This is an example of what the holder dies can do to the coin. Note the raised veins in the clover and how they continue on into the coin.
borg - it's really simple. There are no letters on the encasement blank before is placed around the coin. So the encasement blank is struck with a die, just like a coin is struck. And the letters on the encasement die are incuse, just like on a coin die. So if the coin is placed slightly off center by the encasing machine - when the encasement is struck with the encasement die - some of those letters can be struck onto the coin being encased and they will be raised letters - just like they are supposed to be.
It is also possible that the encasement die was intended for a smaller coin than a five cent piece which would explain the flattening most of the way around the coin.