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 June 30, 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 small business issuer as specified in its charter)
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DELAWARE
(State or other jurisdiction
of incorporation or organization)
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22-3388607
(IRS Employer
Identification No.) |
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210 SYLVAN AVE., ENGLEWOOD CLIFFS, NEW JERSEY
(Address of principal executive offices)
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07632
(Zip Code) |
ISSUERS 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 August 6, 2007, the registrant had 13,913,158 common shares outstanding.
ASTA FUNDING, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, |
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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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$ |
20,638,000 |
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$ |
7,826,000 |
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Consumer receivables acquired for liquidation, (at net realizable value) |
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539,703,000 |
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257,275,000 |
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Due from third party collection agencies and attorneys |
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5,069,000 |
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3,062,000 |
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Investment in venture |
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3,514,000 |
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5,965,000 |
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Furniture and equipment, net |
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1,067,000 |
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1,101,000 |
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Deferred income taxes |
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12,576,000 |
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7,577,000 |
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Other assets |
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4,801,000 |
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5,034,000 |
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Total assets |
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$ |
587,368,000 |
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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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$ |
344,688,000 |
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$ |
82,811,000 |
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Other liabilities |
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4,706,000 |
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4,338,000 |
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Dividends payable |
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557,000 |
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6,052,000 |
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Income taxes payable |
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12,746,000 |
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10,377,000 |
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Total liabilities |
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362,697,000 |
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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, $.01 par value; authorized 30,000,000 shares; issued
and outstanding 13,913,158 at
June 30, 2007 and 13,755,157 at September 30, 2006 |
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138,000 |
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138,000 |
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Additional paid-in capital |
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64,690,000 |
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61,803,000 |
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Retained earnings |
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159,843,000 |
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122,321,000 |
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Total stockholders equity |
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224,671,000 |
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184,262,000 |
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Total liabilities and stockholders equity |
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$ |
587,368,000 |
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$ |
287,840,000 |
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See accompanying notes to condensed consolidated financial statements
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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Nine Months |
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Nine 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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June 30, 2007 |
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June 30, 2006 |
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June 30, 2007 |
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June 30, 2006 |
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Revenues: |
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Finance income, net |
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$ |
38,845,000 |
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$ |
26,090,000 |
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$ |
96,139,000 |
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$ |
71,179,000 |
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Other income |
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43,000 |
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336,000 |
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502,000 |
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336,000 |
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Equity in earnings in venture |
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50,000 |
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1,025,000 |
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38,938,000 |
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26,426,000 |
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97,666,000 |
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71,515,000 |
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Expenses: |
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General and administrative |
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6,510,000 |
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4,692,000 |
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17,388,000 |
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13,492,000 |
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Interest |
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6,651,000 |
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1,249,000 |
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11,949,000 |
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3,214,000 |
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Impairments |
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675,000 |
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2,412,000 |
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675,000 |
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13,161,000 |
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6,616,000 |
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31,749,000 |
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17,381,000 |
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Income before income taxes |
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25,777,000 |
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19,810,000 |
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65,917,000 |
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54,134,000 |
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Income tax expense |
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10,469,000 |
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8,030,000 |
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26,731,000 |
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21,939,000 |
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Net income |
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$ |
15,308,000 |
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$ |
11,780,000 |
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$ |
39,186,000 |
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$ |
32,195,000 |
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Net income per share: |
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Basic |
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$ |
1.10 |
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$ |
0.86 |
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$ |
2.84 |
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$ |
2.37 |
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Diluted |
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$ |
1.03 |
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$ |
0.80 |
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$ |
2.67 |
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$ |
2.20 |
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Weighted average number of shares outstanding: |
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Basic |
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13,907,554 |
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13,628,776 |
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13,794,877 |
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13,611,915 |
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Diluted |
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14,819,926 |
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14,639,432 |
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14,677,258 |
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14,604,678 |
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See accompanying notes to condensed consolidated financial statements
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 options |
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90,001 |
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1,254,000 |
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1,254,000 |
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Restricted stock granted |
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68,000 |
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Stock based compensation expense |
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953,000 |
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953,000 |
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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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(1,664,000 |
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(1,664,000 |
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Net income |
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39,186,000 |
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39,186,000 |
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Balance, June 30, 2007 |
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13,913,158 |
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$ |
138,000 |
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$ |
64,690,000 |
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$ |
159,843,000 |
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$ |
224,671,000 |
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See accompanying notes to condensed consolidated financial statements
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine Months Ended |
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Nine Months Ended |
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June 30, 2007 |
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June 30, 2006 |
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Cash flows from operating activities: |
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Net income |
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$ |
39,186,000 |
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$ |
32,195,000 |
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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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439,000 |
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382,000 |
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Deferred income taxes |
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(4,999,000 |
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Impairments of consumer receivables acquired for liquidation |
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2,412,000 |
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675,000 |
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Stock based compensation |
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953,000 |
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105,000 |
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Other |
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(209,000 |
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Changes in: |
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Income taxes payable |
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2,369,000 |
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(474,000 |
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Due from third party collection agencies and attorneys |
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(2,007,000 |
) |
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(313,000 |
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Other assets |
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(17,000 |
) |
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(133,000 |
) |
Other investments |
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(2,471,000 |
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Other liabilities |
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(531,000 |
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(1,082,000 |
) |
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Net cash provided by operating activities |
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35,125,000 |
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31,355,000 |
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Cash flows from investing activities: |
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Purchase of consumer receivables acquired for liquidation |
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(402,316,000 |
) |
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(155,361,000 |
) |
Principal collected on receivables acquired for liquidation |
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94,921,000 |
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72,569,000 |
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Principal collected on receivable accounts represented by
account sales |
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22,555,000 |
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18,805,000 |
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Cash distribution from venture |
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2,450,000 |
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Purchase of other investments |
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(5,777,000 |
) |
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Collections on other investments |
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9,357,000 |
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Acquisition of businesses, net of cash acquired |
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(1,406,000 |
) |
Capital expenditures |
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(155,000 |
) |
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(338,000 |
) |
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Net cash used in investing activities |
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(278,965,000 |
) |
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(65,731,000 |
) |
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Cash flows from financing activities: |
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Proceeds from exercise of options |
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1,254,000 |
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590,000 |
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Excess tax benefit arising from exercise of non-qualified options and
Vesting of restricted stock |
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680,000 |
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Dividends paid |
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(7,159,000 |
) |
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(1,565,000 |
) |
Advances under lines of credit, net |
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261,877,000 |
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36,002,000 |
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Net cash provided by financing activities |
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256,652,000 |
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35,027,000 |
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Increase in cash |
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12,812,000 |
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|
651,000 |
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Cash at the beginning of period |
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7,826,000 |
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4,059,000 |
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Cash at end of period |
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$ |
20,638,000 |
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$ |
4,710,000 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period |
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Interest |
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$ |
9,121,000 |
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$ |
3,132,000 |
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Income taxes |
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$ |
28,655,000 |
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$ |
22,322,000 |
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See accompanying notes to condensed consolidated financial statements.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 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 nine and
three month periods ended June 30, 2007 and 2006, the condensed consolidated statement of stockholders equity
as of and for the nine months ended June 30, 2007 and the condensed consolidated statements of cash
flows for the nine month periods ended June 30, 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 June 30, 2007 and
September 30, 2006, the results of operations for the nine and three month periods ended June 30,
2007 and 2006 and cash flows for the nine month periods ended June 30, 2007 and 2006 have been
made. The results of operations for the nine and three month periods ended June 30, 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 note 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 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 for 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. Adoption had no material impact on the Company.
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 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.
Reclassification
Certain items in prior years financial statements
have been reclassified to conform to current periods presentation.
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.
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. No impairments were recorded in the three
month period ended June 30, 2007. Impairments on three portfolios of receivables totaling
approximately $2.4 million were recorded in the second quarter of fiscal year 2007. For the three and nine month periods
ended June 30, 2006 the Company recorded an impairment on one portfolio of $675,000. 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.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
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.
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. 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. After SOP 03-3 was adopted by the Company beginning with our fiscal
year beginning October 1, 2005, we began to 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; |
|
|
|
|
number of days since charge-off; |
|
|
|
|
payments made since charge-off; |
|
|
|
|
the credit originator and its credit guidelines;
|
|
|
|
|
our ability to analyze accounts and resell accounts that meet our criteria for resale;
|
|
|
|
|
the locations of the debtors as there are better states to attempt to collect in and ultimately 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; |
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
|
|
|
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 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.
The following tables summarize the changes in the balance sheet of the investment in
receivable portfolios during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended June 30, 2007 |
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
|
Balance, beginning of period |
|
$ |
256,199,000 |
|
|
$ |
1,076,000 |
|
|
$ |
257,275,000 |
|
Acquisitions of receivable portfolios, net |
|
|
356,884,000 |
|
|
|
45,432,000 |
|
|
|
402,316,000 |
|
Net cash collections from collections of consumer
receivables acquired for
liquidation (1) |
|
|
(164,829,000 |
) |
|
|
(8,020,000 |
) |
|
|
(172,849,000 |
) |
Net cash collections represented by accounts sales of
consumer receivables acquired for liquidation |
|
|
(36,519,000 |
) |
|
|
(4,247,000 |
) |
|
|
(40,766,000 |
) |
Transfer to
cost recovery (2) |
|
|
(4,478,000 |
) |
|
|
4,478,000 |
|
|
|
|
|
Impairment |
|
|
(2,412,000 |
) |
|
|
|
|
|
|
(2,412,000 |
) |
Finance
income recognized (3) |
|
|
94,168,000 |
|
|
|
1,971,000 |
|
|
|
96,139,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
499,013,000 |
|
|
$ |
40,690,000 |
|
|
$ |
539,703,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
46.8 |
% |
|
|
16.1 |
% |
|
|
45.0 |
% |
|
|
|
(1) |
|
Includes put backs of purchased accounts returned to the
seller totaling $5.5 million. |
|
(2) |
|
Represents a portfolio acquired during the three months ended December 31, 2006 which
the Company has successfully negotiated the return to the seller. The portfolio was
returned on July 31, 2007. |
|
(3) |
|
Includes $11.1 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended June 30, 2006 |
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
|
Balance, beginning of period |
|
$ |
172,636,000 |
|
|
$ |
91,000 |
|
|
$ |
172,727,000 |
|
Acquisitions of receivable portfolios, net |
|
|
155,361,000 |
|
|
|
|
|
|
|
155,361,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(116,464,000 |
) |
|
|
(2,820,000 |
) |
|
|
(119,284,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(43,034,000 |
) |
|
|
(235,000 |
) |
|
|
(43,269,000 |
) |
Transfer to cost recovery |
|
|
(529,000 |
) |
|
|
529,000 |
|
|
|
|
|
Impairment |
|
|
(675,000 |
) |
|
|
|
|
|
|
(675,000 |
) |
Finance
income recognized (4) |
|
|
68,415,000 |
|
|
|
2,764,000 |
|
|
|
71,179,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
235,710,000 |
|
|
$ |
329,000 |
|
|
$ |
236,039,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
42.9 |
% |
|
|
90.5 |
% |
|
|
43.8 |
% |
|
|
|
(4) |
|
Includes $4.0 million derived from fully amortized interest method pools. |
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended June 30, 2007 |
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
522,345,000 |
|
|
$ |
41,389,000 |
|
|
$ |
563,734,000 |
|
Acquisitions of receivable portfolios, net |
|
|
11,086,000 |
|
|
|
4,548,000 |
|
|
|
15,634,000 |
|
Net cash collections from collections of consumer
receivables acquired for
liquidation (5) |
|
|
(62,814,000 |
) |
|
|
(5,931,000 |
) |
|
|
(68,745,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(9,765,000 |
) |
|
|
|
|
|
|
(9,765,000 |
) |
Finance
income recognized (6) |
|
|
38,161,000 |
|
|
|
684,000 |
|
|
|
38,845,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
499,013,000 |
|
|
$ |
40,690,000 |
|
|
$ |
539,703,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
52.6 |
% |
|
|
11.5 |
% |
|
|
49.5 |
% |
|
|
|
(5) |
|
Includes put backs of purchased accounts returned to the
seller totaling $5.5 million.
|
|
|
|
(6) |
|
Includes $5.6 million derived from fully amortized interest method pools.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended June 30, 2006 |
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
236,821,000 |
|
|
$ |
385,000 |
|
|
$ |
237,206,000 |
|
Acquisitions of receivable portfolios, net |
|
|
34,173,000 |
|
|
|
|
|
|
|
34,173,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(42,994,000 |
) |
|
|
(798,000 |
) |
|
|
(43,792,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(16,963,000 |
) |
|
|
|
|
|
|
(16,963,000 |
) |
Impairment |
|
|
(675,000 |
) |
|
|
|
|
|
|
(675,000 |
) |
Finance
income recognized (7) |
|
|
25,348,000 |
|
|
|
742,000 |
|
|
|
26,090,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
235,710,000 |
|
|
$ |
329,000 |
|
|
$ |
236,039,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
42.3 |
% |
|
|
93.0 |
% |
|
|
42.9 |
% |
|
|
|
(7) |
|
Includes $1.2 million derived from fully amortized interest method pools. |
As
of June 30, 2007 the Company had $539,703,000 in consumer receivables
acquired for liquidation, of which $499,013,000 are accounted for on the interest method. Based
upon current projections, net cash collections, applied to principal for interest method portfolios
will be as follows for the twelve months in the periods ending:
|
|
|
|
|
September 30,
2007 (three months ending) |
|
$ |
10,793,000 |
|
September 30, 2008 |
|
|
176,700,000 |
|
September 30, 2009 |
|
|
153,283,000 |
|
September 30, 2010 |
|
|
121,320,000 |
|
September 30, 2011 |
|
|
63,513,000 |
|
September 30, 2012 |
|
|
1,595,000 |
|
|
|
|
|
|
|
|
527,204,000 |
|
Cash collections in advance of projected amounts
(deferred revenue) |
|
|
(28,191,000 |
) |
|
|
|
|
Total |
|
$ |
499,013,000 |
|
|
|
|
|
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
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 June 30,
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 nine and three months ended June 30, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
Balance at beginning of period |
|
$ |
148,900,000* |
|
|
$ |
94,022,000 |
|
|
|
|
|
|
|
|
|
|
Income recognized on finance receivables, net |
|
|
(94,168,000 |
) |
|
|
(68,415,000 |
) |
Additions representing expected revenue from purchases |
|
|
135,224,000 |
|
|
|
85,252,000 |
|
Impairment |
|
|
(423,000 |
) |
|
|
(600,000 |
) |
Reclassifications from nonaccretable difference |
|
|
19,177,000 |
|
|
|
37,734,000* |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
208,710,000 |
|
|
$ |
147,993,000* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
Balance at beginning of period |
|
$ |
231,971,000* |
|
|
$ |
156,659,000* |
|
|
|
|
|
|
|
|
|
|
Income recognized on finance receivables, net |
|
|
(38,161,000 |
) |
|
|
(25,348,000 |
) |
Additions representing expected revenue from purchases |
|
|
3,654,000 |
|
|
|
13,582,000 |
|
Impairment |
|
|
|
|
|
|
(600,000 |
) |
Reclassifications from nonaccretable difference |
|
|
11,246,000 |
|
|
|
3,700,000* |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
208,710,000 |
|
|
$ |
147,993,000* |
|
|
|
|
|
|
|
|
* As
revised to reflect zero basis income recognized.
During the nine months ended June 30, 2007, the Company purchased $10.2 billion
of face value charged-off consumer receivables at a cost of $402.3 million. This includes a
portfolio with an approximate value of $4.8 million that was recently returned to the seller at
our original cost and put backs of purchased accounts returned to the
seller totaling $5.5 million. During the three months ended June 30, 2007 the Company purchased $496.8
million of face value charged-off consumer receivables at a cost of $15.6 million. At June 30,
2007, the estimated remaining net collections on the receivables
purchased in the nine months ended June 30, 2007 are $443.6 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 nine and three month
periods ended June 30, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Gross collections (1) |
|
$ |
304,692,000 |
|
|
$ |
238,054,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
91,077,000 |
|
|
|
75,501,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
213,615,000 |
|
|
$ |
162,553,000 |
|
|
|
|
|
|
|
|
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables
Acquired for Liquidation (continued)
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Gross collections (1) |
|
$ |
111,877,000 |
|
|
$ |
93,022,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
33,367,000 |
|
|
|
32,267,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
78,510,000 |
|
|
$ |
60,755,000 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross collections include: collections from third-party collection agencies and
attorneys, collections from our in-house efforts and collections
represented by account sales. In addition, includes put backs of
purchased accounts returned to the seller totaling $5.5 million
in 2007. |
|
|
|
(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. |
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 12 to 24 months.
From its inception through June 30, 2007, the venture made distributions to the Company of
$5,870,000. Subsequent to June 30, 2007 and through August 6, 2007, the venture distributed an
additional $475,000 to the Company.
Note 5: Furniture and Equipment
Furniture and equipment consist of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
Furniture |
|
$ |
307,000 |
|
|
$ |
307,000 |
|
Equipment |
|
|
2,718,000 |
|
|
|
2,563,000 |
|
|
|
|
|
|
|
|
|
|
|
3,025,000 |
|
|
|
2,870,000 |
|
Less accumulated depreciation |
|
|
1,958,000 |
|
|
|
1,769,000 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
1,067,000 |
|
|
$ |
1,101,000 |
|
|
|
|
|
|
|
|
Note 6: Debt
The Company has an agreement with a consortium of banks (the Loan
Agreement) with a facility for borrowing $175 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 Loan Agreement, as amended, allows
the Company a line of credit that 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, other than the
Portfolio Purchase discussed below, 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
restated Loan Agreement, as amended, was signed on July 11, 2006 and has a term
of three years, ending on July 11, 2009. The balance outstanding on June 30,
2007 and 2006 was $136.9 million and $65.3 million, respectively. The
applicable rate at June 30, 2007 and 2006 was 8.25% and 7.75%, respectively.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 6: Debt (continued)
Additionally,
in March 2007, Palisades Acquisition XVI, LLC (Palisades
XVI), an affiliate of the Company, borrowed approximately $227 million under a
new Receivables Financing Agreement, as amended in July 2007, with a major
financial institution, in order 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 our purchase price plus cost of
funds). The debt is full recourse only to Palisades XVI, and bears 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 applied to interest and principal of the underlying loan.
The portfolio is serviced by Palisades Collection LLC, a wholly owned
subsidiary of the Company, which has engaged a subservicer for the portfolio.
As of June 30, 2007, the outstanding balance on this loan was approximately
$207.8 million.
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.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 7: Commitments and Contingencies (continued)
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 August 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.
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 third fiscal quarter of 2007. An impairment of $675,000 on one
portfolio was recorded for the three and nine month periods ended June 30, 2006.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 8: Income Recognition and Impairments (continued)
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;
our ability to analyze accounts and resell accounts that meet our criteria; |
|
|
|
|
our ability to analyze accounts and resell accounts that meet
our criteria; |
|
|
|
|
Jobs or property of the debtors found within portfolios. With our business
model, this is of particular importance. Debtors with jobs or property are
more likely to repay their obligation through the suit strategy and
conversely, debtors without jobs or property are less likely to repay
their obligation. 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. |
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. 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.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
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 nine month periods ending June 30, 2007 and 2006, reflects income tax
expense at an effective rate of 40.5%.
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 nine
and three months ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
39,186,000 |
|
|
|
13,794,877 |
|
|
$ |
2.84 |
|
|
$ |
32,195,000 |
|
|
|
13,611,915 |
|
|
$ |
2.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Stock |
|
|
|
|
|
|
882,381 |
|
|
|
|
|
|
|
|
|
|
|
992,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
39,186,000 |
|
|
|
14,677,258 |
|
|
$ |
2.67 |
|
|
$ |
32,195,000 |
|
|
|
14,604,678 |
|
|
$ |
2.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
15,308,000 |
|
|
|
13,907,554 |
|
|
$ |
1.10 |
|
|
$ |
11,780,000 |
|
|
|
13,628,776 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Stock |
|
|
|
|
|
|
912,372 |
|
|
|
|
|
|
|
|
|
|
|
1,010,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
15,308,000 |
|
|
|
14,819,926 |
|
|
$ |
1.03 |
|
|
$ |
11,780,000 |
|
|
|
14,639,432 |
|
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 November 16, 2007. Such estimates are based on
such factors such as historical and expected employee turnover rates
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 11: Stock-Based Compensation (continued)
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 June 30, 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 June 30, 2007. In December 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 nine month period ended June 30, 2007, $185,000 and $953,000 of stock based
compensation expense was recorded, respectively. See Note 12 Stock Option Plans.
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.
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 393,334 were available as of June 30, 2007. As of June 30, 2007, approximately 160 of the
Companys employees were eligible to participate in the 2002 Plan. Future grants under the 2002
Plan have not yet been determined.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12: Stock Option Plans (continued)
1995 Stock Option Plan
The 1995 Stock Option Plan expired on September 14, 2005. The plan was adopted in order to
attract and retain qualified directors, officers and employees of, and consultants, to the Company.
The following description does not purport to be complete and is qualified in its entirety by
reference to the full text of the 1995 Stock Option Plan, which is included as an exhibit to the
Companys reports filed with the SEC.
The 1995 Stock Option Plan authorized the granting of incentive stock options (as defined in
Section 422 of the 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.
The following table summarizes stock option transactions under the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
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 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(90,001 |
) |
|
|
13.9446 |
|
|
|
(39,166 |
) |
|
|
15.0582 |
|
Options cancelled |
|
|
|
|
|
|
|
|
|
|
(6,667 |
) |
|
|
22.3600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of period |
|
|
1,342,438 |
|
|
$ |
9.4086 |
|
|
|
1,534,772 |
|
|
$ |
8.8988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of period |
|
|
1,330,438 |
|
|
$ |
9.2341 |
|
|
|
1,534,772 |
|
|
$ |
8.8988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
2007 |
|
2006 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
Shares |
|
Price |
|
Shares |
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the beginning of period |
|
|
1,352,438 |
|
|
$ |
9.3739 |
|
|
|
1,554,772 |
|
|
$ |
9.0720 |
|
Options granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(10,000 |
) |
|
|
4.7250 |
|
|
|
(13,333 |
) |
|
|
15.0582 |
|
Options cancelled |
|
|
|
|
|
|
|
|
|
|
(6,667 |
) |
|
|
22.3600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of period |
|
|
1,342,438 |
|
|
$ |
9.4086 |
|
|
|
1,534,772 |
|
|
$ |
8.8988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of period |
|
|
1,330,438 |
|
|
$ |
9.2341 |
|
|
|
1,534,772 |
|
|
$ |
8.8988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company recognized $118,000 and $22,000 of compensation expense related to stock options granted
during the nine and three month periods ended June 30, 2007.
There was no compensation expense related to stock options during
fiscal year 2006. As of June 30, 2007, there was $158,000 of
unrecognized compensation cost related to unvested stock options.
The aggregate intrinsic value of the outstanding and exercisable options as of June 30, 2007 is
$38.8 million.
The
following table summarizes the intrinsic value of the stock options
exercised during the nine and three month periods ended June 30, 2007
and 2006.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Nine months ended June 30
|
|
$ |
2,034,000 |
|
|
$ |
761,000 |
|
Three months ended June 30 |
|
$ |
355,000 |
|
|
$ |
221,000 |
|
The following table summarizes information about the Plans outstanding options as of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable |
|
Options Outstanding |
|
|
|
|
|
|
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 |
|
|
|
2.8 |
|
|
$ |
2.0208 |
|
|
|
600,000 |
|
|
$ |
2.0208 |
|
$2.8751 $5.7500 |
|
|
106,667 |
|
|
|
5.3 |
|
|
|
4.7250 |
|
|
|
106,667 |
|
|
|
4.7250 |
|
$5.7501 $8.6250 |
|
|
12,000 |
|
|
|
4.4 |
|
|
|
5.9600 |
|
|
|
12,000 |
|
|
|
5.9600 |
|
$14.3751 $17.2500 |
|
|
223,611 |
|
|
|
6.4 |
|
|
|
15.0318 |
|
|
|
223,611 |
|
|
|
15.0318 |
|
$17.2501 $20.1250 |
|
|
382,160 |
|
|
|
7.3 |
|
|
|
18.2217 |
|
|
|
382,160 |
|
|
|
18.2217 |
|
$28.7500 $28.7500 |
|
|
18,000 |
|
|
|
9.5 |
|
|
|
28.7500 |
|
|
|
6,000 |
|
|
|
28.7500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,342,438 |
|
|
|
5.0 |
|
|
$ |
9.4085 |
|
|
|
1,330,438 |
|
|
$ |
9.2341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about restricted stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Nine Months |
|
|
Average |
|
|
|
Ended |
|
|
Grant Date |
|
|
|
June 30, 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 $835,000 and $162,000 of compensation expense related to the restricted stock
awarded during the nine and three month periods ended June 30,
2007. There was no compensation expense related to restricted stock
awards during fiscal year 2006. As of June 30, 2007 there was $1,120,000
of unrecognized compensation cost related to unvested restricted stock.
Note 13: Stockholders Equity
For
the nine months ended June 30, 2007, we declared dividends of
$1,664,000. $556,000 was declared and accrued as of June 30, 2007 and paid August 1, 2007.
|
|
|
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:
|
|
|
|
|
charged-off receivables accounts that have been written-off by the originators and may
have been previously serviced by collection agencies; |
|
|
|
semi-performing receivables accounts where the debtor is currently making partial or
irregular monthly payments, but the accounts may have been written-off by the originators; and |
|
|
|
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:
|
|
|
|
|
our relationships with industry participants, collection agencies, investors and our
financing sources; |
|
|
|
brokers who specialize in the sale of consumer receivable portfolios; and |
|
|
|
other sources. |
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, 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 (SEC).
Our annual report 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 SEC are
available free of charge through our website at www.astafunding.com. Information on our website
does not constitute a part of this report. The SEC also maintains an internet site (www.sec.gov)
that contains reports and information statements and other information regarding issuers such as
ourselves who file electronically with the SEC.
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 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.
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. 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 began 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 collections and the timing thereof, the
following variables are analyzed and factored into our original estimates:
|
|
|
The number of collection agencies previously attempting to collect the receivables in the portfolio;
|
|
|
|
|
the average balance of the receivables; |
|
|
|
|
the age of the receivables (as older receivables might be more difficult to collect or might be less cost effective); |
|
|
|
|
past history of performance of similar assets as we purchase
portfolios of similar assets, we believe we have built significant
history on how these receivables will liquidate and cash flow; |
|
|
|
|
number of 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 nine-month period ended June 30, 2007, compared to the nine-month period ended June 30,
2006
Finance income. During the nine-month period ended June 30, 2007, finance income increased
$24.9 million or 35.0% to $96.1 million from $71.2 million for the nine-month period ended June 30,
2006. The increase in finance income primarily resulted from an increase in the average outstanding
level of consumer receivable accounts acquired for liquidation during the nine-month period ended
June 30, 2007, as compared to the same prior year period, coupled with the effect of adjustments to
accretable yields on certain portfolios. The average level of consumer receivables acquired for
liquidation increased from $204.4 million for the nine month period ended June 30, 2006 to $398.5
for the same period in 2007. During the nine-month period ended June 30, 2007, we acquired consumer
receivable portfolios at a cost of $402.3 million as compared to $155.4 million during the
nine-month period ended June 30, 2006.The acquired portfolios in 2007 include a portfolio with a
cost of approximately $4.7 million that has been returned to the
seller for the same purchase value.
The return was completed on July 31, 2007. During the nine-month period ended June 30, 2007,
commissions and fees associated with gross collections from our third party collection agencies and
attorneys increased $15.6 million, or 20.6% to $91.1 million from $75.5 million for the nine month
period ended June 30, 2006. The increase is indicative of a shift to the suit strategy implemented
by the Company and includes advances of court costs by our legal network. As we continue to
purchase portfolios and utilize our third party collection agencies and attorney networks, we
anticipate these costs will rise; however the contingency fees should stabilize in the range of 30%
to 32% of gross collections based upon the current mix of portfolios.
Adjustments to accretable yields on certain portfolios were made based on available
information, and based on improved liquidation rates from our third party collection agencies and
attorneys. Management believes the anticipated collections on these portfolios to be in excess of
our original projections. As we believe these improved liquidation rates will continue, we adjusted
our accretable yields by $8.0 million and $33.7 million for the nine month periods ended June 30, 2007
and 2006, respectively . Finance income related to the accretable yield reclassifications during
the nine month period ended June 30, 2007 was approximately $6.7
million. While our expectations on our third quarter purchases are lower than in the prior period,
they still fit our investment criteria. Income recognized from fully amortized portfolios (zero
based revenue) was $11.1 million and $4.0 million for the
nine month periods ended June 30, 2007 and
2006, respectively. Collections with regard to the $6.9 billion face value portfolio purchased in
the second quarter of fiscal year 2007, (the Portfolio Purchase) were $34.4 million through June
30, 2007, which includes approximately $5.5 million of accounts returned to the seller, and finance
income earned was $11.4 million.
Other
income. Other income of $502,000 for the nine month period ended June 30, 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 $1,025,000 during the nine months ended June 30,
2007. The Company has received approximately $5.9 million in cash distributions from the inception
of the venture through June 30, 2007. Subsequent to
June 30, 2007, and through August 6, 2007 an
additional $475,000 has been received by the Company.
General and Administrative Expenses. During the nine-month period ended June 30, 2007, general
and administrative expenses increased $3.9 million or 28.9% to $17.4 million from $13.5 million for
the nine-month period ended June 30, 2006, and represented 54.8% of total expenses (excluding
income taxes) for the nine-month period ended June 30, 2007. The increase in general and administrative expenses was primarily due to an increase in receivable servicing expenses during
the nine-month period ended June 30, 2007, as compared to the same prior year period. The increase
in receivable servicing expenses resulted from the substantial
increase in our average number of accounts acquired for liquidation, primarily due to the Portfolio Purchase in the second quarter of
2007. A majority of the increased costs were from collection expenses including court costs,
salaries, payroll taxes and benefits, professional fees, telephone charges and travel costs as we are visiting our third
party collection agencies and attorneys on a more frequent basis for financial and operational
audits. In addition, due to the Portfolio Purchase in the second quarter of 2007, postage costs increased by approximately 11%
due to the mailing program to notify debtors of the new ownership of their accounts.
Interest Expense. During the nine-month period ended June 30, 2007, interest expense increased
to $11.9 million from $3.2 million in the same prior year period and represented 37.6% of total
expenses (excluding income taxes) for the nine-month period ended June 30, 2007. The increase was
due to an increase in average outstanding borrowings under our line of credit during the nine-month
period ended June 30, 2007, as compared to the same period in the prior year coupled with higher
interest rates during the nine month period ended June 30, 2007. The average rate for the nine
month period ended June 30, 2007 was 7.23% as compared to 6.86% for the same period of the prior
year. The average outstanding borrowings increased from $47.3 million to $213.7 million for the
nine month periods ended June 30, 2006 and 2007, respectively. The increase in borrowings was due
to the increase in acquisitions of consumer receivables acquired for liquidation during the nine
months ended June 30, 2007, as compared to the same period last year, including the Portfolio
Purchase.
Impairment. Net impairments of $2,412,000 were recorded by the Company during the second
quarter of fiscal year 2007 and represented 7.6% of total expenses (excluding income taxes) for the
nine month period ended June 30, 2007. Based on lower than expected cash collections on certain
portfolios, and reduced forward expectations, we concluded that an impairment charge should be
recorded. An impairment charge of $675,000 was recorded in the third fiscal quarter of the prior
year.
The three-month period ended June 30, 2007 as compared to the three month period ended June 30,
2006
Finance income. During the three-month period ended June 30, 2007, finance
income increased $12.8 million or 48.9% to $38.9 million from $26.1 million for the three-month
period ended June 30, 2006. The increase in finance income primarily resulted from an increase in
the average outstanding level of consumer receivable accounts acquired for liquidation during the
three month period ended June 30, 2007, as compared to the same prior year period, coupled with the
effect of adjustments to accretable yields on certain portfolios. Income recognized from fully
amortized portfolios (zero based revenue) was $5.6 million and $1.2 million for the three month
periods ended June 30, 2007 and 2006, respectively.
Adjustments to accretable yields on certain portfolios were made based on available
information, and based on improved liquidation rates from our third party collection agencies and
attorneys. Management believes the anticipated collections on these portfolios to be in excess of
our original projection. As we believe these improved liquidation rates will continue, we adjusted
our accretable yields by $5.7 million and $2.5 million for the three month periods ended June 30, 2007
and 2006, respectively . Finance income related to the accretable yield reclassifications during
the three month period ended June 30, 2007 was approximately $2.3 million. Collections with regard
to the Portfolio Purchase in the second quarter of fiscal year 2007, were $22.2 million, which
includes approximately $5.5 million of accounts returned to the seller in the third quarter of
fiscal 2007, and finance income earned was $8.8 million.
The average level of consumer receivables acquired for liquidation increased from $236.6
million for the three month period ended June 30, 2006 to $551.7 million for the same period in
2007. During the three month period ended June 30, 2007, we acquired consumer receivable portfolios
at a cost of $15.6 million as compared to $34.2 million during the three month period ended June
30,
2006. While our expectations on our third quarter purchases are lower than in the prior
period, they still fit our investment criteria. During the three-month period ended June 30, 2007,
commissions and fees associated with gross collections from our third party collection agencies and
attorneys increased $1.1 million, or 3.4% to $33.4 million from $32.3 million for the three month
period ended June 30, 2005.
Other income. Other income of $43,000 for the three month period ended June 30, 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 $50,000 during the three months ended
June 30, 2007. The Company has received approximately $5.9 million in cash distributions from the
inception of the venture through June 30, 2007. Subsequent to
June 30, 2007, and through August 6,
2007 an additional $475,000 has been received by the Company.
General and Administrative Expenses. During the three-month period ended June 30, 2007,
general and administrative expenses increased $1.8 million or 38.8% to $6.5 million from $4.7
million for the three-month period ended June 30, 2006, and represented 49.5% of total expenses
(excluding income taxes) for the current three-month period. The increase in general and
administrative expenses was primarily due to an increase in receivable servicing expenses during the three-month
period ended June 30, 2007, as compared to the same prior year period. The increase in receivable
servicing expenses resulted from the substantial increase in the
average number of accounts
acquired for liquidation during the three-month period ended June 30, 2007, as compared to the same
prior year period. A majority of the increased costs were
from collection expenses including salaries, payroll taxes and benefits, professional fees and telephone charges. In addition,
postage costs associated with the Portfolio Purchase increased significantly due to the mailing
program to notify the debtor of the new ownership of the account.
Interest Expense. During
the three-month period ended June 30, 2007, interest expense
increased $5.4 million to $6.7 million from $1.3 million in the same prior year period and represented 50.5% of
total expenses (excluding income taxes) for the three-month period ended June 30, 2007. The
increase was due to an increase in average outstanding borrowings under our line of credit during
the three-month period ended June 30, 2007, coupled with a slightly higher interest rate, as
compared to the same period in the prior year. The average outstanding borrowing increased to
$360.1 million for the three month period ended June 30, 2006, from $68.6 million for the three
month period ended June 30, 2006. The average interest rate for the three month period ended June
30, 2007 was 7.3% as compared to 7.2% in the same period of the prior year. The increase in
borrowings was due to the increase in acquisitions of consumer receivables acquired for liquidation during fiscal 2007 including the Portfolio Purchase of face value $6.9
billion in the second fiscal quarter of 2007.
Impairment. No impairments were recorded in the three month period ended June 30, 2007. A net
impairment of $675,000 was recorded by the Company during the third quarter of fiscal year 2006 and
represented 10.2% of total expenses (excluding income taxes) for the three month period ended June
30, 2006. Based on lower than expected cash collections on a certain portfolio, and reduced forward
expectations, we concluded that an impairment charge should be recorded.
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 June 30, 2007, there was a $136.9
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 amended 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. On June 26, 2007 the
Company signed the Fifth Amendment to the 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 further amend the definition of the Borrowing Base and increase the advance
rates on portfolio purchases allowing the Company more borrowing availability.
In March 2007, Palisades Acquisition XVI, LLC (Palisades XVI), an indirect wholly-owned
subsidiary of the Company purchased 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 paid a deposit of
$75 million,
fully using its existing credit facility, as modified in February 2007.
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 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 is serviced by Palisades Collection LLC, a wholly own
subsidiary of the company, which has engaged a subservicer for the portfolio. As of June 30, 2007,
there was a $207.8 million outstanding balance under this facility.
As of June 30, 2007, our cash and cash equivalents increased $12.8 million to $20.6 million
from $7.8 million at September 30, 2006. The increase in cash and cash equivalents during the nine
month period ended June 30, 2007, was due to an increase in net
income for the period , an increase in
cash flows from financing activities slightly offset by consumer receivable purchases, higher
dividend and interest payments offset by cash distributions from the venture and collections on
other investments during the nine months ended June 30, 2007, as compared to the same period in the
prior year.
Net cash provided by operating activities was $35.1 million during the nine months ended June
30, 2007, compared to net cash provided by operating activities of $31.4 million during the nine
months ended June 30, 2006. The increase in net cash provided by operating activities was primarily
due to the increase in net income, a decrease in the investment in venture, an increase in income
taxes payable offset by an increase in amounts due from third party collection agencies and
attorneys, and an increase in deferred income taxes. Net cash used in investing activities was
$279.0 million during the nine months ended June 30, 2007, compared to net cash used by investing
activities of $65.7 million during the nine months ended June 30, 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 nine months ended June 30, 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 $256.7 million during the nine month period ended June 30,
2007, as compared to cash provided by financing activities of $35.0 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.
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 customary financial and other covenants (relative to tangible
net worth, interest coverage, and leverage ratio, as defined) that must be maintained in order to
borrow funds.
Our cash requirements have been and will continue to be significant. We depend on external
financing to acquire consumer receivables. During the nine-month period ended June 30, 2007, we
acquired consumer receivable portfolios at a cost of approximately $402.3 million. These
acquisitions were financed with our cash flows from operating activities and primarily with our
existing and new credit facilities.
We anticipate the funds available under our current 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 but we may not be
able to complete any acquisitions on favorable terms or at all.
The following tables summarize the changes in the balance sheet of the investment in
receivable portfolios during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended June 30, 2007 |
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
256,199,000 |
|
|
$ |
1,076,000 |
|
|
$ |
257,275,000 |
|
Acquisitions of receivable portfolios, net |
|
|
356,884,000 |
|
|
|
45,432,000 |
|
|
|
402,316,000 |
|
Net cash collections from collections of consumer
receivables acquired for
liquidation (1) |
|
|
(164,829,000 |
) |
|
|
(8,020,000 |
) |
|
|
(172,849,000 |
) |
Net cash collections represented by accounts sales of
consumer receivables acquired for liquidation |
|
|
(36,519,000 |
) |
|
|
(4,247,000 |
) |
|
|
(40,766,000 |
) |
Transfer to
cost recovery (2) |
|
|
(4,478,000 |
) |
|
|
4,478,000 |
|
|
|
|
|
Impairment |
|
|
(2,412,000 |
) |
|
|
|
|
|
|
(2,412,000 |
) |
Finance
income recognized (3) |
|
|
94,168,000 |
|
|
|
1,971,000 |
|
|
|
96,139,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
499,013,000 |
|
|
$ |
40,690,000 |
|
|
$ |
539,703,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
46.8 |
% |
|
|
16.1 |
% |
|
|
45.0 |
% |
|
|
|
(1) |
|
Includes put backs of purchased accounts returned to the
seller totaling $5.5 million. |
|
(2) |
|
Represents a portfolio acquired during the three months ended December 31, 2006 which
the Company has successfully negotiated the return to the seller. The portfolio was
returned on July 31, 2007. |
|
(3) |
|
Includes $11.1 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended June 30, 2006 |
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
172,636,000 |
|
|
$ |
91,000 |
|
|
$ |
172,727,000 |
|
Acquisitions of receivable portfolios, net |
|
|
155,361,000 |
|
|
|
|
|
|
|
155,361,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(116,464,000 |
) |
|
|
(2,820,000 |
) |
|
|
(119,284,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(43,034,000 |
) |
|
|
(235,000 |
) |
|
|
(43,269,000 |
) |
Transfer to cost recovery |
|
|
(529,000 |
) |
|
|
529,000 |
|
|
|
|
|
Impairment |
|
|
(675,000 |
) |
|
|
|
|
|
|
(675,000 |
) |
Finance
income recognized (4) |
|
|
68,415,000 |
|
|
|
2,764,000 |
|
|
|
71,179,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
235,710,000 |
|
|
$ |
329,000 |
|
|
$ |
236,039,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
42.9 |
% |
|
|
90.5 |
% |
|
|
43.8 |
% |
|
|
|
(4) |
|
Includes $4.0 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended June 30, 2007 |
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
522,345,000 |
|
|
$ |
41,389,000 |
|
|
$ |
563,734,000 |
|
Acquisitions of receivable portfolios, net |
|
|
11,086,000 |
|
|
|
4,548,000 |
|
|
|
15,634,000 |
|
Net cash collections from collections of consumer
receivables acquired for
liquidation (5) |
|
|
(62,814,000 |
) |
|
|
(5,931,000 |
) |
|
|
(68,745,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(9,765,000 |
) |
|
|
|
|
|
|
(9,765,000 |
) |
Finance
income recognized (6) |
|
|
38,161,000 |
|
|
|
684,000 |
|
|
|
38,845,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
499,013,000 |
|
|
$ |
40,690,000 |
|
|
$ |
539,703,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
52.6 |
% |
|
|
11.5 |
% |
|
|
49.5 |
% |
|
|
|
(5) |
|
Includes put backs of purchased accounts returned to the
seller totaling $5.5 million. |
|
(6) |
|
Includes $5.6 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended June 30, 2006 |
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
236,821,000 |
|
|
$ |
385,000 |
|
|
$ |
237,206,000 |
|
Acquisitions of receivable portfolios, net |
|
|
34,173,000 |
|
|
|
|
|
|
|
34,173,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(42,994,000 |
) |
|
|
(798,000 |
) |
|
|
(43,792,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(16,963,000 |
) |
|
|
|
|
|
|
(16,963,000 |
) |
Impairment |
|
|
(675,000 |
) |
|
|
|
|
|
|
(675,000 |
) |
Finance
income recognized (7) |
|
|
25,348,000 |
|
|
|
742,000 |
|
|
|
26,090,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
235,710,000 |
|
|
$ |
329,000 |
|
|
$ |
236,039,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
42.3 |
% |
|
|
93.0 |
% |
|
|
42.9 |
% |
|
|
|
(7) |
|
Includes $1.2 million derived from fully amortized interest method pools. |
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 nine months ended June 30, 2007, we purchased portfolios with an aggregate
purchase price of $402.3 million with a face value of $10.2 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 |
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2007 |
|
$ |
40,766,000 |
|
|
$ |
18,211,000 |
|
Three months ended June 30, 2007 |
|
$ |
9,765,000 |
|
|
$ |
3,697,000 |
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2006 |
|
$ |
43,269,000 |
|
|
$ |
24,464,000 |
|
Three months ended June 30, 2006 |
|
$ |
16,963,000 |
|
|
$ |
10,218,000 |
|
PORTFOLIO PERFORMANCE (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
Total estimated |
|
|
|
|
|
|
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 |
|
|
$ |
95,243,000 |
|
|
$ |
0 |
|
|
$ |
95,243,000 |
|
|
|
146 |
% |
2002 |
|
|
36,557,000 |
|
|
|
52,266,000 |
|
|
|
0 |
|
|
|
52,266,000 |
|
|
|
143 |
% |
2003 |
|
|
115,626,000 |
|
|
|
190,895,000 |
|
|
|
9,476,000 |
|
|
|
200,371,000 |
|
|
|
173 |
% |
2004 |
|
|
103,743,000 |
|
|
|
156,118,000 |
|
|
|
8,168,000 |
|
|
|
164,286,000 |
|
|
|
158 |
% |
2005 |
|
|
126,023,000 |
|
|
|
146,163,000 |
|
|
|
70,858,000 |
|
|
|
217,021,000 |
|
|
|
172 |
% |
2006 |
|
|
200,237,000 |
|
|
|
133,271,000 |
|
|
|
175,642,000 |
|
|
|
308,913,000 |
|
|
|
154 |
% |
2007 |
|
|
356,884,000 |
|
|
|
45,230,000 |
|
|
|
443,579,000 |
|
|
|
488,809,000 |
|
|
|
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 basis. |
|
(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. 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 for 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. 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.
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 June 30, 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 June 30, 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.
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.
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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
|
10.1 |
|
Fifth Amended to the Fourth Amended and Restated Loan Agreement dated June 26, 2006 |
|
|
10.2 |
|
Amendment to Receivables Financing Agreement Dated July 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. |
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: August 9, 2007 |
By: |
/s/ Gary Stern
|
|
|
|
Gary Stern, President, Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
Date: August 9, 2007 |
By: |
/s/ Mitchell Cohen
|
|
|
|
Mitchell Cohen, Chief Financial Officer |
|
|
|
(Principal Financial Officer and
Principal Accounting Officer) |
|
|