initial term of one year. In November 2015, Cabot paid off the outstanding balance on the 2015 Senior Secured Bridge Facility. As a result, at December 31, 2015, there was no amount outstanding on the 2015 Senior Secured Bridge Facility. On November 11, 2015, Cabot Financial (Luxembourg) II S.A. (the “Cabot Financial II”), an indirect subsidiary of Janus Holdings, issued €310.0 million (approximately $332.2 million) in aggregate principal amount of Senior Secured Floating Rate Notes due 2021 (the “Cabot Floating Rate Notes”). The Cabot Floating Rate Notes bear interest at a rate equal to three-month EURIBOR plus 5.875% per annum, reset quarterly. The Cabot Floating Rate Notes will mature on November 15, 2021. Propel has an $80.0 million syndicated loan facility (the “Propel Facility I”), with an accordion feature that allows Propel to increase the Propel Facility I by an additional $20.0 million. The Propel Facility I is used to fund tax liens. As of December 31, 2015 there was $63.0 million outstanding and $17.0 million of availability under the Propel Facility I, excluding the $20.0 million available under the accordion. Propel also has a $150.0 million revolving credit facility (the “Propel Facility II”) that is used to purchase tax liens in various states directly from taxing authorities. As of December 31, 2015, there was $107.9 million outstanding and $42.1 million of availability under the Propel Facility II. On April 24, 2014, our Board of Directors approved a $50.0 million share repurchase program. During the year ended December 31, 2015, we repurchased 839,295 shares of our common stock for approximately $33.2 million, which represented the remaining amount allowed under the share repurchase program. On August 12, 2015, our Board of Directors approved a new $50.0 million share repurchase program. Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as determined by the management and our Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements. The program does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion. We did not make any repurchases under the new share repurchase program during the year ended December 31, 2015. Currently, all of our portfolio purchases are funded with cash from operations and borrowings under our Senior Secured Credit Facilities and our Cabot Credit Facility. All of our purchases for receivables secured by property tax liens are funded with cash from Propel’s operations and borrowings under the Propel Facility I and the Propel Facility II. We are in compliance with all covenants under our financing arrangements. See Note 9, “Debt” to our consolidated financial statements for a further discussion of our debt. Our cash and cash equivalents at December 31, 2015 consisted of $56.9 million held by U.S.-based entities and $96.7 million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and may be subject to material tax effects if repatriated. However, we believe that our U.S. sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate the funds. We believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities. Our future cash needs will depend on our acquisitions of portfolios and businesses. 64 Table of Contents Future Contractual Cash Obligations The following table summarizes our future contractual cash obligations as of December 31, 2015 (in thousands): Contractual Obligations Principal payments on debt Estimated interest payments(1) Capital leases Operating leases Purchase commitments on receivable portfolios Preferred equity certificates(2) Total contractual cash obligations(3) ________________________ Payment Due By Period Total Less Than 1 Year 1 – 3 Years 3 – 5 Years More Than 5 Years $ 2,975,612 $ 42,320 $ 367,023 $ 1,733,914 $ 832,355 718,396 11,628 75,813 297,157 221,516 167,253 6,650 17,542 297,157 — 323,076 4,297 28,267 — — 207,788 681 14,573 — — 20,279 — 15,431 — 221,516 $ 4,300,122 $ 530,922 $ 722,663 $ 1,956,956 $ 1,089,581 (1) We calculated estimated interest payments for long-term debt as follows: (a) for the fixed interest bearing debt, such as our senior secured notes and convertible senior notes, we calculated interest based on the applicable rates and payment dates and (b) for the debt facilities that are subject to variable interest rates, we estimated the debt balance and interest rates based on our determination of the most likely scenario. We expect to settle such interest payments with cash flows from operating activities. (2) As of December 31, 2015, we carried a liability of approximately $221.5 million related to principal and accumulated interests for PECs issued in connection with the Cabot Acquisition. The PECs have a maturity date of May 2043, accrue interest at 12% per annum, and are held by Cabot’s noncontrolling interest holders. The future accrued interest is excluded from the table above due to uncertainty in determining the timing of the payment because the payment will only be satisfied in connection with the disposition of the noncontrolling interests. See Note 9, “Debt” to our consolidated financial statements for additional information on our PECs. (3) We had approximately $58.5 million of liabilities and accrued interests related to uncertain tax positions at December 31, 2015. We are unable to reasonably estimate the timing of the cash settlement with the tax authorities due to the uncertainties related to these tax matters and, as a result, these obligations are not included in the table. See Note 12, “Income Taxes” to our consolidated financial statements for additional information on our uncertain tax positions. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K. Critical Accounting Policies and Estimates We prepare our financial statements, in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1, “Ownership, Description of Business and Summary of Significant Accounting Policies” of the notes to consolidated financial statements describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates and such differences may be material. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors. Investment in Receivable Portfolios and Related Revenue. As permitted by the authoritative guidance for loans and debt securities acquired with deteriorated credit quality, static pools are established on a quarterly basis with accounts purchased during the quarter that have common risk characteristics. Discrete receivable portfolio purchases during a quarter are aggregated into pools based on these 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 we expect 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. 65 Table of Contents In compliance with the authoritative guidance, we account for our investments in consumer receivable portfolios using either the interest method or the cost recovery method. The interest method applies an 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. We account 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, we account for that pool using the cost recovery method. The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue is recognized until the purchase price of a cost recovery portfolio has been fully recovered. Deferred Court Costs. We pursue legal collection using a network of attorneys that specialize in collection matters and through our internal legal channel. We generally pursue collections through legal means only when we believe a consumer has sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In connection with our agreements with our contracted attorneys, we advance certain out-of-pocket court costs, or Deferred Court Costs. We capitalize these costs in the consolidated financial statements and provide a reserve for those costs that we believe will ultimately be uncollectible. We determine the reserve based on our analysis of court costs that have been advanced and recovered, or that we anticipate recovering. We write off any Deferred Court Cost not recovered within five years of placement. Collections received through litigation are first applied against related court costs with the balance applied to the debtors’ account. Receivables Secured by Property Tax Liens, Net. Receivables secured by property tax liens are reported at their outstanding principal balances, adjusted for, if any, charge-offs, allowance for losses, deferred fees or costs, and unamortized premiums or discounts. Interest income is reported on the interest method and includes amortization of net deferred fees and costs over the term of the agreements. We accrue interest on all receivable portfolios as the receivables are collateralized by tax liens that are in a priority position over most other liens on the properties. If there is doubt about the ultimate collection of the accrued interest on a specific receivable, it would be placed on non-accrual and, at that time, any accrued interest would be reversed. The allowance for losses on receivables secured by property tax liens is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the receivables in light of historical experience, adverse situations that may affect the borrower’s ability to repay, the estimated value of the underlying collateral, and prevailing economic conditions. Goodwill and Other Intangible Assets. Business combinations typically result in the recording of goodwill and other intangible assets. The excess of the purchase price over the fair value assigned to the tangible and identifiable intangible assets, liabilities assumed, and noncontrolling interests in the acquiree is recorded as goodwill. Goodwill and indefinite-lived intangible assets are tested at the reporting unit level for impairment annually and in interim periods if certain events occur indicating that the carrying amounts may be impaired. Determining the number of reporting units and the fair value of a reporting unit requires us to make judgments and involves the use of significant estimates and assumptions. We have six reporting units identified for goodwill impairment testing purposes. The annual goodwill testing date for the five reporting units that are included in the portfolio purchasing and recovery reportable segment is October 1st; the annual goodwill testing date for the tax lien business reporting unit is April 1st. We first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The qualitative factors include economic environment, business climate, market capitalization, operating performance, competition, and other factors. We may proceed directly to the two-step quantitative test without performing the qualitative test. The first step involves measuring the recoverability of goodwill at the reporting unit level by comparing the estimated fair value of the reporting unit in which the goodwill resides to its carrying value. The second step, if necessary, measures the amount of impairment, if any, by comparing the implied fair value of goodwill to its carrying value. We apply various valuation 66 Table of Contents techniques to measure the fair value of each reporting unit, including the income approach and the market approach. For goodwill impairment analyses conducted at most of the reporting units, we use the income approach in determining fair value, specifically the discounted cash flow method, or DCF. In applying the DCF method, an identified level of future cash flow is estimated. Annual estimated cash flows and a terminal value are then discounted to their present value at an appropriate discount rate to obtain an indication of fair value. The discount rate utilized reflects estimates of required rates of return for investments that are seen as similar to an investment in the reporting unit. DCF analyses are based on management’s long-term financial projections and require significant judgments, therefore, for our Cabot reporting unit, which carries a material goodwill balance and where we have access to reliable market participant data, the market approach is conducted in addition to the income approach in determining its fair value. We use a guideline company method under the market approach to estimate the fair value of equity and market value of invested capital (“MVIC”). The guideline company approach relies on estimated remaining collections data for each of the selected guideline companies, which enables a direct comparison between the reporting unit and the selected peer group. We believe that the current methodology used in determining the fair value of our reporting units represent the best estimate. In addition, we compare the aggregate fair value of the reporting units to our overall market capitalization. For our annual goodwill impairment tests performed at October 1, 2015 for the reporting units that are included in our portfolio purchasing and recovery reportable segment, the estimated fair value of each of these reporting units exceeded its respective carrying value. As a result, no impairment existed at any of these reporting units. We have determined, at April 1, 2015, the annual goodwill impairment testing date for our tax lien business reporting unit, that the estimated fair value exceeded the carrying value. The estimation of fair value was based on a DCF analysis under the income approach as discussed above. However, as discussed in Note 17 “Subsequent Event” to our consolidated financial statements, on February 19, 2016, we entered into a securities purchase agreement with certain funds, which provides for the sale of 100% of Encore’s membership interests in Propel. The purchase price for the transaction is calculated in accordance with a formula relating to the redemptive value of certain tax liens as well as the book value of certain other assets and liabilities of Propel, and will be determined at the closing of the transaction. The application of the purchase price formula as of December 31, 2015 would have resulted in an enterprise value for Propel of $344.3 million. After repayment of third party debt, the cash consideration payable to Encore would have been $142.8 million. Authoritative guidance defines fair value as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). In connection with the preparation of our financial statements and based, in part, on these developments, management believes that the proposed purchase price would indicate that Propel’s fair value at December 31, 2015 was less than its carrying value. Based on the estimated sales price using the purchase price formula, we wrote-down the entire goodwill balance of $49.3 million carried at the tax lien business reporting unit as of December 31, 2015. Significant judgments are required to estimate the fair value of reporting units including estimating future cash flows, determining appropriate discount rates, growth rates, comparable guideline companies and other assumptions. Future business conditions and/or activities could differ materially from the projections made by management, which in turn, could result in the need for impairment charges. We will perform additional impairment testing if events occur or circumstances change indicating that the carrying amounts may be impaired. Redeemable Noncontrolling Interests. Some minority shareholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value, while others have the right to force a sale of the subsidiary if we choose not to purchase their interests at fair value. The noncontrolling interests subject to these arrangements are included in temporary equity as redeemable noncontrolling interests, and are adjusted to their estimated redemption amounts each reporting period with a corresponding adjustment to additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor. These adjustments do not affect the calculation of earnings per share. Stock-Based Compensation. We record compensation costs related to our stock-based awards which include stock options, restricted stock awards, and restricted stock units. We measure stock-based compensation cost at the grant date based on the fair value of the award. Compensation cost for service-based awards is recognized ratably over the applicable vesting period. Compensation cost for performance-based awards is reassessed each period and recognized based upon the probability that the performance targets will be achieved. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. We have certain share awards that include market conditions that affect vesting, the fair value of these shares is estimated using a lattice model. Compensation cost for these awards is not adjusted if the market condition is not met, as long as the requisite service is completed. 67 Table of Contents Income Taxes. We use the liability method of accounting for income taxes. When we prepare the consolidated financial statements, we estimate our income taxes based on the various jurisdictions where we conduct business. This requires us to estimate our current tax exposure and to assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. Deferred income taxes are recognized based on the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We then assess the likelihood that our deferred tax assets will be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding tax expense in our statement of income. When we reduce our valuation allowance in an accounting period, we record a corresponding tax benefit in our statement of income. We include interest and penalties related to income taxes within our provision for income taxes. See Note 12, “Income Taxes” to our consolidated financial statements for further discussion of income taxes. Item 7A—Quantitative and Qualitative Disclosures about Market Risk We are exposed to economic risks from foreign currency exchange rates and interest rates. A portion of these risks is hedged, but the risks may affect our financial statements. Foreign Currency Exchange Rates We have operations in foreign countries, which expose us to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. We continuously evaluate and manage our foreign currency risk through the use of derivative financial instruments, including foreign currency forward contracts with financial counterparties where practicable. Such derivative instruments are viewed as risk management tools and are not used for speculative or trading purposes. As of December 31, 2015, we had 28 outstanding foreign currency forward contracts that hedge our risk of foreign currency exchange against the Indian rupee. Each contract settles monthly with a notional amount ranging from a U.S. dollar equivalent of $1.4 million. The contracts hedge the forecasted monthly cash settlements resulting from the expenses incurred by our operations in India. We have not experienced any hedge ineffectiveness since the inception of the hedging program; a hypothetical change in the foreign exchange rate against the Indian rupee would not have a material impact on our consolidated statement of income. In addition, we are exposed to foreign currency risk that arises from the revaluation of monetary assets and liabilities held by our subsidiaries that are not denominated in our functional currency. We may hedge currency exposures associated with certain assets and liabilities denominated in nonfunctional currencies and certain anticipated nonfunctional currency transactions. We could experience unanticipated gains or losses on anticipated foreign currency cash flows. The financial statements of certain of our foreign subsidiaries are translated into U.S. dollars from their functional currencies. We are exposed to foreign currency risk due to the translation and remeasurement of the results of certain international operations into U.S. dollars as part of the consolidation process. Fluctuations in foreign currency exchange rates can therefore create volatility in the results of operations and may adversely affect our financial condition. We currently do not hedge the net assets of these foreign subsidiaries from foreign currency exposure. Interest Rates We have variable-interest-bearing borrowings under our credit facilities that subject us to interest rate risk. We have, from time to time, utilized derivative financial instruments, including interest rate swap contracts and interest rate caps with financial counterparties to manage our interest rate risk. As of December 31, 2015, we did not have any material interest rate hedge contracts outstanding. Our variable-interest-bearing debt is subject to the risk of interest rate fluctuations. Significant increases in future interest rates on our variable rate debt could lead to a material decrease in future earnings assuming all other factors remained constant. If the market interest rates for our variable rate agreements increase 10%, interest expense on such outstanding debt would increase by approximately $5.2 million, on an annualized basis. Conversely, if the market interest rates decreased an average of 10%, our interest expense on such outstanding debt would decrease by $5.2 million on an annualized basis. Our analysis and methods used to assess and mitigate the risks discussed above should not be considered projections of future risks. Item 8—Financial Statements and Supplementary Data Our consolidated financial statements, the notes thereto and the Report of BDO USA, LLP, our Independent Registered Public Accounting Firm, are included in this Annual Report on Form 10-K on pages F-1 through F-42. 68 Table of Contents Item 9—Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A—Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period. Management’s Report on Internal Control over Financial Reporting The Company’s management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for Encore Capital Group, Inc. and its subsidiaries (the “Company”). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changing conditions, effectiveness of internal control over financial reporting may vary over time. The Company’s processes contain self-monitoring mechanisms and actions are taken to correct deficiencies as they are identified. Management has assessed the effectiveness of Encore’s internal control over financial reporting as of December 31, 2015, based on the criteria for effective internal control described in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2015. Management did not assess the effectiveness of internal control over financial reporting of dlc and Baycorp because of the timing of the acquisitions, which were completed on June 1, 2015 and October 21, 2015, respectively. dlc and Baycorp constituted approximately 8.6% of total assets as of December 31, 2015 and 2.9% and 21.3% of revenues and net income, respectively, for the year then ended. BDO USA, LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report on Form 10-K, was engaged to attest to and report on the effectiveness of Encore’s internal control over financial reporting as of December 31, 2015, as stated in its report below. 69 Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Encore Capital Group, Inc. San Diego, California We have audited Encore Capital Group, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Encore Capital Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As indicated in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Hillesden Securities Limited (“dlc”) and Baycorp Holdings Pty Limited (“Baycorp”), which were acquired on June 1, 2015 and October 21, 2015, respectively, and which are included in the consolidated statement of financial condition of Encore Capital Group, Inc. as of December 31, 2015, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year then ended. dlc and Baycorp combined constituted 8.6% of total assets as of December 31, 2015, and 2.9% and 21.3% of revenues and net income, respectively, for the year then ended. Management did not assess the effectiveness of internal control over financial reporting of dlc and Baycorp because of the timing of the acquisitions. Our audit of internal control over financial reporting of Encore Capital Group, Inc. also did not include an evaluation of the internal control over financial reporting of dlc and Baycorp. In our opinion, Encore Capital Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Encore Capital Group, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2015 and our report dated February 24, 2016 expressed an unqualified opinion thereon. /s/ BDO USA, LLP Costa Mesa, California February 24, 2016 70 Table of Contents Changes in Internal Control over Financial Reporting No changes in our internal control over financial reporting occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B—Other Information On February 19, 2016, Encore Capital Group, Inc. (the “Company”) entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain funds affiliated with Prophet Capital Asset Management LP (“Buyer”), which provides for the sale of 100% of the Company’s membership interests in Propel Acquisition LLC (“Propel”) to Buyer (the "Transaction"). The purchase price for the Transaction is calculated in accordance with a formula relating to the redemptive value of certain tax liens as well as the book value of certain other assets and liabilities of Propel, and will be determined at the closing of the Transaction. The application of the purchase price formula as of December 31, 2015 would have resulted in an enterprise value for Propel of $344.3 million. After repayment of third party debt, the cash consideration payable to the Company would have been $142.8 million. The principal business of Propel is the acquisition and servicing of tax liens on residential and commercial real property. The Purchase Agreement contains customary representations, warranties and covenants by each of the parties thereto, including, among others, covenants by the Company to conduct the business of Propel in the ordinary course during the interim period between execution of the Purchase Agreement and consummation of the Transaction. The obligation of the parties to close the Transaction is subject to customary closing conditions. The Purchase Agreement provides for limited termination rights, including, among others, by the mutual consent of the Company and Buyer, upon certain breaches of representations, warranties, covenants or agreements, and in the event the Transaction has not been consummated before May 31, 2016. In connection with the execution of the Purchase Agreement the Company and Buyer entered into a transition services agreement. There are no material relationships between the Company and Buyer or any of their respective affiliates, other than in respect of the Purchase Agreement or the related ancillary agreements. The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Purchase Agreement, a copy of which is filed as an Exhibit 2.4 to this Annual Report on Form 10-K and which is incorporated herein by reference. 71 Table of Contents Item 10—Directors, Executive Officers and Corporate Governance PART III The information under the captions “Election of Directors,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance,” appearing in the 2016 Proxy Statement to be filed no later than April 30, 2016, is hereby incorporated by reference. Item 11—Executive Compensation The information under the caption “Executive Compensation and Other Information,” appearing in the 2016 Proxy Statement to be filed no later than April 30, 2016, is hereby incorporated by reference. Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information under the captions “Security Ownership of Principal Stockholders and Management” and “Equity Compensation Plan Information,” appearing in the 2016 Proxy Statement to be filed no later than April 30, 2016, is hereby incorporated by reference. Item 13—Certain Relationships and Related Transactions, and Director Independence The information under the captions “Certain Relationships and Related Transactions” and “Election of Directors— Corporate Governance—Director Independence,” appearing in the 2016 Proxy Statement to be filed no later than April 30, 2016, is hereby incorporated by reference. Item 14—Principal Accountant Fees and Services The information under the caption “Independent Registered Public Accounting Firm,” appearing in the 2016 Proxy Statement to be filed no later than April 30, 2016, is hereby incorporated by reference. 72 Table of Contents (a) Financial Statements. Item 15—Exhibits and Financial Statement Schedules PART IV The following consolidated financial statements of Encore Capital Group, Inc. are filed as part of this annual report on Form 10-K: Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Condition at December 31, 2015 and 2014 Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Equity for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 Notes to Consolidated Financial Statements Page F-1 F-2 F-3 F-4 F-5 F-6 F-7 (b) Exhibits. Number 2.1 2.2 2.3 2.4 3.1 3.2 3.3 4.1 4.2* 4.3 Description Securities Purchase Agreement, dated May 8, 2012, by and among Propel Acquisition LLC and McCombs Family Partners, Ltd., JHBC Holdings, LLC and Texas Tax Loans, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2012) Agreement and Plan of Merger dated March 6, 2013, by and among Encore Capital Group, Inc., Pinnacle Sub, Inc. and Asset Acceptance Capital Corp. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on March 6, 2013) Stock Purchase Agreement, dated August 1, 2014, by and among Encore Capital Group, Inc., the sellers party thereto, Atlantic Credit & Finance, Inc. and Richard Woolwine as the sellers’ representative (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2014) Securities Purchase Agreement, dated February 19, 2016, by and among Encore Capital Group, Inc. and certain funds affiliated with Prophet Capital Asset Management LP (filed herewith) Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1/A filed on June 14, 1999, File No. 333-77483) Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 4, 2002) Bylaws, as amended through February 8, 2011 (incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K filed on February 14, 2011) Form of Common Stock Certificate (incorporated by reference to Exhibit 4.7 to the Company’s Registration Statement on Form S-3 filed on December 21, 2009, File No. 333-163876) Amended and Restated Senior Secured Note Purchase Agreement, dated February 10, 2011, by and among Encore Capital Group, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement Insurance and Annuity Company and Prudential Annuities Life Assurance Corporation (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on April 27, 2011) Form of 7.75% Senior Secured Note due 2017 (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed on April 27, 2011) 73 Table of Contents Number 4.4 Description Form of 7.375% Senior Secured Note due 2018 (incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q filed on April 27, 2011) 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 Amendment No. 1, dated May 8, 2012, to Amended and Restated Senior Secured Note Purchase Agreement, dated February 10, 2011, by and among Encore Capital Group, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement Insurance and Annuity Company and Prudential Annuities Life Assurance Corporation, and SunTrust Bank as collateral agent and administrative agent (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2012) Indenture, dated November 27, 2012, between Encore Capital Group, Inc. and Union Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on 8-K filed on December 3, 2012) Indenture (including the form of the Note), dated as of June 24, 2013, by and among Encore Capital Group, Inc., Midland Credit Management, Inc., as guarantor, and Union Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 24, 2013) Indenture (including the form of the Note), dated August 2, 2013, by and among Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and all material subsidiaries of Cabot Financial Limited, as guarantors, J.P. Morgan Europe Limited, as security agent, and Citibank, N.A., London Branch as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 6, 2013) Indenture (including the form of the Note), dated September 20, 2012, by and among Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and all material subsidiaries of Cabot Financial Limited, as guarantors, J.P. Morgan Europe Limited, as security agent, and Citibank, N.A., London Branch as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2013) First Supplemental Indenture, dated June 13, 2013, between Cabot Financial (Luxembourg) S.A. and Citibank, N.A., London Branch as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2013) Indenture (including the form of the Note), dated July 25, 2013, by and among Marlin Intermediate Holdings plc, Marlin Financial Group Limited, Marlin Financial Intermediate Limited, certain subsidiaries of Marlin Financial Intermediate Limited, The Bank of New York Mellon, London Branch as trustee, paying agent, transfer agent and registrar, and Royal Bank of Scotland plc, as security agent (incorporated by reference to Exhibit 4.11 to the Company’s Annual Report on Form 10-K filed on February 25, 2014) First Supplemental Indenture, dated February 19, 2014, by and among Marlin Intermediate Holdings plc, Marlin Financial Intermediate II Limited, Cabot Financial Limited the guarantors party thereto and the Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.12 to the Company’s Annual Report on Form 10-K filed on February 25, 2014) Indenture (including form of Note), dated as of March 11, 2014, by and between Encore Capital Group, Inc., Midland Credit Management, Inc., as guarantor, and Union Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 11, 2014) Second Supplemental Indenture, dated March 14, 2014, by and among Cabot Financial (Luxembourg) S.A., Cabot Financial Limited, Cabot Credit Management Limited, as guarantor, and Citibank, N.A., London Branch, as trustee (filed with the Company’s Quarterly Report on Form 10- Q filed on May 8, 2014) Second Supplemental Indenture, dated March 14, 2014, by and among Marlin Intermediate Holdings plc, Cabot Financial Limited, the subsidiary guarantors party thereto and the Bank of New York Mellon, London Branch, as trustee (filed with the Company’s Quarterly Report on Form 10-Q filed on May 8, 2014) 74 Table of Contents Number 4.16 Description Indenture (including form of Note), dated March 27, 2014, between Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited, the subsidiary guarantors party thereto, J.P. Morgan Europe Limited, as security agent, Citibank, N.A., London Branch as trustee, principal paying agent and transfer agent and Citigroup Global Markets Deutschland AG, as registrar (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 28, 2014) 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25 4.26 4.27 4.28 Indenture (including form of Note), dated May 6, 2014, by and between PFS Tax Lien Trust 2014-1 and Citibank, N.A., as trustee (filed with the Company’s Quarterly Report on Form 10-Q filed on May 8, 2014) First Supplemental Indenture, dated March 14, 2014, by and among Cabot Financial (Luxembourg) S.A., Cabot Financial Limited, Cabot Credit Management Limited, as guarantor, and Citibank, N.A., London Branch, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2014) Third Supplemental Indenture, dated May 19, 2014, by and among Cabot Financial (Luxembourg) S.A., Cabot Financial Limited, Citibank, N.A., London Branch, as trustee, and the guarantors party thereto (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on May 20, 2014) Second Supplemental Indenture, dated May 19, 2014, by and among Cabot Financial (Luxembourg) S.A., Cabot Financial Limited, Citibank, N.A., London Branch, as trustee, and the guarantors party thereto (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on May 20, 2014) Third Supplemental Indenture, dated May 19, 2014, by and among Marlin Intermediate Holdings plc, Cabot Financial Limited, The Bank of New York Mellon, London Branch, as trustee, and the guarantors party thereto (incorporated by reference to Exhibit 4.3 of the Company’s Current Report on Form 8-K filed on May 20, 2014) Fourth Supplemental Indenture, dated May 28, 2015, by and among Cabot Asset Purchases (Ireland) Limited, Cabot Financial (Ireland) Limited, Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as trustee (filed herewith) Third Supplemental Indenture, dated May 28, 2015, by and among Cabot Asset Purchases (Ireland) Limited, Cabot Financial (Ireland) Limited, Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as trustee (filed herewith) Fourth Supplemental Indenture, dated May 28, 2015, by and among Cabot Asset Purchases (Ireland) Limited, Cabot Financial (Ireland) Limited, Marlin Intermediate Holdings plc, Marlin Financial Group Limited, Marlin Financial Intermediate Limited, Marlin Financial Intermediate II Limited and The Bank of New York Mellon, London Branch, as trustee (filed herewith) Supplemental Indenture, dated May 28, 2015, by and among Cabot Asset Purchases (Ireland) Limited, Cabot Financial (Ireland) Limited, Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as trustee (filed herewith) Fifth Supplemental Indenture, dated July 28, 2015, by and among Hillesden Securities Limited, Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as trustee (filed herewith) Fourth Supplemental Indenture, dated July 28, 2015, by and among Hillesden Securities Limited, Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as trustee (filed herewith) Fifth Supplemental Indenture, dated July 28, 2015, by and among Hillesden Securities Limited, Marlin Intermediate Holdings plc, Marlin Financial Group Limited, Marlin Financial Intermediate Limited, Marlin Financial Intermediate II Limited and The Bank of New York Mellon, London Branch, as trustee (filed herewith) 75 Table of Contents Number Description 4.29 4.30 4.31 4.32 4.33 4.34 10.1+ 10.2+ 10.3 10.4+ 10.5+ 10.6+ 10.7 Second Supplemental Indenture, dated July 28, 2015, by and among Hillesden Securities Limited, Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as trustee (filed herewith) Indenture, dated November 11, 2015, between Cabot Financial (Luxembourg) II S.A., Cabot Credit Management Limited, Cabot Financial Limited, the subsidiary guarantors party thereto, J.P. Morgan Europe Limited, as security agent, Citibank, N.A., London Branch as trustee, principal paying agent and transfer agent and Citigroup Global Markets Deutschland AG, as registrar (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 13, 2015) Sixth Supplemental Indenture, dated November 11, 2015, by and among Cabot Financial (Luxembourg) II S.A., Cabot Financial (Treasury) Ireland, Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as trustee (filed herewith) Fifth Supplemental Indenture, dated November 11, 2015, by and among Cabot Financial (Luxembourg) II S.A., Cabot Financial (Treasury) Ireland, Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as trustee (filed herewith) Sixth Supplemental Indenture, dated November 11, 2015, by and among Cabot Financial (Luxembourg) II S.A., Cabot Financial (Treasury) Ireland, Marlin Intermediate Holdings PLC, Marlin Financial Group Limited, Marlin Financial Intermediate Limited, Marlin Financial Intermediate II Limited, and The Bank of New York Mellon, London Branch, as trustee (filed herewith) Third Supplemental Indenture, dated November 11, 2015, by and among Cabot Financial (Luxembourg) II S.A., Cabot Financial (Treasury) Ireland, Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as trustee (filed herewith) Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 4, 2006) Severance protection letter agreement, dated March 11, 2009, between Encore Capital Group, Inc. and Paul Grinberg (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 13, 2009) Lease Deed, dated April 22, 2009, between Midland Credit Management India Private Limited and R.S. Technologies Private Limited, for real property located in Gurgaon, India (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on April 29, 2009) Encore Capital Group, Inc. 2005 Stock Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 15, 2009) Amended Form of Stock Option Agreement for awards under the Encore Capital Group, Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on July 30, 2009) Amended Form of Restricted Stock Unit Grant Notice and Agreement under the Encore Capital Group, Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on July 30, 2009) Lease Deed, dated October 26, 2010, between Midland Credit Management India Private Limited and R.S. Technologies Private Limited, for real property located in Gurgaon, India (incorporated by reference to Exhibit 10.47 to the Company’s Annual Report on Form 10-K filed on February 14, 2011) 76 Table of Contents Number 10.8 Description Lease Deed, dated March 4, 2011, between Midland Credit Management, Inc. and Teachers Insurance and Annuity Association of America for the Benefit of its Separate Real Estate Account for real property located in San Diego, California (the “San Diego Lease”) (incorporated by reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K filed on February 9, 2012) 10.9 10.10 10.11 10.12+ 10.13+ 10.14+ 10.15 10.16 10.17 10.18 10.19 10.20 Lease Guaranty, dated March 4, 2011, by Encore Capital Group, Inc., in favor of Teachers Insurance and Annuity Association of America for the Benefit of its Separate Real Estate Account in connection with the San Diego Lease (incorporated by reference to Exhibit 10.50 to the Company’s Annual Report on Form 10-K filed on February 9, 2012) Credit Facility Loan Agreement, dated May 8, 2012, by and among Texas Capital Bank, National Association, as administrative agent, certain banks and Propel Financial Services, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2012) Guaranty Agreement, dated May 8, 2012, with respect to the Credit Facility Loan Agreement, dated May 8, 2012 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2012) Form of Restricted Stock Award Grant Notice and Agreement under the Encore Capital Group, Inc. 2005 Stock Incentive Plan (Non-Executive) (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 1, 2012) Form of Restricted Stock Award Grant Notice and Agreement under the Encore Capital Group, Inc. 2005 Stock Incentive Plan (Executive) (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 1, 2012) Form of Non-Incentive Stock Option Agreement under the Encore Capital Group, Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on November 1, 2012) Amended and Restated Credit Agreement, dated November 5, 2012, by and among Encore Capital Group, Inc., the several banks and other financial institutions and lenders from time to time party thereto and listed on the signature pages thereof, and SunTrust Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on 8-K filed on November 7, 2012) Second Amended and Restated Pledge and Security Agreement, dated November 5, 2012, by and among Encore Capital Group, Inc., certain of its subsidiaries and SunTrust Bank, as collateral agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on 8-K filed on November 7, 2012) Amended and Restated Guaranty, dated November 5, 2012, by and among certain subsidiaries of Encore Capital Group, Inc. and SunTrust Bank, as administrative agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on 8-K filed on November 7, 2012) Amended and Restated Intercreditor Agreement, dated November 5, 2012, by and among Encore Capital Group, Inc., certain of its subsidiaries, SunTrust Bank, as administrative agent for the lenders, and the holders of the Company’s 7.75% Senior Secured Notes due 2017 and 7.375% Senior Secured Notes due 2018 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on 8-K filed on November 7, 2012) Amendment No. 2 to Note Purchase Agreement, dated November 5, 2012, by and among Encore Capital Group, Inc., the holders of the Company’s 7.75% Senior Secured Notes due 2017 and 7.375% Senior Secured Notes due 2018, and SunTrust Bank, as collateral agent and administrative agent (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on 8-K filed on November 7, 2012) Letter Agreement, dated November 20, 2012, between Deutsche Bank AG, London Branch and Encore Capital Group, Inc., regarding the Base Call Option Transaction (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on 8-K filed on December 3, 2012) 77 Table of Contents Number 10.21 Description Letter Agreement, dated November 20, 2012, between RBC Capital Markets, LLC and Encore Capital Group, Inc., regarding the Base Call Option Transaction (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on 8-K filed on December 3, 2012) 10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33+ 10.34+ 10.35+ Letter Agreement, dated November 20, 2012, between Société Générale and Encore Capital Group, Inc., regarding the Base Call Option Transaction (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on 8-K filed on December 3, 2012) Letter Agreement, dated November 20, 2012, between Deutsche Bank AG, London Branch and Encore Capital Group, Inc., regarding the Base Warrant Transaction (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on 8-K filed on December 3, 2012) Letter Agreement, dated November 20, 2012, between RBC Capital Markets, LLC and Encore Capital Group, Inc., regarding the Base Warrant Transaction (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on 8-K filed on December 3, 2012) Letter Agreement, dated November 20, 2012, between Société Générale and Encore Capital Group, Inc., regarding the Base Warrant Transaction (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on 8-K filed on December 3, 2012) Letter Agreement, dated December 6, 2012, between Deutsche Bank AG, London Branch and Encore Capital Group, Inc., regarding the Additional Call Option Transaction (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on 8-K filed on December 12, 2012) Letter Agreement, dated December 6, 2012, between RBC Capital Markets, LLC and Encore Capital Group, Inc., regarding the Additional Call Option Transaction (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on 8-K filed on December 12, 2012) Letter Agreement, dated December 6, 2012, between Société Générale and Encore Capital Group, Inc., regarding the Additional Call Option Transaction (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on 8-K filed on December 12, 2012) Letter Agreement, dated December 6, 2012, between Deutsche Bank AG, London Branch and Encore Capital Group, Inc., regarding the Additional Warrant Transaction (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on 8-K filed on December 12, 2012) Letter Agreement, dated December 6, 2012, between RBC Capital Markets, LLC and Encore Capital Group, Inc., regarding the Additional Warrant Transaction (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on 8-K filed on December 12, 2012) Letter Agreement, dated December 6, 2012, between Société Générale and Encore Capital Group, Inc., regarding the Additional Warrant Transaction (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on 8-K filed on December 12, 2012) Incremental Facility Agreement, dated December 6, 2012, among Encore Capital Group, Inc., Barclays Bank PLC, SunTrust Bank and each of the guarantors party thereto (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on 8-K filed on December 12, 2012) Amendment, dated January 9, 2013, to the Severance Protection Letter Agreement dated March 11, 2009 between Encore Capital Group, Inc. and Paul Grinberg (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 15, 2013) Letter Agreement, dated January 9, 2013, between Encore Capital Group, Inc. and Paul Grinberg (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 15, 2013) Employment offer letter, dated as of April 8, 2013, by and between Encore Capital Group, Inc. and Kenneth A. Vecchione (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 9, 2013) 78 Table of Contents Number 10.36 Description Amendment No. 1 and Limited Waiver, dated May 9, 2013, to Amended and Restated Credit Agreement, dated as of November 5, 2012, by and among Encore Capital Group, Inc., the several banks and other financial institutions and lenders from time to time party thereto and SunTrust Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) 10.37 10.38 10.39+ 10.40+ 10.41+ 10.42+ 10.43+ 10.44+ 10.45+ 10.46+ 10.47 10.48* 10.49 Second Amended and Restated Senior Secured Note Purchase Agreement, dated May 9, 2013, by and among Encore Capital Group, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement Insurance and Annuity Company and Prudential Annuities Life Assurance Corporation (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Amendment No. 1, dated February 7, 2013, to the Credit Facility Loan Agreement, dated May 8, 2012, by and among Propel Financial Services, LLC, certain banks and Texas Capital Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Encore Capital Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Appendix A of the Company’s definitive Proxy Statement on Schedule 14A filed on April 26, 2013) Form of Non-Incentive Stock Option Agreement under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Form of Restricted Stock Award Grant Notice and Agreement (Executive) under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Form of Restricted Stock Award Grant Notice and Agreement (Non-Executive) under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Form of Restricted Stock Unit Grant Notice and Agreement (Executive) under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Form of Performance Stock Grant Notice and Agreement under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Form of Performance Stock Unit Grant Notice and Agreement under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Form of Restricted Stock Unit Grant Notice and Agreement (Non-Employee Director) under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Incremental Facility Agreement, dated May 9, 2013, among Encore Capital Group, Inc., each of the banks and guarantors party thereto and SunTrust Bank, as administrative agent, issuing bank and swingline lender (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Tax Lien Loan and Security Agreement, dated May 15, 2013, by and among PFS Financial 1, LLC, PFS Finance Holdings, LLC, the Borrowers from time to time party thereto and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 20, 2013) Guaranty and Security Agreement, dated May 15, 2013, by PFS Finance Holdings, LLC, in favor of Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) 79 Table of Contents Number 10.50 Description Limited Guarantee, dated May 15, 2013, by Encore Capital Group, Inc., in favor of Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) 10.51 10.52 10.53 10.54 10.55 10.56 10.57 10.58 Securities Purchase Agreement, dated May 29, 2013, by and between Encore Capital Group, Inc. and JCF III Europe S.À R.L. (incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Amendment No. 2, dated May 29, 2013, to Amended and Restated Credit Agreement, dated November 5, 2012, by and among Encore Capital Group, Inc., the guarantors identified therein, the lenders party thereto and SunTrust Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Amendment No. 1, dated May 29, 2013, to Second Amended and Restated Senior Secured Note Purchase Agreement, dated May 9, 2013, by and between Encore Capital Group, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement Insurance and Annuity Company and Prudential Annuities Life Assurance Corporations (incorporated by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) Letter Agreement, dated June 18, 2013, between Barclays Bank PLC and Encore Capital Group, Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 24, 2013) Letter Agreement, dated June 18, 2013, between Credit Suisse International and Encore Capital Group, Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 24, 2013) Letter Agreement, dated June 18, 2013, between Morgan Stanley & Co. International plc and Encore Capital Group, Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June 24, 2013) Letter Agreement, dated June 18, 2013, between RBC Capital Markets, LLC and Encore Capital Group, Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on June 24, 2013) Amendment, dated July 1, 2013, to Securities Purchase Agreement, dated May 29, 2013, by and between Encore Capital Group, Inc. and JCF III Europe S.À R.L. (incorporated by reference to Exhibit 10.23 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013) 10.59* Investors Agreement, dated July 1, 2013, by and between Encore Europe Holdings S.À R.L., JCF III Europe S.À R.L. and the other parties thereto (incorporated by reference to Exhibit 10.24 to the Company’s Quarterly Report on Form 10-Q/A filed on December 20, 2013) 10.60 10.61 10.62 10.63 Letter Agreement, dated July 18, 2013, between Barclays Bank PLC and Encore Capital Group, Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 23, 2013) Letter Agreement, dated July 18, 2013, between Credit Suisse International and Encore Capital Group, Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 23, 2013) Letter Agreement, dated July 18, 2013, between Morgan Stanley & Co. International plc and Encore Capital Group, Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on July 23, 2013) Letter Agreement, dated July 18, 2013, between RBC Capital Markets, LLC and Encore Capital Group, Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on July 23, 2013) 80 Table of Contents Number 10.64 Description Amended and Restated Senior Facilities Agreement, dated June 28, 2013, by and among Cabot Financial (UK) Limited, the several guarantors, banks and other financial institutions and lenders from time to time party thereto and J.P. Morgan Europe Limited as Agent and Security Agent (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2013) 10.65 10.66 10.67 10.68 10.69 10.70+ 10.71 10.72 10.73+ 10.74+ 10.75 10.76 Second Amendment to Securities Purchase Agreement, dated September 25, 2013, by and between Encore Europe Holdings S.À R.L. and JCF III Europe S.À R.L. (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2013) Amendment to Letter Agreement, dated December 16, 2013, between Deutsche Bank AG, London Branch and Encore Capital Group, Inc., regarding the Warrant Transactions (incorporated by reference to Exhibit 10.77 to the Company’s Annual Report on Form 10-K filed February 25, 2014) Amendment to Letter Agreement, dated December 16, 2013, between RBC Capital Markets, LLC and Encore Capital Group, Inc., regarding the Warrant Transactions (incorporated by reference to Exhibit 10.78 to the Company’s Annual Report on Form 10-K filed February 25, 2014) Amendment to Letter Agreement, dated December 16, 2013, between Société Générale and Encore Capital Group, Inc., regarding the Warrant Transactions (incorporated by reference to Exhibit 10.79 to the Company’s Annual Report on Form 10-K filed February 25, 2014) Amendment No. 2, dated December 27, 2013, to the Credit Facility Loan Agreement, dated May 8, 2012, by and among Propel Financial Services, LLC, certain banks and Texas Capital Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 2, 2014) Summary description of director compensation (incorporated by reference to the Company’s Current Report on Form 8-K filed on February 24, 2014) Share Sale and Purchase Agreement, dated February 7, 2014, by and among Cabot Financial Holdings Group Limited, certain funds managed by Duke Street and certain individuals, including certain executive management of Marlin Financial Group Limited (incorporated by reference to Exhibit 10.82 to the Company’s Annual Report on Form 10-K filed on February 25, 2014) Senior Secured Bridge Facilities Agreement, dated February 8, 2014, by and among Cabot Financial Holdings Group Limited, J.P. Morgan Limited, Deutsche Bank, AG, London Branch, Lloyds Bank plc and UBS Limited as lead arrangers and J.P. Morgan Europe Limited as agent security agent (incorporated by reference to Exhibit 10.83 to the Company’s Annual Report on Form 10-K filed on February 25, 2014) First Amendment to Encore Capital Group, Inc. 2013 Incentive Compensation Plan, dated February 20, 2014 (incorporated by reference to Exhibit 10.84 to the Company’s Annual Report on Form 10-K filed on February 25, 2014) Letter Agreement, dated February 24, 2014, between Encore Capital Group, Inc. and Paul Grinberg (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 24, 2014) Second Amended and Restated Credit Agreement, dated February 25, 2014, by and among Encore Capital Group, Inc., the several banks and other financial institutions and lenders from time to time party thereto and listed on the signature pages thereof, and SunTrust Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.86 to the Company’s Annual Report on Form 10-K filed on February 25, 2014) Amendment No. 2, dated February 25, 2014, to Second Amended and Restated Senior Secured Note Purchase Agreement, dated May 9, 2013, by and between Encore Capital Group, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement Insurance and Annuity Company and Prudential Annuities Life Assurance Corporations (incorporated by reference to Exhibit 10.87 to the Company’s Annual Report on Form 10-K filed on February 25, 2014) 81 Table of Contents Number 10.77 Description Amendment No. 1, dated February 25, 2014, to Amended and Restated Guaranty, dated November 5, 2012, by and among certain subsidiaries of Encore Capital Group, Inc. and SunTrust Bank, as administrative agent (incorporated by reference to Exhibit 10.88 to the Company’s Annual Report on Form 10-K filed on February 25, 2014) 10.78 10.79 10.80 10.81 10.82 10.83 10.84 10.85 10.86+ 10.87+ 10.88+ 10.89+ 10.90 Letter Agreement, dated March 5, 2014, between Citibank, N.A. and Encore Capital Group, Inc., regarding the Base Capped Call Transaction (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 11, 2014) Letter Agreement, dated March 5, 2014, between Credit Suisse International and Encore Capital Group, Inc., regarding the Base Capped Call Transaction (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 11, 2014) Letter Agreement, dated March 5, 2014, between Morgan Stanley & Co. LLC and Encore Capital Group, Inc., regarding the Base Capped Call Transaction (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 11, 2014) Letter Agreement, dated March 5, 2014, between Société Générale and Encore Capital Group, Inc., regarding the Base Capped Call Transaction (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on March 11, 2014) Letter Agreement, dated March 6, 2014, between Citibank, N.A. and Encore Capital Group, Inc., regarding the Additional Capped Call Transaction (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on March 11, 2014) Letter Agreement, dated March 6, 2014, between Credit Suisse International and Encore Capital Group, Inc., regarding the Additional Capped Call Transaction (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on March 11, 2014) Letter Agreement, dated March 6, 2014, between Morgan Stanley & Co. LLC and Encore Capital Group, Inc., regarding the Additional Capped Call Transaction (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on March 11, 2014) Letter Agreement, dated March 6, 2014, between Société Générale and Encore Capital Group, Inc., regarding the Additional Capped Call Transaction (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on March 11, 2014) Restricted Stock Award Grant Notice and Agreement, dated March 7, 2014, between Encore Capital Group, Inc. and Paul Grinberg (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q filed on May 8, 2014) Restricted Stock Award Grant Notice and Agreement, dated April 15, 2013, between Encore Capital Group, Inc. and Kenneth A. Vecchione (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q filed on May 8, 2014) Restricted Stock Award Grant Notice and Agreement, dated April 15, 2013, between Encore Capital Group, Inc. and Kenneth A. Vecchione (incorporated by reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q filed on May 8, 2014) Performance Stock Grant Notice and Agreement, dated June 4, 2013, between Encore Capital Group, Inc. and Kenneth A. Vecchione (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q filed on May 8, 2014) Amendment No. 1 to Tax Lien Loan and Security Agreement, dated May 6, 2014, by and among PFS Financial 1, LLC, PFS Finance Holdings, LLC, the Borrowers from time to time party thereto and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q filed on May 8, 2014) 82 Table of Contents Number 10.91 Description Amendment No. 1 to Second Amended and Restated Credit Agreement, dated August 1, 2014, by and among Encore Capital Group, Inc., the several banks and other financial institutions and lenders from time to time party thereto and listed on the signature pages thereof, and SunTrust Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2014) 10.92 10.93+ 10.94+ 10.95+ 10.96 10.97 10.98* 10.99 10.100 10.101 10.102 Amendment No. 3, dated August 1, 2014, to Second Amended and Restated Senior Secured Note Purchase Agreement, dated May 9, 2013, by and between Encore Capital Group, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement Insurance and Annuity Company and Prudential Annuities Life Assurance Corporations (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2014) Form of Performance Award Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 6, 2014) Encore Capital Group, Inc. Executive Separation Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 6, 2014) Employment offer letter dated October 9, 2014 by and between Encore Capital Group, Inc. and Jonathan Clark (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 26, 2015) Amendment Agreement, dated February 5, 2015, for Cabot Financial (UK) Limited, as Parent, with J.P. Morgan Europe Limited, as Agent, relating to a Senior Facilities Agreement originally dated September 20, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 7, 2015) Amendment No. 1 to Limited Guarantee, dated April 3, 2015, by Encore Capital Group, Inc., in favor of Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2015) Amendment No. 2 to Tax Lien Loan and Security Agreement, dated April 3, 2015, by and among PFS Financial 1, LLC, PFS Finance Holdings, LLC, the Borrowers from time to time party thereto and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2015) Credit Facility Loan Agreement, dated May 8, 2015, by and among Texas Capital Bank, National Association, as administrative agent, certain banks and Propel Financial Services, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2015) Amendment No. 2 to Second Amended and Restated Credit Agreement, dated July 9, 2015, by and among Encore Capital Group, Inc., the several banks and other financial institutions and lenders from time to time party thereto and listed on the signature pages thereof, and SunTrust Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2015) Amendment No. 4, dated July 9, 2015, to Second Amended and Restated Senior Secured Note Purchase Agreement, dated May 9, 2013, by and between Encore Capital Group, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement Insurance and Annuity Company and Prudential Annuities Life Assurance Corporations (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2015) Amendment No. 3 to Tax Lien Loan and Security Agreement, dated October 26, 2015, by and among PFS Financial 1, LLC, PFS Financial 2, LLC, PFS Finance Holdings, LLC, the Borrowers from time to time party thereto and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on November 5, 2015) 83 Table of Contents Number 10.103 Description Amended and Restated Senior Facilities Agreement, dated November 11, 2015, by and among Cabot Financial (UK) Limited, the several guarantors, banks and other financial institutions and lenders from time to time party thereto and J.P. Morgan Europe Limited as Agent and Security Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 13, 2015) 10.104 Incremental Facility Agreement, dated November 19, 2015, by and among Encore Capital Group, Inc., Credit Suisse AG, Northwest Bank, SunTrust Bank, and each of the guarantors, party thereto (filed herewith) 21 23 31.1 31.2 32.1 List of Subsidiaries (filed herewith) Consent of Independent Registered Public Accounting Firm, BDO USA, LLP, dated February 24, 2016 (filed herewith) Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 (filed herewith) Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 (filed herewith) Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) 101.INS XBRL Instance Document (filed herewith) 101.SCH XBRL Taxonomy Extension Schema Document (filed herewith) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith) 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith) 101.LAB XBRL Taxonomy Extension Label Linkbase Document (filed herewith) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith) * + The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. Management contract or compensatory plan or arrangement. 84 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENCORE CAPITAL GROUP, INC., a Delaware corporation By: /s/ KENNETH A. VECCHIONE Kenneth A. Vecchione President and Chief Executive Officer Date: February 24, 2016 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name and Signature Title Date /s/ KENNETH A. VECCHIONE Kenneth A. Vecchione President and Chief Executive Officer and Director (Principal Executive Officer) February 24, 2016 /s/ JONATHAN C. CLARK Jonathan C. Clark Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 /s/ ASHWINI GUPTA Ashwini Gupta /s/ WENDY HANNAM Wendy Hannam /s/ WILLEM MESDAG Willem Mesdag /s/ MICHAEL P. MONACO Michael P. Monaco /s/ LAURA OLLE Laura Olle /s/ FRANCIS E. QUINLAN Francis E. Quinlan /s/ NORMAN R. SORENSEN Norman R. Sorensen /s/ RICHARD J. SREDNICKI Richard J. Srednicki Director Director Director Director Director Director Director Director 85 Table of Contents ENCORE CAPITAL GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Condition at December 31, 2015 and 2014 Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Equity for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 Notes to Consolidated Financial Statements Page F-1 F-2 F-3 F-4 F-5 F-6 F-7 Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Encore Capital Group, Inc. San Diego, California We have audited the accompanying consolidated statements of financial condition of Encore Capital Group, Inc. (“Company”) as of December 31, 2015 and 2014 and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Encore Capital Group, Inc. at December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Encore Capital Group, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 24, 2016, expressed an unqualified opinion thereon. /s/ BDO USA, LLP Costa Mesa, California February 24, 2016 F-1 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Financial Condition (In Thousands, Except Par Value Amounts) Assets Cash and cash equivalents Investment in receivable portfolios, net Receivables secured by property tax liens, net Property and equipment, net Deferred court costs, net Other assets Goodwill Total assets Liabilities and equity Liabilities: Accounts payable and accrued liabilities Debt Other liabilities Total liabilities Commitments and contingencies Redeemable noncontrolling interest Redeemable equity component of convertible senior notes Equity: Convertible preferred stock, $.01 par value, 5,000 shares authorized, no shares issued and outstanding Common stock, $.01 par value, 50,000 shares authorized, 25,288 shares and 25,794 shares issued and outstanding as of December 31, 2015 and December 31, 2014, respectively Additional paid-in capital Accumulated earnings Accumulated other comprehensive loss Total Encore Capital Group, Inc. stockholders’ equity Noncontrolling interest Total equity Total liabilities, redeemable equity and equity December 31, 2015 December 31, 2014 $ $ $ 153,593 2,440,669 306,380 73,504 75,239 245,620 924,847 4,219,852 294,243 3,216,572 60,549 3,571,364 38,624 6,126 124,163 2,143,560 259,432 66,969 60,412 197,666 897,933 3,750,135 231,967 2,773,554 79,675 3,085,196 28,885 9,073 — — 253 110,533 543,489 (57,822) 596,453 7,285 603,738 4,219,852 $ 258 125,310 498,354 (922) 623,000 3,981 626,981 3,750,135 $ $ $ $ The following table includes assets that can only be used to settle the liabilities of the Company’s consolidated variable interest entities (“VIEs”) and the creditors of the VIEs have no recourse to the Company. These assets and liabilities are included in the consolidated statements of financial condition above. See Note 10, “Variable Interest Entities” for additional information on the Company’s VIEs. Assets Cash and cash equivalents Investment in receivable portfolios, net Receivables secured by property tax liens, net Property and equipment, net Deferred court costs, net Other assets Goodwill Liabilities Accounts payable and accrued liabilities Debt Other liabilities December 31, 2015 December 31, 2014 $ $ $ $ 57,420 1,197,513 81,149 19,767 33,296 60,640 706,812 142,486 1,747,883 839 44,996 993,462 108,535 15,957 17,317 80,264 671,434 137,201 1,556,956 8,724 See accompanying notes to consolidated financial statements F-2 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Income (In Thousands, Except Per Share Amounts) Year Ended December 31, 2015 2014 2013 Revenues Revenue from receivable portfolios, net Other revenues Net interest income Total revenues Operating expenses Salaries and employee benefits Cost of legal collections Other operating expenses Collection agency commissions General and administrative expenses Depreciation and amortization Goodwill impairment Total operating expenses Income from operations Other (expense) income Interest expense Other income (expense) Total other expense Income from continuing operations before income taxes Provision for income taxes Income from continuing operations Loss from discontinued operations, net of tax Net income Net (income) loss attributable to noncontrolling interest Net income attributable to Encore Capital Group, Inc. stockholders Amounts attributable to Encore Capital Group, Inc.: Income from continuing operations Loss income from discontinued operations, net of tax Net income Earnings (loss) per share attributable to Encore Capital Group, Inc.: Basic earnings (loss) per share from: Continuing operations Discontinued operations Net basic earnings per share Diluted earnings (loss) per share from: Continuing operations Discontinued operations Net diluted earnings per share Weighted average shares outstanding: Basic Diluted $ $ $ $ $ $ $ $ $ $ $ 1,072,436 60,696 28,440 1,161,572 $ 992,832 51,988 27,969 1,072,789 270,334 229,847 98,182 37,858 196,827 33,945 49,277 916,270 245,302 (186,556) 2,235 (184,321) 60,981 (13,597) 47,384 — 47,384 (2,249) 45,135 45,135 — 45,135 $ $ $ 1.75 $ — $ $ 1.75 1.69 $ — $ $ 1.69 246,247 205,661 93,859 33,343 146,286 27,949 — 753,345 319,444 (166,942) 113 (166,829) 152,615 (52,725) 99,890 (1,612) 98,278 5,448 103,726 105,338 (1,612) 103,726 $ $ $ 4.07 $ (0.06) $ $ 4.01 3.83 $ (0.06) $ $ 3.77 744,870 12,588 15,906 773,364 165,040 186,959 66,649 33,097 109,713 13,547 — 575,005 198,359 (73,269) (4,222) (77,491) 120,868 (45,388) 75,480 (1,740) 73,740 1,559 75,299 77,039 (1,740) 75,299 3.12 (0.07) 3.05 2.94 (0.07) 2.87 25,722 26,647 25,853 27,495 24,659 26,204 See accompanying notes to consolidated financial statements F-3 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Comprehensive Income (In Thousands) Net income Other comprehensive (loss) gain, net of tax: Unrealized (loss) gain on derivative instruments Unrealized (loss) gain on foreign currency translation Other comprehensive (loss) gain, net of tax Comprehensive (loss) income Comprehensive (gain) loss attributable to noncontrolling interest: Net (income) loss Unrealized loss (gain) on foreign currency translation Comprehensive loss attributable to noncontrolling interests Comprehensive (loss) income attributable to Encore Capital Group, Inc. stockholders Year Ended December 31, 2015 2014 2013 $ 47,384 $ 98,278 $ 73,740 (1,678) (55,222) (56,900) (9,516) (2,249) 3,390 1,141 2,340 (8,457) (6,117) 92,161 5,448 3,469 8,917 (817) 7,786 6,969 80,709 1,559 (1,398) 161 $ (8,375) $ 101,078 $ 80,870 See accompanying notes to consolidated financial statements F-4 Table of Contents Balance at December 31, 2012 Net income (loss) Other comprehensive gain, net of tax Initial noncontrolling interests related to business combinations Change in fair value of redeemable noncontrolling interests Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes Repurchase of common stock Issuance of common stock Stock-based compensation Tax benefit related to stock-based compensation Issuance of convertible notes, net of hedge transactions Balance at December 31, 2013 Net income (loss) Other comprehensive (loss) gain, net of tax Initial noncontrolling interests related to business combinations Change in fair value of redeemable noncontrolling interests Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes Repurchase of common stock Stock-based compensation Tax benefit related to stock-based compensation Issuance of convertible notes, net of hedge transactions Reclassification of redeemable equity component of convertible senior notes Balance at December 31, 2014 Net income Other comprehensive loss, net of tax Initial noncontrolling interests related to business combinations Change in fair value of redeemable noncontrolling interests Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes Repurchase of common stock Stock-based compensation Tax benefit related to stock-based compensation Reclassification of redeemable equity component of convertible senior notes Other ENCORE CAPITAL GROUP, INC. Consolidated Statements of Equity (In Thousands) Common Stock Additional Shares Par Paid-In Capital Accumulated Earnings Accumulated Other Comprehensive (Loss) Income Noncontrolling Interests Total Equity 23,191 $ 232 $ 88,029 $ 319,329 $ (1,774) $ — $ 405,816 — — — — 618 (24) 1,672 — — — 25,457 — — — — 737 (400) — — — — 25,794 — — — — 333 (839) — — — — — — — — 6 — 17 — — — — — (1,167) (4,973) (729) 62,335 12,649 5,420 — 255 10,255 171,819 — — — — 7 (4) — — — — — — (5,730) (15,496) (16,811) 17,181 11,580 (28,160) — 258 (9,073) 125,310 — — — — 3 (8) — — — — — — — (2,349) (5,321) (33,177) 22,008 1,251 2,948 (137) 75,299 — — — — — — — — — 394,628 103,726 — — — — — — — — — 498,354 45,135 — — — — — — — — — — 6,969 — — — — — — — — 5,195 — (6,117) — — — — — — — — (922) — (56,900) — — — — — — — — (392) 351 74,907 7,320 4,051 4,051 — — — — — — — (1,167) (4,967) (729) 62,352 12,649 5,420 10,255 4,010 575,907 (935) 102,791 14 (6,103) 892 892 — — — — — — — (5,730) (15,489) (16,815) 17,181 11,580 (28,160) (9,073) 3,981 626,981 878 — 46,013 (56,900) 2,426 2,426 — — — — — — — (2,349) (5,318) (33,185) 22,008 1,251 2,948 (137) Balance at December 31, 2015 25,288 $ 253 $ 110,533 $ 543,489 $ (57,822) $ 7,285 $ 603,738 See accompanying notes to consolidated financial statements F-5 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Cash Flows (In Thousands) Operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: 2015 Year Ended December 31, 2014 2013 $ 47,384 $ 98,278 $ 73,740 Depreciation and amortization Goodwill impairment Non-cash interest expense Stock-based compensation expense Recognized loss on termination of derivative contract Deferred income taxes Excess tax benefit from stock-based payment arrangements Reversal of allowances on receivable portfolios, net Changes in operating assets and liabilities Deferred court costs and other assets Prepaid income tax and income taxes payable Accounts payable, accrued liabilities and other liabilities Net cash provided by operating activities Investing activities: Cash paid for acquisitions, net of cash acquired Purchases of receivable portfolios, net of put-backs Collections applied to investment in receivable portfolios, net Originations and purchases of receivables secured by tax liens Collections applied to receivables secured by tax liens Purchases of property and equipment Other, net Net cash used in investing activities Financing activities: Payment of loan costs Proceeds from credit facilities Repayment of credit facilities Proceeds from senior secured notes Repayment of senior secured notes Proceeds from issuance of convertible senior notes Proceeds from issuance of securitized notes Repayment of securitized notes Repayment of preferred equity certificates, net Purchases of convertible hedge instruments Repurchase of common stock Taxes paid related to net share settlement of equity awards Excess tax benefit from stock-based payment arrangements Other, net Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental disclosures of cash flow information: Cash paid for interest Cash paid for income taxes, net Supplemental schedule of non-cash investing and financing activities: Fixed assets acquired through capital lease 33,945 49,277 37,745 22,008 — (32,369) (1,724) (6,763) (41,835) (34,887) 41,644 114,425 (276,575) (749,760) 635,899 (219,722) 164,052 (28,647) 2,044 (472,709) (17,995) 1,073,941 (891,804) 332,693 (15,000) — — (44,251) — — (33,185) (6,289) 1,724 2,011 401,845 43,561 (14,131) 124,163 153,593 151,946 84,101 $ $ 27,949 — 29,380 17,181 — (48,078) (11,928) (17,407) (15,532) 22,180 9,521 111,544 (495,838) (862,997) 633,960 (124,533) 122,638 (23,238) (5,189) (755,197) (20,101) 1,343,417 (1,184,244) 288,645 (15,000) 161,000 134,000 (29,753) (693) (33,576) (16,815) (20,324) 11,928 7,839 626,323 (17,330) 15,280 126,213 124,163 95,034 69,948 $ $ 13,547 — 18,136 12,649 3,630 (28,188) (5,609) (12,193) (11,697) (468) 11,228 74,775 (449,024) (249,562) 546,366 (116,960) 70,573 (13,423) (5,210) (217,240) (17,207) 659,940 (630,163) 151,670 (13,750) 172,500 — — (39,743) (32,008) (729) (9,591) 5,609 (548) 245,980 103,515 5,188 17,510 126,213 50,181 66,759 2,220 $ 8,341 $ 5,011 $ $ $ See accompanying notes to consolidated financial statements F-6 Table of Contents ENCORE CAPITAL GROUP, INC. Notes to Consolidated Financial Statements Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively with Encore, the “Company”), is an international specialty finance company providing debt recovery solutions for consumers and property owners across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy proceedings. In addition, the Company assists property owners who are delinquent on their property taxes by structuring affordable monthly payment plans and purchases delinquent tax liens directly from taxing authorities. Basis of Consolidation The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company also consolidates VIEs, for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (b) either the obligation to absorb losses or the right to receive benefits. Refer to Note 10, “Variable Interest Entities” for further details. All intercompany transactions and balances have been eliminated in consolidation. Translation of Foreign Currencies The financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the functional currency. Assets and liabilities of foreign operations are translated into U.S. dollars using period-end exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates in effect during each period. The resulting translation adjustments are recorded as a component of other comprehensive income or loss. Equity accounts are translated at historical rates, except for the change in retained earnings during the year which is the result of the income statement translation process. Intercompany transaction gains or losses at each period end arising from subsequent measurement of balances for which settlement is not planned or anticipated in the foreseeable future are included as translation adjustments and recorded within other comprehensive income or loss. Transaction gains and losses are included in other income or expense. Reclassifications Certain immaterial reclassifications have been made to the consolidated financial statements to conform to the current year’s presentation. Recent Accounting Pronouncements In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02, “Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. This standard is not expected to have a significant impact to the Company’s financial statements. In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU is effective beginning January 1, 2016, with early adoption permitted, and shall be applied retrospectively. Upon adoption of this ASU in the first quarter of 2016, the Company will change the classification of its debt issuance costs from other assets to a reduction from the debt liability. F-7 Table of Contents In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. ASU 2015-16 is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. ASU 2015-16 is applied prospectively to adjustments to provisional amounts that occur after the effective date, i.e., ASU 2015-16 applies to open measurement periods, regardless of the acquisition date. The Company early adopted this standard in the third quarter of 2015. The adoption of this guidance did not have a material impact on its consolidated financial statements and footnotes disclosures. Use of Estimates The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase. The Company invests its excess cash in bank deposits and money market instruments, which are afforded the highest ratings by nationally recognized rating firms. The carrying amounts reported in the consolidated statements of financial condition for cash and cash equivalents approximate their fair value. Investment in Receivable Portfolios In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality, discrete receivable portfolio purchases during the same fiscal quarter are aggregated into pools based on common risk characteristics. Common risk characteristics include risk ratings (e.g. FICO or similar scores), financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card and telecom, purchased consumer bankruptcy, and mortgage portfolios. We further group these static pools by geographic region or location. 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 (“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. See Note 5, “Investment in Receivable Portfolios, Net” for further discussion of investment in receivable portfolios. Goodwill and Other Intangible Assets Goodwill represents the excess of purchase price over the value assigned to the tangible and identifiable intangible assets, liabilities assumed, and noncontrolling interests of businesses acquired. Acquired intangible assets other than goodwill are amortized over their useful lives unless the lives are determined to be indefinite. In accordance with authoritative guidance on goodwill and other intangible assets, goodwill and other indefinite-lived intangible assets are tested at the reporting unit level annually for impairment and in interim periods if certain events occur indicating the fair value of a reporting unit may be below F-8 Table of Contents its carrying value. See Note 15, “Goodwill and Identifiable Intangible Assets” for further discussion of the Company’s goodwill and other intangible assets. Property and Equipment Property and equipment are recorded at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets as follows: Fixed Asset Category Leasehold improvements Furniture, fixtures and equipment Computer hardware and software Estimated Useful Life Lesser of lease term, including periods covered by renewal options, or useful life 5 to 10 years 3 to 5 years Maintenance and repairs are charged to expense in the year incurred. Expenditures for major renewals that extend the useful lives of fixed assets are capitalized and depreciated over the useful lives of such assets. Deferred Court Costs The Company pursues legal collections using a network of attorneys that specialize in collection matters and through its internal legal channel. The Company generally pursues collections through legal means only when it believes a consumer has sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In order to pursue legal collections the Company is required to pay certain upfront costs to the applicable courts which are recoverable from the consumer (“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. The Company writes off any Deferred Court Cost not recovered within five years of placement. Collections received from debtors are first applied to related court costs with the balance applied to the debtors’ account. See Note 6, “Deferred Court Costs, Net” for further discussion. Receivables Secured by Property Tax Liens, Net The Company’s wholly-owned subsidiary Propel Acquisition, LLC and its subsidiaries and affiliates (collectively, “Propel”), acquires and services residential and commercial tax liens on real property. Propel’s receivables are secured by property tax liens. Repayment of the property tax liens is generally dependent on the property owner but can also come through payments from other lien holders or, in less than 0.5% of cases, from foreclosure on the properties. Propel records receivables secured by property tax liens at their outstanding principal balances, adjusted for, if any, charge-offs, allowance for losses, deferred fees or costs, and unamortized premiums or discounts. Interest income is reported on the interest method and includes amortization of net deferred fees and costs over the term of the agreements. Propel accrues interest on all past due receivables secured by tax liens as the receivables are collateralized by tax liens that are in a priority position over most other liens on the properties. If there is doubt about the ultimate collection of the accrued interest on a specific portfolio, it would be placed on non-accrual basis and, at that time, all accrued interest would be reversed. Receivables secured by property tax liens that have been placed on a non-accrual basis were $0.7 million and zero as of December 31, 2015 and 2014, respectively. The typical redemption period for receivables secured by property tax liens is less than 84 months. On May 6, 2014, Propel, through its subsidiaries, completed the securitization of a pool of approximately $141.5 million in receivables secured by property tax liens on real property located in the State of Texas. In connection with the securitization, investors purchased approximately $134.0 million in aggregate principal amount of 1.44% notes collateralized by these property tax liens. The special purpose entity that is used for the securitization is consolidated by the Company as a VIE. The receivables recognized as a result of consolidating this VIE do not represent assets that can be used to satisfy claims against the Company’s general assets. At December 31, 2015, the Company had approximately $306.4 million in receivables secured by property tax liens, of which $81.1 million was carried at the VIE. See Note 10, “Variable Interest Entity” for further discussion. Income Taxes The Company uses the liability method of accounting for income taxes in accordance with the authoritative guidance for Income Taxes. When the Company prepares its consolidated financial statements, it estimates income taxes based on the various jurisdictions and countries where it conducts business. This requires the Company to estimate current tax exposure and to assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. Deferred income taxes are recognized based on the differences between the financial statement and income tax bases of assets and F-9 Table of Contents liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company then assesses the likelihood that deferred tax assets will be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. When the Company establishes a valuation allowance or increases this allowance in an accounting period, it records a corresponding tax expense in the consolidated statement of operations. The Company includes interest and penalties related to income taxes within its provision for income taxes. The Company uses the income forecasting methodology to recognize the income and expenses of the portfolios with the exception of a certain recently acquired subsidiary, which uses the cost recovery methodology. See Note 12, “Income Taxes” for further discussion. Management must make significant judgments to determine the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance to be recorded against deferred tax assets. Stock-Based Compensation The Company determines stock-based compensation expense for all share-based payment awards based on the measurement date fair value. The Company has certain share awards that include market conditions that affect vesting, the fair value of these shares is estimated using a lattice model. Compensation cost is not adjusted if the market condition is not met, as long as the requisite service is provided. For share awards that require service and performance conditions, the Company recognizes compensation cost only for those awards expected to meet the service and performance vesting conditions over the requisite service period of the award. Forfeiture rates are estimated based on the Company’s historical experience. See Note 11, “Stock-Based Compensation” for further discussion. Derivative Instruments and Hedging Activities The Company recognizes all derivative financial instruments in its consolidated financial statements at fair value. Changes in the fair value of derivative instruments are recorded in earnings unless hedge accounting criteria are met. The Company designates its foreign currency exchange contracts as cash flow hedges. The effective portion of the changes in fair value of these cash flow hedges is recorded each period, net of tax, in accumulated other comprehensive income or loss until the related hedged transaction occurs. Any ineffective portion of the changes in fair value of these cash flow hedges is recorded in earnings. In the event the hedged cash flow does not occur, or it becomes probable that it will not occur, the Company would reclassify the amount of any gain or loss on the related cash flow hedge to income or expense at that time. See Note 4, “Derivatives and Hedging Instruments” for further discussion. Redeemable Noncontrolling Interests Some minority shareholders in certain subsidiaries of the Company have the right, at certain times, to require the Company to acquire their ownership interest in those entities at fair value, while others have the right to force a sale of the subsidiary if the Company chooses not to purchase their interests at fair value. The noncontrolling interests subject to these arrangements are included in temporary equity as redeemable noncontrolling interests, and are adjusted to their estimated redemption amounts each reporting period with a corresponding adjustment to additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments do not affect the calculation of earnings per share. Earnings Per Share Basic earnings per share is calculated by dividing net earnings attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock, and the dilutive effect of the convertible senior notes. On April 24, 2014, the Company’s Board of Directors approved a $50.0 million share repurchase program. In May 2014, the Company repurchased 400,000 shares of its common stock for approximately $16.8 million. In May 2015, the Company repurchased 839,295 shares of common stock for approximately $33.2 million, which represented the remaining amount allowed under this share repurchase program. The Company’s practice is to retire the shares repurchased. On August 12, 2015, the Company’s Board of Directors approved a new $50.0 million share repurchase program. Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as determined by the Company’s management and Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements. The program does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion. F-10 Table of Contents A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands): Weighted average common shares outstanding—basic Dilutive effect of stock-based awards Dilutive effect of convertible senior notes Dilutive effect of warrants Weighted average common shares outstanding—diluted Year Ended December 31, 2015 2014 2013 25,722 253 672 — 26,647 25,853 556 1,082 4 27,495 24,659 950 595 — 26,204 There were no anti-dilutive employee stock options outstanding during the years ended December 31, 2015, 2014 and 2013. The Company has the following convertible senior notes outstanding: $115.0 million convertible senior notes due 2017 at a conversion price equivalent to approximately $31.56 per share of the Company’s common stock (the “2017 Convertible Notes”), $172.5 million convertible senior notes due 2020 at a conversion price equivalent to approximately $45.72 per share of the Company’s common stock (the “2020 Convertible Notes”), and $161.0 million convertible senior notes due 2021 at a conversion price equivalent to approximately $59.39 per share of the Company’s common stock (the “2021 Convertible Notes”). In the event of conversion, the 2017 Convertible Notes are convertible into cash up to the aggregate principal amount and permit the excess conversion premium to be settled in cash or shares of the Company’s common stock. For the 2020 Convertible Notes and 2021 Convertible Notes, the Company has the option to pay cash, issue shares of common stock or any combination thereof for the aggregate amount due upon conversion. The Company’s intent is to settle the principal amount of the 2020 and 2021 Convertible Notes in cash upon conversion. As a result, upon conversion of all the convertible senior notes, only the amounts payable in excess of the principal amounts are considered in diluted earnings per share under the treasury stock method. Diluted earnings per share during the periods presented above included the effect of the common shares issuable upon conversion of certain of the convertible senior notes because the average stock price exceeded the conversion price of these notes. However, as described in Note 9, “Debt-Encore Convertible Notes,” the Company entered into certain hedge transactions that have the effect of increasing the effective conversion price of the 2017 Convertible Notes to $60.00, the 2020 Convertible Notes to $61.55, and the 2021 Convertible Notes to $83.14. On January 2, 2014 the 2017 Convertible Notes became convertible as certain conditions for conversion were met in the immediately preceding calendar quarter as defined in the applicable indenture. However, none of the 2017 Convertible Notes have been converted. Note 2: Business Combinations dlc Acquisition On June 1, 2015, Encore’s U.K.-based subsidiary, Cabot Credit Management Limited and its subsidiaries (collectively, “Cabot”), acquired Hillesden Securities Ltd and its subsidiaries (“dlc”), a U.K.-based acquirer and collector of non-performing unsecured consumer debt for approximately £180.6 million (approximately $274.7 million), (the “dlc Acquisition”). The dlc Acquisition was financed with borrowings under Cabot’s existing revolving credit facility and under Cabot’s senior secured bridge facility. Refer to Note 9, “Debt” for further details of Cabot’s revolving credit facility and senior secured bridge facility. The dlc Acquisition was accounted for using the acquisition method of accounting and, accordingly, the tangible and intangible assets acquired and liabilities assumed were recorded at their estimated fair values as of the date of the acquisition. Fair value measurements have been applied based on assumptions that market participants would use in the pricing of the respective assets and liabilities. F-11 Table of Contents The components of the purchase price allocation for the dlc Acquisition were as follows (in thousands): Purchase price: Cash paid at acquisition Deferred consideration Total purchase price Allocation of purchase price: Cash Investment in receivable portfolios Deferred court costs Property and equipment Other assets Liabilities assumed Identifiable intangible assets Goodwill Total net assets acquired $ $ $ $ 268,391 6,306 274,697 30,518 215,988 760 1,327 2,384 (46,435) 3,669 66,486 274,697 The goodwill recognized is primarily attributable to synergies that are expected to be achieved by combining dlc and Cabot's existing contingent collections operations. The entire goodwill of $66.5 million related to the dlc Acquisition is not deductible for income tax purposes. Total acquisition and integration costs related to the dlc Acquisition were approximately $2.8 million for the year ended December 31, 2015, and have been expensed in the accompanying consolidated statements of income within general and administrative expenses. The amount of revenue and net income attributable to Encore included in the Company’s consolidated statement of income for the year ended December 31, 2015 related to dlc was $27.5 million and $6.3 million, respectively. Pro forma financial information for the dlc Acquisition has not been included as the computation of such information is impracticable and too onerous due to the complexities of a hypothetical calculation because dlc’s revenue recognition methodology prior to the dlc Acquisition was significantly different from GAAP. Atlantic Acquisition On August 6, 2014, the Company acquired all of the outstanding equity interests of Atlantic Credit & Finance, Inc. pursuant to a stock purchase agreement (the “Atlantic Acquisition”). The components of the purchase price allocation for the Atlantic Acquisition were as follows (in thousands): Purchase price: Cash paid at acquisition Allocation of purchase price: Cash Investment in receivable portfolios Deferred court costs Property and equipment Other assets Liabilities assumed Identifiable intangible assets Goodwill Total net assets acquired $ $ $ 196,104 16,743 105,399 995 1,331 14,679 (25,586) 2,595 79,948 196,104 The following summary presents unaudited pro forma consolidated results of operations for the years ended December 31, 2014 and 2013, as if the Atlantic Acquisition had occurred on January 1, 2013. The following unaudited pro forma financial information does not necessarily reflect the actual results that would have occurred had Encore and Atlantic F-12 Table of Contents been combined during the periods presented, nor is it necessarily indicative of the future results of operations of the combined companies (in thousands): (Unaudited) Year Ended December 31, 2014 2013 Consolidated pro forma revenue $ 1,110,872 $ Consolidated pro forma income from continuing operations attributable to Encore 110,016 837,878 81,140 Marlin Acquisition On February 7, 2014, the Company, through its Cabot subsidiary, completed the acquisition (the “Marlin Acquisition”) of Marlin Financial Group Limited (“Marlin”). The components of the purchase price allocation for the Marlin Acquisition were as follows (in thousands): Purchase price: Cash paid at acquisition Allocation of purchase price: Cash Investment in receivable portfolios Deferred court costs Property and equipment Other assets Liabilities assumed Identifiable intangible assets Goodwill Total net assets acquired $ $ $ 274,068 16,342 208,450 914 1,335 18,091 (299,699) 1,819 326,816 274,068 Pro forma financial information for the Marlin Acquisition has not been included as the computation of such information is impracticable and too onerous due to the complexities of a hypothetical calculation because Marlin’s revenue recognition methodology prior to the Marlin Acquisition was significantly different from GAAP. Other Acquisitions In addition to the dlc Acquisition discussed above, the Company, through its subsidiaries, acquired other businesses during the year ended December 31, 2015, for total consideration of $49.4 million, net of cash acquired. The initial purchase price allocation for these other acquisitions were based on the preliminary assessment of assets acquired and liabilities assumed, which is subject to change within one year of the date of the acquisition. These transactions included the acquisition of a controlling interest (50.25%) in Baycorp Holdings Pty Limited (“Baycorp”), a debt resolution specialist in Australia. Based on the preliminary assessment, the fair value of total assets acquired from Baycorp at the time of acquisition was approximately $76.1 million. These acquisitions were immaterial to the Company’s financial statements individually and in the aggregate during their respective reporting periods. In addition to the Atlantic Acquisition and the Marlin Acquisition discussed above, the Company completed certain other acquisitions during the year ended December 31, 2014. The total considerations transferred net of cash acquired for these acquisitions were approximately $59.4 million. These acquisitions were immaterial to the Company’s financial statements individually and in the aggregate during their respective reporting periods. Note 3: Fair Value Measurements The authoritative guidance for fair value measurements defines fair value as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The guidance utilizes a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level: • Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. F-13 Table of Contents • Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. • Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions. Financial Instruments Required To Be Carried At Fair Value Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands): Assets Foreign currency exchange contracts $ — $ 718 $ — $ 718 Fair Value Measurements as of December 31, 2015 Level 1 Level 2 Level 3 Total Liabilities Foreign currency exchange contracts Interest rate swap agreements Temporary Equity Redeemable noncontrolling interests — — — (601) (352) — — (601) (352) — (38,624) (38,624) Fair Value Measurements as of December 31, 2014 Level 1 Level 2 Level 3 Total Assets Foreign currency exchange contracts $ — $ 768 $ — $ 768 Liabilities Foreign currency exchange contracts Temporary Equity Redeemable noncontrolling interests Derivative Contracts: — — (1,037) — (1,037) — (28,885) (28,885) The Company uses derivative instruments to minimize its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies. Redeemable Noncontrolling Interests: Some minority shareholders in certain subsidiaries of the Company have the right, at certain times, to require the Company to acquire their ownership interest in those entities at fair value and, in some cases, to force a sale of the subsidiary if the Company chooses not to purchase their interests at fair value. The noncontrolling interests subject to these arrangements are included in temporary equity as redeemable noncontrolling interests, and are adjusted to their estimated redemption amounts each reporting period with a corresponding adjustment to additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments do not affect the calculation of earnings per share. F-14 Table of Contents The components of the change in the redeemable noncontrolling interests for the years ended December 31, 2015, 2014 and 2013 are presented in the following table (in thousands): Amount $ Balance at December 31, 2012 Initial redeemable noncontrolling interest related to business combinations Net loss attributable to redeemable noncontrolling interests Adjustment of the redeemable noncontrolling interests to fair value Effect of foreign currency translation attributable to redeemable noncontrolling interests Balance at December 31, 2013 Initial redeemable noncontrolling interest related to business combinations Net loss attributable to redeemable noncontrolling interests Adjustment of the redeemable noncontrolling interests to fair value Effect of foreign currency translation attributable to redeemable noncontrolling interests Balance at December 31, 2014 Initial redeemable noncontrolling interest related to business combinations Net income attributable to redeemable noncontrolling interests Adjustment of the redeemable noncontrolling interests to fair value Effect of foreign currency translation attributable to redeemable noncontrolling interests Balance at December 31, 2015 $ — 25,517 (1,167) 1,167 1,047 26,564 4,997 (4,513) 5,730 (3,893) 28,885 9,409 1,371 2,349 (3,390) 38,624 Financial Instruments Not Required To Be Carried At Fair Value Investment in Receivable Portfolios: The Company records its investment in receivable portfolios at cost, which represents a significant discount from the contractual receivable balances due. The Company computes the fair value of its investment in receivable portfolios using Level 3 inputs by discounting the estimated future cash flows generated by its proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. In accordance with authoritative guidance related to fair value measurements, the Company estimates the average cost to collect and discount rates based on its estimate of what a market participant might use in valuing these portfolios. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business. In the Company’s current analysis, the estimated blended market participant cost to collect and discount rate is approximately 50.3% and 10.5%, respectively, for U.S. portfolios, approximately 30% and 12.5%, respectively, for Europe portfolios and approximately 32.5% and 11.0%, respectively for other geographies. Using this method, the fair value of investment in receivable portfolios approximates the carrying value as of December 31, 2015 and 2014. A 100 basis point fluctuation in the cost to collect and discount rate used would result in an increase or decrease in the fair value of United States, Europe and other geographies portfolios by approximately $38.2 million, $53.2 million and $5.8 million, respectively, as of December 31, 2015. This fair value calculation does not represent, and should not be construed to represent, the underlying value of the Company or the amount which could be realized if its investment in receivable portfolios were sold. The carrying value of the investment in receivable portfolios was $2.4 billion and $2.1 billion as of December 31, 2015 and 2014, respectively. Deferred Court Costs: The Company capitalizes deferred court costs and provides a reserve for those costs that it believes will ultimately be uncollectible. The carrying value of net deferred court costs approximates fair value. Receivables Secured By Property Tax Liens: The fair value of receivables secured by property tax liens is estimated by discounting the future cash flows of the portfolio using a discount rate equivalent to the current rate at which similar portfolios would be originated. For tax liens purchased directly from taxing authorities, the fair value is estimated by discounting the expected future cash flows of the F-15 Table of Contents portfolio using a discount rate equivalent to the interest rate expected when acquiring these tax liens. The carrying value of receivables secured by property tax liens approximates fair value. Additionally, the carrying value of the related interest receivable also approximates fair value. Debt: The majority of Encore and its subsidiaries’ borrowings are carried at historical amounts, adjusted for additional borrowings less principal repayments, which approximate fair value. These borrowings include Encore’s senior secured notes and borrowings under its revolving credit and term loan facilities, Propel’s revolving credit facility and securitized notes, Cabot’s revolving credit facility, and other borrowing under revolving credit facilities at certain of the Company’s subsidiaries. Encore’s convertible senior notes are carried at historical cost, adjusted for debt discount. The carrying value of the convertible senior notes was $406.6 million and $397.3 million, as of December 31, 2015 and 2014, respectively. The fair value estimate for these convertible senior notes, which incorporates quoted market prices using Level 2 inputs, was approximately $372.2 million and $507.4 million as of December 31, 2015 and 2014, respectively. Cabot’s senior secured notes are carried at historical cost, adjusted for debt discount and debt premium. The carrying value of Cabot’s senior secured notes was $1,410.3 million and $1,144.2 million, as of December 31, 2015 and 2014, respectively. The fair value estimate for these senior notes, which incorporates quoted market prices using Level 2 inputs, was $1,403.5 million and $1,131.5 million as of December 31, 2015 and 2014, respectively. The Company’s preferred equity certificates are legal obligations to the noncontrolling shareholders of its certain subsidiaries. They are carried at the face amount, plus any accrued interest. The Company determined that the carrying value of these preferred equity certificates approximated fair value as of December 31, 2015 and 2014. Note 4: Derivatives and Hedging Instruments The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment under the authoritative guidance for derivatives and hedging. Foreign Currency Exchange Contracts The Company has operations in foreign countries, which exposes the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company enters into derivative financial instruments, principally Indian rupee forward contracts, which are designated as cash flow hedges, to mitigate fluctuations in the cash payments of future forecasted transactions. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative positions on an ongoing basis. Gains and losses on cash flow hedges are recorded in other comprehensive income (“OCI”) until the hedged transaction is recorded in the consolidated financial statements. Once the underlying transaction is recorded in the consolidated financial statements, the Company reclassifies OCI on the derivative into earnings. If all or a portion of the forecasted transaction is cancelled, this would render all or a portion of the cash flow hedge ineffective and the Company would reclassify the ineffective portion of the hedge into earnings. The Company generally does not experience ineffectiveness of the hedge relationship and the accompanying consolidated financial statements do not include any such gains or losses. As of December 31, 2015, the total notional amount of the forward contracts to buy Indian rupees in exchange for U.S. dollars was $39.2 million. All of these outstanding contracts qualified for hedge accounting treatment. The Company estimates that approximately $0.6 million of net derivative gain included in OCI will be reclassified into earnings within the next 12 months. No gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the years ended December 31, 2015, 2014, or 2013. The Company does not enter into derivative instruments for trading or speculative purposes. F-16 Table of Contents The following table summarizes the fair value of derivative instruments as recorded in the Company’s consolidated statements of financial condition (in thousands): December 31, 2015 December 31, 2014 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments: Foreign currency exchange contracts Other assets $ Foreign currency exchange contracts Other liabilities 718 Other assets (601) Other liabilities $ 768 (1,037) Derivatives not designated as hedging instruments: Interest rate swap agreements Other liabilities (352) Other liabilities — The following table summarizes the effects of derivatives in cash flow hedging relationships on the Company’s statements of income for the years ended December 31, 2015 and 2014 (in thousands): Gain or (Loss) Recognized in OCI- Effective Portion 2015 2014 $ (248) $ 2,281 88 249 Location of Gain or (Loss) Reclassified from OCI into Income - Effective Portion Salaries and employee benefits General and administrative expenses Foreign currency exchange contracts Foreign currency exchange contracts Note 5: Investment in Receivable Portfolios, Net Gain or (Loss) Reclassified from OCI into Income - Effective Portion 2015 2014 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 2015 2014 $ (472) $ (1,084) Other (expense) income $ — $ — (74) (195) Other (expense) income — — In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality, discrete receivable portfolio purchases during the same fiscal quarter are aggregated into pools based on common risk characteristics. Common risk characteristics include risk ratings (e.g. FICO or similar scores), financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card and telecom, purchased consumer bankruptcy, and mortgage portfolios. We further group these static pools by geographic region or location. Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The purchase cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios. In compliance with the authoritative guidance, the Company accounts for its investments in receivable portfolios using either the interest method or the cost recovery method. The interest method applies an 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 recognized prospectively through an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash flows do not change the IRR, but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of comprehensive income as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition. The Company utilizes its proprietary forecasting models to continuously evaluate the economic life of each pool. For purposes of calculating its IRRs, the collection forecast of each pool is estimated to be up to 120 months. F-17 Table of Contents 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 portfolio allowance reversals and decreased by gross collections and portfolio allowances. If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, the Company accounts for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue is recognized until the purchase price of a Cost Recovery Portfolio has been fully recovered. Accretable yield represents the amount of revenue the Company expects to generate over the remaining life of its existing investment in receivable portfolios based on estimated future cash flows. Total accretable yield is the difference between future estimated collections and the current carrying value of a portfolio. All estimated cash flows on portfolios where the cost basis has been fully recovered are classified as zero basis cash flows. 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): Balance at December 31, 2013 Revenue recognized, net Net additions on existing portfolios Additions for current purchases Effect of foreign currency translation Balance at December 31, 2014 Revenue recognized, net Net additions on existing portfolios Additions for current purchases Effect of foreign currency translation Balance at December 31, 2015 Accretable Yield Estimate of Zero Basis Cash Flows $ $ 2,391,471 (958,332) 340,152 1,332,121 (112,091) 2,993,321 (964,225) 263,713 846,632 (91,801) 3,047,640 $ $ $ 8,465 (34,500) 92,427 — — 66,392 (108,211) 266,252 — (1,402) 223,031 $ Total 2,399,936 (992,832) 432,579 1,332,121 (112,091) 3,059,713 (1,072,436) 529,965 846,632 (93,203) 3,270,671 During the year ended December 31, 2015, the Company purchased receivable portfolios with a face value of $12.7 billion for $1.0 billion, or a purchase cost of 8.0% of face value. Purchases of charged-off credit card portfolios include $216.0 million of receivables acquired in connection with the dlc Acquisition and $60.3 million acquired in connection with the acquisition of Baycorp. The estimated future collections at acquisition for all portfolios purchased during the year amounted to $2.5 billion. During the year ended December 31, 2014, the Company purchased receivable portfolios with a face value of $13.8 billion for $1.3 billion, or a purchase cost of 9.1% of face value. Purchases of charged-off credit card portfolios include $105.4 million of portfolio acquired in connection with the Atlantic Acquisition and $208.5 million of portfolios acquired in connection with the Marlin Acquisition. The estimated future collections at acquisition for all portfolios purchased during the year amounted to $2.8 billion. All collections realized after the net book value of a portfolio has been fully recovered (“Zero Basis Portfolios”) are recorded as revenue (“Zero Basis Revenue”). During the years ended December 31, 2015, 2014, and 2013, Zero Basis Revenue was approximately $96.4 million, $22.3 million, and $17.2 million, respectively. F-18 Table of Contents The following tables summarize the changes in the balance of the investment in receivable portfolios during the following periods (in thousands, except percentages): Year Ended December 31, 2015 Accrual Basis Portfolios Cost Recovery Portfolios Zero Basis Portfolios Total Balance, beginning of period $ 2,131,084 $ 12,476 $ — $ 2,143,560 Purchases of receivable portfolios Gross collections(1) Put-backs and Recalls(2) Foreign currency adjustments Revenue recognized Portfolio (allowance) reversals, net Balance, end of period Revenue as a percentage of collections(3) 1,023,722 (1,587,525) (13,009) (82,443) 969,227 (5,002) 2,436,054 $ — (5,237) (20) (2,604) — — — (107,963) (268) 20 96,446 11,765 1,023,722 (1,700,725) (13,297) (85,027) 1,065,673 6,763 $ 4,615 $ — $ 2,440,669 61.1% 0.0% 89.3% 62.7% Year Ended December 31, 2014 Accrual Basis Portfolios Cost Recovery Portfolios Zero Basis Portfolios Total Balance, beginning of period $ 1,585,587 $ Purchases of receivable portfolios Transfer of portfolios Gross collections(1) Put-backs and Recalls(2) Foreign currency adjustments Revenue recognized Portfolio allowance reversals, net Balance, end of period Revenue as a percentage of collections(3) 1,249,651 (18,682) (1,563,996) (15,162) (64,646) 953,154 5,178 4,662 1,709 18,682 (9,010) (536) (3,031) — — $ — $ 1,590,249 — — (34,491) (9) — 22,271 12,229 1,251,360 — (1,607,497) (15,707) (67,677) 975,425 17,407 $ 2,131,084 $ 12,476 $ — $ 2,143,560 60.9% 0.0% 64.6% 60.7% Year Ended December 31, 2013 Accrual Basis Portfolios Cost Recovery Portfolios Zero Basis Portfolios Total Balance, beginning of period $ 873,119 $ — $ — $ 873,119 Purchases of receivable portfolios Transfer of portfolios Gross collections(1) Put-backs and Recalls(2) Foreign currency adjustments Revenue recognized Portfolio allowance reversals, net Balance, end of period Revenue as a percentage of collections(3) ________________________ (1) Does not include amounts collected on behalf of others. 1,203,706 (6,649) (1,249,625) (2,331) 49,634 715,458 2,275 1,073 6,649 (2,764) (296) — — — — — (27,117) (2) — 17,201 9,918 1,204,779 — (1,279,506) (2,629) 49,634 732,659 12,193 $ 1,585,587 $ 4,662 $ — $ 1,590,249 57.3% 0.0% 63.4% 57.3% (2) Put-backs represent accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”). Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”). (3) Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals. F-19 Table of Contents The following table summarizes the change in the valuation allowance for investment in receivable portfolios during the periods presented (in thousands): Balance at December 31, 2012 Provision for portfolio allowances Reversal of prior allowances Balance at December 31, 2013 Provision for portfolio allowances Reversal of prior allowances Balance at December 31, 2014 Provision for portfolio allowances Reversal of prior allowances Allowance charged off to investment in receivable portfolios Balance at December 31, 2015 Note 6: Deferred Court Costs, Net Valuation Allowance 105,273 479 (12,672) 93,080 — (17,407) 75,673 8,322 (15,085) (8,322) 60,588 $ $ The Company pursues legal collections using a network of attorneys that specialize in collection matters and through its internal legal channel. The Company generally pursues collections through legal means only when it believes a consumer has sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In order to pursue legal collections the Company is required to pay certain upfront costs to the applicable courts which are recoverable from the consumer (“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. The Company writes off any Deferred Court Cost not recovered within five years of placement. Collections received from debtors are first applied against related court costs with the balance applied to the debtors’ account balance. Deferred Court Costs for the five-year deferral period consist of the following as of the dates presented (in thousands): Court costs advanced Court costs recovered Court costs reserve December 31, 2015 December 31, 2014 $ $ 636,922 (242,899) (318,784) 75,239 $ $ 546,271 (206,287) (279,572) 60,412 A roll forward of the Company’s court cost reserve is as follows (in thousands): Balance at beginning of period Provision for court costs Net down of reserve after 60 months Effect of foreign currency translation Balance at end of period December 31, 2015 December 31, 2014 December 31, 2013 $ $ (279,572) $ (82,593) 42,745 636 (318,784) $ (210,889) $ (69,062) — 379 (279,572) $ (149,080) (61,809) — — (210,889) F-20 Table of Contents Note 7: Property and Equipment, Net Property and equipment consist of the following, as of the dates presented (in thousands): Furniture, fixtures and equipment Computer equipment and software Telecommunications equipment Leasehold improvements Other Less: accumulated depreciation and amortization December 31, 2015 December 31, 2014 $ $ 22,074 127,454 4,029 19,711 1,694 174,962 (101,458) 73,504 $ $ 18,472 101,721 3,956 17,964 2,178 144,291 (77,322) 66,969 Depreciation and amortization expense for continuing operations was $29.0 million, $24.4 million, and $12.7 million for the years ended December 31, 2015, 2014, and 2013, respectively. Note 8: Other Assets Other assets consist of the following (in thousands): December 31, 2015 December 31, 2014 Debt issuance costs, net of amortization $ 45,033 $ Prepaid income taxes Deferred tax assets Prepaid expenses Interest receivable Identifiable intangible assets, net Service fee receivables Other financial receivables Receivable from seller Recoverable fees Security deposits Funds held in escrow Other 28,159 27,306 22,002 21,079 18,129 13,708 11,275 8,605 5,350 2,809 — 42,165 $ 245,620 $ 38,504 — 33,716 21,427 12,187 21,564 7,864 7,467 7,357 2,905 3,617 16,889 24,169 197,666 F-21 Table of Contents Note 9: Debt The Company is in compliance with all covenants under its financing arrangements. The components of the Company’s consolidated debt and capital lease obligations were as follows (in thousands): Encore revolving credit facility Encore term loan facility Encore senior secured notes Encore convertible notes Less: Debt discount Propel facilities Propel securitized notes Cabot senior secured notes Add: Debt premium Less: Debt discount Cabot senior revolving credit facility Preferred equity certificates Capital lease obligations Other December 31, 2015 December 31, 2014 $ 627,000 $ 143,078 28,750 448,500 (41,867) 170,858 59,996 505,000 146,023 43,750 448,500 (51,202) 84,229 104,247 1,360,000 1,076,952 53,440 (3,184) 54,089 221,516 11,054 83,342 67,259 — 86,368 208,312 15,331 38,785 $ 3,216,572 $ 2,773,554 Encore Revolving Credit Facility and Term Loan Facility On July 9, 2015, the Company amended its revolving credit facility and term loan facility pursuant to Amendment No. 2 to the Second Amended and Restated Credit Agreement (as amended, the “Restated Credit Agreement”). The Restated Credit Agreement includes a revolving credit facility of $742.6 million (the “Revolving Credit Facility”), a term loan facility of $158.8 million (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”), and an accordion feature that allows the Company to increase the Senior Secured Credit Facilities by an additional $250.0 million ($55.0 million of which was exercised in November 2015). Including the accordion feature, the maximum amount that can be borrowed under the Restated Credit Agreement is $1.1 billion. The Restated Credit Agreement expires in February 2019, except with respect to two subtranches of the Term Loan Facility of $60.0 million and $6.3 million, maturing in February 2017 and November 2017, respectively. Provisions of the Restated Credit Agreement include, but are not limited to: • The Revolving Credit Facility of $742.6 million with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted London Interbank Offered Rate (“LIBOR”), plus a spread that ranges from 250 to 300 basis points depending on the Company’s cash flow leverage ratio; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the Company’s cash flow leverage ratio. “Alternate base rate,” as defined in the Restated Credit Agreement, means the highest of (i) the per annum rate which the administrative agent publicly announces from time to time as its prime lending rate, (ii) the federal funds effective rate from time to time, plus 0.5% per annum or (iii) reserved adjusted LIBOR determined on a daily basis for a one month interest period, plus 1.0% per annum; • A $92.5 million five-year term loan with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the Company’s cash flow leverage ratio; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the Company’s cash flow leverage ratio. Principal amortizes $6.9 million in 2016, $9.3 million in 2017, and $9.3 million in 2018 with the remaining principal due at the end of the term; • A $60.0 million term loan maturing on February 28, 2017, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 200 to 250 basis points, depending on the Company’s cash flow leverage ratio; or (2) alternate base rate, plus a spread that ranges from 100 to 150 basis points, depending on the Company’s cash flow leverage ratio. Principal amortizes $4.5 million in 2016 with the remaining principal due at the end of the term; F-22 Table of Contents • A $6.3 million term loan maturing on November 3, 2017, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the Company’s cash flow leverage ratio; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the Company’s cash flow leverage ratio. Principal amortizes $0.6 million in 2016 and $0.5 million in 2017 with the remaining principal due at the end of the term; • A borrowing base equal to (1) the lesser of (i) 30%—35% (depending on the Company’s trailing 12-month cost per dollar collected) of all eligible non-bankruptcy estimated remaining collections, currently 33%, plus 55% of eligible estimated remaining collections for consumer receivables subject to bankruptcy, and (ii) the product of the net book value of all receivable portfolios acquired on or after January 1, 2005 multiplied by 95%, minus (2) the sum of the aggregate principal amount outstanding of Encore’s Senior Secured Notes (as defined below) plus the aggregate principal amount outstanding under the term loans; • • a maximum cash flow leverage ratio permitted of 2.50:1.00; a maximum cash flow secured leverage ratio of 2.00:1.00; • The allowance of additional unsecured or subordinated indebtedness not to exceed $1.1 billion; • Restrictions and covenants, which limit the payment of dividends and the incurrence of additional indebtedness and liens, among other limitations; • Repurchases of up to $150.0 million of Encore’s common stock after July 9, 2015, subject to compliance with certain covenants and available borrowing capacity; • A change of control definition, that 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 Encore’s voting stock; • Events of default which, upon occurrence, may permit the lenders to terminate the facility and declare all amounts outstanding to be immediately due and payable; • A pre-approved acquisition limit of $225.0 million per fiscal year; • A basket to allow for investments not to exceed the greater of (1) 200% of the consolidated net worth of the Company and its restricted subsidiaries; and (2) an unlimited amount such that after giving effect to the making of any investment, the cash flow leverage ratio is less than 1.25:1:00; • Collateralization by all assets of the Company, other than the assets of certain Propel entities, certain foreign subsidiaries and all unrestricted subsidiaries as defined in the Restated Credit Agreement. At December 31, 2015, the outstanding balance under the Restated Credit Agreement was $770.1 million, which bore a weighted average interest rate of 3.17% and 2.93% for the years ended December 31, 2015 and 2014, respectively. Available capacity under the Restated Credit Agreement, subject to borrowing base and applicable debt covenants, was $107.1 million as of December 31, 2015, not including the $195.0 million additional capacity provided by the facility’s remaining accordion feature. Encore Senior Secured Notes In 2010 and 2011 Encore entered into an aggregate of $75.0 million in senior secured notes with certain affiliates of Prudential Capital Group (the “Senior Secured Notes”). $25.0 million of the Senior Secured Notes bear an annual interest rate of 7.375%, mature in 2018 and require quarterly principal payments of $1.25 million. Prior to May 2013, these notes required quarterly payments of interest only. The remaining $50.0 million of Senior Secured Notes bear an annual interest rate of 7.75%, mature in 2017 and require quarterly principal payments of $2.5 million. Prior to December 2012 these notes required quarterly interest only payments. As of December 31, 2015, $11.3 million of the 7.375% Senior Secured Notes and $17.5 million of the 7.75% Senior Secured Notes, for an aggregate of $28.8 million, remained outstanding. The Senior Secured Notes are guaranteed in full by certain of Encore’s subsidiaries. Similar to, and pari passu with, the Senior Secured Credit Facilities, the Senior Secured Notes are collateralized by the same collateral as our Revolving Credit Facility. The Senior Secured Notes may be accelerated and become automatically and immediately due and payable upon certain events of default, including certain events related to insolvency, bankruptcy, or liquidation. Additionally, the Senior Secured Notes may be accelerated at the election of the holder or holders of a majority in principal amount of the Senior Secured Notes upon certain events of default by Encore, including the breach of affirmative covenants regarding guarantors, collateral, most favored lender treatment, minimum revolving credit facility commitment or the breach of any negative F-23 Table of Contents covenant. If Encore prepays the Senior Secured Notes at any time for any reason, payment will be at the higher of par or the present value of the remaining scheduled payments of principal and interest on the portion being prepaid. The discount rate used to determine the present value is 50 basis points over the then current Treasury Rate corresponding to the remaining average life of the senior secured notes. The covenants are substantially similar to those in the Restated Credit Agreement. Prudential Capital Group and the administrative agent for the lenders of the Restated Credit Agreement have an intercreditor agreement related to their pro rata rights to the collateral, actionable default, powers and duties and remedies, among other topics. The terms of the Senior Secured Notes were amended in connection with the Restated Credit Agreement in order to properly align certain provisions between the two agreements. Encore Convertible Notes In November and December 2012, Encore sold $115.0 million aggregate principal amount of 3.0% 2017 Convertible Notes that mature on November 27, 2017 in private placement transactions. In June and July 2013, Encore sold $172.5 million aggregate principal amount of 3.0% 2020 Convertible Notes that mature on July 1, 2020 in private placement transactions. In March 2014, Encore sold $161.0 million aggregate principal amount of 2.875% 2021 Convertible Notes that mature on March 15, 2021 in private placement transactions. The interest on these unsecured convertible senior notes (collectively, the “Convertible Notes”), is payable semi-annually. Prior to the close of business on the business day immediately preceding their respective conversion date (listed below), holders may convert their Convertible Notes under certain circumstances set forth in the applicable Convertible Notes indentures. On or after their respective conversion dates until the close of business on the scheduled trading day immediately preceding their respective maturity date, holders may convert their Convertible Notes at any time. Certain key terms related to the convertible features for each of the Convertible Notes as of year ended December 31, 2015 are listed below. Initial conversion price Closing stock price at date of issuance 2017 Convertible Notes 2020 Convertible Notes 2021 Convertible Notes $ $ 31.56 25.66 $ $ 45.72 33.35 $ $ 59.39 47.51 Closing stock price date November 27, 2012 June 24, 2013 March 5, 2014 Conversion rate (shares per $1,000 principal amount) Conversion date(1) 31.6832 21.8718 16.8386 May 27, 2017 January 1, 2020 September 15, 2020 _______________________ (1) The 2017 Convertible Notes became convertible on January 2, 2014, as certain early conversion events were satisfied. Refer to “Conversion and Earnings Per Share impact” section below for further details. In the event of conversion, the 2017 Convertible Notes are convertible into cash up to the aggregate principal amount of the notes. The excess conversion premium may be settled in cash or shares of the Company’s common stock at the discretion of the Company. In the event of conversion, holders of the Company’s 2020 and 2021 Convertible Notes will receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Company’s current intent is to settle conversions through combination settlement (i.e., convertible into cash up to the aggregate principal amount, and shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, for the remainder). As a result, and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when, during any quarter, the average share price of the Company’s common stock exceeds the initial conversion prices listed in the above table. Authoritative guidance related to debt with conversion and other options requires that issuers of convertible debt instruments that, upon conversion, may be settled fully or partially in cash, must separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively. F-24 Table of Contents The debt and equity components, the issuance costs related to the equity component, the stated interest rate, and the effective interest rate for each of the Convertible Notes are listed below (in thousands, except percentages): Debt component Equity component Equity issuance cost Stated interest rate Effective interest rate 2017 Convertible Notes 2020 Convertible Notes 2021 Convertible Notes $ $ $ $ $ $ 100,298 14,702 788 3.000% 6.000% 140,247 32,253 1,106 $ $ $ 3.000% 6.350% 143,645 17,355 581 2.875% 4.700% The balances of the liability and equity components of all of the Convertible Notes outstanding were as follows (in thousands): Liability component—principal amount Unamortized debt discount Liability component—net carrying amount Equity component December 31, 2015 December 31, 2014 $ $ $ 448,500 (41,867) 406,633 58,184 $ $ $ 448,500 (51,202) 397,298 55,236 The debt discount is being amortized into interest expense over the remaining life of the convertible notes using the effective interest rates. Interest expense related to the convertible notes was as follows (in thousands): Interest expense—stated coupon rate Interest expense—amortization of debt discount Total interest expense—convertible notes Convertible Notes Hedge Transactions Year ended December 31, 2015 2014 $ $ 13,245 9,335 22,580 $ $ 12,418 8,423 20,841 In order to reduce the risk related to the potential dilution and/or the potential cash payments the Company is required to make in the event that the market price of the Company’s common stock becomes greater than the conversion price of the Convertible Notes, the Company maintains a hedge program that increases the effective conversion price for each of the Convertible Notes. All of the hedge instruments related to the Convertible Notes have been determined to be indexed to the Company’s own stock and meet the criteria for equity classification. In accordance with authoritative guidance, the Company recorded the cost of the hedge instruments as a reduction in additional paid-in capital, and will not recognize subsequent changes in fair value of these financial instruments in its consolidated financial statements. The initial hedge instruments the Company entered into in connection with its issuance of the 2017 Convertible Notes had an effective conversion price of $44.19. On December 16, 2013, the Company entered into amendments to the hedge instruments to further increase the effective conversion price from $44.19 to $60.00. All other terms and settlement provisions of the hedge instruments remained unchanged. The transaction was completed in February 2014. The Company paid approximately $27.9 million in total consideration for amending the hedge instruments. The Company recorded the payment as a reduction of equity in the consolidated statements of financial condition. The details of the hedge program for each of the Convertible Notes are listed below (in thousands, except conversion price): Cost of the hedge transaction(s) Initial conversion price Effective conversion price 2017 Convertible Notes 2020 Convertible Notes 2021 Convertible Notes $ $ $ 50,595 31.56 60.00 $ $ $ 18,113 45.72 61.55 $ $ $ 19,545 59.39 83.14 F-25 Table of Contents Conversion and Earnings Per Share Impact During the quarter ending December 31, 2013, the closing price of the Company’s common stock exceeded 130% of the conversion price of the 2017 Convertible Notes for more than 20 trading days during a 30 consecutive trading day period, thereby satisfying one of the early conversion events. As a result, the 2017 Convertible Notes became convertible on demand effective January 2, 2014, and the holders were notified that they could elect to submit their 2017 Convertible Notes for conversion. The carrying value of the 2017 Convertible Notes continues to be reported as debt as the Company intends to draw on the Revolving Credit Facility or use cash on hand to settle the principal amount of any such conversions in cash. No gain or loss was recognized when the debt became convertible. The estimated fair value of the 2017 Convertible Notes was approximately $109.5 million as of December 31, 2015. In addition, upon becoming convertible, a portion of the equity component that was recorded at the time of the issuance of the 2017 Convertible Notes was considered redeemable and that portion of the equity was reclassified to temporary equity in the Company’s consolidated statements of financial condition. Such amount was determined based on the cash consideration to be paid upon conversion and the carrying amount of the debt. Upon conversion, the holders of the 2017 Convertible Notes will be paid in cash for the principal amount and issued shares or a combination of cash and shares for the remaining value of the 2017 Convertible Notes. As a result, the Company reclassified $6.1 million of the equity component to temporary equity as of December 31, 2015. If a conversion event takes place, this temporary equity balance will be recalculated based on the difference between the 2017 Convertible Notes principal and the debt carrying value. If the 2017 Convertible Notes are settled, an amount equal to the fair value of the liability component, immediately prior to the settlement, will be deducted from the fair value of the total settlement consideration transferred and allocated to the liability component. Any difference between the amount allocated to the liability and the net carrying amount of the 2017 Convertible Notes (including any unamortized debt issue costs and discount) will be recognized in earnings as a gain or loss on debt extinguishment. Any remaining consideration is allocated to the reacquisition of the equity component and will be recognized as a reduction in stockholders’ equity. None of the 2017 Convertible Notes were converted during the year ended December 31, 2015 or 2014. In accordance with authoritative guidance related to derivatives and hedging and earnings per share calculation, only the conversion spread of the Convertible Notes is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company’s common stock during any quarter exceeds the respective conversion price of each of the Convertible Notes. See “Earnings Per Share” in Note 1, “Ownership, Description of Business, and Summary of Significant Accounting Policies” for additional information. Propel Facilities Propel Facility I On May 8, 2015, Propel amended its syndicated loan facility (as amended, the “Propel Facility I”). The Propel Facility I is an $80.0 million facility, with a $20.0 million uncommitted accordion feature, used to originate or purchase tax lien assets. The Propel Facility I expires in May 2018 and includes the following key provisions: • Interest at Propel’s option, at either: (1) LIBOR, plus a spread that ranges from 270 to 320 basis points, depending on Propel’s cash flow leverage ratio; or (2) the greatest of (a) the rate publicly announced from time to time by Texas Capital Bank, National Association, as its prime rate, (b) the sum of the federal funds rate for such day plus 50 basis points, or (c) one month LIBOR plus 100 basis points; • A borrowing base of 90% of the face value of the tax lien assets; • Interest payable monthly; principal and interest due at maturity; • Restrictions and covenants, which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens; and • Events of default which, upon occurrence, may permit the lenders to terminate the Propel Facility I and declare all amounts outstanding to be immediately due and payable. The Propel Facility I is primarily collateralized by the tax liens on real property in Texas and requires Propel to maintain various financial covenants, including a minimum interest coverage ratio and a maximum cash flow leverage ratio. At December 31, 2015, the outstanding balance on the Propel Facility I was $63.0 million. The weighted average interest rate was 3.26% and 3.33% for the years ended December 31, 2015 and 2014, respectively. F-26 Table of Contents Propel Facility II On May 15, 2013, the Company, through affiliates of Propel, entered into a $100.0 million revolving credit facility (as amended, the “Propel Facility II”). The Propel Facility II is used to purchase tax liens and tax lien certificates from taxing authorities and third parties in various states and expires on May 10, 2019. On May 6, 2014, April 3, 2015 and October 26, 2015, the Propel Facility II was amended to, among other things, increase the commitment amount, modify the interest rate and permit additional tax lien assets to be included in the borrowing base. The Propel Facility II includes the following key provisions: • Propel can draw up to $150.0 million through May 15, 2017; • The committed amount can be drawn on a revolving basis until May 15, 2017 (unless terminated earlier in accordance with the terms of the facility). During the following two years, until the May 10, 2019 expiration date, no additional draws are permitted, and all proceeds from the tax liens are used to repay any amounts outstanding under the facility. So long as no events or default have occurred, Propel may extend the expiration date for additional one year periods. • Prior to the expiration of the facility, interest at a per annum floating rate equal to LIBOR plus 2.25%; • Upon the occurrence of an event of default, interest at 400 basis points plus the greater of (i) a per annum floating rate equal to LIBOR plus 2.25%, or (ii) Prime Rate, which is defined in the agreement as the rate most recently announced by the lender at its branch in San Francisco, California, from time to time as its prime commercial rate for U.S. dollar-denominated loans made in the United States; • • Proceeds from the tax liens are applied to pay interest, principal and other obligations incurred in connection with the Propel Facility II on a monthly basis as defined in the agreement; Special purpose entity covenants designed to protect the bankruptcy-remoteness of the borrowers and additional restrictions and covenants, which limit, among other things, the payment of certain dividends, the occurrence of additional indebtedness and liens and use of the collections proceeds from certain tax liens; and • Events of default which, upon occurrence, may permit the lender to terminate the Propel Facility II and declare all amounts outstanding to be immediately due and payable. The Propel Facility II is collateralized by tax liens acquired under the Propel Facility II. At December 31, 2015, the outstanding balance on the Propel Facility II was $107.9 million. The weighted average interest rate was 2.62% and 3.85% for the years ended December 31, 2015 and 2014, respectively. Propel Term Loan Facility On May 2, 2014, the Company, through affiliates of Propel, entered into a $31.9 million term loan facility (the “Propel Term Loan Facility”). The Propel Term Loan Facility was entered into to fund the acquisition of a portfolio of tax liens and other assets in a transaction valued at approximately $43.0 million. In July 2015, Propel paid off the outstanding balance on the Propel Term Loan Facility. Propel Securitized Notes On May 6, 2014, Propel, through its affiliates, completed the securitization of a pool of approximately $141.5 million in payment agreements and contracts relating to unpaid real property taxes, assessments, and other charges secured by liens on real property located in the State of Texas (the “Securitized Texas Tax Liens”). In connection with the securitization, investors purchased, in a private placement, approximately $134.0 million in aggregate principal amount of 1.44% notes collateralized by the Securitized Texas Tax Liens (the “Propel Securitized Notes”), due May 15, 2029. The payment agreements and contracts will continue to be serviced by Propel. The Propel Securitized Notes are payable solely from the collateral and represent non-recourse obligations of the consolidated securitization entity PFS Tax Lien Trust 2014-1, a Delaware statutory trust and an affiliate of Propel. Interest accrues monthly at the rate of 1.44% per annum. Principal and interest on the Propel Securitized Notes are payable on the 15th day of each calendar month. Propel used the net proceeds to pay down borrowings under the Propel Facility I, pay certain expenses incurred in connection with the issuance of the Propel Securitized Notes and fund certain reserves. At December 31, 2015, the outstanding balance on the Propel Securitized Notes was $60.0 million and the balance of the collateral was $81.1 million. F-27 Table of Contents Cabot Senior Secured Notes On September 20, 2012, Cabot Financial (Luxembourg) S.A. (“Cabot Financial”), an indirect subsidiary of Encore, issued £265.0 million (approximately $438.4 million) in aggregate principal amount of 10.375% Senior Secured Notes due 2019 (the “Cabot 2019 Notes”). Interest on the Cabot 2019 Notes is payable semi-annually, in arrears, on April 1 and October 1 of each year. On August 2, 2013, Cabot Financial issued £100 million (approximately $151.7 million) in aggregate principal amount of 8.375% Senior Secured Notes due 2020 (the “Cabot 2020 Notes”). Interest on the Cabot 2020 Notes is payable semi-annually, in arrears, on February 1 and August 1 of each year. Of the proceeds from the issuance of the Cabot 2020 Notes, approximately £75.0 million (approximately $113.8 million) was used to repay all amounts outstanding under the senior credit facilities of Cabot Financial (UK) Limited (“Cabot Financial UK”), an indirect subsidiary of Encore, and £25.0 million (approximately $37.9 million) was used to partially repay a portion of the J Bridge preferred equity certificates (the “J Bridge PECs”) to an affiliate of J.C. Flowers & Co. LLC (“J.C. Flowers”), discussed in further detail below. On March 27, 2014, Cabot Financial issued £175.0 million (approximately $291.8 million) in aggregate principal amount of 6.500% Senior Secured Notes due 2021 (the “Cabot 2021 Notes” and, together with the Cabot 2019 Notes and the Cabot 2020 Notes, the “Cabot Notes”). Interest on the Cabot 2021 Notes is payable semi-annually, in arrears, on April 1 and October 1 of each year, beginning on October 1, 2014. The total debt issuance cost associated with the Cabot 2021 Notes was approximately $7.5 million. Approximately £105.0 million (approximately $174.8 million) of the proceeds from the issuance of the Cabot 2021 Notes was used to repay all amounts outstanding under the senior secured bridge facilities that Cabot Financial UK entered into in connection with the Marlin Acquisition. The Cabot Notes are fully and unconditionally guaranteed on a senior secured basis by the following indirect subsidiaries of the Company: Cabot Credit Management Limited (“CCM”), Cabot Financial Limited, and all material subsidiaries of Cabot Financial Limited (other than Cabot Financial and Marlin Intermediate Holdings plc). The Cabot Notes are secured by a first ranking security interest in all the outstanding shares of Cabot Financial and the guarantors (other than CCM and Marlin Midway Limited) and substantially all the assets of Cabot Financial and the guarantors (other than CCM). The guarantees provided in respect of the Cabot Notes are pari passu with each such guarantee given in respect of the Cabot Floating Rate Notes, Marlin Bonds and the Cabot Credit Facility described below. On November 11, 2015, Cabot Financial (Luxembourg) II S.A. (“Cabot Financial II”), an indirect subsidiary of Encore, issued €310.0 million (approximately $332.2 million) in aggregate principal amount of Senior Secured Floating Rate Notes due 2021 (the “Cabot Floating Rate Notes”). The Cabot Floating Rate Notes were issued at a 1%, or €3.1 million (approximately $3.4 million), original issue discount, which is being amortized over the life of the notes and included as interest expense in the Company’s consolidated statements of income. The Cabot Floating Rate Notes bear interest at a rate equal to three-month EURIBOR plus 5.875% per annum, reset quarterly. Interest on the Cabot Floating Rate Notes is payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, beginning on February 15, 2016. The Cabot Floating Rate Notes will mature on November 15, 2021. Loan fees associated with the Cabot Floating Rate Notes during the year ended December 31, 2015 were approximately £5.8 million (approximately $8.7 million) and capitalized as debt issuance costs. The Cabot Floating Rate Notes are fully and unconditionally guaranteed on a senior secured basis by the following indirect subsidiaries of the Company: CCM, Cabot Financial Limited and all material subsidiaries of Cabot Financial Limited (other than Cabot Financial II and Marlin Intermediate Holdings plc). The Cabot Floating Rate Notes are secured by a first- ranking security interest in all the outstanding shares of Cabot Financial II and the guarantors (other than CCM and Marlin Midway Limited) and substantially all the assets of Cabot Financial II and the guarantors (other than CCM). On July 25, 2013, Marlin Intermediate Holdings plc, a subsidiary of Marlin, issued £150.0 million (approximately $246.5 million) in aggregate principal amount of 10.5% Senior Secured Notes due 2020 (the “Marlin Bonds”). Interest on the Marlin Bonds is payable semi-annually, in arrears, on February 1 and August 1 of each year. Cabot assumed the Marlin Bonds as a result of the Marlin Acquisition. The carrying value of the Marlin Bonds was adjusted to approximately $284.2 million to reflect the fair value of the Marlin Bonds at the time of acquisition. The Marlin Bonds are fully and unconditionally guaranteed on a senior secured basis by Cabot Financial Limited and each of Cabot Financial Limited’s material subsidiaries other than Marlin Intermediate Holdings plc, each of which is an indirect subsidiary of the Company. The guarantees provided in respect of the Marlin Bonds are pari passu with each such guarantee given in respect of the Cabot Notes, the Cabot Floating Rate Notes and the Cabot Credit Facility. F-28 Table of Contents Interest expense related to the Cabot Notes, Cabot Floating Rate Notes, and Marlin Bonds was as follows (in thousands): Interest expense—stated coupon rate Interest income—accretion of debt premium Interest expense—amortization of debt discount Total interest expense—Cabot senior secured notes Year ended December 31, 2015 2014 $ $ $ 98,988 (10,747) 75 88,316 $ 97,028 (10,233) — 86,795 At December 31, 2015, the outstanding balance on the Cabot Notes, Cabot Floating Rate Notes, and Marlin Bonds was $1.4 billion. Cabot Senior Revolving Credit Facility On September 20, 2012, Cabot Financial UK entered into an agreement for a senior committed revolving credit facility of £50.0 million (approximately $82.7 million) (the “Cabot Credit Agreement”). Since such date there have been a number of amendments made, including, but not limited to, increases in the lenders’ total commitments thereunder. On November 11, 2015, Cabot Financial UK amended and restated its existing senior secured revolving credit facility agreement to, among other things, increase the total committed amount of the facility to £200.0 million (approximately $304.0 million) and extend the termination date to September 24, 2018 (as amended and restated, the “Cabot Credit Facility”). The Cabot Credit Facility also includes an uncommitted accordion provision which will allow the facility to be increased by an additional £50.0 million, subject to obtaining the requisite commitments and compliance with the terms of Cabot Financial UK’s other indebtedness, among other conditions precedent. Loan fees associated with amending the Cabot Credit Facility during the year ended December 31, 2015 were approximately £4.8 million (approximately $7.2 million) and capitalized as debt issuance costs. The Cabot Credit Facility has a six-year term expiring in September 2018, and includes the following key provisions: • Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus 3.5%; • A restrictive covenant that limits the loan to value ratio to 0.75; • A restrictive covenant that limits the super senior loan (i.e. the Cabot Credit Facility and any super priority hedging liabilities) to value ratio to 0.25; • Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens; and • Events of default which, upon occurrence, may permit the lenders to terminate the Cabot Credit Facility and declare all amounts outstanding to be immediately due and payable. The Cabot Credit Facility is unconditionally guaranteed by the following indirect subsidiaries of the Company: CCM, Cabot Financial Limited, and all material subsidiaries of Cabot Financial Limited. The Cabot Credit Facility is secured by first ranking security interests in all the outstanding shares of Cabot Financial UK and the guarantors (other than CCM) and substantially all the assets of Cabot Financial UK and the guarantors (other than CCM). Pursuant to the terms of intercreditor agreements entered into with respect to the relative positions of the Cabot Notes, the Cabot Floating Rate Notes, the Marlin Bonds and the Cabot Credit Facility, any liabilities in respect of obligations under the Cabot Credit Facility that are secured by assets that also secure the Cabot Notes, the Cabot Floating Rate Notes and the Marlin Bonds will receive priority with respect to any proceeds received upon any enforcement action over any such assets. At December 31, 2015, the outstanding borrowings under the Cabot Credit Facility were approximately $54.1 million. The weighted average interest rate was 3.86% and 4.34% for the years ended December 31, 2015 and 2014, respectively. Cabot 2015 Senior Secured Bridge Facility The dlc Acquisition was financed with borrowings under the existing Cabot Credit Facility and under a new senior secured bridge facility entered into by Cabot on June 1, 2015 (the “2015 Senior Secured Bridge Facility”). The 2015 Senior Secured Bridge Facility provided an aggregate principal amount of up to £90.0 million. The purpose of the 2015 Senior Secured Bridge Facility was to provide funding for the financing, in full or in part, of the purchase price of the dlc Acquisition and the payment of costs, fees and expenses in connection with the dlc Acquisition, and was fully drawn as of F-29 Table of Contents the closing of the dlc Acquisition. The 2015 Senior Secured Bridge Facility had an initial term of one year and could be extended for an additional year if it was not repaid during the first year of issuance. Prior to the initial maturity date, the rate of interest payable under the 2015 Senior Secured Bridge Facility was the aggregate, per annum, of (i) LIBOR (set to a minimum of 1%), plus (ii) an initial spread of 6.00% per annum (such spread stepping up by 50 basis points for each three-month period that the 2015 Senior Secured Bridge Facility remains outstanding), not to exceed total caps set forth in the senior secured bridge facility agreement. Loan fees associated with the 2015 Senior Secured Bridge Facility were approximately $1.4 million for the year ended December 31, 2015. These fees were recognized as interest expense in the Company’s consolidated financial statements. In November 2015, Cabot paid off the outstanding balance on the 2015 Senior Secured Bridge Facility. As a result, at December 31, 2015, there was no amount outstanding under the 2015 Senior Secured Bridge Facility. Preferred Equity Certificates On July 1, 2013, the Company, through its wholly owned subsidiary Encore Europe Holdings, S.a.r.l. (“Encore Europe”), completed the acquisition of Cabot (the “Cabot Acquisition”) by acquiring 50.1% of the equity interest in Janus Holdings S.a.r.l. (“Janus Holdings”). Encore Europe purchased from J.C. Flowers: (i) E Bridge preferred equity certificates issued by Janus Holdings, with a face value of £10,218,574 (approximately $15.5 million) (and any accrued interest thereof) (the “E Bridge PECs”), (ii) E preferred equity certificates issued by Janus Holdings with a face value of £96,729,661 (approximately $147.1 million) (and any accrued interest thereof) (the “E PECs”), (iii) 3,498,563 E shares of Janus Holdings (the “E Shares”), and (iv) 100 A shares of Cabot Holdings S.a.r.l. (“Cabot Holdings”), the direct subsidiary of Janus Holdings, for an aggregate purchase price of approximately £115.1 million (approximately $175.0 million). The E Bridge PECs, E PECs, and E Shares represent 50.1% of all of the issued and outstanding equity and debt securities of Janus Holdings. The remaining 49.9% of Janus Holdings’ equity and debt securities are owned by J.C. Flowers and include: (a) J Bridge PECs with a face value of £10,177,781 (approximately $15.5 million), (b) J preferred equity certificates with a face value of £96,343,515 (approximately $146.5 million) (the “J PECs”), (c) 3,484,597 J shares of Janus Holdings (the “J Shares”), and (d) 100 A shares of Cabot Holdings. All of the PECs accrue interest at 12% per annum. Since PECs are legal form debt, the J Bridge PECs, J PECs and any accrued interests thereof are classified as liabilities and are included in debt in the Company’s accompanying consolidated statements of financial condition. In addition, certain other minority owners hold PECs at the Cabot Holdings level (the “Management PECs”). These PECs are also included in debt in the Company’s accompanying consolidated statements of financial condition. The E Bridge PECs and E PECs held by the Company, and their related interest eliminate in consolidation and therefore are not included in debt in the Company’s consolidated statements of financial condition. The J Bridge PECs, J PECs, and the Management PECs do not require the payment of cash interest expense as they have characteristics similar to equity with a preferred return. The ultimate payment of the accumulated interest would be satisfied only in connection with the disposition of the noncontrolling interests of J.C. Flowers and management. On June 20, 2014, Encore Europe converted all of its E Bridge PECs into E Shares and E PECs, and J.C. Flowers converted all of its J Bridge PECs into J Shares and J PECs, in proportion to the number of E Shares and E PECs, or J Shares and J PECs, as applicable, outstanding on the closing date of the Cabot Acquisition. As of December 31, 2015, the outstanding balance of the PECs, including accrued interest, was approximately $221.5 million. Capital Lease Obligations The Company has capital lease obligations primarily for computer equipment. As of December 31, 2015, the Company’s combined obligations for capital leases were approximately $11.1 million. These capital lease obligations require monthly, quarterly or annual payments through 2020 and have implicit interest rates that range from zero to approximately 11.4%. F-30 Table of Contents Maturity Schedule The aggregate amounts of the Company’s debt, including PECs, accrued interests on PECs, and capital lease obligations, maturing in each of the next five years and thereafter are as follows (in thousands): 2016 2017 2018 2019 2020 Thereafter Total $ $ 48,634 122,478 248,649 1,190,075 544,475 1,053,872 3,208,183 Note 10: Variable Interest Entities A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb losses, or the right to receive the expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company’s VIEs include its subsidiary Janus Holdings and its special purpose entity used for the Propel securitization. Janus Holdings is the immediate parent company of Cabot. The Company has determined that Janus Holdings is a VIE and the Company is the primary beneficiary of the VIE. The key activities that affect Cabot’s economic performance include, but are not limited to, operational budgets and purchasing decisions. Through its control of the board of directors of Janus Holdings, the Company controls the key operating activities at Cabot. Propel used a special purpose entity to issue asset-backed securities to investors. The Company has determined that it is a VIE and Propel is the primary beneficiary of the VIE. Propel has the power to direct the activities of the VIE because it has the ability to exercise discretion in the servicing of the financial assets and to add assets to revolving structures. As discussed in Note 17, “Subsequent Event,” on February 19, 2016, the Company entered into an agreement to sell 100% of its membership interests in Propel. Since Propel is the primary beneficiary of the VIE used for securitization, the Company will no longer consolidate this VIE subsequent to the sale of Propel. Assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs. The Company evaluates its relationships with the VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary. Note 11: Stock-Based Compensation In April 2013, Encore’s Board of Directors (the “Board”) approved the Encore Capital Group, Inc. 2013 Incentive Compensation Plan (as amended, the “2013 Plan”), which was then approved by the Company’s stockholders on June 5, 2013. The 2013 Plan superseded the Company’s 2005 Stock Incentive Plan (“2005 Plan”). Board members, employees, and consultants of Encore and its subsidiaries and affiliates are eligible to receive awards under the 2013 Plan. Subject to certain adjustments, the Company may grant awards for an aggregate of 2,500,000 shares of the Company’s common stock under the 2013 Plan. Any shares subject to awards made under the 2013 Plan that terminate by expiration, forfeiture, cancellation, payment of exercise price, payment of withholding tax obligation or otherwise without the issuance of such shares shall again be available for issuance or payment of awards under the 2013 Plan. The 2013 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash awards, performance-based awards and any other types of awards not inconsistent with the 2013 Plan. The awards under the 2013 Plan consist of compensation subject to authoritative guidance for stock-based compensation. F-31 Table of Contents 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 years ended December 31, 2015, 2014, and 2013 was $22.0 million, $17.2 million, and $12.6 million, respectively. The Company’s stock-based compensation arrangements are described below: Stock Options The 2013 Plan permits the granting of stock options. No options have been awarded under the 2013 Plan. Under the 2005 Plan, option awards were 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 is estimated at the date of grant using a Black-Scholes option-pricing model. There were no options granted during the years ended December 31, 2015, 2014, or 2013. As of December 31, 2015, all outstanding stock options have been fully vested and all related compensation expenses have been fully recognized. A summary of the Company’s stock option activity as of December 31, 2015, and changes during the year then ended, is presented below: Number of Shares Option Price Per Share Weighted Average Exercise Price Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2014 Exercised Outstanding at December 31, 2015 Exercisable at December 31, 2015 170,815 (51,936) 118,879 $2.89 –$24.65 $ 2.89 –24.65 $2.89 –$24.65 118,879 $2.89 –$24.65 $ $ 14.84 18.71 16.23 16.23 $ $ 1,528 1,528 The total intrinsic value of options exercised during the years ended December 31, 2015, 2014, and 2013 was $1.2 million, $29.6 million, and $16.9 million, respectively. As of December 31, 2015, the weighted-average remaining contractual life of options outstanding and options exercisable was 4.6 years. Non-Vested Shares The Company’s 2013 Plan (and previously, the 2005 Plan), permits restricted stock units, restricted stock awards, and performance share awards. The fair value of non-vested shares with service condition and/or performance condition that affect vesting is equal to the closing sale price of the Company’s common stock on the date of issuance. Compensation cost is recognized only for the awards that ultimately vest. The Company has certain share awards that include market conditions that affect vesting, the fair value of these shares is estimated using a lattice model. Compensation cost is not adjusted if the market condition is not met, as long as the requisite service is provided. For the majority of non-vested shares, shares are issued on the vesting dates net of the amount of shares needed to satisfy minimal statutory tax withholding requirements. The tax obligations are then paid by the Company on behalf of the employees. A summary of the status of the Company’s restricted stock units and restricted stock awards as of December 31, 2015, and changes during the year then ended, is presented below: Non-vested at December 31, 2014 Awarded Vested Cancelled/forfeited Non-vested at December 31, 2015 Non-Vested Shares Weighted Average Grant Date Fair Value 1,102,281 $ 712,666 $ (430,813) $ (79,863) $ $ 1,304,271 35.60 42.21 35.90 42.22 38.71 F-32 Table of Contents Unrecognized compensation cost related to non-vested shares as of December 31, 2015, was $21.0 million. The weighted-average remaining expense period, based on the unamortized value of these outstanding non-vested shares, was approximately 2.0 years. The fair value of restricted stock units and restricted stock awards vested for the years ended December 31, 2015, 2014, and 2013 was $16.5 million, $20.2 million, and $11.5 million, respectively. Note 12: Income Taxes The Company recorded income tax provisions for continuing operations of $13.6 million, $52.7 million, and $45.4 million, during the years ended December 31, 2015, 2014 and 2013, respectively. The effective tax rates for the respective periods are shown below: Federal provision State (benefit) provision(1) Federal expense (benefit) of state Changes in state apportionment(2) International benefit(3) Tax reserves(4) Permanent items(5) Release of valuation allowance Other(6) Effective rate ________________________ Year Ended December 31, 2015 2014 2013 35.0 % (1.2)% 0.4 % 0.0 % (12.5)% (3.3)% 9.6 % (9.1)% 3.4 % 22.3 % 35.0 % 8.2 % (2.9)% 0.0 % (3.6)% 0.0 % 4.3 % 0.0 % (6.4)% 34.6 % 35.0 % 5.8 % (2.0)% (0.2)% (2.2)% 0.0 % 2.4 % 0.0 % (1.2)% 37.6 % (1) Change from 2014 to 2015 relates primarily to a beneficial settlement with a state tax authority. (2) Represents changes in state apportionment methodologies. (3) Relates primarily to the lower tax rate on the income attributable to international operations. (4) Represents release of reserves taken for a certain tax position. (5) Represents a provision for nondeductible items, including the CFPB settlement. (6) Includes the effect of discrete items, primarily relates to the recognition of tax benefit as a result of a favorable tax settlement with taxing authorities as discussed below. Due to a one-time charge resulting from a settlement with the Consumer Finance Protection Bureau (“CFPB”), discussed in detail in Note 13, “Commitments and Contingencies,” the Company incurred a $10.0 million civil monetary penalty related to the CFPB settlement which is not deductible for income tax purposes during the year ended December 31, 2015. The pretax income from continuing operations consisted of the following (in thousands): Domestic Foreign Year Ended December 31, 2015 2014 2013 $ $ 22,104 38,877 60,981 $ $ 131,434 21,181 152,615 $ $ 105,009 15,859 120,868 F-33 Table of Contents The provision for income taxes consisted of the following (in thousands): Current expense: Federal State Foreign Deferred (benefit) expense: Federal State Foreign Year Ended December 31, 2015 2014 2013 $ $ 42,459 567 7,124 50,150 (35,353) (1,409) 209 (36,553) 13,597 $ $ 71,002 7,741 3,752 82,495 (33,398) 2,710 918 (29,770) 52,725 $ $ 50,304 7,196 4,052 61,552 (13,134) (2,369) (661) (16,164) 45,388 The components of deferred tax assets and liabilities consisted of the following (in thousands): December 31, 2015 December 31, 2014 $ 1,301 $ Deferred tax assets: Stock-based compensation expense Accrued expenses Differences in income recognition related to receivable portfolios State and international operating losses Difference in basis of depreciable assets Capitalized legal fees—international Cumulative translation adjustment Tax benefit of uncertain tax positions Difference in basis of bond and loan costs Difference in basis of intangible assets Other Valuation allowance Deferred tax liabilities: State taxes Deferred court costs Difference in basis of amortizable assets Difference in basis of depreciable assets Differences in income recognition related to receivable portfolios Deferred debt cancellation income Other Net deferred tax asset $ 7,899 33,652 15,234 3,069 4,143 958 1,349 9,480 18,089 2,372 (4,517) 93,029 (690) (25,277) (14,988) (9,163) (17,432) (1,957) (46) (69,553) 23,476 $ 7,143 6,701 31,799 12,917 2,077 4,365 4,036 1,247 10,455 — 376 (10,047) 71,069 (1,643) (19,550) (10,682) (7,868) (16,308) (2,602) (3,533) (62,186) 8,883 Valuation allowances are recognized on deferred tax assets if the Company believes that it is more likely than not that some or all of the deferred tax assets will not be realized. The Company believes the majority of the deferred tax assets will be realized due to the reversal of certain significant temporary differences and anticipated future taxable income from operations. The valuation allowance of $4.5 million as of December 31, 2015 had been reduced from $10.0 million as of December 31, 2014, due to the release of a valuation allowance associated with one of the Company’s international subsidiaries. Based on F-34 Table of Contents current information, the Company believes that the subsidiary will have sufficient income in the future that will allow the utilization of the net operating loss that gave rise to the deferred tax asset and associated valuation allowance. The differences between the total income tax expense and the income tax expense computed using the applicable federal income tax rate of 35.0% per annum were as follows (in thousands): Computed “expected” Federal income tax expense (Decrease) increase in income taxes resulting from: State income taxes, net Foreign non-taxed income, rate differential Other adjustments, net Year Ended December 31, 2015 2014 2013 21,343 $ 53,415 $ 42,304 (460) (7,609) 323 13,597 $ 8,118 (5,453) (3,355) 52,725 $ 3,138 (2,647) 2,593 45,388 $ $ The Company has not provided for U.S. income taxes or foreign withholding taxes on the undistributed earnings from continuing operations of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries as of December 31, 2015, were approximately $35.1 million. Such undistributed earnings are considered permanently reinvested. The Company does not provide deferred taxes on translation adjustments on unremitted earnings under the indefinite reversal exception. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable due the complexities of a hypothetical calculation. The Company’s subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2018 and a 50% tax holiday for the subsequent four years. The impact of the tax holiday in Costa Rica for the year ended December 31, 2015 was immaterial. A reconciliation of the beginning and ending amount of the Company’s unrecognized tax benefit is as follows (in thousands): Balance at December 31, 2012 Decreases related to prior year tax positions Increases related to current and prior year tax positions Balance at December 31, 2013 Increases related to prior year tax positions Increases related to current year tax positions Decreases related to settlements with taxing authorities Balance at December 31, 2014 Increases related to prior year tax positions Increases related to current year tax positions Decreases related to prior year tax positions Balance at December 31, 2015 Amount 1,784 (712) 70,201 71,273 33,027 1,329 (67,204) 38,425 5,835 11,882 (8,193) 47,949 $ $ The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $58.5 million, $44.4 million and $83.0 million at December 31, 2015, 2014, and 2013 respectively. At December 31, 2015, 2014 and 2013, there were $14.9 million, $12.7 million and $13.5 million, respectively, of unrecognized tax benefits that if recognized, would result in a net tax benefit. During the year ended December 31, 2015, the increase in the Company’s gross unrecognized tax benefit was primarily associated with certain business combinations. During the year ended December 31, 2014, the decrease in total gross unrecognized tax benefits was due to a favorable tax settlement in November 2014 with taxing authorities related to a previously uncertain tax position. The result of the settlement was a reduction in the unrecognized tax benefit offset by an increase in current taxes payable and deferred tax liabilities. Additionally, the Company recorded a net tax benefit as a result of the settlement of approximately $6.6 million. The Company anticipates that the unrecognized tax benefits will decrease by approximately $32.0 million in the next twelve months due to a settlement with taxing authorities. The uncertain tax benefit is included in “Other liabilities” in the Company’s consolidated statements of financial condition. F-35 Table of Contents The Company recognizes interest and penalties related to unrecognized tax benefits in its tax expense. The Company recognized expense of approximately $0.3 million and $1.3 million in interest and penalties during the years ended December 31, 2015 and 2014, respectively. The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2012 through 2015 tax years remain subject to examination by federal taxing authorities, 2011 through 2015 tax years generally remain subject to examination by state tax authorities, and the 2012 through 2015 tax years remain subject to examination by foreign tax authorities. Tax years from 2008 forward remain open at certain of the Company’s subsidiaries for adjustment for federal and state tax purposes. Certain of the Company’s foreign subsidiaries have net operating loss carry forwards in the amount of approximately $63.5 million, which can be carried forward indefinitely. One of the Company’s domestic subsidiaries has a net operating loss carry forward in the approximate amount of $1.6 million which will begin to expire in 2024 unless previously utilized. Note 13: Commitments and Contingencies Litigation and Regulatory The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions based on the Fair Debt Collection Practices Act (“FDCPA”), comparable state statutes, the Telephone Consumer Protection Act (“TCPA”), state and federal unfair competition statutes, and common law causes of action. The violations of law investigated or 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 or unsupported assertions of fact in support of its collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and regulatory actions could involve potential compensatory or punitive damage claims, fines, sanctions, injunctive relief, or changes in business practices. Many continue on for some length of time and involve substantial investigation, litigation, negotiation, and other expense and effort before a result is achieved, and during the process the Company often cannot determine the substance or timing of any eventual outcome. 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 filed a class action counter-claim against two of the Company’s subsidiaries (the “Midland Defendants”). The complaint alleged that the Midland Defendants’ business practices violated consumers’ rights under the FDCPA and the Ohio Consumer Sales Practices Act. The Company has vigorously denied the claims asserted against it in these matters, but has agreed to a proposed settlement to avoid the burden and expense of continued litigation. Subject to court approval, settlement awards to eligible class members, as well as fees and costs, will be paid from a settlement fund of approximately $5.2 million, which has already been paid by the Company and its insurer. If the number of class members who make claims exceeds a certain level, the total settlement could increase to an amount not to exceed $5.7 million. On October 14, 2014, the district court issued an order granting final approval of the parties’ revised agreed upon settlement of this lawsuit. That order has been appealed by an objector to the settlement, which appeal remains pending. On November 2, 2010 and December 17, 2010, two national class actions entitled Robinson v. Midland Funding LLC and Tovar v. Midland Credit Management, respectively, were filed in the United States District Court for the Southern District of California. The complaints allege that certain of the Company’s subsidiaries violated the TCPA by calling consumers’ cellular phones without their prior express consent. The complaints seek monetary damages under the TCPA, injunctive relief, and other relief, including attorney fees. On May 10, 2011 and May 11, 2011 two class actions entitled Scardina v. Midland Credit Management, Inc., Midland Funding LLC and Encore Capital Group, Inc. and Martin v. Midland Funding, LLC, respectively, were filed in the United States District Court for the Northern District of Illinois. The complaints allege on behalf of a putative class of Illinois consumers that certain of the Company’s subsidiaries violated the TCPA by calling consumers’ cellular phones without their prior express consent. The complaints seek monetary damages under the TCPA, injunctive relief, and other relief, including attorney fees. On July 28, 2011, the Company filed a motion to transfer the Scardina and Martin cases to the United States District Court for the Southern District of California to be consolidated with the Tovar and Robinson cases. On October 11, 2011, the United States Judicial Panel on Multidistrict Litigation granted the Company’s motion to transfer. All four of these cases, along with a number of additional cases brought against the Company that allege violations of the TCPA, are now pending in the United States District Court for the Southern District of California in a multidistrict litigation titled In re Midland Credit Management Inc. Telephone Consumer Protection Act Litigation. The lead plaintiffs filed an amended consolidated complaint on July 11, 2012. The Company has vigorously denied the claims asserted against it in these matters, but has agreed to a proposed class settlement to avoid the burden and expense of continued litigation. The proposed class settlement is intended to resolve all cases involved in multi-district litigation, and all claims against the Company for alleged F-36 Table of Contents violations of the TCPA that occurred before August 31, 2014, other than those of persons who exclude themselves from class settlement. The settlement agreement, which is subject to court approval, would require the Company to contribute $2.0 million to a settlement fund, to be disbursed among eligible class members, and to set aside $13.0 million in debt forgiveness to be allocated among eligible class members. In addition, the settlement agreement provides that the Company will pay plaintiffs’ attorney fees in an amount to be determined by the court, and for the costs associated with administering the class relief. On September 9, 2015, the Company entered into a consent order (the “Consent Order”) with the CFPB in which it settled allegations arising from its practices between 2011 and 2015. The Consent Order includes obligations on the Company to, among other things: (1) follow certain specified operational requirements, substantially all of which are already part of the Company’s current operations; (2) submit to the CFPB for review a comprehensive plan designed to ensure that its debt collection practices comply with all applicable federal consumer financial laws and the terms of the Consent Order; (3) pay redress to certain specified groups of consumers; and (4) pay a civil monetary penalty. The Company will continue to cooperate and engage with the CFPB and work to ensure compliance with the Consent Order. In addition, the Company is subject to ancillary state attorney general investigations related to similar debt collection practices. The Company incurred a one-time, after-tax charge of approximately $43 million in the third quarter of 2015. The Company believes this charge will cover all related impacts of the Consent Order, including civil monetary penalties, restitution, any such ancillary state regulatory matters, legal expenses and portfolio allowance charges on several pool groups due to the impact on the Company’s current estimated remaining collections related to its existing receivable portfolios. The Company anticipates that after this one-time charge, any future earnings impact will be immaterial. In certain legal proceedings, the Company may have recourse to insurance or third party contractual indemnities to cover all or portions of its litigation expenses, judgments, or settlements. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. The Company continuously assesses the potential liability related to its pending litigation and regulatory matters and revises its estimates when additional information becomes available. As of December 31, 2015, other than reserves related to the CFPB Consent Order, ancillary state regulatory matters and the TCPA settlement fund discussed above, the Company has no material reserves for legal matters. Additionally, based on the current status of litigation and regulatory matters, either the estimate of exposure is immaterial to the Company’s financial statements or an estimate cannot yet be determined. The Company’s legal costs are recorded to expense as incurred. Leases The Company leases office facilities in the United States, Europe, and other geographies. The leases are structured as operating leases, and the Company incurred related rent expense in the amounts of $19.4 million, $23.0 million, and $12.0 million during the years ended December 31, 2015, 2014, and 2013, respectively. The Company has capital lease obligations primarily for certain computer equipment. Refer to Note 9, “Debt—Capital Lease Obligations” for additional information on the Company’s capital leases. Amortization of assets under capital leases is included in depreciation and amortization expense. Future minimum lease payments under lease obligations consist of the following for the years ending December 31, (in thousands): 2016 2017 2018 2019 2020 Thereafter Total minimal leases payments Less: Interest Present value of minimal lease payments Capital Leases Operating Leases Total 17,542 16,008 12,259 8,294 6,279 15,431 75,813 $ $ 24,192 19,132 13,432 8,725 6,530 15,431 87,442 $ $ 6,650 3,124 1,173 431 251 — 11,629 (575) 11,054 $ $ F-37 Table of Contents Purchase Commitments In the normal course of business, the Company enters into forward flow purchase agreements and other purchase commitment agreements. As of December 31, 2015, the Company has entered into agreements to purchase receivable portfolios with a face value of approximately $1.8 billion for a purchase price of approximately $297.2 million. The Company has no purchase commitments extending past one year. Guarantees Encore’s Certificate of Incorporation and indemnification agreements between the Company and its officers and directors provide that the Company will indemnify and hold harmless its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The Company has also agreed to indemnify certain third parties under certain circumstances pursuant to the terms of certain underwriting agreements, registration rights agreements, credit facilities, portfolio purchase and sale agreements, and other agreements entered into by the Company in the ordinary course of business. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these indemnification agreements is minimal and, as of December 31, 2015, has no liabilities recorded for these agreements. Note 14: Segment Information The Company conducts business through several operating segments that meet the aggregation criteria under authoritative guidance related to segment reporting. The Company has determined that it has two reportable segments: portfolio purchasing and recovery, and tax lien business. The Company’s management relies on internal management reporting processes that provide segment revenue, segment operating income, and segment asset information in order to make financial decisions and allocate resources. Segment operating income includes income from operations before depreciation, amortization of intangible assets, and stock-based compensation expense. The following table provides a reconciliation of revenue and segment operating income by reportable segment to consolidated results and was derived from the segments’ internal financial information as used for corporate management purposes (in thousands): Revenues: Portfolio purchasing and recovery Tax lien business Operating income (loss): Portfolio purchasing and recovery Tax lien business Depreciation and amortization Stock-based compensation Other expense Income from continuing operations before income taxes Year Ended December 31, 2015 2014 2013 $ $ $ $ 1,129,967 31,605 1,161,572 337,422 (36,167) 301,255 (33,945) (22,008) (184,321) 60,981 $ $ $ $ 1,043,429 29,360 1,072,789 352,754 11,820 364,574 (27,949) (17,181) (166,829) 152,615 $ $ $ $ 756,277 17,087 773,364 219,510 5,045 224,555 (13,547) (12,649) (77,491) 120,868 Additionally, assets are allocated to operating segments for management review. As of December 31, 2015, total segment assets were $3.8 billion and $377.5 million for the portfolio purchasing and recovery segment and tax lien business segment, respectively. As discussed in Note 17, “Subsequent Event,” on February 19, 2016, the Company entered into an agreement to sell Propel which represents the entire tax lien business reportable segment. As the Company’s Board of Directors did not approve a plan to sell Propel until 2016, the tax lien business did not qualify as held for sale as of December 31, 2015. F-38 Table of Contents The following table presents information about geographic areas in which the Company operates (in thousands): Revenues(1): United States Europe Other geographies ________________________ (1) Revenues are attributed to countries based on location of customer. Note 15: Goodwill and Identifiable Intangible Assets Year Ended December 31, 2015 2014 2013 $ $ 741,010 376,055 44,507 1,161,572 $ $ 752,607 295,173 25,009 1,072,789 $ $ 673,302 95,491 4,571 773,364 In accordance with authoritative guidance, goodwill is tested for impairment at the reporting unit level annually and in interim periods if certain events occur that indicate that the fair value of a reporting unit may be below its carrying value. Determining the number of reporting units and the fair value of a reporting unit requires the Company to make judgments and involves the use of significant estimates and assumptions. The Company has six reporting units for goodwill impairment testing purposes. The annual goodwill testing date for the five reporting units that are included in the portfolio purchasing and recovery reportable segment is October 1st; the annual goodwill testing date for the tax lien business reporting unit is April 1st. The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The qualitative factors include economic environment, business climate, market capitalization, operating performance, competition, and other factors. The Company may proceed directly to the two-step quantitative test without performing the qualitative test. The first step involves measuring the recoverability of goodwill at the reporting unit level by comparing the estimated fair value of the reporting unit in which the goodwill resides to its carrying value. The second step, if necessary, measures the amount of impairment, if any, by comparing the implied fair value of goodwill to its carrying value. The Company applies various valuation techniques to measure the fair value of each reporting unit, including the income approach and the market approach. For goodwill impairment analyses conducted at most of the reporting units, the Company uses the income approach in determining fair value, specifically the discounted cash flow method, or DCF. In applying the DCF method, an identified level of future cash flow is estimated. Annual estimated cash flows and a terminal value are then discounted to their present value at an appropriate discount rate to obtain an indication of fair value. The discount rate utilized reflects estimates of required rates of return for investments that are seen as similar to an investment in the reporting unit. DCF analyses are based on management’s long-term financial projections and require significant judgments, therefore, for the Company’s Cabot reporting unit, which carries a material goodwill balance and where the Company has access to reliable market participant data, the market approach is conducted in addition to the income approach in determining its fair value. The Company uses a guideline company method under the market approach to estimate the fair value of equity and the market value of invested capital (“MVIC”). The guideline company approach relies on estimated remaining collections data for each of the selected guideline companies, which enables a direct comparison between the reporting unit and the selected peer group. The Company believes that the current methodology used in determining the fair value at its reporting units represent its best estimates. In addition, the Company compares the aggregate fair value of the reporting units to its overall market capitalization. For the Company’s annual goodwill impairment tests performed at October 1, 2015 for its reporting units that are included in the portfolio purchasing and recovery reportable segment, the estimated fair value of each of these reporting units exceeded its respective carrying value. As a result, no impairment existed at any of these reporting units. The Company determined, at April 1, 2015, the annual goodwill impairment testing date for its tax lien business reporting unit, that the estimated fair value exceeded the carrying value. The estimation of fair value was based on a DCF analysis under the income approach as discussed above. However, as discussed in Note 17, Subsequent Event, on February 19, 2016, the Company entered into an agreement with certain funds which provides for the sale of 100% of the Company’s membership interests in Propel. The purchase price for the transaction is calculated in accordance with a formula relating to the redemptive value of certain tax liens as well as the book value of certain other assets and liabilities of Propel, and will be determined at the closing of the transaction. The application of the purchase price formula as of December 31, 2015 would have resulted in an enterprise value for Propel of $344.3 million. After repayment of third party debt, the cash consideration payable to the Company would have been $142.8 million. Authoritative guidance defines fair value as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement F-39 Table of Contents date (i.e., the “exit price”). In connection with the preparation of its financial statements, considering these developments, management believes that the proposed purchase price indicates that Propel’s fair value at December 31, 2015 was less than its carrying value. Based on the estimated sales price at closing, the Company wrote-down the entire goodwill balance of $49.3 million carried at the tax lien business reporting unit as of December 31, 2015. Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded goodwill and long-lived assets. Further adverse changes in the Company’s actual or expected operating results, market capitalization, business climate, economic factors or other negative events that may be outside the control of management could result in a material non-cash impairment charge in the future. Goodwill was allocable to reporting units included in the Company’s reportable segments. The following table summarizes the activity in the Company’s goodwill balance, as follows (in thousands): Balance, December 31, 2014 Goodwill acquired Goodwill impairment Goodwill adjustment(1) Effect of foreign currency translation Balance, December 31, 2015 ______________________ (1) Represents purchase accounting adjustments. Portfolio Purchasing and Recovery Tax Lien Business Total $ $ 848,656 $ 49,277 $ 114,730 — 2,410 (40,949) 924,847 — (49,277) — — $ — $ 897,933 114,730 (49,277) 2,410 (40,949) 924,847 The Company’s acquired intangible assets are summarized as follows (in thousands): As of December 31, 2015 As of December 31, 2014 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount $ 5,716 $ (1,263) $ 4,453 $ 5,437 $ (743) $ Customer relationships Developed technologies Trade name and other Other intangibles—indefinite lived 8,141 11,304 1,962 (3,793) (3,938) — 4,348 7,366 1,962 8,353 10,458 1,962 Total intangible assets $ 27,123 $ (8,994) $ 18,129 $ 26,210 $ The weighted-average useful lives of intangible assets at the time of acquisition were as follows: Customer relationships Developed technologies Trade name and other F-40 (2,194) (1,709) 4,694 6,159 8,749 — (4,646) $ 1,962 21,564 Weighted-Average Useful Lives 10 5 6 Table of Contents The amortization expense for intangible assets that are subject to amortization was $5.0 million, $3.6 million, and $0.8 million for the years ended December 31, 2015, 2014, and 2013, respectively. Estimated future amortization expense related to finite-lived intangible assets at December 31, 2015 is as follows (in thousands): 2016 2017 2018 2019 2020 Thereafter Total $ $ 4,323 3,943 2,341 1,186 1,109 3,265 16,167 Note 16: Quarterly Information (Unaudited) The following table summarizes quarterly financial data for the periods presented (in thousands, except per share amounts): 2015 Gross collections Revenues Total operating expenses Net income (loss) Net income (loss) attributable to Encore Capital Group, Inc. stockholders Earnings (loss) per share attributable to Encore Capital Group, Inc.: Basic Diluted 2014 Gross collections Revenues Total operating expenses Income from continuing operations Net income Amounts attributable to Encore Capital Group, Inc.: Income from continuing operations Net income Earnings per share attributable to Encore Capital Group, Inc.: From continuing operations: Basic Diluted From net income: Basic Diluted March 31 June 30 September 30 December 31 Three Months Ended $ 425,071 285,663 199,627 29,967 $ 437,324 290,356 203,352 25,185 $ 421,753 287,796 253,307 (9,364) 416,577 297,757 259,984 1,596 29,425 27,657 (10,959) (988) $ 1.13 1.08 $ 1.07 1.03 (0.43) $ (0.43) (0.04) (0.04) 396,674 $ 409,280 $ 407,220 $ 253,741 185,472 18,830 18,830 23,180 23,180 269,195 190,689 21,353 21,353 23,561 23,561 273,282 188,960 30,138 30,138 30,335 30,335 $ $ 0.90 0.82 0.90 0.82 $ $ 0.91 0.86 0.91 0.86 $ $ 1.17 1.11 1.17 1.11 394,323 276,571 188,224 29,569 27,957 28,262 26,650 1.09 1.04 1.03 0.98 $ $ $ $ $ F-41 Table of Contents Note 17: Subsequent Event On February 19, 2016, the Company entered into a securities purchase agreement with certain funds affiliated with Prophet Capital Asset Management LP (“Buyer”), which provides for the sale of 100% of the Company’s membership interests in Propel to Buyer (the “Transaction”). The purchase price for the Transaction is calculated in accordance with a formula relating to the redemptive value of certain tax liens as well as the book value of certain other assets and liabilities of Propel, and will be determined at the closing of the Transaction. The application of the purchase price formula as of December 31, 2015 would have resulted in an enterprise value for Propel of $344.3 million. After repayment of third party debt, the cash consideration payable to the Company would have been $142.8 million. Based on the proposed selling price, the Company concluded that the entire goodwill balance of $49.3 million related to Propel was impaired as of December 31, 2015. As the Company’s Board of Directors did not approve a plan to sell Propel until 2016, the tax lien business did not qualify as held for sale as of December 31, 2015. The Company recognized a pre-tax impairment charge for goodwill of $49.3 million, or $1.17 per diluted share, after the effect of income taxes for the year ended December 31, 2015. Propel represented the Company’s entire tax lien business reportable segment. Revenue from this segment comprised 3%, 3%, and 2% of the Company’s total consolidated revenues for each of the years ended December 31, 2015, 2014, and 2013, respectively. Excluding the goodwill impairment charge of $49.3 million discussed above, operating income from this segment comprised 4%, 3%, and 2% of the Company’s total consolidated operating income for each of the years ended December 31, 2015, 2014, and 2013, respectively. Refer to Note 14, “Segment Information” for further details of revenues and operating income of the Company’s tax lien business segment. F-42 

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