Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-26906
ASTA FUNDING, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(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) |
Registrants telephone number: (201) 567-5648
Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files.)
Yes o No o
The registrant is not yet subject to this requirement.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer as in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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, 2009, the registrant had 14,271,924 common shares outstanding.
ASTA FUNDING, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
2
PART I. FINANCIAL INFORMATION
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ITEM 1. |
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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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2009 |
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2008 |
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(Unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
3,223,000 |
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$ |
3,623,000 |
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Restricted cash |
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2,256,000 |
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3,047,000 |
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Consumer receivables acquired for liquidation, (at net realizable value) |
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356,264,000 |
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449,012,000 |
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Due from third party collection agencies and attorneys |
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3,516,000 |
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5,070,000 |
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Income taxes receivable |
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807,000 |
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Investment in venture |
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119,000 |
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555,000 |
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Furniture and equipment, net |
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511,000 |
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762,000 |
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Deferred income taxes |
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22,593,000 |
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15,567,000 |
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Other assets |
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2,877,000 |
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3,500,000 |
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Total assets |
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$ |
392,166,000 |
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$ |
481,136,000 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities |
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Debt |
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$ |
144,888,000 |
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$ |
213,485,000 |
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Subordinated debt related party |
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8,246,000 |
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8,246,000 |
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Other liabilities |
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1,980,000 |
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4,618,000 |
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Dividends payable |
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285,000 |
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571,000 |
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Income taxes payable |
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357,000 |
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6,315,000 |
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Total liabilities |
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155,756,000 |
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233,235,000 |
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Commitments and contingencies |
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Stockholders Equity |
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Preferred stock, $.01 par value; authorized 5,000,000; issued and outstanding none |
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Common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding 14,271,924 at
June 30, 2009 and 14,276,158 at September 30, 2008 |
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143,000 |
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143,000 |
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Additional paid-in capital |
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70,069,000 |
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69,130,000 |
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Accumulated other comprehensive loss |
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(344,000 |
) |
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(297,000 |
) |
Retained earnings |
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166,542,000 |
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178,925,000 |
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Total stockholders equity |
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236,410,000 |
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247,901,000 |
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Total liabilities and stockholders equity |
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$ |
392,166,000 |
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$ |
481,136,000 |
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See accompanying notes to condensed consolidated financial statements
3
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months |
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Three Months |
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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, 2009 |
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June 30, 2008 |
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June 30, 2009 |
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June 30, 2008 |
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Revenues: |
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Finance income, net |
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$ |
17,202,000 |
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$ |
23,560,000 |
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$ |
53,722,000 |
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$ |
91,573,000 |
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Other income |
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36,000 |
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12,000 |
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90,000 |
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156,000 |
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17,238,000 |
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23,572,000 |
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53,812,000 |
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91,729,000 |
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Expenses: |
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General and administrative |
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6,634,000 |
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7,615,000 |
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20,006,000 |
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20,544,000 |
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Interest |
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1,655,000 |
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3,619,000 |
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6,522,000 |
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14,271,000 |
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Interest Related Party |
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128,000 |
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24,000 |
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385,000 |
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24,0000 |
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Impairments of consumer receivables acquired for liquidation |
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6,364,000 |
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8,153,000 |
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46,208,000 |
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43,153,000 |
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14,781,000 |
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19,411,000 |
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73,121,000 |
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77,992,000 |
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Income (loss) before equity in earnings (loss) of venture and income taxes |
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2,457,000 |
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4,161,000 |
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(19,309,000 |
) |
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13,737,000 |
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Equity (loss) in earnings of venture |
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34,000 |
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(59,000 |
) |
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(21,000 |
) |
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(137,000 |
) |
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Income (loss) before income tax expense (benefit) |
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2,491,000 |
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4,102,000 |
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(19,330,000 |
) |
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13,600,000 |
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Income tax expense (benefit) |
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1,013,000 |
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1,662,000 |
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(7,803,000 |
) |
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5,553,000 |
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Net income (loss) |
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$ |
1,478,000 |
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$ |
2,440,000 |
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$ |
(11,527,000 |
) |
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$ |
8,047,000 |
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Net income (loss) per share: |
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Basic |
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$ |
0.10 |
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$ |
0.17 |
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$ |
(0.81 |
) |
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$ |
0.57 |
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Diluted |
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$ |
0.10 |
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$ |
0.17 |
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$ |
(0.81 |
) |
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$ |
0.55 |
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Weighted average number of shares outstanding: |
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Basic |
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14,271,946 |
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14,276,158 |
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14,271,931 |
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14,111,954 |
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Diluted |
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14,445,572 |
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14,535,548 |
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14,271,931 |
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14,642,467 |
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See accompanying notes to condensed consolidated financial statements
4
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(UNAUDITED)
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Additional |
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Accumulated |
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Common Stock |
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Paid-In |
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Retained |
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Other Comprehensive |
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Shares |
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Amount |
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Capital |
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Earnings |
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Income |
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Total |
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Balance, September 30, 2008 |
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14,276,158 |
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$ |
143,000 |
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$ |
69,130,000 |
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$ |
178,925,000 |
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(297,000 |
) |
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$ |
247,901,000 |
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Exercise of options |
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100 |
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Restricted shares forfeited |
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(4,334 |
) |
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Stock based compensation expense |
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865,000 |
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865,000 |
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Tax benefit arising from vesting of restricted stock |
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74,000 |
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74,000 |
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Dividends |
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(856,000 |
) |
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(856,000 |
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Other comprehensive loss (net of tax) |
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$ |
(47,000 |
) |
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(47,000 |
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Net loss |
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(11,527,000 |
) |
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(11,527,000 |
) |
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Balance, June 30, 2009 |
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14,271,924 |
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$ |
143,000 |
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$ |
70,069,000 |
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$ |
166,542,000 |
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$ |
(344,000 |
) |
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$ |
236,410,000 |
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Comprehensive income is as follows:
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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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June 30, 2009 |
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June 30, 2008 |
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Net (loss) income |
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$ |
(11,527,000 |
) |
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$ |
8,047,000 |
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Other comprehensive (loss)
income, Net of tax Foreign
Currency translation |
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(47,000 |
) |
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607,000 |
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Comprehensive (loss) income |
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$ |
(11,574,000 |
) |
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$ |
8,654,000 |
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See accompanying notes to condensed consolidated financial statements
5
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, 2009 |
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June 30, 2008 |
|
Cash flows from operating activities: |
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Net (loss) income |
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$ |
(11,527,000 |
) |
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$ |
8,047,000 |
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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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1,261,000 |
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|
915,000 |
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Deferred income taxes |
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(7,026,000 |
) |
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|
111,000 |
|
Impairments of consumer receivables acquired for liquidation |
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46,208,000 |
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43,153,000 |
|
Stock based compensation |
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865,000 |
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|
731,000 |
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Changes in: |
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Income taxes payable and receivable |
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(6,765,000 |
) |
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(4,955,000 |
) |
Due from third party collection agencies and attorneys |
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|
1,554,000 |
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|
(197,000 |
) |
Other assets |
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(349,000 |
) |
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|
(478,000 |
) |
Other liabilities |
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(2,642,000 |
) |
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(2,695,000 |
) |
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Net cash provided by operating activities |
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21,579,000 |
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44,632,000 |
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Cash flows from investing activities: |
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Purchase of consumer receivables acquired for liquidation |
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(16,501,000 |
) |
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(48,864,000 |
) |
Principal collected on receivables acquired for liquidation |
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57,545,000 |
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56,757,000 |
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Principal collected on receivable accounts represented by account sales |
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5,317,000 |
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|
8,355,000 |
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Foreign exchange effect on receivable accounts acquired for liquidation |
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126,000 |
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(782,000 |
) |
Cash distributions received from venture |
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436,000 |
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|
1,377,000 |
|
Capital expenditures |
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(38,000 |
) |
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(296,000 |
) |
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Net cash provided by investing activities |
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46,885,000 |
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|
16,547,000 |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options |
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425,000 |
|
Tax benefit arising from vesting of restricted stock and exercise of non-qualified options |
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74,000 |
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|
2,541,000 |
|
Change in restricted cash |
|
|
791,000 |
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|
1,918,000 |
|
Dividends paid |
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(1,142,000 |
) |
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(1,685,000 |
) |
Repayments of debt, net |
|
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(68,574,000 |
) |
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(74,398,000 |
) |
Advance under subordinated debt related party |
|
|
|
|
|
|
8,270,000 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(68,851,000 |
) |
|
|
(62,929,000 |
) |
|
|
|
|
|
|
|
(Decrease) in cash |
|
|
(387,000 |
) |
|
|
(1,750,000 |
) |
Effect of foreign exchange on cash |
|
|
(13,000 |
) |
|
|
42,000 |
|
Cash at the beginning of period |
|
|
3,623,000 |
|
|
|
4,525,000 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
3,223,000 |
|
|
$ |
2,817,000 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period |
|
|
|
|
|
|
|
|
Interest |
|
$ |
7,101,000 |
|
|
$ |
14,657,000 |
|
Interest Related Party |
|
|
386,000 |
|
|
|
|
|
Income taxes |
|
$ |
5,885,000 |
|
|
$ |
8,233,000 |
|
See accompanying notes to condensed consolidated financial statements.
6
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 significant operating subsidiaries
Palisades Collection LLC, Palisades Acquisition XVI, LLC (Palisades XVI), VATIV Recovery
Solutions LLC (VATIV) and other subsidiaries, not all wholly owned, and not considered material
(the Company) is engaged in the business of purchasing, and managing for its own account,
distressed consumer receivables, including charged-off receivables, semi-performing receivables and
performing receivables. Primary charged-off receivables are accounts that have been written-off by
the originators and may have been previously serviced by collection agencies. Semi-performing
receivables are accounts where the debtor is currently making partial or irregular monthly
payments, but the accounts may have been written-off by the originators. Performing receivables are
accounts where the debtor is making regular monthly payments that may or may not have been
delinquent in the past. Distressed consumer receivables are the unpaid debts of individuals to
banks, finance companies and other credit and service providers. A large portion of the Companys
distressed consumer receivables are MasterCard(R), Visa(R), other credit card accounts,
telecommunication accounts and auto deficiency receivables, which were charged-off by the issuers
or providers for non-payment. The Company acquires these portfolios at substantial discounts from
their face values. The discounts are based on the characteristics (issuer, account size, debtor
location and age of debt) of the underlying accounts of each portfolio.
Basis of Presentation
The condensed consolidated balance sheets as of June 30, 2009, the condensed consolidated
statements of operations for the nine and three month periods ended June 30, 2009 and 2008, the
condensed consolidated statement of stockholders equity as of and for the nine months ended
June 30, 2009 and the condensed consolidated statements of cash flows for the nine month periods
ended June 30, 2009 and 2008 are unaudited. The September 30, 2008 financial information included
in this report has been extracted from our audited financial statements included in our Annual
Report on Form 10-K and Form 10-K/A. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly our financial position at June 30,
2009 and September 30, 2008, the results of operations for the nine and three month periods ended
June 30, 2009 and 2008 and cash flows for the nine month periods ended June 30, 2009 and 2008 have
been made. The results of operations for the nine and three month periods ended June 30, 2009 and
2008 are not necessarily indicative of the operating results for any other interim period or the
full fiscal year.
The accompanying unaudited condensed consolidated financial statements have been prepared
in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange
Commission (SEC or the 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 and Form 10-K/A for the fiscal year ended September 30,
2008 filed with the SEC.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (US GAAP) 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 June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codifications and
the Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB Statement No.
162. Under SFAS No. 168, The FASB Accounting Standards Codification (Codification) will become
the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under
authority of the federal securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of SFAS No. 168, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become non-authoritative. SFAS No. 168
is effective for financial statements issued for interim and annual periods ending after September
15, 2009. In the FASBs views, the issuance of SFAS No. 168 and the Codification will not change
GAAP, except for those nonpublic nongovernmental entities that must now apply the American
Institute to Certified Public Accountants Technical Inquiry Service Section 5100, Revenue
Recognition paragraphs 38-76. The Company does not expect the adoption of SFAS No. 168 will have
a material impact on the Companys consolidated financial statements.
7
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Business and Basis of Presentation (continued)
In June 2009, the Financial Accounting Standards Board issued FASB Statement 167, Amendments
to FASB Interpretation No. 46(R), to improve how enterprises account for and disclose their
involvement with variable interest entities (VIEs), which are special-purpose entities, and other
entities whose equity at risk is insufficient or lack certain characteristics. Among other things,
Statement 167 changes how an entity determines whether it is the primary beneficiary of a variable
interest entity (VIE) and whether that VIE should be consolidated. The new Statement requires an
entity to provide significantly more disclosures about its involvement with VIEs. As a result, the
Company must comprehensively review its involvements with VIEs and potential VIEs, including
entities previously considered to be qualifying special purpose entities, to determine the effect
on its consolidated financial statements and related disclosures. Statement 167 is effective as of
the beginning of a reporting entitys first annual reporting period that begins after November 15,
2009 and for interim periods within the first annual reporting period. Earlier application is
prohibited. The Company does not believe that the adoption of Statement 167 will have a significant
effect on its consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, to incorporate the accounting
and disclosures requirements for subsequent events into GAAP. SFAS No. 165 introduces new
terminology, defines a date through which management must evaluate subsequent events, and lists the
circumstances under which an entity must recognize and disclose events or transactions occurring
after the balance-sheet date. The Company adopted SFAS No. 165 as of June 30, 2009, which was the
required effective date. The Company evaluated its June 30, 2009 financial statements for
subsequent events through August 7, 2009, the date the financial statements were issued. The
Company is not aware of any subsequent events, other than that disclosed in Note 15, which would
require recognition or disclosure in the financial statements.
In April 2009 the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments, (FSP 107-1). FSP 107-1 expands disclosures for fair value of
financial instruments that are within the scope of FASB statement number 107 (SFAS 107) and now
requires the FAS 107 fair value disclosures in interim period reports. The FSP is effective for
interim reporting periods ending after June 15, 2009. The
Company adopted FAS 107-1 and APB 28-1 during
the quarter ended June 30, 2009.
In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin 110 (SAB 110). This staff accounting bulletin (SAB) expresses the views of the staff
regarding the use of a simplified method, as discussed in SAB No. 107 (SAB 107), in developing
an estimate of expected term of plain vanilla share options in accordance with Financial
Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment . In
particular, the staff indicated in SAB 107 that it will accept a companys election to use the
simplified method, regardless of whether the company has sufficient information to make more
refined estimates of expected term. At the time SAB 107 was issued, the staff believed that more
detailed external information about employee exercise behavior (e.g., employee exercise patterns by
industry and/or other categories of companies) would, over time, become readily available to
companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the
simplified method for share option grants after December 31, 2007. The staff understands that such
detailed information about employee exercise behavior might not have been widely available by
December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the
use of the simplified method beyond December 31, 2007. This SAB does not have a material impact on
the Company.
Reclassifications
Certain items in the prior years financial statements have been reclassified to conform to
the current periods presentation.
Note 2: Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its
wholly owned and majority owned subsidiaries. The Companys investment in a venture, representing a
25% interest, is accounted for using the equity method. All significant intercompany balances and
transactions have been eliminated in consolidation.
8
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation
|
|
The Company accounts for its investments in consumer receivable portfolios, using either: |
|
|
the interest method; or |
|
|
|
the cost recovery method. |
Accounts acquired for liquidation are stated at their net estimated realizable value and
consist primarily of defaulted consumer loans to individuals throughout the country and in
Central and South America.
The Company accounts for its investment in finance receivables using the interest method
under the guidance of AICPA Statement of Position 03-3, Accounting for Loans or Certain
Securities Acquired in a Transfer (SOP 03-3). Practice Bulletin 6, Amortization of Discounts
on Certain Acquired Loans. (Practice Bulletin 6) was amended by SOP 03-3. Under the guidance
of SOP 03-3 (and the amended Practice Bulletin 6), static pools of accounts are established.
These pools are aggregated based on certain common risk criteria. Each static pool is recorded
at cost and is accounted for as a single unit for the recognition of income, principal payments
and loss provision.
Once a static pool is established for a quarter, individual receivable accounts are not
added to the pool (unless replaced by the seller) or removed from the pool (unless sold or
returned to the seller). SOP 03-3 (and the amended Practice Bulletin 6) requires that the excess
of the contractual cash flows over expected cash flows not be recognized as an adjustment of
revenue or expense or on the balance sheet. SOP 03-3 initially freezes the internal rate of
return, referred to as IRR, estimated when the accounts receivable are purchased, as the basis
for subsequent impairment testing. Significant increases in actual or expected future cash flows
may be recognized prospectively through an upward adjustment of the IRR over a portfolios
remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing.
Rather than lowering the estimated IRR if the collection estimates are not received or projected
to be received, the carrying value of a pool would be impaired, or written down to maintain the
then current IRR. Under the interest method, income is recognized on the effective yield method
based on the actual cash collected during a period and future estimated cash flows and timing of
such collections and the portfolios cost. Revenue arising from collections in excess of
anticipated amounts attributable to timing differences is deferred until such time as a review
results in a change in the expected cash flows. The estimated future cash flows are reevaluated
quarterly.
The Company uses the cost recovery method when collections on a particular pool of accounts
cannot be reasonably predicted. Under the cost recovery method, no income is recognized until
the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero
carrying balance on the balance sheet) while still generating cash collections. In this case,
all cash collections are recognized as revenue when received.
As a result of the recent challenging economic environment and the impact it has had on
collections, for portfolio purchases acquired in fiscal year 2009 we have extended our time
frame of the expectation of recovering 100% of our invested capital within a 24-39 month period
from an 18-28 month period and the expectation of recovering 130-140% over 7 years which is an
increase from the previous 5 year expectation. The collection expectations of portfolios
previously purchased were not changed. We routinely monitor these expectations 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
is recorded. Conversely, in the event the cash flows are in excess of our expectations and the
reason is due to timing, we would defer the excess collection as deferred revenue.
The Companys extensive liquidating experience is in the field of distressed credit card
receivables, telecommunication receivables, consumer loan receivables, retail installment
contracts, consumer receivables, and auto deficiency receivables. The Company uses the interest
method for accounting for asset acquisitions within these classes of receivables when it
believes it can reasonably estimate the timing of the cash flows. In those situations where the
Company diversifies its acquisitions into other asset classes where the Company does not possess
the same expertise or history, or the Company cannot reasonably estimate the timing of the cash
flows, the Company utilizes the cost recovery method of accounting for those portfolios of
receivables. At June 30, 2009, approximately $136.5 million of the consumer receivables acquired
for liquidation are accounted for using the interest method, while approximately $219.8 million
are accounted for using the cost recovery method. The latter includes one portfolio valued at
approximately $181 million.
9
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
After SOP 03-3 was adopted, the Company aggregates portfolios of receivables acquired
sharing specific common characteristics which were acquired within a given quarter. The Company
currently considers for aggregation portfolios of accounts, purchased within the same fiscal
quarter, that generally meet the following characteristics:
|
|
same issuer/originator; |
|
|
|
same underlying credit quality; |
|
|
|
similar geographic distribution of the accounts; |
|
|
|
similar age of the receivable; and |
|
|
|
same type of asset class (credit cards, telecommunication, etc.) |
The Company uses a variety of qualitative and quantitative factors to estimate collections
and the timing thereof. This analysis includes the following variables:
|
|
the number of collection agencies previously attempting to collect the receivables in the portfolio; |
|
|
|
the average balance of the receivables, as higher balances might be more difficult to collect while
low balances might not be cost effective to collect; |
|
|
|
the age of the receivables, as older receivables might be more difficult to collect or might be
less cost effective. On the other hand, the passage of time, in certain circumstances, might result
in higher collections due to changing life events of some individual debtors; |
|
|
|
past history of performance of similar assets; |
|
|
|
time since charge-off; |
|
|
|
payments made since charge-off; |
|
|
|
the credit originator and its credit guidelines; |
|
|
|
our ability to analyze accounts and resell accounts that meet our criteria for resale; |
|
|
|
the locations of the debtors, as there are better states to attempt to collect in and ultimately
the Company has better predictability of the liquidations and the expected cash flows. Conversely,
there are also states where the liquidation rates are not as favorable and that is factored into
our cash flow analysis; |
|
|
|
jobs or property of the debtors found within portfolios. In our business model, this is of
particular importance. Debtors with jobs or property are more likely to repay their obligation and
conversely, debtors without jobs or property are less likely to repay their obligation; and |
|
|
|
the ability to obtain timely customer statements from the original issuer. |
The Company obtains and utilizes, as appropriate, input, including but not limited to
monthly collection projections and liquidation rates, from our third party collection agencies
and attorneys, as further evidentiary matter, to assist in evaluating and developing collection
strategies and in evaluating and modeling the expected cash flows for a given portfolio.
10
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
The following tables summarize the changes in the balance sheet of the investment in
consumer receivables acquired for liquidation during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended June 30, 2009 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
203,470,000 |
|
|
$ |
245,542,000 |
|
|
$ |
449,012,000 |
|
Acquisitions of receivable portfolios, net |
|
|
16,221,000 |
|
|
|
280,000 |
|
|
|
16,501,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(75,123,000 |
) |
|
|
(33,619,000 |
) |
|
|
(108,742,000 |
) |
Net cash collections represented by
account sales of consumer receivables
acquired for liquidation |
|
|
(4,158,000 |
) |
|
|
(3,684,000 |
) |
|
|
(7,842,000 |
) |
Transfer to cost recovery (1) |
|
|
(10,128,000 |
) |
|
|
10,128,000 |
|
|
|
|
|
Impairments of consumer receivables
acquired for liquidation |
|
|
(46,208,000 |
) |
|
|
|
|
|
|
(46,208,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
(179,000 |
) |
|
|
(179,000 |
) |
Finance income recognized (2) |
|
|
52,366,000 |
|
|
|
1,356,000 |
|
|
|
53,722,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
136,440,000 |
|
|
$ |
219,824,000 |
|
|
$ |
356,264,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
66.1 |
% |
|
|
3.6 |
% |
|
|
46.1 |
% |
|
|
|
(1) |
|
During the nine months ended June 30, 2009, three portfolios were
transferred from the interest method to the cost recovery method. Based
on the nature of these portfolios and the recent cash flows, our
estimates of the timing of expected cash flows became uncertain. |
|
(2) |
|
Includes $31.1 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended June 30, 2008 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
508,515,000 |
|
|
$ |
37,108,000 |
|
|
$ |
545,623,000 |
|
Acquisitions of receivable portfolios, net |
|
|
25,622,000 |
|
|
|
23,242,000 |
|
|
|
48,864,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation (1) |
|
|
(130,572,000 |
) |
|
|
(10,633,000 |
) |
|
|
(141,205,000 |
) |
Net cash collections represented by
account sales of consumer receivables
acquired for liquidation |
|
|
(15,480,000 |
) |
|
|
|
|
|
|
(15,480,000 |
) |
Transfer to cost recovery (2) |
|
|
(208,693,000 |
) |
|
|
208,693,000 |
|
|
|
|
|
Impairments of consumer receivables
acquired for liquidation |
|
|
(43,153,000 |
) |
|
|
|
|
|
|
(43,153,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
782,000 |
|
|
|
782,000 |
|
Finance income recognized (3) |
|
|
90,624,000 |
|
|
|
949,000 |
|
|
|
91,573,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
226,863,000 |
|
|
$ |
260,141,000 |
|
|
$ |
487,004,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
62.0 |
% |
|
|
8.9 |
% |
|
|
58.4 |
% |
|
|
|
(1) |
|
Includes the put back of a portfolio purchased and returned to the seller
in the amount of $2.8 million in the first quarter of fiscal year 2008. |
|
(2) |
|
The Company purchased $6.9 billion in face value receivables for a
purchase price of $300 million in March 2007 (the Portfolio Purchase).
During the quarter ending June 30, 2008, the Company transferred the
interest method carrying value of the Portfolio Purchase from the
interest method to the cost recovery method. |
|
(3) |
|
Includes $34.2 million derived from fully amortized interest method pools. |
11
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, 2009 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
137,497,000 |
|
|
$ |
230,726,000 |
|
|
$ |
368,223,000 |
|
Acquisitions of receivable portfolios, net |
|
|
13,540,000 |
|
|
|
273,000 |
|
|
|
13,813,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(23,660,000 |
) |
|
|
(12,766,000 |
) |
|
|
(36,426,000 |
) |
Net cash collections represented by
account sales of consumer receivables
acquired for liquidation |
|
|
(1,083,000 |
) |
|
|
(112,000 |
) |
|
|
(1,195,000 |
) |
Impairments of consumer receivables
acquired for liquidation |
|
|
(6,364,000 |
) |
|
|
|
|
|
|
(6,364,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
1,011,000 |
|
|
|
1,011,000 |
|
Finance income recognized (1) |
|
|
16,510,000 |
|
|
|
692,000 |
|
|
|
17,202,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
136,440,000 |
|
|
$ |
219,824,000 |
|
|
$ |
356,264,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
66.7 |
% |
|
|
5.4 |
% |
|
|
45.7 |
% |
|
|
|
(1) |
|
Includes $10.5 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended June 30, 2008 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
460,623,000 |
|
|
$ |
51,633,000 |
|
|
$ |
512,256,000 |
|
Acquisitions of receivable portfolios, net |
|
|
5,467,000 |
|
|
|
2,090,000 |
|
|
|
7,557,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(42,869,000 |
) |
|
|
(3,303,000 |
) |
|
|
(46,172,000 |
) |
Net cash collections represented by
account sales of consumer receivables
acquired for liquidation |
|
|
(2,826,000 |
) |
|
|
|
|
|
|
(2,826,000 |
) |
Transfer to cost recovery (1) |
|
|
(208,693,000 |
) |
|
|
208,693,000 |
|
|
|
|
|
Impairments of consumer receivables
acquired for liquidation |
|
|
(8,153,000 |
) |
|
|
|
|
|
|
(8,153,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
782,000 |
|
|
|
782,000 |
|
Finance income recognized (2) |
|
|
23,314,000 |
|
|
|
246,000 |
|
|
|
23,560,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
226,863,000 |
|
|
$ |
260,141,000 |
|
|
$ |
487,004,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
51.0 |
% |
|
|
7.4 |
% |
|
|
48.1 |
% |
|
|
|
(1) |
|
Represents the transfer of the carrying value of the Portfolio Purchase from the interest method to the cost recovery method. |
|
(2) |
|
Includes $10.4 million derived from fully amortized interest method pools. |
12
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
As of June 30, 2009 the Company had $356,264,000 in consumer receivables acquired for
liquidation, of which $136,440,000 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, 2009 (three months ending) |
|
$ |
10,928,000 |
|
September 30, 2010 |
|
|
54,056,000 |
|
September 30, 2011 |
|
|
34,570,000 |
|
September 30, 2012 |
|
|
23,545,000 |
|
September 30, 2013 |
|
|
10,597,000 |
|
September 30, 2014 |
|
|
1,524,000 |
|
September 30, 2015 |
|
|
720,000 |
|
September 30, 2016 |
|
|
587,000 |
|
|
|
|
|
|
|
|
136,527,000 |
|
Cash collections in advance of projected amounts (deferred revenue) |
|
|
(87,000 |
) |
|
|
|
|
Total |
|
$ |
136,440,000 |
|
|
|
|
|
Accretable yield represents the amount of income the Company can expect to generate
over the remaining life of its existing interest method portfolios based on estimated future net
cash flows as of June 30, 2009. The Company adjusts the accretable yield upward when it believes,
based on available evidence, that portfolio collections will exceed amounts previously estimated.
Changes in accretable yield for the nine and three months ended June 30, 2009 and 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
Balance at beginning of period |
|
$ |
58,134,000 |
|
|
$ |
176,615,000 |
|
|
|
|
|
|
|
|
|
|
Income recognized on finance receivables, net |
|
|
(52,366,000 |
) |
|
|
(67,337,000 |
) |
Additions representing expected revenue from purchases |
|
|
4,937,000 |
|
|
|
9,237,000 |
|
Transfers to cost recovery (1) |
|
|
(3,372,000 |
) |
|
|
(100,475,000 |
) |
Reclassifications from nonaccretable difference |
|
|
37,751,000 |
|
|
|
51,530,000 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
45,084,000 |
|
|
$ |
69,570,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
Balance at beginning of period |
|
$ |
48,071,000 |
|
|
$ |
189,434,000 |
|
|
|
|
|
|
|
|
|
|
Income recognized on finance receivables, net |
|
|
(16,510,000 |
) |
|
|
(20,289,000 |
) |
Additions representing expected revenue from purchases |
|
|
4,035,000 |
|
|
|
1,915,000 |
|
Transfers to cost recovery (1) |
|
|
|
|
|
|
(100,475,000 |
) |
Reclassifications from nonaccretable difference |
|
|
9,488,000 |
|
|
|
(1,015,000 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
45,084,000 |
|
|
$ |
69,570,000 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The period ended June 30, 2008 amount represents the remaining
finance income expected on the Portfolio Purchase which was
transferred from the interest method to the cost recovery method
during the quarter. |
13
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
During the three and nine month periods ended June 30, 2009, the Company purchased $335.6 million
and $427.1 million, respectively, of face value of charged-off consumer receivables at a cost of
$13.8 million and $16.5 million, respectively. Most of the portfolios purchased in the nine months
ended June 30, 2009 are classified under the interest method. At June 30, 2009, the estimated
remaining net collections on the receivables purchased in the nine months ended June 30, 2009 is
$18.5 million, of which $13.7 million represents principal.
We record collections received from third party collection agencies and attorneys net of
commissions and fees. The following table summarizes collections on a gross basis, less commissions
and direct costs for the nine and three month periods ended June 30, 2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
Gross collections (1) |
|
$ |
176,709,000 |
|
|
$ |
254,833,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
60,125,000 |
|
|
|
98,148,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
116,584,000 |
|
|
$ |
156,685,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
Gross collections (1) |
|
$ |
53,484,000 |
|
|
$ |
78,145,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
15,863,000 |
|
|
|
29,147,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
37,621,000 |
|
|
$ |
48,998,000 |
|
|
|
|
|
|
|
|
|
|
|
(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 the first quarter of
fiscal year 2008, the Company returned a portfolio to
the seller in the amount of $2.8 million, which is
included in the nine-month period ended June 30, 2008. |
|
(2) |
|
Commissions and fees are the contractual commission
earned by third party collection agencies and
attorneys, and direct costs associated with the
collection effort- generally court costs. Includes a
3% fee charged by a servicer on gross collections
received by the Company in connection with the
Portfolio Purchase. |
Note 4: Acquisition
In October 2007, through a newly formed subsidiary, the Company acquired a portfolio of
consumer receivables domiciled in South America. The investment in the subsidiary company,
substantially all of which was applied to the cost of the portfolio, was approximately $8.6 million
in cash.
Note 5: Furniture and Equipment
Furniture and equipment consist of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Furniture |
|
$ |
310,000 |
|
|
$ |
310,000 |
|
Leasehold improvements |
|
|
86,000 |
|
|
|
105,000 |
|
Equipment |
|
|
2,752,000 |
|
|
|
2,714,000 |
|
|
|
|
|
|
|
|
|
|
|
3,148,000 |
|
|
|
3,129,000 |
|
Less accumulated depreciation |
|
|
2,637,000 |
|
|
|
2,367,000 |
|
Balance, end of period |
|
$ |
511,000 |
|
|
$ |
762,000 |
|
|
|
|
|
|
|
|
14
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 6: Debt and Subordinated Debt Related Party
Credit Facility
On July 11, 2006, the Company entered into the Fourth Amended and Restated Loan Agreement with a
consortium of banks (the Bank Group). This agreement and all future amendments are referred to
as the (Credit Facility). As a result of this amended agreement, the Credit Facility increased to
$175 million, from $125 million and had an expandable feature which enabled the Company to increase
the line to $225 million with the consent of the Bank Group. Since the inception of the Credit
Facility on July 11, 2006, material amendments are as follows:
Second Amendment to the Fourth Amended and Restated Loan Agreement, dated March 2, 2007 Amendment
consented to the proposed Portfolio Purchase by non-credit party affiliates of the Company.
Third Amendment to the Fourth Amended and Restated Loan Agreement, dated March 30, 2007 Amendment
granted a temporary over advance of $16 million from March 30, 2007 through May 17, 2007 to permit
the Portfolio Purchase.
Fourth Amendment to the Fourth Amended and Restated Loan Agreement, dated May 10, 2007 Amendment
reduced the borrowing base availability advance rate to $40 million from May 10, 2007 through
October 7, 2007, and further reduced to $20 million effective October 8, 2007 and thereafter.
Fifth Amendment to the Fourth Amended and Restated Loan Agreement, dated June 27, 2007 Amendment
established an 80% advance rate on eligible receivables and further reduced the borrowing base
availability advance rate to $15 million effective June 27, 2007.
Sixth Amendment to the Fourth Amended and Restated Loan Agreement, dated December 4, 2007
Amendment granted a temporary increase to the Credit Facility to $185 million. The temporary
increase was never utilized.
Seventh Amendment to the Fourth Amended and Restated Loan Agreement, dated February 20, 2009 (and
effective as of June 30, 2009) Amendment revises the Credit Facility to, among other items,
reduce the level of the loan commitment as described below, redefine certain financial covenant
ratios, revise the requirement for an unqualified opinion on annual audited financial statements,
and permit certain encumbrances relating to restructuring of the Bank of Montreal (BMO) Facility
(the Receivables Financing Agreement), as further described below. Pursuant to the Seventh
Amendment, the loan commitment has been revised down from $175.0 million to the following schedule:
(1) $90.0 million until March 30, 2009, (2) $85.0 million from March 31, 2009 through June 29,
2009, and (3) $80.0 million from June 30, 2009 and thereafter. Beginning with the fiscal year
ending September 30, 2008 (and for each period included in calculating fixed charge coverage ratio
for the fiscal year ending September 30, 2008) and continuing thereafter for each reporting period
thereafter (and for each period included in calculating fixed charge coverage ratio for such
reporting period), EBITDA and fixed charges attributable to Palisades XVI as further described
below are to be excluded from the computation of the fixed charge coverage ratio for Asta Funding
and its Subsidiaries. In addition, the fixed charge coverage ratio has been revised to exclude
impairment expense of portfolios of consumer receivables acquired for liquidation and increase the
ratio from a minimum of 1.50 to 1.0 to a minimum of 1.75 to 1.0. The permitted encumbrances under
the Credit Facility were revised to include certain encumbrances incurred by the Company in
connection with certain guarantees and liens provided to BMO Facility and Asta Group (the Family
Entity). Further, individual portfolio purchases in excess of $7.5 million now require the consent
of the agent and portfolio purchases in excess of $15.0 million in the aggregate during any 120 day
period now require the consent of the Bank Group.
Eighth Amendment to the Fourth Amended and Restated Loan Agreement, dated July 10, 2009 Amendment
revised the Commitment Termination Date from July 11, 2009 to December 31, 2009. Also, the Credit
Facility commitment shall not exceed the following amounts: (1) $40.0 million through July 30,
2009; (2) $34.0 million from July 31, 2009 through August 30, 2009; (3) $30.8 million from
August 31, 2009 through September 29, 2009; (4) $22.9 million from September 30, 2009 through
October 30, 2009; (5) $15.0 million from October 31, 2009 through November 29, 2009; (6) $7.4
million from November 30, 2009 through December 30, 2009; and (6) Zero Dollars on December 31,
2009. In addition, use of Advances to finance portfolio purchases in excess of $7.5 million shall
require the consent of the Administrative Agent and use of Advances to finance portfolio purchases
in excess of (a) $15.0 million in the aggregate as of July 31, 2009 and August 31, 2009; (b) $8.0
million in the aggregate as of September 30, 2009; (c) $6.0 million in the aggregate as of
October 31, 2009 and November 30, 2009; and (d) $2.0 million in the aggregate as of December 31,
2009, during any 120 day period shall require the consent of the Requisite Lenders. In addition,
the Company shall have no net loss on a consolidated basis during any Fiscal Year, provided
however, for Fiscal Year ending September 30, 2009 only, a net loss not to exceed $10.0 million
will be permitted under this Amendment. The Credit Facility bears interest at the lesser of LIBOR
plus an applicable margin, or the prime rate minus an applicable margin based on certain leverage
ratios, with a minimum rate of 5.5% per annum. See Note 15 Subsequent Event.
15
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 6: Debt and Subordinated Debt Related Party (continued)
The Credit Facility is collateralized by all portfolios of consumer receivables acquired for
liquidation, other than the Portfolio Purchase, discussed below, and contains customary financial
and other covenants (relative to tangible net worth, interest coverage, and leverage ratio, as
defined) that must be maintained in order to borrow funds. The applicable rate at June 30, 2009 and
2008 was 5.00%. The average interest rate excluding unused credit line fees for the nine-month
periods ended June 30, 2009 and 2008, respectively, was 4.32% and 6.37% . The average interest
rate excluding unused credit line fees for the three-month periods ended June 30, 2009 and 2008,
was 5.00% and 5.09% , respectively. The outstanding balance on the Credit Facility was
approximately $35.5 million on June 30, 2009 and
$114.3 million on June 30, 2008. On June 30, 2009, the
Company was in compliance with the Credit Facility loan covenants.
Receivables Financing Agreement
In March 2007, Palisades XVI borrowed approximately $227 million under the Receivables Financing
Agreement (the Receivables Financing Agreement) , as amended in July 2007, December 2007,
May 2008 and February 2009 with BMO, in order to finance the Portfolio Purchase. The Portfolio
Purchase had a purchase price of $300 million (plus 20% of net payments after Palisades XVI
recovers 150% of its purchase price plus cost of funds). Prior to the modification, discussed
below, the debt was full recourse only to Palisades XVI and bore an interest rate of approximately
170 basis points over LIBOR. The original term of the agreement was three years. This term was
extended by each of the Second, Third and Fourth Amendments to the Receivables Financing Agreement
as discussed below. The Receivables Financing Agreement contains cross default provisions related
to the Credit Facility. This cross default can only occur in the event of a non-payment in excess
of $2.5 million of the Credit Facility. Proceeds received as a result of the net collections from
the Portfolio Purchase are applied to interest and principal of the underlying loan. The Portfolio
Purchase is serviced by Palisades Collection LLC, a wholly owned subsidiary of the Company, which
has engaged unaffiliated subservicers for a majority of the Portfolio Purchase.
Since the inception of the Receivables Financing Agreement amendments have been signed to revise
various terms of the Receivables Financing Agreement. The following is a summary of the material
amendments:
Second Amendment Receivables Financing Agreement, dated December 27, 2007 revised the
amortization schedule of the loan from 25 months to approximately 31 months. BMO charged Palisades
XVI a fee of $475,000 which was paid on January 10, 2008. The fee was capitalized and is being
amortized over the remaining life of the Receivables Financing Agreement.
Third Amendment Receivables Financing Agreement, dated May 19, 2008 extended the payments of the
loan through December 2010. The lender also increased the interest rate from 170 basis points over
LIBOR to approximately 320 basis points over LIBOR, subject to automatic reduction in the future if
additional capital contributions are made by the parent of Palisades XVI.
Fourth Amendment Receivables Financing Agreement, dated February 20, 2009, among other things,
(i) lowered the collection rate minimum to $1 million per month (plus interest and fees) as an
average for each period of three consecutive months, (ii) provided for an automatic extension of
the maturity date from April 30, 2011 to April 30, 2012 should the outstanding balance be reduced
to $25 million or less by April 30, 2011 and (iii) permanently waived the previous termination
events. The interest rate remains unchanged at approximately 320 basis points over LIBOR, subject
to automatic reduction in the future should certain collection milestones be attained.
As additional credit support for repayment by Palisades XVI of its obligations under the
Receivables Financing Agreement and as an inducement for BMO to enter into the Fourth Amendment,
the Company provided BMO a limited recourse, subordinated guaranty, secured by the assets of the
Company, in an amount not to exceed $8.0 million plus reasonable costs of enforcement and
collection. Under the terms of the guaranty, BMO cannot exercise any recourse against the Company
until the earlier of (i) five years from the date of the Fourth Amendment and (ii) the termination
of the Companys existing senior lending facility or any successor senior facility.
The aggregate minimum repayment obligations required under the Fourth Amendment including interest
and principal for fiscal years ending September 30, 2009 (three months), September 30, 2010 and
September 30, 2011 (seven months), are $3.0 million, $12.0 million and $7.0 million, respectively,
plus monthly interest and fees. While the Company believes it will be able to make all payments due
under the new payment schedule, there is no assurance we will be able to liquidate the balance of
the facility by April 30, 2011.
16
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 6: Debt and Subordinated Debt Related Party (continued)
On June 30, 2009 and 2008, the outstanding balance on this loan was approximately $109.4
million, and $148.3 million, respectively. The applicable interest rate at June 30,2009 and 2008
was 3.94% and 6.24%.The average interest rate of the Receivable Financing Agreement was 5.13% and
6.27% for the nine-month period ended June 30, 2009 and 2008, respectively. The average interest
rate of the Receivable Financing Agreement was 4.01% and 5.43% for the three-month period ended
June 30, 2009 and 2008, respectively.
The Companys average debt obligation (excluding the subordinated debt related party) for the nine
and three month periods ended June 30, 2009, was approximately $172.7 million, and $152.4 million,
respectively. The average interest rate for the nine and three month periods ended June 30, 2009
was 4.87% and 4.26%, respectively.
In addition, as further credit support under the Receivables Financing Agreement, the Family Entity
provided BMO a limited recourse, subordinated guaranty, secured solely by a collateral assignment
of $700,000 of the $8.2 million subordinated note executed by the Company for the benefit of the
Family Entity (See further discussion below on the Family Entity loan under Subordinated Debt
Related Party). The subordinated note was separated into a $700,000 note and a $7.5 million note
for such purpose. Under the terms of the guaranty, except upon the occurrence of certain
termination events, BMO cannot exercise any recourse against the Family Entity until the occurrence
of a termination event under the Receivables Financing Agreement and an undertaking of reasonable
efforts to dispose of Palisades XVIs assets. As an inducement for agreeing to make such collateral
assignment, the Family Entity was also granted a subordinated guaranty by the Company (other than
Asta Funding, Inc.) for the performance by Asta Funding, Inc. of its obligation to repay the
$8.2 million note, secured by the assets of the Company (other than Asta Funding, Inc.), and the
Company agreed to indemnify the Family Entity to the extent that BMO exercises recourse in
connection with the collateral assignment. Without the consent of the agent under the senior
lending facility, the Family Entity will not be permitted to act on such guaranty, and cannot
receive payment under such indemnity, until the termination of the Companys senior lending
facility or any successor senior facility. On June 30, 2009, the
Company was in compliance with the Receivables Financing Agreement
loan covenants.
Subordinated Debt Related Party
On April 29, 2008, the Company obtained a subordinated loan pursuant to a subordinated promissory
note from the Family Entity. The Family Entity is a greater than 5% shareholder of the Company
beneficially owned and controlled by Arthur Stern, a Director of the Company, Gary Stern, the
Chairman, President and Chief Executive Officer of the Company, and members of their families. The
loan is in the aggregate principal amount of approximately $8.2 million, bears interest at a rate
of 6.25% per annum, is payable interest only each quarter until its maturity date of January 9,
2010, subject to prior repayment in full of the Companys senior loan facility with the Bank Group.
The subordinated loan was incurred by the Company to resolve certain issues related to the
activities of one of the subservicers utilized by Palisades Collection LLC under the Receivables
Financing Agreement. Proceeds from the subordinated loan were used initially to further
collateralize the Companys $175 million revolving loan facility with the Bank Group and was used
to reduce the balance due on that facility as of May 31, 2008.
The Companys cash requirements have been and will continue to be significant. The Company will
depend on external financing to acquire consumer receivables. Portfolio acquisitions are financed
primarily through cash flows from operating activities and with the Companys Credit Facility,
which matures on December 31, 2009. With limited purchases of portfolios through the nine months
ended June 30, 2009, availability under the borrowing base formula is approximately $26.8 million
at June 30, 2009. Our borrowing availability is limited to a formula based on the age of the
receivables. As the collection environment remains challenging, we may be required to seek
additional funding. Although availability has increased, this limited availability is coupled with
the need for lender consents and with slower collections has had and could continue to have a
negative impact on our ability to purchase new portfolios for future growth.
If the Companys collections deteriorate below our lowest projections, the Company might need to
secure another source of funding in order to satisfy its working capital needs, downsize its
operations, or secure financing on terms that are not favorable to the Company. However, the
Company believes its net cash collections over the next twelve months will be sufficient to cover
its operating expenses, continue paying down debt, purchase additional portfolios and pay
dividends, if declared.
17
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6: Debt and Subordinated Debt Related Party (continued)
The Companys debt and subordinated debt related party at June 30, 2009 and September
30, 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
Interest |
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Rate |
|
|
|
|
|
|
Rate (1) |
|
|
|
|
|
Credit Facility |
|
$ |
35,540,000 |
|
|
$ |
84,934,000 |
|
|
|
|
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
4.32 |
% |
|
|
|
|
Receivables Financing Agreement |
|
|
109,348,000 |
|
|
|
128,551,000 |
|
|
|
|
|
|
|
3.94 |
% |
|
|
|
|
|
|
|
|
|
|
5.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
144,888,000 |
|
|
$ |
213,485,000 |
|
|
|
|
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
4.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt related party |
|
$ |
8,246,000 |
|
|
$ |
8,246,000 |
|
|
|
|
|
|
|
6.25 |
% |
|
|
|
|
|
|
|
|
|
|
6.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7: Commitments and Contingencies
Employment Agreements
We have employment agreements with two executives. Such agreements provide for base salary
payments as well as bonuses. The agreements also contain confidentiality and non-compete
provisions. Please refer to Part III of our Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, under the caption Executive Compensation for additional
information.
Leases
The Company is a party to three operating leases with respect to our current and former
facilities in Englewood Cliffs, New Jersey; Sugar Land, Texas and Bethlehem, Pennsylvania.
Please refer to our consolidated financial statements and notes thereto in our Annual Report on
Form 10-K and 10-K/A, as filed with the Securities and Exchange Commission, for additional
information. On February 12, 2009, the Company announced the closing of the call center, located
in Pennsylvania, by the end of the second fiscal quarter of 2009. The cost of closing of the
facility was approximately $250,000 including, but not limited to, severance costs for 38
employees. The lease on the facility is scheduled to expire on December 31, 2009. There has been
no material impact on the level of collections, as the operations were shifted to the New Jersey
location, or accounts were outsourced. The cost of this closure was recorded in the second
quarter of fiscal year 2009.
Litigation
In the ordinary course of its business, the Company is involved in numerous legal
proceedings. The Company regularly initiates collection lawsuits, using its network of third
party law firms, against consumers. Also, consumers occasionally initiate litigation against the
Company, in which they allege that the Company has violated a federal or state law in the
process of collecting their account. The Company does not believe that these matters are
material to its business and financial condition. The Company is not involved in any material
litigation in which it was a defendant.
In July 2009, the New York Attorney General filed a special proceeding in New York State
Supreme Court against certain law firms and collection agencies, seeking to vacate approximately
100,000 default judgments that were taken in connection with actions in which a particular
process serving company served process. The Company was not named in the action. Several of
the third-party law firms used by the Company were named as defendants. These law firms have
indicated that they intend to vigorously defend the action. There are an immaterial number of
the Companys accounts involved.
In settlement of a lawsuit filed by the Minnesota Attorney General, the National
Arbitration Forum announced in July 2009 that it would no longer administer consumer or
employment arbitrations. The Company does not use arbitration as a primary means of collection
from consumers, and the change is not expected to have a significant impact on the Company.
18
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 8: Income Recognition, Impairments of Consumer Receivables Acquired for Liquidation and
Accretable Yield Adjustments
Income Recognition
The Company accounts for its investment in consumer receivables acquired for liquidation using
the interest method under the guidance of AICPA Statement of Position 03-3, Accounting for Loans
or Certain Securities Acquired in a Transfer (SOP 03-3). Practice Bulletin 6 was amended by SOP
03-3. Under the guidance of SOP 03-3 (and the amended Practice Bulletin 6) static pools of accounts
are established. These pools are aggregated based on certain common risk criteria. Each static pool
is recorded at cost and is accounted for as a single unit for the recognition of income, principal
payments and loss provision.
Once a static pool is established for a quarter, individual receivable accounts are not added
to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to
the seller). SOP 03-3 (and the amended Practice Bulletin 6) requires that the excess of the
contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or
expense or on the balance sheet. SOP 03-3 initially freezes the internal rate of return (IRR),
estimated when the accounts receivable are purchased, as the basis for subsequent impairment
testing. Significant increases in actual, or expected future cash flows may be recognized
prospectively through an upward adjustment of the IRR over a portfolios remaining life. Any
increase to the IRR then becomes the new benchmark for impairment testing. Under SOP 03-3 and the
amended Practice Bulletin 6, rather than lowering the estimated IRR if the collection estimates are
not received or projected to be received, the carrying value of a pool would be written down to
maintain the then current IRR.
The Company uses the cost recovery method when collections on a particular pool of accounts
cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the
cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying
balance on the balance sheet) while still generating cash collections. In this case, all cash
collections are recognized as finance income when received.
Impairments and accretable yield adjustments
The Company accounts for its impairments in accordance with SOP 03-3. This SOP provides
guidance on accounting for differences between contractual and expected cash flows from an
investors initial investment in loans or debt securities acquired in a transfer if those
differences are attributable, at least in part, to credit quality. Increases in expected cash flows
should be recognized prospectively through an adjustment of the internal rate of return while
decreases in expected cash flows should be recognized as impairment. This SOP became effective
October 1, 2005. Implementation of this SOP makes 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. As a result of the slower economy and other factors that resulted in slower collections
on certain portfolios, impairments of $46.2 million and $43.2 million were recorded during the nine
month periods ended June 30, 2009 and 2008, respectively. Impairments of $6.4 million and $8.2
million were recorded in the three month period ended June 30, 2009 and 2008, respectively. There
were no accretable yield adjustments recorded in the nine and three periods ended June 30, 2009 and
2008. In the third quarter ended June 30, 2008, the Company discontinued using the interest method
for income recognition under SOP 03-3 for the Portfolio Purchase. The recognition of income under
SOP 03-3 is dependent on the Company having the ability to develop reasonable expectations of both
the timing and amount of cash flows to be collected. In the event the Company cannot develop a
reasonable expectation as to both the timing and amount of cash flows expected to be collected, SOP
03-3 permits the use or the change to the cost recovery method. Due to uncertainties related to the
timing of the collections of the older judgments purchased in this portfolio as a result of the
economic environment, the lack of reasonable delivery of media requests, the lack of validation of
certain account components, and the sale of the primary servicer (which was commonly owned by the
seller), the Company determined that it no longer has the ability to develop a reasonable
expectation of the timing of the cash flows to be collected and therefore, transferred the
Portfolio Purchase to the cost recovery method. Accordingly, the Company will recognize income
only after it has recovered its carrying value, which, as of June 30, 2009 was $181.4 million. As a
result of the transfer of the Portfolio Purchase in the third quarter of 2008, no finance income
has been recognized in each of the comparable quarters of fiscal years 2009 and 2008. $17.7 million
was recognized as finance income on the Portfolio Purchase in fiscal year 2008 prior to the
transfer to cost recovery.
19
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 8: Income Recognition, Impairments of Consumer Receivables Acquired for Liquidation and
Accretable Yield Adjustments (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 to
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
payments, if any, since charge-off, and the credit guidelines of the
credit originator also represent factors taken into consideration in our
estimation process since, for example, older receivables might be more
difficult to collect in amount and/or require more time to collect; |
|
|
|
|
past history and performance of similar assets acquired. As we purchase
portfolios of like assets, we accumulate a significant historical data
base on the tendencies of debtor repayments and factor this into our
initial expected cash flows; |
|
|
|
|
our ability to analyze accounts and resell accounts that meet our criteria; |
|
|
|
|
Jobs or property of the debtors found within portfolios. With our business
model, this is of particular importance. Debtors with jobs or property are
more likely to repay their obligation through the suit strategy and,
conversely, debtors without jobs or property are less likely to repay
their obligation. 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 sale. 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, or 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.
As a result of the recent challenging economic environment and the impact it has had on
collections, for portfolio purchases acquired in fiscal year 2009 we have extended our time frame
of the expectation of recovering 100% of our invested capital within an 24-39 month period from an
18-28 month period and the expectation of recovering 130-140% over 7 years which is an increase
from the previous 5 year expectation. The collection expectations of portfolios previously
purchased were not changed. We routinely monitor expectations 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 is recorded. 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.
20
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 8: Income Recognition, Impairments of Consumer Receivables Acquired for Liquidation and
Accretable Yield Adjustments (continued)
Commissions and fees
Commissions and fees are the contractual commissions earned by third party collection agencies
and attorneys, and direct costs associated with the collection effort- generally court costs. The
Company expects to continue to purchase portfolios and utilize third party collection agencies and
attorney networks.
Note 9: Income Taxes
Deferred federal and state taxes principally arise from (i) recognition of finance income
collected for tax purposes, but not yet recognized for financial reporting; (ii) provision for
impairments/credit losses, both resulting in timing differences between financial accounting and
tax reporting. The provision for income tax expense for the three month periods ending June 30,
2009 and 2008 reflects income tax expense at an effective rate of 40.7% and 40.5%, respectively.
The provision for income tax expense for the nine month periods ending June 30, 2009 and 2008
reflects income tax expense at an effective rate of 40.8%. Income taxes receivable represent
taxes due for overpayment of federal income taxes. Income taxes payable represent tax
obligations due state jurisdictions.
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, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
Loss |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
(11,527,000 |
) |
|
|
14,271,931 |
|
|
$ |
(0.81 |
) |
|
$ |
8,047,000 |
|
|
|
14,111,954 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(11,527,000 |
) |
|
|
14,271,931 |
|
|
$ |
(0.81 |
) |
|
$ |
8,047,000 |
|
|
|
14,642,467 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009, 913,004 options at a weighted average price of $12.79 were not
included in the dilutive earnings per share calculation, as they were anti-dilutive. Options to
purchase 18,000 shares of common stock with a weighted average exercise price of $28.75 for the
nine months ended June 30, 2008 were excluded from the computation of common share equivalents as
the exercise price was greater than the average market price of the common shares.
21
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 10: Net Income Per Share (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
1,478,000 |
|
|
|
14,271,946 |
|
|
$ |
0.10 |
|
|
$ |
2,440,000 |
|
|
|
14,276,158 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive
Stock |
|
|
|
|
|
|
173,626 |
|
|
|
|
|
|
|
|
|
|
|
259,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1,478,000 |
|
|
|
14,445,572 |
|
|
$ |
0.10 |
|
|
$ |
2,440,000 |
|
|
|
14,535,548 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 911,338 shares of common stock with a weighted average exercise price of
$12.81 for the three months ended June 30, 2009 were excluded from the computation of common share
equivalents as the exercise price was greater than the average market price of the common shares.
Note 11: Stock-Based Compensation
The Company accounts for stock-based employee compensation under FASB Statement of Financial
Accounting Standards No. 123 (Revised 2005), Share-Based Payment (SFAS 123R). SFAS 123R, which
the Company adopted on 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.
On May 5, 2009, the Compensation Committee awarded 122,000 stock options to employees of the
Company. 45,673 shares vested on that date. The remaining 114,000 shares vest in two equal annual
installments starting on May 5, 2010. The weighted average assumptions used in the option pricing
models were as follows:
|
|
|
|
|
Risk-free interest rate |
|
|
0.18 |
% |
Expected term (years) |
|
|
10.0 |
|
Expected volatility |
|
|
111.7 |
% |
Dividend yield |
|
|
1.45 |
% |
On January 17, 2008 the Compensation Committee awarded 58,000 shares of restricted stock to
officers and directors of the Company. These shares vest in three equal annual installments
starting on October 1, 2008.
There were no stock option awards granted in the first nine months of fiscal year 2008.
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.
22
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 12: Stock Option Plans (continued)
The Company has 1,000,000 shares of Common Stock authorized for issuance under the Equity
Compensation Plan and 878,334 were available as of June 30, 2009. On January 17, 2008, the
Compensation Committee of the Board of Directors awarded 58,000 shares of restricted stock to
certain officers and directors of the Company which vest in three equal annual installments
beginning October 1, 2008. 68,000 restricted shares were granted in the first quarter of fiscal
year 2007. As of June 30, 2009, approximately 102 of the Companys employees were eligible to
participate in the Equity Compensation Plan.
2002 Stock Option Plan
On March 5, 2002, the Board of Directors adopted the Asta Funding, Inc. 2002 Stock Option Plan
(the 2002 Plan), which plan was approved by the Companys stockholders on May 1, 2002. The 2002
Plan was adopted in order to attract and retain qualified directors, officers and employees of, and
consultants to, the Company. The following description does not purport to be complete and is
qualified in its entirety by reference to the full text of the 2002 Plan, which is included as an
exhibit to the Companys reports filed with the SEC.
The 2002 Plan authorizes the granting of incentive stock options (as defined in Section 422 of
the 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 272,334 were available as of June 30, 2009. As of June 30, 2009, approximately 102 of the
Companys employees were eligible to participate in the 2002 Plan. Future grants under the 2002
Plan have not yet been determined.
1995 Stock Option Plan
The 1995 Stock Option Plan expired on September 14, 2005. The plan was adopted in order to
attract and retain qualified directors, officers and employees of, and consultants, to the Company.
The following description does not purport to be complete and is qualified in its entirety by
reference to the full text of the 1995 Stock Option Plan, which is included as an exhibit to the
Companys reports filed with the SEC.
The 1995 Stock Option Plan authorized the granting of incentive stock options (as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the Code)) and non-qualified stock
options to eligible employees of the Company, including officers and directors of the Company
(whether or not employees) and consultants of the Company.
The Company authorized 1,840,000 shares of Common Stock for issuance under the 1995 Stock
Option Plan. All but 96,002 shares were utilized. As of September 14, 2005, no more options could
be issued under this plan.
The following table summarizes stock option transactions under the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding options at the beginning of period |
|
|
1,037,438 |
|
|
$ |
11.69 |
|
|
|
1,337,438 |
|
|
$ |
9.39 |
|
Options granted |
|
|
122,000 |
|
|
|
2.95 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(100 |
) |
|
|
2.95 |
|
|
|
(300,000 |
) |
|
|
1.42 |
|
Options forfeited |
|
|
(1,000 |
) |
|
|
28.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of period |
|
|
1,158,338 |
|
|
$ |
10.76 |
|
|
|
1,037,438 |
|
|
$ |
11.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of period |
|
|
1,082,345 |
|
|
$ |
11.31 |
|
|
|
1,031,438 |
|
|
$ |
11.59 |
|
|
|
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23
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 12: Stock Option Plans (continued)
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Three Months Ended June 30, |
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2009 |
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2008 |
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Weighted |
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Weighted |
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Average |
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Average |
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Exercise |
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Exercise |
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Shares |
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Price |
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Shares |
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Price |
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Outstanding options at the beginning of period |
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1,036,438 |
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$ |
11.68 |
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1,037,438 |
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$ |
9.37 |
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Options granted |
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122,000 |
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2.95 |
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Options exercised |
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(100 |
) |
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2.95 |
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Outstanding options at the end of period |
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1,158,338 |
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$ |
10.76 |
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1,037.438 |
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$ |
11.69 |
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Exercisable options at the end of period |
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1,082,345 |
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$ |
11.31 |
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1,031,438 |
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$ |
11.59 |
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The Company recognized $164,000 and $121,000 of compensation expense related to stock option
awards during the nine and three month periods ended June 30, 2009. The Company recognized $69,000
and $22,000 of compensation expense related to stock option awards during the nine and three month
periods ended June 30, 2008. As of June 30, 2009, there was $164,000 of unrecognized compensation
cost related to unvested stock options.
The intrinsic value of the stock options exercised during the third quarter of fiscal year 2009 was
not material. The intrinsic value of stock options exercised during the nine months ended June 30,
2008 was $6,281,000. There were no options exercised during the third quarter of fiscal year 2008.
The following table summarizes information about the Plans outstanding options as of June 30,
2009:
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Options Outstanding |
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Options Exercisable |
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Weighted |
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Average |
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Weighted |
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Weighted |
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Remaining |
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Average |
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Average |
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Number |
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Contractual |
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Exercise |
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Number |
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Exercise |
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Range Of Exercise Price |
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Outstanding |
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Life (In Years) |
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Price |
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Exercisable |
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Price |
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$0.8125 $2.8750 |
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300,000 |
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1.2 |
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$ |
2.63 |
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300,000 |
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$ |
2.63 |
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$2.875001 $5.7500 |
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228,567 |
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6.8 |
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$ |
3.78 |
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152,574 |
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$ |
4.19 |
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$5.750001 $8.6250 |
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12,000 |
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2.4 |
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$ |
5.96 |
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12,000 |
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$ |
5.96 |
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$14.3750001 $17.2500 |
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218,611 |
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4.4 |
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$ |
15.04 |
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218,611 |
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$ |
15.04 |
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$17.250001 $20.1250 |
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382,160 |
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5.3 |
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$ |
18.22 |
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382,160 |
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$ |
18.22 |
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$28.7500 $28.7500 |
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17,000 |
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7.5 |
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$ |
28.75 |
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17,000 |
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$ |
28.75 |
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1,158,338 |
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4.4 |
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$ |
10.76 |
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1,082,345 |
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$ |
11.31 |
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The following table summarizes information about restricted stock transactions:
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Nine Months Ended June 30, |
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2009 |
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2008 |
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Weighted |
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Weighted |
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Average Grant |
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Average Grant |
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Date Fair |
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Date Fair |
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Shares |
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Value |
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Shares |
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Value |
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Unvested at the beginning of period |
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80,667 |
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$ |
23.06 |
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45,333 |
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$ |
28.75 |
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Awards granted |
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58,000 |
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$ |
19.73 |
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Vested |
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(40,995 |
) |
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$ |
28.75 |
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(22,666 |
) |
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$ |
28.75 |
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Forfeited |
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(4,334 |
) |
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$ |
21.81 |
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Unvested at the end of period |
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35,338 |
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$ |
19.73 |
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80,667 |
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$ |
22.26 |
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The Company recognized $701,000 and $95,000 of compensation expense related to the
restricted stock awards during the nine and three month periods ended June 30, 2009. The Company
recognized $661,000 and $257,000 of compensation expense related to the restricted stock awarded
during the nine and three month periods ended June 30, 2008. As of June 30, 2009 there was $479,000
of unrecognized compensation cost related to unvested restricted stock.
24
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 13: Stockholders Equity
For the nine months ended June 30, 2009, the Company declared dividends of $856,000 or $0.02
per share. $286,000 was declared and accrued as of June 30, 2009 and paid August 3, 2009. For the
nine months ended June 30, 2009, the Company recorded $47,000, net of taxes, in cumulative
translation adjustment related to its investment in South America.
Note 14: Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Values of Financial Instruments (SFAS 107), requires
disclosure of fair value information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. Because there are a limited
number of market participants for certain of the Companys assets and liabilities, fair value
estimates are based upon judgments regarding credit risk, investor expectation of economic
conditions, normal cost of administration and other risk characteristics, including interest rate
and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters
of judgment, which significantly affect the estimates. In April 2009 the FASB issued FSP FAS 107-1
and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which now requires
the SFAS 107 fair value disclosures in interim period results.
The carrying value of consumer receivables acquired for liquidation was $356,264,000 at
June 30, 2009 and $449,012,000 at September 30, 2008. The Company computed the fair value of these
receivables using its forecasting model and the fair value approximated the carrying value at June
30, 2009 and September 30, 2008.
The carrying value of debt and subordinated debt (related party) was $153,134,000 at June
30, 2009 and $221,731,000 at September 30, 2008. The majority of these loans are variable rate and
short-term, therefore, the carrying amounts approximate fair value.
Note 15: Subsequent Events
On July 10, 2009 the Company entered into the Eighth Amendment to the Fourth Amended and
Restated Loan Agreement. This Amendment revised the Commitment Termination Date from July 11, 2009
to December 31, 2009. Also, the Credit Facility commitment shall not exceed the following amounts:
(1) $40.0 million through July 30, 2009; (2) $34.0 million from July 31, 2009 through August 30,
2009; (3) $30.8 million from August 31, 2009 through September 29, 2009; (4) $22.9 million from
September 30, 2009 through October 30, 2009; (5) $15.0 million from October 31, 2009 through
November 29, 2009; (6) $7.4 million from November 30, 2009 through December 30, 2009; and (6) Zero
Dollars on December 31, 2009. In addition, use of Advances to finance portfolio purchases in
excess of $7.5 million shall require the consent of the Administrative Agent and use of Advances to
finance portfolio purchases in excess of (a) $15.0 million in the aggregate as of July 31, 2009 and
August 31, 2009; (b) $8.0 million in the aggregate as of September 30, 2009; (c) $6.0 million in
the aggregate as of October 31, 2009 and November 30, 2009; and (d) $2.0 million in the aggregate
as of December 31, 2009, during any 120 day period shall require the consent of the Requisite
Lenders. In addition, the Company shall have no net loss on a consolidated basis during any Fiscal
Year, provided however, for Fiscal Year ending September 30, 2009 only, a net loss not to exceed
$10.0 million will be permitted under this Amendment. The Credit Facility bears interest at the
lesser of LIBOR plus an applicable margin, or the prime rate minus an applicable margin based on
certain leverage ratios, with a minimum rate of 5.5% per annum. All
other terms of the loan were unchanged.
25
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ITEM 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Caution Regarding Forward Looking Statements
This Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are
identified by use of terms such as may, will, should, plan, expect, believe,
anticipate, estimate and similar expressions, although some forward-looking statements are
expressed differently. Forward-looking statements represent our managements judgment regarding
future events. Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will prove to be
correct. All statements other than statements of historical fact included in this report regarding
our financial position, business strategy, products, products under development and clinical
trials, markets, budgets, plans, or objectives for future operations are forward-looking
statements. We cannot guarantee the accuracy of the forward-looking statements, and you should be
aware that our actual results could differ materially from those contained in the forward-looking
statements due to a number of factors, including the statements under Risk Factors and Critical
Accounting Policies detailed in our Annual Report on Form 10-K and Form 10-K/A for the year ended
September 30, 2008, and other reports filed with the Securities and Exchange Commission (SEC).
Our annual report on Form 10-K and Form 10-K/A, quarterly reports on Form 10-Q, current
reports on Form 8-K and all other documents filed by the Company or with respect to its securities
with the SEC are available free of charge through our website at www.astafunding.com. Information
on our website does not constitute a part of this report. The SEC also maintains an internet site
(www.sec.gov) that contains reports and information statements and other information
regarding issuers, such as ourselves, who file electronically with the SEC.
Overview
We are primarily engaged in the business of acquiring, managing, servicing and recovering on
portfolios of consumer receivables. These portfolios generally consist of one or more of the
following types of consumer receivables:
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charged-off receivables accounts that have been
written-off by the originators and may have been
previously serviced by collection agencies; |
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semi-performing receivables accounts where the
debtor is currently making partial or irregular
monthly payments, but the accounts may have been
written-off by the originators; and |
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|
performing receivables accounts where the
debtor is making regular monthly payments that may
or may not have been delinquent in the past. |
We acquire these consumer receivable portfolios at a significant discount to the amount
actually owed by the borrowers. We acquire these portfolios after a qualitative and quantitative
analysis of the underlying receivables and calculate the purchase price so that our estimated cash
flow offers us an adequate return on our acquisition costs and servicing expenses. After purchasing
a portfolio, we actively monitor its performance and review and adjust our collection and servicing
strategies accordingly.
We purchase receivables from credit grantors and others through privately negotiated direct
sales and auctions in which sellers of receivables seek bids from several pre-qualified debt
purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis
through:
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|
our relationships with industry participants, collection agencies, investors and our financing sources; |
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|
|
brokers who specialize in the sale of consumer receivable portfolios; and |
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|
Other sources. |
Critical Accounting Policies
We account for our investments in consumer receivable portfolios, using either:
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the interest method; or |
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the cost recovery method. |
26
As we believe our extensive liquidating experience in certain asset classes such as distressed
credit card receivables, telecommunications receivables, consumer loan receivables, retail
installment contracts, mixed consumer receivables, and auto deficiency receivables has matured, we
use the interest method for accounting for substantially all asset acquisitions within these
classes of receivables when we believe we can reasonably estimate the timing of the cash flows. In
those situations where we diversify our acquisitions into other asset classes in which we do not
possess the same expertise or history, or we cannot reasonably estimate the timing of the cash
flows, we utilize the cost recovery method of accounting for those portfolios of receivables. At
June 30, 2009, approximately $136.5 million of the consumer receivables acquired for liquidation
are accounted for using the interest method, while approximately $219.8 million are accounted for
using the cost recovery method. The latter includes one portfolio valued at approximately $181
million.
Over time, as we continue to purchase asset classes to the point where we believe we have
developed the requisite expertise and experience, we are more likely to utilize the interest method
to account for such purchases.
The Company accounts for its investment in finance receivables using the interest method under
the guidance of AICPA Statement of Position 03-3, Accounting for Loans or Certain Securities
Acquired in a Transfer (SOP 03-3). Practice Bulletin 6, Amortization of Discounts on Certain
Acquired Loans. (Practice Bulletin 6) was amended by SOP 03-3. Under the guidance of SOP 03-3
(and the amended Practice Bulletin 6), static pools of accounts are established. These pools are
aggregated based on certain common risk criteria. Each static pool is recorded at cost and is
accounted for as a single unit for the recognition of income, principal payments and loss
provision. We currently consider for aggregation portfolios of accounts, purchased within the same
fiscal quarter, that generally have the following characteristics:
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same issuer/originator |
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same underlying credit quality |
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similar geographic distribution of the accounts |
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similar age of the receivable and |
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same type of asset class (credit cards, telecommunications, etc.) |
After determining that an investment will yield an adequate return on our acquisition cost
after servicing fees, including court costs which are expensed as incurred, we use a variety of
qualitative and quantitative factors to determine the estimated cash flows. As previously
mentioned, included in our analysis for purchasing a portfolio of receivables and determining a
reasonable estimate of collections and the timing thereof, the following variables are analyzed and
factored into our original estimates:
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|
the number of collection agencies previously attempting to collect the receivables in the portfolio; |
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|
the average balance of the receivables; |
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|
|
the age of the receivables (as older receivables might be more difficult to collect or might be
less cost effective); |
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|
|
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; |
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|
number of months since charge-off; |
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|
payments made since charge-off; |
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|
the credit originator and their credit guidelines; |
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|
|
the locations of the debtors as there are better states to attempt
to collect in and ultimately we have better predictability of the
liquidations and the expected cash flows. Conversely, there are
also states where the liquidation rates are not as good and that is
factored into our cash flow analysis; |
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|
financial wherewithal of the seller; |
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|
|
jobs or property of the debtors found within portfolios-with our
business model, this is of particular importance. Debtors with jobs
or property are more likely to repay their obligation and
conversely, debtors without jobs or property are less likely to
repay their obligation ; and |
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|
the ability to obtain customer statements from the original issuer. |
27
We will obtain and utilize as appropriate input including, but not limited to, monthly
collection projections and liquidation rates, from our third party collection agencies and
attorneys, as further evidentiary matter, to assist us in developing collection strategies and in
modeling the expected cash flows for a given portfolio.
We acquire accounts that have experienced deterioration of credit quality between origination
and the date of our acquisition of the accounts. The amount paid for a portfolio of accounts
reflects our determination that it is probable we will be unable to collect all amounts due
according to the portfolio of accounts contractual terms. We consider the expected payments and
estimate the amount and timing of undiscounted expected principal, interest and other cash flows
for each acquired portfolio coupled with expected cash flows from accounts available for sales. The
excess of this amount over the cost of the portfolio, representing the excess of the accounts cash
flows expected to be collected over the amount paid, is accreted into income recognized on finance
receivables over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain distressed consumer receivable
portfolios at a significant discount to the amount actually owed by underlying debtors. We acquire
these portfolios only after both qualitative and quantitative analyses of the underlying
receivables are performed and a calculated purchase price is paid so that we believe our estimated
cash flow offers us an adequate return on our costs including servicing expenses. Additionally,
when considering larger portfolio purchases of accounts, or portfolios from issuers from whom we
have little or limited experience, we have the added benefit of soliciting our third party
collection agencies and attorney networks 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.
As a result of the recent challenging economic environment and the impact it has had on
collections, for portfolio purchases acquired in fiscal year 2009 we have extended our time frame
of the expectation of recovering 100% of our invested capital within a 24-39 month period from an
18-28 month period and the expectation of recovering 130-140% over 7 years which is an , increase
from the previous 5 year expectation. The collection expectations of portfolios previously
purchased were not changed. We routinely monitor these results against the actual cash flows and,
in the event the cash flows are below our expectations and we believe there are no reasons relating
to mere timing differences or explainable delays (such as can occur particularly when the court
system is involved) for the reduced collections, an impairment would be recorded as a provision for
credit losses. Conversely, in the event the cash flows are in excess of our expectations and the
reason is due to timing, we would defer the excess collection as deferred revenue.
The Company uses the cost recovery method when collections on a particular pool of accounts
cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the
cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying
balance on the balance sheet) while still generating cash collections. In this case, all cash
collections are recognized as revenue when received.
Results of Operations
The nine-month period ended June 30, 2009, compared to the nine-month period ended June 30,
2008
Finance income. During the nine-month period ended June 30, 2009, finance income decreased
$37.9 million or 41.3% to $53.7 million from $91.6 million for the nine-month period ended June 30,
2008. The decrease was, in part, attributable to the transfer of the $6.9 billion in face value
receivables for a purchase price of $300 million in March 2007 (the Portfolio Purchase) from the
interest method to the cost recovery method effective at the beginning of the third quarter of
fiscal year 2008. $17.7 million in finance income was recognized through the second quarter of
fiscal year 2008 . Due to uncertainties related to the timing of the collections of the older
judgments purchased in this portfolio as a result of the economic environment, the lack of
reasonable delivery of media requests, the lack of validation of certain account components, and
the sale of the primary servicer (which was commonly owned by the seller), the Company determined
that it no longer has the ability to develop a reasonable expectation of the timing of the cash
flows to be collected and therefore, transferred the Portfolio Purchase to the cost recovery
method. As a result of the transfer, no finance income was recognized on the Portfolio Purchase for
the nine month period ended June 30, 2009. In addition, finance income is lower due to the lower
level of portfolio purchases and older portfolios aging out. Average receivables under the interest
method of accounting, declined approximately $72 million from $242.2 million at June 30, 2008 to
$170.0 million at June 30, 2009. The decrease in the average level of consumer receivables is
attributable to impairments recorded, continued amortization of principal and our reduced level of
portfolio purchases which were down from $1.6 billion of face value receivables at a cost of $48.9
million during the nine-month period ended June 30, 2008, as compared to $427.1 million of face
value receivables at a cost of $16.5 million during the nine-month period ended June 30, 2009.
Income recognized from fully amortized portfolios (zero basis revenue) was $31.1 million and $34.2
million for the nine months ended June 30, 2009 and 2008, respectively.
During the first nine months of fiscal year 2009, net cash collections of consumer receivables
acquired for liquidation decreased by $40.1 million, or 25.5%, to $116.6 million from $156.7
million for the nine months ended June 30, 2008. The decrease in net collections is attributable to
the aging of the portfolio, and the declining purchase volume over the last year and half.
Collections have also been impacted by the overall slowdown in the economy. Commissions and fees
associated with gross collections from our third party collection agencies and attorneys decreased
$38.0 million, or 38.7%, to $60.1 million for the nine months ended June 30, 2009
28
During the nine months ended June 30, 2009, three portfolios were transferred from the
interest method to the cost recovery
method. Based on the nature of these portfolios and the recent cash flows, our estimates of
the timing of expected cash flows became uncertain. One of the portfolios is related to unsecured
installment loans domiciled in Puerto Rico. Due to local market conditions, the future cash flows
of this portfolio became increasingly unpredictable. The second portfolio is made up of retail
installment contracts that have not followed the performance curves we have historically
experienced in this area of the market. The third portfolio has not performed as expected as
compared to other portfolios in its class. Based upon the forecasts not being as reliable as first
forecasted, we transferred these portfolios to the cost recovery method. Finance income on these
portfolios collectively was approximately 3% of revenue for each of the nine-month periods ended
June 30, 2009 and 2008, respectively. As a result of the transfer to the cost recovery method, we
will not recognize finance income on these three portfolios until their carrying values are
recovered. At June 30, 2009, the combined carrying values of these portfolios were $9.2 million.
Impairments of approximately $8.9 million were recorded in the first and second quarters of fiscal
year 2009 on these three portfolios.
Other income. Other income of $90,000 and $156,000 for the nine months ended June 30, 2009 and
2008, respectively, includes interest income and service fee income.
General and Administrative Expenses. During the nine months ended June 30, 2009, general and
administrative expenses decreased $0.5 million, or 2.6% to $20.0 million from $20.5 million for the
nine months ended June 30, 2008, and represented 27.4% of total expenses (excluding income taxes)
for the nine months ended June 30, 2009 as compared to 26.3% for the nine month period ended June
30, 2008. The decrease in general and administrative expenses was primarily due to reduced salary
and salary related expenses and postage expense due to lower portfolio levels, offset by
professional fees related to the banking amendment signed in the second and third quarters of this
year, and higher collection expenses with increased legal costs related to the collection cycle and
maintaining a higher level of debtor accounts acquired in the past several years. In the second
quarter of fiscal year 2009 we closed the Pennsylvania collection facility. The cost of closing the
Pennsylvania call center in February 2009 was approximately $250,000 and was included in general
and administrative expense in the three month period ended March 31, 2009. The closure yielded
savings of approximately $375,000 in the third quarter of fiscal year
2009.
Interest Expense. During the nine month period ended June 30, 2009, interest expense
decreased $7.4 million or 51.7% from $14.3 million in the same prior year period and represented
9.4% of total expenses (excluding income taxes) for the nine-month period ended June 30, 2009
compared to 18.3% for the nine-month period ended June 30, 2008. The decrease in interest expense
is primarily the result of a reduction in the average loan balance from $300.8 for the nine-month
period ended June 30, 2008 to $172.7 million for the same current year period as we continue our
program of reducing debt, in addition to reduced portfolio purchases. Additionally, the average
interest rate in the nine-month period ended June 30, 2009 was 4.9% as compared to 6.2% for the
same prior year period.
Impairments. Impairments of $46.2 million were recorded by the Company during the nine months
ended June 30, 2009 as compared to $43.2 million for the nine months ended June 30, 2008, and
represented 63.2% of total expenses (excluding income taxes) for the quarter ended June 30, 2009 as
compared to 55.3% for the same prior year period. Included in impairments is $8.9 million related
to three portfolios transferred to the cost recovery method. As relative collections with respect
to our expectations on these portfolios were sustaining a lower level ,we believed that these
impairment charges and adjustments to our cash flow expectations became necessary. We recorded
impairments on the Portfolio Purchase in the amount of $30.3 million and five other portfolios in
the amount of $12.9 million in the nine month period ended June 30, 2008.
The three-month period ended June 30, 2009 as compared to the three month period ended June 30,
2008
Finance income. For the three months ended June 30, 2009, finance income decreased $6.4
million or 27.0% to $17.2 million from $23.6 million for the three months ended June 30, 2008. The
decrease is primarily attributable to the reduced level of portfolio purchases under the interest
method over the last year and a half, the aging out of older portfolios . Average receivables
under the interest method of accounting declined approximately $91 million from $239.4 million at
June 30, 2008 to $137.0 million at June 30, 2009. The decrease in the average level of consumer
receivables is attributable to impairments recorded, continued amortization of principal and
decline in the level of portfolio purchases over the last year and a half. Income recognized from
fully amortized portfolios (zero basis revenue) was $10.5 million and $10.4 million for the three
months ended June 30, 2009 and 2008, respectively.
During the third quarter of fiscal year 2009, net collections of consumer receivables acquired for
liquidation decreased by 23.2% to $37.6 million from $49.0 million for the three months ended June
30, 2008. The decrease in net collections is attributable to the aging of the portfolio, and the
lower level of portfolio purchases over the last year and half. Collections have also been
impacted by the overall slowdown in the economy. Commissions and fees associated with gross
collections from our third party collection agencies and attorney networks decreased $13.3 million,
or 45.5%, for the three months ended June 30, 2009 as compared to the same period in the prior
year.
Other income. Other income of $36,000 and $12,000 for the three months ended June 30,
2009 and 2008, respectively, includes interest and service fee income.
29
General and Administrative Expenses. During the three-month period ended June 30, 2009,
general and administrative expenses
decreased $1.0 million or 12.9% to $6.6 million from $7.6 million for the three-months ended June
30, 2008, and represented 44.9% of total expenses (excluding income taxes) for the three months
ended June 30, 2009 as compared to 39.2% for the same period in the prior year. The decrease is
primarily the result of lower salary and salary-related expenses, as the full effect of the closing
of the Pennsylvania call center in the second quarter of fiscal year 2009 was reflected in the
third quarter of fiscal 2009. In addition as the level of portfolio purchases has been lower,
postage related to mailings was down. Also, as we have made significant improvements in the
technology area in the past several years, technology costs have moved lower towards a level of
maintenance.
Interest Expense. During the three-month period ended June 30, 2009, interest expense was
$1.8 million compared to $3.6 million in the same period in the prior year and represented 12.1% of
total expenses (excluding income taxes) for the three-month period ended June 30, 2009 compared to
18.8% in the same prior year period. The decrease in interest expense is primarily the result of
the decrease in the average loan balance from $270.6 million for the three-month period ended June
30, 2008 to $152.4 million for the same current year period as we continue our program of reducing
debt, in addition to reduced portfolio purchases. Additionally, the average interest rate in the
three-month period ended June 30, 2009 was 4.3% as compared to 5.3% for the same prior year period.
Impairments. Impairments of $6.4 million were recorded by the Company during the three months
ended June 30, 2009 as compared to $8.2 million for the three months ended June 30, 2008, and
represented 43.1% of total expenses (excluding income taxes) for the
quarter ended June 30, 2009
as compared to 42.0% for the three months ended June 30, 2008. There were 5 portfolios impaired in
each of the three-month periods. As relative collections with respect to our expectations on these
portfolios were sustaining a lower level, we believed that these impairment charges and adjustments
to our cash flow expectations became necessary.
Liquidity and Capital Resources
Our primary sources of cash from operations include collections on the receivable portfolios
that we have acquired. Our primary uses of cash include repayment of debt, our purchases of
consumer receivable portfolios, interest payments, costs involved in the collections of consumer
receivables, dividends and taxes. We rely significantly upon our lenders to provide the funds
necessary for the purchase of consumer and commercial accounts receivable portfolios. As of June
30, 2009, the Seventh Amendment to the Fourth Amended and Restated Loan Agreement (the Credit
Facility) entered into on February 20, 2009, granted an $80 million line of credit from a
consortium of banks (the Bank Group) for portfolio purchases and working capital. The Credit
Facility bears interest at the lesser of LIBOR plus an applicable margin, or the prime rate minus
an applicable margin based on certain leverage ratios, with a minimum rate of 5%. The Credit
Facility is collateralized by all portfolios of consumer receivables acquired for liquidation other
than the assets of Palisades Acquisition XVI, LLC, a subsidiary of the Company (Palisades XVI)
and contains financial and other covenants (relative to tangible net worth, interest coverage, and
leverage ratio, as defined) that must be maintained in order to borrow funds. The Credit Facilitys
commitment termination date (Commitment Termination Date) was July 11, 2009.
As of June 30, 2009, there was a $35.5 million outstanding balance on the Credit Facility.
Although we are within the borrowing limits of this facility, there are certain limitations in
place with regard to collateralization whereby the Company may be limited in its ability to borrow
funds to purchase additional portfolios. The availability was $26.1 million on June 30, 2009.
On July 10, 2009 the Company entered into the Eighth Amendment to the Fourth Amended and
Restated Loan Agreement. This Amendment revised the Commitment Termination Date from July 11, 2009
to December 31, 2009. Also, the Credit Facility commitment shall not exceed the following amounts:
(1) $40.0 million through July 30, 2009; (2) $34.0 million from July 31, 2009 through August 30,
2009; (3) $30.8 million from August 31, 2009 through September 29, 2009; (4) $22.9 million from
September 30, 2009 through October 30, 2009; (5) $15.0 million from October 31, 2009 through
November 29, 2009; (6) $7.4 million from November 30, 2009 through December 30, 2009; and (6) Zero
Dollars on December 31, 2009. In addition, use of Advances to finance portfolio purchases in
excess of $7.5 million shall require the consent of the Administrative Agent and use of Advances to
finance portfolio purchases in excess of (a) $15.0 million in the aggregate as of July 31, 2009 and
August 31, 2009; (b) $8.0 million in the aggregate as of September 30, 2009; (c) $6.0 million in
the aggregate as of October 31, 2009 and November 30, 2009; and (d) $2.0 million in the aggregate
as of December 31, 2009, during any 120 day period shall require the consent of the Requisite
Lenders. In addition, the Company shall have no net loss on a consolidated basis during any Fiscal
Year, provided however, for Fiscal Year ending September 30, 2009 only, a net loss not to exceed
$10.0 million will be permitted under this Amendment
In March 2007, Palisades XVI consummated the Portfolio Purchase. The Portfolio Purchase 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
Companys line of credit with the Bank Group was fully utilized, as modified in February 2007, with
the aggregate deposit of $75 million paid for the Portfolio Purchase.
The remaining $225 million was paid on March 5, 2007 by borrowing approximately $227 million
(inclusive of transaction costs) under 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, and, as of June 30, 2008, bore an interest rate of
approximately 320 basis points over LIBOR. The term of the original agreement was three years. All
proceeds received as a result of the net collections from the Portfolio Purchase are applied to
interest and principal of the underlying loan. The Company made certain representations and
warranties to the lender to support the transaction. The Portfolio Purchase is serviced by
Palisades Collection, LLC, a wholly owned subsidiary of the Company, which has also engaged several
unrelated subservicers.
30
On February 20, 2009, the Company entered into the Fourth Amendment Receivables Financing
Agreement. The effect of this
Fourth Amendment is, among other things, to (i) lower the collection rate minimum to $1
million per month (plus interest and fees) as an average for each period of three consecutive
months, (ii) provide for an automatic extension of the maturity date from April 30, 2011 to April
30, 2012 should the outstanding balance be reduced to $25 million or less by April 30, 2011 and
(iii) permanently waive the previous termination events. The interest rate will remain unchanged at
approximately 320 basis points over LIBOR, subject to automatic reduction in the future should
certain collection milestones be attained.
As additional credit support for repayment by Palisades XVI of its obligations under the
Receivables Financing Agreement and as an inducement for BMO to enter into the Fourth Amendment,
the Company provided BMO a limited recourse, subordinated guaranty, secured by the assets of the
Company, in an amount not to exceed $8 million plus reasonable costs of enforcement and collection.
Under the terms of the guaranty, BMO cannot exercise any recourse against the Company until the
earlier of (i) five years from the date of the Fourth Amendment and (ii) the termination of the
Companys existing senior lending facility or any successor senior facility.
The aggregate minimum repayment obligations required under the Fourth Amendment to the
Receivables Financing Agreement entered into on February 20, 2009 with Palisades XVI including
interest and principal for fiscal years ending September 30, 2009 (three months), September 30,
2010 and September 30, 2011 (seven months), are $3.0 million, $12.0 million and $7.0 million,
respectively, plus monthly interest and fees. There is an additional requirement that the balance
of the facility be reduced to $25 million by April 30, 2011. While the Company believes it will be
able to make all payments due under the new payment schedule, there is no assurance we will be able
to reduce the balance of the facility to $25 million by April 30, 2011.
On June 30, 2009 and 2008, the outstanding balance on this loan was approximately $109.4
million, and $148.3 million, respectively. The average interest rate of the Receivable Financing
Agreement was 5.13% and 6.27% for the nine-month period ended June 30, 2009 and 2008, respectively.
On April 29, 2008, the Company obtained a subordinated loan pursuant to a subordinated
promissory note from Asta Group, Inc. (the Family Entity). The Family Entity is a greater than 5%
shareholder of the Company beneficially owned and controlled by Arthur Stern, the Chairman of the
Board of the Company, Gary Stern, the Chief Executive Officer of the Company, and members of their
families. The loan is in the aggregate principal amount of $8,246,493, bears interest at a rate of
6.25% per annum, is payable interest only each quarter until its maturity date of January 9, 2010,
subject to prior repayment in full of the Companys senior loan facility with a consortium of
banks. Interest expense on this loan was $385,000 for the nine months ended June 30, 2009.
The subordinated loan was incurred by the Company to resolve certain issues. Proceeds of the
subordinated loan were used to reduce the balance due on our line of credit with the Bank Group on
June 13, 2008. This facility is secured by substantially all of the assets of the Company and its
subsidiaries (the Bank Group Collateral), other than the assets of Palisades XVI, which was
separately financed by the Bank of Montreal (the BMO Facility).
As of June 30, 2009, our cash decreased $0.4 million to $3.2 million from $3.6 million at
September 30, 2008. The decrease in cash during the nine month period ended June 30, 2009, was due
to an increase in net cash used in financing activities, substantially offset by an increase in
cash provided by investing and operating activities.
Net cash provided by operating activities was $21.6 million during the nine months ended June
30, 2009, compared to $44.6 million during the nine months ended June 30, 2008. The decrease in net
cash provided by operating activities is primarily attributable to lower net income (excluding
non-cash items), partially offset by an increase in deferred and current income taxes receivable.
Net cash provided by investing activities was $46.9 million during the nine months ended June 30,
2009, compared to $16.5 million during the nine months ended June 30, 2008. The increase in net
cash provided by investing activities is primarily the reflection of decreased accounts acquired
for liquidation purchases during the nine months ended June 30, 2009. Decreased collections and
cash distributions received from venture were somewhat offset by a favorable exchange effect on
receivable accounts acquired for liquidation in South America. Net cash used in financing
activities was $68.9 million during the nine month period ended June 30, 2009, as compared to cash
provided by financing activities of $62.9 million in the prior period. The change in net cash used
by financing activities was primarily due to an advance under related party subordinated debt
issued during the third quarter of fiscal year 2008 partially offset by a decrease in the paydown
of the lines of credit during the nine months ended June 30, 2009. In addition, there was
approximately a $13,000 unfavorable foreign exchange rate effect on cash for the nine month period
ended June 30, 2009 compared to approximately a $42,000 unfavorable exchange impact in the prior
year.
31
The following tables summarize the changes in the balance sheet of the investment in consumer
receivables acquired for liquidation during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended June 30, 2009 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
203,470,000 |
|
|
$ |
245,542,000 |
|
|
$ |
449,012,000 |
|
Acquisitions of receivable portfolios, net |
|
|
16,221,000 |
|
|
|
280,000 |
|
|
|
16,501,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(75,123,000 |
) |
|
|
(33,619,000 |
) |
|
|
(108,742,000 |
) |
Net cash collections represented by
account sales of consumer receivables
acquired for liquidation |
|
|
(4,158,000 |
) |
|
|
(3,684,000 |
) |
|
|
(7,842,000 |
) |
Transfer to cost recovery (1) |
|
|
(10,128,000 |
) |
|
|
10,128,000 |
|
|
|
|
|
Impairments of consumer receivables
acquired for liquidation |
|
|
(46,208,000 |
) |
|
|
|
|
|
|
(46,208,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
(179,000 |
) |
|
|
(179,000 |
) |
Finance income recognized (2) |
|
|
52,366,000 |
|
|
|
1,356,000 |
|
|
|
53,722,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
136,440,000 |
|
|
$ |
219,824,000 |
|
|
$ |
356,264,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
66.1 |
% |
|
|
3.6 |
% |
|
|
46.1 |
% |
|
|
|
(1) |
|
During the nine months ended June 30, 2009, three portfolios were
transferred from the interest method to the cost recovery method. Based
on the nature of these portfolios and the recent cash flows, our
estimates of the timing of expected cash flows became uncertain. |
|
(2) |
|
Includes $31.1 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended June 30, 2008 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
508,515,000 |
|
|
$ |
37,108,000 |
|
|
$ |
545,623,000 |
|
Acquisitions of receivable portfolios, net |
|
|
25,622,000 |
|
|
|
23,242,000 |
|
|
|
48,864,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation (1) |
|
|
(130,572,000 |
) |
|
|
(10,633,000 |
) |
|
|
(141,205,000 |
) |
Net cash collections represented by
account sales of consumer receivables
acquired for liquidation |
|
|
(15,480,000 |
) |
|
|
|
|
|
|
(15,480,000 |
) |
Transfer to cost recovery (2) |
|
|
(208,693,000 |
) |
|
|
208,693,000 |
|
|
|
|
|
Impairments of consumer receivables
acquired for liquidation |
|
|
(43,153,000 |
) |
|
|
|
|
|
|
(43,153,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
782,000 |
|
|
|
782,000 |
|
Finance income recognized (3) |
|
|
90,624,000 |
|
|
|
949,000 |
|
|
|
91,573,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
226,863,000 |
|
|
$ |
260,141,000 |
|
|
$ |
487,004,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
62.0 |
% |
|
|
8.9 |
% |
|
|
58.4 |
% |
|
|
|
(1) |
|
Includes the put back of a portfolio purchased and returned to the seller
in the amount of $2.8 million in the first quarter of fiscal year 2008. |
|
(2) |
|
The Company purchased $6.9 billion in face value receivables for a
purchase price of $300 million in March 2007 (the Portfolio Purchase).
During the quarter ending June 30, 2008, the Company transferred the
carrying value of the Portfolio Purchase from the interest method to the
cost recovery method. |
|
(3) |
|
Includes $34.2 million derived from fully amortized interest method pools. |
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
137,497,000 |
|
|
$ |
230,726,000 |
|
|
$ |
368,223,000 |
|
Acquisitions of receivable portfolios, net |
|
|
13,540,000 |
|
|
|
273,000 |
|
|
|
13,813,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(23,660,000 |
) |
|
|
(12,766,000 |
) |
|
|
(36,426,000 |
) |
Net cash collections represented by
account sales of consumer receivables
acquired for liquidation |
|
|
(1,083,000 |
) |
|
|
(112,000 |
) |
|
|
(1,195,000 |
) |
Impairments of consumer receivables
acquired for liquidation |
|
|
(6,364,000 |
) |
|
|
|
|
|
|
(6,364,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
1,011,000 |
|
|
|
1,011,000 |
|
Finance income recognized (1) |
|
|
16,510,000 |
|
|
|
692,000 |
|
|
|
17,202,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
136,440,000 |
|
|
$ |
219,824,000 |
|
|
$ |
356,264,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
66.7 |
% |
|
|
5.4 |
% |
|
|
45.7 |
% |
|
|
|
(1) |
|
Includes $10.5 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended June 30, 2008 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
460,623,000 |
|
|
$ |
51,633,000 |
|
|
$ |
512,256,000 |
|
Acquisitions of receivable portfolios, net |
|
|
5,467,000 |
|
|
|
2,090,000 |
|
|
|
7,557,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(42,869,000 |
) |
|
|
(3,303,000 |
) |
|
|
(46,172,000 |
) |
Net cash collections represented by
account sales of consumer receivables
acquired for liquidation |
|
|
(2,826,000 |
) |
|
|
|
|
|
|
(2,826,000 |
) |
Transfer to cost recovery (1) |
|
|
(208,693,000 |
) |
|
|
208,693,000 |
|
|
|
|
|
Impairments of consumer receivables
acquired for liquidation |
|
|
(8,153,000 |
) |
|
|
|
|
|
|
(8,153,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
782,000 |
|
|
|
782,000 |
|
Finance income recognized (2) |
|
|
23,314,000 |
|
|
|
246,000 |
|
|
|
23,560,000 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
226,863,000 |
|
|
$ |
260,141,000 |
|
|
$ |
487,004,000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
51.0 |
% |
|
|
7.4 |
% |
|
|
48.1 |
% |
|
|
|
(1) |
|
Represents the transfer of the carrying value of the Portfolio Purchase from the interest method to the cost recovery method. |
|
(2) |
|
Includes $10.4 million derived from fully amortized interest method pools. |
33
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 small portion of
the face amounts. During the nine months ended June 30, 2009, we purchased portfolios with an
aggregate purchase price of $16.5 million with a face value of $427.1 million.
The Company accounts for its investment in finance receivables using the interest method
under the guidance of American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 03-3, Accounting for Loans or Certain Securities Acquired in a Transfer.
Practice Bulletin 6 was amended by SOP 03-3 as described further. Under the guidance of SOP 03-3
(and the amended Practice Bulletin 6), static pools of accounts are established. These pools are
aggregated based on certain common risk criteria. Each static pool is recorded at cost and is
accounted for as a single unit for the recognition of income, principal payments and loss
provision. Once a static pool is established for a quarter, individual receivable accounts are not
added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned
to the seller). SOP 03-3 (and the amended Practice Bulletin 6) requires that the excess of the
contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or
expense or on the balance sheet. The SOP initially freezes the internal rate of return, referred to
as IRR, estimated when the accounts receivable are purchased as the basis for subsequent impairment
testing. Significant increases in actual, or expected future cash flows may be recognized
prospectively through an upward adjustment of the IRR over a portfolios remaining life. Any
increase to the IRR then becomes the new benchmark for impairment testing. Under SOP 03-3 and the
amended Practice Bulletin 6, rather than lowering the estimated IRR if the collection estimates are
not received or projected to be received, the carrying value of a pool would be written down to
maintain the then current IRR. Income on finance receivables is earned based on each static pools
effective IRR. Under the interest method, income is recognized on the effective yield method based
on the actual cash collected during a period and future estimated cash flows and timing of such
collections and the portfolios cost. Revenue arising from collections in excess of anticipated
amounts attributable to timing differences is deferred. The estimated future cash flows are
reevaluated quarterly.
COLLECTIONS REPRESENTED BY ACCOUNT SALES
|
|
|
|
|
|
|
|
|
|
|
Collections |
|
|
|
|
|
|
Represented |
|
|
Finance |
|
|
|
By Account |
|
|
Income |
|
Period |
|
Sales |
|
|
Earned |
|
Nine months ended June 30, 2009 |
|
$ |
7,842,000 |
|
|
$ |
2,525,000 |
|
Three months ended June 30, 2009 |
|
$ |
1,195,000 |
|
|
$ |
734,000 |
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2008 |
|
$ |
15,480,000 |
|
|
$ |
7,125,000 |
|
Three months ended June 30, 2008 |
|
$ |
2,826,000 |
|
|
$ |
1,946,000 |
|
INTEREST METHOD 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 |
|
|
$ |
105,427,000 |
|
|
$ |
0 |
|
|
$ |
105,427,000 |
|
|
|
162 |
% |
2002 |
|
|
36,557,000 |
|
|
|
47,955,000 |
|
|
|
0 |
|
|
|
47,955,000 |
|
|
|
131 |
% |
2003 |
|
|
115,626,000 |
|
|
|
209,397,000 |
|
|
|
1,641,000 |
|
|
|
211,038,000 |
|
|
|
183 |
% |
2004 |
|
|
103,743,000 |
|
|
|
177,670,000 |
|
|
|
1,098,000 |
|
|
|
178,768,000 |
|
|
|
172 |
% |
2005 |
|
|
126,023,000 |
|
|
|
198,857,000 |
|
|
|
22,828,000 |
|
|
|
221,685,000 |
|
|
|
176 |
% |
2006 |
|
|
163,392,000 |
|
|
|
225,327,000 |
|
|
|
49,204,000 |
|
|
|
274,531,000 |
|
|
|
168 |
% |
2007 |
|
|
109,235,000 |
|
|
|
73,602,000 |
|
|
|
73,937,000 |
|
|
|
147,539,000 |
|
|
|
135 |
% |
2008 |
|
|
25,622,000 |
|
|
|
25,661,000 |
|
|
|
14,638,000 |
|
|
|
40,299,000 |
|
|
|
157 |
% |
2009 |
|
|
16,221,000 |
|
|
|
3,042,000 |
|
|
|
18,179,000 |
|
|
|
21,221,000 |
|
|
|
131 |
% |
|
|
|
(1) |
|
Total collections do not represent full collections of the Company with
respect to this or any other year. Excludes interest method portfolio
purchases subsequently transferred to cost recovery. |
|
(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 refer to the actual net cash collections,
including cash sales, plus estimated remaining net collections. |
34
Recent Accounting Pronouncements
In June 2009, the FASB issues SFAS No. 168, The FASB Accounting Standards Codifications and
the Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB Statement No.
162. Under SFAS No. 168, The FASB Accounting Standards Codification (Codification) will become
the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under
authority of the federal securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of SFAS No. 168, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become non-authoritative. SFAS No. 168
is effective for financial statements issued for interim and annual periods ending after September
15, 2009. In the FASBs views, the issuance of SFAS No. 168 and the Codification will not change
GAAP, except for those nonpublic nongovernmental entities that must now apply the American
Institute to Certified Public Accountants Technical Inquiry Service Section 5100, Revenue
Recognition paragraphs 38-76. The Company does not expect the adoption of SFAS No. 168 will have
a material impact on the Companys consolidated financial statements.
In June 2009, the Financial Accounting Standards Board issued FASB Statement 167, Amendments
to FASB Interpretation No. 46(R), to improve how enterprises account for and disclose their
involvement with variable interest entities (VIEs), which are special-purpose entities, and other
entities whose equity at risk is insufficient or lack certain characteristics. Among other things,
Statement 167 changes how an entity determines whether it is the primary beneficiary of a variable
interest entity (VIE) and whether that VIE should be consolidated. The new Statement requires an
entity to provide significantly more disclosures about its involvement with VIEs. As a result, the
Company must comprehensively review its involvements with VIEs and potential VIEs, including
entities previous considered to be qualifying special purpose entities, to determine the effect on
its consolidated financial statements and related disclosures. Statement 167 is effective as of
the beginning of a reporting entitys first annual reporting period that begins after November 15,
2009 and for interim periods within the first annual reporting period. Earlier application is
prohibited. The Company does not believe that the adoption of Statement 167 will have a significant
effect on its consolidated financial statements.
In May 2009, the FASB issues SFAS No. 165, Subsequent Events, to incorporate the accounting
and disclosures requirements for subsequent events into GAAP. SFAS No. 165 introduces new
terminology, defines a date through which management must evaluate subsequent events, and lists the
circumstances under which an entity must recognize and disclose events or transactions occurring
after the balance-sheet date. The Company adopted SFAS No. 165 as of June 30, 2009, which was the
required effective date. The Company evaluated its June 30, 2009 financial statements for
subsequent events through August 7, 2009, the date the financial statements were available to be
issued.
In April 2009 the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments, (FSP 107-1). FSP 107-1 expands disclosures for fair value of
financial instruments that are within the scope of FASB statement number 107 (SFAS 107) and now
requires the FAS 107 fair value disclosures in interim period reports. The FSP is effective for
interim reporting periods ending after June 15, 2009.
In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin 110 (SAB 110). This staff accounting bulletin (SAB) expresses the views of the staff
regarding the use of a simplified method, as discussed in SAB No. 107 (SAB 107), in developing
an estimate of expected term of plain vanilla share options in accordance with Financial
Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment . In
particular, the staff indicated in SAB 107 that it will accept a companys election to use the
simplified method, regardless of whether the company has sufficient information to make more
refined estimates of expected term. At the time SAB 107 was issued, the staff believed that more
detailed external information about employee exercise behavior (e.g., employee exercise patterns by
industry and/or other categories of companies) would, over time, become readily available to
companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the
simplified method for share option grants after December 31, 2007. The staff understands that such
detailed information about employee exercise behavior might not have been widely available by
December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the
use of the simplified method beyond December 31, 2007. This SAB does not have a material impact on
the Company.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to various types of market risk in the normal course of business, including
the impact of interest rate changes and changes in corporate tax rates. A material change in
these rates could adversely affect our operating results and cash flows. At June 30, 2009, our
Credit Facility and our Receivable Financing Agreement, all of which is variable debt, had an
outstanding balance of $35.5 million and $109.4 million, respectively. A 25 basis-point increase
in interest rates would have increased our interest expense for the nine month period ended
June 30, 2009 by approximately $216,000 based on the average debt outstanding during the period.
We do not currently invest in derivative financial or commodity instruments.
35
|
|
|
Item 4. |
|
Controls and Procedures |
a. |
|
Disclosure Controls and Procedures. |
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an
evaluation, with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant
to Securities Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures are effective
in ensuring that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SECs rules and forms.
b. |
|
Changes in Internal Controls Over Financial Reporting. |
There have been no other changes in our internal controls over financial reporting that
occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that
have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings |
In the ordinary course of our business, we are involved in numerous legal proceedings. We
regularly initiate collection lawsuits, using our network of third party law firms, against
consumers. Also, consumers occasionally initiate litigation against us, in which they allege
that we have violated a federal or state law in the process of collecting their account. We do
not believe that these ordinary course matters are material to our business and financial
condition. As of the date of this Form 10-Q, we were not involved in any material litigation in
which we were a defendant.
In July 2009, the New York Attorney General filed a special proceeding in New York State
Supreme Court against certain law firms and collection agencies, seeking to vacate approximately
100,000 default judgments that were taken in connection with actions in which a particular
process serving company served process. The Company was not named in the action. Several of
the third-party law firms used by the Company were named as defendants. These law firms have
indicated that they intend to vigorously defend the action. It appears that an immaterial
number of the Companys accounts are involved.
In settlement of a lawsuit filed by the Minnesota Attorney General, the National
Arbitration Forum announced in July 2009 that it would no longer administer consumer or
employment arbitrations. The Company does not use arbitration as a primary means of collection
from consumers, and the change is not expected to have a significant impact on the Company.
On July 10, 2009 the Company entered into the Eighth Amendment to the Fourth Amended and
Restated Loan Agreement with the Bank Group. This Amendment revised the Commitment Termination Date
from July 11, 2009 to December 31, 2009, reduced the credit facility commitment limits, and revised
other debt provisions (see further detail in Note 15: Subsequent Events to the Condensed
Consolidated Financial Statements).
This amendment includes certain commitment limits and restrictive covenants, including
financial covenants. Failure to satisfy any of these commitment limits or covenants could result in
all or any of the following:
|
|
|
acceleration of the payment of our outstanding indebtedness; |
|
|
|
cross defaults to and acceleration of the payment under our existing financing agreements; |
|
|
|
our inability to borrow additional amounts under our existing financing arrangements; and |
|
|
|
our inability to secure financing on favorable terms or at all from alternative sources. |
The Company believes that it will meet all covenant and repayment requirements to pay down the
debt by December 31, 2009. If, however, the Company, does not meet the requirements, it will
consider the sale of assets collateralized by this loan agreement to satisfy its obligations by
December 31, 2009.
There were no other material changes in any risk factors previously disclosed in the Companys
Report on Form 10-K filed with the Securities & Exchange Commission on February 20, 2009, or the
Report on Form 10-K/A filed with the Securities & Exchange Commission on March 13, 2009.
36
|
|
|
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.
(a) Exhibits
|
|
|
|
|
|
31.1 |
|
|
Certification of the Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Registrants Chief Financial Officer, Robert J.
Michel, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of the Registrants Chief Financial Officer, Robert J.
Michel, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
37
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 7, 2009 |
By: |
/s/ Gary Stern
|
|
|
|
Gary Stern, Chairman, President, |
|
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
Date: August 7, 2009 |
By: |
/s/ Robert J. Michel
|
|
|
|
Robert J. Michel, Chief Financial Officer |
|
|
|
(Principal Financial Officer and
Principal Accounting Officer) |
|
38
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
|
|
31.1 |
|
|
Certification of the Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Registrants Chief Financial Officer, Robert
J. Michel, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of the Registrants Chief Financial Officer, Robert
J. Michel, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
39