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, 2007
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 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.
Large accelerated filer o Accelerated filer þ Non-accelerated filer 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 9, 2007, the registrant had 13,903,158 common shares outstanding.
ASTA FUNDING, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
1
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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2007 |
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2006 |
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(Unaudited) |
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Assets |
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Cash |
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$ |
6,769,000 |
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$ |
7,826,000 |
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Consumer receivables acquired for liquidation (at net realizable value) |
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563,734,000 |
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257,275,000 |
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Due from third party collection agencies and attorneys |
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3,567,000 |
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3,062,000 |
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Investment in venture |
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4,015,000 |
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5,965,000 |
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Furniture and equipment, net |
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1,080,000 |
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1,101,000 |
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Deferred income taxes |
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12,616,000 |
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7,577,000 |
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Other assets |
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10,237,000 |
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5,034,000 |
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Total assets |
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$ |
602,018,000 |
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$ |
287,840,000 |
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Liabilities And Stockholders Equity
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Liabilities |
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Debt |
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$ |
377,162,000 |
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$ |
82,811,000 |
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Other liabilities |
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4,268,000 |
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4,338,000 |
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Dividends payable |
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556,000 |
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6,052,000 |
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Income taxes payable |
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10,344,000 |
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10,377,000 |
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Total liabilities |
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392,330,000 |
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103,578,000 |
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Stockholders Equity |
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Preferred stock, $.01 par value; authorized 5,000,000; issued
and outstanding none |
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Common stock, $.01 par value; authorized 30,000,000 shares; issued
and outstanding 13,903,158 at March 31, 2007 and 13,755,157
at September 30, 2006 |
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138,000 |
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138,000 |
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Additional paid-in capital |
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64,458,000 |
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61,803,000 |
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Retained earnings |
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145,092,000 |
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122,321,000 |
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Total stockholders equity |
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209,688,000 |
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184,262,000 |
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Total liabilities and stockholders equity |
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$ |
602,018,000 |
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$ |
287,840,000 |
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See accompanying notes to condensed consolidated financial statements
2
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, 2007 |
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March 31, 2006 |
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March 31, 2007 |
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March 31, 2006 |
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Revenue: |
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Finance income, net |
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$ |
32,353,000 |
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$ |
24,829,000 |
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$ |
57,294,000 |
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$ |
45,089,000 |
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Other income |
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255,000 |
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459,000 |
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Equity in earnings of venture |
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475,000 |
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975,000 |
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33,083,000 |
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24,829,000 |
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58,728,000 |
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45,089,000 |
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Expenses: |
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General and administrative |
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5,790,000 |
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4,848,000 |
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10,878,000 |
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8,800,000 |
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Interest |
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3,779,000 |
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1,302,000 |
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5,298,000 |
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1,965,000 |
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Impairments |
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2,412,000 |
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2,412,000 |
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11,981,000 |
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6,150,000 |
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18,588,000 |
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10,765,000 |
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Income before income tax expense |
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21,102,000 |
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18,679,000 |
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40,140,000 |
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34,324,000 |
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Income tax expense |
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8,550,000 |
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7,576,000 |
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16,262,000 |
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13,909,000 |
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Net income |
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$ |
12,552,000 |
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$ |
11,103,000 |
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$ |
23,878,000 |
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$ |
20,415,000 |
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Net income per share: |
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Basic |
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$ |
0.91 |
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$ |
0.82 |
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$ |
1.73 |
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$ |
1.50 |
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Diluted |
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$ |
0.85 |
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$ |
0.76 |
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$ |
1.63 |
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$ |
1.40 |
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Weighted average number
of common shares
outstanding: |
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Basic |
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13,848,194 |
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13,608,994 |
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13,772,538 |
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13,603,485 |
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Diluted |
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14,744,499 |
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14,604,636 |
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14,647,556 |
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14,583,252 |
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See accompanying notes to condensed consolidated financial statements
3
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
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Additional |
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Common Stock |
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Paid-in |
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Retained |
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Shares |
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Amount |
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Capital |
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Earnings |
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Total |
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Balance, September 30, 2006 |
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13,755,157 |
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$ |
138,000 |
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$ |
61,803,000 |
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$ |
122,321,000 |
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$ |
184,262,000 |
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Exercise of
stock options |
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80,001 |
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1,207,000 |
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1,207,000 |
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Restricted
stock granted |
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68,000 |
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0 |
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Stock based compensation expense |
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768,000 |
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768,000 |
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Excess tax benefit
arising from exercise of non-qualified stock options and vesting of
restricted stock |
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680,000 |
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680,000 |
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Dividends
declared |
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(1,107,000 |
) |
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(1,107,000 |
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Net income |
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23,878,000 |
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23,878,000 |
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Balance, March 31, 2007 |
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13,903,158 |
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$ |
138,000 |
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$ |
64,458,000 |
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$ |
145,092,000 |
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$ |
209,688,000 |
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See accompanying notes to condensed consolidated financial statements
4
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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Six Months Ended |
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March 31, 2007 |
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March 31, 2006 |
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Cash flows from operating activities: |
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Net income |
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$ |
23,878,000 |
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$ |
20,415,000 |
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Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation and amortization |
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201,000 |
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264,000 |
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Deferred income taxes |
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(5,039,000 |
) |
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Impairments of consumer receivable acquired for liquidation |
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2,412.000 |
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Equity in earnings of venture |
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(975,000 |
) |
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Cash distribution from venture |
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975,000 |
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Stock based compensation |
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768,000 |
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Changes in: |
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Due from third party collection agencies and attorneys |
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(505,000 |
) |
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(1,405,000 |
) |
Income taxes payable |
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(33,000 |
) |
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6,678,000 |
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Other assets |
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(2,295,000 |
) |
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(116,000 |
) |
Other liabilities |
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(70,000 |
) |
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(1,812,000 |
) |
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Net cash provided by operating activities |
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19,317,000 |
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24,024,000 |
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Cash flows from investing activities: |
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Purchase of consumer receivables acquired for liquidation |
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(386,682,000 |
) |
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(121,188,000 |
) |
Principal collected on receivables acquired for liquidation |
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61,324,000 |
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44,649,000 |
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Principal collected on receivable accounts represented by
account sales |
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16,487,000 |
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12,060,000 |
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Acquisition of businesses, net of cash acquired |
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(1,406,000 |
) |
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Cash distributions from venture |
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1,950,000 |
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Purchase of other investments |
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(5,771,000 |
) |
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Collections on other investments |
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2,788,000 |
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Capital expenditures |
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(105,000 |
) |
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(213,000 |
) |
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Net cash used in investing activities |
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(310,009,000 |
) |
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(66,098,000 |
) |
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Cash flows from financing activities: |
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Proceeds from exercise of options |
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1,207,000 |
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|
291,000 |
|
Excess tax benefit
arising from exercise of non-qualified stock options and vesting of
restricted stock |
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|
680,000 |
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|
|
|
Dividends paid |
|
|
(6,603,000 |
) |
|
|
(1,020,000 |
) |
Advances under lines of credit, net |
|
|
294,351,000 |
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|
42,715,000 |
|
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Net cash provided by financing activities |
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|
289,635,000 |
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|
|
41,986,000 |
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Decrease in cash |
|
|
(1,057,000 |
) |
|
|
(88,000 |
) |
Cash at the beginning of period |
|
|
7,826,000 |
|
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|
4,059,000 |
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Cash at end of period |
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$ |
6,769,000 |
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$ |
3,971,000 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period |
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Interest |
|
$ |
3,588,000 |
|
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$ |
1,820,000 |
|
Income taxes |
|
$ |
20,655,000 |
|
|
$ |
7,146,000 |
|
See accompanying notes to condensed consolidated financial statements.
5
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 subsidiaries, is engaged in the business of
purchasing, managing and servicing non-performing and distressed consumer receivables.
Non-performing consumer receivables are the obligations of individuals that have incurred credit
impairment either at the time the obligation was originated or subsequent to origination.
Distressed consumer receivables are the unpaid debts of individuals to banks, finance companies and
other credit providers. A large portion of our distressed consumer receivables are MasterCard®,
Visa®, other credit card accounts and telecommunication accounts which were charged-off by the
issuers for non-payment. We acquire these portfolios at substantial discounts from their
contractual amounts based on certain characteristics (issuer, average 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, 2007 and the consolidated balance
sheets as of September 30, 2006, (the September 30, 2006 financial information included in this
report has been extracted from our audited financial statements included in our Annual Report on
Form 10-K), the condensed consolidated statements of operations for the six and three month periods ended
March 31, 2007 and 2006, the condensed consolidated statement of stockholders equity as of March
31, 2007 and the condensed consolidated statements of cash flows for the six month periods ended March 31,
2007 and 2006, have been prepared by us without an audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to present fairly our
financial position at March 31, 2007 and September 30, 2006, the results of operations for the six
and three month periods ended March 31, 2007 and 2006 and cash flows for the six month periods
ended March 31, 2007 and 2006 have been made. The results of operations for the six and three month
periods ended March 31, 2007 and 2006 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 footnote disclosures required under generally
accepted accounting principles. We suggest that these financial statements be read in conjunction
with the financial statements and notes thereto included in our Annual Report on Form 10-K for the
fiscal year ended September 30, 2006 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 the amount and timing of future cash flows and the allocation of collections between principal and
interest resulting therefrom.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of
FASB Statement No. 115, this Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve financial reporting
by providing entities with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the use of fair value measurement,
which is consistent with the Boards long-term measurement objectives for accounting for financial
instruments. This Statement is effective as of the beginning of the Companys fiscal year that
begins October 1, 2008. The Company believes that the statement, when adopted, will not impact the
Company.
6
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 1: Business and Basis of Presentation (Continued)
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 was issued in order to eliminate the diversity in practice
surrounding how public companies quantify financial statement misstatements. SAB 108 requires that
registrants quantify errors using both a balance sheet and income statement approach and evaluate
whether either approach results in a misstated amount that, when all relevant quantitative and
qualitative factors are considered, is material. SAB 108 became effective for the Company in the
current fiscal year. Adoption had no material impact on the Company.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does not require any new
fair value measurements. FASB Statement No. 157 will be effective for our financial statements
issued for our fiscal year beginning October 1, 2008. We do not expect the adoption of FASB
Statement No. 157 to have a material impact on our financial reporting, and we are currently
evaluating the impact, if any, the adoption of FASB Statement No. 157 will have on our disclosure
requirements.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for our fiscal year beginning October 1, 2007.
We do not expect the adoption of FIN 48 to have a material impact on our financial reporting and
disclosure.
Note 2: Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its
wholly 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.
7
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation
Accounts acquired for liquidation are stated at their net realizable value and consist mainly
of defaulted consumer loans to individuals throughout the country.
Prior to October 1, 2005, the Company accounted for its investment in finance receivables
using the interest method under the guidance of Practice Bulletin 6, Amortization of Discounts on
Certain Acquired Loans. Effective October 1, 2005, the Company adopted and began to account 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 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. Effective for fiscal years beginning October 1,
2005 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. If cash collections increase subsequent to
recording an impairment, reversal of the previously recognized impairment(s) is made prior to any
increase to the IRR. No impairments were recorded in the three month period ended December 31,
2006. Impairments on three portfolios of receivables totaling
approximately $2.4 million were recorded in the
second quarter of fiscal year 2007. No impairments were recorded in the three and six month periods ended March 31, 2006. 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. 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. Additionally, the Company uses the cost recovery method when collections on a particular
pool of accounts cannot be reasonably predicted.
We account for our investments in consumer receivable portfolios, using either:
|
|
|
the interest method; or |
|
|
|
|
the cost recovery method. |
Our
extensive liquidating experience is in the field of distressed
credit card receivables, telecom receivables, consumer loan receivables, retail installment
contracts, mixed consumer receivables, and auto deficiency
receivables.
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 where 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 in which we believe we have requisite expertise
and experience, we are more likely to utilize the interest method to account for such purchases.
8
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
The Company accounted for its investment in finance receivables using the interest method
under the guidance of Practice Bulletin 6. Each purchase was treated as a separate portfolio of
receivables and was considered a separate financial investment, and accordingly we did not
aggregate such loans under Practice Bulletin 6 as the underlying collateral had similar
characteristics. As SOP 03-3 was adopted by the Company for our fiscal year beginning October 1,
2005, we aggregate portfolios of receivables acquired sharing specific common
characteristics which were acquired within a given quarter. We currently consider 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, telecom etc.) |
We use a variety of qualitative and quantitative factors to
estimate collections and the timing thereof. Our 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 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 days since charge-off; |
|
|
|
|
payments made since charge-off; |
|
|
|
|
the credit originator and their credit guidelines; |
|
|
|
|
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 favorable and that is
factored into our cash flow analysis; |
|
|
|
|
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 |
|
|
|
|
the ability to obtain customer statements from the original issuer. |
We will obtain and utilize as appropriate input from our third party collection
agencies and attorneys, as further evidentiary matter, to assist us in evaluating and developing collection
strategies and in evaluating and modeling the expected cash flows for a given portfolio.
9
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
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, 2007 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
256,199,000 |
|
|
$ |
1,076,000 |
|
|
$ |
257,275,000 |
|
Acquisitions of receivable portfolios, net |
|
|
345,798,000 |
|
|
|
40,884,000 |
|
|
|
386,682,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(102,015,000 |
) |
|
|
(2,089,000 |
) |
|
|
(104,104,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(26,754,000 |
) |
|
|
(4,247,000 |
) |
|
|
(31,001,000 |
) |
Transfer to cost recovery (1) |
|
|
(4,478,000 |
) |
|
|
4,478,000 |
|
|
|
|
|
Impairment |
|
|
(2,412,000 |
) |
|
|
|
|
|
|
(2,412,000 |
) |
Finance income recognized |
|
|
56,007,000 |
|
|
|
1,287,000 |
|
|
|
57,294,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
522,345,000 |
|
|
$ |
41,389,000 |
|
|
$ |
563,734,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
43.5 |
% |
|
|
20.3 |
% |
|
|
42.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2006 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
172,636,000 |
|
|
$ |
91,000 |
|
|
$ |
172,727,000 |
|
Acquisitions of receivable portfolios, net |
|
|
121,188,000 |
|
|
|
|
|
|
|
121,188,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(73,470,000 |
) |
|
|
(2,022,000 |
) |
|
|
(75,492,000 |
) |
Net cash
collections represented by account sales of consumer receivables acquired for liquidation |
|
|
(26,071,000 |
) |
|
|
(235,000 |
) |
|
|
(26,306,000 |
) |
Transferred to cost recovery |
|
|
(529,000 |
) |
|
|
529,000 |
|
|
|
|
|
Finance income recognized |
|
|
43,067,000 |
|
|
|
2,022,000 |
|
|
|
45,089,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
236,821,000 |
|
|
$ |
385,000 |
|
|
$ |
237,206,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
43.3 |
% |
|
|
89.6 |
% |
|
|
44.3 |
% |
(1) Represents a portfolio acquired during the three months ended
December 31, 2006 which the Company is presently negotiating to return to the seller.
10
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2007 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
281,852,000 |
|
|
$ |
3,671,000 |
|
|
$ |
285,523,000 |
|
Acquisitions of receivable portfolios, net |
|
|
288,224,000 |
|
|
|
36,191,000 |
|
|
|
324,415,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(60,765,000 |
) |
|
|
(1,461,000 |
) |
|
|
(62,226,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(11,825,000 |
) |
|
|
(2,094,000 |
) |
|
|
(13,919,000 |
) |
Transfer to cost recovery (1) |
|
|
(4,478,000 |
) |
|
|
4,478,000 |
|
|
|
|
|
Impairment |
|
|
(2,412,000 |
) |
|
|
|
|
|
|
(2,412,000 |
) |
Finance income recognized |
|
|
31,749,000 |
|
|
|
604,000 |
|
|
|
32,353,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
522,345,000 |
|
|
$ |
41,389,000 |
|
|
$ |
563,734,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
43.7 |
% |
|
|
17.0 |
% |
|
|
42.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2006 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
248,758,000 |
|
|
$ |
425,000 |
|
|
$ |
249,183,000 |
|
Acquisitions of receivable portfolios, net |
|
|
18,783,000 |
|
|
|
|
|
|
|
18,783,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(42,408.000 |
) |
|
|
(849,000 |
) |
|
|
(43,257,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(12,332,000 |
) |
|
|
|
|
|
|
(12,332,000 |
) |
Finance income recognized |
|
|
24,020,000 |
|
|
|
809,000 |
|
|
|
24,829,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
236,821,000 |
|
|
$ |
385,000 |
|
|
$ |
237,206,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
43.9 |
% |
|
|
95.3 |
% |
|
|
44.7 |
% |
(1) Represents a portfolio acquired during the three months ended
December 31, 2006 which the Company is presently negotiating to return to the seller.
11
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
As of March 31, 2007 the Company had $563,734,000 in Consumer Receivables acquired for Liquidation,
of which $522,345,000 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, 2007 (six months ending) |
|
$ |
45,915,000 |
|
September 30, 2008 |
|
|
172,085,000 |
|
September 30, 2009 |
|
|
150,343,000 |
|
September 30, 2010 |
|
|
119,497,000 |
|
September 30, 2011 |
|
|
61,674,000 |
|
September 30, 2012 |
|
|
1,118,000 |
|
|
|
|
|
Total |
|
|
550,632,000 |
|
|
|
|
|
|
Deferred revenue |
|
|
(28,287,000 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
522,345,000 |
|
|
|
|
|
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,
2007. 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, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
|
|
|
Balance at beginning of period |
|
$ |
143,800,000 |
|
|
$ |
94,022,000 |
|
|
|
|
|
|
|
|
|
|
Income recognized on finance receivables, net |
|
|
(56,007,000 |
) |
|
|
(43,067,000 |
) |
Additions representing expected revenue from purchases |
|
|
131,570,000 |
|
|
|
71,670,000 |
|
Impairments |
|
|
(423,000 |
) |
|
|
|
|
Reclassifications from nonaccretable difference |
|
|
7,931,000 |
|
|
|
31,234,000 |
|
Balance at end of period |
|
$ |
226,871,000 |
|
|
$ |
153,859,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
|
|
|
Balance at beginning of period |
|
$ |
138,966,000 |
|
|
$ |
135,306,000 |
|
|
|
|
|
|
|
|
|
|
Income recognized on finance receivables, net |
|
|
(31,749,000 |
) |
|
|
(24,020,000 |
) |
Additions representing expected revenue from
purchases |
|
|
112,146,000 |
|
|
|
11,339,000 |
|
Impairments |
|
|
(423,000 |
) |
|
|
|
|
Reclassifications from nonaccretable difference |
|
|
7,931,000 |
|
|
|
31,234,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
226,871,000 |
|
|
$ |
153,859,000 |
|
|
|
|
|
|
|
|
12
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
During the six months ended March 31, 2007, the Company purchased $9.8 billion of face value
charged-off consumer receivables at a cost of $386.7 million, including one purchase (the
Portfolio Purchase) with a face value $6.9 billion and a cost of $300 million . The acquisition
resulted in a concentration in that the Portfolio Purchase accounted for approximately 52.3% of the
consumer receivables acquired for liquidation (at net realizable value) at March 31, 2007. During the three months
ended March 31, 2007 the Company purchased $8.5 billion of face value charged-off consumer
receivables at a cost of $324.4 million. At March 31, 2007, the estimated remaining net
collections on the receivables purchased in the six months ended
March 31, 2007 are $445.7 million.
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, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Gross collections (1) |
|
$ |
192,815,000 |
|
|
$ |
145,032,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
57,710,000 |
|
|
|
43,234,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
135,105,000 |
|
|
$ |
101,798,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Gross collections (1) |
|
$ |
106,119,000 |
|
|
$ |
79,304,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
29,974,000 |
|
|
|
23,715,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
76,145,000 |
|
|
$ |
55,589,000 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross collections include: collection from third-party collection agencies and attorneys,
collections from our in-house efforts and collections represented by account sales. |
|
(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, advanced by our third party collection agencies and attorneys. |
Note 4: Investment in venture
In August 2006, the Company acquired a 25% interest in a newly formed venture for $7,810,000.
The Company accounts for its investment in the venture using the equity method. This venture is in
business to liquidate the assets of a retail business which it acquired through bankruptcy
proceedings. It is anticipated the liquidation will be completed over the next 18 to 30 months.
From its inception through March 31, 2007, the venture made distributions to the Company of $5,320,000. Subsequent to
March 31, 2007 and through May 4, 2007, the venture distributed an additional $300,000 to the
Company.
13
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5: Furniture and Equipment
Furniture and equipment consist of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006` |
|
Furniture |
|
$ |
307,000 |
|
|
$ |
307,000 |
|
Equipment |
|
|
2,668,000 |
|
|
|
2,563,000 |
|
|
|
|
|
|
|
|
|
|
|
2,975,000 |
|
|
|
2,870,000 |
|
Less accumulated depreciation |
|
|
1,895,000 |
|
|
|
1,769,000 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
1,080,000 |
|
|
$ |
1,101,000 |
|
|
|
|
|
|
|
|
Note 6: Debt
In March 2007,
Palisades Acquisition XVI, LLC (Palisades XVI), the Companys indirect wholly-owned subsidiary, closed on its definitive agreement to purchase a portfolio of
approximately $6.9 billion in face value receivables for a purchase price of $300 million plus 20%
of net payments after we recover 150% of the purchase price plus our cost of funds. The portfolio
is made up of predominantly credit card accounts and includes accounts in collection litigation and
accounts as to which the sellers have been awarded judgments and other traditional charge-offs. The
Company originally paid a $60 million deposit upon execution of the contract on February 5, 2007
and funded an additional deposit of $15 million on February 16, 2007 using its existing credit
facility, as modified on that date.
The
remaining $225 million was paid on March 5, 2007, by borrowing approximately $227 million
(inclusive of transaction costs) under a new Receivables Financing Agreement entered into by
Palisades XVI with a major financial institution as the funding source, and consists of debt with
full recourse only to Palisades XVI, bearing an interest rate of approximately 170 basis points
over LIBOR. The term of the agreement is three years. All proceeds received as a result of the net
collections from this portfolio are to be 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 will be serviced by Palisades Collection LLC, a wholly owned subsidiary of the
Company, which has engaged a subservicer for the portfolio.
On March 30,
2007 the Company entered into the Third Amendment to Fourth Amended and Restated Loan
Agreement (the Credit Agreement) with a consortium of banks that amends certain terms of the
Credit Agreement, whereby the parties agreed to a Temporary Overadvance of $16 million to be
reduced to zero on or before May 17, 2007. In addition, the parties agreed to an increase in
interest rate, to LIBOR plus 275 basis points for LIBOR loans, from 175 basis points.
The rate is subject to adjustment each quarter upon delivery of results that evidence a need for an
adjustment. As of May 7, 2007, the Temporary Overadvance was approximately $12 million. On May 10,
2007, the Company signed the Fourth Amendment to the Credit Agreement whereby the parties agreed to
revise certain terms of the agreement which eliminated the Temporary
Overadvance provision increased instead the limit on
availability for existing portfolios until October 7, 2007. See
Note 14: Subsequent Event for more information.
On July 11, 2006, the Company entered into the Fourth Amended and Restated Loan
Agreement with a consortium of banks, increasing the credit facility to $175 million, up
from $125 million with an expandable feature which allows the Company the ability to increase the
line to $225 million with the consent of the banks. The line of credit 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 line is collateralized by all portfolios of consumer receivables
acquired for liquidation 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. The term of the agreement ends July 11, 2009. The balance outstanding at March 31,
2006 was $ 160.4 million. The applicable rate at March 31, 2007 and 2006 was 7.25%. The average
interest rate excluding unused credit line fees for the six month period ended March 31, 2007 and
2006, respectively was 7.12% and 6.69%. The average rate is a combination of both applicable rates.
14
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7: Commitments and Contingencies
Employment Agreements
On January 25, 2007, the Company entered into
employment agreements (each as Employment
Agreement) with the Companys President and Chief Executive Officer, the Companys Executive Vice
President and the Companys Chief Financial Officer (each, an Executive). Each of Gary Sterns
and Mitchell Cohens Employment Agreements expire on December 31, 2009, and Arthur Sterns
Employment Agreement expires on December 31, 2007, provided, however, that the parties are required
to provide ninety days prior written notice if they do not intend to seek an extension or renewal
of the Employment Agreement. If each Employment Agreement is not renewed by the expiration dates
each executive will continue in their respective roles as officers of the Company at the discretion
of the Board of Directors.
Leases
We are 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.
Litigation
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 matters are material to our business and financial condition. As of May
7, 2007, we were not involved in any material litigation in which we were a defendant.
In the fourth quarter of fiscal year 2006, a subsidiary of the Company received subpoenas from
three jurisdictions to produce information in connection with debt collection practices in those
jurisdictions. The Company has fully cooperated with the issuing agencies and has provided the
requested documentation. One jurisdiction has closed the case with no action taken against the
Company. The Company has not made any provision with respect to the remaining matters in the
financial statements as the nature of these matters constitute information requests only.
In the course of conducting its business, the Company is required by certain of the
jurisdictions within which it operates to obtain licenses and permits to conduct its collection
activities. The Company has been notified by one such jurisdiction that it did not operate for a
period of time from February 1, 2005 to April 17, 2006 with the proper license. The Company did not
make any provision for such matter in its financial statements as it deemed penalties, if any, to
be immaterial.
Note 8: Income Recognition and Impairments
Income Recognition
Prior to October 1, 2005, the Company accounted for its investment in finance receivables
using the interest method under the guidance of Practice Bulletin 6, Amortization of Discounts on
Certain Acquired Loans. Effective October 1, 2005, the Company adopted and began to account 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 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.
15
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8: Income Recognition and Impairments (continued)
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. Effective for
fiscal years beginning October 1, 2005 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.
Impairments
SOP 03-3 requires we account 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 impairment. This SOP became effective
October 1, 2005. SOP 03-3 will make it more likely that impairment losses and accretable yield
adjustments 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.
Impairments of approximately $2.4 million were recorded in the second quarter of fiscal year 2007. No impairments
were recorded in the first fiscal quarter of 2007, or in the three and
six month periods ended March 31, 2006.
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 collect receivables and we factor in both good and bad
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 suitable for our 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; |
|
|
|
|
the age of the receivables, the number of days since charge-off, the number of days
from 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 have built significant history on the tendencies of debtor repayments and
factor this into our initial expected cash flows; |
|
|
|
|
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. While we believe that debtors with jobs or
property are more likely to repay, we also believe that these debtors generally might take
longer to repay and that is factored into our initial expected cash flows. |
16
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8: Income Recognition and Impairments (continued)
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
from whom we have little 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 for 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. Historically, we have 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.
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; (ii) provision for
impairments/credit losses, and (iii) venture income recognized on the equity method, all resulting
in timing differences between financial accounting and tax reporting. The provision for income tax
expense for the three and six month periods ending March 31, 2007 and 2006, reflects income tax
expense at an effective rate of 40.5%.
17
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
23,878,000 |
|
|
|
13,772,538 |
|
|
$ |
1.73 |
|
|
$ |
20,415,000 |
|
|
|
13,603,485 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive impact of equity-based compensation awards |
|
|
|
|
|
|
875,018 |
|
|
|
|
|
|
|
|
|
|
|
979,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
23,878,000 |
|
|
|
14,647,556 |
|
|
$ |
1.63 |
|
|
$ |
20,415,000 |
|
|
|
14,583,252 |
|
|
$ |
1.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
12,552,000 |
|
|
|
13,848,194 |
|
|
$ |
0.91 |
|
|
$ |
11,103,000 |
|
|
|
13,608,994 |
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive impact of equity-based compensation awards |
|
|
|
|
|
|
896,305 |
|
|
|
|
|
|
|
|
|
|
|
995,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
12,552,000 |
|
|
|
14,744,499 |
|
|
$ |
0.85 |
|
|
$ |
11,103,000 |
|
|
|
14,604,636 |
|
|
$ |
0.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, which the Company adopted October 1, 2005, 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.
Effective September 30, 2005, the Company accelerated the vesting of all unvested stock
options previously awarded to employees, officers and directors under the Companys stock option
plans. In order to prevent unintended personal benefits to employees, officers and directors, the
Board imposed restrictions on any shares received through the exercise of accelerated options held
by those individuals. These restrictions prevent the sale of any stock obtained through exercise of
an accelerated option prior to the earlier of the original vesting date or the individuals
termination of employment. Financial Accounting Standards Board (FASB) Financial Interpretation
No. 44 requires the Company to recognize compensation expense under certain circumstances, such as
the change in the vesting schedule, that would allow an employee to vest in an option that would
have otherwise been forfeited based on the awards original terms. The Company is required to
recognize
18
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11: Stock-based Compensation (continued)
compensation expense over the new expected vesting periods based on estimates of the numbers of
options that employees ultimately will retain that otherwise would have been forfeited, absent the
modifications. The accelerated options, absent the acceleration, would substantially have vested
over the period October 1, 2005 through April 30, 2007. Such estimates are based on such factors
such as historical and expected employee turnover rates and similar statistics. Of the 587,000
stock options that were affected by the acceleration of the vesting of all stock options as of
September 30, 2005, 143,175 shares would not have vested at March 31, 2007, had it not been for the
acceleration of the vesting of these shares. Of the 143,174 shares, 136,672, or 95.5%, are
attributable to officers and directors of the Company representing $1.3 million of the $1.4 million
intrinsic value of the vested stock options. The Company is unable to estimate the number of stock
options issued that employees will ultimately retain that otherwise would have been forfeited,
absent the modification. Based on the current circumstances, market price above the grant price,
concentration of options awarded to officers and directors and low historical turnover rates, no
compensation expense applicable to current officers and directors resulting from the new
measurement date of the stock option issued prior to October 1, 2005 has been recognized through
March 31, 2007. In December of 2006, 18,000 stock options and 68,000 restricted shares were granted
to directors, officers and other employees. The stock options and restricted shares vest over a
twenty seven month period beginning December 2006. The first one third of the stock options and
restricted shares vested on March 19, 2007 with the remaining vesting on the first and second
anniversary dates of March 19, 2007. For the three and six month period ended March 31, 2007,
$662,000 and $768,000 of stock based compensation expense was recorded, respectively. See Note 12
Stock Option Plans.
In the first quarter of fiscal year 2007, the weighted average assumptions used in the option
pricing models were as follows:
|
|
|
|
|
Risk free interest rate |
|
|
4.94 |
% |
Expected term (years) |
|
|
10.0 |
|
Expected volatility |
|
|
36.3 |
% |
Dividend yield |
|
|
0.47 |
% |
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), which was 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.
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.
19
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 12: Stock Option Plans- (continued)
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.
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 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 404,667 were available as of March 31, 2006. As of March 31, 2006, approximately 140 of the
Companys employees were eligible to participate in the 2002 Plan. Future grants under the 2002
Plan have not yet been determined.
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 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 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.
20
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 12: Stock-Option Plans (Continued)
The following table summarizes stock option transactions under the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
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|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding options at the beginning of period |
|
|
1,414,439 |
|
|
$ |
9.4511 |
|
|
|
1,580,605 |
|
|
$ |
9.1082 |
|
Options granted |
|
|
18,000 |
|
|
|
28.7500 |
|
|
|
-0 |
- |
|
|
0.0000 |
|
Options exercised |
|
|
(80,001 |
) |
|
|
15.0970 |
|
|
|
(25,833 |
) |
|
|
11.2895 |
|
Options cancelled |
|
|
-0 |
- |
|
|
0.0000 |
|
|
|
-0 |
- |
|
|
0.0000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of period |
|
|
1,352,438 |
|
|
$ |
9.3739 |
|
|
|
1,554,772 |
|
|
$ |
9.0720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of period |
|
|
1,340,438 |
|
|
$ |
9.2005 |
|
|
|
1,554,772 |
|
|
$ |
9.0720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about the Plans outstanding options as of March 31, 2007:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
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|
Options Exercisable |
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|
|
|
|
|
|
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 |
|
|
600,000 |
|
|
|
3.0 |
|
|
$ |
2.0208 |
|
|
|
600,000 |
|
|
$ |
2.0208 |
|
$2.8751 $5.7500 |
|
|
116,667 |
|
|
|
5.6 |
|
|
|
4.7250 |
|
|
|
116,667 |
|
|
|
4.7250 |
|
$5.7501 $8.6250 |
|
|
12,000 |
|
|
|
4.6 |
|
|
|
5.9600 |
|
|
|
12,000 |
|
|
|
5.9600 |
|
$14.3751 $17.2500 |
|
|
223,611 |
|
|
|
6.7 |
|
|
|
15.0318 |
|
|
|
223,611 |
|
|
|
15.0318 |
|
$17.2501 $20.1250 |
|
|
382,160 |
|
|
|
7.6 |
|
|
|
18.2217 |
|
|
|
382,160 |
|
|
|
18.2217 |
|
$28.7500 $28.7500 |
|
|
18,000 |
|
|
|
9.7 |
|
|
|
28.7500 |
|
|
|
6,000 |
|
|
|
28.7500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,352,438 |
|
|
|
5.2 |
|
|
$ |
9.3739 |
|
|
|
1,340,438 |
|
|
$ |
9.2004 |
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
|
The Company recognized $95,000 of compensation expense related to stock options granted during
the six month period ended March 31, 2007. As of March 31, 2007, there was $181,000 of unrecognized
compensation cost related to unvested stock options.
The aggregate intrinsic value of the outstanding and exercisable options as of March 31, 2007 is
$45.5 million.
21
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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Six Months |
|
|
Average |
|
|
|
Ended |
|
|
Grant Date |
|
|
|
March 31, 2007 |
|
|
Fair Value |
|
Unvested at beginning of period |
|
|
0 |
|
|
$ |
0.00 |
|
Awards granted |
|
|
68,000 |
|
|
$ |
28.75 |
|
Vested |
|
|
(22,667 |
) |
|
$ |
28.75 |
|
Forfeited |
|
|
0 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
Unvested at end of period |
|
|
45,333 |
|
|
$ |
28.75 |
|
|
|
|
|
|
|
|
|
The Company recognized $673,000 of compensation expense related to the restricted stock
awarded during the six month period ended March 31, 2007. As of March 31, 2007 there was $1,282,000
of unrecognized compensation cost related to unvested restricted stock.
Note 13: Stockholders Equity
For the six months ended March 31, 2007, we declared dividends of $1,107,000. $556,000 was
accrued as of March 31, 2007 and paid May 1, 2007.
Note 14: Subsequent Event
On May 10. 2007 the Company signed the Fourth Amendment to the Credit Agreement with a
consortium of banks that amends certain terms of the Credit
Agreement, whereby the parties agreed
to amend the definition of the Borrowing Base to modify the maximum Availability based on Average
Collection Multiple from $20 million to $40 million for the period May 10, 2007 through October 7,
2007 and $20 million from October 8, 2007 and thereafter.
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
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; |
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|
|
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; |
|
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|
|
brokers who specialize in the sale of consumer receivable portfolios; and |
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|
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other sources. |
Cautions With Respect to 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 for the year ended September 30,
2006, and other reports filed with the Securities and Exchange Commission.
Our annual reports on Form 10-K, 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
Securities and Exchange Commission 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 that file electronically with the SEC.
Critical Accounting Policies
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
23
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
from whom we have little 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
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 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. 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.
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 where 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, we continue to purchase asset classes which we believe we have requisite expertise
and experience, we are more likely to utilize the interest method to account for such purchases.
The Company accounted for its investment in finance receivables using the interest method
under the guidance of Practice Bulletin 6. Each purchase was treated as a separate portfolio of
receivables and was considered a separate financial investment, and accordingly we did not
aggregate such loans under Practice Bulletin 6 as the underlying collateral had similar
characteristics. As SOP 03-3 was adopted by the Company for our fiscal year beginning October 1,
2005, we have begun aggregating portfolios of receivables acquired sharing specific common
characteristics which were acquired within a given quarter. We currently consider 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, telecom etc.) |
After determining that an investment will yield an adequate return on our acquisition cost after
servicing fees, 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 collectionsand 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); |
24
|
|
|
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 days since charge-off; |
|
|
|
|
payments made since charge-off; |
|
|
|
|
the credit originator and their credit guidelines; |
|
|
|
|
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; |
|
|
|
|
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 |
|
|
|
|
the ability to obtain customer statements from the original issuer. |
We will obtain and utilize as appropriate input 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.
In the following discussions, most percentages and dollar amounts have been rounded to aid
presentation. As a result, all figures are approximations.
Results of Operations
The six-month period ended March 31, 2007, compared to the six-month period ended March
31, 2006
Finance income. During the six-month period ended March 31, 2007, finance income
increased $12.2 million or 27.1% to $57.3 million from $45.1 million for the six-month period ended
March 31, 2006. The increase in finance income was primarily due to an increase in finance income
earned on consumer receivables acquired for liquidation, which resulted from an increase in the
average outstanding accounts acquired for liquidation during the six-months ended March 31, 2007,
as compared to the same prior year period, including the purchase of a portfolio with a face value
of $6.9 billion (the Portfolio Purchase), coupled with revenue recognized by adjustments to
accretable yields on certain portfolios. The Company adjusts the accretable yield upward when it
believes, based on available evidence, that portfolio collections will exceed amounts previously
estimated. The average outstanding accounts increased from $205.0 million for the six month period
ended March 31, 2006 compared to $410.5 million for the same period of 2007. During the six-months ended
March 31, 2007, we acquired receivables at a cost of
$386.7 million as compared to $121.2 million
during the six- months ended March 31, 2006 and for year ended September 30, 2006, we acquired
receivables at a cost of $200.2 million as compared to $126.0 million for the year ended September
30, 2005. During the six-month period ended March 31, 2007, the commissions and fees associated
with gross collections from our third-party collection agencies and
attorneys increased $14.5
million or 33.5% to $57.7 million from $43.2 million for the six-month period ended March 31, 2006.
The increase is indicative of a shift to the suit strategy
implemented by the Company, as well as growth attributable to
portfolio acquisitions. While the dollar value has increased, the percentage has decreased during the six-month period ended March 31, 2007. This percentage decrease reflects slightly lower rates changed by our servicers based on the current mix of collections. As we
continue to purchase portfolios and utilize our third party collection agencies and attorney
networks, we anticipate these costs will rise. However, commissions
and fees should stabilize in the range of 30% to 32%
of gross collections exclusive of court costs, based upon the current mix of the portfolio make up.
During the six months ended March 31, 2007, the Company had adjusted accretable yield
reclassifications of $7.9 million. Finance income related to this accretable yield
reclassification in the six month period ended March 31, 2007
was approximately $4.4 million. Collections with regard
to the Portfolio Purchase during the second quarter of 2007, were $12.3 million in the second
quarter of fiscal year 2007 and finance revenue earned was
$2.6 million.
25
We expect it to
increase next quarter as we owned the portfolio for approximately one month of the most
recent quarter.
Other income. Other income of $459,000 for the six month period ended March 31, 2007 includes
interest income from banks and other loan instruments.
Equity in earnings of venture. In August 2006, the Company invested approximately $7.8 million
for a 25% interest in a newly formed venture. The venture invested in a bankruptcy liquidation that
will collect on existing rental contracts and the liquidation of inventory. The investment is
expected to return to the Company its normal expected investment results over a two to three year
period. The Companys share of the income was $975,000 during
the six months ended March 31, 2007. The Company has received approximately $5.3
million from the inception of the venture through March 31, 2007 in cash distributions from the venture and an additional $300,000
through May 6, 2007 as returns of its investment.
General and Administrative Expenses. During the six-month period ended March 31, 2007,
general and administrative expenses increased $2.1 million, or 23.6% to $10.9 million from $8.8
million for the six-months ended March 31, 2006, and represented 58.5% of total expenses
(excluding income taxes) for the six months ended March 31, 2007. The increase in general and
administrative expenses was primarily due to an increase in receivable servicing expenses during
the six-month period ended March 31, 2007, as compared to the same prior year period. The increase
in receivable servicing expenses resulted from the substantial increase in our average outstanding
accounts acquired for liquidation during the six-months ended March 31, 2007, as compared to the
same prior year period with the average balance increasing 95.0%. A majority of the increased
costs were from collection expenses including printing, postage and delivery costs, salary and
related benefits, telephone charges, offset by reduced professional fees, as work related to
contracts and other legal matters has been brought inhouse.
Interest Expense. During the six-month period ended March 31, 2007, interest expense
increased to $5.3 million from $2.0 million in the same prior year period and represented 28.5% of
total expenses (excluding income taxes) for the six-month period ended March 31, 2007. The
increase was due to an increase in average outstanding borrowings coupled with a slightly higher
interest during the six-month period ended March 31, 2007, as compared to the same period in the
prior year. The average balance increased from $50.6 million for the six month period ended March
31, 2006 to $144.2 million for the same period of fiscal year
2007. The increase in borrowings was
due to the increase in acquisitions of consumer receivables acquired for liquidation.
The three-month period ended March 31, 2007, compared to the three-month period ended March 31,
2006
Finance income. During the three-month period ended March 31, 2007, finance income increased
$7.5 million or 30.3% to $32.4 million from $24.8 million for the three-month period ended
March 31, 2006. The increase in finance income was primarily due to an increase in finance income
earned on consumer receivables acquired for liquidation, which resulted from an increase in the
average outstanding accounts acquired for liquidation during the six and three-month periods ended
March 31, 2007, as compared to the same prior year periods, coupled with revenue recognized by
adjustments to accretable yields on certain portfolios. The Company adjusts the accretable yield
upward when it believes, based on available evidence, that portfolio collections will exceed
amounts previously estimated. During the second quarter, the Company had adjusted accretable yield
reclassifications of $7.9 million. Finance income related to this
accretable yield reclassification in the three month period ended
March 31, 2007 was approximately $4.4 million. Income from the
Portfolio Purchase was $2.6 million and we expect it to increase next
quarter as we owned the Portfolio Purchase for approximately one month of the most recent
quarter.
The average balance outstanding of the consumer receivables acquired for liquidation for the
quarter ended March 31, 2007 was $424.7 million, an increase of $181.5 million from $243.2
million for the second quarter of 2006. During the three months ended March 31, 2007, we acquired
receivables at a cost of $324.4 million, as compared to $18.8 million during the three months
ended March 31, 2006. During the three-month period ended March 31, 2007, the commissions and fees
associated with gross collections from our third-party collection
agencies and attorneys increased
$6.3 million, to $30.0 million from $23.7 million for the three-month period ended March 31, 2006.
Other income. Other income of $255,000 for the three month period ended March 31, 2007
includes interest income from banks and other loan instruments.
Equity in earnings of venture. In August 2006, the Company invested approximately $7.8 million
for a 25% interest in a newly formed venture. The venture invested in a bankruptcy liquidation that
will collect on existing rental contracts and the liquidation of inventory. The investment is
expected to return to the Company its normal expected investment results over a two to three year
period. The Companys share of the income was $475,000 during the
three month period ended March 31, 2007. The Company
has received approximately $825,000 during the three month period
ended March 31, 2007 in cash distributions from the venture and an
additional $300,000
through May 6, 2007 as returns of its investment.
26
General and Administrative Expenses. During the three-month period ended March 31, 2007,
general and administrative expenses increased $0.9 million, or 19.4% to $5.8 million from $4.8
million for the three-months ended March 31, 2006 and represented 48.3%of total expenses (excluding
income taxes) for the three months ended March 31, 2007. The increase in general and administrative
expenses was primarily due to an increase in receivable servicing expenses during the three-month
period ended March 31, 2007, as compared to the same prior year period. The increase in receivable
servicing expenses resulted from the substantial increase in our average outstanding accounts
acquired for liquidation during the three-months ended March 31, 2007, as compared to the same
prior year period. A majority of the increased costs were from collection expenses including
printing, delivery, data processing costs, salaries and related benefits and telephone charges,
slightly offset by lower professional fees and postage charges for the quarter.
Interest Expense. During the three-month period ended March 31, 2007, interest expense
increased to $3.8 million from $1.3 million in the same period of the prior year and represented
31.5 % of total expenses (excluding income taxes) for the three-month period ended March 31, 2007.
The increase was due to an increase in average outstanding borrowings coupled with a higher interest rate during the three-month period ended March 31, 2007, as compared to the same
period in the prior year. The increase in borrowings was due to the increase in acquisitions of
consumer receivables acquired for liquidation. The average balance
outstanding for the three month period ended March 31, 2007 was $209.1 million
compared to $60.5 million for the same period of the prior year.
Liquidity and Capital Resources
Our primary sources of cash from operations include payments on the receivable portfolios that
we have acquired. Our primary uses of cash include our purchases of consumer receivable portfolios.
We rely significantly upon our lenders to provide the funds necessary for the purchase of consumer
and commercial accounts receivable portfolios. We maintain a $175 million line of credit for
portfolio purchases, with an expandable feature which allows the Company the ability to increase
the line to $225 million with consent of the banks. As of
March 31, 2007, there was $160.4 million
outstanding balance under this facility. Although we are within the borrowing limits of the this
facility, there are certain restrictions in place with regard to collateralization whereby the
Company may be limited in its ability to borrow funds to purchase additional portfolios.
On March 30. 2007 the Company signed the Third Amendment to Fourth Amended and Restated Loan
Agreement (the Credit Agreement) with a consortium of banks that amends certain terms of the
Credit Agreement, whereby the parties agreed to a Temporary Overadvance of $16 million to be
reduced to zero on or before May 17, 2007. In addition, the
parties agreed to an increase in
interest rate, to LIBOR plus 275 basis points for LIBOR loans, an increase from 175 basis points.
The rate is subject to adjustment each quarter upon delivery of results that evidence a need for an
adjustment. As of May 7, 2007, the Temporary Overadvance was approximately $12 million. On May 10,
2007, the Company signed the Fourth Amendment to the Credit Agreement whereby the parties agreed to
revise certain terms of the agreement which eliminated the Temporary Overadvance provision.
In March 2007, Palisades Acquisition XVI, LLC (Palisades XVI), an indirect wholly-owned
subsidiary of the Company, closed on its definitive agreement to purchase a portfolio of
approximately $6.9 billion in face value receivables for a purchase price of $300 million plus 20%
of net payments after we recover 150% of the purchase price plus our cost of funds. The portfolio
is made up of predominantly credit card accounts and includes accounts in collection litigation and
accounts as to which the sellers have been awarded judgments and other traditional charge-offs. The
Company originally paid a $60 million deposit upon execution of the contract on February 5, 2007
and funded an additional deposit of $15 million on February 16, 2007 fully using its existing credit
facility, as modified on that date.
The remaining $225 million was paid in full on March 5, 2007, by borrowing approximately $227
million (inclusive of transaction costs) under a new Receivables Financing Agreement entered into
by Palisades XVI with a major financial institution as the funding source, and consists of debt
with full recourse only to Palisades XVI, bearing an interest rate of approximately 170 basis
points over LIBOR. The term of the agreement is three years. All proceeds received as a result of
the net collections from this portfolio are to be 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 will be serviced by Palisades Collection LLC, a wholly own
subsidiary of the company, which has engaged a subservicer for the portfolio. As of March 31, 2007,
there was a $216.8 million outstanding balance under this facility.
As of March 31, 2007, our cash and cash equivalents decreased $1.0 million to $6.8 million
from $7.8 million at September 30, 2006. The decrease in cash and cash equivalents during the six
month period ended March 31, 2007, was due to an increase in consumer receivable purchases, higher dividend and interest payments offset
by cash distributions from the
27
venture and collections on other investments during the six months
ended March 31, 2007, as compared to the same period in the prior year.
Net
cash provided by operating activities was $19.3 million during the six months ended March
31, 2007, compared to net cash provided by operating activities of $24.0 million during the six
months ended March 31, 2006. The decrease in net cash provided by operating activities was
primarily due to the increase in income tax estimate payments, an increase in other assets and
amounts due from third party collection agencies and attorneys and a small decrease in other
liabilities. Net cash used in investing activities was $310.0 million during the six months ended
March 31, 2007, compared to net cash used by investing activities of $66.1 million during the six
months ended March 31, 2006. The increase in net cash used by investing activities was primarily
due to an increase in the purchase of accounts acquired for liquidation during the six months ended
March 31, 2007, including the Portfolio Purchase of $6.9 billion of face value consumer receivables
at a cost of approximately $300 million. Net cash provided by
financing activities was $289.7 million during the six month period ended March 31, 2007, as compared to $42.0 million in the prior
period. The increase in net cash provided by financing activities was primarily due to an increase
in borrowings under our line of credit and our new Receivable Financing Agreement to finance the
Portfolio Purchase, previously discussed under investing activities.
On July 11, 2006, the Company entered into the Fourth Amended and Restated Loan Agreement with
a consortium of banks, and as a result the credit facility is now $175 million, up from $125
million with an expandable feature which allows the Company the ability to increase the line to
$225 million with the consent of the banks. The line of credit 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 line is collateralized by all portfolios of consumer receivables
acquired for liquidation 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. The term of the agreement ends July 11, 2009.
Our cash requirements have been and will continue to be significant. We depend on external
financing to acquire consumer receivables. During the six months ended March 31, 2007, we acquired
consumer receivable portfolios at a cost of approximately $386.7 million. These acquisitions were
financed with our credit facility, our new Receivable Financing Agreement and cash flows from
operating activities.
We anticipate the funds available under our current renegotiated credit facility and cash from
operations will be sufficient to satisfy our estimated cash requirements for at least the next 12
months. If for any reason our available cash otherwise proves to be insufficient to fund operations
(because of future changes in the industry, general economic conditions, unanticipated increases in
expenses, or other factors), we may be required to seek additional funding.
From time to time, we evaluate potential acquisitions of related businesses. However, we have
not reached any agreement or arrangement with respect to any particular acquisition and we may not
be able to complete any acquisitions on favorable terms or at all.
28
The following tables summarize the changes in the balance sheet of the investment in
receivable portfolios during the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2007 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
256,199,000 |
|
|
$ |
1,076,000 |
|
|
$ |
257,275,000 |
|
Acquisitions of receivable portfolios, net |
|
|
345,798,000 |
|
|
|
40,884,000 |
|
|
|
386,682,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(102,015,000 |
) |
|
|
(2,089,000 |
) |
|
|
(104,104,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(26,754,000 |
) |
|
|
(4,247,000 |
) |
|
|
(31,001,000 |
) |
Transfer to
cost recovery(1) |
|
|
(4,478,000 |
) |
|
|
4,478,000 |
|
|
|
|
|
Impairment |
|
|
(2,412,000 |
) |
|
|
|
|
|
|
(2,412,000 |
) |
Finance income recognized |
|
|
56,007,000 |
|
|
|
1,287,000 |
|
|
|
57,294,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
522,345,000 |
|
|
$ |
41,389,000 |
|
|
$ |
563,734,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
43.5 |
% |
|
|
20.3 |
% |
|
|
42.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2006 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
172,636,000 |
|
|
$ |
91,000 |
|
|
$ |
172,727,000 |
|
Acquisitions of receivable portfolios, net |
|
|
121,188,000 |
|
|
|
|
|
|
|
121,188,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(73,470,000 |
) |
|
|
(2,022,000 |
) |
|
|
(75,492,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(26,071,000 |
) |
|
|
(235,000 |
) |
|
|
(26,306,000 |
) |
Transferred to cost recovery |
|
|
(529,000 |
) |
|
|
529,000 |
|
|
|
|
|
Finance income recognized |
|
|
43,067,000 |
|
|
|
2,022,000 |
|
|
|
45,089,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
236,821,000 |
|
|
$ |
385,000 |
|
|
$ |
237,206,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
43.3 |
% |
|
|
89.6 |
% |
|
|
44.3 |
% |
|
|
(1) Represents
a portfolio acquired during the three months ended December 31,
2006 which the Company is presently negotiating to
return to the
seller.
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2007 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
281,852,000 |
|
|
$ |
3,671,000 |
|
|
$ |
285,523,000 |
|
Acquisitions of receivable portfolios, net |
|
|
288,224,000 |
|
|
|
36,191,000 |
|
|
|
324,415,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(60,765,000 |
) |
|
|
(1,461,000 |
) |
|
|
(62,226,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(11,825,000 |
) |
|
|
(2,094,000 |
) |
|
|
(13,919,000 |
) |
Transfer to
cost recovery(1) |
|
|
(4,478,000 |
) |
|
|
4,478,000 |
|
|
|
|
|
Impairment |
|
|
(2,412,000 |
) |
|
|
|
|
|
|
(2,412,000 |
) |
Finance income recognized |
|
|
31,749,000 |
|
|
|
604,000 |
|
|
|
32,353,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
522,345,000 |
|
|
$ |
41,389,000 |
|
|
$ |
563,734,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
43.7 |
% |
|
|
17.0 |
% |
|
|
42.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2006 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
248,758,000 |
|
|
$ |
425,000 |
|
|
$ |
249,183,000 |
|
Acquisitions of receivable portfolios, net |
|
|
18,783,000 |
|
|
|
|
|
|
|
18,783,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(42,408.000 |
) |
|
|
(849,000 |
) |
|
|
(43,257,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(12,332,000 |
) |
|
|
|
|
|
|
(12,332,000 |
) |
Finance income recognized |
|
|
24,020,000 |
|
|
|
809,000 |
|
|
|
24,829,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
236,821,000 |
|
|
$ |
385,000 |
|
|
$ |
237,206,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
43.9 |
% |
|
|
95.3 |
% |
|
|
44.7 |
% |
(1) |
|
Represents a portfolio acquired during the three months ended
December 31, 2006 which the Company is presently negotiating to
return to the seller. |
30
Additional 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 portion of the face
amounts. During the six months ended March 31, 2007, we purchased portfolios with an aggregate
purchase price of $386.7 million with a face value of $9.8 billion.
Prior to October 1, 2005, we accounted for our investment in finance receivables using the
interest method under the guidance of Practice Bulletin 6, Amortization of Discounts on Certain
Acquired Loans. Effective October 1, 2005, we adopted and began to account 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. Effective for fiscal years beginning October 1, 2005 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, 2007 |
|
$ |
31,001,000 |
|
|
$ |
14,514,000 |
|
Three months ended March 31, 2007 |
|
$ |
13,919,000 |
|
|
$ |
5,555,000 |
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, 2006 |
|
$ |
26,306,000 |
|
|
$ |
14,246,000 |
|
Three months ended March 31, 2006 |
|
$ |
12,332,000 |
|
|
$ |
7,794,000 |
|
31
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 |
|
|
$ |
95,091,000 |
|
|
$ |
0 |
|
|
$ |
95,091,000 |
|
|
|
146 |
% |
2002 |
|
|
36,557,000 |
|
|
|
52,132,000 |
|
|
$ |
0 |
|
|
|
52,132,000 |
|
|
|
143 |
% |
2003 |
|
|
115,626,000 |
|
|
|
185,715,000 |
|
|
|
11,474,000 |
|
|
|
197,189,000 |
|
|
|
171 |
% |
2004 |
|
|
103,743,000 |
|
|
|
150,188,000 |
|
|
|
14,098,000 |
|
|
|
164,286,000 |
|
|
|
158 |
% |
2005 |
|
|
126,023,000 |
|
|
|
133,156,000 |
|
|
|
81,563,000 |
|
|
|
214,719,000 |
|
|
|
170 |
% |
2006 |
|
|
200,237,000 |
|
|
|
109,963,000 |
|
|
|
196,367,000 |
|
|
|
306,330,000 |
|
|
|
153 |
% |
2007 |
|
|
341,320,000 |
|
|
|
20,798,000 |
|
|
|
445,714,000 |
|
|
|
466,512,000 |
|
|
|
137 |
% |
(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.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
159 The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of
FASB Statement No. 115This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve financial reporting
by providing entities with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the use of fair value measurement,
which is consistent with the Boards long-term measurement objectives for accounting for financial
instruments. This Statement is effective as of the beginning of the Companys fiscal year that
begins October 1, 2008. The Company believes that the statement, when adopted, will not impact the
Company.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 was issued in order to eliminate the diversity in practice
surrounding how public companies quantify financial statement misstatements. SAB 108 requires that
registrants quantify errors using both a balance sheet and income statement approach and evaluate
whether either approach results in a misstated amount that, when all relevant quantitative and
qualitative factors are considered, is material. SAB 108 became effective for the Company in the
current fiscal year.
In September 2006, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement improves
financial reporting by requiring an employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in
its statement of financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity. This Statement also
improves financial reporting by requiring an employer to measure the funded status of a plan as of
the date of its year-end statement of financial position, with limited exceptions. The Company
believes that the statement, when adopted, will not impact the Company.
32
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does not require any new
fair value measurements. FASB Statement No. 157 will be effective for our financial statements
issued for our fiscal year beginning October 1, 2008. We do not expect the adoption of FASB
Statement No. 157 to have a material impact on our financial reporting, and we are currently
evaluating the impact, if any, the adoption of FASB Statement No. 157 will have on our disclosure
requirements.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 will be effective for our fiscal year beginning October 1, 2007.
We do not expect the adoption of FIN 48 to have a material impact on our financial reporting and
disclosure.
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. A 25 basis-point increase in
interest rates could increase our annual interest expense by $25,000 for each $10 million of
variable debt outstanding for the entire fiscal year. We do not invest in derivative financial or
commodity instruments.
Item 4. Controls and Procedures
a. Disclosure Controls and Procedures.
During the three month period ended March 31, 2007, our management, including the principal
executive officer and principal financial officer, evaluated our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to
the recording, processing, summarization and reporting of information in our reports that we file
with the SEC. These disclosure controls and procedures have been designed to ensure that material
information relating to us, including our subsidiaries, is made known to our management, including
these officers, by other of our employees, and that this information is recorded, processed,
summarized, evaluated and reported, as applicable, within the time periods specified in the SEC
rules and forms. Due to the inherent limitations of control systems, not all misstatements may be
detected. These inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of a simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons by collusion of two or more
people, or by management override of the control. Our controls and procedures can only provide
reasonable, not absolute, assurance that the above objectives have been met.
Based on their evaluation as of March 31, 2007, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to reasonably
ensure that the information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.
b. Changes in Internal Controls Over Financial Reporting.
There have been no changes in our internal control 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.
33
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 December 14, 2006.
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 8, 2007. At that meeting, the following matter
was voted on and received the votes indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authority |
Election of Directors |
|
For |
|
Withheld |
Gary Stern |
|
|
12,610,499 |
|
|
|
782,659 |
|
Arthur Stern |
|
|
12,344,430 |
|
|
|
1,048,728 |
|
Herman Badillo |
|
|
12,589,777 |
|
|
|
803,381 |
|
David Slackman |
|
|
12,654,810 |
|
|
|
738,348 |
|
Edward Celano |
|
|
12,607,724 |
|
|
|
785,424 |
|
Harvey Leibowitz |
|
|
12,606,210 |
|
|
|
786,948 |
|
Alan Rivera |
|
|
13,312,237 |
|
|
|
80,921 |
|
Louis A. Piccolo |
|
|
13,312,737 |
|
|
|
80,421 |
|
34
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
|
10.1 |
|
Receivables Financing Agreement dated March 2, 2007 |
|
|
10.2 |
|
Third Amendment to Fourth Amended and Restated Loan Agreement dated March 30, 2007 |
|
|
10.3 |
|
Fourth Amendment to Fourth Amended and Restated Loan Agreement dated May 10, 2007 |
|
|
10.4 |
|
Subservicing Agreement dated March 2, 2007* |
|
|
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, Mitchell Cohen, 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, Mitchell Cohen, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
* Portions of this document have been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment in accordance with Rule 24b-2 of
the Securities Exchange Act of 1934, as amended.
35
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 15, 2007 |
By: |
/s/ Gary Stern
|
|
|
Gary Stern, President, Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
Date: May 15, 2007 |
By: |
/s/ Mitchell Cohen
|
|
|
Mitchell Cohen, Chief Financial Officer |
|
|
(Principal Financial Officer and
Principal Accounting Officer) |
|
|
36