Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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o |
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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: 0-26906
ASTA FUNDING, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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22-3388607 |
(State or other jurisdiction
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(IRS Employer |
of incorporation or organization)
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Identification No.) |
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210 Sylvan Ave., Englewood Cliffs, New Jersey
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07632 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number: (201) 567-5648
Former name, former address and former fiscal year, if changed since last report: N/A
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 such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files.)
Yes o No o
The registrant is not yet subject to this requirement.
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer as in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer filer o
Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act) Yes o No þ
As of May 4, 2009, the registrant had 14,271,824 common shares outstanding.
ASTA FUNDING, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, |
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September 30, |
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2009 |
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2008 |
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(Unaudited) |
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ASSETS |
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|
|
|
|
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Cash and cash equivalents |
|
$ |
2,635,000 |
|
|
$ |
3,623,000 |
|
Restricted cash |
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|
2,736,000 |
|
|
|
3,047,000 |
|
Consumer receivables acquired for liquidation (at net realizable value) |
|
|
368,223,000 |
|
|
|
449,012,000 |
|
Due from third party collection agencies and attorneys |
|
|
3,723,000 |
|
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|
5,070,000 |
|
Income taxes receivable |
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|
954,000 |
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|
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|
Investment in venture |
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187,000 |
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555,000 |
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Furniture and equipment, net |
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596,000 |
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|
762,000 |
|
Deferred income taxes |
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|
23,917,000 |
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|
15,567,000 |
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Other assets |
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3,265,000 |
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3,500,000 |
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Total assets |
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$ |
406,236,000 |
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$ |
481,136,000 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities |
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Debt |
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$ |
160,084,000 |
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$ |
213,485,000 |
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Subordinated debt related party |
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|
8,246,000 |
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|
8,246,000 |
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Other liabilities |
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|
2,931,000 |
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|
4,618,000 |
|
Dividends payable |
|
|
285,000 |
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|
571,000 |
|
Income taxes payable |
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393,000 |
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6,315,000 |
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Total liabilities |
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171,939,000 |
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233,235,000 |
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Commitments and contingencies |
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Stockholders Equity |
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Preferred stock, $.01 par value; authorized 5,000,000 shares;
issued and outstanding none |
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Common stock, $.01 par value; authorized 30,000,000 shares; issued
and outstanding 14,271,824 at March 31, 2009 and 14,276,158 at
September 30, 2008 |
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143,000 |
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|
143,000 |
|
Additional paid-in capital |
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|
69,853,000 |
|
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|
69,130,000 |
|
Accumulated other comprehensive loss |
|
|
(1,048,000 |
) |
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|
(297,000 |
) |
Retained earnings |
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|
165,349,000 |
|
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|
178,925,000 |
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|
|
|
|
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Total stockholders equity |
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|
234,297,000 |
|
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|
247,901,000 |
|
|
|
|
|
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Total liabilities and stockholders equity |
|
$ |
406,236,000 |
|
|
$ |
481,136,000 |
|
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|
|
|
|
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|
See accompanying notes to condensed consolidated financial statements
3
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months |
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Three Months |
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Six Months |
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Six Months |
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Ended |
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Ended |
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Ended |
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Ended |
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March 31, 2009 |
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March 31, 2008 |
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March 31, 2009 |
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|
March 31, 2008 |
|
Revenues: |
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Finance income, net |
|
$ |
18,104,000 |
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$ |
33,878,000 |
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|
$ |
36,520,000 |
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|
$ |
68,013,000 |
|
Other income |
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|
22,000 |
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|
4,000 |
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54,000 |
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|
144,000 |
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18,126,000 |
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33,882,000 |
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36,574,000 |
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68,157,000 |
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Expenses: |
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General and administrative |
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6,345,000 |
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7,124,000 |
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13,372,000 |
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12,929,000 |
|
Interest (fiscal year 2009
Related party
Period ended March 31, 2009
Three months, $128,000;
Six months, $256,000) |
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1,954,000 |
|
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|
4,711,000 |
|
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|
5,124,000 |
|
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|
10,652,000 |
|
Impairments |
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|
18,429,000 |
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|
35,000,000 |
|
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|
39,844,000 |
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|
35,000,000 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
26,728,000 |
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|
46,835,000 |
|
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|
58,340,000 |
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58,581,000 |
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|
(Loss) income before equity in
loss of venture and income tax |
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|
(8,602,000 |
) |
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|
(12,953,000 |
) |
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|
(21,766,000 |
) |
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|
9,576,000 |
|
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|
|
|
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|
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|
|
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Equity in loss of venture |
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(72,000 |
) |
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|
(1,000 |
) |
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|
(55,000 |
) |
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(78,000 |
) |
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|
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(Loss) income before income tax
(benefit) |
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|
(8,674,000 |
) |
|
|
(12,954,000 |
) |
|
|
(21,821,000 |
) |
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9,498,000 |
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|
|
|
|
|
|
|
|
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|
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|
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Income tax (benefit) expense |
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|
(3,506,000 |
) |
|
|
(5,247,000 |
) |
|
|
(8,816,000 |
) |
|
|
3,891,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) Income |
|
$ |
(5,168,000 |
) |
|
$ |
(7,707,000 |
) |
|
$ |
(13,005,000 |
) |
|
$ |
5,607,000 |
|
|
|
|
|
|
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|
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|
|
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Net (loss) income per share: |
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|
|
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|
Basic |
|
$ |
(0.36 |
) |
|
$ |
(0.54 |
) |
|
$ |
(0.91 |
) |
|
$ |
0.40 |
|
Diluted |
|
$ |
(0.36 |
) |
|
$ |
(0.54 |
) |
|
$ |
(0.91 |
) |
|
$ |
0.38 |
|
|
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|
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|
Weighted average number of common shares outstanding: |
|
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|
|
|
|
|
|
|
|
|
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|
Basic |
|
|
14,271,824 |
|
|
|
14,201,674 |
|
|
|
14,271,824 |
|
|
|
14,059,142 |
|
Diluted |
|
|
14,271,824 |
|
|
|
14,201,674 |
|
|
|
14,271,824 |
|
|
|
14,742,549 |
|
See accompanying notes to condensed consolidated financial statements
4
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
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|
|
|
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|
|
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|
|
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
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|
Additional |
|
|
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|
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Other |
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|
|
|
|
|
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|
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Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
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|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008 |
|
|
14,276,158 |
|
|
$ |
143,000 |
|
|
$ |
69,130,000 |
|
|
$ |
178,925,000 |
|
|
$ |
(297,000 |
) |
|
$ |
247,901,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
expense |
|
|
|
|
|
|
|
|
|
|
649,000 |
|
|
|
|
|
|
|
|
|
|
|
649,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares forfeited |
|
|
(4,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit arising from
exercise of non- qualified
stock options |
|
|
|
|
|
|
|
|
|
|
74,000 |
|
|
|
|
|
|
|
|
|
|
|
74,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(571,000 |
) |
|
|
|
|
|
|
(571,000 |
) |
Other comprehensive loss,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(751,000 |
) |
|
|
(751,000 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,005,000 |
) |
|
|
|
|
|
|
(13,005,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009 |
|
|
14,271,824 |
|
|
$ |
143,000 |
|
|
$ |
69,853,000 |
|
|
$ |
165,349,000 |
|
|
$ |
(1,048,000 |
) |
|
$ |
234,297,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2009 |
|
|
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(13,005,000 |
) |
|
$ |
5,607,000 |
|
Other comprehensive loss,
Net of tax Foreign
Currency translation |
|
|
(751,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(13,756,000 |
) |
|
$ |
5,607,000 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
5
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, 2009 |
|
|
March 31, 2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(13,005,000 |
) |
|
$ |
5,607,000 |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
803,000 |
|
|
|
549,000 |
|
Deferred income taxes |
|
|
(8,350,000 |
) |
|
|
(10,116,000 |
) |
Impairments of consumer receivables acquired for liquidation |
|
|
39,844,000 |
|
|
|
35,000,000 |
|
Stock based compensation |
|
|
649,000 |
|
|
|
450,000 |
|
|
|
|
|
|
|
|
|
|
Changes in: |
|
|
|
|
|
|
|
|
Due from third party collection agencies and attorneys |
|
|
1,347,000 |
|
|
|
(302,000 |
) |
Income taxes receivable and income taxes payable |
|
|
(6,876,000 |
) |
|
|
3,236,000 |
|
Other assets |
|
|
(369,000 |
) |
|
|
(361,000 |
) |
Other liabilities |
|
|
(2,473,000 |
) |
|
|
(3,978,000 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
11,570,000 |
|
|
|
30,085,000 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of consumer receivables acquired for liquidation |
|
|
(2,688,000 |
) |
|
|
(41,307,000 |
) |
Principal collected on receivables acquired for liquidation |
|
|
37,587,000 |
|
|
|
32,199,000 |
|
Principal collected on receivable accounts represented by account sales |
|
|
4,856,000 |
|
|
|
7,475,000 |
|
Foreign exchange effect on receivables acquired for liquidation |
|
|
1,185,000 |
|
|
|
|
|
Cash distributions received from venture |
|
|
368,000 |
|
|
|
878,000 |
|
Capital expenditures |
|
|
(34,000 |
) |
|
|
(155,000 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
41,274,000 |
|
|
|
(910,000 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of options |
|
|
|
|
|
|
425,000 |
|
Tax benefit arising from non-qualified options |
|
|
74,000 |
|
|
|
2,541,000 |
|
Change in restricted cash |
|
|
311,000 |
|
|
|
646,000 |
|
Dividends paid |
|
|
(856,000 |
) |
|
|
(1,114,000 |
) |
Repayments of debt, net |
|
|
(53,423,000 |
) |
|
|
(32,609,000 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(53,894,000 |
) |
|
|
(30,111,000 |
) |
|
|
|
|
|
|
|
Decrease in cash |
|
|
(1,050,000 |
) |
|
|
(936,000 |
) |
Effect of foreign exchange on cash |
|
|
62,000 |
|
|
|
|
|
Cash at the beginning of period |
|
|
3,623,000 |
|
|
|
4,525,000 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
2,635,000 |
|
|
$ |
3,589,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period |
|
|
|
|
|
|
|
|
Interest (fiscal year 2009 Related party $256,000) |
|
$ |
5,601,000 |
|
|
$ |
10,836,000 |
|
Income taxes |
|
$ |
5,814,000 |
|
|
$ |
8,198,000 |
|
See accompanying notes to condensed consolidated financial statements.
6
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Business and Basis of Presentation
Business
Asta Funding, Inc., together with its wholly owned significant operating subsidiaries
Palisades Collection LLC, Palisades Acquisition XVI, LLC (Palisades XVI), VATIV Recovery
Solutions LLC (VATIV) and other subsidiaries, not all wholly owned, and not considered material
(the Company) is engaged in the business of purchasing, and managing for its own account,
distressed consumer receivables, including charged-off receivables, semi-performing receivables and
performing receivables. The primary charged-off receivables are accounts that have been written-off
by the originators and may have been previously serviced by collection agencies. Semi-performing
receivables are accounts where the debtor is currently making partial or irregular monthly
payments, but the accounts may have been written-off by the originators. Performing receivables are
accounts where the debtor is making regular monthly payments that may or may not have been
delinquent in the past. Distressed consumer receivables are the unpaid debts of individuals to
banks, finance companies and other credit providers. A large portion of the Companys distressed
consumer receivables are MasterCard(R), Visa(R), other credit card accounts, telecommunication
accounts and auto deficiency receivables, which were charged-off by the issuers for non-payment.
The Company acquires these portfolios at substantial discounts from their face values. The
discounts are based on the characteristics (issuer, account size, debtor location and age of debt)
of the underlying accounts of each portfolio.
Basis of Presentation
The condensed consolidated balance sheets as of March 31, 2009, the condensed consolidated
statements of operations for the six and three month periods ended March 31, 2009 and 2008, the
condensed consolidated statement of stockholders equity as of March 31, 2009 and the condensed
consolidated statements of cash flows for the six month periods ended March 31, 2009 and 2008, are
unaudited. The September 30, 2008 financial information included in this report has been extracted
from our audited financial statements included in our Annual Report on Form 10-K and Form 10-K/A.
In the opinion of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly our financial position at March 31, 2009 and September 30, 2008, the
results of operations for the six and three month periods ended March 31, 2009 and 2008 and cash
flows for the six month periods ended March 31, 2009 and 2008 have been made. The results of
operations for the six and three month periods ended March 31, 2009 and 2008 are not necessarily
indicative of the operating results for any other interim period or the full fiscal year.
The accompanying unaudited condensed consolidated financial statements 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 note disclosures required under generally accepted
accounting principles. The Company suggests that these financial statements be read in conjunction
with the financial statements and notes thereto included in our Annual Report on Form 10-K and Form
10-K/A for the fiscal year ended September 30, 2008 filed with the Securities and Exchange
Commission.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates including
managements estimates of future cash flows and the resulting rates of return.
7
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
Note 1: Business and Basis of Presentation (continued)
Recent Accounting Pronouncements
In April 2009 the
FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments, (FSP 107-1). FSP 107-1 expands disclosures for fair
value of financial instruments that are within the scope of FASB statement
number 107 (SFAS 107) and now requires the FAS 107 fair value disclosures in
interim period reports. The FSP is effective for interim reporting periods ending after
June 15, 2009.
In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin 110 (SAB 110). This staff accounting bulletin (SAB) expresses the views of the staff
regarding the use of a simplified method, as discussed in SAB No. 107 (SAB 107), in developing
an estimate of expected term of plain vanilla share options in accordance with Financial
Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment . In
particular, the staff indicated in SAB 107 that it will accept a companys election to use the
simplified method, regardless of whether the company has sufficient information to make more
refined estimates of expected term. At the time SAB 107 was issued, the staff believed that more
detailed external information about employee exercise behavior (e.g., employee exercise patterns by
industry and/or other categories of companies) would, over time, become readily available to
companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the
simplified method for share option grants after December 31, 2007. The staff understands that such
detailed information about employee exercise behavior might not have been widely available by
December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the
use of the simplified method beyond December 31, 2007. This SAB does not have a material impact on
the Company.
In February 2007, the FASB issued Statement 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159). The objective of SFAS No. 159 is to provide companies
with the option to recognize most financial assets and liabilities and certain other items at fair
value. Statement 159 will allow companies the opportunity to mitigate earnings volatility caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting. Unrealized gains and losses on items for which the fair value option has been elected
should be reported in earnings. The fair value option election is applied on an instrument by
instrument basis (with some exceptions), is irrevocable, and is applied to an entire instrument.
The election may be made as of the date of initial adoption for existing eligible items. Subsequent
to initial adoption, the Company may elect the fair value option at initial recognition of eligible
items or on entering into an eligible firm commitment. The Company can only elect the fair value
option after initial recognition in limited circumstances.
SFAS No. 159 requires similar assets and liabilities for which the Company has elected the
fair value option to be displayed on the face of the balance sheet either (a) together with
financial instruments measured using other measurement attributes with parenthetical disclosure of
the amount measured at fair value or (b) in separate line items. In addition, SFAS No. 159 requires
additional disclosures to allow financial statement users to compare similar assets and liabilities
measured differently either within the financial statements of the Company or between financial
statements of different companies.
SFAS No. 159 was required to be adopted by the Company on October 1, 2008. Early adoption was
permitted; however, the Company did not adopt SFAS No. 159 prior to the required adoption date of
October 1, 2008. The Company is required to adopt SFAS No. 159 concurrent with SFAS No. 157, Fair
Value Measurements. The remeasurement to fair-value will be reported as a cumulative-effect
adjustment in the opening balance of retained earnings. Additionally, any changes in fair value due
to the concurrent adoption of SFAS No. 157 will be included in the cumulative-effect adjustment if
the fair value option is also elected for that item.
The Company opted to not apply the fair value option to any of its financial assets or
liabilities. If the Company elects to recognize items at fair value as a result of Statement 159,
this could result in increased earnings volatility.
In September 2006 the FASB issued SFAS No. 157, Fair Value Measurements. Effective October 1,
2008, the Company adopted SFAS No. 157. The Statement defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. The adoption of SFAS No. 157 did not impact the
Companys financial reporting or disclosure requirements.
Reclassifications
Certain items in the prior years financial statements have been reclassified to conform to current
the periods presentation.
8
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 2: Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and
its wholly owned and majority owned subsidiaries. The Companys investment in a venture,
representing a 25% interest, is accounted for using the equity method. All significant intercompany
balances and transactions have been eliminated in consolidation.
Note 3: Consumer Receivables Acquired for Liquidation
The Company accounts for its investments in consumer receivable portfolios, using either:
|
|
|
the interest method; or |
|
|
|
|
the cost recovery method. |
Accounts acquired for liquidation are stated at their net estimated realizable value and
consist primarily of defaulted consumer loans to individuals throughout the country and in Central
and South America.
The Company accounts for its investment in finance receivables using the interest method under
the guidance of AICPA Statement of Position 03-3, Accounting for Loans or Certain Securities
Acquired in a Transfer (SOP 03-3). Practice Bulletin 6, Amortization of Discounts on Certain
Acquired Loans. (Practice Bulletin 6) was amended by SOP 03-3. Under the guidance of SOP 03-3
(and the amended Practice Bulletin 6), static pools of accounts are established. These pools are
aggregated based on certain common risk criteria. Each static pool is recorded at cost and is
accounted for as a single unit for the recognition of income, principal payments and loss
provision.
Once a static pool is established for a quarter, individual receivable accounts are not added
to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to
the seller). SOP 03-3 (and the amended Practice Bulletin 6) requires that the excess of the
contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or
expense or on the balance sheet. SOP 03-3 initially freezes the internal rate of return, referred
to as IRR, estimated when the accounts receivable are purchased, as the basis for subsequent
impairment testing. Significant increases in actual or expected future cash flows may be recognized
prospectively through an upward adjustment of the IRR over a portfolios remaining life. Any
increase to the IRR then becomes the new benchmark for impairment testing. Rather than lowering the
estimated IRR if the collection estimates are not received or projected to be received, the
carrying value of a pool would be impaired, or written down to maintain the then current IRR. Under
the interest method, income is recognized on the effective yield method based on the actual cash
collected during a period and future estimated cash flows and timing of such collections and the
portfolios cost. Revenue arising from collections in excess of anticipated amounts attributable to
timing differences is deferred until such time as a review results in a change in the expected cash
flows. The estimated future cash flows are reevaluated quarterly.
The Company uses the cost recovery method when collections on a particular pool of accounts
cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the
cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying
balance on the balance sheet) while still generating cash collections. In this case, all cash
collections are recognized as revenue when received.
The Companys extensive liquidating experience is in the field of distressed credit card
receivables, telecommunication receivables, consumer loan receivables, retail installment
contracts, consumer receivables, and auto deficiency receivables. The Company uses the interest
method for accounting for asset acquisitions within these classes of receivables when it believes
it can reasonably estimate the timing of the cash flows. In those situations where the Company
diversifies its acquisitions into other asset classes where the Company does not possess the same
expertise or history, or the Company cannot reasonably estimate the timing of the cash flows, the
Company utilizes the cost recovery method of accounting for those portfolios of receivables. At
March 31, 2009, approximately $137.5 million of the consumer receivables acquired for liquidation
are accounted for using the interest method, while approximately $230.7 million are accounted for
using the cost recovery method.
9
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
After SOP 03-3 was adopted, the Company aggregates portfolios of receivables acquired sharing
specific common characteristics which were acquired within a given quarter. The Company currently
considers for aggregation portfolios of accounts, purchased within the same fiscal quarter, that
generally meet the following characteristics:
|
|
|
same issuer/originator; |
|
|
|
|
same underlying credit quality; |
|
|
|
|
similar geographic distribution of the accounts; |
|
|
|
|
similar age of the receivable; and |
|
|
|
|
same type of asset class (credit cards, telecommunication, etc.) |
The Company uses a variety of qualitative and quantitative factors to estimate collections and
the timing thereof. This analysis includes the following variables:
|
|
|
the number of collection agencies previously attempting to collect the receivables in the portfolio; |
|
|
|
|
the average balance of the receivables, as higher balances might be more difficult to collect while
low balances might not be cost effective to collect; |
|
|
|
|
the age of the receivables, as older receivables might be more difficult to collect or might be
less cost effective. On the other hand, the passage of time, in certain circumstances, might result
in higher collections due to changing life events of some individual debtors; |
|
|
|
|
past history of performance of similar assets; |
|
|
|
|
time since charge-off; |
|
|
|
|
payments made since charge-off; |
|
|
|
|
the credit originator and its credit guidelines; |
|
|
|
|
our ability to analyze accounts and resell accounts that meet our criteria for resale; |
|
|
|
|
the locations of the debtors, as there are better states to attempt to collect in and ultimately
the Company has better predictability of the liquidations and the expected cash flows. Conversely,
there are also states where the liquidation rates are not as favorable and that is factored into
our cash flow analysis; |
|
|
|
|
jobs or property of the debtors found within portfolios. In our business model, this is of
particular importance. Debtors with jobs or property are more likely to repay their obligation and
conversely, debtors without jobs or property are less likely to repay their obligation; and |
|
|
|
|
the ability to obtain timely customer statements from the original issuer. |
The Company obtains and utilizes, as appropriate, input, including but not limited to monthly
collection projections and liquidation rates, from our third party collection agencies and
attorneys, as further evidentiary matter, to assist in evaluating and developing collection
strategies and in evaluating and modeling the expected cash flows for a given portfolio.
10
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
The following tables summarize the changes in the balance sheet of the investment in
receivable portfolios during the following periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2009 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
203,470,000 |
|
|
$ |
245,542,000 |
|
|
$ |
449,012,000 |
|
Acquisitions of receivable portfolios, net |
|
|
2,681,000 |
|
|
|
7,000 |
|
|
|
2,688,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(51,463,000 |
) |
|
|
(20,853,000 |
) |
|
|
(72,316,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(3,075,000 |
) |
|
|
(3,572,000 |
) |
|
|
(6,647,000 |
) |
Transfer to cost recovery |
|
|
(10,128,000 |
) |
|
|
10,128,000 |
|
|
|
|
|
Impairments |
|
|
(39,844,000 |
) |
|
|
|
|
|
|
(39,844,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
(1,190,000 |
) |
|
|
(1,190,000 |
) |
Finance income recognized (1) |
|
|
35,856,000 |
|
|
|
664,000 |
|
|
|
36,520,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
137,497,000 |
|
|
$ |
230,726,000 |
|
|
$ |
368,223,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
65.7 |
% |
|
|
2.7 |
% |
|
|
46.2 |
% |
|
|
|
(1) |
|
Includes $20.6 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2008 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
508,515,000 |
|
|
$ |
37,108,000 |
|
|
$ |
545,623,000 |
|
Acquisitions of receivable portfolios, net |
|
|
20,155,000 |
|
|
|
21,152,000 |
|
|
|
41,307,000 |
|
Net cash collections from collection of
consumer receivables acquired for
liquidation (1) |
|
|
(87,703,000 |
) |
|
|
(7,330,000 |
) |
|
|
(95,033,000 |
) |
Net cash collections represented by account
sales of consumer receivables acquired for
liquidation |
|
|
(12,654,000 |
) |
|
|
|
|
|
|
(12,654,000 |
) |
Impairments |
|
|
(35,000,000 |
) |
|
|
|
|
|
|
(35,000,000 |
) |
Finance income recognized (2) |
|
|
67,310,000 |
|
|
|
703,000 |
|
|
|
68,013,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
460,623,000 |
|
|
$ |
51,633,000 |
|
|
$ |
512,256,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
67.1 |
% |
|
|
9.6 |
% |
|
|
63.2 |
% |
|
|
|
(1) |
|
Includes the put back of a portfolio purchased and returned to the seller
in the amount of $2.8 million in the first quarter of fiscal 2008. |
|
(2) |
|
Includes $23.9 million derived from fully amortized interest method pools. |
11
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2009 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
166,432,000 |
|
|
$ |
237,376,000 |
|
|
$ |
403,808,000 |
|
Acquisitions of receivable portfolios, net |
|
|
1,603,000 |
|
|
|
7,000 |
|
|
|
1,610,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(25,090,000 |
) |
|
|
(10,971,000 |
) |
|
|
(36,061,000 |
) |
Net cash collections represented by account
sales of consumer receivables acquired for
liquidation |
|
|
(727,000 |
) |
|
|
(147,000 |
) |
|
|
(874,000 |
) |
Transfer to cost recovery |
|
|
(3,979,000 |
) |
|
|
3,979,000 |
|
|
|
|
|
Impairments |
|
|
(18,429,000 |
) |
|
|
|
|
|
|
(18,429,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
65,000 |
|
|
|
65,000 |
|
Finance income recognized (1) |
|
|
17,687,000 |
|
|
|
417,000 |
|
|
|
18,104,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
137,497,000 |
|
|
$ |
230,726,000 |
|
|
$ |
368,223,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
68.5 |
% |
|
|
3.8 |
% |
|
|
49.0 |
% |
|
|
|
(1) |
|
Includes approximately $10.5 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2008 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
509,580,000 |
|
|
$ |
49,794,000 |
|
|
$ |
559,374,000 |
|
Acquisitions of receivable portfolios, net |
|
|
239,000 |
|
|
|
3,559,000 |
|
|
|
3,798,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(42,807,000 |
) |
|
|
(2,124,000 |
) |
|
|
(44,931,000 |
) |
Net cash collections represented by account
sales of consumer receivables acquired for
liquidation |
|
|
(4,863,000 |
) |
|
|
|
|
|
|
(4,863,000 |
) |
Impairments |
|
|
(35,000,000 |
) |
|
|
|
|
|
|
(35,000,000 |
) |
Finance income recognized (1) |
|
|
33,474,000 |
|
|
|
404,000 |
|
|
|
33,878,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
460,623,000 |
|
|
$ |
51,633,000 |
|
|
$ |
512,256,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
70.2 |
% |
|
|
19.0 |
% |
|
|
68.0 |
% |
|
|
|
(1) |
|
Includes $12.2 million derived from fully amortized interest method pools. |
12
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
As of March 31, 2009, the Company had $368,223,000 in Consumer Receivables acquired for
Liquidation, of which $137,497,000 are being accounted for on the accrual basis. Based upon current
projections, net cash collections, applied to principal for accrual basis portfolios will be as
follows for the twelve months in the periods ending:
|
|
|
|
|
September 30, 2009 (six months ending) |
|
$ |
23,969,000 |
|
September 30, 2010 |
|
|
55,441,000 |
|
September 30, 2011 |
|
|
30,869,000 |
|
September 30, 2012 |
|
|
19,710,000 |
|
September 30, 2013 |
|
|
9,008,000 |
|
September 30, 2014 |
|
|
636,000 |
|
September 30, 2015 |
|
|
148,000 |
|
|
|
|
|
Total |
|
|
139,781,000 |
|
|
|
|
|
|
Deferred revenue |
|
|
(2,284,000 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
137,497,000 |
|
|
|
|
|
Accretable yield represents the amount of income the Company can expect to generate over the
remaining life of its existing portfolios based on estimated future net cash flows as of March 31,
2009. The Company adjusts the accretable yield upward when it believes, based on available
evidence, that portfolio collections will exceed amounts previously estimated. Changes in
accretable yield for the six months and three months ended March 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2009 |
|
|
March 31, 2008 |
|
Balance at beginning of period |
|
$ |
58,134,000 |
|
|
$ |
176,615,000 |
|
|
|
|
|
|
|
|
|
|
Income recognized on finance receivables, net |
|
|
(35,856,000 |
) |
|
|
(47,049,000 |
) |
Additions representing expected revenue from purchases |
|
|
902,000 |
|
|
|
7,322,000 |
|
Transfers to cost recovery |
|
|
(3,372,000 |
) |
|
|
|
|
Reclassifications from nonaccretable difference |
|
|
28,263,000 |
|
|
|
52,546,000 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
48,071,000 |
|
|
$ |
189,434,000 |
|
|
|
|
|
|
|
|
13
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2009 |
|
|
March 31, 2008 |
|
Balance at beginning of period |
|
$ |
53,952,000 |
|
|
$ |
172,690,000 |
|
|
|
|
|
|
|
|
|
|
Income recognized on finance receivables, net |
|
|
(17,687,000 |
) |
|
|
(23,098,000 |
) |
Additions representing expected revenue from purchases |
|
|
493,000 |
|
|
|
115,000 |
|
Transfers to cost recovery |
|
|
(895,000 |
) |
|
|
|
|
Reclassifications from nonaccretable difference |
|
|
12,208,000 |
|
|
|
39,727,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
48,071,000 |
|
|
$ |
189,434,000 |
|
|
|
|
|
|
|
|
As of March 31, 2008, the accretable yield balance of $189.4 million at the end of the period
included expected income of $107.7 million on the $6.9 billion face value portfolio purchased at a
price of $300 million in March 2007 (the Portfolio Purchase) and $5.6 million on three other
portfolios transferred to cost recovery during the first six months of fiscal year 2009. For
comparative purposes, the accretable yield excluding the Portfolio Purchase and three other
portfolios was $76.1 million.
During the second quarter of fiscal year 2009, one portfolio was transferred from the interest
method to the cost recovery method. Based on the nature of this portfolio and the recent cash
flows, our estimates of the timing of expected cash flows became uncertain. Finance income was less
than 1% of revenue for each of the three month periods ended March 31, 2009 and 2008, respectively,
on this portfolio. As a result of the transfer to the cost recovery method, we will not recognize
finance income on this portfolio until their carrying values are recovered. At March 2009, the
carrying value of this portfolio was $4.0 million. An impairment of approximately $1.5 million was
recorded in the second quarter of fiscal year 2009 on this portfolio.
During the three and six month periods ended March 31, 2009, the Company purchased $44.0
million and $91.5 million, respectively, of face value of charged-off consumer receivables at a
cost of $1.6 million and $2.7 million, respectively. During the second quarter of fiscal year
2009, most of the portfolios purchased were classified under the interest method. During the six
month period ended March 31, 2008, the Company purchased $1.3 billion of face value of charged-off
consumer receivables at a cost of $41.3 million, including $8.6 million invested in a portfolio
domiciled in South America.
14
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
The following table summarizes collections on a gross basis as received by our third-party
collection agencies and attorneys, less commissions and direct costs for the six and three month
periods ended March 31, 2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Gross collections (1) |
|
$ |
123,225,000 |
|
|
$ |
176,688,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
44,262,000 |
|
|
|
69,001,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
78,963,000 |
|
|
$ |
107,687,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Gross collections (1) |
|
$ |
57,402,000 |
|
|
$ |
87,432,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
20,467,000 |
|
|
|
37,638,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
36,935,000 |
|
|
$ |
49,794,000 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross collections include: collections by third-party collection
agencies and attorneys, collections from our internal efforts and
collections represented by account sales. In the first quarter of
fiscal year 2008, the Company returned a portfolio to the seller in
the amount of $2.8 million, which is included in the three- and
six-month periods ended March 31, 2008. |
|
(2) |
|
Commissions and fees are the contractual commission earned by third
party collection agencies and attorneys, and direct costs associated
with the collection effort, generally court costs. Includes a 3% fee
charged by a servicer on substantially all gross collections received by the Company in
connection with the Portfolio Purchase. |
Note 4: Acquisition
In October 2007, through a newly formed subsidiary, the Company acquired a portfolio of
consumer receivables domiciled in South America. The investment in the subsidiary company,
substantially all of which was applied to the cost of the portfolio, was approximately $8.6 million
in cash.
15
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 5: Furniture and Equipment
Furniture and equipment consist of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Furniture |
|
$ |
310,000 |
|
|
$ |
310,000 |
|
Leasehold improvements |
|
|
86,000 |
|
|
|
105,000 |
|
Equipment |
|
|
2,747,000 |
|
|
|
2,714,000 |
|
|
|
|
|
|
|
|
|
|
|
3,143,000 |
|
|
|
3,129,000 |
|
Less accumulated depreciation |
|
|
2,547,000 |
|
|
|
2,367,000 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
596,000 |
|
|
$ |
762,000 |
|
|
|
|
|
|
|
|
Note 6: Debt and Subordinated Debt Related Party
On July 11, 2006, the Company entered into the Fourth Amended and Restated Loan Agreement with
a consortium of banks (the Bank Group). This amendment and all future amendments are referred to
as the (Credit Facility). As a result, the Credit Facility increased to $175 million, from
$125 million with an expandable feature which enables the Company to increase the line to
$225 million with the consent of the Bank Group. The loan commitment as of March 31, 2009 was $85.0
million. See further description below under the February 20, 2009 Seventh Amendment to the Credit
Facility. The Credit Facility bears interest at the lesser of LIBOR plus an applicable margin, or
the prime rate minus an applicable margin based on certain leverage ratios. The Credit Facility is
collateralized by all portfolios of consumer receivables acquired for liquidation, other than the
Portfolio Purchase, discussed below, and contains customary financial and other covenants (relative
to tangible net worth, interest coverage, and leverage ratio, as defined) that must be maintained
in order to borrow funds. The term of the Credit Facility is three years and is to mature July
11, 2009. The applicable rate at March 31, 2009 and 2008 was 5.00% and 5.25%, respectively. The
average interest rate excluding unused credit line fees for the six-month period ended March 31,
2009 and 2008, respectively, was 4.11% and 6.89%. The outstanding balance on the Credit Facility
was approximately $44.8 million on March 31, 2009 and $145.6 million on March 31, 2008. The
Company and the Bank Group are in discussions to renew the current Credit Facility. If, however, a
renewal cannot be ultimately agreed to, the Company, at maturity, will consider the sale of assets
collateralized by this loan agreement, to satisfy its obligations at July 11, 2009.
On February 20, 2009, the Company entered into the Seventh Amendment to the Credit Facility in
order to, among other items, reduce the level of the loan commitment, redefine certain financial
covenant ratios, revise the requirement for an unqualified opinion on annual audited financial
statements, and permit certain encumbrances relating to restructuring of the Bank of Montreal
(BMO) Facility. Pursuant to the Seventh Amendment, the loan commitment has been revised down from
$175.0 million to the following schedule: (1) $90.0 million until March 30, 2009, (2) $85.0 million
from March 31, 2009 through June 29, 2009, and (3) $80.0 million from June 30, 2009 and thereafter.
Beginning with the fiscal year ending September 30, 2008 (and for each period included in
calculating fixed charge coverage ratio for the fiscal year ending September 30, 2008) and
continuing thereafter for each reporting period thereafter (and for each period included in
calculating fixed charge coverage ratio for such reporting period), EBITDA and fixed charges
attributable to Palisades XVI as further described below are to be excluded from the computation of
the fixed charge coverage ratio for Asta Funding and its Subsidiaries. In addition, the fixed
charge coverage ratio has been revised to exclude impairment expense of portfolios of consumer
receivables acquired for liquidation and increase the ratio from a minimum of 1.50 to 1.0 to a
minimum of 1.75 to 1.0. The permitted encumbrances under the Credit Facility were revised to
include certain encumbrances incurred by the Company in connection with certain guarantees and
liens provided to BMO Facility and Asta Group (the Family Entity). Further, individual portfolio
purchases in excess of $7.5 million will now require the consent of the agent and portfolio
purchases in excess of $15.0 million in the aggregate during any 120 day period will require the
consent of the Bank Group. Asta Funding under that certain
Undertaking Agreement dated as of March 2, 2007 made by Asta Funding for
the benefit of BMO as collateral agent for the benefit of the secured parties
under that certain Receivables Financing Agreement dated as of March 2,
2007 by and among Palisades Acquisition XVI, LLC, as borrower, Palisades
Collection, L.L.C., as servicer, Fairway Finance Company, LLC, as lender, BMO,
as administrator and collateral agent, and Bank of Montreal, as liquidity agent
(the “Receivables Financing Agreement”), or Palisades occurs under
the Receivables Financing Agreement or any agreement, document or instrument
related thereto to which Palisades is a party, in either event that is not
cured within any applicable grace period therefore, and such default or breach
involves damages in excess of $2,000,000 in the aggregate.
In
March 2007, Palisades XVI borrowed approximately
$227 million under the Receivables Financing
Agreement (Receivables Financing Agreement), as amended in July 2007, December 2007, May 2008 and
February 2009 with BMO, in order to finance the Portfolio Purchase. The Portfolio Purchase had a
purchase price of $300 million (plus 20% of net payments after Palisades XVI recovers 150% of its
purchase price plus cost of funds). Prior to the modification, discussed below, the debt was full
recourse only to Palisades XVI and bore an interest rate of approximately 170 basis points over
LIBOR. The original term of the agreement was three years. This term was extended by each of the
Second, Third and Fourth Amendments to the Receivables Financing Agreement as discussed below.
Proceeds received as a result of the net collections from the Portfolio Purchase are applied to
interest and principal of the underlying loan. The Portfolio Purchase is serviced by Palisades Collection LLC, a wholly owned
subsidiary of the Company, which has engaged unaffiliated subservicers for a majority of the
Portfolio Purchase.
16
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6: Debt and Subordinated Debt Related Party (continued)
On March 31, 2009 and 2008, the outstanding balance on this loan was approximately $115.3
million, and $148.3 million, respectively.
At September 30, 2007, Palisades XVI was required to remit an additional $13.1 million to its
lender in order to be in compliance under the Receivables Financing Agreement. The Company
facilitated the ability of Palisades XVI to make this payment by borrowing $13.1 million under the
Credit Facility and causing another of its subsidiaries to purchase a portion of the Portfolio
Purchase from Palisades XVI at a price of $13.1 million prior to the measurement date under the
Receivables Financing Agreement.
On December 27, 2007, Palisades XVI entered into the Second Amendment to its Receivables
Financing Agreement. As the actual collections had been slower than the minimum collections
scheduled under the original agreement, coupled with contemplated sales of accounts which had not
occurred, BMO and Palisades XVI agreed to an extended amortization schedule which did not
contemplate the sales of accounts. The effect of this reduction was to extend the payments of the
loan from approximately 25 months to approximately 31 months from the amendment date. BMO charged
Palisades XVI a fee of $475,000 which was paid on January 10, 2008. The fee was capitalized and is
being amortized over the remaining life of the Receivables Financing Agreement.
On May 19, 2008, Palisades XVI entered into the Third Amendment to its Receivables Financing
Agreement. As the actual collections on the Portfolio Purchase continued to be slower than the
minimum collections scheduled under the Second Amendment, BMO and Palisades XVI agreed to a more
extended amortization schedule. The effect of this amendment was to extend the payments of the loan
through December 2010. The lender also increased the interest rate from 170 basis points over LIBOR
to approximately 320 basis points over LIBOR, subject to automatic reduction in the future if
additional capital contributions are made by the parent of Palisades XVI. The applicable rate was
4.08% and 4.93% at March 31, 2009 and 2008, respectively. The average interest rate of the
Receivable Financing Agreement was 5.65% and 6.27% for the six-month period ended March 31, 2009
and 2008, respectively. In addition, on May 19, 2008, the Company entered into an amended and
restated Servicing Agreement. The amendment calls for increased documentation, responsibilities and
approvals of subservicers engaged by Palisades Collection LLC.
As a result of the actual collections being lower than the minimum collection rates required
under the Receivables Financing Agreement for the months ended November 30, 2008, December 31, 2008
and January 31, 2009, termination events occurred under the terms of the Receivable Financing
Agreement. In order to resolve these issues, on February 20, 2009, the Company executed the Fourth
Amendment to the Receivables Financing Agreement with BMO. The effect of this Fourth Amendment is,
among other things, to (i) lower the collection rate minimum to $1 million per month (plus interest
and fees) as an average for each period of three consecutive months, (ii) provide for an automatic
extension of the maturity date from April 30, 2011 to April 30, 2012 should the outstanding balance
be reduced to $25 million or less by April 30, 2011 and (iii) permanently waive the previous
termination events. The interest rate will remain unchanged at approximately 320 basis points over
LIBOR, subject to automatic reduction in the future should certain collection milestones be
attained.
As additional credit support for repayment by Palisades XVI of its obligations under the
Receivables Financing Agreement and as an inducement for BMO to enter into the Fourth Amendment,
the Company provided BMO a limited recourse, subordinated guaranty, secured by the assets of the
Company, in an amount not to exceed $8 million plus reasonable costs of enforcement and collection.
Under the terms of the guaranty, BMO cannot exercise any recourse against the Company until the
earlier of (i) five years from the date of the Fourth Amendment and (ii) the termination of the
Companys existing senior lending facility or any successor senior facility.
The aggregate minimum repayment obligations required under the Fourth Amendment to the
Receivables Financing Agreement entered into on February 20, 2009 with Palisades XVI including
interest and principal for fiscal years ending September 30, 2009 (six months), September 30, 2010
and September 30, 2011 (seven months), are $6.0 million, $12.0 million and $7.0 million,
respectively, plus monthly interest and fees. There is an additional requirement that the balance
of the facility be reduced to $25 million by April 30, 2011. While the Company believes it will be
able to make all payments due under the new payment schedule, there is no assurance we will be able
to reduce the balance of the facility to $25 million by April 30, 2011.
17
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6: Debt and Subordinated Debt Related Party (continued)
In addition, as further credit support under the Receivables Financing Agreement, the Family
Entity provided BMO a limited recourse, subordinated guaranty, secured solely by a collateral
assignment of $700,000 of the $8.2 million subordinated note executed by the Company for the
benefit of the Family Entity (See further discussion below on the Family Entity loan). The
subordinated note was separated into a $700,000 note and a $7.5 million note for such purpose.
Under the terms of the guaranty, except upon the occurrence of certain termination events, BMO
cannot exercise any recourse against the Family Entity until the occurrence of a termination event
under the Receivables Financing Agreement and an undertaking of reasonable efforts to dispose of
Palisades XVIs assets. As an inducement for agreeing to make such collateral assignment, the
Family Entity was also granted a subordinated guaranty by the Company (other than Asta Funding,
Inc.) for the performance by Asta Funding, Inc. of its obligation to repay the $8.2 million,
secured by the assets of the Company (other than Asta Funding, Inc.), and the Company agreed to
indemnify the Family Entity to the extent that BMO exercises recourse in connection with the
collateral assignment. Without the consent of the agent under the senior lending facility, the
Family Entity will not be permitted to act on such guaranty, and cannot receive payment under such
indemnity, until the termination of the Companys senior lending facility or lenders under any
successor senior facility.
On April 29, 2008, the Company obtained a subordinated loan pursuant to a subordinated
promissory note from the Family Entity. The Family Entity is a greater than 5% shareholder of the
Company beneficially owned and controlled by Arthur Stern, a Director of the Company, Gary Stern,
the Chairman, President and Chief Executive Officer of the Company, and members of their families.
The loan is in the aggregate principal amount of approximately $8.2 million, bears interest at a
rate of 6.25% per annum, is payable interest only each quarter until its maturity date of
January 9, 2010, subject to prior repayment in full of the Companys senior loan facility with the
Bank Group. The subordinated loan was incurred by the Company to resolve certain issues related to
the activities of one of the subservicers utilized by Palisades Collection LLC under the
Receivables Financing Agreement. Proceeds from the subordinated loan were used initially to further
collateralize the Companys $175 million revolving loan facility with the Bank Group and was used
to reduce the balance due on that facility as of May 31, 2008.
The Companys average debt obligation (excluding the subordinated debt related party) for the
six and three month periods ended March 31, 2009, was approximately $183.7 million, and
$172.0 million, respectively. The average interest rate for the six and three month periods ended
March 31, 2009 was 5.11% and 4.12%, respectively.
The Companys cash requirements have been and will continue to be significant and will depend
on external financing to acquire consumer receivables. Portfolio acquisitions are financed
primarily through cash flows from operating activities and with the Companys Credit Facility,
which matures on July 11, 2009. With limited purchases of portfolios through the six months ended
March 31, 2009, availability under the borrowing base formula is approximately $20.1 million at
March 31, 2009. Our borrowing availability is limited to a formula based on the age of the
receivables. As the collection environment remains challenging, we may be required to seek
additional funding. Although availability has increased, the limited availability coupled with
slower collections has had and could continue to have a negative impact on our ability to purchase
new portfolios for future growth.
If the Companys collections deteriorate below our lowest projections, the Company might need
to secure another source of funding in order to satisfy its working capital needs, downsize its
operations, or secure financing on terms that are not favorable to the Company. However, the
Company believes its net cash collections over the next twelve months will be sufficient to cover
its operating expenses, continue paying down debt, and pay dividends
if declared.
18
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6: Debt and Subordinated Debt Related Party (continued)
The Companys debt and subordinated debt related party at March 31, 2009 and
September 30, 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Stated |
|
|
Average |
|
|
|
March 31, |
|
|
September 30, |
|
|
Interest |
|
|
Interest |
|
|
|
2009 |
|
|
2008 |
|
|
Rate |
|
|
Rate (1) |
|
Credit Facility |
|
$ |
44,778,000 |
|
|
$ |
84,934,000 |
|
|
|
5.00 |
% |
|
|
4.11 |
% |
Receivables Financing Agreement |
|
|
115,306,000 |
|
|
|
128,551,000 |
|
|
|
4.08 |
% |
|
|
5.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
160,084,000 |
|
|
$ |
213,485,000 |
|
|
|
n/a |
|
|
|
5.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt related party |
|
$ |
8,246,000 |
|
|
$ |
8,246,000 |
|
|
|
6.25 |
% |
|
|
6.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7: Commitments and Contingencies
Employment Agreements
We have employment agreements with two executives. Such agreements provide for base salary
payments as well as bonuses. The agreements also contain confidentiality and non-compete
provisions. Please refer to Part III of our Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, under the caption Executive Compensation for additional
information.
Leases
The Company is a party to three operating leases with respect to our facilities in Englewood
Cliffs, New Jersey; Bethlehem, Pennsylvania; and Sugar Land, Texas. Please refer to our
consolidated financial statements and notes thereto in our Annual Report on Form 10-K, as filed
with the Securities and Exchange Commission, for additional information. On February 12, 2009, the
Company announced the closing of the call center, located in Pennsylvania, by the end of the second
fiscal quarter of 2009. Managements preliminary estimate of the cost related to the closing of the
facility is $250,000 including, but not limited to, severance costs for approximately 38 employees.
The lease on the facility is scheduled to expire on December 31, 2009. There will be no material
impact on the level of collections, as the operations will be shifted to the New Jersey location,
or accounts will be outsourced. The cost of this closure was recorded in the second quarter of
fiscal year 2009.
Litigation
In the ordinary course of its business, the Company is involved in numerous legal proceedings.
The Company regularly initiates collection lawsuits, using its network of third party law firms,
against consumers. Also, consumers occasionally initiate litigation against the Company, in which
they allege that the Company has violated a federal or state law in the process of collecting their
account. The Company does not believe that these matters are material to its business and financial
condition. The Company is not involved in any material litigation in which it was a defendant.
19
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 8: Income Recognition and Impairments
Income Recognition
The Company accounts for its investment in consumer receivables acquired for liquidation using the
interest method under the guidance of AICPA Statement of Position 03-3, Accounting for Loans or
Certain Securities Acquired in a Transfer (SOP 03-3). Practice Bulletin 6 was amended by SOP
03-3. Under the guidance of SOP 03-3 (and the amended Practice Bulletin 6) static pools of accounts
are established. These pools are aggregated based on certain common risk criteria. Each static pool
is recorded at cost and is accounted for as a single unit for the recognition of income, principal
payments and loss provision.
Once a static pool is established for a quarter, individual receivable accounts are not added to
the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the
seller). SOP 03-3 (and the amended Practice Bulletin 6) requires that the excess of the contractual
cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on
the balance sheet. SOP 03-3 initially freezes the internal rate of return (IRR), estimated when
the accounts receivable are purchased, as the basis for subsequent impairment testing. Significant
increases in actual, or expected future cash flows may be recognized prospectively through an
upward adjustment of the IRR over a portfolios remaining life. Any increase to the IRR then
becomes the new benchmark for impairment testing. Under SOP 03-3 and the amended Practice Bulletin
6, rather than lowering the estimated IRR if the collection estimates are not received or projected
to be received, the carrying value of a pool would be written down to maintain the then current
IRR.
The Company uses the cost recovery method when collections on a particular pool of accounts cannot
be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of
the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on
the balance sheet) while still generating cash collections. In this case, all cash collections are
recognized as finance income when received.
Impairments
The Company accounts for its impairments in accordance with SOP 03-3. This SOP provides guidance on
accounting for differences between contractual and expected cash flows from an investors initial
investment in loans or debt securities acquired in a transfer if those differences are
attributable, at least in part, to credit quality. Increases in expected cash flows should be
recognized prospectively through an adjustment of the internal rate of return while decreases in
expected cash flows should be recognized as impairments. SOP 03-3 makes it more likely that
impairment losses and accretable yield adjustments for portfolios performances which exceed
original collection projections will be recorded, as all downward revisions in collection estimates
will result in impairment charges, given the requirement that the IRR of the affected pool be held
constant. As a result of the slower economy and other factors that resulted in slower collections
on certain portfolios, impairments of $39.8 million were recorded during the six-month period ended
March 31, 2009. Impairments totaling $21.4 million for the first quarter include $7.4 million in
impairments related to two portfolios transferred to the cost recovery method in the first
quarter, one of which is made up of unsecured installment loans domiciled outside the United
States. Impairments of $18.4 million recorded during the three-month period ended March 31, 2009
include $1.5 million on one portfolio transferred to cost recovery. This portfolio was previously
impaired $2.7 million in the quarter ended June 30, 2008 and the future cash flows have been
increasingly unpredictable. This portfolio is made up of telecommunication accounts that have not
followed the performance curves of most of our other telecommunications portfolios. Due to the
uncertainty of projections on this portfolio, the portfolio was transferred to the cost recovery
method. The remaining impairments relate to the timing of and/or the collections projected to be
below the original expectations.
Our analysis of the timing and amount of cash flows to be generated by our portfolio purchases are
based on the following attributes:
|
|
|
the type of receivable, the location of the debtor and the number of
collection agencies previously attempting to collect the receivables in
the portfolio. We have found that there are better states to try to
collect receivables and we factor in both better and worse states when
establishing our initial cash flow expectations; |
|
|
|
|
the average balance of the receivables influence our analysis in that
lower average balance portfolios tend to be more collectible in the
short-term and higher average balance portfolios are more appropriate for
our law suit strategy and thus yield better results over the longer term.
As we have significant experience with both types of balances, we are able
to factor these variables into our initial expected cash flows; |
20
|
|
|
the age of the receivables, the number of days since charge-off, the
payments, if any, since charge-off, and the credit guidelines of the
credit originator also represent factors taken into consideration in our
estimation process since, for example, older receivables might be more
difficult to collect in amount and/or require more time to collect; |
|
|
|
|
past history and performance of similar assets acquired. As we purchase
portfolios of like assets, we accumulate a significant historical data
base on the tendencies of debtor repayments and factor this into our
initial expected cash flows; |
|
|
|
|
our ability to analyze accounts and resell accounts that meet our criteria; |
|
|
|
|
jobs or property of the debtors found within portfolios. With our business
model, this is of particular importance. Debtors with jobs or property are
more likely to repay their obligation through the suit strategy and,
conversely, debtors without jobs or property are less likely to repay
their obligation. We believe that debtors with jobs or property are more
likely to repay because courts have mandated the debtor must pay the debt.
Ultimately, the debtor will pay to clear title or release a lien. We also
believe that these debtors generally might take longer to repay and that
is factored into our initial expected cash flows; and |
|
|
|
|
credit standards of issuer. |
We acquire accounts that have experienced deterioration of credit quality between origination
and the date of our acquisition of the accounts. The amount paid for a portfolio of accounts
reflects our determination that it is probable we will be unable to collect all amounts due
according to the portfolio of accounts contractual terms. We consider the expected payments and
estimate the amount and timing of undiscounted expected principal, interest and other cash flows
for each acquired portfolio coupled with expected cash flows from accounts available for sales. The
excess of this amount over the cost of the portfolio, representing the excess of the accounts cash
flows expected to be collected over the amount paid, is accreted into income recognized on finance
receivables over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain distressed consumer receivable
portfolios at a significant discount to the amount actually owed by underlying debtors. We acquire
these portfolios only after both qualitative and quantitative analyses of the underlying
receivables are performed and a calculated purchase price is paid so that we believe our estimated
cash flow offers us an adequate return on our acquisition costs after our servicing expenses.
Additionally, when considering larger portfolio purchases of accounts, or portfolios from issuers
with whom we have limited experience, we have the added benefit of soliciting our third party
servicers for their input on liquidation rates and, at times, incorporate such input into the
estimates we use for our expected cash flows.
Typically, when purchasing portfolios with which we have the experience detailed above, we
have expectations of achieving a 100% return on our invested capital back within an 18-28 month
time frame and expectations of generating in the range of 130-150% of our invested capital over 3-5
years. We continue to use this as our basis for establishing the original cash flow estimates for
our portfolio purchases. We routinely monitor these results against the actual cash flows and, in
the event the cash flows are below our expectations and we believe there are no reasons relating to
mere timing differences or explainable delays (such as can occur particularly when the court system
is involved) for the reduced collections, an impairment would be recorded as a provision for credit
losses. Conversely, in the event the cash flows are in excess of our expectations and the reason is
due to timing, we would defer the excess collections and record as deferred revenue.
Commissions and fees
Commissions and fees are the contractual commissions earned by third party collection agencies
and attorneys, and direct costs associated with the collection effort- generally court costs. The
Company expects to continue to purchase portfolios and utilize third party collection agencies and
attorney networks.
Note 9: Income Taxes
Deferred federal and state taxes principally arise from (i) recognition of finance income
collected for tax purposes, but not yet recognized for financial reporting; and (ii) provision for
impairments/credit losses, both resulting in timing differences between financial accounting and
tax reporting. The provision for income tax expense for the three month periods ending March 31,
2009 and 2008 reflects income tax expense at an effective rate of 40.4% and 40.5%, respectively.
The provision for income tax expense for the six month periods ending March 31, 2009 and 2008
reflects income tax expense at an effective rate of 40.4% and 41.0%, respectively. Income taxes
receivable represent taxes due for overpayment of federal income taxes. Income taxes payable
represent tax obligations due state jurisdistions.
21
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 10: Net Income Per Share
Basic per share data is determined by dividing net income by the weighted average
shares outstanding during the period. Diluted per share data is computed by dividing net income by
the weighted average shares outstanding, assuming all dilutive potential common shares were issued.
With respect to the assumed proceeds from the exercise of dilutive options, the treasury stock
method is calculated using the average market price for the period.
The following table presents the computation of basic and diluted per share data for
the six and three months ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
(13,005,000 |
) |
|
|
14,271,824 |
|
|
$ |
(0.91 |
) |
|
$ |
5,607,000 |
|
|
|
14,059,142 |
|
|
$ |
0.40 |
|
Effect of Dilutive
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
683,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(13,005,0000 |
) |
|
|
14,271,824 |
|
|
$ |
(0.91 |
) |
|
$ |
5,607,000 |
|
|
|
14,742,549 |
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
(Loss) |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
(5,168,000 |
) |
|
|
14,271,824 |
|
|
$ |
(0.36 |
) |
|
$ |
(7,707,000 |
) |
|
|
14,201,674 |
|
|
$ |
(0.54 |
) |
Effect of Dilutive
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(5,168,000 |
) |
|
|
14,271,824 |
|
|
$ |
(0.36 |
) |
|
$ |
(7,707,000 |
) |
|
|
14,201,674 |
|
|
$ |
(0.54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009, 1,036,438 options at a weighted average exercise price of $11.68 were not
included in the diluted earnings per share calculation as they were antidilutive.
Note 11: Stock-based Compensation
The Company accounts for stock-based employee compensation under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 123 (Revised 2005), Share-Based
Payment (SFAS 123R). SFAS 123R requires that compensation expense associated with stock options
and other stock based awards be recognized in the statement of operations, rather than a disclosure
in the notes to the Companys consolidated financial statements.
On January 17, 2008, the Compensation Committee awarded 58,000 shares of restricted
stock to officers and directors of the Company. These shares vest in three equal annual
installments starting on October 1, 2008.
For the three month and six month periods ended March 31, 2009, $368,000 and $649,000,
respectively, of stock based compensation expense was recognized. For the three and six month
periods ended March 31, 2008, $263,000 and $450,000, respectively of stock based compensation
expense was recorded. See Note 12 Stock Option Plans for more information.
There were no stock option awards granted in the first six months of fiscal years 2009 and 2008.
22
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 12: Stock Option Plans
Equity Compensation Plan
On December 1, 2005, the Board of Directors adopted the Companys Equity Compensation Plan
(the Equity Compensation Plan), approved by the stockholders of the Company on March 1, 2006. The
Equity Compensation Plan was adopted to supplement the Companys existing 2002 Stock Option Plan.
In addition to permitting the grant of stock options as are permitted under the 2002 Stock Option
Plan, the Equity Compensation Plan allows the Company flexibility with respect to equity awards by
also providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights
and stock appreciation rights. One million shares were authorized for issuance under the Equity
Compensation Plan. The following description does not purport to be complete and is qualified in
its entirety by reference to the full text of the Equity Compensation Plan, which is included as an
exhibit to the Companys reports filed with the SEC.
The general purpose of the Equity Compensation Plan is to provide an incentive to
our employees, directors and consultants, including executive officers, employees and consultants
of any subsidiaries, by enabling them to share in the future growth of our business. The Board of
Directors believes that the granting of stock options and other equity awards promotes continuity
of management and increases incentive and personal interest in the welfare of the Company by those
who are primarily responsible for shaping and carrying out our long range plans and securing our
growth and financial success.
The Board believes that the Equity Compensation Plan will advance our interests by
enhancing our ability to (a) attract and retain employees, directors and consultants who are in a
position to make significant contributions to our success; (b) reward employees, directors and
consultants for these contributions; and (c) encourage employees, directors and consultants to take
into account our long-term interests through ownership of our shares.
The Company has 1,000,000 shares of Common Stock authorized for issuance under the
Equity Compensation Plan and 878,334 were available as of March 31, 2009. On January 17, 2008 the
Compensation Committee of the Board of Directors awarded 58,000 shares of restricted stock to
officers and directors of the Company which vest in three equal annual installments beginning
October 1, 2008. 68,000 restricted shares were granted in the first quarter of fiscal year 2007.
These shares vest in three equal annual installments starting on October 1, 2008. As of March 31,
2009, approximately 103 of the Companys employees were eligible to participate in the Equity
Compensation Plan.
2002 Stock Option Plan
On March 5, 2002, the Board of Directors adopted the Asta Funding, Inc. 2002 Stock
Option Plan (the 2002 Plan), which plan was approved by the Companys stockholders on May 1,
2002. The 2002 Plan was adopted in order to attract and retain qualified directors, officers and
employees of, and consultants to, the Company. The following description does not purport to be
complete and is qualified in its entirety by reference to the full text of the 2002 Plan, which is
included as an exhibit to the Companys reports filed with the SEC.
The 2002 Plan authorizes the granting of incentive stock options (as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the Code)) and non-qualified stock
options to eligible employees of the Company, including officers and directors of the
Company(whether or not employees) and consultants of the Company.
The Company has 1,000,000 shares of Common Stock authorized for issuance under the
2002 Plan and 394,334 were available as of March 31, 2009. As of March 31, 2009, approximately 103
of the Companys employees were eligible to participate in the 2002 Plan.
23
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 12: Stock Option Plans (continued)
1995 Stock Option Plan
The 1995 Stock Option Plan expired on September 14, 2005. The plan was adopted in
order to attract and retain qualified directors, officers and employees of, and consultants, to the
Company. The following description does not purport to be complete and is qualified in its entirety
by reference to the full text of the 1995 Stock Option Plan, which is included as an exhibit to the
Companys reports filed with the SEC.
The 1995 Stock Option Plan authorized the granting of incentive stock options (as
defined in Section 422 of the Code) and non-qualified stock options to eligible employees of the
Company, including officers and directors of the Company (whether or not employees) and consultants
to the Company.
The Company authorized 1,840,000 shares of Common Stock for issuance under the 1995 Stock
Option Plan. All but 96,002 shares were utilized. As of September 14, 2005, no more options could
be issued under this plan.
The following table summarizes stock option transactions under the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding options at the beginning of period |
|
|
1,037,438 |
|
|
$ |
11.69 |
|
|
|
1,337,438 |
|
|
$ |
9.38 |
|
Options granted |
|
|
-0- |
|
|
$ |
-0- |
|
|
|
-0- |
|
|
$ |
-0- |
|
Options exercised |
|
|
-0- |
|
|
$ |
-0- |
|
|
|
(300,000 |
) |
|
$ |
1.42 |
|
Options forfeited |
|
|
(1,000 |
) |
|
$ |
28.75 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of period |
|
|
1,036,438 |
|
|
$ |
11.68 |
|
|
|
1,037,438 |
|
|
$ |
11.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of period |
|
|
1,036,438 |
|
|
$ |
11.68 |
|
|
|
1,031,438 |
|
|
$ |
11.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about the Plans outstanding options as of March 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Contractual |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
Range of Exercise Price |
|
Outstanding |
|
|
Life (in Years) |
|
|
Price |
|
|
Exercisable |
|
|
Price |
|
$0.8125 $2.8750 |
|
|
300,000 |
|
|
|
1.5 |
|
|
$ |
2.63 |
|
|
|
300,000 |
|
|
$ |
2.63 |
|
$2.8751 $5.7500 |
|
|
106,667 |
|
|
|
3.6 |
|
|
$ |
4.73 |
|
|
|
106,667 |
|
|
$ |
4.73 |
|
$5.7501 $8.6250 |
|
|
12,000 |
|
|
|
2.6 |
|
|
$ |
5.96 |
|
|
|
12,000 |
|
|
$ |
5.96 |
|
$14.3751 $17.2500 |
|
|
218,611 |
|
|
|
4.7 |
|
|
$ |
15.04 |
|
|
|
218,611 |
|
|
$ |
15.04 |
|
$17.2501 $20.1250 |
|
|
382,160 |
|
|
|
5.5 |
|
|
$ |
18.22 |
|
|
|
382,160 |
|
|
$ |
18.22 |
|
$25.8751 $28.7500 |
|
|
17,000 |
|
|
|
7.7 |
|
|
$ |
28.75 |
|
|
|
17,000 |
|
|
$ |
28.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,036,438 |
|
|
|
4.0 |
|
|
$ |
11.68 |
|
|
|
1,036,438 |
|
|
$ |
11.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $43,000 and $46,000 of compensation expense related to stock options
during the six month periods ended March 31, 2009 and 2008, respectively. As of March 31, 2009,
compensation expense related to stock options was fully recognized. There is no remaining expense
to be recognized for existing outstanding stock options. There is no intrinsic value of the
outstanding and exercisable options as of March 31, 2009.
24
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 12: Stock-Option Plans (Continued)
The following table summarizes information about restricted stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
|
|
|
Average Grant |
|
|
|
|
|
|
|
Date Fair |
|
|
|
|
|
|
Date Fair |
|
|
|
Shares |
|
|
Value |
|
|
Shares |
|
|
Value |
|
Unvested at the beginning of period |
|
|
80,667 |
|
|
$ |
22.26 |
|
|
|
45,333 |
|
|
$ |
28.75 |
|
Awards granted |
|
|
|
|
|
|
|
|
|
|
58,000 |
|
|
$ |
19.73 |
|
Vested |
|
|
(40,995 |
) |
|
$ |
24.50 |
|
|
|
(22,666 |
) |
|
$ |
28.75 |
|
Forfeited |
|
|
(4,334 |
) |
|
$ |
21.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at the end of period |
|
|
35,338 |
|
|
$ |
19.73 |
|
|
|
80,667 |
|
|
$ |
22.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $606,000 and $403,000 of compensation expense related to the restricted
stock awards during the six-month periods ended March 31, 2009 and 2008, respectively. As of
March 31, 2009, there was $574,000 of unrecognized compensation cost related to unvested restricted
stock.
Note 13: Stockholders Equity
For the six months ended March 31, 2009, the Company declared dividends of $571,000, or $.02
per share. $285,000 was accrued as of March 31, 2009 and paid May 1, 2009. For the six months ended
March 31, 2009 the Company recorded $751,000, net of taxes, in cumulative translation adjustments
related to its investment in South America.
25
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Caution Regarding Forward Looking Statements
This Form 10-Q contains forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements
typically are identified by use of terms such as may, will, should, plan, expect,
believe, anticipate, estimate and similar expressions, although some forward-looking
statements are expressed differently. Forward-looking statements represent our managements
judgment regarding future events. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such expectations will
prove to be correct. All statements other than statements of historical fact included in this
report regarding our financial position, business strategy, products, products under development
and clinical trials, markets, budgets, plans, or objectives for future operations are
forward-looking statements. We cannot guarantee the accuracy of the forward-looking statements, and
you should be aware that our actual results could differ materially from those contained in the
forward-looking statements due to a number of factors, including the statements under Risk
Factors and Critical Accounting Policies detailed in our Annual Report on Form 10-K and Form
10-K/A for the year ended September 30, 2008, and other reports filed with the Securities and
Exchange Commission (SEC), and the additional Risk Factors detailed in Part II Item 1A, herein.
Our annual report on Form 10-K and Form 10-K/A, quarterly reports on Form 10-Q,
current reports on Form 8-K and all other documents filed by the Company or with respect to its
securities with the SEC are available free of charge through our website at www.astafunding.com.
Information on our website does not constitute a part of this report. The SEC also maintains an
internet site ( www.sec.gov ) that contains reports and information statements and other
information regarding issuers, such as ourselves, who file electronically with the SEC.
Overview
We are primarily engaged in the business of acquiring, managing, servicing and recovering on
portfolios of consumer receivables. These portfolios generally consist of one or more of the
following types of consumer receivables:
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|
|
charged-off receivables accounts that have been written-off by the
originators and may have been previously serviced by collection
agencies; |
|
|
|
|
semi-performing receivables accounts where the debtor is currently
making partial or irregular monthly payments, but the accounts may
have been written-off by the originators; and |
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|
|
performing receivables accounts where the debtor is making regular
monthly payments that may or may not have been delinquent in the past. |
We acquire these consumer receivable portfolios at a significant discount to the
amount actually owed by the borrowers. We acquire these portfolios after a qualitative and
quantitative analysis of the underlying receivables and calculate the purchase price so that our
estimated cash flow offers us an adequate return on our acquisition costs and servicing expenses.
After purchasing a portfolio, we actively monitor its performance and review and adjust our
collection and servicing strategies accordingly.
We purchase receivables from credit grantors and others through privately negotiated
direct sales and auctions in which sellers of receivables seek bids from several pre-qualified debt
purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis
through:
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|
|
our relationships with industry participants, collection agencies, investors and our financing sources; |
|
|
|
|
brokers who specialize in the sale of consumer receivable portfolios; and |
|
|
|
|
other sources. |
26
Critical Accounting Policies
We account for our investments in consumer receivable portfolios, using either:
|
|
the interest method; or |
|
|
|
the cost recovery method. |
As we believe our extensive liquidating experience in certain asset classes such as
distressed credit card receivables, telecom receivables, consumer loan receivables, retail
installment contracts, mixed consumer receivables, and auto deficiency receivables has matured,
we use the interest method for accounting for substantially all asset acquisitions within these
classes of receivables when we believe we can reasonably estimate the timing of the cash flows.
In those situations where we diversify our acquisitions into other asset classes in which we do
not possess the same expertise or history, or we cannot reasonably estimate the timing of the
cash flows, we utilize the cost recovery method of accounting for those portfolios of
receivables.
Over time, as we continue to purchase asset classes to the point where we believe we have
developed the requisite expertise and experience, we are more likely to utilize the interest
method to account for such purchases.
The Company accounts for its investment in finance receivables using the interest method
under the guidance of AICPA Statement of Position 03-3, Accounting for Loans or Certain
Securities Acquired in a Transfer (SOP 03-3). Practice Bulletin 6, Amortization of Discounts
on Certain Acquired Loans. (Practice Bulletin 6) was amended by SOP 03-3. Under the guidance
of SOP 03-3 (and the amended Practice Bulletin 6), static pools of accounts are established.
These pools are aggregated based on certain common risk criteria. Each static pool is recorded
at cost and is accounted for as a single unit for the recognition of income, principal payments
and loss provision. We currently consider for aggregation portfolios of accounts, purchased
within the same fiscal quarter, that generally have the following characteristics:
|
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same issuer/originator |
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|
|
same underlying credit quality |
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|
similar geographic distribution of the accounts |
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|
|
similar age of the receivable and |
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|
|
same type of asset class (credit cards, telecommunications, etc.) |
After determining that an investment will yield an adequate return on our acquisition cost
after servicing fees, including court costs which are expensed as incurred, we use a variety of
qualitative and quantitative factors to determine the estimated cash flows. As previously
mentioned, included in our analysis for purchasing a portfolio of receivables and determining a
reasonable estimate of collections and the timing thereof, the following variables are analyzed
and factored into our original estimates:
|
|
the number of collection agencies previously attempting to collect the receivables in the portfolio; |
|
|
|
the average balance of the receivables; |
|
|
|
the age of the receivables (as older receivables might be more difficult to collect or might be
less cost effective); |
|
|
|
past history of performance of similar assets as we purchase portfolios of similar assets, we
believe we have built significant history on how these receivables will liquidate and cash flow; |
|
|
|
number of months since charge-off; |
|
|
|
payments made since charge-off; |
27
|
|
the credit originator and their credit guidelines; |
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|
|
the locations of the debtors as there are better states to attempt to collect in and ultimately we
have better predictability of the liquidations and the expected cash flows. Conversely, there are
also states where the liquidation rates are not as good and that is factored into our cash flow
analysis; |
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|
|
financial wherewithal of the seller; |
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|
|
jobs or property of the debtors found within portfolios-with our business model, this is of
particular importance. Debtors with jobs or property are more likely to repay their obligation and
conversely, debtors without jobs or property are less likely to repay their obligation ; and |
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|
the ability to obtain customer statements from the original issuer. |
We will obtain and utilize as appropriate input including, but not limited to, monthly
collection projections and liquidation rates, from our third party collection agencies and
attorneys, as further evidentiary matter, to assist us in developing collection strategies and
in modeling the expected cash flows for a given portfolio.
We acquire accounts that have experienced deterioration of credit quality between
origination and the date of our acquisition of the accounts. The amount paid for a portfolio of
accounts reflects our determination that it is probable we will be unable to collect all
amounts due according to the portfolio of accounts contractual terms. We consider the expected
payments and estimate the amount and timing of undiscounted expected principal, interest and
other cash flows for each acquired portfolio coupled with expected cash flows from accounts
available for sales. The excess of this amount over the cost of the portfolio, representing the
excess of the accounts cash flows expected to be collected over the amount paid, is accreted
into income recognized on finance receivables over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain distressed consumer
receivable portfolios at a significant discount to the amount actually owed by underlying
debtors. We acquire these portfolios only after both qualitative and quantitative analyses of
the underlying receivables are performed and a calculated purchase price is paid so that we
believe our estimated cash flow offers us an adequate return on our costs including servicing
expenses. Additionally, when considering larger portfolio purchases of accounts, or portfolios
from issuers from whom we have little or limited experience, we have the added benefit of
soliciting our third party collection agencies and attorneys for their input on liquidation
rates and at times incorporate such input into the price we offer for a given portfolio and the
estimates we use for our expected cash flows.
Typically, when purchasing portfolios for which we have the experience detailed above, we
have expectations of recovering 100% return of our invested capital back within an 18-28 month
time frame and expectations of collecting in the range of 130-150% of our invested capital over
3-5 years. Historically, we have generally been able to achieve these results and we continue to
use this as our basis for establishing the original cash flow estimates for our portfolio
purchases. We routinely monitor these results against the actual cash flows and, in the event
the cash flows are below our expectations and we believe there are no reasons relating to mere
timing differences or explainable delays (such as can occur particularly when the court system
is involved) for the reduced collections, an impairment would be recorded as a provision for
credit losses. Conversely, in the event the cash flows are in excess of our expectations and the
reason is due to timing, we would defer the excess collection as deferred revenue.
The Company uses the cost recovery method when collections on a particular pool of accounts
cannot be reasonably predicted. Under the cost recovery method, no income is recognized until
the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero
carrying balance on the balance sheet) while still generating cash collections. In this case,
all cash collections are recognized as revenue when received.
28
Results of Operations
The six-month period ended March 31, 2009, compared to the six-month period ended
March 31, 2008
Finance income. For the six-month period ended March 31, 2009, finance income decreased
$31.5 million or 46.3% to $36.5 million from $68.0 million for the six-month period ended March 31,
2008. The purchase of the $6.9 billion in face value receivables for a purchase price of $300
million in March 2007 (the Portfolio Purchase) was accounted for using the interest method for
the six month period ended March 31, 2008, during which time $17.7 million in finance income was
recognized. The Portfolio Purchase was transferred to the cost recovery method effective at the
beginning of the third quarter of fiscal year 2008. As a result of the transfer, no finance income
was recognized on the Portfolio Purchase for the six month period ended March 31, 2009. In
addition, receivables under the interest method of accounting, excluding the Portfolio Purchase,
declined $105 million from $242.6 million at March 31, 2008 to $137.5 million at March 31, 2009.
The decrease in the average level of consumer receivables is attributable impairments recorded,
amortization of the portfilos and portfolio purchases down from $1.3 billion of face value
receivables at a cost of $41.3 million during the six-month period ended March 31, 2008, to $91.5
million of face value receivables at a cost of $2.7 million during the six-month period ended March
31, 2009. This decline results in the further reduction of finance income by $13.8 million.
During the first six months of fiscal year 2009, gross collections decreased 30.3% to
$123.2 million from $176.7 million for the six months ended March 31, 2008. Commissions and fees
associated with gross collections from our third party collection agencies and attorneys decreased
$24.7 million for the six months ended March 31, 2009 as compared to the same period in the prior
year and averaged 35.9% of collections for the six months ended March 31, 2009 as compared to 39.1%
in the same prior year period. Net collections decreased by 26.7% to $79.0 million from
$107.7 million for the six months ended March 31, 2008. The Company pays a third party servicer a
fee of $275,000 per month for twenty-five months for its consulting and skiptracing efforts in
connection with the Portfolio Purchase. This fee, which began in May 2007 and ends in May 2009, is
recorded as part of general and administrative expenses.
Income recognized from fully amortized portfolios (zero based revenue) was $20.6 million
and $23.9 million for the six months ended March 31, 2009 and 2008, respectively.
During the six months ended March 31, 2009, three portfolios were transferred from the
interest method to the cost recovery method. Based on the nature of these portfolios and the recent
cash flows, our estimates of the timing of expected cash flows became uncertain. One of the
portfolios is related to unsecured installment loans domiciled in Puerto Rico. Due to local market
conditions, the future cash flows of this portfolio became increasingly unpredictable. The second
portfolio is made up of retail installment contracts that have not followed the performance curves
we have historically experienced in this area of the market. The third portfolio has not performed
as expected as compared to other portfolios in its class. Based upon the forecasts not being as
reliable as first forecasted, we transferred these portfolios to the cost recovery method. Finance
income on these portfolios collectively was approximately 3% of revenue for each of the six-month
periods ended March 31, 2009 and 2008, respectively. As a result of the transfer to the cost
recovery method, we will not recognize finance income on these three portfolios until their
carrying values are recovered. At March 31, 2009, the combined carrying values of these portfolios
were $9.5 million. Impairments of approximately $8.9 million were recorded in the first and second
quarters of fiscal year 2009 on these three portfolios.
Other income. Other income of $ 54,000 and $144,000 for the six months ended March 31,
2009 and 2008, respectively, includes interest and service fee income.
General and Administrative Expenses. During the six months ended March 31, 2009, general
and administrative expenses increased $0.5 million, or 3.4% to $13.4 million from $12.9 million for
the six months ended March 31, 2008, and represented 22.9% of total expenses (excluding income
taxes) for the six months ended March 31, 2009 as compared to 22.1% for the six month period ended
March 31, 2008. The increase in general and administrative expenses was primarily due to an
increase in collection expenses that resulted from the higher cost of maintaining the increased
number of debtor accounts acquired in the past several years. In addition, professional fees
increased during the six-month period ended March 31, 2009 resulting from work related to the bank
amendments that were finalized on February 20, 2009. Also, amortization increased during the
six-month period ended March 31, 2009 as compared to the same prior year period, reflecting
increased amortization expense related to the fees on the loan amendments. The increased
collection and amortization expenses were partially offset by lower postage and lower salary and
salary -related expenses in fiscal year 2009 compared to the prior year. The reduced postage
expense resulted from the reduced portfolio purchases in fiscal year 2009. The reduced salary
expense reflected lower average number of employees during the six-month period ended March 31,
2009 compared to the same prior year period, in part, the result of the closing of the Pennsylvania
collection facility. The cost of closing the Pennsylvania call center in February 2009 was
approximately $250,000 and was included in general and administrative expense in the three month
period ended March 31, 2009. This action is estimated to save the Company approximately $1.5
million annually.
29
Interest Expense. During the six month period ended March 31, 2009, interest expense
decreased $5.5 million or 51.9% from $10.7 million in the same prior year period and represented
8.8% of total expenses (excluding income taxes) for the six-month period ended March 31, 2009
compared to 18.2% for the six-month period ended March 31, 2008. The decrease in interest expense
is primarily the result of a reduction in the average loan balance from $318.5 for the six-month
period ended March 31, 2008 to $183.7 million for the same current year period as we continue our
program of reducing debt, in addition to reduced portfolio purchases. Additionally, the average
interest rate in the six-month period ended March 31, 2009 was 5.1% as compared to 6.2% for the
same prior year period.
Impairments. Impairments of $39.8 million were recorded by the Company during the six
months ended March 31, 2009 as compared to $35.0 million for the six months ended March 31, 2008,
and represented 68.3% of total expenses (excluding income taxes) for the quarter ended March 31,
2009 as compared to 59.7% for the same prior year period. Included in impairments is $8.9 million
related to three portfolios transferred to the cost recovery method. As relative collections with
respect to our expectations on these portfolios were deteriorating, we believed that these
impairment charges and adjustments to our cash flow expectations became necessary. We recorded
impairments on the Portfolio Purchase in the amount of $30.3 million and five other portfolios in
the amount of $4.7 million in the six month period ended March 31, 2008.
The three-month period ended March 31, 2009, compared to the three-month period ended
March 31, 2008
Finance income. For the three months ended March 31, 2009, finance income decreased
$15.8 million or 46.6% to $18.1 million from $33.9 million for the three months ended March 31,
2008. The Portfolio Purchase was accounted for using the interest method for the three-month period
ended March 31, 2008, during which time $8.8 million in finance income was recognized. The
Portfolio Purchase was transferred to the cost recovery method effective in the third quarter of
fiscal year 2008. As a result of the transfer, no finance income was recognized on the Portfolio
Purchase for the three-month period ended March 31, 2009. In addition, receivables under the
interest method of accounting, excluding the Portfolio Purchase, declined $105 million from $242.6
million at March 31, 2008 to $137.5 million at March 31, 2009. The decrease in the average level
of consumer receivables is largely attributable to the
impairments recorded, amortization of the portfolios and the decrease in portfolio purchases down
from $155 million of face value receivables at a cost of $3.8 million during the three-month period
ended March 31, 2008, to $44.0 million of face value receivables at a cost of $1.6 million during
the three-month period ended March 31, 2009. This decline results in the further reduction of
finance income by $7.0 million.
During the second quarter of fiscal year 2009, gross collections decreased 34.3% to $57.4
million from $87.4 million for the three months ended March 31, 2008. Commissions and fees
associated with gross collections from our third party collection agencies and attorneys decreased
$17.2 million, or 45.6%, for the three months ended March 31, 2009 as compared to the same period
in the prior year and averaged 35.7% during the three-month period ended March 31, 2009. Net
collections decreased by 25.8% to $36.9 million from $49.8 million for the three months ended
March 31, 2008. The Company pays a third party servicer a monthly fee of $275,000 per month for
twenty-five months for its consulting and skiptracing efforts in connection with the Portfolio
Purchase. This fee, which began in May 2007, is recorded as part of general and administrative
expenses. The final payment is due in May 2009.
During the three months ended March 31, 2009, one portfolio was transferred from the interest
method to the cost recovery method. Based on the nature of this portfolio and the recent cash
flows, our estimates of the timing of expected cash flows became uncertain. Based upon the
forecast not being as reliable as first forecasted we transferred this portfolio to the cost
recovery method. Finance income was less than 1% of revenue for each of the three month periods
ended March 31, 2009 and 2008, respectively, on this portfolio. As a result of the transfer to the
cost recovery method, we will not recognize finance income on this portfolio until its carrying
values is recovered. At March 31, 2009, the carrying value of this portfolio was $4.0 million. An
impairment of approximately $1.5 million was recorded in the second quarter of fiscal year 2009 on
this portfolio.
Income recognized from fully amortized portfolios (zero based revenue) was $10.5 million
and $12.2 million for the three months ended March 31, 2009 and 2008, respectively.
Other income. Other income of $ 22,000 and $4,000 for the three months ended March 31,
2009 and 2008, respectively, includes interest and service fee income.
General and Administrative Expenses. During the three-month period ended March 31, 2009,
general and administrative expenses decreased $0.8 million or 10.9% to $6.3 million from
$7.1 million for the three-months ended March 31, 2008, and represented 23.7% of total expenses
(excluding income taxes) for the three months ended March 31, 2009 as compared to 15.2% for the
same period in the prior year. The decrease is the result of lower postage expense and lower salary
and salary-related expenses, partially offset by an increase in professional fees associated with
the work on the banking arrangements finalized February 20, 2009. The cost of closing the
Pennsylvania call center was approximately $250,000 and was included in general and administrative
expense in the three month period ended March 31, 2009.
30
Interest Expense. During the three-month period ended March 31, 2009, interest expense
was $2.0 million compared to $4.7 million in the same period in the prior year and represented 7.3%
of total expenses (excluding income taxes) for the three-month
period ended March 31, 2009 compared to 10.1% in the same prior year period. The decrease in
interest expense is primarily the result the average loan balance from $315.7 million for the
three-month period ended March 31, 2008 to $172.0 million for the same current year period as we
continue our program of reducing debt, in addition to reduced portfolio purchases.
Additionally, the average interest rate in the three-month period ended March 31, 2009 was 4.1% as
compared to 6.8% for the same prior year period.
Impairments. Impairments of $18.4 million were recorded by the Company during the three
months ended March 31, 2009 as compared to $35.0 million for the three months ended March 31, 2008,
and represented 69.0% of total expenses (excluding income taxes) for the quarter ended March 31,
2009 as compared to 74.7% for the three months ended March 31, 2008. Included in impairments is
$1.5 million related to a portfolio transferred to the cost recovery method. For the three months
ended March 31, 2008, we recorded impairments on the Portfolio Purchase in the amount of
$30.3 million and 5 other portfolios in the amount of $4.7 million. As relative collections with
respect to our expectations on these portfolios were deteriorating, we believed that these
impairment charges and adjustments to our cash flow expectations became necessary.
Liquidity and Capital Resources
Our primary source of cash from operations is collections on the receivable portfolios we have
acquired. Our primary uses of cash include repayments of debt, purchases of consumer receivable
portfolios, interest payments, costs involved in the collections of consumer receivables, dividends
and taxes. Management believes that the results of operations will provide enough liquidity to meet
our obligations of the business and be in compliance with debt covenants. We rely significantly
upon our lenders to provide the funds necessary for the purchase of consumer accounts receivable
portfolios.
On February 20, 2009, we executed the Seventh Amendment to the Fourth Amended and Restated
Loan Agreement (this and all other amendments referred to as the Credit Facility) with a
consortium of banks (the Bank Group) See further discussion on this amendment below. As of
March 31, 2009, we had an $85.0 million line of credit on the Credit Facility. The Credit Facility
will reduce to $80.0 million by June 30, 2009. The Credit Facility bears interest at the lesser of
LIBOR plus an applicable margin, or the prime rate minus an applicable margin based on certain
leverage ratios. The Credit Facility is collateralized by all portfolios of consumer receivables
acquired for liquidation and all other assets of the Company excluding the assets of Palisades
Acquisition XVI, LLC, a wholly-owned subsidiary of the Company (Palisades XVI), and contains
financial and other covenants (relative to tangible net worth, interest coverage, and leverage
ratio, as defined) that must be maintained in order to borrow funds. As of March 31, 2009, there
was a $44.8 million outstanding balance under this facility and availability of $20.9 million. Our
borrowing availability is based on a formula calculated on the age of the receivables. The balance
outstanding at March 31, 2008 was $148.3 million. Although we are within the borrowing limits of
this facility, there are certain limitations in place with regard to collateralization whereby the
Company may be limited in its ability to borrow funds to purchase additional portfolios. The term
of the Credit Facility ends July 11, 2009. If the loan agreement cannot be renewed at maturity, we
believe we can sell any of the assets secured by the Credit Facility, which is all assets of the
Company except those owned by Palisades XVI.
On March 30, 2007 the Company signed the Third Amendment to the Credit Facility whereby the
parties agreed to a Temporary Overadvance of $16 million. In addition, the parties agreed to an
increase in interest rate to LIBOR plus 275 basis points for LIBOR loans, subject to an adjustment
each quarter, an increase from 175 basis points. On May 10, 2007, the Company signed the Fourth
Amendment to the Credit Facility whereby the parties agreed to revise certain terms of the
agreement which eliminated the Temporary Overadvance provision. On June 26, 2007 the Company signed
the Fifth Amendment to the Credit Facility that amended certain terms of the Credit Agreement
whereby the parties agreed to increase the advance rates on portfolio purchases allowing the
Company more borrowing availability within the $175 million upper limit. On December 4, 2007, the
Company signed the Sixth Amendment to the Credit Facility with the Bank Group that temporarily
increased the total revolving loan commitment from $175 million to 185 million through February 29,
2008. The temporary increase was not used.
In March 2007, Palisades XVI consummated the $300 million Portfolio Purchase. The Portfolio
Purchase is made up of predominantly credit card accounts and includes accounts in collection
litigation, accounts as to which the sellers had been awarded judgments, and other traditional
charge-offs. The Companys line of credit with the Bank Group was fully utilized, as modified in
February 2007, with the aggregate deposit of $75 million paid for the Portfolio Purchase.
The remaining $225 million was paid on March 5, 2007 by borrowing approximately $227 million
(inclusive of transaction costs) under the Receivables Financing Agreement entered into by
Palisades XVI with BMO as the funding source, and consists of debt with full recourse only to
Palisades XVI, bore an interest rate of approximately 170 basis points over LIBOR at the inception
of the agreement. The term of the original agreement was three years. All proceeds received as a
result of the net collections from the Portfolio Purchase are applied to interest and principal of
the underlying loan. The Company made certain representations and warranties to the lender to
support the transaction. The Portfolio Purchase is serviced by Palisades Collection, LLC, a wholly
owned subsidiary of the Company, which has also engaged several unrelated subservicers. As of
March 31, 2009, there was a $115.3 million outstanding balance under this facility.
31
At September 30, 2007, Palisades XVI was required to remit an additional $13.1 million to its
lender in order to be in compliance under the Receivables Financing Agreement. The Company
facilitated the ability of Palisades XVI to make this payment
by borrowing $13.1 million under its current revolving credit facility and causing another of
its subsidiaries to purchase a portion of the Portfolio Purchase from Palisades XVI at a price of
$13.1 million prior to the measurement date under the Receivables Financing Agreement.
On December 27, 2007, Palisades XVI entered into the Second Amendment of its Receivables
Financing Agreement. As the actual collections had been slower than the minimum collections
scheduled under the original agreement, which contemplated sales of accounts which had not
occurred, the lender and Palisades XVI agreed to a lower amortization schedule which did not
contemplate the sales of accounts. The effect of this reduction was to extend the payments of the
loan from approximately 25 months to approximately 31 months from the date of the second amendment.
The lender charged Palisades XVI a fee of $475,000 which was paid on January 10, 2008. The fee was
capitalized and is being amortized over the remaining life of the Receivables Financing Agreement.
On May 19, 2008, Palisades XVI entered into the Third Amendment of its Receivables Financing
Agreement. As the actual collections on the Portfolio Purchase continued to be slower than the
minimum collections scheduled under the Second Amendment, the lender and Palisades XVI agreed to an
extended amortization schedule. The effect of this reduction is to extend the length of the
original loan to three years, nine months, an extension of nine months. BMO also increased the
interest rate to approximately 320 basis points (from 170 basis points) over LIBOR, subject to
automatic reduction in the future if additional capital contributions are made by the parent of
Palisades XVI. In addition, on May 19, 2008, the Company entered into an amended and restated
Servicing Agreement among Palisades XVI, Palisades Collection, L.L.C. and BMO (the Servicing
Agreement). The amendment calls for increased documentation, responsibilities and approvals of
subservicers engaged by Palisades Collection LLC.
On April 29, 2008, the Company obtained a subordinated loan pursuant to a subordinated
promissory note from Asta Group, Inc. (the Family Entity). The loan is in the aggregate principal
amount of $8.2 million, bears interest at a rate of 6.25% per annum, is payable interest only each
quarter until its maturity date of January 9, 2010, subject to prior repayment in full of the
Companys senior loan facility with the Bank Group. Interest expense on this loan was $257,000 for
the six months ended March 31, 2009. The subordinated loan was incurred by the Company to resolve
certain issues described below. Proceeds of the subordinated loan were used to reduce the balance
due on our line of credit with the Bank Group on June 13, 2008. This facility is secured by the
Bank Group Collateral, other than the assets of Palisades XVI, which was separately financed by the
BMO Facility.
A servicer that provides servicing for certain portfolios within the Bank Group Collateral,
was also engaged by Palisades Collection, LLC, after the initial purchase of the Portfolio Purchase
in March 2007, to provide certain management services with respect to the portfolios owned by
Palisades XVI and financed by the BMO Facility and to provide subservicing functions for portions
of the Portfolio Purchase. Collections with respect to the Portfolio Purchase, and most portfolios
purchased by the Company, lag the costs and fees which are expended to generate those collections,
particularly when court costs are advanced to pursue an aggressive litigation strategy, as is the
case with the Portfolio Purchase. Start-up cash flow issues with respect to the Portfolio Purchase
were exacerbated by (a) collection challenges caused by the economic environment at that time,
(b) the fact that Palisades Collection believed that it would be desirable to engage this servicer
to perform management services with respect to the Portfolio Purchase which services were not
contemplated at the time of the initial Portfolio Purchase and (c) Palisades Collection believed it
would be desirable to commence litigations and incur court costs at a faster rate than initially
budgeted. The agreements with this servicer call for a 3%fee on substantially all gross collections
from the Portfolio Purchase on the first $500 million and 7% on substantially all collections from
the Portfolio Purchase in excess of $500 million. Additionally, the Company pays this servicer a
monthly fee of $275,000 for twenty-five months commencing May 2007 for its consulting, asset
identification and skiptracing efforts in connection with the Portfolio Purchase. The monthly
service fee ends in May 2009. This servicer also receives a servicing fee with respect to those
accounts it actually subservices. As the fees due to this servicer for management and subservicing
functions and the amounts spent for court costs were higher than those initially contemplated for
subservicing functions, and as start-up collections with respect to the Portfolio Purchase were
slower than initially projected, the amounts owed to the servicer with respect to the Portfolio
Purchase for fees and advances for court costs to pursue litigation against debtors exceeded
amounts available to pay the servicer from collections received by the servicer on the Portfolio
Purchase. The Company considered the effects of these trends on portfolio valuation.
Rather than waiting for collections from the Portfolio Purchase to satisfy sums of
approximately $8.2 million due it for court cost advances and its fees, this servicer set-off that
amount against amounts it had collected on behalf of the Company with respect to the Bank Group
Collateral. While the servicer disagrees, the Company believes that those sums should have been
remitted to the Bank Group without setoff.
The Company determined to remedy any shortfall in the receipts due to the Bank Group by
obtaining the $8.2 million subordinated loan from the Family Entity and causing the proceeds of the
loan to be delivered to the Bank Group and not to pursue a dispute with the servicer at that time.
The Company believed that avoiding a dispute with this servicer was in its best interests. On
April 29, 2008, the Company entered into a letter agreement with the Bank Group in which the Bank
Group consented to the Subordinated Loan from the Family Entity. On January 18, 2009, the Company
entered into amended agreements with this servicer pursuant to which the Servicer agreed that it
will not make any further setoffs against collections. The Company believes that any future sums
due to this servicer will be available from the cash flow of the Portfolio Purchase.
32
On February 20, 2009, the Company entered into the Seventh Amendment to the Credit Facility in
order to, among other items, reduce the level of the loan commitment, redefine certain financial
covenant ratios, revise the requirement for an unqualified opinion on annual audited financial
statements, and permit certain encumbrances relating to restructuring of the BMO Facility. Pursuant
to the Seventh Amendment, the loan commitment has been revised down from $175.0 million to the
following schedule: (1) $90.0 million until March 30, 2009, (2) $85.0 million from March 31, 2009
through June 29, 2009, and (3) $80.0 million from June 30, 2009 and thereafter. In addition, the
Company shall pay interest to the Bank Group at the following rates: the lesser of LIBOR plus an
applicable margin or the prime rate plus an applicable margin per annum or, at the election of the
Company, the applicable LIBOR Rate plus the Applicable LIBOR Margin per annum, based on the
aggregate Advances outstanding from time to time; provided, however, at no time shall the interest
rate be less than five hundred (500) basis points per annum. Beginning with the fiscal year ending
September 30, 2008 (and for each period included in calculating fixed charge coverage ratio for the
fiscal year ending September 30, 2008) and continuing thereafter for each reporting period
thereafter (and for each period included in calculating fixed charge coverage ratio for such
reporting period), EBITDA and fixed charges attributable to Palisades XVI shall be excluded from
the computation of the fixed charge coverage ratio for Asta Funding and its Subsidiaries. In
addition, the fixed charge coverage has been revised to exclude impairment expense of portfolios of
consumer receivables acquired for liquidation and increase the ratio from a minimum of 1.50 to 1.0
to a minimum of 1.75 to 1.0. In addition, the Seventh Amendment provides that a qualification on
the Companys audited financial statements, as consolidated, resulting solely from the Bank Group
maturity date being scheduled to occur in less than one year shall not be deemed to violate the
Credit Agreement. The permitted encumbrances under the Credit Agreement were revised to include
certain encumbrances incurred by the Company in connection with certain guarantees and liens
provided to BMO Facility and the Family Entity. Further, individual portfolio purchases in excess
of $7.5 million will now require the consent of the agent and portfolio purchases in excess of
$15.0 million in the aggregate during any 120 day period will require the consent of the Bank
Group. The Company and the Bank Group are in the beginning phase of discussions to renew the
current Loan Agreement. If, however, a renewal cannot be ultimately agreed to, the Company, at
maturity, will consider the sale of assets collateralized by this loan agreement, to satisfy its
obligations after July 11, 2009.
As a result of the actual collections being lower than the minimum collection rates required
under the Receivables Financing Agreement for the months ended November 30, 2008, December 31, 2008
and January 31, 2009, termination events occurred under the terms of the Receivable Financing
Agreement. In order to resolve these issues, on February 20, 2009, the Company executed the Fourth
Amendment to the Receivables Financing Agreement with BMO. The effect of this Fourth Amendment is,
among other things, to (i) lower the collection rate minimum to $1 million per month (plus interest
and fees) as an average for each period of three consecutive months, (ii) provide for an automatic
extension of the maturity date from April 30, 2011 to April 30, 2012 should the outstanding balance
be reduced to $25 million or less by April 30, 2011 and (iii) permanently waive the termination
events. The interest rate will remain unchanged at approximately 320 basis points over LIBOR,
subject to automatic reduction in the future should certain collection milestones be attained.
As additional credit support for repayment by Palisades XVI of its obligations under the
Receivables Financing Agreement and as an inducement for BMO to enter into the Fourth Amendment,
the Company offered BMO a limited recourse, subordinated guaranty, secured by the assets of the
Company, in an amount not to exceed $8 million plus reasonable costs of enforcement and collection.
Under the terms of the guaranty, BMO cannot exercise any recourse against the Company until the
earlier of (i) five years from the date of the Fourth Amendment and (ii) the termination of the
Companys existing senior lending facility or any successor senior facility.
In addition, as further credit support under the Receivables Financing Agreement, the Family
Entity offered BMO a limited recourse, subordinated guaranty, secured solely by a collateral
assignment of $700,000 of the $8.2 million subordinated note executed by the Company for the
benefit of the Family Entity. The subordinated note was separated into a $700,000 note and a
$7.5 million note for such purpose. Under the terms of the guaranty, except upon the occurrence of
certain termination events, BMO cannot exercise any recourse against the Family Entity until the
occurrence of a termination event under the Receivables Financing Agreement and an undertaking of
reasonable efforts to dispose of Palisades XVIs assets. As an inducement for agreeing to make such
collateral assignment, the Family Entity was also granted a subordinated guaranty by the Company
(other than Asta Funding, Inc.) for the performance by Asta Funding, Inc. of its obligation to
repay the $8.2 million, secured by the assets of the Company (other than Asta Funding, Inc.), and
the Company agreed to indemnify the Family Entity to the extent that BMO exercises recourse in
connection with the collateral assignment. Without the consent of the agent under the senior
lending facility, the Family Entity will not be permitted to act on such guaranty, and cannot
receive payment under such indemnity, until the termination of the Companys senior lending
facility or lenders under any successor senior facility. As a result of the Companys current
capital structure and their interrelated components, it may be difficult to obtain new financing.
As of March 31, 2009, our cash decreased $1.0 million to $2.6 million, down from $3.6 million
at September 30, 2008, including a $62,000 positive effect of foreign exchange on cash. The
decrease in cash was the result of an increase in net cash used in financing activities partially
offset by an increase in net cash provided by investing and operating activities.
33
Net cash provided by operating activities was $11.6 million during the six month period ended
March 31, 2009, compared to $30.1 million for the six months ended March 31, 2008. The decrease in
net cash provided by operating activities is primarily attributable to lower net income (excluding
impairments, a non-cash item), and lower income taxes payable during the six months
ended March 31, 2009 compared to the same prior year period. Net cash provided by investing
activity was $41.3 million during the six months ended March 31, 2009 compared to $0.9 million used
in investing activities for the six months ended March 31, 2008, almost entirely a reflection of
the decrease in new portfolio purchases from $41.3 million during the six months ended March 31,
2008 to $2.7 million during the same current year period. Net cash used in financing activities
increased to $53.9 million for the six months ended March 31, 2009 from $30.1 million for the same
prior year period. The increase reflects the continuation of reducing debt. In addition, there
has been a decrease in portfolio purchases.
The following tables summarize the changes in the balance sheet of the investment in
receivable portfolios during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2009 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
203,470,000 |
|
|
$ |
245,542,000 |
|
|
$ |
449,012,000 |
|
Acquisitions of receivable portfolios, net |
|
|
2,681,000 |
|
|
|
7,000 |
|
|
|
2,688,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(51,463,000 |
) |
|
|
(20,853,000 |
) |
|
|
(72,316,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(3,075,000 |
) |
|
|
(3,572,000 |
) |
|
|
(6,647,000 |
) |
Transfer to cost recovery |
|
|
(10,128,000 |
) |
|
|
10,128,000 |
|
|
|
|
|
Impairments |
|
|
(39,844,000 |
) |
|
|
|
|
|
|
(39,844,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
(1,190,000 |
) |
|
|
(1,190,000 |
) |
Finance income recognized (1) |
|
|
35,856,000 |
|
|
|
664,000 |
|
|
|
36,520,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
137,497,000 |
|
|
$ |
230,726,000 |
|
|
$ |
368,223,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
65.7 |
% |
|
|
2.7 |
% |
|
|
46.2 |
% |
|
|
|
(1) |
|
Includes $20.6 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2008 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
508,515,000 |
|
|
$ |
37,108,000 |
|
|
$ |
545,623,000 |
|
Acquisitions of receivable portfolios, net |
|
|
20,155,000 |
|
|
|
21,152,000 |
|
|
|
41,307,000 |
|
Net cash collections from collection of
consumer receivables acquired for
liquidation |
|
|
(87,703,000 |
) |
|
|
(7,330,000 |
) |
|
|
(95,033,000 |
) |
Net cash collections represented by account
sales of consumer receivables acquired for
liquidation (1) |
|
|
(12,654,000 |
) |
|
|
|
|
|
|
(12,654,000 |
) |
Impairments |
|
|
(35,000,000 |
) |
|
|
|
|
|
|
(35,000,000 |
) |
Finance income recognized (2) |
|
|
67,310,000 |
|
|
|
703,000 |
|
|
|
68,013,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
460,623,000 |
|
|
$ |
51,633,000 |
|
|
$ |
512,256,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
67.1 |
% |
|
|
9.6 |
% |
|
|
63.2 |
% |
|
|
|
(1) |
|
Includes the put back of a portfolio purchased and returned to the seller
in the amount of $2.8 million in the first quarter of fiscal 2008. |
|
(2) |
|
Includes $23.9 million derived from fully amortized interest method pools. |
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2009 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
166,432,000 |
|
|
$ |
237,376,000 |
|
|
$ |
403,808,000 |
|
Acquisitions of receivable portfolios, net |
|
|
1,603,000 |
|
|
|
7,000 |
|
|
|
1,610,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(25,090,000 |
) |
|
|
(10,971,000 |
) |
|
|
(36,061,000 |
) |
Net cash collections represented by account
sales of consumer receivables acquired for
liquidation |
|
|
(727,000 |
) |
|
|
(147,000 |
) |
|
|
(874,000 |
) |
Transfer to cost recovery |
|
|
(3,979,000 |
) |
|
|
3,979,000 |
|
|
|
|
|
Impairments |
|
|
(18,429,000 |
) |
|
|
|
|
|
|
(18,429,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
65,000 |
|
|
|
65,000 |
|
Finance income recognized (1) |
|
|
17,687,000 |
|
|
|
417,000 |
|
|
|
18,104,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
137,497,000 |
|
|
$ |
230,726,000 |
|
|
$ |
368,223,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
68.5 |
% |
|
|
3.8 |
% |
|
|
49.0 |
% |
|
|
|
(1) |
|
Includes approximately $10.5 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2008 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
509,580,000 |
|
|
$ |
49,794,000 |
|
|
$ |
559,374,000 |
|
Acquisitions of receivable portfolios, net |
|
|
239,000 |
|
|
|
3,559,000 |
|
|
|
3,798,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(42,807,000 |
) |
|
|
(2,124,000 |
) |
|
|
(44,931,000 |
) |
Net cash collections represented by account
sales of consumer receivables acquired for
liquidation |
|
|
(4,863,000 |
) |
|
|
|
|
|
|
(4,863,000 |
) |
Impairments |
|
|
(35,000,000 |
) |
|
|
|
|
|
|
(35,000,000 |
) |
Finance income recognized (1) |
|
|
33,474,000 |
|
|
|
404,000 |
|
|
|
33,878,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
460,623,000 |
|
|
$ |
51,633,000 |
|
|
$ |
512,256,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
70.2 |
% |
|
|
19.0 |
% |
|
|
68.0 |
% |
|
|
|
(1) |
|
Includes $12.2 million derived from fully amortized interest method pools. |
Supplementary Information:
We do not anticipate collecting the majority of the purchased principal amounts.
Accordingly, the difference between the carrying value of the portfolios and the gross receivables
is not indicative of future revenues from these accounts acquired for liquidation. Since we
purchased these accounts at significant discounts, we anticipate collecting only a small portion of
the face amounts. During the six months ended March 31, 2009, we purchased portfolios with a face
value of $91.5 million for an aggregate purchase price of $2.7 million.
35
The Company accounts for its investment in finance receivables using the interest method under
the guidance of American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) 03-3, Accounting for Loans or Certain Securities Acquired in a Transfer. Practice
Bulletin 6 was amended by SOP 03-3 as described further. Under the guidance of SOP 03-3 (and the
amended Practice Bulletin 6), static pools of accounts are established. These pools are aggregated
based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as
a single unit for the recognition of income, principal payments and loss provision. Once a static
pool is established for a quarter, individual receivable accounts are not added to the pool (unless
replaced by the seller) or removed from the pool (unless sold or returned to the seller). SOP 03-3
(and the amended Practice Bulletin 6) requires that the excess of the contractual cash flows over
expected cash flows not be recognized as an adjustment of revenue or expense or on the balance
sheet. The SOP initially freezes the internal rate of return, referred to as IRR, estimated when
the accounts receivable are purchased as the basis for subsequent impairment testing. Significant
increases in actual, or expected future cash flows may be recognized prospectively through an
upward adjustment of the IRR over a portfolios remaining life. Any increase to the IRR then
becomes the new benchmark for impairment testing. Under SOP 03-3 and the amended Practice Bulletin
6, rather than lowering the estimated IRR if the collection estimates are not received or projected
to be received, the carrying value of a pool would be written down to maintain the then current
IRR. Income on finance receivables is earned based on each static pools effective IRR. Under the
interest method, income is recognized on the effective yield method based on the actual cash
collected during a period and future estimated cash flows and timing of such collections and the
portfolios cost. Revenue arising from collections in excess of anticipated amounts attributable to
timing differences is deferred. The estimated future cash flows are reevaluated quarterly.
Collections Represented by Account Sales
|
|
|
|
|
|
|
|
|
|
|
Collections |
|
|
|
|
|
|
Represented |
|
|
Finance |
|
|
|
By Account |
|
|
Income |
|
Period |
|
Sales |
|
|
Earned |
|
Six months ended March 31, 2009 |
|
$ |
6,647,000 |
|
|
$ |
1,791,000 |
|
Three months ended March 31, 2009 |
|
$ |
874,000 |
|
|
$ |
418,000 |
|
Six months ended March 31, 2008 |
|
$ |
12,654,000 |
|
|
$ |
5,179,000 |
|
Three months ended March 31, 2008 |
|
$ |
4,863,000 |
|
|
$ |
2,826,000 |
|
Portfolio Performance (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated |
|
|
|
|
|
|
|
Cash Collections |
|
|
Estimated |
|
|
Total |
|
|
Collections as a |
|
|
|
Purchase |
|
|
Including Cash |
|
|
Remaining |
|
|
Estimated |
|
|
Percentage of |
|
Purchase Period |
|
Price (2) |
|
|
Sales (3) |
|
|
Collections (4) |
|
|
Collections (5) |
|
|
Purchase Price |
|
2001 |
|
$ |
65,120,000 |
|
|
$ |
105,391,000 |
|
|
|
|
|
|
$ |
105,391,000 |
|
|
|
162 |
% |
2002 |
|
|
36,557,000 |
|
|
|
47,921,000 |
|
|
|
|
|
|
|
47,921,000 |
|
|
|
131 |
% |
2003 |
|
|
115,626,000 |
|
|
|
207,805,000 |
|
|
$ |
1,967,000 |
|
|
|
209,772,000 |
|
|
|
181 |
% |
2004 |
|
|
103,743,000 |
|
|
|
175,948,000 |
|
|
|
1,322,000 |
|
|
|
177,270,000 |
|
|
|
171 |
% |
2005 |
|
|
126,023,000 |
|
|
|
194,724,000 |
|
|
|
29,843,000 |
|
|
|
224,567,000 |
|
|
|
178 |
% |
2006 |
|
|
163,392,000 |
|
|
|
218,991,000 |
|
|
|
55,140,000 |
|
|
|
274,131,000 |
|
|
|
168 |
% |
2007 |
|
|
109,235,000 |
|
|
|
68,921,000 |
|
|
|
78,521,000 |
|
|
|
147,442,000 |
|
|
|
135 |
% |
2008 |
|
|
25,622,000 |
|
|
|
21,926,000 |
|
|
|
15,971,000 |
|
|
|
37,897,000 |
|
|
|
148 |
% |
2009 |
|
|
2,681,000 |
|
|
|
813,000 |
|
|
|
2,804,000 |
|
|
|
3,617,000 |
|
|
|
135 |
% |
|
|
|
(1) |
|
Total collections do not represent full collections of the Company with respect to this or any other year. |
|
(2) |
|
Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase price
refunded by a seller due to the return of non-compliant accounts (also defined as put-backs). |
|
(3) |
|
Net cash collections include: net collections from our third-party collection agencies and attorneys, net
collections from our in-house efforts and collections represented by account sales. |
|
(4) |
|
Does not include estimated collections from portfolios that are zero bases. |
|
(5) |
|
Total estimated collections refers to the actual net cash collections, including cash sales, plus
estimated remaining net collections. |
36
Recent Accounting Pronouncements
In April 2009 the
FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments, (FSP 107-1). FSP 107-1 expands disclosures for fair
value of financial instruments that are within the scope of FASB statement
number 107 (SFAS 107) and now requires the FAS 107 fair value disclosures in
interim period reports. The FSP is effective for interim reporting periods ending after
June 15, 2009.
In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin 110 (SAB 110). This staff accounting bulletin (SAB) expresses the views of the staff
regarding the use of a simplified method, as discussed in SAB No. 107 (SAB 107), in developing
an estimate of expected term of plain vanilla share options in accordance with Financial
Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment .
In particular, the staff indicated in SAB 107 that it will accept a companys election to use the
simplified method, regardless of whether the company has sufficient information to make more
refined estimates of expected term. At the time SAB 107 was issued, the staff believed that more
detailed external information about employee exercise behavior (e.g., employee exercise patterns by
industry and/or other categories of companies) would, over time, become readily available to
companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the
simplified method for share option grants after December 31, 2007. The staff understands that such
detailed information about employee exercise behavior might not have been widely available by
December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the
use of the simplified method beyond December 31, 2007. This SAB does not have a material impact on
the Company.
In February 2007, the FASB issued Statement 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159). The objective of SFAS No. 159 is to provide companies
with the option to recognize most financial assets and liabilities and certain other items at fair
value. Statement 159 will allow companies the opportunity to mitigate earnings volatility caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting. Unrealized gains and losses on items for which the fair value option has been elected
should be reported in earnings. The fair value option election is applied on an instrument by
instrument basis (with some exceptions), is irrevocable, and is applied to an entire instrument.
The election may be made as of the date of initial adoption for existing eligible items. Subsequent
to initial adoption, the Company may elect the fair value option at initial recognition of eligible
items or on entering into an eligible firm commitment. The Company can only elect the fair value
option after initial recognition in limited circumstances.
SFAS No. 159 requires similar assets and liabilities for which the Company has elected the
fair value option to be displayed on the face of the balance sheet either (a) together with
financial instruments measured using other measurement attributes with parenthetical disclosure of
the amount measured at fair value or (b) in separate line items. In addition, SFAS No. 159 requires
additional disclosures to allow financial statement users to compare similar assets and liabilities
measured differently either within the financial statements of the Company or between financial
statements of different companies.
SFAS No. 159 was required to be adopted by the Company on October 1, 2008. Early adoption was
permitted; however, the Company did not adopt SFAS No. 159 prior to the required adoption date of
October 1, 2008. The Company is required to adopt SFAS No. 159 concurrent with SFAS No. 157, Fair
Value Measurements. The remeasurement to fair-value will be reported as a cumulative-effect
adjustment in the opening balance of retained earnings. Additionally, any changes in fair value due
to the concurrent adoption of SFAS No. 157 will be included in the cumulative-effect adjustment if
the fair value option is also elected for that item.
The Company opted to not apply the fair value option to any of its financial assets or
liabilities. If the Company elects to recognize items at fair value as a result of Statement 159,
this could result in increased earnings volatility.
In September 2006 the FASB issued SFAS No. 157, Fair Value Measurements. Effective October 1,
2008, the Company adopted SFAS No. 157. The Statement defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. The adoption of SFAS No. 157 did not impact the
Companys financial reporting or disclosure requirements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various types of market risk in the normal course of business, including the
impact of interest rate changes and changes in corporate tax rates. A material change in these
rates could adversely affect our operating results and cash flows. At March 31, 2009, our Credit
Facility and our Receivable Financing Agreement, all of which is variable debt, had an outstanding
balance of $44.8 million and $115.3 million, respectively. A 25 basis-point increase in interest
rates would have increased our interest expense for the six month period ended March 31, 2009 by
approximately $230,000 based on the average debt outstanding during the period. We do not currently
invest in derivative financial or commodity instruments.
Item 4. Controls and Procedures
a. Disclosure Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an
evaluation, with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures are effective in
ensuring that information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms.
37
b. |
|
Changes in Internal Controls Over Financial Reporting. |
During the second quarter of fiscal year 2009, the Company upgraded the system through
which it records, reports and stores data relative to cash receipts. Additional controls were added
to streamline the process. The system was tested by management and there were no material
weaknesses noted during testing.
There have been no other changes in our internal controls over financial reporting that
occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of our business, we are involved in numerous legal proceedings. We
regularly initiate collection lawsuits, using our network of third party law firms, against
consumers. Also, consumers occasionally initiate litigation against us, in which they allege that
we have violated a federal or state law in the process of collecting their account. We do not
believe that these ordinary course matters are material to our business and financial condition. As
of the date of this Form 10-Q, we were not involved in any material litigation in which we were a
defendant.
Item 1A. Risk Factors
There were no material changes in any risk factors previously disclosed in the Companys
Report on Form 10-K filed with the Securities & Exchange Commission on February 20, 2009, or the
Report on Form 10-K/A filed with the Securities & Exchange Commission on March 13, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on March 31, 2009. At that meeting, the
following matter was voted on and received the votes indicated:
|
|
|
|
|
|
|
|
|
|
|
Authority |
|
Election of Directors |
|
For |
|
|
Withheld |
|
Gary Stern |
|
|
11,662,899 |
|
|
|
267,576 |
|
Arthur Stern |
|
|
11,593,068 |
|
|
|
337,407 |
|
Herman Badillo |
|
|
11,561,102 |
|
|
|
369,373 |
|
David Slackman |
|
|
11,707,889 |
|
|
|
222,586 |
|
Edward Celano |
|
|
11,674,951 |
|
|
|
255,524 |
|
Harvey Leibowitz |
|
|
11,714,194 |
|
|
|
216,281 |
|
Louis A. Piccolo |
|
|
11,713,530 |
|
|
|
216,530 |
|
Ratification of Grant Thornton LLP as the Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For |
|
|
Against |
|
|
Abstain |
|
|
Broker non-vote |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Thornton LLP |
|
|
11,878,261 |
|
|
|
45,025 |
|
|
|
7,195 |
|
|
|
0 |
|
Item 5. Other Information
None.
38
Item 6. Exhibits
(a) Exhibits
|
|
|
|
|
|
31.1 |
|
|
Certification of the Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Registrants Chief Financial Officer, Robert J.
Michel, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of the Registrants Chief Financial Officer, Robert J.
Michel, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
39
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.
|
|
|
|
|
|
|
|
|
ASTA FUNDING, INC. |
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
|
|
Date: May 8, 2009
|
|
By:
|
|
/s/ Gary Stern
Gary Stern, Chairman, President,
|
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
Date: May 8, 2009
|
|
By:
|
|
/s/ Robert J. Michel
Robert J. Michel, Chief Financial Officer
|
|
|
|
|
|
|
(Principal Financial Officer and |
|
|
|
|
|
|
Principal Accounting Officer) |
|
|
40
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
|
|
31.1 |
|
|
Certification of the Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Registrants Chief Financial Officer, Robert
J. Michel, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of the Registrants Chief Financial Officer, Robert
J. Michel, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
41