Encore Capital Reports a Drop in Income on Increased Revenues

Encore Capital Group, Inc., a leading accounts receivable management firm, today reported consolidated financial results for the first quarter ended March 31, 2006.

For the first quarter of 2006:

• Gross collections were $87.6 million, a 33% increase over the $65.9 million in the same period of the prior year
• Total revenues were $60.5 million, a 20% increase over the $50.5 million in the same period of the prior year
• Net income was $4.7 million, a 37% decrease from the $7.5 million in the same period of the prior year
• Earnings per fully diluted share were $0.20, a 38% decrease from the $0.32 in the same period of the prior year
• Adjusted EBITDA, defined as net income before interest, taxes, depreciation and amortization, stock-based compensation related to stock options, and portfolio amortization, were $47.8 million, a 32% increase from the $36.3 million in the same period of the prior year

Commenting on the first quarter results, J. Brandon Black, President and CEO of Encore Capital Group, Inc., said, “We had strong collection growth this quarter, as we received excellent production from all collection channels and had good contributions from both credit card and alternative asset classes such as telecom, healthcare and auto deficiencies. We continue to drive innovation in our collection efforts and have begun incorporating new strategies within our legal and direct marketing channels. As these initiatives gain traction, we believe they will improve the liquidation of our portfolios, which could ultimately result in higher collection multiples and revenue recognition.

“From a cash flow perspective, we are very pleased with the performance of the Company. Our Adjusted EBITDA increased 32% over the first quarter of 2005, which indicates that our operating strategies are generating strong, profitable growth and creating value for our stockholders.

“Pricing remained elevated for new portfolios during the first quarter. However, we did find several attractive opportunities, including a number of alternative asset class portfolios, and invested $27 million to purchase $560 million in face value debt. During the quarter, we also purchased our second portfolio of healthcare receivables, and we recently initiated our first internal collection efforts on this asset class. Building out our internal collection capabilities will enable us to better capitalize on the growth opportunities in this business without having to depend on the available capacity of third-party agencies that specialize in healthcare debt collection,” said Mr. Black.

Financial Highlights

The decrease in diluted earnings per share from the first quarter of 2005 is primarily attributable to the following factors:

• A lower revenue recognition rate resulting from the continued shift in the Company’s collection mix from portfolios with higher collection multiples to portfolios with lower collection multiples.
• Additional expenses resulting from investment in new portfolio liquidation strategies.
• The adoption of SFAS 123®, which requires the recognition of stock option expense.
• The dilutive impact of the Ascension Capital bankruptcy services business, although the business generated positive cash flow from operations during the quarter.

  
  Revenue recognized on receivable portfolios, as a percentage of portfolio collections, was 66% in the first quarter of 2006, compared with 77% in the first quarter of 2005. The lower revenue recognition rate was primarily attributable to a higher percentage of collections from more recently purchased portfolios that have lower collection multiples assigned to them.

  
  The Company generated $2.9 million in fee-based revenue during the first quarter of 2006, through the Ascension Capital bankruptcy services business acquired in August 2005.

  
  Total operating expenses for the first quarter of 2006 were $44.7 million, compared with $30.3 million in the first quarter of 2005. Excluding stock option expense and Ascension Capital, which is a fee-based business, operating expenses were $38.3 million in the first quarter of 2006, compared with $30.3 million in the first quarter of 2005, while operating expense per dollar collected declined to 44% from 46%.

  
  Total interest expense was $8.0 million in the first quarter of 2006, compared to $8.1 million in the first quarter of 2005. The contingent interest component of interest expense was $4.7 million in the first quarter of 2006, compared with $6.9 million in the same period of the prior year. The Company continues to see a reduction in contingent interest expense as collections decline from older portfolios purchased under its previous credit facility.