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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from                         to                            .

COMMISSION FILE NUMBER: 000-26489

ENCORE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)


Delaware 48-1090909
(State or other jurisdiction of (IRS 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)


MCM Capital Group, Inc.
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.

Yes [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes [  ] No [X]

There were 7,411,132 shares of common stock outstanding as of November 12, 2002.

           
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item Item 4. Controls and Procedures
PART II — OTHER INFORMATION
Item 1 – Legal Proceedings
Item 2 – Changes in Securities and Use of Proceeds
Item 3 – Defaults Upon Senior Securities
Item 4 – Submission of Matters to a Vote of Security Holders
Item 5 – Other Information
Item 6 — Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICER
CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER

ENCORE CAPITAL GROUP, INC.
INDEX TO FORM 10-Q

           
      Page
     
           
PART I. FINANCIAL INFORMATION     2  
           
Item 1. Financial Statements     2  
           
  Condensed Consolidated Statements of Financial Condition     2  
           
  Condensed Consolidated Statements of Operations     3  
           
  Condensed Consolidated Statements of Cash Flows     4  
           
  Condensed Consolidated Statement of Stockholders' Equity (Deficit)     6  
           
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS     7  
           
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     22  
           
Item 3. Quantitative and Qualitative Disclosures about Market Risk     29  
           
Item 4. Controls and Procedures     30  
           
           
PART II — OTHER INFORMATION     30  
           
  Item 1 – Legal Proceedings     31  
           
  Item 2 – Changes in Securities and Use of Proceeds     33  
           
  Item 3 – Defaults Upon Senior Securities     33  
           
  Item 4 – Submission of Matters to a Vote of Security Holders     33  
           
  Item 5 – Other Information     33  
           
  Item 6 – Exhibits and Reports on Form 8-K     33  
           
SIGNATURES     35  
           
CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICER     36  
           
CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER     37  
           


1



Index

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Financial Condition
(In thousands)

December 31, September 30,
2001 (A)
 2002
(Unaudited)
Assets          
Cash  $   1,412   $   1,229  
Restricted cash (Note 6)  3,053   4,005  
Investment in receivable portfolios, net (Note 5)  47,001   57,451  
Retained interest in securitized receivables (Note 6)  17,926   9,624  
Property and equipment, net (Note 7)  5,244   4,033  
Other assets, net  3,075
   4,066
  
    Total assets  $ 77,711
   $ 80,408
  
Liabilities and Stockholders' Equity (Deficit)         
Accounts payable and accrued liabilities (Note 6)  $   7,240   $ 8,659  
Accrued profit sharing arrangement (Note 8)  2,378   9,420  
Notes payable and other borrowings (Notes 3, 5, 6 and 8)  69,215   52,331  
Capital lease obligations  1,236
   500
  
     Total liabilities  80,069
   70,910
  
Commitments and Contingencies (Note 11)       
Stockholders' Equity (Deficit) (Notes 2, 3 and 12)         
Preferred stock, $.01 par value, 5,000,000 shares authorized,         
   zero shares and 1,000,000 shares issued and     
   outstanding at December 31, 2001 and September 30,2002     
    respectively  –   10  
Common stock, $0.01 par value, 50,000,000 shares authorized,         
   and 7,161,132 shares and 7,411,132 shares issued and outstanding at         
   December 31, 2001 and September 30, 2002, respectively  72   74  
Additional paid in capital  22,111   31,479  
Accumulated deficit  (25,737 ) (22,604 )
Accumulated other comprehensive income  1,196
   539
  
   Total stockholders' equity (deficit)  (2,358)
 9,498
  
   Total liabilities and stockholders' equity (deficit)  $ 77,711
   $ 80,408
  

(A) Derived from the audited consolidated financial statements as of December 31, 2001.

See accompanying notes to condensed consolidated financial statements



2



Index

ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Operations

Three Months Ended Nine Months Ended
September 30, September 30,
2001
 2002
 2001
2002
(In thousands, except per share amounts)
(Unaudited)
Revenues                  
      Income from portfolio receivables (Note 5)  $ 10,354   $ 21,931   $ 20,892   $ 55,164  
      Income from retained interest (Note 6)  2,223   1,331   7,530   4,549  
      Servicing fees and related income (Note 11)  992
   1,144
   4,265
   3,019
  
Total revenues  13,569
   24,406
   32,687
   62,732
  
Operating expenses                 
      Salaries and employee benefits  6,467   8,820   19,850   26,022  
      Other operating expenses  2,852   4,648   7,268   12,441  
      General and administrative expenses  1,464   1,919   4,181   4,914  
      Provision for portfolio losses  –   492   –   492  
      Depreciation and amortization  593
   623
   1,735
   1,815
  
Total operating expenses  11,376
   16,502
   33,034
   45,684
  
Income (Loss) before other income and                 
        expense and income taxes  2,193   7,904   (347 ) 17,048  
Other income and expense                 
      Interest expense  (3,153 ) (5,272 ) (7,703 ) (13,285 )
      Other income  187
   16
   269
   173
  
Income (Loss) before income taxes  (773 ) 2,648   (7,781 ) 3,936  
Income tax provision  (272)
 (127)
 (887)
 (490)
Net Income (Loss)  (1,045 ) 2,521   (8,668 ) 3,446  
        Preferred Dividends (Note 3)  –
   (128)
 –
   (313)
Net Income (Loss) available to                 
        Common Stockholders  ($ 1,045)
 $   2,393
   ($ 8,668)
 $   3,133
  
Earnings (Loss) per share (Note 10)                 
        Basic  ($ 0.15)
 $     0.32
   ($ 1.21)
 $     0.43
  
        Diluted  ($ 0.15)
 $     0.14
   ($ 1.21)
 $     0.22
  
Shares used for computation                 
        Basic  7,161
   7,411
   7,161
   7,311
  
        Diluted  7,161
   17,841
   7,161
   15,911
  

See accompanying notes to condensed consolidated financial statements



3



Index

ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Cash Flows

Nine Months Ended
September 30,
2001 2002
(Unaudited, in thousands)
Operating Activities          
      Gross collections  $ 57,697   $ 108,359  
          Less: Amounts collected on behalf of third parties (Note 11)  (9,126) (8,636)
          Less: Amounts applied to principal on receivable portfolios  (10,503) (32,916)
          Less: Amounts applied to principal of Securitization 98-1  (2,272) (7,096)
      Servicing fees  4,265   3,020  
      Operating Expenses:         
          Salaries and employee benefits  (20,229) (24,833)
          Other operating expenses  (5,072) (6,246)
          Collection legal expense  (3,352) (6,919)
          General and administrative  (4,943) (5,154)
          Interest payments  (3,741) (5,170)
          Other income and expense  280   173  
      Increase in restricted cash  (594)
 (952)
Net cash provided by operating activities  2,410
 13,630
  
Investing Activities         
Putbacks of receivable portfolios  940   766  
Purchases of receivable portfolios  (29,526) (44,625)
Collections applied to principal of receivable portfolios  10,503   32,916  
Collections applied to principal of Securitization 98-1  2,272   7,096  
Purchases of property and equipment  (313) (604)
Proceeds from the sale of property and equipment  52
 –
Net cash used in investing activities  (16,072)
   (4,451)
Financing Activities         
Proceeds from exercise of common stock warrants (Note 8)  –   2  
Proceeds from sale of preferred stock, net (Note 3)  –   4,588  
Payment of dividends  –   (250)  
Proceeds from notes payable and other borrowings  28,290   39,310  
Repayment of notes payable and other borrowings  (14,060) (52,122)
Capitalized loan costs relating to finance arrangement  (94) (154)
Repayment of capital lease obligations  (751)
 (736)
Net cash provided by (used in) financing activities  13,385
   (9,362)
Net decrease in cash  (277)   (183)
Cash at beginning of period  888
   1,412
  
Cash at end of period  $   611
   $   1,229
  

See accompanying notes to condensed consolidated financial statements



4



ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Cash Flows (Cont.)

Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities

Nine Months Ended
September 30,
2001 2002
(Unaudited, in thousands)
Net Income (loss)   $    (8,668) $       3,446  
Adjustments to reconcile net income (loss) to net cash         
  provided by operating activities:         
       Depreciation and amortization  1,735   1,815  
       Amortization of loan costs and debt discount  1,181   654  
       Gain on sales of property and equipment  (3) –  
       Deferred income tax expense  887   490  
       Increase in income on portfolio receivables  479   –  
       Increase in provision for portfolio losses  –   492  
       Increase in income on retained interest  6,069 419  
Changes in operating assets and liabilities:         
       Increase in restricted cash  (594) (952)
       Increase in other assets  (1,200) (1,364)
       Note payable issued in lieu of interest payment  1,308   –  
       Increase in accounts payable and accrued liabilities  33   1,589  
       Increase in accrued profit sharing arrangement  1,183
   7,041
  
Net cash provided by operating activities  $   2,410
 $     13,630
  

See accompanying notes to condensed consolidated financial statements



5



Index

ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statement of Stockholders' Equity (Deficit)
(Unaudited, in thousands)

Accumulated
Additional Other
Preferred Stock   Common Stock   Paid-in Accumulated      Comprehensive
Shares
 Par
 Shares
 Par
 Capital
 Deficit