|
2. Significant Accounting Policies |
|
The following is a summary of significant accounting policies followed in preparation of the carve out financial statements. |
|
Investments in Previously Charged Off Receivables and Revenue Recognition |
|
Investments in previously charged off receivables on the carve out balance sheets include the uncollected purchase price of charged off receivables purchased by the carve out Company. All of the carve out Companys acquisitions of previously charged off receivables have been from the securitization trusts serviced by CompuCredit. These receivables were acquired subject to a competitive bid process involving other potential third-party portfolio purchasers to ensure that all acquisitions have been at fair market prices. |
|
Static pools consisting of homogenous accounts and receivables are established for each acquisition. Once a static pool is established, the receivables within the pool are not changed. Each static pool is recorded at cost and is accounted for as a single unit for payment application and income recognition purposes. The carve out Company accounts for its investments in previously charged off receivables by applying the cost recovery method on a portfolio-by-portfolio basis under the guidance of Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans (PB 6). Under the cost recovery method, income associated with a particular portfolio is not recognized until cash collections have exceeded the investment. Additionally, until such time as cash collected for a particular portfolio exceeds the investment in the portfolio, the carve out Company will incur commission costs and other internal and external
servicing costs associated with the cash collections on the portfolio investment that will be charged as an operating expense without any offsetting income amounts. |
|
Cash and Cash Equivalents |
|
CompuCredit provides cash as needed for investments in previously charged off receivables and to support the operations of the carve out Company and collects cash as the carve out Company receives it from its customers. Consequently, the accompanying carve out balance sheets do not include any cash balances. |
|
No portion of CompuCredits debt was specifically established to support the operations of Jefferson Capital. Thus, the accompanying carve out statements of operations include no interest income from CompuCredit on the net cash provided by the carve out Company, or interest expense on temporary use of cash provided by CompuCredit. |
|
Software and equipment are stated at cost less accumulated depreciation or amortization. Depreciation and amortization expenses are computed using the straight-line method over the estimated useful lives of the assets, which are approximately 3 years for software and 5 years for equipment. Management periodically reviews these assets to determine if any impairment, other than a temporary impairment, exists. There were no such impairments in the periods presented. Software and equipment consist of the following: |
|
|
|
December 31, |
|
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands) |
Software |
|
|
$ |
40 |
|
$ |
6 |
|
Data processing and telephone |
|
|
equipment |
|
|
|
37 |
|
|
33 |
|
|
Total cost |
|
|
|
77 |
|
|
39 |
|
Accumulated depreciation |
|
|
|
(55 |
) |
|
(30 |
) |
|
Software and equipment, net |
|
|
$ |
22 |
|
$ |
9 |
|
|
|
Collection expenses primarily include collections personnel. These costs are expensed when incurred, or in the case of prepaid costs, over the respective service period. |
|
Third party collection expenses are for commissions to collections agencies. These costs are expensed when incurred, which coincide when collections are remitted to the carve out Company. |
|
In 2004 and 2003, Jefferson Capital joined in the consolidated income tax filings of CompuCredit. The income tax provision included in the carve out financial statements is accounted for as if the carve out Company were a separate entity, stand-alone filer in its respective tax jurisdictions pursuant to Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes (Statement No. 109). The calculation of the income tax provision is based on the liability method required by Statement No. 109. Under the liability method, deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Jefferson Capital is a single member LLC, which historically has not reimbursed or been reimbursed from its parent for income tax liabilities. Therefore, these
carve out financial statements do not include cash paid for income taxes. |
|
3. Related Party Transactions |
|
Investments in Previously Charged Off Receivables |
|
All of the carve out Companys acquisitions of previously charged off credit card receivables have been from the securitization trusts serviced by CompuCredit. These receivables were acquired subject to a competitive bid process involving other potential third-party portfolio purchasers to ensure that all acquisitions have been at fair market prices. The acquisition amounts for the years ended December 31, 2004 and 2003 were $20,906,377 and $21,643,729, respectively. |
|
Included in the rent expense on the accompanying carve out statements of operations is a charge for leasing premises from FMT Services, Inc. (FMT), a wholly owned subsidiary of CompuCredit. Total rental expense was $36,839 and $27,717 for the years ended December 31, 2004 and 2003, respectively. |
|
The carve out financial statements have been prepared in accordance with SAB No. 55. These rules require allocations of costs for salaries and benefits, depreciation, rent, accounting and legal services, and other selling, general and administrative expenses. Jefferson Capital operates within the same facility as FMT. During 2004 and 2003, FMT allocated costs to Jefferson Capital as follows: (1) salary and benefit expenses directly based on employees servicing Jefferson Capital; (2) collections, depreciation, rent and utilities based on the number of full time employee equivalents serving Jefferson Capital; and (3) management and administrative expenses based on a predetermined percentage of time spent supporting Jefferson Capital. |
|
For carve out financial statement presentation, management has only included in the accompanying statements of operations the amounts they believe would have been necessary to operate the carve out Company autonomously. CompuCredit controls other entities that provide services to the carve out Company. In the opinion of management, these related party transactions are conducted under terms which approximate those which could be obtained from third parties. The above costs allocated from FMT to Jefferson Capital were allocated to the carve out Company based upon the percentage of total collections received on accounts retained by Jefferson Capital versus the collections on the sold accounts for both periods presented. |
|
CompuCredit has a 401(k) plan. All full time employees of the carve out Company are eligible to participate in CompuCredits 401(k) plan. The 401(k) plan provides for a matching contribution by CompuCredit, which amounted to approximately $29,000 and $30,000 in 2004 and 2003, respectively, and are included in salaries and benefits in the accompanying carve out statements of operations. |
|
Income tax expense or benefit is calculated by applying the effective income tax rate of 41.4% to income or loss before income taxes. The income tax expense or benefit is composed entirely of deferred tax expense or benefit with no components of current tax expense or benefit. |
|
The reconciling difference between the effective income tax rate and the statutory U.S. Federal income tax rate of 35% results from the impact of state income taxes for the years ended December 31, 2004 and 2003. |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax assets as of December 31, 2004 and 2003 of $543,638 and $790,013, respectively, consist solely of net operating loss carryforwards generated in the carve out Companys initial year of operations. |
|
5. Commitments and Contingencies |
|
Jefferson Capital is subject to various legal proceedings and claims that arise in the ordinary course of business. There are no material pending legal proceedings to which Jefferson Capital is a party. |
|
|
Pursuant to the Agreement between Encore and Jefferson Capital entered into on June 2, 2005, Jefferson Capital sold a portfolio of charged off credit card receivables having a face amount of approximately $2.8 billion, as adjusted, to Encore and agreed to sell Encore up to $3.25 billion in face amount of future charged-off credit card receivable acquisitions at established pricing over the next five years (the Forward Flow Contract). Pursuant to the Forward Flow Contract, Jefferson Capital is expected to purchase previously charged off credit card receivables from CompuCredit and related parties for delivery to Encore over the life of the contract. Any shortfalls in delivery of the required minimum periodic dollar amounts of previously charged off receivables to Encore could result in Jefferson Capital being required to return a portion of the purchase price related to the Forward Flow Contract. |
EXHIBIT 99.2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed consolidated statements of operations give effect to Encore Capital Group, Incs acquisition of certain assets from Jefferson Capital Systems, LLC (Jefferson Capital). In these unaudited pro forma condensed consolidated financial statements, Encore Capital Group, Inc. is referred to as we, us, our, and Encore.
On June 7, 2005, pursuant to an agreement entered into on June 2, 2005, the Company acquired certain assets, including receivable portfolios, from Jefferson Capital Systems, LLC (Jefferson Capital), a subsidiary of CompuCredit Corporation. As part of the acquisition, the Company acquired a portfolio of charged-off consumer credit card debt with a face value of approximately $2.8 billion (the Portfolio Purchase), entered into a forward flow agreement to purchase a minimum of $3.0 billion and up to $3.25 billion in face value of credit card charge-offs from Jefferson Capital over a five-year period beginning in July 2005 at a fixed price (the Forward Flow) and entered into an agreement to offer employment to approximately 120 employees of Jefferson Capital (the Employment Offer) at its collection site in St. Cloud, Minnesota in
September 2005, after completion of a three-month transition period. In addition, the Company entered into a two-year agreement to sell Chapter 13 bankruptcies to Jefferson Capital based on a pre-set pricing schedule (the BK Sales Agreement) and agreed to provide Jefferson Capital with a prescribed number of accounts on a monthly basis for its balance transfer program, also on a pre-set pricing schedule (the Balance Transfer Agreement). The Portfolio Purchase, Forward Flow, Employment Offer, BK Sales Agreement and Balance Transfer Agreement are collectively referred to as the Acquisition or the Business acquired from Jefferson Capital.
The Acquisition was accounted for as a business combination in accordance with Statement of Financial Accounting Standards No. 141 Business Combinations and accordingly, the tangible and intangible assets acquired were recorded at their estimated fair values as of the date of the Acquisition. The final allocation of the purchase price is pending completion of a third party valuation of the assets acquired. Depending on the outcome of that valuation the preliminary purchase price allocation could change .
The following unaudited pro forma condensed consolidated statements of operations have been prepared to assist you in your analysis of the financial effects of the Acquisition, and have been presented in accordance with the accounting principles generally accepted in the United States of America (US GAAP). The unaudited pro forma condensed consolidated statement of operations for the six months ended June 30, 2005, combines the historical results of Encore for the six months ended June 30, 2005, and the historical results of the Business acquired from Jefferson Capital for the period from January 1, 2005 through the date of acquisition on June 7, 2005, as if the Acquisition had occurred on January 1, 2005. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2004, combines the
historical results of Encore for the year ended December 31, 2004, and the historical results of the Business acquired from Jefferson Capital for the year ended December 31, 2004, as if the Acquisition had occurred on January 1, 2004.
Encores information was derived from its unaudited condensed consolidated financial statements for the quarterly period ended June 30, 2005, and its audited consolidated financial statements for the year ended December 31, 2004. These unaudited and audited consolidated financial statements are included in Encores Form 10-Q, filed on August 4, 2005, and in Encores Form 10-K, filed on March 3, 2005, respectively.
Jefferson Capitals information was derived from its unaudited carve out financial statements for the period from January 1, 2005 through the date of acquisition on June 7, 2005, and its audited carve out financial statements for the year ended December 31, 2004.
The unaudited pro forma condensed consolidated statements of operations do not reflect any operating efficiencies and cost savings that we may achieve as a result of the Acquisition, nor any expense associated with achieving those benefits.
The unaudited pro forma condensed consolidated statements of operations presented are based on the assumptions and adjustments described in the accompanying notes. The unaudited pro forma condensed consolidated statements of operations are presented for illustrative purposes and are not necessarily indicative of what our results of operations actually would have been if the Acquisition had occurred as of the dates indicated, nor are they necessarily indicative of results of operations for any future periods. The unaudited pro forma condensed consolidated statements of operations, and the accompanying notes, should be read in conjunction with the historical consolidated financial statements, and the accompanying notes, contained in the annual reports and other information that Encore has filed with the Securities and Exchange Commission.
ENCORE CAPITAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005
(In thousands, except per share data)
|
|
Historical |
|
|
|
|
|
Jefferson |
|
|
|
|
Historical |
Capital |
Pro Forma |
|
|
|
Encore |
Carve Out |
Adjustments |
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
$ |
104,234 |
|
$ |
5,759 |
|
$ |
10,614 |
|
|
(A) |
|
$ |
120,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
Salaries and employee benefits |
|
|
|
24,975 |
|
|
153 |
|
|
- |
|
|
|
|
|
25,128 |
|
Cost of legal collections |
|
|
|
16,987 |
|
|
- |
|
|
- |
|
|
|
|
|
16,987 |
|
Other operating expenses |
|
|
|
8,792 |
|
|
883 |
|
|
- |
|
|
|
|
|
9,675 |
|
Collection agency commissions |
|
|
|
5,486 |
|
|
3,683 |
|
|
- |
|
|
|
|
|
9,169 |
|
General and administrative expenses |
|
|
|
5,027 |
|
|
345 |
|
|
- |
|
|
|
|
|
5,372 |
|
Depreciation and amortization |
|
|
|
928 |
|
|
15 |
|
|
- |
|
|
|
|
|
943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
62,195 |
|
|
5,079 |
|
|
- |
|
|
|
|
|
67,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income (expense) |
|
|
and income taxes |
|
|
|
42,039 |
|
|
680 |
|
|
10,614 |
|
|
|
|
|
53,333 |
|
Other income (expense) |
|
|
Interest expense |
|
|
|
(16,471 |
) |
|
- |
|
|
(4,212 |
) |
|
(B) |
|
|
(20,683 |
) |
Other income |
|
|
|
608 |
|
|
- |
|
|
- |
|
|
|
|
|
608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
26,176 |
|
|
680 |
|
|
6,402 |
|
|
|
|
|
33,258 |
|
Provision for income taxes |
|
|
|
(10,627 |
) |
|
(281 |
) |
|
(2,594 |
) |
|
(C) |
|
|
(13,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
$ |
15,549 |
|
$ |
399 |
|
$ |
3,808 |
|
|
|
|
$ |
19,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
22,257 |
|
|
|
|
|
|
|
|
|
|
|
22,257 |
|
Incremental shares from assumed |
|
|
conversion of stock options |
|
|
|
1,309 |
|
|
|
|
|
|
|
|
|
|
|
1,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares |
|
|
outstanding |
|
|
|
23,566 |
|
|
|
|
|
|
|
|
|
|
|
23,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
Basic |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
to unaudited pro forma condensed consolidated statements of operations.
ENCORE CAPITAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
(In thousands, except per share data)
|
|
Historical |
|
|
|
|
|
Jefferson |
|
|
|
|
Historical |
Capital |
Pro Forma |
|
|
|
Encore |
Carve Out |
Adjustments |
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
$ |
178,475 |
|
$ |
7,456 |
|
$ |
21,949 |
|
|
(A) |
|
$ |
207,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
Salaries and employee benefits |
|
|
|
47,193 |
|
|
205 |
|
|
- |
|
|
|
|
|
47,398 |
|
Cost of legal collections |
|
|
|
28,202 |
|
|
- |
|
|
- |
|
|
|
|
|
28,202 |
|
Other operating expenses |
|
|
|
13,645 |
|
|
1,221 |
|
|
- |
|
|
|
|
|
14,866 |
|
Collection agency commissions |
|
|
|
4,786 |
|
|
4,893 |
|
|
- |
|
|
|
|
|
9,679 |
|
General and administrative expenses |
|
|
|
9,212 |
|
|
516 |
|
|
- |
|
|
|
|
|
9,728 |
|
Depreciation and amortization |
|
|
|
1,951 |
|
|
25 |
|
|
- |
|
|
|
|
|
1,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
104,989 |
|
|
6,860 |
|
|
- |
|
|
|
|
|
111,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income (expense) |
|
|
and income taxes |
|
|
|
73,486 |
|
|
596 |
|
|
21,949 |
|
|
|
|
|
96,031 |
|
Other income (expense) |
|
|
Interest expense |
|
|
|
(35,330 |
) |
|
- |
|
|
(10,110 |
) |
|
(B) |
|
|
(45,440 |
) |
Other income |
|
|
|
690 |
|
|
- |
|
|
- |
|
|
|
|
|
690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
38,846 |
|
|
596 |
|
|
11,839 |
|
|
|
|
|
51,281 |
|
Provision for income taxes |
|
|
|
(15,670 |
) |
|
(246 |
) |
|
(4,770 |
) |
|
(C) |
|
|
(20,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
$ |
23,176 |
|
$ |
350 |
|
$ |
7,069 |
|
|
|
|
$ |
30,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
22,072 |
|
|
|
|
|
|
|
|
|
|
|
22,072 |
|
Incremental shares from assumed |
|
|
conversion of stock options |
|
|
|
1,409 |
|
|
|
|
|
|
|
|
|
|
|
1,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares |
|
|
outstanding |
|
|
|
23,481 |
|
|
|
|
|
|
|
|
|
|
|
23,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
Basic |
|
|
$ |
1.05 |
|
|
|
|
|
|
|
|
|
|
$ |
1.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
$ |
0.99 |
|
|
|
|
|
|
|
|
|
|
$ |
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed consolidated statements of operations.
ENCORE CAPITAL GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF 0PERATIONS
Note 1 Basis of Presentation
The unaudited pro forma condensed consolidated statement of operations for the six months ended June 30, 2005, combines the historical results of Encore for the six months ended June 30, 2005, and the historical results of the Business acquired from Jefferson Capital for the period from January 1, 2005 through the date of acquisition on June 7, 2005, as if the Acquisition had occurred on January 1, 2005. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2004, combines the historical results of Encore for the year ended December 31, 2004, and the historical results of the Business acquired from Jefferson Capital for the year ended December 31, 2004, as if the Acquisition had occurred on January 1, 2004.
Jefferson Capitals audited financial statements as of and for the years ended December 31, 2004 and 2003, have been filed as Exhibit 99.1 to this report.
You should not rely on the unaudited condensed consolidated statement of operations data as being indicative of the historical results that would have occurred had Encore and the Business acquired from Jefferson Capital been combined during these periods or the future results that may be achieved after the Acquisition.
Note 2 Preliminary Allocation of Purchase Price
The Companys preliminary allocation of the purchase price is summarized as follows (in thousands):
|
|
Investment in receivable portfolios |
|
$ 95,708 |
|
Forward flow asset |
|
42,152 |
|
Goodwill |
|
5,000 |
|
|
|
Total purchase price |
|
$142,860 |
|
|
|
The final allocation of the purchase price is pending completion of a third party valuation of the assets acquired. Depending on the outcome of that valuation the preliminary purchase price allocation could change.
Note 3 Pro Forma Adjustments
The following pro forma adjustments are based on our preliminary allocation of the Jefferson Capital purchase price to acquired assets:
|
(A) |
To
convert the revenue recognition method from the cost recovery method used by Jefferson
Capital to the accretion method used by Encore. |
|
(B) |
To
record interest expense associated with borrowings incurred to fund the Acquisition of
$142.9 million at an interest rate of 6.5% per annum and amortization of $2.5 million in
deferred loan fees over a three-year period. |
|
(C) |
Reflects
(i) the recording of an income tax provision on the additional income before income taxes
and (ii) the adjustment of the effective tax rate to Encores rate. |