8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of report (Date of earliest event reported): February 13, 2013

ENCORE CAPITAL GROUP, INC.

(Exact Name of Registrant as Specified in Charter)

Delaware	000-26489	48-1090909
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)
3111 Camino Del Rio North, Suite 1300, San Diego, California		92108
(Address of Principal Executive Offices)		(Zip Code)

(877) 445-4581

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition.

On February 13, 2013, Encore Capital Group, Inc. (the “Company”) issued a press release announcing its financial results for the fourth quarter and full year ended December 31, 2012. A copy of the press release is furnished as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated by reference herein.

The information in Item 2.02 of this Current Report on Form 8-K, including the information contained in Exhibit 99.1, is being furnished to the Securities and Exchange Commission pursuant to Item 2.02, and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by a specific reference in such filing.

Item 7.01. Regulation FD Disclosure.

A copy of a slide presentation contained on the Company’s website is furnished as Exhibit 99.2 to this Current Report on Form 8-K and is incorporated herein solely for purposes of this Item 7.01.

The information in Item 7.01 of this Current Report on Form 8-K, including the information contained in Exhibit 99.2, is being furnished to the Securities and Exchange Commission pursuant to Item 7.01, and shall not be deemed to be “filed” for the purposes of the Exchange Act or otherwise subject to the liabilities of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by a specific reference in such filing.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

Exhibit Number	Description
99.1	Press release dated February 13, 2013.
99.2	Slide presentation of Encore Capital Group, Inc. dated February 13, 2013.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	ENCORE CAPITAL GROUP, INC.
Date: February 13, 2013		/s/ Paul Grinberg
		Paul Grinberg
		Executive Vice President, Chief Financial Officer and Treasurer

EXHIBIT INDEX

Exhibit Number	Description
99.1	Press release dated February 13, 2013.
99.2	Slide presentation of Encore Capital Group, Inc. dated February 13, 2013.

EX-99.1

Exhibit 99.1

Encore Capital Group Announces Fourth Quarter and Full Year 2012 Financial Results

Quarterly Net Income Increased 17% to $20.2 million; Quarterly Gross Collections Increased 24% to $230.5 million

SAN DIEGO, February 13, 2013—Encore Capital Group, Inc. (Nasdaq: ECPG), through its subsidiaries (the “Company”), a leading provider of debt management and recovery solutions for consumers and property owners across a broad range of assets, today reported consolidated financial results for the fourth quarter and full year ended December 31, 2012.

“2012 was an exceptional year for Encore,” said Brandon Black, the Company’s President and Chief Executive Officer. “We delivered record earnings, record collections and record operating cash flow, even as we made investments to strengthen our core business and expand our services for financially stressed consumers through the acquisition of Propel Financial Services. We believe that these strategic investments, combined with our analytic strength and our disciplined approach to deploying capital, position us well in an increasingly complex business and regulatory environment.”

For the Fourth Quarter of 2012:

• Gross collections from the portfolio purchasing and recovery business were $230.5 million, a 24% increase over the $185.9 million in the same period of the prior year.

• Investment in receivable portfolios in the portfolio purchasing and recovery business was $153.6 million, to purchase $8.5 billion in face value of debt, compared to $136.7 million, to purchase $3.8 billion in face value of debt in the same period of the prior year.

• Available capacity under the Encore Capital Group revolving credit facility, subject to borrowing base and applicable debt covenants, was $187.0 million as of December 31, 2012. Total debt, consisting of the Encore revolving credit and term loan facility, the Propel facility, the senior secured notes, and capital lease obligations, was $706.0 million as of December 31, 2012, compared to $389.0 million as of December 31, 2011.

• Revenue from receivable portfolios in the portfolio purchasing and recovery business, net of allowance adjustments, was $139.6 million, a 20% increase over the $116.5 million in the same period of the prior year. Revenue recognized on receivable portfolios, as a percentage of portfolio collections, excluding the effects of net portfolio allowances, decreased to approximately 59% from 64% in the same period of the prior year.

• Total operating expenses were $103.9 million, a 24% increase over the $83.6 million in the same period of the prior year. Adjusted operating expense per dollar collected for the portfolio purchasing and recovery business decreased to 43.2% compared to 44.1% in the same period of the prior year.

• Adjusted EBITDA, defined as net income before interest, taxes, depreciation and amortization, stock-based compensation expense, and portfolio amortization, was $134.7 million, a 28% increase over the $105.0 million in the same period of the prior year.

• Total interest expense for the portfolio purchasing and recovery segment increased to $6.5 million, as compared to $5.0 million in the same period of the prior year.

• Income from continuing operations was $20.2 million, or $0.79 per fully diluted share, compared to income from continuing operations of $17.2 million, or $0.67 per fully diluted share in the same period of the prior year.

Encore Capital Group, Inc.

Page 2 of 8

For the full year of 2012:

• Gross collections were $948.1 million, a 25% increase over the $761.2 million in 2011.

• Investment in receivable portfolios in the portfolio purchasing and recovery business was $562.3 million, to purchase $18.5 billion in face value of debt, compared to $386.9 million, to purchase $11.7 billion in face value of debt in 2011.

• Revenue from receivable portfolios in the portfolio purchasing and recovery business, net of allowance adjustments, was $545.4 million, a 22% increase over the $448.7 million in 2011.

• Total operating expenses were $401.7 million, a 22% increase over the $328.6 million 2011. Adjusted operating expenses for the portfolio purchasing and recovery business per dollar collected decreased to 40.4% compared to 42.2% in 2011.

• Adjusted EBITDA was $577.4 million, a 30% increase over the $443.9 million in 2011.

• Income from continuing operations was $78.6 million or $3.04 per fully diluted share, compared to income from continuing operations of $60.6 million or $2.36 per fully diluted share in 2011.

• Total stockholders’ equity per share, excluding the effects of discontinued operations, was $16.06 at December 31, 2012, an 11% increase over $14.45 at December 31, 2011.

Conference Call and Webcast

The Company will hold a conference call today at 2:00 p.m. Pacific time / 5:00 p.m. Eastern time to discuss fourth quarter and full year results.

Members of the public are invited to listen to the event via a listen-only telephone conference call line or the Internet. To access the live telephone conference call, please dial (877) 670-9781 or (408) 940-3818. The Conference ID is 90236787. To access the live webcast via the Internet, log on at the Investors page of the Company’s website at www.encorecapital.com.

Non-GAAP Financial Measures

The Company has included information concerning non-GAAP financial measures, including adjusted earnings per share, because management believes that investors regularly rely on non-GAAP adjusted earnings and adjusted earnings per share, to assess operating performance, in order to highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. The Company has also included information concerning adjusted EBITDA, because management utilizes this information, which is materially similar to a financial measure contained in covenants used in the Company’s credit agreement, in the evaluation of its operations and believes that this measure is a useful indicator of the Company’s ability to generate cash collections in excess of operating expenses through the liquidation of its receivable portfolios. Additionally, the Company has included information related to adjusted operating expenses for the portfolio purchasing and recovery business, in order to facilitate a comparison of approximate cash costs to cash collections for the portfolio purchasing and recovery business in the periods presented. These non-GAAP financial measures should not be considered as alternatives to, or more meaningful than, net income and total operating expenses as indicators of the Company’s operating performance. Further, these non-GAAP financial measures, as presented by the Company, may not be comparable to similarly titled measures reported by other companies. The Company has included a reconciliation of adjusted earnings per share to reported earnings under GAAP, a reconciliation of adjusted EBITDA to reported earnings under GAAP, a reconciliation of adjusted operating expenses for the portfolio purchasing and recovery business to the GAAP measure total operating expenses, and a reconciliation of adjusted stockholders’ equity per share to reported stockholders’ equity under GAAP in the attached financial tables.

Encore Capital Group, Inc.

Page 3 of 8

About Encore Capital Group, Inc.

Encore Capital Group is a leading provider of debt management and recovery solutions for consumers and property owners across a broad range of assets. Through its subsidiaries, the Company purchases portfolios of consumer receivables from major banks, credit unions, and utility providers, and partners with individuals as they repay their obligations and work toward financial recovery. Through its Propel Financial Services, LLC subsidiary, the Company assists property owners who are delinquent on their property taxes by structuring affordable monthly payment plans.

Headquartered in San Diego, Encore Capital Group is a publicly traded NASDAQ Global Select company (ticker symbol: ECPG) and a component stock of the Russell 2000, the S&P SmallCap 600, and the Wilshire 4500. More information about the Company can be found at www.encorecapital.com. The Company’s website and the information contained therein, is not incorporated into and is not a part of this press release.

Forward Looking Statements

The statements in this press release that are not historical facts, including, most importantly, those statements preceded by, or that include, the words “may,” “believe,” “projects,” “expects,” “anticipates” or the negation thereof, or similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). These statements may include, but are not limited to, statements regarding our future operating results, performance, business plans or prospects. For all “forward-looking statements,” the Company claims the protection of the safe harbor for forward-looking statements contained in the Reform Act. Such forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company and its subsidiaries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks, uncertainties and other factors are discussed in the reports filed by the Company with the Securities and Exchange Commission, including the most recent reports on Forms 10-K, 10-Q and 8-K, each as it may be amended from time to time. The Company disclaims any intent or obligation to update these forward-looking statements.

Encore Capital Group, Inc.

Page 4 of 8

Contact:

Encore Capital Group, Inc.

Paul Grinberg (858) 309-6904

paul.grinberg@encorecapital.com

Adam Sragovicz (858) 309-9509

adam.sragovicz@encorecapital.com

FINANCIAL TABLES FOLLOW

Encore Capital Group, Inc.

Page 5 of 8

ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Financial Condition

(In Thousands, Except Par Value Amounts)

	December 31, 2012			December 31, 2011
Assets
Cash and cash equivalents	$	17,510		$	8,047
Investment in receivable portfolios, net		873,119			716,454
Deferred court costs, net		35,407			38,506
Property tax payment agreements receivable, net		135,100			—
Interest receivable		4,042			—
Property and equipment, net		23,223			17,796
Other assets		27,006			15,233
Goodwill		55,446			15,985
Identifiable intangible assets, net		487			462
Total assets	$	1,171,340		$	812,483
Liabilities and stockholders’ equity
Liabilities:
Accounts payable and accrued liabilities	$	45,450		$	29,628
Income tax payable		3,080			—
Deferred tax liabilities, net		8,236			15,709
Debt		706,036			388,950
Other liabilities		2,722			6,661
Total liabilities		765,524			440,948
Commitments and contingencies
Stockholders’ equity:
Convertible preferred stock, $.01 par value, 5,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $.01 par value, 50,000 shares authorized, 23,191 shares and 24,520 shares issued and outstanding as of December 31, 2012 and December 31, 2011, respectively		232			245
Additional paid-in capital		88,029			123,406
Accumulated earnings		319,329			249,852
Accumulated other comprehensive loss		(1,774	)		(1,968	)
Total stockholders’ equity		405,816			371,535
Total liabilities and stockholders’ equity	$	1,171,340		$	812,483

Encore Capital Group, Inc.

Page 6 of 8

ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Comprehensive Income

(In Thousands, Except Per Share Amounts)

	(Unaudited) Three Months Ended December 31,						Year Ended December 31,
	2012			2011			2012			2011
Revenues
Revenue from receivable portfolios, net	$	139,594		$	116,452		$	545,412		$	448,714
Tax lien transfer
Interest income		5,315			—			13,882			—
Interest expense		(1,297	)		—			(3,422	)		—
Net interest income		4,018			—			10,460			—
Total revenues		143,612			116,452			555,872			448,714
Operating expenses
Salaries and employee benefits		28,193			20,347			101,084			77,805
Cost of legal collections		45,500			39,686			168,703			157,050
Other operating expenses		10,085			8,764			48,939			35,708
Collection agency commissions		2,980			3,388			15,332			14,162
General and administrative expenses		15,467			10,289			61,798			39,760
Depreciation and amortization		1,647			1,165			5,840			4,081
Total operating expenses		103,872			83,639			401,696			328,566
Income from operations		39,740			32,813			154,176			120,148
Other (expense) income
Interest expense		(6,540	)		(4,979	)		(25,564	)		(21,116	)
Other income (expense)		328			(181	)		1,713			(363	)
Total other expense		(6,212	)		(5,160	)		(23,851	)		(21,479	)
Income from continuing operations before income taxes		33,528			27,653			130,325			98,669
Provision for income taxes		(13,361	)		(10,418	)		(51,754	)		(38,076	)
Income from continuing operations		20,167			17,235			78,571			60,593
(Loss) income from discontinued operations, net of tax		—			(101	)		(9,094	)		365
Net income	$	20,167		$	17,134		$	69,477		$	60,958
Weighted average shares outstanding:
Basic		24,639			24,689			24,855			24,572
Diluted		25,565			25,657			25,836			25,690
Basic earnings (loss) per share from:
Continuing operations	$	0.82		$	0.70		$	3.16		$	2.47
Discontinued operations	$	0.00		$	(0.01	)	$	(0.36	)	$	0.01
Net basic earnings per share	$	0.82		$	0.69		$	2.80		$	2.48
Diluted earnings (loss) per share from:
Continuing operations	$	0.79		$	0.67		$	3.04		$	2.36
Discontinued operations	$	0.00		$	0.00		$	(0.35	)	$	0.01
Net diluted earnings per share	$	0.79		$	0.67		$	2.69		$	2.37
Other comprehensive (loss) gain:
Unrealized (loss) gain on derivative instruments	$	(791	)	$	(870	)	$	414		$	(2,964	)
Income tax benefit (provision) related to unrealized (loss) gain on derivative instruments		252			26			(220	)		845
Other comprehensive (loss) gain, net of tax		(539	)		(844	)		194			(2,119	)
Comprehensive income	$	19,628		$	16,290		$	69,671		$	58,839

Encore Capital Group, Inc.

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ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Cash Flows

(In Thousands)

	Year Ended December 31,
	2012			2011			2010
Operating activities:
Net income	$	69,477		$	60,958		$	49,052
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,840			4,661			3,199
Impairment charge for goodwill and identifiable intangible assets		10,400			—			—
Amortization of loan costs and premium on property tax payment agreements receivable		3,268			1,833			3,682
Stock-based compensation expense		8,794			7,709			6,010
Income tax provision (less than) in excess of income tax payments		(7,474	)		(1,917	)		646
Excess tax benefit from stock-based payment arrangements		(4,123	)		(5,101	)		(3,249	)
Loss on sale of discontinued operations		2,416			—			—
(Reversal) provision for allowances on receivable portfolios, net		(4,221	)		10,823			22,209
Changes in operating assets and liabilities
Deferred court costs		3,099			(6,348	)		(6,201	)
Other assets		(206	)		2,179			(1,390	)
Prepaid income tax and income taxes payable		7,060			6,495			(1,782	)
Accounts payable, accrued liabilities and other liabilities		4,190			3,287			3,299
Net cash provided by operating activities		98,520			84,579			75,475
Investing activities:
Cash paid for acquisition, net of cash acquired		(186,731	)		—			—
Purchases of receivable portfolios		(562,335	)		(386,850	)		(361,957	)
Collections applied to investment in receivable portfolios, net		406,815			301,474			217,891
Proceeds from put-backs of receivable portfolios		3,076			2,852			3,981
Originations of property tax payment agreements receivable		(34,036	)		—			—
Collections applied to property tax payment agreements receivable, net		35,706			—			—
Purchases of property and equipment		(6,265	)		(5,564	)		(2,722	)
Net cash used in investing activities		(343,770	)		(88,088	)		(142,807	)
Financing activities:
Payment of loan costs		(12,359	)		(840	)		(6,248	)
Proceeds from senior secured notes		—			25,000			50,000
Repayment of senior secured notes		(2,500	)		—			—
Proceeds from revolving credit facility and term loan facility		508,399			121,000			125,500
Repayment of revolving credit facility and term loan facility		(289,673	)		(143,000	)		(58,500	)
Proceeds from issuance of convertible notes		115,000			—			—
Repayment of convertible notes		—			—			(42,920	)
Purchases of convertible hedge instruments		(22,669	)		—			—
Proceeds from sale of warrants		11,028			—			—
Repurchase of common stock		(49,270	)		—			—
Proceeds from net settlement of certain call options		—			—			524
Proceeds from exercise of stock options		1,847			1,263			2,118
Taxes paid related to net share settlement of equity awards		(2,969	)		(3,891	)		(2,024	)
Excess tax benefit from stock-based payment arrangements		4,123			5,101			3,249
Repayment of capital lease obligations		(6,244	)		(3,982	)		(1,850	)
Net cash provided by financing activities		254,713			651			69,849
Net increase (decrease) in cash and cash equivalents		9,463			(2,858	)		2,517
Cash and cash equivalents, beginning of period		8,047			10,905			8,388
Cash and cash equivalents, end of period	$	17,510		$	8,047		$	10,905
Supplemental disclosures of cash flow information:
Cash paid for interest	$	25,218		$	19,038		$	15,652
Cash paid for income taxes		46,297			32,125			30,125
Supplemental schedule of non-cash investing and financing activities:
Fixed assets acquired through capital lease	$	5,287		$	2,949		$	4,317

Encore Capital Group, Inc.

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ENCORE CAPITAL GROUP, INC.

Supplemental Financial Information

Reconciliation of Adjusted Earnings From Continuing Operations to GAAP Net Income From Continuing Operations, Adjusted EBITDA to GAAP Net Income, Adjusted Operating Expenses For The Portfolio Purchasing And Recovery Business to GAAP Total Operating Expenses, and Adjusted Stockholders’ Equity Per Share to GAAP Total Stockholders’ Equity

(In Thousands, Except Per Share amounts) (Unaudited)

	Three Months Ended December 31,								Year Ended December 31,
	2012				2011				2012				2011
	$		Per Diluted Share		$		Per Diluted Share		$		Per Diluted Share		$		Per Diluted Share
GAAP net income from continuing operations, as reported	$	20,167	$	0.79	$	17,235	$	0.67	$	78,571	$	3.04	$	60,593	$	2.36
Adjustment:
Convertible notes non-cash interest and issuance cost amortization, net of tax		191	$	0.01		—		—		191	$	0.01		—		—
Adjusted earnings from continuing operations	$	20,358	$	0.80	$	17,235	$	0.67	$	78,762	$	3.05	$	60,593	$	2.36

	Three Months Ended December 31,				Year Ended December 31,
	2012		2011		2012		2011
GAAP net income, as reported	$	20,167	$	17,134	$	69,477	$	60,958
Adjustments:
Loss (income) from discontinued operations, net of tax		—		101		9,094		(365	)
Interest expense		6,540		4,979		25,564		21,116
Provision for income taxes		13,361		10,418		51,754		38,076
Depreciation and amortization		1,647		1,165		5,840		4,081
Amount applied to principal on receivable portfolios		90,895		69,462		402,594		312,297
Stock-based compensation expense		2,084		1,729		8,794		7,709
Acquisition related expenses		—		—		4,263		—
Adjusted EBITDA	$	134,694	$	104,988	$	577,380	$	443,872

	Three Months Ended December 31,						Year Ended December 31,
	2012			2011			2012			2011
GAAP total operating expenses, as reported	$	103,872		$	83,639		$	401,696		$	328,566
Adjustments:
Stock-based compensation expense		(2,084	)		(1,729	)		(8,794	)		(7,709	)
Tax lien transfer segment operating expenses		(2,113	)		—			(5,681	)		—
Acquisition related expenses		—			—			(4,263	)		—
Adjusted operating expenses for the portfolio purchasing and recovery business	$	99,675		$	81,910		$	382,958		$	320,857

	December 31, 2012		December 31, 2011
GAAP stockholders’ equity, as reported	$	405,816	$	371,535
Effect of discontinued operations		9,094		(365	)
Adjusted stockholders’ equity	$	414,910	$	371,170
Diluted shares outstanding		25,836		25,690
Adjusted stockholders’ equity per share	$	16.06	$	14.45

SOURCE Encore Capital Group, Inc.

EX-99.2

$115 MILLION

CONVERTIBLE BOND ISSUANCE

February 13, 2013

Exhibit 99.2

1

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

FORWARD-LOOKING STATEMENTS

The statements in this presentation that are not historical facts, including, most importantly,

those statements preceded by, or that include, the words “may,”

“believe,”

“projects,”

“expects,”

“anticipates”

or the negation thereof, or similar expressions, constitute “forward-

looking statements”

within the meaning of the Private Securities Litigation Reform Act of

1995 (the “Reform Act”). These statements may include, but are not limited to, statements

regarding our future operating results and growth. For all “forward-looking statements,”

Encore Capital Group, Inc. (the “Company”) claims the protection of the safe harbor for

forward-looking statements contained in the Reform Act. Such forward-looking statements

involve risks, uncertainties and other factors which may cause actual results, performance or

achievements of the Company and its subsidiaries to be materially different from any future

results, performance or achievements expressed or implied by such forward-looking

statements. These risks, uncertainties and other factors are discussed in the reports filed by

the Company with the Securities and Exchange Commission, including the most recent

reports on Forms 10-K, 10-Q and 8-K, each as it may be amended from time to time. The

Company disclaims any intent or obligation to update these forward-looking statements.

IN THE 4

QUARTER OF 2012, WE RAISED $115 MILLION THROUGH

THE ISSUANCE OF A CONVERTIBLE BOND

2

Encore

issued

a

convertible

bond

to

Qualified

Institutional

Buyers,

raising

$115

million

(1)

at

an

annual coupon of 3.0%, with a conversion premium of 25.0% above the stock price at issue

($31.5625)

(2)

Simultaneously with the issuance of the convertible bond:

Encore purchased a bond hedge in the over-the-counter equity derivatives market

(effectively repurchasing the call-option embedded in the convertible bond)

Encore

sold

warrants

at

75.0%

above

the

stock

price

at

issue

($44.1875)

(2)

–

The purchased call options are considered integrated with the convertible bond from a

tax perspective and, as a result, the cost of the options is deductible for tax purposes

–

The sold warrants expire 3 months after the bond hedge

Concurrent

with

the

transaction,

Encore

repurchased

shares

worth

$25

million

pursuant

to

a

share repurchase program

Overview of the Offering

A

B

3

1.

Comprised of a $100 million offering on November 27, 2012 and a $15 million overallotment option exercised on December 6, 2012

2.

The stock price at issue was $25.25

1

2

TH

THE COMBINATION OF THE CONVERTIBLE BOND WITH A BOND HEDGE PLUS

WARRANTS EFFECTIVELY INCREASED THE CONVERSION PREMIUM TO 75%

3

•

Encore issued a convertible bond with a conversion price of $31.5625 (25% above stock price at issue)

–

With net share settlement, if the stock price is above the conversion price at maturity, Encore would

deliver the original issue amount in cash and the incremental value above the conversion price in shares

•

Encore purchased a bond hedge in the over-the-counter derivatives market (i.e., Encore purchased back the

call option embedded in the convertible bond)

–

If the stock price is above the conversion price at maturity, Encore would receive the incremental value

above the conversion price in shares from the bond hedge counterparties

•

Encore

sold

a

warrant

with

a

strike

price

of

$44.1875

(75%

above

stock

price

at

issue)

in

the

over-the-counter

derivatives market

–

If the stock price is above the warrant strike price at maturity, Encore would deliver the incremental value

above the warrant strike price in shares to the warrant counterparties

•

In

effect,

it

is

as

if

Encore

had

issued

a

convertible

bond

with

a

conversion

price

of

$44.1875

(the

warrant

strike price)

–

If the stock price is above the warrant strike price at maturity, Encore will deliver the original issue amount

in

cash

and

the

incremental

value

above

the

warrant

strike

price

in

shares

Step 1: Issue Convertible Bond

Step 2: Purchase Bond Hedge

Step 3: Sell Warrants

Net Effect: Convertible with Bond Hedge + Warrants

1. Value measured as a percentage of par

Value Delivered by Encore at Maturity

(1)

5

8

10

13

15

100%

Stock Price

$31.5625

5

8

10

13

15

0%

Stock Price

$31.5625

5

8

10

13

15

0%

Stock Price

$44.1875

5

8

10

13

15

100%

Stock Price

$44.1875

THE BOND HEDGE IS TREATED AS EQUITY FOR ACCOUNTING

PURPOSES AND HAS TAX BENEFITS

4

Tax Considerations

Bond Hedge Plus Warrants Accounting

Net Share Settled Convertible Accounting

Description

Balance Sheet

Income Statement

Net Share Settlement

Accounting Method

Encore pays par in cash

and delivers shares for the

in-the-money amount of

the conversion option

•

Balance sheet: Debt

plus option

•

Interest expense:

Straight debt cost

•

EPS dilution: Treasury

stock method

•

The debt component is the estimated

fair value, as of the issuance date, of a

similar bond without the conversion

feature

–

The remainder is additional paid-

in capital

•

The debt component is subsequently

accreted to par over its expected life,

with interest expense that reflects the

convertible coupon plus amortization

of the bond discount

•

Illustration: Convertible coupon is

3.0%, straight cost of debt is 6.0%,

maturity is 5 years, and issue size is

$115 million

–

The debt component is initially

recorded at $100.3 million

(present value of cash flows

discounted at the straight cost of

debt), with the remaining $14.7

million recorded as a component

of equity

–

The end of year 1 value of the

debt component is $100.3 million

+ $2.6 million amortization of

bond discount

=

$102.9

million

(1)

•

Interest expense is calculated as

follows:

–

Year 1 interest expense is $6.1

million, cash interest = $3.5

million and amortization of bond

discount is

$2.6

million

(1)

•

The Treasury stock method is used to

determine shares added to total

shares outstanding

–

This is only applicable when the

stock trades above the conversion

price of $31.5625

•

The purchased call options (bond hedge) reduce equity and the sold warrants increase equity; equity is reduced by the net amount

–

The purchased call options and sold warrants are identified as equity pursuant to EITF 00-19

–

The bond hedge and warrants premium are not expensed and they are not marked to market

•

The purchased call options are ignored for EPS purposes

•

The sold warrants are accounted for pursuant to the Treasury Stock Method

•

The Convertible Bond is treated as debt issued at a discount (convertible face value minus cost of bond hedge)

•

The discount is amortized as interest expense over the life of the bond

•

This results in deductions being taken at Encore’s straight cost of debt (on the accreted balance sheet liability)

•

The proceeds from the sold warrants are tax-free

1.

Refer to page 5 and Appendix A for bond amortization schedule

Debt Accretion Schedule

Year

Interest

(1)

Coupon

Payment

Amort. of

Discount

EOP Debt

Balance

(2)

A

B

C

D

6.0%*D

(t-1)

3.0%*Par

A + B

D

(t-1)

+C

0

100.3

1

6.1

(3.5)

2.6

102.9

2

6.2

(3.5)

2.8

105.7

3

6.4

(3.5)

2.9

108.6

4

6.6

(3.5)

3.1

111.7

5

6.8

(3.5)

3.3

0.0

D

(t-1)

: Previous period accounting debt balance

Assumptions

Base Offering Size

$115.0 million

Maturity (Years)

5

Convertible Coupon

3.00%

Conversion Premium

25.0%

Straight Debt Cost

6.00%

Bond Component

$100.3 million

Tax Rate

39.0%

THE ACCOUNTING RULES RESULT IN A DIFFERENCE BETWEEN

CASH AND REPORTED INTEREST EXPENSE

5

1.

Interest calculated on a semi-annual basis

2.

End of Period (“EOP”) accounting debt balance is net of the net any paydown on the convertible bond; refer to

Appendix A for additional calculation detail

Present Value of convertible

bond cash flows discounted

at the equivalent cost of

straight debt

Accounting Overview of Settlement

Net Share Settled

What Happens Upon Conversion?

Par

paid

in

cash

and

(Conversion

Value

-

Par)

delivered

in

stock

Upfront Balance Sheet

Debt

100.3

Equity component

14.7

Interest Expense in Year 1 (Annualized)

Convertible coupon (cash interest expense)

3.5

Accretion (non-cash interest expense)

2.6

Total interest expense

6.1

Tax benefit

(2.4)

After-tax interest expense

3.7

EPS Calculation

Method

Debt and Equity

: Coupon + Accretion deducted from earnings

Shares Outstanding

: In-the-money amount included in share count under

treasury

stock

method

(underlying

shares

x

(current

share

price

-

conversion

price) / current share price)

Description

Interest Expense

THE STRUCTURE RESULTS IN A FAVORABLE AFTER-TAX INTEREST

RATE

6

Pre-tax Interest Rate Calculation

•

# of semi-annual payments: 10

•

Semi-annual coupon: $1.73 million

•

Upfront proceeds: $103.4 million

•

Maturity value: $115 million

Annualized IRR: 5.33%

1

1.

Assumes

Encore’s

effective

tax

rate

of

39%

and

implied

cost

of

straight

debt

at

6.0%;

refer

to

Appendix

A

for

additional

calculation detail

Convertible Terms

Offering Size

$115.0 million

Ranking

Senior Unsecured

Coupon

3.00%

Conversion Premium

25.00%

Share Price at Issuance

$25.25

Conversion Price

$31.5625

Maturity

5 Years

Settlement Method

Net Share Settlement

Call Protection

Non-Call Life

Bond Hedge Plus Warrants

With Overlay

Maturity

5 Years

Bond Hedge Strike (%) / Bond Hedge Strike ($)

25.0% / $31.5625

Warrant Strike (%) / Warrant Strike ($)

75.0% / $44.1875

Net Premium / % of Proceeds

$11.6 million / 10.1%

Net Proceeds

$103.4 million

Implied effective pre-tax interest rate on proceeds

(including cost of Bond Hedge and Warrants)

5.33%

Implied effective after-tax interest rate on proceeds

(1)

3.03%

1

EPS

Accretion

/

Dilution

Analysis

(1), (2)

Net Share Settled

$million, unless otherwise stated

FY12

Illustrative

Annual Impact

(4)

Stock Price Assumption ($)

$25.25

$50.50

GAAP Income from Continuing Operations

78.6

157.1

Pro Forma Adjustments

After-Tax Cash Interest Expense from Convertible Bond

(2.1)

(2.1)

After-Tax Amortization Expense

(1.6)

(1.6)

After-Tax Interest Savings from Debt Paydown

1.8

-

Adjusted GAAP Income from Continuing Operations

76.7

153.4

Adjusted

Non-GAAP

Income

from

Continuing

Operations

(5)

78.3

155.0

Stock Price ($)

$25.25

$50.50

Conversion Price ($)

$31.56

$31.56

Warrants Strike Price ($)

$44.19

$44.19

Fully Diluted Shares Outstanding (million)

25.8

25.8

Pro Forma Adjustments

Share Dilution from Base Convertible (million)

-

1.4

Share Dilution from Warrants (million)

-

0.5

Shares Repurchased (million)

(1.0)

(1.0)

Adjusted Fully Diluted Shares (million)

24.8

26.7

GAAP EPS from Continuing Operations ($)

$3.04

$6.08

Illustrative Pro Forma GAAP Accounting EPS from Continuing Operations ($)

$3.09

$5.75

Illustrative Accretion / Dilution (%)

1.6%

(5.4%)

Illustrative

Pro

Forma

Non-GAAP

Accounting

EPS

from

Continuing

Operations

($)

(5)

$3.15

$5.81

Illustrative

Pro

Forma

Non-GAAP

Economic

EPS

from

Continuing

Operations

($)

(5), (6)

$3.15

$6.13

Assumptions

Stock Price at Issue

$25.25

Illustrative Stock Price

$50.50

Wgt. Avg. Diluted Shrs Outstanding

25.8 million

Illustrative Annual EPS

$6.08

Interest Rate on Existing Revolver

4.0%

Share Repurchase Amount

$25.0 million

Paydown of Revolver with Proceeds

$74.5 million

Tax Rate

39.0%

Convertible Terms

Offering Size

$115 million

Convertible Coupon

3.00%

Conversion Premium

25.0%

Maturity

5 Years

Conversion Price

$31.56

Underlying Shares

3.6 million

Bond Component

$100.3 million

Assumed Straight Debt Cost

6.00%

Bond Hedge Plus Warrants

Bond Hedge Premium

19.70%

Bond Hedge Strike Price

$31.56

Warrants Strike Price

$44.19

Net Premium (cost)

10.1%

Net Proceeds

$103.4 million

AT AN ILLUSTRATIVE PRICE ABOVE $50 PER SHARE, THERE IS ACCOUNTING

DILUTION, BUT NO ECONOMIC DILUTION DUE TO THE SHARE REPURCHASE

7

Economic EPS excludes

dilution from the base

convertible bond

1.

Pro forma adjustments give effect to the issuance of the convertible bond and the repurchase of $25 million of common stock

2.

Refer to Appendix B for additional detail on the calculation of EPS

3.

Represents stock price at issuance of convertible bond

4.

Illustrative scenario assumes 100% growth in stock price and income

5.

“Non-GAAP”

EPS excludes the pro forma adjustment for after-tax amortization of bond discount (non-cash interest expense)

6.

“Economic”

EPS excludes dilution from the base convertible bond

(3)

Conversion Price

$31.56

Warrant Strike Price

$44.19

Stock Price ($)

Illustrative Stock Price

$50.50

$5.81

$6.13

$6.08

$5.75

$5.40

$5.60

$5.80

$6.00

$6.20

$6.40

$20

$24

$28

$32

$36

$40

$44

$48

$52

$56

$60

Pre-Transaction Illustrative GAAP EPS

Accounting GAAP EPS of Convertible Bond with Bond Hedge and Warrants

Economic Non-GAAP EPS of Convertible Bond with Bond Hedge and Warrants

Accounting Non-GAAP EPS of Convertible Bond with Bond Hedge and Warrants

Illustrative Diluted EPS Sensitivity Analysis

Accounting vs. Economic EPS ($)

FROM AN ECONOMIC PERSPECTIVE, SHARE DILUTION RESULTING FROM THE

BASE CONVERTIBLE BOND IS OFFSET BY THE BOND HEDGE

8

Conversion Price

$31.56

Warrant Strike Price

$44.19

Stock Price ($)

Illustrative Stock Price

$50.50

$5.81

$6.13

$6.08

$5.75

Non-GAAP EPS reflects the impact of:

•After-tax cash interest expense on the

convertible bond (excludes after-tax

amortization of the bond discount)

•$25MM share repurchase

(0.8)

(0.6)

(0.4)

(1.0)

(1.2)

(1.0)

(0.8)

(0.6)

(0.4)

(0.2)

0.0

$29.00

$32.00

$35.00

$38.00

$41.00

$44.00

$47.00

$50.00

$53.00

Stock Price at Conversion

(4.7%)

(3.9%)

(3.1%)

(2.4%)

(1.6%)

(0.8%)

(0.0%)

Net Share Settlement (with Bond Hedge and Warrants)

Net shares issued / (repurchased) as % of Total Shares Outstanding

THE COMBINATION OF THE BOND HEDGE PLUS WARRANTS AND THE SHARE

BUYBACK RESULTS IN A NET REDUCTION IN SHARES OUTSTANDING

9

1.

$25.25 stock price at issuance. 25.8 million weighted average diluted shares outstanding

Net

Change

in

Share

Count

at

Maturity

(1)

In millions

Net Share Settled Convertible

with Bond Hedge and Warrants

•

With the net share settlement

feature, Encore would repay the

original issue amount in cash and

the in-the-money amount above

the warrants strike

price in stock,

reducing the number of shares

issued upon conversion

•

Given the upfront buyback and

the net share settlement option,

Encore’s total shares outstanding

decrease as a result of the

transaction

Conversion Price:

$31.56

Warrant Strike Price:

$44.19

Net

Change

in

Share

Count

at

Maturity

-

Net

Share

Settled

Convertible

with

Bond

Hedge

and

Warrants

alongside

upfront

buyback

3.000% up 25.0%, $44.19 upper strike (75.0% effective premium), $25MM Buyback

A

B

C = Max(0, A-$44.19)

D = B*C

E = D/A

F

G = E -

F

($ per share)

($MM)

$29.00

3.6

$0.00

0.0

0.0

1.0

(1.0)

$32.00

3.6

$0.00

0.0

0.0

1.0

(1.0)

$35.00

3.6

$0.00

0.0

0.0

1.0

(1.0)

$38.00

3.6

$0.00

0.0

0.0

1.0

(1.0)

$41.00

3.6

$0.00

0.0

0.0

1.0

(1.0)

$44.00

3.6

$0.00

0.0

0.0

1.0

(1.0)

$47.00

3.6

$2.81

10.2

0.2

1.0

(0.8)

$50.00

3.6

$5.81

21.2

0.4

1.0

(0.6)

$53.00

3.6

$8.81

32.1

0.6

1.0

(0.4)

Shares

Repurchased

(MM)

Net Shares

Issued

(MM)

In-the-Money Amount incl.

Bond Hedge Plus Warrants

Stock Price At

Conversion

Shares

Underlying

Number of

Shares

(MM)

After-tax Interest Rate

(1)

$ millions

Year

Interest

(2)

Coupon

Payment

Amortization

of Discount

Debt Proceeds /

Paydown

End of Period

Accounting

Debt Balance

Interest Tax

Shield

Net Cash Flow

A

B

C

D

E

F

B+D+F

6.0%*E

(t-1)

3.0%*Par

A + B

E

(t-1)

+C+D

39.0%*A

0

0.0

103.4

100.3

103.4

1

6.1

(3.5)

2.6

102.9

2.4

(1.1)

2

6.2

(3.5)

2.8

105.7

2.4

(1.0)

3

6.4

(3.5)

2.9

108.6

2.5

(1.0)

4

6.6

(3.5)

3.1

111.7

2.6

(0.9)

5

6.8

(3.5)

3.3

(115.0)

-

2.6

(115.8)

After-tax Interest Rate

3.03%

E

(t-1)

: Previous Period Accounting Debt Balance

APPENDIX A: AFTER-TAX INTEREST RATE CALCULATION DETAIL

10

1.

Amounts may not total due to rounding

2.

Interest calculated on a semi-annual basis

3.

At period 0, the end of period accounting debt balance represents the present value of the  convertible bond cash flows discounted at an implied

straight cost of debt of 6%

(3)

APPENDIX B: EPS CALCULATION DETAIL

11

1.

Pro forma adjustments give effect to the issuance of the convertible bond and the repurchase of $25 million of common stock

2.

“Non-GAAP”

EPS excludes the pro forma adjustment for after-tax amortization of bond discount (non-cash interest expense)

3.

“Economic”

EPS excludes dilution from the base convertible bond

EPS Accretion / (Dilution) Calcluation Detail

$million, unless otherwise stated

Formula

Illustrative

Annual Impact

GAAP Income from Continuing Operations

A

157.1

Pro Forma Adjustments

After-Tax Cash Interest Expense from Convertible Bond

B

(2.1)

After-Tax Amortization Expense

C

(1.6)

After-Tax Interest Savings from Debt Paydown

D

0.0

Adjusted GAAP Income from Continuing Operations

E = A+B+C+D

153.4

Adjusted

Non-GAAP

Income

from

Continuing

Operations

(2)

F = E-C

155.0

Underlying Shares (million)

G

3.6

Stock Price ($)

H

$50.50

Conversion Price ($)

I

$31.56

Warrants Strike Price ($)

J

$44.19

Fully Diluted Shares Outstanding (million)

K

25.8

Pro Forma Adjustments

Share Dilution from Base Convertible (million)

L=G*(H-I)/H

1.4

Share Dilution from Warrants (million)

M=G*(H-J)/H

0.5

Shares Repurchased (million)

N

(1.0)

Adjusted Fully Diluted Shares (million)

O=K+L+M+N

26.7

GAAP EPS from Continuing Operations ($)

P=A/K

6.08

Illustrative Pro Forma GAAP Accounting EPS from Continuing Operations ($)

Q=E/O

5.75

Illustrative Accretion / Dilution (%)

(Q-P)/P

(5.38%)

Illustrative

Pro

Forma

Non-GAAP

Accounting

EPS

from

Continuing

Operations

($)

(2)

F/O

5.81

Illustrative

Pro

Forma

Non-GAAP

Economic

EPS

from

Continuing

Operations

($)

(2), (3)

F/(O-L)

6.13

Net Share Settled

(1)