UNITED STATES
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): November 12, 2003
Encore Capital Group,
Inc.
(Exact Name of
Registrant as Specified in its Charter)
| Delaware | 000-26489 | 48-1090909 |
|---|---|---|
| (State or other jurisdiction of | (Commission File Number) | (I.R.S Employer |
| incorporation or organization) | 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 November 12, 2003 the Company issued a press release announcing its unaudited financial results for the third quarter ended September 30, 2003. 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 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: | November 12, 2003 | By /s/ Barry R. Barkley |
| Barry R. Barkley | ||
| Executive Vice President, | ||
| Chief Financial Officer and Treasurer |
EXHIBIT INDEX
| Exhibit | Description |
| 99.1 | Press release dated November 12, 2003. |
Exhibit 99.1
| November 12, 2003 |
Contact:
| Shareholders / Analysts: Carl C. Gregory, III Encore Capital Group, Inc. President and CEO 858-309-6961 carl.gregory@encorecapitalgroup.com |
Press: Tony Rossi Financial Relations Board Investor Relations 310-407-6563 trossi@financialrelationsboard.com |
Encore Reports 23%
Increase in Net Income For Third Quarter of 2003
*Cash Flow From Operations
Increases 91% in the First Nine Months of 2003
San Diego, Calif., November 12, 2003 — Encore Capital Group, Inc. (Nasdaq: ECPG), a leading accounts receivable management firm, today reported consolidated financial results for the third quarter and nine months ended September 30, 2003.
* Pretax Income for the third quarter of 2003 increased 96.0% or $2.5 million to $5.2 million over the $2.6 million earned in the third quarter of 2002.
* Net income for the third quarter of 2003 increased 23.1% over third quarter of 2002, from $2.5 million to $3.1 million, or $0.14 to $0.15 per diluted share. Fully diluted EPS were impacted by both a higher tax rate in 2003 and a higher number of fully diluted shares outstanding - primarily as a result of a higher share price.
* Gross collections for the third quarter of 2003 increased by 26.7% or $10.4 million to $49.1 million over $38.7 million in the third quarter of 2002.
* Total revenues for the third quarter of 2003 were $29.5 million, an increase of 21.0% or $5.1 million over $24.4 million in the same period of the prior year.
* For the nine months ended September 30, 2003, cash flow from operations was $26.0 million, an increase of 91.2% or $12.4 million over $13.6 million for the first nine months of 2002.
“ We are very pleased with our third quarter performance, which represented our eighth consecutive quarter of year-over-year improvement in net income,” said Carl C. Gregory, III, President and CEO of Encore Capital Group, Inc. “We achieved significant increases in key metrics such as gross collections, revenues, and net income. We continue to effectively manage our growth and have excellent operating leverage, as our third quarter collections increased 26.7% over the prior year, while our operating expenses increased only 18.0%. Employee productivity remained high during this period of growth. Over the past twelve months, we increased total employees by approximately 27%, while maintaining average collections per employee at a consistent rate.”
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Mr. Gregory added “It is also important to note that we completed a follow-on public offering shortly after the quarter ended that raised approximately $30.1 million for the Company and significantly improved our capital structure. With a stronger, less complex balance sheet, we can more aggressively pursue attractive receivable portfolios and grow the Company as we find appropriate opportunities.”
Third Quarter Financial Highlights
Gross collections were $49.1 million in third quarter of 2003, an increase of 26.7% or $10.4 million over $38.7 million in the same period of 2002. Revenue recognized as a percentage of collections was down slightly, from 63.0% in the third quarter of 2002 to 60.2% in the third quarter of 2003.
Total operating expenses were $19.5 million, an increase of 18.0% or $3.0 million over the $16.5 million in the third quarter of 2002.
The Company purchased approximately $640 million in face value debt during the third quarter of 2003, with a blended purchase price of 3.02% of face value.
Nine Month Financial Highlights
Total revenues for the nine months ended September 30, 2003 were $86.0 million, an increase of 37.2% or $23.4 million over $62.7 million in the same period of the previous year.
Net income was $14.6 million, or $0.73 per diluted share, for the nine months ended September 30, 2003, an increase of 323% or $11.2 million over net income of $3.4 million, or $0.22 per diluted share, in the same period of the previous year. The 2003 number includes the one-time benefit of the previously announced litigation settlement of $4.4 million, or $0.22 per diluted share.
In the first nine months of 2003, the Company purchased $2.4 billion of face value debt at a blended price of 2.68% of face value, compared with $2.2 billion at a blended price of 2.02% of face value for the same period in 2002.
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Outlook
The Company cited the following key drivers of future growth in revenue, earnings, and cash flow:
- The Company’s exclusive Secured Financing Facility, under which it purchases credit card receivables, expires at the end of 2004. The Company believes that any replacement or renegotiation of this financing relationship will lower the Company’s effective cost of borrowing and have a positive effect on earnings and cash flow. As a reference point, the interest expense under this facility was an after-tax $0.14 and $0.38 per fully diluted share for the three and nine months ended September 30, 2003, respectively. The contingent interest portion of this expense was an after-tax $0.12 and $0.33 per fully diluted share for the three and nine months ended September 30, 2003, respectively.
- The Company is currently validating the accuracy of a new model related to the expected collections on its receivables portfolios, and believes the validation will be completed in the fourth quarter of 2003. Once the validation is complete, the Company will implement the revised collection forecasts.
- As a result of our business success and the completion of our public offering, the Company now has approximately $37.5 million in cash. This cash is immediately available to invest in non-credit card paper purchases or other opportunities. As such, the Company expects that non-credit card paper will make up an increasing percentage of its purchases in the near future. The Company believes these purchases will yield a higher profit margin since they will not be financed under the current financing arrangement for its credit card receivables discussed above.
Commenting on the outlook for the Company, Mr. Gregory said, “We expect to deliver strong year-over-year growth going forward. We continue to see good opportunities to purchase additional portfolios that meet our investment criteria. We are also focused on prudently managing our growth. We are adding approximately 15 new collectors per month, while maintaining an employee retention rate above 80.0% for those employees who have graduated from our training program,” said Mr. Gregory.
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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 third quarter results. Members of the public are invited to listen to the live conference call via the Internet. To hear the 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.
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 maintain existing, and secure additional, financing; the Company’s ability to maintain sufficient liquidity to operate our business; the Company’s continued servicing of the receivables in our secured financing facility; the Company’s ability to recover sufficient amounts on or with respect to receivables to fund operations (including from sellers of non-conforming receivable portfolios); 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, 2002.
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.
#####
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ENCORE CAPITAL GROUP, INC.
Condensed Consolidated
Statements of Financial Condition
(In Thousands, Except
Par Value Amounts)
| September 30, 2003 (unaudited) |
December 31, 2002 (audited) | |||||||
|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||
| Cash | $ | 10,883 | $ | 752 | ||||
| Restricted cash | 745 | 3,105 | ||||||
| Investment in receivable portfolios, net | 78,497 | 64,168 | ||||||
| Investment in retained interest | 2,349 | 8,256 | ||||||
| Property and equipment, net | 3,156 | 3,541 | ||||||
| Deferred tax asset, net | 208 | 6,813 | ||||||
| Other assets | 4,135 | 3,339 | ||||||
| Total assets | $ | 99,973 | $ | 89,974 | ||||
| Liabilities and stockholders' equity | ||||||||
| Accounts payable and accrued liabilities | $ | 10,100 | $ | 10,688 | ||||
| Accrued profit sharing arrangement | 11,360 | 11,180 | ||||||
| Income tax payable | 2,383 | 531 | ||||||
| Notes payable and other borrowings, net of discount | ||||||||
| of $634 and $742 as of September 30, 2003, and | ||||||||
| December 31, 2002, respectively | 42,058 | 47,689 | ||||||
| Capital lease obligations | 524 | 344 | ||||||
| Total liabilities | 66,425 | 70,432 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity: | ||||||||
| Convertible preferred stock, $.01 par value, 5,000 shares | ||||||||
| authorized, 1,000 shares issued and outstanding | ||||||||
| (Liquidation value of $122,000 at September 30, 2003) | 10 | 10 | ||||||
| Common stock, $.01 par value, 50,000 shares authorized, | ||||||||
| and 7,437 shares and 7,411 shares issued and outstanding | ||||||||
| at September 30, 2003 and December 31, 2002, respectively | 74 | 74 | ||||||
| Additional paid-in capital | 31,558 | 31,479 | ||||||
| Accumulated earnings (deficit) | 1,815 | (12,388 | ) | |||||
| Accumulated other comprehensive income | 91 | 367 | ||||||
| Total stockholders' equity | 33,548 | 19,542 | ||||||
| Total liabilities and stockholders' equity | $ | 99,973 | $ | 89,974 | ||||
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ENCORE CAPITAL GROUP, INC.
Condensed Consolidated
Statements of Operations
(In Thousands, Except
Per Share Amounts)
(Unaudited)
| Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| Revenues | ||||||||||||||
| Revenue from portfolio receivables | $ | 29,148 | $ | 21,931 | $ | 84,405 | $ | 55,164 | ||||||
| Revenue from retained interest | 59 | 1,331 | 272 | 4,549 | ||||||||||
| Servicing fees and related revenue | 332 | 1,144 | 1,375 | 3,019 | ||||||||||
| Total revenues | 29,539 | 24,406 | 86,052 | 62,732 | ||||||||||
| Operating expenses | ||||||||||||||
| Salaries and employee benefits | 9,872 | 8,820 | 29,001 | 26,022 | ||||||||||
| Other operating expenses | 3,393 | 2,198 | 8,404 | 5,522 | ||||||||||
| Cost of legal collections | 3,983 | 2,450 | 11,502 | 6,919 | ||||||||||
| General and administrative expenses | 1,712 | 1,919 | 4,725 | 4,914 | ||||||||||
| Provision for portfolio losses | – | 492 | – | 492 | ||||||||||
| Depreciation and amortization | 507 | 623 | 1,521 | 1,815 | ||||||||||
| Total operating expenses | 19,467 | 16,502 | 55,153 | 45,684 | ||||||||||
| Income before other income (expense) | ||||||||||||||
| and income taxes | 10,072 | 7,904 | 30,899 | 17,048 | ||||||||||
| Other income and expense | ||||||||||||||
| Interest expense | (4,903 | ) | (5,272 | ) | (13,857 | ) | (13,285 | ) | ||||||
| Other income | 21 | 16 | 7,310 | 173 | ||||||||||
| Income before income taxes | 5,190 | 2,648 | 24,352 | 3,936 | ||||||||||
| Income tax provision | (2,086 | ) | (127 | ) | (9,773 | ) | (490 | ) | ||||||
| Net Income | 3,104 | 2,521 | 14,579 | 3,446 | ||||||||||
| Other comprehensive income: | ||||||||||||||
| Increase (decrease) in unrealized gain on | ||||||||||||||
| non-qualified deferred compensation plan | ||||||||||||||
| assets | 42 | 44 | (4 | ) | 65 | |||||||||
| Decrease in unrealized gain on retained | ||||||||||||||
| interest | ||||||||||||||
| in securitized receivables, net of tax | (58 | ) | (181 | ) | (272 | ) | (722 | ) | ||||||
| Comprehensive income | $ | 3,088 | $ | 2,384 | $ | 14,303 | $ | 2,789 | ||||||
| Earnings per share - Basic | $ | 0.40 | $ | 0.32 | $ | 1.91 | $ | 0.43 | ||||||
| Earnings per share - Diluted | $ | 0.15 | $ | 0.14 | $ | 0.73 | $ | 0.22 | ||||||
| Shares used for computation | ||||||||||||||
| Basic | 7,435 | 7,411 | 7,422 | 7,311 | ||||||||||
| Diluted | 20,197 | 17,841 | 19,999 | 15,911 | ||||||||||
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ENCORE CAPITAL GROUP, INC.
Condensed Consolidated
Statements of Cash Flows
(Unaudited, In
Thousands)
| Nine Months Ended September 30 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | |||||||
| Operating activities | ||||||||
| Gross Collections | $ | 142,828 | $ | 108,359 | ||||
| Proceeds from litigation settlement | 11,100 | – | ||||||
| Less: | ||||||||
| Amounts collected on behalf of third parties | (3,982 | ) | (8,636 | ) | ||||
| Amounts applied to principal of receivable portfolios | (48,715 | ) | (32,916 | ) | ||||
| Amounts applied to principal of securitization 98-1 | (5,453 | ) | (7,096 | ) | ||||
| Litigation settlement proceeds applied to principal of | ||||||||
| receivable portfolios | (692 | ) | – | |||||
| Legal and other costs related to litigation settlement | (3,198 | ) | – | |||||
| Servicing fees | 1,375 | 3,020 | ||||||
| Operating Expenses | ||||||||
| Salaries and employee benefits | (28,777 | ) | (24,833 | ) | ||||
| Other operating expenses | (8,429 | ) | (6,246 | ) | ||||
| Collection legal costs | (11,502 | ) | (6,919 | ) | ||||
| General and administrative | (4,491 | ) | (5,154 | ) | ||||
| Interest payments | (4,581 | ) | (3,255 | ) | ||||
| Contingent interest payments | (10,806 | ) | (1,915 | ) | ||||
| Other income | 100 | 173 | ||||||
| Decrease (increase) in restricted cash | 2,360 | (952 | ) | |||||
| Income taxes | (1,077 | ) | – | |||||
| Net cash provided by operating activities | 26,060 | 13,630 | ||||||
| Investing activities | ||||||||
| Purchases of receivable portfolios | (64,423 | ) | (44,625 | ) | ||||
| Collections applied to principal of receivable portfolios | 48,715 | 32,916 | ||||||
| Litigation settlement proceeds applied to principal of receivable | ||||||||
| portfolios | 692 | – | ||||||
| Collections applied to principal of securitization 98-1 | 5,453 | 7,096 | ||||||
| Proceeds from put-backs of receivable portfolios | 687 | 766 | ||||||
| Purchases of property and equipment | (594 | ) | (604 | ) | ||||
| Net cash used in investing activities | (9,470 | ) | (4,451 | ) | ||||
| Financing activities | ||||||||
| Proceeds from notes payable and other borrowings | 56,489 | 39,310 | ||||||
| Repayment of notes payable and other borrowings | (62,227 | ) | (52,122 | ) | ||||
| Capitalized loan costs relating to financing arrangement | – | (154 | ) | |||||
| Proceeds from exercise of common stock options | 17 | – | ||||||
| Proceeds from exercise of common stock warrants | – | 2 | ||||||
| Proceeds from sale of preferred stock | – | 4,588 | ||||||
| Payment of preferred dividend | (375 | ) | (250 | ) | ||||
| Repayment of capital lease obligations | (363 | ) | (736 | ) | ||||
| Net cash used in financing activities | (6,459 | ) | (9,362 | ) | ||||
| Net increase (decrease) in cash | 10,131 | (183 | ) | |||||
| Cash, beginning of period | 752 | 1,412 | ||||||
| Cash, end of period | $ | 10,883 | $ | 1,229 | ||||
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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)
| Nine Months Ended September 30 |
||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | |||||||
| Net income | $ | 14,579 | $ | 3,446 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depreciation and amortization | 1,521 | 1,815 | ||||||
| Amortization of loan costs and debt discount | 206 | 654 | ||||||
| Deferred income tax expense | 6,851 | 490 | ||||||
| Increase in provision for portfolio losses | – | 492 | ||||||
| Increase in income on retained interest | – | 419 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Decrease (increase) in restricted cash | 2,360 | (952 | ) | |||||
| Increase in other assets | (895 | ) | (1,364 | ) | ||||
| Increase in accounts payable and accrued liabilities | 1,258 | 1,589 | ||||||
| Increase in accrued profit sharing arrangement | 180 | 7,041 | ||||||
| Net cash provided by operating activities | $ | 26,060 | $ | 13,630 | ||||
| Supplemental schedule of non-cash investing activities: | ||||||||
| Property and equipment acquired under capital lease | $ | 542 | $ | – | ||||
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The following table sets forth our capitalization as of September 30, 2003 on an actual basis and on a pro-forma basis to reflect the effects of the follow-on public offering, the conversion of the Series A convertible preferred stock, the exercise of warrants and options, and the repayment of the senior note:
| As of September 30, 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Actual | Pro-forma | |||||||
| Cash | $ | 10,883 | $ | 34,100 | ||||
| Notes payable and other borrowings, net of | 42,058 | 34,808 | ||||||
| $634 discount, actual; and $0 pro-forma | ||||||||
| Capital lease obligations | 524 | 524 | ||||||
| Total Debt | 42,582 | 35,332 | ||||||
| Stockholders’ equity | ||||||||
| Series A convertible preferred stock, | ||||||||
| $0.01 par value, 5,000,000 shares | ||||||||
| authorized, 1,000,000 shares issued | ||||||||
| and outstanding, actual; zero shares | ||||||||
| issued and outstanding, pro-forma | 10 | – | ||||||
| Common stock, $0.01 par value, | ||||||||
| 50,000,000 shares authorized, | ||||||||
| 7,437,433 shares issued and | ||||||||
| outstanding, actual; and 21,299,187 | ||||||||
| shares issued and outstanding | ||||||||
| pro-forma (1) | 74 | 213 | ||||||
| Additional paid-in capital | 31,558 | 62,083 | ||||||
| Accumulated earnings (2) | 1,815 | 945 | ||||||
| Accumulated other comprehensive income | 91 | 91 | ||||||
| Total stockholders’ equity | 33,548 | 63,332 | ||||||
| Total capitalization | $ | 76,130 | $ | 98,664 | ||||
| (1) | Total pro-forma shares outstanding and potential dilutive common shares at September 30, 2003 were 23,424,128. | |
| (2) | Reflects,
on a pro-forma basis, the write-off of $0.9 million in debt discount and
capitalized loan fees related to the payoff of our Senior Notes, which will be recorded as a charge to earnings. |
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