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): March 10, 2005
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.) | ||
8875 Aero Drive, Suite 200
San Diego, California 92123
(Address of Principal Executive Offices) (Zip Code)
(877) 445-4581
(Registrant’s Telephone Number, Including Area Code)
Item 7.01 Regulation FD Disclosure
A copy of a slide presentation given by Carl C. Gregory, III, Vice Chairman and Chief Executive Officer, at the JP Morgan Think Big, Buy Small 5.0 Small Cap conference on March 10, 2005 in Chicago, Illinois, is attached to this Current Report on Form 8-K as Exhibit 99.1 and is incorporated herein solely for purposes of this Item 7.01.
The slide presentation attached to this Current Report on Form 8-K as Exhibit 99.1 contains financial measures for net income excluding one-time benefits and charges and for income before taxes exluding one time benefits and charges that are not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”). The Company has provided a reconciliation in Exhibit 99.2 to this Current Report on Form 8-K of the non-GAAP financial measures for net income excluding one-time benefits and charges to GAAP net income, and for income before taxes excluding one time benefits and charges to GAAP income before taxes.
Management believes that the non-GAAP financial measures for net income and income before taxes provide useful information to investors about the Company’s results of operations because the elimination of one-time benefits and charges that are 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 exhibits, is furnished pursuant to Item 7.01 and 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 exhibits, shall not be deemed to be incorporated by reference into the filings of Encore Capital Group, Inc. under the Securities Act of 1933.
Risk Factors
The slide presentation attached to this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). The words “believe,” “expect,” “anticipate,” “estimate,” “project,” or the negation thereof or similar expressions constitute forward-looking statements within the meaning of 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 these matters. For all forward-looking statements, the Company claims the protection of the safe-harbor for forward-looking statements contained in the Reform Act.
2
The Company’s actual results could differ materially from those contained in the forward-looking statements due to a number of factors, some of which are beyond our control. Factors that could affect our results of operations or financial condition and cause them to differ from those contained in the forward-looking statements include:
- Our quarterly operating results may fluctuate and cause our stock price to decrease;
- We may not be able to purchase receivables at sufficiently favorable prices or terms for us to be successful;
- We may not be successful at acquiring and collecting on portfolios consisting of new types of receivables;
- We may not be able to collect sufficient amounts on our receivables portfolios to recover our costs and fund our operations;
- The statistical model we use to project remaining cash flows from our receivables portfolios may prove to be inaccurate, which could result in reduced revenues if we do not achieve the collections forecasted by our model;
- Our industry is highly competitive, and we may be unable to continue to successfully compete with businesses that may have greater resources than we have;
- Our failure to purchase sufficient quantities of receivable portfolios may necessitate workforce reductions, which may harm our business;
- High financing costs currently have an adverse effect on our earnings;
- A significant portion of our portfolio purchases during any period may be concentrated with a small number of sellers;
- We may be unable to meet our future liquidity requirements;
- We may not be able to continue to satisfy the restrictive covenants in our debt agreements;
- We use estimates in our accounting and our earnings will be reduced if actual results are less than estimated;
- We will be required to change how we account for under performing receivable portfolios, which will have an adverse effect on our earnings;
- Our earnings will be reduced by the payment of substantial amounts in income taxes as a result of our full utilization of our federal net operating loss carry-forward in 2003;
- Government regulation may limit our ability to recover and enforce the collection of receivables;
- We are subject to ongoing risks of litigation, including individual or class actions under securities, consumer credit, collections, employment and other laws;
- We may make acquisitions that prove unsuccessful or strain or divert our resources;
- Recent legislative actions and proposed regulations will require corporate governance initiatives, which may be difficult and expensive to implement;
- We may not be able to hire and retain enough sufficiently trained employees to support our operations, and/or we may experience high rates of personnel turnover;
- The failure of our technology and phone systems could have an adverse effect on our operations;
- We may not be able to successfully anticipate, invest in or adopt technological advances within our industry;
- We may not be able to adequately protect the intellectual property rights upon which we rely; and
- We have engaged in transactions with members of our Board of Directors, significant stockholders, and entities affiliated with them; future transactions with related parties could pose conflicts of interest.
Forward-looking statements speak only as of the date the statement was made. They are inherently subject to risks and uncertainties, some of which we cannot predict or quantify. Future events and actual results could differ materially from the forward-looking statements. When considering each forward-looking statement, you should keep in mind the risk factors and cautionary statements found throughout the Company’s annual report on Form 10-K as of and for the year ended December 31, 2004 filed with the Securities and Exchange Commission. We do not undertake and specifically decline 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 a result of new information, future events, or for any other reason.
In addition, it is our policy generally 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.
3
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: March 10, 2005 | By /s/ Barry R. Barkley —————————————— Barry R. Barkley Executive Vice President, Chief Financial Officer and Treasurer |
4
EXHIBIT INDEX
| Exhibit | Description |
| 99.1 | Slide presentation given by Carl C. Gregory, III, Vice Chairman and Chief Executive Officer, at the JP Morgan Think Big, Buy Small 5.0 Small Cap conference on March 10, 2005 in Chicago, Illinois. |
| 99.2 | Reconciliation of non-GAAP information pursuant to Regulation G. |
5
Exhibit 99.1
NASDAQ: ECPG
JPMorgan
Small Cap Conference
March 10, 2005
1
CAUTIONARY NOTE A BOUT FORWARD - -LOOKING STATEMENTS
Certain Statements in This Presentation Constitute “Forward-looking Statements” Within the
Meaning of the Private Securities Litigation Reform Act of 1995. Such 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. For a Discussion of These Factors, We Refer You to the Company’s Annual
Report on Form 10-K As of and for the Year Ended December 31, 2004.
In Light of the Significant Uncertainties Inherent in the Forward-looking Statements Included
Herein, the Inclusion of Such Information
Should Not Be Regarded As a Representation by the
Company or by Any Other Person or Entity That the Objectives and Plans of the Company Will
Be Achieved.
2
ENCORE CAPITAL
50 year old purchaser and manager of consumer receivables portfolios
Unique business model
Excellent financial and operating results
Strong drivers for growth
3
INVESTMENT HIGHLIGHTS
Growth Industry
No barriers to entry - high barriers to long-term success
Demonstrated ability to buy right and collect well
Process company focused on debt collection
Innovations and analysis
Multiple collection channels reduces need to acquire new portfolios & increase
outbound collection staff
New lower cost financing
Significant catalyst for pretax margin expansion and earnings growth
Highly seasoned and respected management team
4
COMPELLING FUNDAMENTALS
Source: Federal Reserve Board, February 7, 2005 for Consumer Credit
Federal Reserve Board, February 23, 2005 for Charge-Off Rates
$ in billions
Non-mortgage consumer debt and charge-off rates
Traditional consumer debt continues to grow
Other types of consumer receivables are beginning to be sold
Automobile deficiencies Telecom
Utilities Medical
Health Club
5
BUSINESS DRIVERS
Buy Right
Collect Well
Manage Expenses
Challenge Everything
Demand Professional and Ethical Behavior
6
Encore’s COMPETITIVE ADVANTAGES
Consumer level analytics
Multiple collection strategies
Proprietary and dynamic account management
software
7
Account level valuation provides several competitive advantages
Buy Right
Note: All purchases since mid-2000 through 12/31/04.
Provides ability to create
positively selected deals
Expands universe of sources to
include our competition
Applies to alternative paper types
Increases our flexibility to buy throughout
the universe of defaulted receivables
8
Month Since
Charge
-
off
Face Value
($ in Billions)
% of Total
Face Purch.
0
-
6
$
2.2
18%
7
-
12
$
1.0
9%
13
-
18
$
2.1
19%
19
-
24
$
0.8
8%
25
-
36
$
2.7
25%
37+
$
2.3
21%
Total
$
11.1
100%
Strong Collection Growth
* 1Q ’04 total includes $4 million sale of rewrite business
9
COLLECT WELL - UNIQUE LIQUIDATION STRATEGIES
Continuous innovation is driving our collection growth
10
COLLECT WELL - RESULTS
Collection innovation drives our performance improvement
($ in Thousands)
(Employees)
11
STRONG FINANCIAL R ESULTS & MOMENTUM
*Excludes one-time items.
12
*Pretax Income excludes one-time benefit and charges.
STRONG FINANCIAL R ESULTS & MOMENTUM
The real earnings power not yet realized
13
STRONG
FINANCIAL RESULTS & MOMENTUM
-
BALANCE SHEET IMPROVEMENT
14
ACTUAL RESULTS
Our returns are consistently strong.
36 months
24 months
12 months
6 months
106
$4.3 Billion
$1.9 Billion
$7.6 Billion
$ 9.7 Billion
Total Face Value
57
189
226
# of Portfolios
0.8x
1.4x
2.5x
3.4x
15
Our Average Monthly Collections per Employee are very favorable.
ECPG1
$26,863
Monthly Collections
per Avg. Total
Employees
$234,676
2004 YTD Gross
Collections (in thousands)
728
Average # of
Total Employees
Key Metric
1 Data from 10-K filing for the period ending December 31, 2004 (12-month period).
16
Strong Collections and Judicious Portfolio Buys Create Strong Turnover
ECPG1
1.21
Annualized Portfolio
Turnover
$234,676
Annualized Gross
Collections (in thousands)
$193,741
Total Inventory
(in thousands)
$103,374
Annualized Purchases
(in thousands)
$90,367
Portfolio BOY
(in thousands)
Key Metric
1 Data from 10-K filing for the period ending December 31, 2004 (12-month period).
17
$376,500
Implied Gross Collections to
Realize Book Value
(in thousands)
$19,556
Avg. Monthly Collections 2004
(in thousands)
ECPG1
19.3
Months Remaining to Amortize
Book
24%
YTD Amortization Rate
$90,367
Portfolio January 1, 2004
(in thousands)
Key Metric
1 Data from 10-K filing for the period ending December 31, 2004 (12-month period).
We Are Amortizing Our Portfolio Quickly
18
COMPETITIVE COMPARISON
Recent Vintages Are Consistently Strong
Ratio of Total Collections to Purchase Price by Year of Origin
1 Data from 10-K filings for the period ending December 31, 2004 (12-month period).
19
EXPERIENCED MANAGEMENT TEAM
Former CFO of Stellcom, Inc.; Former EVP and CFO of Telespectrum Worldwide Inc.; Former Partner
of M&A Services at Deloitte and Touche
Paul Grinberg
SVP Finance
Former Director of Service Strategy at Gateway, Inc.
Anna Hansen
SVP Collection Operations
Former VP of Decision Science for Associates Home Equity Division
Eric Von Dohlen
VP
& Chief Credit Risk Officer
Former VP & CIO of West Capital; Former VP & CIO for Frederick’s of Hollywood and The Welk Group
John Treiman
SVP & CIO
Former VP and General Counsel of West Capital and Comstream Corp.
Robin R. Pruitt
SVP, General Counsel and Secretary
Former Director of Human Resources at Gateway, Inc.
Alison James
SVP, Human Resources
Former SVP of Operations of West Capital and First Data Resources; Former VP/Risk Operations of
Capital One
J. Brandon Black
President
& COO
Former CFO of West Capital; Former CFO and Board Member of Bank One, Texas, N.A; Former
Controller of Great Western Financial Corp.
Barry R. Barkley
EVP
& CFO
Former Chairman, President and CEO of West Capital; Former Chairman, President and CEO of MIP
Properties, Inc., a publicly traded REIT
Carl C. Gregory, III
Vice Chairman
& CEO
Experience
Name/Position
20
Future Prospects
Growth Opportunities
Innovations and analysis
Significant reduction in effective
interest rate driven by new financing
Continued penetration of alternative
asset classes
Ample liquidity for complementary
acquisitions.
Challenges
Higher prices for purchased
receivables
Implementation of SOP 2003-03
Managing SOX 404 requirements
21
NASDAQ: ECPG
JP Morgan
Small Cap Conference
March 10, 2005
22
Exhibit 99.2
ENCORE CAPITAL GROUP, INC.
Supplemental Financial Information
Reconciliation of GAAP Net Income and Income Before Taxes to
Net Income and Income Before Taxes Excluding One-Time Benefits and Charges
(In Thousands)
| Quarter Ended March 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
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| 2004 | 2003 | 2002 | ||||||||||||
|
|
|
|
||||||||||||
| GAAP net income, as reported | $ | 6,016 | $ | 8,166 | $ | 233 | ||||||||
| Gain on settlement of litigation1 | - | (4,376 | ) | - | ||||||||||
|
|
|
|
||||||||||||
| Net income, excluding one-time benefits | $ | 6,016 | $ | 3,790 | $ | 233 | ||||||||
|
|
|
|
||||||||||||
| Quarter Ended June 30, | ||||||||||||||
|
|
||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||
|
|
|
|
||||||||||||
| GAAP net income, as reported | $ | 5,595 | $ | 3,309 | $ | 692 | ||||||||
| Benefit from restoration of net deferred tax assets3 | - | - | (143 | ) | ||||||||||
|
|
|
|
||||||||||||
| Net income, excluding one-time benefits | $ | 5,595 | $ | 3,309 | $ | 549 | ||||||||
|
|
|
|
||||||||||||
| Quarter Ended September 30, | ||||||||||||||
|
|
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| 2004 | 2003 | 2002 | ||||||||||||
|
|
|
|
||||||||||||
| GAAP net income, as reported | $ | 5,882 | $ | 3,104 | $ | 2,521 | ||||||||
| Benefit from restoration of net deferred tax assets3 | - | - | (914 | ) | ||||||||||
|
|
|
|
||||||||||||
| Net income, excluding one-time benefits | $ | 5,882 | $ | 3,104 | $ | 1,607 | ||||||||
|
|
|
|
||||||||||||
| Quarter Ended December 31, | ||||||||||||||
|
|
||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||
|
|
|
|
||||||||||||
| GAAP net income, as reported | $ | 5,683 | $ | 3,841 | $ | 10,343 | ||||||||
| Write off of deferred costs2 | - | 528 | - | |||||||||||
| Benefit from restoration of net deferred tax assets3 | - | - | (8,830 | ) | ||||||||||
|
|
|
|
||||||||||||
| Net income, excluding one-time (benefits) Charges | $ | 5,683 | $ | 4,369 | $ | 1,513 | ||||||||
|
|
|
|
||||||||||||
| Years Ended December 31, | ||||||||||||||
|
|
||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||
|
|
|
|
||||||||||||
| GAAP income before taxes | $ | 38,846 | $ | 29,423 | $ | 8,086 | ||||||||
| Gain on settlement of litigation1 | - | (7,210 | ) | - | ||||||||||
| Write off of deferred costs2 | - | 870 | - | |||||||||||
|
|
|
|
||||||||||||
| Income before taxes, exluding one time (benefits) charges | $ | 38,846 | $ | 23,083 | $ | 8,086 | ||||||||
|
|
|
|
||||||||||||
| 1This is the result of a net pre-tax gain of $7.2 million and a net after-tax gain of $4.4 million associated with a litigation settlement during the first quarter of 2003. |
| 2This is the result of the pre-tax write-off of $0.9 million and an after-tax write-off of $0.5 million in deferred loans costs and a debt discount associated with the early retirement of our Senior Notes during the fourth quarter of 2003. |
| 3This is the result of a change in the valuation allowance associated with our net tax assets during 2002, which resulted in the recognition of a current tax benefit in the amount of $8.8 million, $0.9 million, and $.01 million for the quarters ended December 31, September 30 and June 30, respectively. |