| Delaware (State or other jurisdiction of incorporation or organization) |
48-1090909 (IRS Employer Identification No.) |
| 5775 Roscoe Court San Diego, California (Address of principal executive offices) |
92123 (Zip code) |
_________________
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 Act)
Yes [ ] No [X]
There were 7,411,132 shares of common stock outstanding as of May 9, 2003.
1
| March 31, 2003 (Unaudited) |
December 31, 2002 (A) | |||||||
|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||
| Cash | $ | 2,066 | $ | 752 | ||||
| Restricted cash | 3,748 | 3,105 | ||||||
| Investment in receivable portfolios, net (Notes 5 and 6) | 66,891 | 64,168 | ||||||
| Retained interest in securitized receivables (Note 6) | 5,446 | 8,256 | ||||||
| Property and equipment, net (Note 7) | 3,422 | 3,541 | ||||||
| Deferred tax assets, net (Note 9) | 1,831 | 6,813 | ||||||
| Other assets (Note 2) | 14,787 | 3,339 | ||||||
| Total assets | $ | 98,191 | $ | 89,974 | ||||
| Liabilities and stockholders' equity | ||||||||
| Accounts payable and accrued liabilities (Notes 2 and 8) | $ | 12,926 | $ | 10,688 | ||||
| Accrued profit sharing arrangement (Note 8) | 11,232 | 11,180 | ||||||
| Income tax payable (Note 9) | 356 | 531 | ||||||
| Notes payable and other borrowings (Notes 6 and 8) | 45,927 | 47,689 | ||||||
| Capital lease obligations (Note 11) | 275 | 344 | ||||||
| Total liabilities | 70,716 | 70,432 | ||||||
| Commitments and contingencies (Note 11) | ||||||||
| Stockholders' equity (Notes 3, 6, 10, and 12) | ||||||||
| Preferred stock, $.01 par value, 5,000 shares | ||||||||
| authorized, and 1,000 shares issued | ||||||||
| (Liquidation value of $21,000 at March 31, 2003) | 10 | 10 | ||||||
| Common stock, $.01 par value, 50,000 shares authorized, | ||||||||
| 7,411 shares issued and outstanding | 74 | 74 | ||||||
| Additional paid-in capital | 31,479 | 31,479 | ||||||
| Accumulated deficit | (4,347 | ) | (12,388 | ) | ||||
| Accumulated other comprehensive income | 259 | 367 | ||||||
| Total stockholders' equity | 27,475 | 19,542 | ||||||
| Total liabilities and stockholders' equity | $ | 98,191 | $ | 89,974 | ||||
(A)
Derived from the audited consolidated financial statements as of December 31,
2002.
See accompanying notes to condensed consolidated financial statements
2
| Three Months Ended March 31, |
||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 |
2002 | |||||||
| Revenues | ||||||||
| Income from receivable portfolios | $ | 27,256 | $ | 15,247 | ||||
| Income from retained interest | 128 | 1,799 | ||||||
| Servicing fees and other related income | 739 | 1,150 | ||||||
| Total revenues | 28,123 | 18,196 | ||||||
| Operating expenses | ||||||||
| Salaries and employee benefits | 9,647 | 8,268 | ||||||
| Other operating expenses | 2,377 | 1,551 | ||||||
| Collection legal costs | 3,357 | 2,016 | ||||||
| General and administrative expense | 1,474 | 1,385 | ||||||
| Depreciation and amortization (Note 7) | 536 | 593 | ||||||
| Total operating expenses | 17,391 | 13,813 | ||||||
| Income before other income (expense) | ||||||||
| and income taxes | 10,732 | 4,383 | ||||||
| Other income (expense) | ||||||||
| Interest expense (Notes 6 and 8) | (4,410 | ) | (3,938 | ) | ||||
| Other income (Note 2) | 7,274 | 7 | ||||||
| Total other income (expense) | 2,864 | (3,931 | ) | |||||
| Income before income taxes | 13,596 | 452 | ||||||
| Provision for income taxes (Note 8) | (5,430 | ) | (219 | ) | ||||
| Net income | 8,166 | 233 | ||||||
Other comprehensive income (loss) | ||||||||
| Increase in unrealized gain on non-qualified | ||||||||
| deferred compensation plan assets (Note 11) | 19 | – | ||||||
| Decrease in unrealized gain on retained interest | ||||||||
| in securitized receivables, net of tax (Note 6) | (127 | ) | (324 | ) | ||||
| Comprehensive income (loss) | $ | 8,058 | $ | (91 | ) | |||
| Earnings per share - Basic (Note 10) | $ | 1.09 | $ | 0.02 | ||||
| Earnings per share - Diluted (Note 10) | $ | 0.44 | $ | 0.02 | ||||
| Shares used for computation | ||||||||
| Basic (Note 10) | 7,411 | 7,161 | ||||||
| Diluted (Note 10) | 18,681 | 12,012 | ||||||
See accompanying notes to condensed consolidated financial statements
3
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 |
2002 | |||||||
| Operating activities | ||||||||
| Gross collections | $ | 47,083 | $ | 33,840 | ||||
| Less: | ||||||||
| Amounts collected on behalf of third parties | (1,968 | ) | (3,205 | ) | ||||
| Amounts applied to principal on receivable portfolios | (15,132 | ) | (10,561 | ) | ||||
| Amounts applied to principal of securitization 98-1 | (2,598 | ) | (2,193 | ) | ||||
| Servicing fees | 739 | 928 | ||||||
| Operating expenses | ||||||||
| Salaries and employee benefits | (10,786 | ) | (7,604 | ) | ||||
| Other operating expenses | (2,887 | ) | (2,114 | ) | ||||
| Collection legal costs | (3,357 | ) | (2,016 | ) | ||||
| General and administrative | (1,046 | ) | (1,349 | ) | ||||
| Interest payments | (4,267 | ) | (1,041 | ) | ||||
| Other income and expense | 64 | 6 | ||||||
| Increase in restricted cash | (643 | ) | (1,439 | ) | ||||
| Tax payments | (538 | ) | – | |||||
| Net cash provided by operating activities | 4,664 | 3,252 | ||||||
| Investing activities | ||||||||
| Purchases of receivable portfolios | (18,803 | ) | (13,145 | ) | ||||
| Collections applied to principal of receivable portfolios | 15,132 | 10,561 | ||||||
| Collections applied to principal of securitization 98-1 | 2,598 | 2,193 | ||||||
| Collections applied by putbacks/recalls | 255 | 331 | ||||||
| Purchases of property and equipment | (417 | ) | (17 | ) | ||||
| Net cash used in investing activities | (1,235 | ) | (77 | ) | ||||
| Financing activities | ||||||||
| Proceeds from notes payable and other borrowings | 16,922 | 11,887 | ||||||
| Repayment of notes payable and other borrowings | (18,718 | ) | (19,929 | ) | ||||
| Capitalized loan costs relating to financing arrangement | – | (150 | ) | |||||
| Proceeds from sale of preferred stock | – | 4,822 | ||||||
| Payment of preferred dividend | (250 | ) | – | |||||
| Repayment of capital lease obligations | (69 | ) | (263 | ) | ||||
| Net cash used in financing activities | (2,115 | ) | (3,633 | ) | ||||
| Net increase (decrease) in cash | 1,314 | (458 | ) | |||||
| Cash, beginning of period | 752 | 1,412 | ||||||
| Cash, end of period | $ | 2,066 | $ | 954 | ||||
See accompanying notes to condensed consolidated financial statements
4
| Three Months Ended March 31, |
||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 |
2002 | |||||||
| Net income | $ | 8,166 | $ | 233 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depreciation and amortization | 536 | 593 | ||||||
| Amortization of loan costs and debt discount | 122 | 217 | ||||||
| Deferred income tax expense | 4,982 | 219 | ||||||
| Increase in income on retained interest | – | 414 | ||||||
| Increase in income on receivable portfolios | – | 340 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Increase in restricted cash | (643 | ) | (1,439 | ) | ||||
| Increase in other assets | (10,844 | ) | (712 | ) | ||||
| Increase in accounts payable and accrued liabilities | 2,345 | 3,387 | ||||||
| Net cash provided by operating activities | $ | 4,664 | $ | 3,252 | ||||
See accompanying notes to condensed consolidated financial statements
5
| Retained | Accumulated | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Additional | Earnings | Other | |||||||||||||||||||||||||
| Common Stock | Preferred Stock | Paid-In | (Accumulated | Comprehensive | |||||||||||||||||||||||
| Shares | Par | Shares | Par | Capital | Deficit) | Income | Total | ||||||||||||||||||||
| Balance at December 31, 2002 | 7,411 | $ | 74 | 1,000 | $ | 10 | $ | 31,479 | $ | (12,388 | ) | $ | 367 | $ | 19,542 | ||||||||||||
| Net income | – | – | – | – | – | 8,166 | – | 8,166 | |||||||||||||||||||
| Decrease in unrealized gain | – | – | – | – | – | – | (108 | ) | (108 | ) | |||||||||||||||||
| Preferred dividends | – | – | – | – | – | (125 | ) | – | (125 | ) | |||||||||||||||||
| Balance at March 31, 2003 | 7,411 | $ | 74 | 1,000 | $ | 10 | $ | 31,479 | $ | (4,347 | ) | $ | 259 | $ | 27,475 | ||||||||||||
See accompanying notes to condensed consolidated financial statements
6
Encore Capital Group, Inc. (“Encore” or the “Company”), previously known as MCM Capital Group, Inc., is a financial services company specializing in the purchase, collection, restructuring, resale and securitization of receivable portfolios acquired at deep discounts. The Company is a Delaware holding company whose principal assets are its investments in its wholly-owned subsidiaries, Midland Credit Management, Inc. (“Midland Credit”), Midland Funding 98-A Corporation (“98-A”), Midland Receivables 99-1 Corporation (“99-1”), Midland Acquisition Corporation, and MRC Receivables Corporation (“MRC”) (collectively referred to herein as the “Company”). Encore also has a wholly-owned subsidiary, Midland Receivables 98-1 Corporation, which is not consolidated. The receivable portfolios consist primarily of charged-off domestic consumer credit card receivables purchased from national financial institutions, major retail credit corporations, and resellers of such portfolios. Acquisitions of receivable portfolios are financed by operations and by borrowings from third parties (see Note 6).
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of the Company, however, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s consolidated financial position as of March 31, 2003, its consolidated results of operations and cash flows for the three month periods ended March 31, 2003 and 2002. The consolidated results of operations of the Company for the three month period ended March 31, 2003 may n