Form 8-K Earnings Release 8-03-04

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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): August 3, 2004

Encore Capital Group, Inc.
(Exact Name of Registrant as Specified in its Charter)

Delaware 000-26489 48-1090909
(State or other jurisdiction of
incorporation or organization)
(Commission File Number) (I.R.S Employer
(Identification No.)

5775 Roscoe Court
San Diego, California 92123

(Address of Principal Executive Offices) (Zip Code)

(877) 445-4581
(Registrant’s Telephone Number, Including Area Code)











Item 12. Disclosure of Results of Operations and Financial Condition

                On August 3, 2004 the Company issued a press release announcing its unaudited financial results for the second quarter ended June 30, 2004. A copy of the press release is attached to this Current Report on Form 8-K as Exhibit 99.1 and is incorporated herein solely for purposes of Item 12.

        The press release attached to this Current Report on Form 8-K as Exhibit 99.1 contains financial measures for income before taxes, net income, fully diluted earnings per share and cash flow from operations excluding one-time benefit that are not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”). The Company has provided a reconciliation in the press release attached to this Current Report on Form 8-K as Exhibit 99.1 of the non-GAAP financial measures for income before taxes, net income, fully diluted earnings per share and cash flow from operations excluding one-time benefit to GAAP income before taxes, net income, fully diluted earnings per share and cash flow from operations.

        Management believes that these non-GAAP financial measures provide useful information to investors about the Company’s results of operations because the elimination of one-time benefit that is included in the GAAP financial measures results in enhanced comparability of certain key financial results between the periods presented.

                 The information in this Current Report on Form 8-K, including the exhibit, shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities under that Section. Furthermore, the information in this Current Report on Form 8-K, including the exhibit, shall not be deemed to be incorporated by reference into the filings of Encore Capital Group, Inc. under the Securities Act of 1933.

SIGNATURES

        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 thereunto duly authorized.

ENCORE CAPITAL GROUP, INC.
Date: August 3, 2004 By   /s/ Barry R. Barkley

         Barry R. Barkley
         Executive Vice President,
         Chief Financial Officer and Treasurer




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EXHIBIT INDEX

Exhibit                    Description

        99.1           Press release dated August 3, 2004.





3

Press Release 08-03-04

Exhibit 99.1

Encore Reports 41% Increase in Diluted Earnings Per Share

Highlights:

San Diego – (Business Wire) – August 3, 2004 – Encore Capital Group, Inc. (Nasdaq: ECPG), a leading accounts receivable management firm, today reported consolidated financial results for the second quarter ended June 30, 2004.

For the second quarter of 2004:

“We are very pleased with our second quarter performance, which represents the highest level of net income for any second quarter in the history of the Company,” according to Carl C. Gregory, III, President and CEO of Encore Capital Group, Inc. “We executed well on our strategy to increase our collections from non-credit card portfolios, which grew 336% over the prior year and now represent almost 9% of gross collections, compared with just 3% of gross collections in the same period last year. Until our Secured Financing Facility expires at the end of the year, collections from new purchases of non-credit card portfolios are significantly more profitable for the Company, as they do not require contingent interest payments to the lender.

“Importantly, we took a major step towards accelerating the Company’s growth prospects with the signing of a new $75.0 million credit facility with J.P. Morgan Chase during the second quarter. This new credit facility will significantly decrease our interest expense and should have a dramatic impact on increasing our bottom-line going forward,” said Mr. Gregory.










Financial Highlights

Gross collections for the second quarter 2004 were $57.4 million, an increase of 23% over $46.7 million in the second quarter of 2003.

Total revenue for the second quarter 2004 was $43.6 million, up 53.5% from the second quarter of 2003. Revenue recognized, as a percentage of collections, was 76% in the second quarter of 2004, compared to 61% in the second quarter of 2003.

Total operating expenses for the second quarter 2004 were $25.4 million, compared with $18.3 million in the second quarter of 2003. The increase in total operating expenses is largely volume driven and reflects growth in the costs of legal collections of $2.5 million, a $2.4 million increase in salaries and benefits, investment in the start-up of a new collection channel which amounted to $0.9 million, as well as growth of $0.5 million in insurance costs, compliance costs for Sarbanes-Oxley, SEC reporting fees, legal fees, and accounting fees.

Pretax cash flow from operations for the six months ended June 30, 2004 excluding the non-recurring litigation settlement recovered in the second quarter of 2003 increased from $13.3 million to $24.5 million – an increase of $11.2 million or 84%. (Adjustments to arrive at pretax cash flow from operations consisted of the 2003 non-recurring net litigation settlement of $7.2 million and income tax payments of $12.3 million in 2004 and $0.8 million in 2003.) The Company exhausted its Federal net operating loss carry forward in the fourth quarter of 2003 and began to make income tax payments at the statutory rates in 2004.

The Company spent $19.0 million to purchase approximately $759 million in face value of portfolios during the second quarter of 2004, a blended purchase price of 2.51% of face value. Credit card portfolios represented 67% of total purchases in the second quarter, and non-credit card portfolios represented the remaining 33%. Not included in the purchases for second quarter of 2004 is the $13.0 million acquisition of a portfolio representing approximately $421 million in face value that was negotiated in the second quarter and closed shortly after the quarter ended. Approximately 84% of this portfolio consists of non-credit card accounts.

The Company spent $26.3 million to purchase approximately $1.2 billion in face value of portfolios during the second quarter of 2003, a blended purchase price of 2.23% of face value.

Outlook

Commenting on the outlook for the Company, Mr. Gregory said, “We are pleased with the outlook for the remainder of 2004, and we believe we will have excellent momentum going into 2005 when our earnings per share should significantly increase due to lower interest expense, as well as continued steady growth in collections. We are effectively scaling the business and generating significant increases in collections, while maintaining disciplined approaches to portfolio purchases and expense control. As a result, we continue to increase the profitability of the business and the return generated on our capital. Although competition for acquiring attractive portfolios remains challenging, the market for charged-off consumer debt continues to grow as more industries begin to explore the sale of their receivables. As such, we believe the long-term outlook for the collections industry is promising, and we are well positioned to continue growing along with the market.”










The Company also provided the following information to assist the investment community:

  As a result of the new credit facility, the Company anticipates that contingent interest expense will decline beginning in 2005. The Company has forecasted, subject to effects of actual purchases under the line through the end of the year, that its contingent interest expense could be approximately 60-65% of current levels in 2005; 25-30% of current levels in 2006; and will be reduced to minimal amounts beyond 2006.

GAAP Reconciliation

The table included in the attached supplemental financial information is a reconciliation of generally accepted accounting principles in the United States of America (“GAAP”) income before taxes, net income, and fully diluted earnings per share to income before taxes, net income, and fully diluted earnings per share, excluding one-time benefits for the periods presented. We believe that these non-GAAP financial measures provide useful information to investors about our results of operations because the elimination of one-time benefits that are included in the GAAP financial measures results in a normalized comparison of certain key financial results between the periods presented.

Conference Call and Webcast
The Company will hold a conference call today at 2:00 PM Pacific time / 5:00 P.M. Eastern time to discuss the second quarter results. Members of the public are invited to listen to the live conference call via the Internet.

To hear the presentation and to access a slide presentation containing financial information that will be discussed in the conference call, log on at the Investor Relations page of the Company’s web site at www.encorecapitalgroup.com. For those who cannot listen to the live broadcast, a replay of the conference call will be available shortly after the call at the same location.

About Encore Capital Group, Inc.
Encore Capital Group, Inc. is an accounts receivable management firm that specializes in purchasing charged-off and defaulted consumer debt. More information on the company can be found at
www.encorecapitalgroup.com.










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,” “believes,” “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, projections of 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 those matters. 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 our subsidiaries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could affect the Company’s results and cause them to materially differ from those contained in the forward-looking statements include: the Company’s ability to purchase receivables portfolios on acceptable terms and in sufficient quantities; the availability and cost of financing; the Company’s ability to recover sufficient amounts on or with respect to receivables to fund operations; the Company’s continued servicing of receivables in its third party financing transactions; the Company’s ability to hire and retain qualified personnel to recover on its receivables efficiently; changes in, or failure to comply with, government regulations; the costs, uncertainties and other effects of legal and administrative proceedings; and risk factors and cautionary statements made in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2003.

Forward-looking statements speak only as of the date the statement was made. They are inherently subject to risks and uncertainties, some of which the Company cannot predict or quantify. Future events and actual results could differ materially from the forward-looking statements. The Company will not undertake and specifically declines any obligation to publicly release the result of any revisions to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, whether as the result of new information, future events or for any other reason. In addition, it is the Company’s policy generally not to make any specific projections as to future earnings, and the Company does not endorse any projections regarding future performance that may be made by third parties.

CONTACT:

Encore Capital Group, Inc. (Shareholders/Analysts)
Carl C. Gregory, III, 858-309-6961
carl.gregory@encorecapitalgroup.com

or

Financial Relations Board (Press)
Tony Rossi, 310-407-6563 (Investor Relations)
trossi@financialrelationsboard.com

SOURCE: Encore Capital Group, Inc.

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ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)



June 30,
2004
(Unaudited)
December 31,
2003 (A)


Assets            
Cash and cash equivalents   $ 33,692   $ 38,612  
Restricted cash    3,095    842  
Investment in receivable portfolios, net     91,555    89,136  
Investment in retained interest         1,231  
Property and equipment, net     2,907    2,786  
Prepaid income tax     3,684      
Deferred tax assets, net    1,839    1,358  
Other assets    5,560    4,320  


Total assets   $ 142,332   $ 138,285  


Liabilities and stockholders' equity   
Liabilities  
   Accounts payable and accrued liabilities   $ 13,018   $ 11,644  
   Accrued profit sharing arrangement    18,603    12,749  
   Income tax payable         883  
   Notes payable and other borrowings     26,918    41,178  
   Capital lease obligations     351    460  


Total liabilities    58,890    66,914  


Commitments and contingencies   
Stockholders' equity   
   Preferred stock, $.01 par value, 5,000 shares  
     authorized, and no shares issued and outstanding          
   Common stock, $.01 par value, 50,000 shares  
     authorized, 22,058 shares and 22,003 shares  
     issued and outstanding as of June 30, 2004  
     and December 31, 2003, respectively    221    220  
   Additional paid-in capital    65,851    65,387  
   Accumulated earnings    17,268    5,658  
   Accumulated other comprehensive income    102    106  


 Total stockholders' equity    83,442    71,371  


Total liabilities and stockholders' equity   $ 142,332   $ 138,285  



(A)     Derived from the audited consolidated financial statements as of December 31, 2003










ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)



Three Months Ended
June 30,
Six Months Ended
June 30,


2004 2003 2004 2003




Revenues                    
     Revenue from receivable portfolios    $ 42,622   $ 28,001   $ 84,697   $ 55,257  
     Revenue from retained interest     810    86    826    214  
     Servicing fees and other related revenue     154    304    450    1,043  




Total revenues    43,586    28,391    85,973    56,514  




Operating expenses   
     Salaries and employee benefits    11,852    9,482    23,476    19,129  
     Other operating expenses    4,255    2,634    8,349    5,011  
     Cost of legal collections    6,701    4,161    12,203    7,518  
     General and administrative expenses    2,154    1,539    3,807    3,013  
     Depreciation and amortization    473    477    917    1,013  




Total operating expenses    25,435    18,293    48,752    35,684  




Income before other income (expense)  
     and income taxes    18,151    10,098    37,221    20,830  
Other income (expense)  
     Interest expense     (8,977 )  (4,546 )  (18,259 )  (8,956 )
     Other income     166    15    320    7,289  




Income before income taxes    9,340    5,567    19,282    19,163  
Provision for income taxes     (3,745 )  (2,258 )  (7,672 )  (7,687 )




Net income     5,595    3,309    11,610    11,476  
Preferred stock dividends        (126 )      (251 )




Net income available to common stockholders    $ 5,595   $ 3,183   $ 11,610   $ 11,225  




Weighted average shares outstanding    22,048    7,421    22,035    7,416  
Incremental shares from assumed conversion  
     of warrants, options, and preferred stock    1,391    12,579    1,407    12,307  




Adjusted weighted average share outstanding    23,439    20,000    23,442    19,723  




Earnings per share – Basic   $ 0.25   $ 0.43   $ 0.53   $ 1.51  




Earnings per share - Diluted   $ 0.24   $ 0.17   $ 0.50   $ 0.58  















ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited, In Thousands)



Common Stock Additional
Paid-In
Accumulated Accumulated
Other
Comprehensive
Shares Par Capital Earnings Income Total






Balances at December 31, 2003      22,003   $ 220   $ 65,387   $ 5,658   $ 106   $ 71,371  
   Net income                11,610        11,610  
   Other comprehensive income - unrealized gain on  
        non-qualified deferred compensation plan assets                    32    32  
   Other comprehensive loss - decrease in unrealized gain  
        on investment in retained interest, net of tax                    (36 )  (36 )

   Comprehensive income                        11,606  
   Exercise of stock options     55    1    49            50  
   Tax benefits related to stock option exercises            360            360  
   Amortization of stock options issued at below market            55            55  






Balances at June 30, 2004    22,058   $ 221   $ 65,851   $ 17,268   $ 102   $ 83,442  















ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, In Thousands)

Six Months Ended
June 30,


2004 2003


Operating activities            
Gross collections   $ 121,397   $ 93,733  
Proceeds from litigation settlement        11,100  
Less:  
    Amounts collected on behalf of third parties    (1,468 )  (3,027 )
    Amounts applied to principal on receivable portfolios    (33,211 )  (31,135 )
    Amounts applied to principal of securitization 98-1    (1,195 )  (4,100 )
    Litigation settlement proceeds applied to principal  
       of receivable portfolios        (692 )
    Legal and other costs related to litigation settlement        (3,198 )
Servicing fees    450    1,043  
Operating expenses  
    Salaries and employee benefits    (23,483 )  (19,882 )
    Other operating expenses    (8,135 )  (5,147 )
    Cost of legal collections    (12,203 )  (7,518 )
    General and administrative    (3,401 )  (2,573 )
    Interest payments    (1,186 )  (3,581 )
    Contingent interest payments    (11,194 )  (7,113 )
    Other income    345    79  
    Decrease (increase) in restricted cash    (2,253 )  2,512  
    Income taxes    (12,344 )  (808 )


Net cash provided by operating activities    12,119    19,693  


Investing activities   
Purchases of receivable portfolios    (36,279 )  (45,073 )
Collections applied to principal of receivable portfolios    33,211    31,135  
Collections applied to principal of securitization 98-1    1,195    4,100  
Litigation settlement proceeds applied to principal  
     of receivable portfolios        692  
Proceeds from put-backs of receivable portfolios    649    504  
Purchases of property and equipment    (1,038 )  (403 )


Net cash used in investing activities    (2,262 )  (9,045 )


Financing activities   
Proceeds from notes payable and other borrowings    19,063    39,993  
Repayment of notes payable and other borrowings    (33,323 )  (46,629 )
Capitalized loan costs    (458 )    
Proceeds from exercise of common stock options    50    13  
Payment of preferred dividend        (250 )
Repayment of capital lease obligations    (109 )  (277 )


Net cash used in financing activities    (14,777 )  (7,150 )


Net increase (decrease) in cash    (4,920 )  3,498  
Cash, beginning of period    38,612    752  


Cash, end of period   $ 33,692   $ 4,250  













ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows (cont.)
Reconciliation of Net Income to Net Cash Provided by Operating Activities
(Unaudited, In Thousands)

Six Months Ended
June 30,


2004 2003


Net income     $ 11,610   $ 11,476  
Adjustments to reconcile net income to net cash  
   provided by operating activities:  
      Depreciation and amortization    917    1,013  
      Amortization of loan costs and debt discount    24    293  
      Tax benefits from stock option exercises     360     42  
      Amortization of stock based compensation     55      
      Deferred income tax expense (benefit)    (465 )  7,023  
Changes in operating assets and liabilities  
      Decrease (increase) in restricted cash    (2,253 )  2,512  
      Increase in prepaid income tax    (4,567 )    
      Increase in other assets    (807 )  (218 )
      Increase (decrease) in accrued profit sharing arrangement    5,854    (64 )
      Increase (decrease) in accounts payable and accrued liabilities    1,391    (2,384 )


Net cash provided by operating activities   $ 12,119   $ 19,693  













Supplemental Financial Information
The following table is a reconciliation of generally accepted accounting principles in the United States of America (“GAAP”) income before taxes, net income and fully diluted earnings per share to income before taxes, net income and fully diluted earnings per share, excluding one-time benefits for the periods presented. We believe that these non-GAAP financial measures provide useful information to investors about our results of operations because the elimination of one-time benefits that are included in the GAAP financial measures results in an enhanced comparability of certain key financial results between the periods presented (in thousand, except per share amounts and percentages):

Six Months Ended
June 30,



2004 2003


Income Before Taxes            
GAAP, as reported   $ 19,282   $ 19,163  
Gain on settlement of litigation        (7,210 )


Income before taxes, excluding  
     one-time benefit   $ 19,282   $ 11,953  


Percentage increase over prior period    61.3 %     

Net Income:   
GAAP, as reported   $ 11,610   $ 11,476  
Gain on settlement of litigation        (4,376 )


Net income, excluding one-time benefit   $ 11,610   $ 7,100  


Percentage increase over prior period    63.5 %     

Fully Diluted Earnings Per Share:   
GAAP, as reported   $ 0.50   $ 0.58  
Gain on settlement of litigation        (0.22 )


Fully diluted earnings per share,  
     excluding one-time benefit   $ 0.50   $ 0.36  


Percentage increase over prior period    38.9 %     

Cash Flow From Operations:   
GAAP, as reported   $ 12,119   $ 19,693  
Income Taxes Paid    12,344    808  


Pretax Cash Flow From Operations   $ 24,463   $ 20,501  
Proceeds from litigation settlement        (11,100 )
Legal and other costs related to  
    litigation settlement        3,198  
Litigation proceeds applied to portfolio        692  


Pre-tax cash flow from operations,  
    excluding one-time benefit   $ 24,463   $ 13,291  


Percentage increase over prior period    84.1 %