10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-26906
ASTA FUNDING, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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22-3388607 |
(State or other jurisdiction
of incorporation or organization)
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(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 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 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 May 15, 2008, the registrant had 14,276,158 common shares outstanding.
ASTA FUNDING, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, |
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September 30, |
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2008 |
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2007 |
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(Unaudited) |
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Assets |
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Cash |
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$ |
3,589,000 |
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$ |
4,525,000 |
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Restricted cash |
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5,048,000 |
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5,694,000 |
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Consumer receivables acquired for liquidation (at net realizable value) |
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512,256,000 |
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545,623,000 |
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Due from third party collection agencies and attorneys |
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5,211,000 |
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4,909,000 |
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Investment in venture |
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1,162,000 |
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2,040,000 |
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Furniture and equipment, net |
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797,000 |
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793,000 |
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Deferred income taxes |
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22,465,000 |
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12,349,000 |
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Other assets and investments |
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4,285,000 |
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4,323,000 |
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Total assets |
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$ |
554,813,000 |
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$ |
580,256,000 |
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Liabilities And Stockholders Equity |
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Liabilities |
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Debt |
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$ |
293,857,000 |
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$ |
326,466,000 |
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Other liabilities |
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3,558,000 |
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7,537,000 |
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Dividends payable |
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571,000 |
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557,000 |
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Income taxes payable |
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11,397,000 |
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8,161,000 |
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Total liabilities |
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309,383,000 |
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342,721,000 |
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Stockholders Equity |
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Preferred stock, $.01 par value; authorized 5,000,000 shares; issued
and outstanding none |
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Common stock, $.01 par value; authorized 30,000,000 shares; issued
and outstanding 14,276,158 at March 31, 2008 and 13,918,158
at September 30, 2007 |
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143,000 |
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139,000 |
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Additional paid-in capital |
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68,442,000 |
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65,030,000 |
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Retained earnings |
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176,845,000 |
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172,366,000 |
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Total stockholders equity |
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245,430,000 |
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237,535,000 |
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Total liabilities and stockholders equity |
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$ |
554,813,000 |
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$ |
580,256,000 |
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See accompanying notes to condensed consolidated financial statements
-2-
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months |
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Three Months |
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Six Months |
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Six Months |
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Ended |
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Ended |
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Ended |
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Ended |
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March 31, 2008 |
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March 31, 2007 |
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March 31, 2008 |
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March 31, 2007 |
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Revenues: |
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Finance income, net |
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$ |
33,878,000 |
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$ |
32,353,000 |
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68,013,000 |
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$ |
57,294,000 |
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Other income |
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4,000 |
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255,000 |
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144,000 |
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459,000 |
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33,882,000 |
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32,608,000 |
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68,157,000 |
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57,753,000 |
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Expenses: |
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General and administrative |
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7,124,000 |
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5,790,000 |
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12,929,000 |
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10,878,000 |
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Interest |
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4,711,000 |
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3,779,000 |
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10,652,000 |
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5,298,000 |
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Impairments |
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35,000,000 |
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2,412,000 |
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35,000,000 |
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2,412,000 |
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46,835,000 |
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11,981,000 |
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58,581,000 |
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18,588,000 |
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(Loss) income before equity in
earnings (loss) of venture and income tax |
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(12,953,000 |
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20,627,000 |
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9,576,000 |
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39,165,000 |
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Equity in (loss) earnings of venture |
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(1,000 |
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475,000 |
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(78,000 |
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975,000 |
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Income tax (benefit)expense |
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(5,247,000 |
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8,550,000 |
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3,891,000 |
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16,262,000 |
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Net (loss) Income |
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$ |
(7,707,000 |
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$ |
12,552,000 |
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$ |
5,607,000 |
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$ |
23,878,000 |
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Net (loss) income per share: |
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Basic |
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$ |
(0.54 |
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$ |
0.91 |
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$ |
0.40 |
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$ |
1.73 |
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Diluted |
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$ |
(0.54 |
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$ |
0.85 |
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$ |
0.38 |
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$ |
1.63 |
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Weighted average number of common shares outstanding:
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Basic |
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14,201,674 |
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13,848,194 |
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14,059,142 |
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13,772,538 |
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Diluted |
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14,201,674 |
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14,744,499 |
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14,742,549 |
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14,647,556 |
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See accompanying notes to condensed consolidated financial statements
-3-
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
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Additional |
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Retained |
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Shares |
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Amount |
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Paid-in Capital |
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Earnings |
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Total |
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Balance, September 30, 2007 |
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13,918,158 |
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$ |
139,000 |
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$ |
65,030,000 |
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$ |
172,366,000 |
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$ |
237,535,000 |
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Exercise of options |
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300,000 |
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3,000 |
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422,000 |
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425,000 |
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Restricted stock granted |
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58,000 |
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1,000 |
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(1,000 |
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Stock based compensation expense |
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450,000 |
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450,000 |
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Tax benefit arising from exercise of non-
qualified stock options |
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2,541,000 |
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2,541,000 |
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Dividends |
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(1,128,000 |
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(1,128,000 |
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Net income |
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5,607,000 |
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5,607,000 |
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Balance, March 31, 2008 |
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14,276,158 |
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$ |
143,000 |
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$ |
68,442,000 |
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$ |
176,845,000 |
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$ |
245,430,000 |
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See accompanying notes to condensed consolidated financial statements
-4-
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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Six Months Ended |
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March 31, 2008 |
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March 31, 2007 |
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Cash flows from operating activities: |
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Net income |
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$ |
5,607,000 |
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$ |
23,878,000 |
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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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549,000 |
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201,000 |
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Deferred income taxes |
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(10,116,000 |
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(5,039,000 |
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Impairments
of consumer receivables acquired for liquidation |
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35,000,000 |
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2,412,000 |
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Stock based compensation |
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450,000 |
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768,000 |
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Changes in: |
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Due from third party collection agencies and attorneys |
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(302,000 |
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(505,000 |
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Income taxes payable |
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3,236,000 |
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(33,000 |
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Other assets |
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(361,000 |
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(2,295,000 |
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Other liabilities |
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(3,978,000 |
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(70,000 |
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Net cash provided by operating activities |
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30,085,000 |
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19,317,000 |
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Cash flows from investing activities: |
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Purchase of consumer receivables acquired for liquidation |
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(41,307,000 |
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(386,682,000 |
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Principal collected on receivables acquired for liquidation |
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32,199,000 |
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61,324,000 |
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Principal collected on receivable accounts represented by
account sales |
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7,475,000 |
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16,487,000 |
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Cash distributions received from venture |
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800,000 |
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2,925,000 |
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Loss (earnings) on investment in venture |
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78,000 |
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(975,000 |
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Purchase of other investments |
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(5,771,000 |
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Collections on other investments |
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2,788,000 |
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Capital expenditures |
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(155,000 |
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(105,000 |
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Net cash used in investing activities |
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(910,000 |
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(310,009,000 |
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Cash flows from financing activities: |
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Proceeds from exercise of options |
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425,000 |
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1,207,000 |
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Tax benefit arising from non-qualified options |
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2,541,000 |
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680,000 |
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Change in restricted cash |
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646,000 |
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Dividends paid |
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(1,114,000 |
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(6,603,000 |
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(Repayments) advances under lines of credit, net |
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(32,609,000 |
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294,351,000 |
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Net cash (used in) provided by financing activities |
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(30,111,000 |
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289,635,000 |
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Decrease in cash |
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(936,000 |
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(1,057,000 |
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Cash at the beginning of period |
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4,525,000 |
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7,826,000 |
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Cash at end of period |
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$ |
3,589,000 |
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$ |
6,769,000 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period |
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Interest |
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$ |
10,836,000 |
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$ |
3,588,000 |
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Income taxes |
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$ |
8,198,000 |
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$ |
20,655,000 |
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See accompanying notes to condensed consolidated financial statements.
-5-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Business and Basis of Presentation
Business
Asta Funding, Inc., together with its wholly owned subsidiaries, (the Company) is engaged in
the business of purchasing, managing for its own account and servicing distressed consumer
receivables, including charged-off receivables, semi-performing receivables and performing
receivables. Charged-off receivables are accounts that have been written-off by the originators and
may have been previously serviced by collection agencies. Semi-performing receivables are accounts
where the debtor is currently making partial or irregular monthly payments, but the accounts may
have been written-off by the originators. Performing receivables are accounts where the debtor is
making regular monthly payments that may or may not have been delinquent in the past. Distressed
consumer receivables are the unpaid debts of individuals to banks, finance companies and other
credit providers. A large portion of the Companys distressed consumer receivables are
MasterCard(R), Visa(R), other credit card accounts and telecommunication accounts which were
charged-off by the issuers for non-payment. The Company acquires these portfolios at substantial
discounts from their face values. The discounts are based on the characteristics (issuer, account
size, debtor location and age of debt) of the underlying accounts of each portfolio.
Basis of Presentation
The condensed consolidated balance sheet as of March 31, 2008 and the consolidated balance
sheet as of September 30, 2007, the condensed consolidated statements of operations for the six and
three month periods ended March 31, 2008 and 2007, the condensed consolidated statement of
stockholders equity as of March 31, 2008 and the condensed consolidated statements of cash flows
for the six month periods ended March 31, 2008 and 2007, are unaudited. The September 30, 2007
financial information included in this report has been extracted from our audited financial
statements included in our Annual Report on Form 10-K and Form 10-K/A. In the opinion of
management, all adjustments (which include only normal recurring adjustments) necessary to present
fairly our financial position at March 31, 2008 and September 30, 2007, the results of operations
for the six and three month periods ended March 31, 2008 and 2007 and cash flows for the six month
periods ended March 31, 2008 and 2007 have been made. The results of operations for the six and
three month periods ended March 31, 2008 and 2007 are not necessarily indicative of the operating
results for any other interim period or the full fiscal year.
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission
and therefore do not include all information and footnote disclosures required under generally
accepted accounting principles. The Company suggests that these financial statements be read in
conjunction with the financial statements and notes thereto included in our Annual Report on Form
10-K and Form 10-K/A for the fiscal year ended September 30, 2007 filed with the Securities and
Exchange Commission.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates including
managements estimates of future cash flows and the resulting
rates of return.
-6-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
Note 1: Business and Basis of Presentation (continued)
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 161
Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No.
133. This Statement requires enhanced disclosures about an entitys derivative and hedging
activities and thereby improves the transparency of financial reporting providing users of
financial statements with an enhanced understanding of (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedged items are accounted for under
Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging
Activities and its related interpretations and (iii) how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash flows.
This Statement is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial adoption. The Company
believes this statement will not impact the Company.
In December 2007, the FASB ratified Emerging Issues Task Force, or EITF, Issue No. 07-1,
Accounting for Collaborative Arrangements Related to the Development and Commercialization of
Intellectual Property, or EITF 07-1, which provides guidance on how the parties to a collaborative
agreement should account for costs incurred and revenue generated on sales to third parties, how
sharing payments pursuant to a collaboration agreement should be presented in the income statement
and certain related disclosure requirements. EITF 07-1 will be effective for the Company beginning
January 1, 2009 on a retrospective basis. The Company is currently evaluating the impact that the
adoption of EITF 07-1 will have, if any, on its consolidated financial statements.
In December 2007 The Securities & 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 Statement of
Financial Accounting Standards 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 be widely available by December 31, 2007. Accordingly, the
staff will continue to accept, under certain circumstances, the use of the simplified method beyond
December 31, 2007. This SAB does not have a material impact on the Company.
In December 2007, the FASB issued FASB Statement No. 160 Noncontrolling Interests in
Consolidated Financial Statementsan amendment of ARB No. 51. A noncontrolling interest, sometimes
called a minority interest, is the portion of equity in a subsidiary not attributable, directly or
indirectly, to a parent. The objective of this Statement is to improve the relevance,
comparability, and transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting standards that
require:
The ownership interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial position within
equity, but separate from the parents equity.
The amount of consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated statement of
income.
Changes in a parents ownership interest while the parent retains its controlling financial
interest in its subsidiary be accounted for consistently. A parents ownership interest in a
subsidiary changes if the parent purchases additional ownership interests in its subsidiary or
if the parent sells some of its ownership interests in its subsidiary. It also changes if the
subsidiary reacquires some of its ownership interests or the subsidiary issues additional
ownership interests. All of those transactions are economically similar, and this Statement
requires that they be accounted for similarly, as equity transactions.
When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the
former subsidiary be initially measured at fair value. The gain or loss on the deconsolidation
of the subsidiary is measured using the fair value of any noncontrolling equity investment
rather than the carrying amount of that retained investment.
Entities provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners.
-7-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
Note 1: Business and Basis of Presentation (continued)
Recent Accounting Pronouncements (continued)
This Statement is effective for fiscal years, and interim periods within those fiscal years,
beginning with the Companys first annual reporting period on or after December 15, 2008. Earlier
adoption is prohibited. The effective date of this Statement is the same as that of the related
Statement 141(R). The Company anticipates the adoption will not have a material effect on the
Companys financial statements.
This Statement shall be applied prospectively as of the beginning of the fiscal year in which
this Statement is initially applied, except for the presentation and disclosure requirements. The
presentation and disclosure requirements shall be applied retrospectively for all periods
presented.
In
December 2007, the FASB issued FASB Statement No. 141R (revised 2007) Business Combinations
(FASB Statement No. 141R). FASB Statement No. 141R Replaces FASB Statement No. 141 Business
Combinations (FASB Statement No. 141). The objective of FASB Statement No. 141R is to improve the
relevance, representational faithfulness, and comparability of the information that a reporting
entity provides in its financial reports about a business combination and its effects. To
accomplish that, this Statement establishes principles and requirements for how the acquirer:
a. recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree;
b. recognizes and measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and
c. determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
FASB Statement No. 141R applies to all transactions or other events in which an entity (the
acquirer) obtains control of one or more businesses (the acquiree), including those sometimes
referred to as true mergers or mergers of equals and combinations achieved without the transfer
of consideration, for example, by contract alone or through the lapse of minority veto rights. FASB
Statement No. 141R applies to all business entities, including mutual entities that previously used
the pooling-of-interests method of accounting for some business combinations. It does not apply to:
a. the
formation of a joint venture;
b. the
acquisition of an asset or a group of assets that does not constitute a business;
c. a
combination between entities or businesses under common control; and
d. a combination between not-for-profit organizations or the acquisition of a for-profit
business by a not-for-profit organization.
FASB Statement No. 141R retains the guidance in FASB Statement No. 141 for identifying and
recognizing intangible assets separately from goodwill. FASB Statement No. 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed and any non-controlling interest
in the acquiree at the acquisition date, measured at their fair values at that date. In addition,
FASB Statement No. 141R generally requires that acquisition related costs such as professional fees
and consulting fees be expensed as incurred.
FASB Statement No. 141 R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. An entity may not apply it before that date. Currently, the Company does
not anticipate FASB Statement No. 141R will have an impact on the Companys financial statements.
In November 2007 the Securities & Exchange Commission issued Staff Accounting Bulletin No. 109
(SAB 109) which expresses the staff views regarding written loan commitments that are accounted
for at fair value through earnings under
-8-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
Note 1: Business and Basis of Presentation (continued)
Recent Accounting Pronouncements (continued)
generally accepted accounting principles. SAB No. 105, Application of Accounting Principles to Loan
Commitments (SAB 105), provided the views of the staff regarding derivative loan commitments
that are accounted for at fair value through earnings pursuant to Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities . SAB 105 stated
that in measuring the fair value of a derivative loan commitment, the staff believed it would be
inappropriate to incorporate the expected net future cash flows related to the associated servicing
of the loan. This SAB supersedes SAB 105 and expresses the current view of the staff that,
consistent with the guidance in Statement of Financial Accounting Standards No. 156, Accounting
for Servicing of Financial Assets , and Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, the expected net future cash
flows related to the associated servicing of the loan should be included in the measurement of all
written loan commitments that are accounted for at fair value through earnings. SAB 105 also
indicated that the staff believed that internally-developed intangible assets (such as customer
relationship intangible assets) should not be recorded as part of the fair value of a derivative
loan commitment. This SAB retains that staff view and broadens its application to all written loan
commitments that are accounted for at fair value through earnings. The adoption of SAB No. 109 will
not have any impact on the Company.
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 . This
Statement permits entities to choose to measure many financial instruments and certain other items
at fair value. The objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions. This Statement
is expected to expand the use of fair value measurement, which is consistent with the Boards
long-term measurement objectives for accounting for financial instruments. This Statement is
effective for the Companys fiscal year that begins October 1, 2008. The Company believes that this
statement, when adopted, will not impact the Company.
-9-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 1: Business and Basis of Presentation (continued)
Recent Accounting Pronouncements (continued)
In September 2006,
the FASB issued FASB Statement No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106
and 132(R) (FASB 158). FASB 158 improves financial reporting by requiring an employer to
recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than
a multiemployer plan) as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity. FASB 158 also improves financial reporting by requiring
an employer to measure the funded status of a plan as of the date of its year-end statement of
financial position, with limited exceptions. FASB 158 was required to be implemented by the end of
our fiscal year 2007. At this time, the Company does not sponsor a defined benefit plan; therefore,
there is no impact on the Company with regard to FASB 158.
In
September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements (FASB Statement No. 157). This
Statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does not require any new
fair value measurements. FASB Statement No. 157 will be effective for our financial statements
issued for our fiscal year beginning October 1, 2008. The Company does not expect the adoption of
FASB Statement No. 157 to have a material impact on its financial reporting or disclosure
requirements.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109 (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 became effective October 1, 2007. The adoption of FIN 48 has had
no material impact on our financial reporting and disclosure.
Reclassifications
Certain items in prior the prior years financial statements have been reclassified to conform
to current the periods presentation.
Note 2: Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. The Companys investment in a venture, representing a 25% interest, is
accounted for using the equity method. All significant intercompany balances and transactions have
been eliminated in consolidation.
-10-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation
Accounts acquired for liquidation are stated at their net realizable value and consist mainly of
defaulted consumer loans to individuals throughout the country and in Central and South America.
Prior to October 1, 2005, the Company accounted for its investment in finance receivables
using the interest method under the guidance of Practice Bulletin 6, Amortization of Discounts on
Certain Acquired Loans. Effective October 1, 2005, the Company adopted and began to account for
its investment in finance receivables using the interest method under the guidance of AICPA
Statement of Position 03-3, Accounting for Loans or Certain Securities Acquired in a Transfer
(SOP 03-3). Practice Bulletin 6 was amended by SOP 03-3. Under the guidance of SOP 03-3 (and the
amended Practice Bulletin 6), static pools of accounts are established. These pools are aggregated
based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as
a single unit for the recognition of income, principal payments and loss provision. Once a static
pool is established for a quarter, individual receivable accounts are not added to the pool (unless
replaced by the seller) or removed from the pool (unless sold or returned to the seller). SOP 03-3
(and the amended Practice Bulletin 6) requires that the excess of the contractual cash flows over
expected cash flows not be recognized as an adjustment of revenue or expense or on the balance
sheet. SOP 03-3 initially freezes the internal rate of return, referred to as IRR, estimated when
the accounts receivable are purchased, as the basis for subsequent impairment testing. Significant
increases in actual or expected future cash flows may be recognized prospectively through an
upward adjustment of the IRR over a portfolios remaining life. Any increase to the IRR then
becomes the new benchmark for impairment testing. Effective for fiscal years beginning October 1,
2005 under SOP 03-3 and the amended Practice Bulletin 6, rather than lowering the estimated IRR if
the collection estimates are not received or projected to be received, the carrying value of a pool
would be written down to maintain the then current IRR. Impairments on six portfolios of
receivables totaling approximately $35.0 million were recorded in the second quarter of fiscal
year 2008. Impairments on three portfolios of receivables totaling approximately $2.4 million were
recorded in the second quarter of fiscal year 2007. Under the interest method, income is recognized
on the effective yield method based on the actual cash collected during a period and future
estimated cash flows and timing of such collections and the portfolios cost. Revenue arising from
collections in excess of anticipated amounts attributable to timing differences is deferred. The
estimated future cash flows are reevaluated quarterly.
Under the cost recovery method, no income is recognized until the cost of the portfolio has
been fully recovered. A pool can become fully amortized (zero carrying balance on the balance
sheet) while still generating cash collections. In this case, all cash collections are recognized
as revenue when received. Additionally, the Company uses the cost recovery method when collections
on a particular pool of accounts cannot be reasonably predicted.
The Company accounts for its investments in consumer receivable portfolios, using either:
|
|
|
the interest method; or |
|
|
|
|
the cost recovery method. |
The Companys extensive liquidating experience is in the field of distressed credit card
receivables, telecom receivables, consumer loan receivables, retail installment contracts, mixed
consumer receivables, and auto deficiency receivables. The Company uses the interest method for
accounting for a vast majority of 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 the 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.
Over time, as the Company continues to purchase asset classes in which it believes it has
the requisite expertise and experience, the Company is more likely to utilize the interest method
to account for such purchases.
-11-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
Prior to October 1, 2005, the Company accounted for its investment in finance receivables
using the interest method under the guidance of Practice Bulletin 6. Each purchase was treated as a
separate portfolio of receivables and was considered a separate financial investment, and
accordingly the Company did not aggregate such loans under Practice Bulletin 6 notwithstanding that
the underlying collateral may have had similar characteristics. After SOP 03-3 was adopted by the
Company beginning with the Companys fiscal year beginning October 1, 2005, the Company began to
aggregate 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, telecom 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; |
|
|
|
|
Number of days since charge-off; |
|
|
|
|
Payments made since charge-off; |
|
|
|
|
The credit originator and its credit guidelines; |
|
|
|
|
Our ability to analyze accounts and resell accounts that meet our criteria for resale; |
|
|
|
|
The locations of the debtors, as there are better states to attempt to collect in and ultimately 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 business model, this is of particular
importance. Debtors with jobs or property are more likely to repay their obligation and conversely,
debtors without jobs or property are less likely to repay their obligation; and |
|
|
|
|
The ability to obtain customer statements from the original issuer. |
-12-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
The Company obtains and utilizes, as appropriate, input 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.
The following tables summarize the changes in the balance sheet of the investment in receivable
portfolios during the following periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2008 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
508,515,000 |
|
|
$ |
37,108,000 |
|
|
$ |
545,623,000 |
|
Acquisitions of receivable portfolios, net |
|
|
20,155,000 |
|
|
|
21,152,000 |
|
|
|
41,307,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation (1) |
|
|
(87,703,000 |
) |
|
|
(7,330,000 |
) |
|
|
(95,033,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(12,654,000 |
) |
|
|
|
|
|
|
(12,654,000 |
) |
Impairments |
|
|
(35,000,000 |
) |
|
|
|
|
|
|
(35,000,000 |
) |
Finance income recognized (2) |
|
|
67,310,000 |
|
|
|
703,000 |
|
|
|
68,013,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
460,623,000 |
|
|
$ |
51,633,000 |
|
|
$ |
512,256,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
67.1 |
% |
|
|
9.6 |
% |
|
|
63.2 |
% |
|
|
|
(1) |
|
Includes the put back of a portfolio purchased and returned to the seller in the
amount of $2.8 million in the first quarter of fiscal 2008. |
|
(2) |
|
Includes $23.9 million derived from fully amortized interest method pools. |
-13-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2007 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
256,199,000 |
|
|
$ |
1,076,000 |
|
|
$ |
257,275,000 |
|
Acquisitions of receivable portfolios, net |
|
|
345,798,000 |
|
|
|
40,884,000 |
|
|
|
386,682,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(102,015,000 |
) |
|
|
(2,089,000 |
) |
|
|
(104,104,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(26,754,000 |
) |
|
|
(4,247,000 |
) |
|
|
(31,001,000 |
) |
Transferred to cost recovery (1) |
|
|
(4,478,000 |
) |
|
|
4,478,000 |
|
|
|
|
|
Impairments |
|
|
(2,412,000 |
) |
|
|
|
|
|
|
(2,412,000 |
) |
Finance income recognized (2) |
|
|
56,007,000 |
|
|
|
1,287,000 |
|
|
|
57,294,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
522,345,000 |
|
|
$ |
41,389,000 |
|
|
$ |
563,734,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
43.5 |
% |
|
|
20.3 |
% |
|
|
42.4 |
% |
|
|
|
(1) |
|
Represents a portfolio acquired during the three months ended December 31, 2006 which
the Company successfully returned to the seller at the original purchase value. |
|
(2) |
|
Includes $5.5 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2008 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
509,580,000 |
|
|
$ |
49,794,000 |
|
|
$ |
559,374,000 |
|
Acquisitions of receivable portfolios, net |
|
|
239,000 |
|
|
|
3,559,000 |
|
|
|
3,798,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(42,807,000 |
) |
|
|
(2,124,000 |
) |
|
|
(44,931,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(4,863,000 |
) |
|
|
|
|
|
|
(4,863,000 |
) |
Impairments |
|
|
(35,000,000 |
) |
|
|
|
|
|
|
(35,000,000 |
) |
Finance income recognized (1) |
|
|
33,474,000 |
|
|
|
404,000 |
|
|
|
33,878,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
460,623,000 |
|
|
$ |
51,633,000 |
|
|
$ |
512,256,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
70.2 |
% |
|
|
19.0 |
% |
|
|
68.0 |
% |
|
|
|
(1) |
|
Includes $12.2 million derived from fully amortized interest method pools. |
-14-
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 March 31, 2007 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
281,852,000 |
|
|
$ |
3,671,000 |
|
|
$ |
285,523,000 |
|
Acquisitions of receivable portfolios, net |
|
|
288,224,000 |
|
|
|
36,191,000 |
|
|
|
324,415,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(60,765.000 |
) |
|
|
(1,461,000 |
) |
|
|
(62,226,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(11,825,000 |
) |
|
|
(2,094,000 |
) |
|
|
(13,919,000 |
) |
Transfer to cost recovery (1) |
|
|
(4,478,000 |
) |
|
|
4,478,000 |
|
|
|
|
|
Impairment |
|
|
(2,412,000 |
) |
|
|
|
|
|
|
(2,412,000 |
) |
Finance income recognized (2) |
|
|
31,749,000 |
|
|
|
604,000 |
|
|
|
32,353,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
522,345,000 |
|
|
$ |
41,389,000 |
|
|
$ |
563,734,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
43.7 |
% |
|
|
17.0 |
% |
|
|
42.5 |
% |
|
|
|
(1) |
|
Represents a portfolio acquired during the three months ended
December 31, 2006 which
the Company successfully retuned to the seller at the original purchase value. |
|
(2) |
|
Includes approximately $500,000 derived from fully amortized interest method pools. |
As of March 31, 2008, the Company had $512,256,000 in Consumer Receivables acquired for Liquidation,
of which $460,623,000 are being accounted for on the accrual basis. Based upon current projections,
net cash collections, applied to principal for accrual basis portfolios will be as follows for the
twelve months in the periods ending:
|
|
|
|
|
September 30, 2008 (six months ending) |
|
$ |
65,129,000 |
|
September 30, 2009 |
|
|
121,507,000 |
|
September 30, 2010 |
|
|
114,680,000 |
|
September 30, 2011 |
|
|
71,295,000 |
|
September 30, 2012 |
|
|
52,013,000 |
|
September 30, 2013 |
|
|
44,012,000 |
|
|
|
|
|
Total |
|
|
468,636,000 |
|
|
|
|
|
|
Deferred revenue |
|
|
(8,013,000 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
460,623,000 |
|
|
|
|
|
-15-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
Accretable yield represents the amount of income the Company can expect to generate over the
remaining life of its existing portfolios based on estimated future net cash flows as of March 31,
2008. The Company adjusts the accretable yield upward when it believes, based on available
evidence, that portfolio collections will exceed amounts previously estimated. Changes in
accretable yield for the six months and three months ended March 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2008 |
|
|
March 31, 2007 |
|
|
|
|
Balance at beginning of period |
|
$ |
176,615,000 |
|
|
$ |
143,800,000 |
|
|
|
|
|
|
|
|
|
|
Income recognized on finance receivables, net |
|
|
(47,049,000 |
) |
|
|
(56,007,000 |
) |
Additions representing expected revenue from purchases |
|
|
7,322,000 |
|
|
|
131,570,000 |
|
Reclassifications from nonaccretable difference |
|
|
52,546,000 |
|
|
|
7,508,000 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
189,434,000 |
|
|
$ |
226,871,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2008 |
|
|
March 31, 2007 |
|
Balance at beginning of period |
|
$ |
172,690,000 |
|
|
$ |
138,966,000 |
|
|
|
|
|
|
|
|
|
|
Income recognized on finance receivables, net |
|
|
(23,098,000 |
) |
|
|
(31,749,000 |
) |
Additions representing expected revenue from purchases |
|
|
115,000 |
|
|
|
112,146,000 |
|
Reclassifications from nonaccretable difference |
|
|
39,727,000 |
|
|
|
7,508,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
189,434,000 |
|
|
$ |
226,871,000 |
|
|
|
|
|
|
|
|
During the three and six month periods ended March 31, 2008, the Company purchased $155
million and $1.3 billion, respectively, of face value of charged-off consumer receivables at a cost
of $3.8 million and $41.3
million , respectively, including $8.6 million invested in a portfolio domiciled in South America
during the first quarter of 2008. Approximately half of the portfolios purchased in the six months
ended March 31, 2008 are classified under the interest method. At March 31, 2008, the estimated
remaining net collections on the receivables purchased in the six months ended March 31, 2008 is
$23.8 million, of which $17.7 million represents principle. The Company purchased $6.9 billion in
face value receivables for a purchase price of $300 million in March 2007 (the Portfolio
Purchase).
-16-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation- (continued)
The following table summarizes collections on a gross basis as received by our third-party
collection agencies and attorneys, less commissions and direct costs for the six and three month
periods ended March 31, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Gross collections (1) |
|
$ |
176,688,000 |
|
|
$ |
192,815,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
69,001,000 |
|
|
|
57,710,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
107,687,000 |
|
|
$ |
135,105,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Gross collections (1) |
|
$ |
87,432,000 |
|
|
$ |
106,119,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
37,638,000 |
|
|
|
29,974,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
49,794,000 |
|
|
$ |
76,145,000 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross collections include: collections by third-party collection agencies and attorneys,
collections from our in-house efforts, collections represented by account sales and the put back of
a portfolio returned to the seller in the amount of $2.8 million in the first quarter of fiscal
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. Such arrangement was consummated in December 2007, but
effective as of March, 2007. The fee is charged for asset location, skiptracing and ultimately
identifying debtors worthy of the Companys suit strategy in connection with the Portfolio
Purchase. |
Note 4: Acquisition and Investment in venture
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.
In August 2006, the Company acquired a 25% interest in a newly formed venture for
$7,810,000. The Company accounts for its investment in the venture using the equity method. This
venture is in business to liquidate the assets of a retail business which it acquired through
bankruptcy proceedings. It is anticipated the liquidation will be completed over the remaining 9 to
15 months of the liquidation period. Through March 31, 2008, the venture made distributions to the
Company of $7,345,000. Subsequent to March 31, 2008 and through
May 8, 2008, the venture
distributed an additional $340,000 to the Company.
-17-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 5: Furniture and Equipment
Furniture and equipment consist of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Furniture |
|
$ |
310,000 |
|
|
$ |
307,000 |
|
Leasehold improvements |
|
|
37,000 |
|
|
|
|
|
Equipment |
|
|
2,648,000 |
|
|
|
2,534,000 |
|
|
|
|
|
|
|
|
|
|
|
2,995,000 |
|
|
|
2,841,000 |
|
Less accumulated depreciation |
|
|
2,198,000 |
|
|
|
2,048,000 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
797,000 |
|
|
$ |
793,000 |
|
|
|
|
|
|
|
|
Note 6: Debt
On July 11, 2006, the Company entered into the Fourth Amended and Restated Loan Agreement with
a consortium of banks, and as a result the credit facility increased to $175 million, up from $125
million with an expandable feature which allows the Company the ability to increase the line to
$225 million with the consent of the banks. The line of credit bears interest at the lesser of
LIBOR plus an applicable margin, or the prime rate minus an applicable margin based on certain
leverage ratios. The credit line is collateralized by all portfolios of consumer receivables
acquired for liquidation, 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
-18-
must be maintained in order to borrow funds. The term of the agreement is three years. The
applicable rate at March 31, 2008 and 2007 was 5.25% and 7.25%, respectively. The average interest
rate excluding unused credit line fees for the six month period ended March 31, 2008 and 2007,
respectively, was 6.89% and 7.12%. The outstanding balance on this line of credit was approximately
$145.6 million as of March 31, 2008.
On December 4, 2007, the Company signed the Sixth Amendment to the Fourth Amended and Restated
Loan Agreement (the Credit Agreement) with a consortium of banks that temporarily increased the
total revolving loan commitment from $175 million to $185 million. The temporary increase of $10
million was required to be repaid by February 29, 2008. This temporary increase was not used.
Additionally, in March 2007, Palisades Acquisition XVI, LLC (Palisades XVI), an affiliate of
the Company, borrowed approximately $227 million under a new Receivables Financing Agreement, as
amended in July 2007, December 2007 and May 2008, with a major financial
institution, 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). The debt is full recourse only to Palisades XVI, and, as of March 31,
2008, bore an interest rate of approximately 170 basis points over LIBOR. The applicable rate at
March 31, 2008 was 4.93%. The average interest rate for the six months ended March 31, 2008 of the
Receivable Financing Agreement was 6.27%. The original term of the agreement was three years. This
term was extended by the second amendment of the Receivable Financing Agreement as discussed below.
Proceeds received as a result of the net collections from the Portfolio Purchase are applied to
interest and principal of the underlying loan. The Portfolio Purchase is serviced by Palisades
Collection LLC, a wholly owned subsidiary of the Company, which has engaged unaffiliated
subservicers for the Portfolio Purchase. As of March 31, 2008, the outstanding balance on this loan
was approximately $148.3 million.
As of September 30, 2007, Palisades XVI was required to remit an additional $13.1 million to
its lender in order to be in compliance under the Receivable Financing Agreement. The Company
facilitated the ability of Palisades XVI to make this payment by borrowing $13.1 million under its
current revolving credit facility and causing another of its subsidiaries to purchase a portion of
the Portfolio Purchase from Palisades XVI at a price of $13.1 million prior to the measurement date
under the Receivable Financing Agreement.
On December 27, 2007, Palisades XVI entered into the second amendment of its Receivable
Financing Agreement. As the actual collections had been slower than the minimum collections
scheduled under the original agreement, which contemplated sales of accounts which had not
occurred, the lender and Palisades XVI agreed to an extended amortization schedule
which did not contemplate the sales of accounts. The effect of this reduction was to extend
the payments of the loan from approximately 25 months to approximately 31 months. The lender
charged Palisades XVI a fee of $475,000 which was paid on January 10, 2008. The fee
was capitalized and is being amortized over the remaining life of the Receivables Financing
Agreement.
On May 19, 2008, Palisades XVI entered into the third amendment of its Receivable Financing
Agreement. As the actual collections on the Portfolio Purchase continued to be slower than the
minimum collections scheduled under the second amendment, the lender
and Palisades XVI agreed to an extended amortization schedule than the schedule determined in connection with the second amendment.
The effect of this reduction is to extend the payments of the loan. The
lender also increased the interest rate 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. See Note 14 Subsequent Events.
The Companys total average debt obligation for the six and three month periods ended March
31, 2008, was approximately $315.7 million, and $310.1 million, respectively. The
average interest rate for the six and three month periods ended March 31, 2008 was 6.58% and
5.92%, 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 approximately $8.2 million, bears
interest at a rate of 6.25% per annum, is payable interest only
-19-
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. See Note 14 -
Subsequent Events for more details.
Note 7: Commitments and Contingencies
Employment Agreements
On January 25, 2007, the Company entered into an employment agreement (the Employment
Agreement) with the Companys President and Chief Executive Officer, the Companys Executive Vice
President and the Companys Chief Financial Officer (each, an Executive). Each of Gary Sterns
and Mitchell Cohens Employment Agreements, the Companys Chief Executive Officer and Chief
Financial Officer, respectively, expire on December 31, 2009, provided, however, that the parties
are required to provide ninety days prior written notice if they do not intend to seek an
extension or renewal of the Employment Agreement. Arthur Sterns agreement, the Companys Executive
Vice President, had a one year term. In January 2008, the Company entered into a similar two year
employment agreement with Cameron Williams, the Companys Chief Operating Officer, and a one year
agreement with Arthur Stern. The employment agreements each provide for a base salary, which may be
increased by the Board of Directors in its sole discretion as follows: Arthur Stern $355,000 and
Cameron Williams $300,000, except that by June 1, 2009, Mr. Williams base salary shall equal or
exceed $350,000.
Each Executive is eligible to receive bonuses and equity awards in amounts to be
determined by the Compensation Committee of the Board of Directors. Each Executive may also
participate in all of the Companys employee benefit plans and programs generally available to
other employees. Mr. Williams contract provides that he will be entitled to a cash bonus of up to
$175,000 and a restricted stock grant of up to $175,000 if all performance goals for 2008 are
satisfied at the highest level set by the Board of Directors. Performance goals are currently in
the process of being formalized by the Board of Directors.
If the Executives employment is terminated without Cause, subject to the execution of
a general release agreement by the Executive in favor of the Company, the Company must continue to
pay the executive his base salary for 12 months following the effective date of termination and
maintain insurance benefits for that period (18 months for Mr. Williams).
-20-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 7: Commitments and Contingencies (continued)
If the Executives employment with the Company is terminated for any reason within
180 days following a change of control of the Company, the Company is required to pay him a lump
sum amount in cash equal to two (2) times the sum of the Executives base salary in effect on the
date of termination and the highest annual bonus earned by the Executive during his employment with
the Company. The Executive also will continue to receive the benefits provided in the employment
agreement for two years from the date of termination.
In the event that any payment that each Executive would receive upon termination would
otherwise constitute a parachute payment under Section 280G of the Internal Revenue Code and be
subject to the excise tax imposed by Section 4999 of the Code, such payment and benefits will be
reduced to an amount equal to the maximum amount that would avoid such payment.
Each Executive is also subject to standard non-compete and confidentially provisions
contained in the employment agreement.
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.
Leases
We are a party to three operating leases with respect to our facilities in Englewood
Cliffs, New Jersey, Bethlehem, Pennsylvania and Sugar Land, Texas. Please refer to our consolidated
financial statements and notes thereto in our Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, for additional information.
Litigation
In the ordinary course of our business, the Company is involved in numerous legal
proceedings. The Company regularly initiates collection lawsuits, using our network of third party
law firms, against consumers. Also, consumers occasionally initiate litigation against the Company,
in which they allege that we have violated a federal or state law in the process of collecting
their account. The Company does not believe that these matters are material to our business and
financial condition. As of May 5, 2008, the Company was not involved in any material litigation in
which it was a defendant.
In the fourth quarter of fiscal year 2006, a subsidiary of the Company received subpoenas
from three jurisdictions to produce information in connection with debt collection practices in
those jurisdictions. The Company has fully cooperated with the issuing agencies and has provided
the requested documentation. One jurisdiction has closed the case with no action taken against the
Company. The Company has not made any provision with respect to the remaining matters in the
financial statements as the nature of these matters is information requests only.
In the course of conducting its business, the Company is required by certain of the
jurisdictions within which it operates to obtain licenses and permits to conduct its collection
activities. The Company has been notified by one such jurisdiction that it did not operate for a
period of time from February 1, 2005 to April 17, 2006 with the proper license. The Company did not
make any provision for such matter in the financial statements. There has been no communication
from the jurisdiction regarding this matter for over a year and the Company is properly licensed in
this jurisdiction.
-21-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 8: Income Recognition and Impairments
Income Recognition
Prior to October 1, 2005, the Company accounted for its investment in finance
receivables using the interest method under the guidance of Practice Bulletin 6, Amortization of
Discounts on Certain Acquired Loans. Effective October 1, 2005, the Company adopted and began to
account for its investment in finance receivables using the interest method under the guidance of
AICPA Statement of Position 03-3, Accounting for Loans or Certain Securities Acquired in a
Transfer (SOP 03-3). Practice Bulletin 6 was amended by SOP 03-3. Under the guidance of SOP 03-3
(and the amended Practice Bulletin 6); static pools of accounts are established. These pools are
aggregated based on certain common risk criteria. Each static pool is recorded at cost and is
accounted for as a single unit for the recognition of income, principal payments and loss
provision.
Once a static pool is established for a quarter, individual receivable accounts are
not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or
returned to the seller). SOP 03-3 (and the amended Practice Bulletin 6) requires that the excess of
the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue
or expense or on the balance sheet. SOP 03-3 initially freezes the internal rate of return,
referred to as IRR, estimated when the accounts receivable are purchased, as the basis for
subsequent impairment testing. Significant increases in actual, or expected future cash flows may
be recognized prospectively through an upward adjustment of the IRR over a portfolios remaining
life. Any increase to the IRR then becomes the new benchmark for impairment testing. Effective for
fiscal years beginning October 1, 2005 under SOP 03-3 and the amended Practice Bulletin 6, rather
than lowering the estimated IRR if the collection estimates are not received or projected to be
received, the carrying value of a pool would be written down to maintain the then current IRR.
Impairments
The Company accounts for its impairments in accordance with SOP 03-3. This SOP proposes 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 an 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 in a slower economy and other factors that resulted in
slower collections on certain portfolios, impairments of $35.0 million and $2.4 million were recorded during the three month periods ended
March 31, 2008 and 2007, respectively.
Our analysis of the timing and amount of cash flows to be generated by our portfolio purchases are
based on the following attributes:
|
|
|
The type of receivable, the location of the debtor and the number of
collection agencies previously attempting to collect the receivables in
the portfolio. We have found that there are better states to try collect
receivables and we factor in both good and bad states when establishing
our initial cash flow expectations. |
|
|
|
|
the average balance of the receivables influence our analysis in that
lower average balance portfolios tend to be more collectible in the
short-term and higher average balance portfolios are more suitable for our
suit strategy and thus yield better results over the longer term. As we
have significant experience with both types of balances, we are able to
factor these variables into our initial expected cash flows; |
|
|
|
|
the age of the receivables, the number of days since charge-off, the
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; |
-22-
|
|
|
past history and performance of similar assets acquired. As we purchase
portfolios of like assets, we have built significant history on the
tendencies of debtor repayments and factor this into our initial expected
cash flows; |
|
|
|
|
our ability to analyze accounts and resell accounts that meet our criteria; |
|
|
|
|
Jobs or property of the debtors found within portfolios. With our business
model, this is of particular importance. Debtors with jobs or property are
more likely to repay their obligation through the suit strategy and
conversely, debtors without jobs or property are less likely to repay
their obligation. While we believe that debtors with jobs or property are
more likely to repay, we also believe that these debtors generally might
take longer to repay and that is factored into our initial expected cash
flows. |
We acquire accounts that have experienced deterioration of credit quality between
origination and the date of our acquisition of the accounts. The amount paid for a portfolio of
accounts reflects our determination that it is probable we will be unable to collect all amounts
due according to the portfolio of accounts contractual terms. We consider the expected payments and
estimate the amount and timing of undiscounted expected principal, interest and other cash flows
for each acquired portfolio coupled with expected cash flows from accounts available for sales. The
excess of this amount over the cost of the portfolio, representing the excess of the accounts cash
flows expected to be collected over the amount paid, is accreted into income recognized on finance
receivables over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain distressed consumer
receivable portfolios at a significant discount to the amount actually owed by underlying debtors.
We acquire these portfolios only after both qualitative and quantitative analyses of the underlying
receivables are performed and a calculated purchase price is paid so that we believe our estimated
cash flow offers us an adequate return on our acquisition costs after our servicing expenses.
Additionally, when considering larger portfolio purchases of accounts, or portfolios from issuers
from whom we have little limited experience, we have the added benefit of soliciting our third
party servicers for their input on liquidation rates and at times incorporate such input into the
estimates we use for our expected cash flows.
Typically, when purchasing portfolios for which we have the experience detailed
above, we have expectations of achieving a 100% return on our invested capital back within an
18-28 month time frame and expectations of generating in the range of 130-150% of our invested
capital over 3-5 years. We continue to use this as our basis for establishing the original cash
flow estimates for our portfolio purchases. We routinely monitor these results against the actual
cash flows and, in the event the cash flows are below our expectations and we believe there are no
reasons relating to mere timing differences or explainable delays (such as can occur particularly
when the court system is involved) for the reduced collections, an impairment would be recorded as
a provision for credit losses. Conversely, in the event the cash flows are in excess of our
expectations and the reason is due to timing, we would defer the excess collection as deferred
revenue.
Note 9: Income Taxes
Deferred federal and state taxes principally arise from (i) recognition of finance income
collected for tax purposes, but not yet recognized for financial reporting; (ii) provision for
impairments/credit losses, and (iii) investee income recognized on the equity method, all resulting
in timing differences between financial accounting and tax reporting. The provision for income tax
expense for the three month periods ending March 31, 2008 and 2007 reflects income tax expense at
an effective rate of 41% and 40.5%, respectively. The slight increase in the tax rate reflects the effect of
foreign income taxes. The provision for income tax expense for
the six month periods ending March 31, 2008 and 2007 reflects income tax expense at an effective
rate of 40.5%.
-23-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 10: Net Income Per Share
Basic per share data is determined by dividing net income by the weighted average shares
outstanding during the period. Diluted per share data is computed by dividing net income by the
weighted average shares outstanding, assuming all dilutive potential common shares were issued.
With respect to the assumed proceeds from the exercise of dilutive options, the treasury stock
method is calculated using the average market price for the period.
The following table presents the computation of basic and diluted per share data for the six
and three months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
5,607,000 |
|
|
|
14,059,142 |
|
|
$ |
0.40 |
|
|
$ |
23,878,000 |
|
|
|
13,772,538 |
|
|
$ |
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Stock |
|
|
|
|
|
|
683,407 |
|
|
|
|
|
|
|
|
|
|
|
875,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
5,607,000 |
|
|
|
14,742,549 |
|
|
$ |
0.38 |
|
|
$ |
23,878,000 |
|
|
|
14,647,556 |
|
|
$ |
1.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
(Loss) |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
(7.707,000 |
) |
|
|
14,201,674 |
|
|
$ |
(0.54 |
) |
|
$ |
12,552,000 |
|
|
|
13,848,194 |
|
|
$ |
0.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
896,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(7,707,000 |
) |
|
|
14,201,674 |
|
|
$ |
(0.54 |
) |
|
$ |
12,552,000 |
|
|
|
14,744,499 |
|
|
$ |
0.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11: Stock-based Compensation
The Company accounts for stock-based employee compensation under Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 123 (Revised 2005),
Share-Based Payment (SFAS 123R). SFAS 123R, which the Company adopted 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 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.
In December of 2006, 18,000 stock options and 68,000 restricted shares were granted
to directors, officers and other employees. The stock options and restricted shares vest over a
twenty seven month period with the first one third of the stock options and restricted shares
vesting on March 19, 2007 and the remaining vesting on the first and second anniversary dates of
March 19, 2007. For the three month and six month periods ended March 31, 2008, $263,000 and
$450,000, respectively of
-24-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 11: Stock-based Compensation (continued)
stock based compensation expense was recorded. For the three and six month period ended March 31,
2007, $662,000 and $768,000 of stock based compensation expense was recorded. See Note 12 Stock
Option Plans for more information..
There were no stock option awards granted in the first six months of fiscal year 2008.
In the first quarter of fiscal year 2007, the weighted average assumptions used in the
option pricing models were as follows:
|
|
|
|
|
Risk-free interest rate |
|
|
4.94 |
% |
Expected term (years) |
|
|
10.0 |
|
Expected volatility |
|
|
36.3 |
% |
Dividend yield |
|
|
0.47 |
% |
Note 12: Stock Option Plans
Equity Compensation Plan
On December 1, 2005, the Board of Directors adopted the Companys Equity Compensation Plan (the
Equity Compensation Plan), subject to the approval of the stockholders of the Company. The Equity
Compensation Plan was adopted to supplement the Companys existing 2002 Stock Option Plan. In
addition to permitting the grant of stock options as are permitted under the 2002 Stock Option
Plan, the Equity Compensation Plan allows the Company flexibility with respect to equity awards by
also providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights
and stock appreciation rights. One million shares were authorized for issuance under the Equity
Compensation Plan. The Equity Compensation Plan was ratified by the shareholders on March 1, 2006.
The following description does not purport to be complete and is qualified in its entirety by
reference to the full text of the Equity Compensation Plan, which is included as an exhibit to the
Companys reports filed with the SEC.
The general purpose of the Equity Compensation Plan is to provide an incentive to
our employees, directors and consultants, including executive officers, employees and consultants
of any subsidiaries, by enabling them to share in the future growth of our business. The Board of
Directors believes that the granting of stock options and other equity awards promotes continuity
of management and increases incentive and personal interest in the welfare of the Company by those
who are primarily responsible for shaping and carrying out our long range plans and securing our
growth and financial success.
The Board believes that the Equity Compensation Plan will advance our interests by
enhancing our ability to (a) attract and retain employees, directors and consultants who are in a
position to make significant contributions to our success; (b) reward employees, directors and
consultants for these contributions; and (c) encourage employees, directors and consultants to take
into account our long-term interests through ownership of our shares.
-25-
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 874,000 were available as of March 31, 2008. On January 17, 2008
the Compensation Committee of the Board of Directors awarded 58,000 shares of restricted stock to
officers and directors of the Company which vest in three equal annual installments beginning
October 1, 2008. 68,000 restricted shares were granted in the first quarter of fiscal year 2007.
These shares vest in three equal annual installments starting on October 1, 2008. As of March 31,
2008, approximately 170 of the Companys employees were eligible to participate in the Equity
Compensation Plan.
2002 Stock Option Plan
On March 5, 2002, the Board of Directors adopted the Asta Funding, Inc. 2002 Stock
Option Plan (the 2002 Plan), which plan was approved by the Companys stockholders on May 1,
2002. The 2002 Plan was adopted in order to attract and retain qualified directors, officers and
employees of, and consultants to, the Company. The following description does not purport to be
complete and is qualified in its entirety by reference to the full text of the 2002 Plan, which is
included as an exhibit to the Companys reports filed with the SEC.
The 2002 Plan authorizes the granting of incentive stock options (as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the Code)) and non-qualified stock
options to eligible employees of the Company, including officers and directors of the
Company(whether or not employees) and consultants of the Company.
The Company has 1,000,000 shares of Common Stock authorized for issuance under the
2002 Plan and 393,334 were available as of March 31, 2008. A total of 18,000 stock options were
granted in the first quarter of fiscal year 2007. As of March 31, 2007, approximately 170 of the
Companys employees were eligible to participate in the 2002 Plan.
1995 Stock Option Plan
The 1995 Stock Option Plan expired on September 14, 2005. The plan was adopted in
order to attract and retain qualified directors, officers and employees of, and consultants, to the
Company. The following description does not purport to be complete and is qualified in its entirety
by reference to the full text of the 1995 Stock Option Plan, which is included as an exhibit to the
Companys reports filed with the SEC.
The 1995 Stock Option Plan authorized the granting of incentive stock options (as
defined in Section 422 of the Code) and non-qualified stock options to eligible employees of the
Company, including officers and directors of the Company (whether or not employees) and consultants
to the Company.
The Company authorized 1,840,000 shares of Common Stock for issuance under the 1995 Stock
Option Plan. All but 96,002 shares were utilized. As of September 14, 2005, no more options could
be issued under this plan.
-26-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 12: Stock-Option Plans (Continued)
The following table summarizes stock option transactions under the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
Shares |
|
Price |
|
Shares |
|
Price |
Outstanding options at the beginning of period |
|
|
1,337,438 |
|
|
$ |
9.38 |
|
|
|
1,414,439 |
|
|
$ |
9.45 |
|
Options granted |
|
|
-0- |
|
|
$ |
-0- |
|
|
|
18,000 |
|
|
$ |
28.75 |
|
Options exercised |
|
|
(300,000 |
) |
|
$ |
1.42 |
|
|
|
(80,001 |
) |
|
$ |
15.10 |
|
Options cancelled |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of period |
|
|
1,037,438 |
|
|
$ |
11.69 |
|
|
|
1,352,438 |
|
|
$ |
9.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of period |
|
|
1,031,438 |
|
|
$ |
11.59 |
|
|
|
1,340,438 |
|
|
$ |
9.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about the Plans outstanding options as of March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Remaining |
|
Average |
|
|
|
|
|
Average |
|
|
Number |
|
Contractual |
|
Exercise |
|
Number |
|
Exercise |
Range of Exercise Price |
|
Outstanding |
|
Life (in Years) |
|
Price |
|
Exercisable |
|
Price |
$0.8125 - $2.8750 |
|
|
300,000 |
|
|
|
2.5 |
|
|
$ |
2.63 |
|
|
|
300,000 |
|
|
$ |
2.63 |
|
$2.8751 - $5.7500 |
|
|
106,667 |
|
|
|
4.6 |
|
|
$ |
4.73 |
|
|
|
106,667 |
|
|
$ |
4.73 |
|
$5.7501 - $8.6250 |
|
|
12,000 |
|
|
|
3.6 |
|
|
$ |
5.96 |
|
|
|
12,000 |
|
|
$ |
5.96 |
|
$14.3751 - $17.2500 |
|
|
218,611 |
|
|
|
5.7 |
|
|
$ |
15.04 |
|
|
|
218,611 |
|
|
$ |
15.04 |
|
$17.2501 - $20.1250 |
|
|
382,160 |
|
|
|
6.5 |
|
|
$ |
18.22 |
|
|
|
382,160 |
|
|
$ |
18.22 |
|
$25.8751 - $28.7500 |
|
|
18,000 |
|
|
|
8.7 |
|
|
$ |
28.75 |
|
|
|
12,000 |
|
|
$ |
28.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,037,438 |
|
|
|
5.0 |
|
|
$ |
11.69 |
|
|
|
1,031,438 |
|
|
$ |
11.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $46,000 of compensation expense related to stock options during the six
month period ended March 31, 2008. As of March 31, 2008, there was $92,000 of unrecognized
compensation cost related to unvested stock options.
The aggregate intrinsic value of the outstanding and exercisable options as of March 31, 2008 is
$2.3 million.
-27-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 12: Stock-Option Plans (Continued)
The following table summarizes information about restricted stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Six Months |
|
Average |
|
|
Ended |
|
Grant Date |
|
|
March 31, 2008 |
|
Fair Value |
Unvested at beginning of period |
|
|
45,333 |
|
|
$ |
28.75 |
|
Awards granted |
|
|
58,000 |
|
|
$ |
19.73 |
|
Vested |
|
|
(22,666 |
) |
|
$ |
28.75 |
|
Forfeited |
|
|
0 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
Unvested at end of period |
|
|
80,667 |
|
|
$ |
22.26 |
|
|
|
|
|
|
|
|
|
|
The Company recognized $403,000 of compensation expense related to the restricted stock
awarded during the six month period ended March 31, 2008. As of March 31, 2008 there was $1,607,000
of unrecognized compensation cost related to unvested restricted stock.
Note 13: Stockholders Equity
For the six months ended March 31, 2008, the Company declared dividends of $1,129,000.
$571,000 was accrued as of March 31, 2008 and paid May 1, 2008. For the six months ended March 31,
2008 the Company recorded $207,000 in cumulative translation adjustments related to its investment
in South America.
Note 14: Subsequent Events
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 $8,226,278, 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.
The subordinated loan was incurred by the Company to resolve certain issues described below.
Proceeds from the subordinated loan are being used initially to further collateralize the Companys
$175 million revolving loan facility with a consortium of banks (the Bank Group) and ultimately
will be used to reduce the balance due on that facility on or prior to May 31, 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, the entity that made the Portfolio Purchase
that was separately financed by the Bank of Montreal (the BMO Facility).
An entity (the Servicer) that provides servicing for certain portfolios within the Bank
Group Collateral, was also engaged by Palisades Collection, LLC, the Companys servicing subsidiary
(Palisades Collection), after the acquisition of the Portfolio Purchase , to provide certain
management services with respect to the portfolios owned by Palisades XVI and financed
-28-
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note
14: Subsequent Events (continued)
by the BMO Facility and to provide subservicing functions for portions of the Portfolio Purchase.
Collections with respect to the Portfolio Purchase, and most portfolios purchased by the Company,
lag the costs and fees which are expended to generate those collections, particularly when court
costs are advanced to pursue an aggressive litigation strategy, as is the case with the Portfolio
Purchase. Start-up cash flow issues with respect to the Portfolio Purchase were exacerbated by
(a) collection challenges caused by the current economic environment, (b) the fact that Palisades
Collection believed that it would be desirable to engage the Servicer to perform management
services with respect to the Portfolio Purchase which services were not contemplated at the time of
the initial acquisition of the Portfolio Purchase and (c) Palisades Collection believed it would be
desirable to commence litigations and incur court costs at a faster rate than initially budgeted.
As previously described in the Companys Form 10-K and Form 10-K/A for the year ended September 30,
2007, the agreements with the Servicer call for a 3% fee on substantially all gross collections
from the Portfolio Purchase on the first $500 million and 7% on substantially all gross collections
from the Portfolio Purchase in excess of $500 million. Additionally, the Company pays the Servicer
a monthly fee of $275,000 for the first twenty four months for consulting, asset identification and
skiptracing efforts in connection with the Portfolio Purchase. The Servicer also receives a
servicing fee with respect to those accounts it actually subservices. As the fees due to the
Servicer for management and subservicing functions and the amounts spent for court costs were
higher than those initially contemplated for subservicing functions, and as start-up collections
with respect to the Portfolio Purchase were slower than initially projected, the amounts owed to
the Servicer with respect to the Portfolio Purchase for fees and advances for court costs to pursue
litigation against debtors have, to date, exceeded amounts available to pay the Servicer from
collections received by the Servicer on the Portfolio Purchase on a current basis. The Company
considered the effects of these trends on the Portfolio Purchase valuation.
Rather than waiting for collections from the Portfolio Purchase to satisfy sums of
approximately $8.2 million due the Servicer for court cost advances and its fees, the Servicer
set-off that amount against amounts it had collected on behalf of the Company with respect to the
Bank Group Collateral. While the Servicer disagrees, the Company believes that those sums should
have been remitted to the Bank Group without setoff.
The Company has determined to remedy any shortfall in the receipts under the Bank Group
facility by obtaining the $8.2 million subordinated loan from the Family Entity and causing the
proceeds of the loan to be delivered to the Bank Group and not to pursue a dispute with the
Servicer at this time. The Company believes that avoiding a dispute with the Servicer at this time
is in its best interests, as it should improve collections on the Portfolio Purchase and, provide
for greater borrowing ability for new portfolios under the Bank Group facility. The Company also
believes that the terms of the subordinated loan from the Family Entity are more favorable than
could be obtained from an unrelated third party institution.
On April 29, 2008, the Company entered into a letter agreement with the Bank Group in which
the Bank Group consented to the Subordinated Loan from the Family Entity and the Servicer has
stated, in writing, that it will not make any further set-offs against collections due to it pending
resolution of this dispute. The Company believes that any future sums due to the Servicer will be
available from the cash flow of the Portfolio Purchase.
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On
May 19, 2008, Palisades XVI entered into the third amendment of its Receivable Financing
Agreement. As the actual collections on the Portfolio Purchase continued to be slower than the
minimum collections scheduled under the second amendment, the lender
and Palisades XVI agreed to an extended amortization schedule than the schedule determined in connection with the second amendment.
The effect of this reduction is to extend the payments of the loan. The
lender also increased the interest rate 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. While the Company believes it will be able to make all
payments due under the new payment schedule, the Company also
believes that if it fails to do so it will be required to sell the
Portfolio Purchase or may be subject to a foreclosure on the
Portfolio Purchase.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are primarily engaged in the business of acquiring, managing, servicing and recovering on
portfolios of consumer receivables. These portfolios generally consist of one or more of the
following types of consumer receivables:
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charged-off receivables accounts that have been written-off by the
originators and may have been previously serviced by collection
agencies; |
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semi-performing receivables accounts where the debtor is currently
making partial or irregular monthly payments, but the accounts may
have been written-off by the originators; and |
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performing receivables accounts where the debtor is making regular
monthly payments that may or may not have been delinquent in the past. |
We acquire these consumer receivable portfolios at a significant discount to the
amount actually owed by the borrowers. We acquire these portfolios after a qualitative and
quantitative analysis of the underlying receivables and calculate the purchase price so that our
estimated cash flow offers us an adequate return on our acquisition costs and servicing expenses.
After purchasing a portfolio, we actively monitor its performance and review and adjust our
collection and servicing strategies accordingly.
We purchase receivables from credit grantors and others through privately negotiated
direct sales and auctions in which sellers of receivables seek bids from several pre-qualified debt
purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis
through:
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our relationships with industry participants, collection agencies, investors and our financing sources; |
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brokers who specialize in the sale of consumer receivable portfolios; and |
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other sources. |
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, 2007, and other reports filed with the Securities and
Exchange Commission (SEC), and the additional Risk Factors detailed in Part II Item 1A, herein.
Our annual report on Form 10-K and Form 10-K/A, quarterly reports on Form 10-Q,
current reports on Form 8-K and all other documents filed by the Company or with respect to its
securities with the SEC are available free of charge through our website at www.astafunding.com.
Information on our website does not constitute a part of this report. The SEC also maintains an
internet site ( www.sec.gov ) that contains reports and information statements and other
information regarding issuers, such as ourselves, who file electronically with the SEC.
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Critical Accounting Policies
We acquire accounts that have experienced deterioration of credit quality between origination
and the date of our acquisition of the accounts. The amount paid for a portfolio of accounts
reflects our determination that it is probable we will be unable to collect all amounts due
according to contractual terms of the portfolio of accounts. We consider the expected payments and
estimate the amount and timing of undiscounted expected principal, interest and other cash flows
for each acquired portfolio coupled with expected cash flows from accounts available for sales. The
excess of this amount over the cost of the portfolio, representing the excess of the accounts cash
flows expected to be collected over the amount paid, is accreted into income recognized on finance
receivables over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain distressed consumer
receivable portfolios at a significant discount to the amount actually owed by underlying debtors.
We acquire these portfolios only after both qualitative and quantitative analyses of the underlying
receivables are performed and a calculated purchase price is paid so that we believe our estimated
cash flow offers us an adequate return on our acquisition costs after our servicing expenses.
Additionally, when considering larger portfolio purchases of accounts, or portfolios from issuers
from whom we have little limited experience, we have the added benefit of soliciting our third
party servicers for their input on liquidation rates and at times incorporate such input into the
price we offer for a given portfolio and the estimates we use for our expected cash flows.
Typically, when purchasing portfolios for which we have the experience detailed above, we
have expectations of achieving a 100% return on our invested capital back within an 18-28 month
time frame and expectations of generating in the range of 130-150% of our invested capital over 3-5
years. Historically, we have generally been able to achieve these results and we continue to use
this as our basis for establishing the original cash flow estimates for our portfolio purchases. We
routinely monitor these results against the actual cash flows and, in the event the cash flows are
below our expectations and we believe there are no reasons relating to mere timing differences or
explainable delays (such as can occur particularly when the court system is involved) for the
reduced collections, an impairment would be recorded as a provision for credit losses. Conversely,
in the event the cash flows are in excess of our expectations and the reason is due to timing, we
would defer the excess collection as deferred revenue.
We account for our investments in consumer receivable portfolios, using either:
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the interest method; or |
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the cost recovery method. |
The Companys extensive liquidating experience is in the field of distressed credit card
receivables, telecom receivables, consumer loan receivables, retail installment contracts, mixed
consumer receivables, and auto deficiency receivables. The Company uses the interest method for
accounting for a vast majority of 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 the 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.
Over time, as the Company continues to purchase asset classes in which it believes it has
the requisite expertise and experience, the Company is more likely to utilize the interest method
to account for such purchases.
Prior to October 1, 2005, the Company accounted for its investment in finance receivables
using the interest method under the guidance of Practice Bulletin 6. Each purchase was treated as a
separate portfolio of receivables and was considered a separate financial investment, and
accordingly the Company did not aggregate such loans under Practice Bulletin 6 notwithstanding that
the underlying collateral may have had similar characteristics. After SOP 03-3 was adopted by the
Company beginning with the Companys fiscal year beginning October 1, 2005, the Company began to
aggregate 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:
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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, telecom etc.) |
The Company uses a variety of qualitative and quantitative factors to estimate
collections and the timing thereof. This analysis includes the following variables:
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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, as higher balances might be more difficult to collect while
low balances might not be cost effective to collect; |
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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; |
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past history of performance of similar assets; |
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number of days since charge-off; |
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payments made since charge-off; |
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the credit originator and its credit guidelines; |
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our ability to analyze accounts and resell accounts that meet our criteria for resale; |
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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; |
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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. |
The Company obtains and utilizes, as appropriate, input 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.
We have seen a decline in our collections in the first six months of fiscal 2008, the first quarter
of which is typically slow. We might also be experiencing the effects of a slowing economy. Our
operating results could be negatively influenced by economic events including: a slowdown in the
economy, problems in the credit and housing markets, reductions in consumer spending, changes in
the underwriting criteria by originators and changes in laws and regulations governing consumer
lending.
In the following discussions, most percentages and dollar amounts have been rounded to
aid presentation. As a result, all figures are approximations.
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Results of Operations
The six-month period ended March 31, 2008, compared to the six-month period ended
March 31, 2007
Finance income. For the six-month period ended March 31, 2008, finance income increased
$10.7 million or 18.7% to $68.0 million from $57.3 million for the six-month period ended March 31,
2007. While our gross and net collections have slowed, and the environment for collections remains
challenging, our finance income increased primarily resulting from an increase during the six
months ended March 31, 2008 in the average outstanding level of consumer receivable accounts
acquired for liquidation, as compared to the same period in the prior year, coupled with the effect
of income recognized from fully amortized portfolios (zero basis revenue), which also increased our
revenue recognition. The increase in the average level of consumer receivables acquired for
liquidation is due primarily to the purchase of the $6.9 billion in face value receivables for a
purchase price of $300 million in March of 2007 (the Portfolio Purchase).
During the six months of fiscal year 2008, gross collections decreased 8.4% to $176.7
million from $192.8 million for the six months ended March 31, 2007. Commissions and fees
associated with gross collections from our third party collection agencies and attorneys increased
$11.3 million, or 19.6%, for the six months ended March 31, 2008 as compared to the same period in
the prior year. The increase is indicative of a shift to the suit strategy implemented by the
Company and includes advances of court costs by our legal network, particularly with respect to the
Portfolio Purchase, coupled with an agreement consummated in December 2007, negotiated with a third
party servicer, to assist the Company in asset location, skiptracing efforts and ultimately
identifying debtors who can be sued. The agreement calls for a 3% percent fee on substantially all
gross collections from the Portfolio Purchase on the first $500 million of gross collections and 7%
on substantially all gross collections from the Portfolio Purchase in
excess of $500 million. These fees
have increased our commissions and fees paid to $69.0 million, or 39.0% of gross collections,
compared to $57.7 million, or 30.0% of gross collections in the same period of the prior year. As a
result, net collections decreased by 20.3% to $107.7 million from $135.1 million for the six months
ended March 31, 2007. The Company also pays this third party servicer a fee of $275,000 per month
for twenty four months for its consulting and skiptracing efforts in connection with the Portfolio
Purchase. This fee, which began in May 2007, is recorded as part of general and administrative
expenses. In addition, we do anticipate expending court costs during fiscal year 2008 on the
Portfolio Purchase in order to accelerate the suit process, and
should be financed from gross collections.
Income recognized from fully amortized portfolios (zero based revenue) was $23.9 million
and $5.5 million for the six months ended March 31, 2008 and 2007, respectively. The increase is
due primarily to more pools which became fully amortized in the first quarter of 2008 combined with
the fully amortized pools from last fiscal year and prior.
Other income. Other income of $ 144,000 consisted primarily of bank interest and service fee
income for the six months ended March 31, 2008. Other income of $459,000 for the six month period
ended March 31, 2008, includes interest income from banks and other loan instruments.
General and Administrative Expenses. During the six months ended March 31, 2008 general and
administrative expenses increased $2.0 million, or 18.9% to $12.9 million from $10.9 million for
the six months ended March 31, 2007, and represented 22.1% of total expenses (excluding income
taxes) for the six months ended March 31, 2008 as compared to 58.5% for the six month period ended
March 31, 2007. The increase in general and administrative expenses was primarily due to an
increase in receivable servicing expenses during the six months ended March 31, 2008, as compared
to the same prior year period. A majority of the increased costs were from collection expenses
including, $275,000 per month paid to a third party servicer in connection with consulting and
skiptracing efforts for the Portfolio Purchase, as previously discussed under Finance income above,
technology costs, salaries, payroll taxes and benefits, professional fees, postage and telephone
charges. Additionally, we have experienced increased legal fees and
settlement expenses as the size of our
debtor base has increased.
Interest Expense. During the six month period ended March 31, 2008, interest expense was
$10.7 million compared to $5.3 million in the same period in the prior year and represented 18.2%
of total expenses (excluding income taxes) for the six month period ended March 31, 2008. The
increase in interest expense is the result of an increase in borrowings and was due to the
increase in acquisitions of consumer receivables acquired for liquidation during fiscal 2007
primarily resulting from the Portfolio Purchase. This increase was partially offset by lower
average interest rates in the six month period ended March 31, 2008, as compared to the same prior
year period. The new amendment to the Receivables Financing Agreement
dated May 19, 2008 changes the effective rate on the loan to
approximately LIBOR plus 320 basis points, an increase of
approximately 150 basis points.
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Impairments. Impairments of $35.0 million were recorded by the Company during the six months
ended March 31, 2008 as compared to $2.4 million for the six months ended March 31, 2007, and
represented 59.7% of total expenses (excluding income taxes) for the
quarter ended March 31, 2008.
We recorded impairments on the Portfolio Purchase in the amount of $30.3 million and 5 other
portfolios in the amount of $4.7 million. As relative collections with respect to our expectations
on these portfolios were deteriorating, we believed that these impairment charges and
adjustments to our cash flow expectations became necessary.
Equity in (loss) of venture. In August 2006, the Company invested approximately $7.8 million
for a 25% interest in a newly formed venture. The venture invested in a bankruptcy liquidation that
will collect on existing rental contracts and the liquidation of inventory. The investment is
expected to return to the Company its normal expected investment results over the remaining 9 to
15 months of the liquidation period. Although the venture has a loss for the six months ended
March 31, 2008 of $78,000, certain fixed price arrangements of the venture expire shortly which
will have a positive effect on the results. The Companys share of the income was $975,000 in the
comparable period of the previous year.
The three-month period ended March 31, 2008, compared to the three-month period ended
March 31, 2007
Finance income. For the three months ended March 31, 2008, finance income increased
$1.5 million or 4.7% to $33.9 million from $32.4 million for the three months ended March 31, 2007.
While our gross and net collections have slowed, and the environment for collections remains
challenging, our finance income increased primarily resulting from an increase during the three
months ended March 31, 2008 in the average outstanding level of consumer receivable accounts
acquired for liquidation, as compared to the same period in the prior year, coupled with the effect
of income recognized from fully amortized portfolios (zero basis revenue), which also increased our
revenue recognition. The increase in the average level of consumer receivables acquired for
liquidation is due primarily to the Portfolio Purchase..
During the second quarter of fiscal year 2008, gross collections decreased 17.6% to $87.4
million from $106.1 million for the three months ended March 31, 2007. Commissions and fees
associated with gross collections from our third party collection agencies and attorneys increased
$7.7 million, or 25.6%, for the three months ended March 31, 2008 as compared to the same period in
the prior year. The increase is indicative of a shift to the suit strategy implemented by the
Company and includes advances of court costs by our legal network, particularly with respect to the
Portfolio Purchase coupled with an agreement consummated in December 2007 negotiated with a third
party to assist the Company in asset location, skiptracing efforts and ultimately identifying
debtors who can be sued. The agreement calls for a 3% percent fee on substantially all gross
collections from the Portfolio Purchase on the first $500 million and 7% on substantially all
collections from the Portfolio Purchase in excess of $500 million. Fees, along with advanced court
costs, have increased our commissions and fees paid to $37.6 million , or 43.0% of gross
collections, compared to $30.0 million, or 28.2% of gross collections in the same period of the
prior year. As a result, our net collections decreased by 34.6% to $49.8 million from $76.1 million
for the three months ended March 31, 2008. The Company also pays this third party servicer a
monthly fee of $275,000 per month for twenty four months for its consulting and skiptracing efforts
in connection with the Portfolio Purchase. This fee, which began in May 2007, is recorded as part
of general and administrative expenses. In addition, we have been expending court costs during
fiscal year 2008 on the Portfolio Purchase in order to accelerate the suit process.
Income recognized from fully amortized portfolios (zero based revenue) was $12.2 million
and $500,000 for the three months ended March 31, 2008 and 2007, respectively. The increase is due
primarily to more pools which became fully amortized in the first quarter of 2008 combined with the
fully amortized pools from last fiscal year and prior.
Other income. Other income of $4,000 consisted of bank interest and service fee income for the
three months ended March 31, 2008. Other income of $255,000 for the three month period ended March
31, 2007 includes interest income from banks and other loan instruments.
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General and Administrative Expenses. During the three-month period ended March 31, 2008,
general and administrative expenses increased $1.3 million or 23.0% to $7.1 million from
$5.8 million for the three-months ended March 31, 2007, and represented 15.2% of total expenses
(excluding income taxes) for the three months ended March 31, 2008 as compared to 77% for the same
period in the prior year. The increase is due to an increase in receivable servicing expenses that
resulted from the increase during the three months ended March 31, 2008 in our average outstanding
accounts acquired for liquidation of approximately $535.6 million, as compared to approximately
$410.5 million during the three month period ended March 31, 2007. A majority of the increased
costs were from collection expenses including, $275,000 per month paid to a third party servicer in
connection with consulting and skiptracing efforts for the Portfolio Purchase, as previously
discussed under Finance income above, technology costs, salaries, payroll taxes and benefits,
professional fees, postage and telephone charges.
Interest Expense. During the three-month period ended March 31, 2008, interest expense was
$4.7 million compared to $3.8 million in the same period in the prior year and represented 10.1% of
total expenses (excluding income taxes) for the three-month period ended March 31, 2008. The
increase in borrowings was due to the increase in acquisitions of consumer receivables acquired for
liquidation during fiscal 2007 primarily resulting from the Portfolio Purchase, and the
corresponding increase in interest expense was due to an increase in the average outstanding
borrowings under our line of credit during the three-month period ended March 31, 2008, as compared
to the same period in the prior year partially offset by lower interest rates during the three
months ended March 31, 2008. The new amendment to the Receivables Financing Agreement dated May 19, 2008 charges the effective rate on the loan to approximately LIBOR plus
320 basis points, or an increase of approximately 150 basis points.
Impairments. Impairments of $35.0 million were recorded by the Company during the three
months ended March 31, 2008 as compared to $2.4 million for the three months ended March 31, 2007,
and represented 74.7% of total expenses (excluding income taxes) for the quarter ended March 31,
2008. We recorded impairments on the Portfolio Purchase in the amount of $30.3 million and 5 other
portfolios in the amount of $4.7 million. As relative collections with respect to our expectations
on these portfolios were deteriorating, we believed that these impairment charges and
adjustments to our cash flow expectations became necessary.
Equity in (loss) of venture. In August 2006, the Company invested approximately $7.8 million
for a 25% interest in a newly formed venture. The venture invested in a bankruptcy liquidation that
will collect on existing rental contracts and the liquidation of inventory. The investment is
expected to return to the Company its normal expected investment results over the remaining 9 to
15 months of the liquidation period. The venture essentially broke even for the quarter ended
March 31, 2008 as compared to the Companys share of the income of $475,000 in the comparable
period of the previous year.
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 our purchases of consumer receivable portfolios.
We rely significantly upon our lenders to provide the funds necessary for the purchase of consumer
and commercial accounts receivable portfolios. As of March 31, 2008, we had a $175 million line of
credit from a consortium of banks (the Bank Group) for portfolio purchases, with an expandable
feature which allows the Company the ability to increase the line to $225 million with the consent
of the Bank Group. As of March 31, 2008, there was a $145.6 million outstanding balance under this
facility. Although we are within the borrowing limits of this facility, there are certain
restrictions in place with regard to collateralization whereby the Company may be limited in its
ability to borrow funds to purchase additional portfolios. On March 30, 2007 the Company signed the
Third Amendment to Fourth Amended and Restated Loan Agreement (the Third Credit Agreement) with
the Bank Group that amended certain terms of the Credit Agreement, whereby the parties agreed to a
Temporary Overadvance of $16 million to be reduced to zero on or before May 17, 2007. In addition,
the parties agreed to an increase in interest rate, to LIBOR plus 275 basis points for LIBOR loans,
an increase from 175 basis points. The rate is subject to adjustment each quarter upon delivery of
results that evidence a need for an adjustment. As of May 7, 2007, the Temporary Overadvance was
approximately
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$12 million. On May 10, 2007, the Company signed the Fourth Amendment to the Credit Agreement (the
Fourth Credit Agreement) whereby the parties agreed to revise certain terms of the agreement
which eliminated the Temporary Overadvance provision. On June 26, 2007 the Company signed the Fifth
Amendment to the Fourth Amended and Restated Loan Agreement (the Fifth Credit Agreement) with the
Bank Group that amended certain terms of the Credit Agreement whereby the parties agreed to
further amend the definition of the Borrowing Base and increase the advance rates on portfolio
purchases allowing the Company more borrowing availability. On December 4, 2007, the Company signed
the Sixth Amendment to the Fourth Amended and Restated Loan Agreement (the Sixth Credit
Agreement) with a consortium of banks that temporarily increased the total revolving loan
commitment from $175 million to $185 million. The increase of $10 million was required to be repaid
by February 29, 2008. The temporary increase was not used. During the six months ended March 31,
2008, the Company purchased portfolios for an aggregate purchase price of $41.3 million, including
an $8.6 million investment in a portfolio domiciled in South America.
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 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 March 31, 2008, bore an interest rate of
approximately 170 basis points over LIBOR. The term of the agreement is three years. All proceeds
received as a result of the net collections from 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 engaged an unrelated subservicer for the
portfolio. As of March 31, 2008, there was a $148.3 million outstanding balance under this
facility.
On December 27, 2007, Palisades XVI entered into the second amendment of its Receivable
Financing Agreement. As the actual collections had been slower than the minimum collections
scheduled under the original agreement, which contemplated sales of accounts which had not
occurred, the lender and Palisades XVI agreed to a lower
amortization schedule which did not
contemplate the sales of accounts. The effect of this reduction was to extend the payments of the
loan from approximately 25 months to approximately 31 months. The lender charged Palisades XVI
a fee of $475,000 which was paid on January 10, 2008. The fee was capitalized and is being
amortized over the remaining life of the Receivables Financing Agreement.
On May 19, 2008, Palisades XVI entered into the third amendment of its Receivable Financing
Agreement. As the actual collections on the Portfolio Purchase continued to be slower than the
minimum collections scheduled under the second amendment, the lender and Palisades XVI agreed to an extended amortization schedule than the schedule determined in connection with the second amendment.
The effect of this reduction is to extend the payments of the loan to approximately 30 months. The
lender also increased the interest rate 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.
As of March 31, 2008, our cash and cash equivalents decreased $0.9 million to $3.6 million
from $4.5 million at September 30, 2007. The decrease in cash during the six month period ended
March 31, 2007, was due to lower net collections, and higher interest payments offset by lower tax
payments as compared to the same period of the prior year.
Net cash provided by operating activities was $30.1 million during the six months ended March
31, 2008, compared to net cash provided by operating activities of $19.3 million during the six
months ended March 31, 2007. The increase in net cash provided by operating activities
is due to an increase in revenues and a reduction in tax payments
offset in part, by an increase in
interest payments and operating expenses.
Net cash used in investing activities was $0.9 million during the six months ended March 31,
2008, compared to net cash used by investing activities of $310 million during the six months ended
March 31, 2007. The decrease in net cash used by investing activities was primarily due to the
Portfolio Purchase in March 2007. Net cash used in
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financing activities was $30.1 million during the six month period ended March 31, 2008, as
compared to $289.6 million in the prior period. The change was primarily due to the Portfolio
Purchase in March 2007 under our line of credit and our new Receivable Financing Agreement to
finance the Portfolio Purchase, previously discussed under investing activities.
On July 11, 2006, the Company entered into the Fourth Amended and Restated Loan Agreement with
the Bank Group, and as a result the credit facility is now $175 million, up from $125 million with
an expandable feature which allows the Company the ability to increase the line to $225 million
with the consent of the Bank Group. The line of credit bears interest at the lesser of LIBOR plus
an applicable margin, or the prime rate minus an applicable margin based on certain leverage
ratios. The credit line is collateralized by all portfolios of consumer receivables acquired for
liquidation other than the assets of 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 term of the agreement ends July 11, 2009.
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 $8,226,278, 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.
The subordinated loan was incurred by the Company to resolve certain issues described below.
Proceeds of the subordinated loan will be used to reduce the balance due on that facility on or
prior to May 31, 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).
An entity (the Servicer) that provides servicing for certain portfolios within the Bank
Group Collateral, was also engaged by Palisades Collection, LLC, the Companys servicing subsidiary
(Palisades Collection), after the initial purchase in March 2007, to provide certain management
services with respect to the portfolios owned by Palisades XVI and financed by the BMO Facility and
to provide subservicing functions for portions of the Portfolio Purchase. Collections with
respect to the Portfolio Purchase, and most portfolios purchased by the Company, lag the costs and
fees which are expended to generate those collections, particularly when court costs are advanced
to pursue an aggressive litigation strategy, as is the case with the Portfolio Purchase. Start-up cash
flow issues with respect to the Portfolio Purchase were exacerbated by (a)
collection challenges caused by the current economic environment, (b) the fact that Palisades
Collection believed that it would be desirable to engage the Servicer to perform management
services with respect to the Portfolio Purchase which services were not contemplated at the time
of the initial Portfolio Purchase and (c) Palisades Collection believed it would be desirable to
commence litigations and incur court costs at a faster rate than initially budgeted. The
agreements with the Servicer call for a 3% fee on substantially all gross collections from the
Portfolio Purchase on the first $500 million and 7% on substantially all collections from the
Portfolio Purchase in excess of $500 million. Additionally, the Company pays the Servicer a
monthly fee of $275,000 for the first twenty four months for its consulting, asset identification
and skiptracing efforts in connection with the Portfolio Purchase. The Servicer also receives a
servicing fee with respect to those accounts it actually subservices. As the fees due to the
Servicer for management and subservicing functions and the amounts spent for court costs were
higher than those initially contemplated for subservicing functions, and as start-up collections
with respect to the Portfolio Purchase were slower than initially projected, the amounts owed to
the Servicer with respect to the Portfolio Purchase for fees and advances for court costs to
pursue litigation against debtors have to date exceeded amounts available to pay the Servicer from
collections received by the Servicer on the Portfolio Purchase on a current basis. The Company
considered the effects of these trends on portfolio valuation.
Rather than waiting for collections from the Portfolio Purchase to satisfy sums of
approximately $8.2 million due it for court cost advances and its fees, the Servicer set-off that
amount against amounts it had collected on behalf of the Company with respect to the Bank Group
Collateral. While the Servicer disagrees, the Company believes that those sums should have been
remitted to the Bank Group without setoff.
-38-
The Company determined to remedy any shortfall in the receipts due to the Bank Group by obtaining
the $8.2 million subordinated loan from the Family Entity and causing the proceeds of the loan to
be delivered to the Bank Group and not to pursue a dispute with the Servicer at this time. The
Company believes that avoiding a dispute with the Servicer at this time is in its best interests,
as it should improve collections on the Portfolio Purchase and provide for greater borrowing
ability for new portfolios under the Bank Group facility. The Company also believes that the
terms of the subordinated loan from the Family Entity are more favorable than could be obtained
from an unrelated third party institution.
On April 29, 2008, the Company entered into a letter agreement with the Bank Group that
consented to the Subordinated Loan from the Family Entity and the Servicer has stated in writing
that it will not make any further set-offs against collections due to it pending resolution of this
dispute. The Company believes that any future sums due to the Servicer will be available from the
cash flow of the Portfolio Purchase.
Our cash requirements have been and will continue to be significant. We depend on external
financing to acquire consumer receivables. Acquisitions are financed primarily through cash flows
from operating activities and with our credit facility. At December 31, 2007 and March 31, 2008,
due to the collateral formula required by the Bank Group , the Company was approaching the upper
limit of its borrowing capacity. However, with limited purchases of portfolios in the second
quarter, coupled with the $8.2 million of subordinated debt acquired by the Company, availability has increased to approximately $15.0 million. As the collection
environment remains challenging, we may be required to seek additional funding. Although
availability has increased, the limited availability coupled with slower collections have had and
could continue to have a negative impact on our ability to purchase new portfolios for future
growth.
Our business model affords us the ability to sell accounts on an opportunistic basis. While we
have not consummated any significant sales from our Portfolio Purchase, we launched a sales effort
in order to attempt to enhance our cash flow and pay down our debt faster. The results were slower
than expected for a variety of factors, including a slow resale market, similar to the decrease in
pricing we are seeing in general.
The following tables summarize the changes in the balance sheet of the investment in
receivable portfolios during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2008 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
508,515,000 |
|
|
$ |
37,108,000 |
|
|
$ |
545,623,000 |
|
Acquisitions of receivable portfolios, net |
|
|
20,155,000 |
|
|
|
21,152,000 |
|
|
|
41,307,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation (1) |
|
|
(87,703,000 |
) |
|
|
(7,330,000 |
) |
|
|
(95,033,000 |
) |
Net cash collections represented by account sales of |
|
|
|
|
|
|
|
|
|
|
|
|
consumer receivables acquired for liquidation |
|
|
(12,654,000 |
) |
|
|
|
|
|
|
(12,654,000 |
) |
Impairments |
|
|
(35,000,000 |
) |
|
|
|
|
|
|
(35,000,000 |
) |
Finance income recognized (2) |
|
|
67,310,000 |
|
|
|
703,000 |
|
|
|
68,013,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
460,623,000 |
|
|
$ |
51,633,000 |
|
|
$ |
512,256,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
67.1 |
% |
|
|
9.6 |
% |
|
|
63.2 |
% |
|
|
|
(1) |
|
Includes the put back of a portfolio purchased and returned to the seller in the
amount of $2.8 million in the first quarter of fiscal 2008. |
|
(2) |
|
Includes $23.9 million derived from fully amortized interest method pools. |
-39-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2007 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
256,199,000 |
|
|
$ |
1,076,000 |
|
|
$ |
257,275,000 |
|
Acquisitions of receivable portfolios, net |
|
|
345,798,000 |
|
|
|
40,884,000 |
|
|
|
386,682,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(102,015,000 |
) |
|
|
(2,089,000 |
) |
|
|
(104,104,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(26,754,000 |
) |
|
|
(4,247,000 |
) |
|
|
(31,001,000 |
) |
Transferred to cost recovery (1) |
|
|
(4,478,000 |
) |
|
|
4,478,000 |
|
|
|
|
|
Impairments |
|
|
(2,412,000 |
) |
|
|
|
|
|
|
(2,412,000 |
) |
Finance income recognized (2) |
|
|
56,007,000 |
|
|
|
1,287,000 |
|
|
|
57,294,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
522,345,000 |
|
|
$ |
41,389,000 |
|
|
$ |
563,734,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
43.5 |
% |
|
|
20.3 |
% |
|
|
42.4 |
% |
|
|
|
(1) |
|
Represents a portfolio acquired during the three months ended December 31, 2006 which
the Company successfully retuned to the seller at the original purchase value. |
|
(2) |
|
Includes $5.5 million derived from fully amortized interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2008 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
509,580,000 |
|
|
$ |
49,794,000 |
|
|
$ |
559,374,000 |
|
Acquisitions of receivable portfolios, net |
|
|
239,000 |
|
|
|
3,559,000 |
|
|
|
3,798,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(42,807,000 |
) |
|
|
(2,124,000 |
) |
|
|
(44,931,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(4,863,000 |
) |
|
|
|
|
|
|
(4,863,000 |
) |
Impairments |
|
|
(35,000,000 |
) |
|
|
|
|
|
|
(35,000,000 |
) |
Finance income recognized (1) |
|
|
33,474,000 |
|
|
|
404,000 |
|
|
|
33,878,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
460,623,000 |
|
|
$ |
51,633,000 |
|
|
$ |
512,256,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
70.2 |
% |
|
|
19.0 |
% |
|
|
68.0 |
% |
|
|
|
(1) |
|
Includes $12.2 million derived from fully amortized interest method pools. |
-40-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2007 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
281,852,000 |
|
|
$ |
3,671,000 |
|
|
$ |
285,523,000 |
|
Acquisitions of receivable portfolios, net |
|
|
288,224,000 |
|
|
|
36,191,000 |
|
|
|
324,415,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(60,765 000 |
) |
|
|
(1,461,000 |
) |
|
|
(62,226,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(11,825,000 |
) |
|
|
(2,094,000 |
) |
|
|
(13,919,000 |
) |
Transfer to cost recovery (1) |
|
|
(4,478,000 |
) |
|
|
4,478,000 |
|
|
|
|
|
Impairment |
|
|
(2,412,000 |
) |
|
|
|
|
|
|
(2,412,000 |
) |
Finance income recognized (2) |
|
|
31,749,000 |
|
|
|
604,000 |
|
|
|
32,353,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
522,345,000 |
|
|
$ |
41,389,000 |
|
|
$ |
563,734,000 |
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
43 7 |
% |
|
|
17 0 |
% |
|
|
42 5 |
% |
|
|
|
(1) |
|
Represents a portfolio acquired during the three months ended December 31,2006 which the
Company successfully retuned to the seller at the original purchase value. |
|
(2) |
|
Includes approximately $500,000 derived from fully amortized interest method pools. |
Supplementary Information:
We do not anticipate collecting the majority of the purchased principal amounts. Accordingly,
the difference between the carrying value of the portfolios and the gross receivables is not
indicative of future revenues from these accounts acquired for liquidation. Since we purchased
these accounts at significant discounts, we anticipate collecting only a small portion of the face
amounts. During the six months ended March 31, 2008, we purchased portfolios with an aggregate
purchase price of $41.3 million with a face value of $1.3 billion.
Prior to October 1, 2005, we accounted for our investment in finance receivables using the
interest method under the guidance of Practice Bulletin 6, Amortization of Discounts on Certain
Acquired Loans. Effective October 1, 2005, we adopted and began to account for its investment in
finance receivables using the interest method under the guidance of American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 03-3, Accounting for Loans or Certain
Securities Acquired in a Transfer. Practice Bulletin 6 was amended by SOP 03-3 as described
further. Under the guidance of SOP 03-3 (and the amended Practice Bulletin 6), static pools of
accounts are established. These pools are aggregated based on certain common risk criteria. Each
static pool is recorded at cost and is accounted for as a single unit for the recognition of
income, principal payments and loss provision. Once a static pool is established for a quarter,
individual receivable accounts are not added to the pool (unless replaced by the seller) or removed
from the pool (unless sold or returned to the seller). SOP 03-3 (and the amended Practice Bulletin
6) requires that the excess of the contractual cash flows over expected cash flows not be
recognized as an adjustment of revenue or expense or on the balance sheet. The SOP initially
freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are
purchased as the basis for subsequent impairment testing. Significant increases in actual, or
expected future cash flows may be recognized prospectively
-41-
through an upward adjustment of the IRR over a portfolios remaining life. Any increase to the
IRR then becomes the new benchmark for impairment testing. Effective for fiscal years beginning
October 1, 2005 under SOP 03-3 and the amended Practice Bulletin 6, rather than lowering the
estimated IRR if the collection estimates are not received or projected to be received, the
carrying value of a pool would be written down to maintain the then current IRR. Income on finance
receivables is earned based on each static pools effective IRR. Under the interest method, income
is recognized on the effective yield method based on the actual cash collected during a period and
future estimated cash flows and timing of such collections and the portfolios cost. Revenue
arising from collections in excess of anticipated amounts attributable to timing differences is
deferred. The estimated future cash flows are reevaluated quarterly.
Collections Represented by Account Sales
|
|
|
|
|
|
|
|
|
|
|
Collections |
|
|
|
|
Represented |
|
Finance |
|
|
By Account |
|
Income |
Period |
|
Sales |
|
Earned |
Six months ended March 31, 2008 |
|
$ |
12,654,000 |
|
|
$ |
5,179,000 |
|
Three months ended March 31, 2008 |
|
$ |
4,863,000 |
|
|
$ |
2,826,000 |
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, 2007 |
|
$ |
31,001,000 |
|
|
$ |
14,514,000 |
|
Three months ended March 31, 2007 |
|
$ |
13,919,000 |
|
|
$ |
5,555,000 |
|
Portfolio Performance (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated |
|
|
|
|
|
|
Cash Collections |
|
Estimated |
|
Total |
|
Collections as a |
|
|
Purchase |
|
Including Cash |
|
Remaining |
|
Estimated |
|
Percentage of |
Purchase Period |
|
Price (2) |
|
Sales (3) |
|
Collections (4) |
|
Collections (5) |
|
Purchase Price |
2001 |
|
$ |
65,120,000 |
|
|
$ |
105,256,000 |
|
|
|
|
|
|
$ |
105,256,000 |
|
|
|
162 |
% |
2002 |
|
|
36,557,000 |
|
|
|
47,686,000 |
|
|
|
|
|
|
|
47,686,000 |
|
|
|
130 |
% |
2003 |
|
|
115,626,000 |
|
|
|
198,438,000 |
|
|
$ |
3,666,000 |
|
|
|
202,104,000 |
|
|
|
175 |
% |
2004 |
|
|
103,743,000 |
|
|
|
166,136,000 |
|
|
|
6,408,000 |
|
|
|
172,544,000 |
|
|
|
166 |
% |
2005 |
|
|
126,023,000 |
|
|
|
172,234,000 |
|
|
|
51,321,000 |
|
|
|
223,555,000 |
|
|
|
177 |
% |
2006 |
|
|
200,237,000 |
|
|
|
179,375,000 |
|
|
|
131,263,000 |
|
|
|
310,638,000 |
|
|
|
155 |
% |
2007 |
|
|
384,850,000 |
|
|
|
105,781,000 |
|
|
|
433,507,000 |
|
|
|
539,288,000 |
|
|
|
140 |
% |
2008 |
|
|
20,155,000 |
|
|
|
3,575,000 |
|
|
|
23,892,000 |
|
|
|
27,467,000 |
|
|
|
136 |
% |
|
|
|
(1) |
|
Total collections do not represent full collections of the Company with respect to this
or any other year. |
|
(2) |
|
Purchase price refers to the cash paid to a seller to acquire a portfolio less the
purchase price refunded by a seller due to the return of non-compliant accounts (also defined as
put-backs). |
|
(3) |
|
Net cash collections include: net collections from our third-party collection agencies
and attorneys, net collections from our in-house efforts and collections represented by account
sales. |
|
(4) |
|
Does not include estimated collections from portfolios that are zero bases. |
|
(5) |
|
Total estimated collections refers to the actual net cash collections, including cash
sales, plus estimated remaining net collections. |
-42-
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 161
Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No.
133. This Statement requires enhanced disclosures about an entitys derivative and hedging
activities and thereby improves the transparency of financial reporting providing users of
financial statements with an enhanced understanding of (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedged items are accounted for under
Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging
Activities and its related interpretations and (iii) how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash flows.
This Statement is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial adoption. The Company
believes this statement will not impact the Company.
In December 2007, the FASB ratified Emerging Issues Task Force, or EITF, Issue No. 07-1,
Accounting for Collaborative Arrangements Related to the Development and Commercialization of
Intellectual Property, or EITF 07-1, which provides guidance on how the parties to a collaborative
agreement should account for costs incurred and revenue generated on sales to third parties, how
sharing payments pursuant to a collaboration agreement should be presented in the income statement
and certain related disclosure requirements. EITF 07-1 will be effective for the Company beginning
January 1, 2009 on a retrospective basis. The Company is currently evaluating the impact that the
adoption of EITF 07-1 will have, if any, on its consolidated financial statements.
In December 2007 The Securities & 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 Statement of
Financial Accounting Standards 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 be widely available by December 31, 2007. Accordingly, the
staff will continue to accept, under certain circumstances, the use of the simplified method beyond
December 31, 2007. This SAB does not have a material impact on the Company.
In December 2007, the FASB issued FASB Statement No. 160 Noncontrolling Interests in
Consolidated Financial Statementsan amendment of ARB No. 51. A noncontrolling interest, sometimes
called a minority interest, is the portion of equity in a subsidiary not attributable, directly or
indirectly, to a parent. The objective of this Statement is to improve the relevance,
comparability, and transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting standards that
require:
The ownership interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial position within
equity, but separate from the parents equity.
The amount of consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated statement of
income.
Changes in a parents ownership interest while the parent retains its controlling financial
interest in its subsidiary be accounted for consistently. A parents ownership interest in a
subsidiary changes if the parent purchases additional ownership interests in its subsidiary or
if the parent sells some of its ownership interests in its subsidiary. It also changes if the
subsidiary reacquires some of its ownership interests or the subsidiary issues additional
ownership interests. All of those transactions are economically similar, and this Statement
requires that they be accounted for similarly, as equity transactions.
When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the
former subsidiary be initially measured at fair value. The gain or loss on the deconsolidation
of the subsidiary is measured using the fair value of any noncontrolling equity investment
rather than the carrying amount of that retained investment.
-43-
Entities provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners.
This Statement is effective for fiscal years, and interim periods within those fiscal years,
beginning with the Companys first annual reporting period on or after December 15, 2008. Earlier
adoption is prohibited. The effective date of this Statement is the same as that of the related
Statement 141(R). The Company anticipates the adoption will not have a material affect on the
Companys financial statements.
This Statement shall be applied prospectively as of the beginning of the fiscal year in which
this Statement is initially applied, except for the presentation and disclosure requirements. The
presentation and disclosure requirements shall be applied retrospectively for all periods
presented.
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007) Business Combinations
(FASB Statement No. 141R). FASB Statement No. 141R replaces FASB Statement No. 141 Business
Combinations (FASB Statement No. 141). The objective of FASB Statement No. 141R is to improve the
relevance, representational faithfulness, and comparability of the information that a reporting
entity provides in its financial reports about a business combination and its effects. To
accomplish that, this Statement establishes principles and requirements for how the acquirer:
a. recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree;
b. recognizes and measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and
c. determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
FASB Statement No. 141R applies to all transactions or other events in which an entity (the
acquirer) obtains control of one or more businesses (the acquiree), including those sometimes
referred to as true mergers or mergers of equals and combinations achieved without the transfer
of consideration, for example, by contract alone or through the lapse of minority veto rights. FASB
Statement No. 141R applies to all business entities, including mutual entities that previously used
the pooling-of-interests method of accounting for some business combinations. It does not apply to:
a. the formation of a joint venture;
b. the acquisition of an asset or a group of assets that does not constitute a business;
c. a combination between entities or businesses under common control; and
d. a combination between not-for-profit organizations or the acquisition of a for-profit
business by a not-for-profit organization.
FASB Statement No. 141R retains the guidance in FASB Statement No. 141 for identifying and
recognizing intangible assets separately from goodwill. FASB Statement No. 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed and any non-controlling interest
in the acquiree at the acquisition date, measured at their fair values at that date. In addition,
FASB Statement No. 141R generally requires that acquisition related costs such as professional fees
and consulting fees be expensed as incurred.
FASB Statement No. 141 R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. An entity may not apply it before that date. Currently, the Company does
not anticipate FASB Statement No. 141R will have an impact on the Companys financial statements.
In November 2007 the Securities & Exchange Commission issued Staff Accounting Bulletin No. 109
(SAB 109) which expresses the staff views regarding written loan commitments that are accounted
for at fair value through earnings under generally accepted accounting principles. SAB No. 105,
Application of Accounting Principles to Loan Commitments (SAB 105), provided the views of the
staff regarding derivative loan commitments that are accounted for at fair value through earnings
pursuant to Statement of Financial Accounting
-44-
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities . SAB 105 stated
that in measuring the fair value of a derivative loan commitment, the staff believed it would be
inappropriate to incorporate the expected net future cash flows related to the associated servicing
of the loan. This SAB supersedes SAB 105 and expresses the current view of the staff that,
consistent with the guidance in Statement of Financial Accounting Standards No. 156, Accounting
for Servicing of Financial Assets , and Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, the expected net future cash
flows related to the associated servicing of the loan should be included in the measurement of all
written loan commitments that are accounted for at fair value through earnings. SAB 105 also
indicated that the staff believed that internally-developed intangible assets (such as customer
relationship intangible assets) should not be recorded as part of the fair value of a derivative
loan commitment. This SAB retains that staff view and broadens its application to all written loan
commitments that are accounted for at fair value through earnings. The adoption of SAB No. 109 will
not have any impact on the Company.
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 . This
Statement permits entities to choose to measure many financial instruments and certain other items
at fair value. The objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions. This Statement
is expected to expand the use of fair value measurement, which is consistent with the Boards
long-term measurement objectives for accounting for financial instruments. This Statement is
effective for the Companys fiscal year that begins October 1, 2008. The Company believes that this
statement, when adopted, will not impact the Company.
In September 2006, the FASB issued FASB Statement No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106
and 132(R) (FASB 158). FASB 158 improves financial reporting by requiring an employer to
recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than
a multiemployer plan) as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity. FASB 158 also improves financial reporting by requiring
an employer to measure the funded status of a plan as of the date of its year-end statement of
financial position, with limited exceptions. FASB 158 was required to be implemented by the end of
our fiscal year 2007. At this time, the Company does not sponsor a defined benefit plan; therefore,
there is no impact on the Company with regard to FASB 158.
In
September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements (FASB Statement
No 157). This
Statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does not require any new
fair value measurements. FASB Statement No. 157 will be effective for our financial statements
issued for our fiscal year beginning October 1, 2008. The Company does not expect the adoption of
FASB Statement No. 157 to have a material impact on its financial reporting or disclosure
requirements.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 became effective October 1, 2007. The adoption of FIN 48 has had
no material impact on our financial reporting and disclosure.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various types of market risk in the normal course of business, including the
impact of interest rate changes and changes in corporate tax rates. A material change in these
rates could adversely affect our operating
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results and cash flows. At March 31, 2008, our $175 million credit facility and our Receivable
Financing Agreement, all of which is variable debt, had an outstanding balance of $145.5 million
and $148.3 million, respectively. A 25 basis-point increase in interest rates would have increased
our interest expense for the six month period ended March 31, 2008 by approximately $400,000 based
on the average debt outstanding during the period. We do not currently invest in derivative
financial or commodity instruments.
Item 4. Controls and Procedures
a. Disclosure Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an
evaluation, with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were not effective as
of such date due to the fact that the material weaknesses described in the September 30, 2007 Form
10-K and Form 10-K/A have not been remediated as of March 31, 2008.
b. Changes in Internal Controls Over Financial Reporting.
The Company has taken a number of corrective actions and continues to address the above
mentioned material weaknesses. These actions included the establishment of an investment committee
comprised of the Chairman, the Chief Executive Officer, the Chief Operating Officer, the Chief
Financial Officer and our Senior Vice President, and if appropriate, members of the audit
committee. This committee reviews all material transactions with a view to ensuring complete,
accurate and timely financial accounting and related disclosure. In addition the Company undertook
a review of its financial reporting processes with an outside consultant and formalized a process
deemed necessary. We believe we have made significant progress in curing the weaknesses cited above
and these actions will lead to the remediation of the material weaknesses cited, above..
-46-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of our business, we are involved in numerous legal proceedings. We
regularly initiate collection lawsuits, using our network of third party law firms, against
consumers. Also, consumers occasionally initiate litigation against us, in which they allege that
we have violated a federal or state law in the process of collecting their account. We do not
believe that these ordinary course matters are material to our business and financial condition. As
of the date of this Form 10-Q, we were not involved in any material litigation in which we were a
defendant.
Item 1A. Risk Factors
The
following are additional risk factors that should be considered in conjunction with risk
factors previously disclosed in the Companys Annual Report on Form 10-K and Form 10-K/A filed with
the Securities & Exchange Commission.
We have seen, at certain times, the environment for collections from debtors is slower and more
challenging.
The current collection environment is particularly challenging as a result of factors in the
economy over which we have no control.
These factors include:
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a slowdown in the economy; |
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problems in the credit and housing markets; |
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reductions in consumer spending; |
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changes in the underwriting criteria by originators; and |
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changes in laws and regulations governing consumer lending. |
We believe that our debtors might be straining to pay their obligations owed to us. A continuation
of the current problems in the credit and housing markets, including
negative effects on the ability of debtors to obtain second
mortgages, home equity lines of credit or other types of refinancing,
and the general slow down in the
economy could adversely affect the value of our portfolio and financial performance.
Recent amendments to our credit facility increase our risk and potential loss.
Since the Portfolio Purchase in March 2007, Palisades XVI has not performed well with respect to
the Receivable Financing Agreement with the Bank of Montreal (BMO). In September 2007, Palisades
XVI was required to remit an additional $13.1 million to BMO in order to be in compliance with its
repayment obligations. The Company purchased a portion of this Portfolio from Palisades XVI at a
price of $13.1 million, giving Palisades XVI the ability to make this payment. In December 2007,
Palisades XVI entered into an amendment of the Receivable Financing Agreement to extend the
required repayment schedule. Again in May 2008, as a result of collections being slower than
anticipated at the time of the December 2007 amendment, Palisades XVI and BMO amended the
Receivable Financing Agreement to further extend the repayment schedule. While the Company believes
it will be able to make all payments due under the new payment schedule, the Company also believes
that if it fails to do so it will be required to sell the Portfolio Purchase
or may be subject to a
foreclosure on the Portfolio Purchase.
We rely on third parties to locate, identify and evaluate consumer receivable portfolios
available for purchase.
We have relied on a third party and paid it significant fees to assist us in asset identification,
skiptracing and other debtor locating methods in order to increase the likelihood of our future
collections with respect to the Portfolio
-47-
Purchase. If such information, much of which has only
recently been received does not prove to be accurate, our collections and results of operations
could be materially adversely affected.
The Company has been required to amend its revolving credit facility on a number of occasions.
The Company has been required to seek amendments to its revolving credit facility due to
issues concerning its financial performance in the past. While the Company has been able to obtain
the requisite amendments on each such occasion, it has resulted in higher interest rates and
increased costs to the Company. Further, there can be no assurance that the Company will be able
to obtain additional amendments if it fails to meet its financial covenants or other obligations
under the revolving credit facility in the future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on March 4, 2008. At that meeting, the following matter
was voted on and received the votes indicated:
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Authority |
Election of Directors |
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For |
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Withheld |
Gary Stern |
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9,918,856 |
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2,659,453 |
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Arthur Stern |
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9,904,348 |
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2,673,961 |
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Herman Badillo |
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9,659,614 |
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2,918,695 |
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David Slackman |
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9,937,396 |
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2,640,913 |
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Edward Celano |
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9,715,007 |
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2,863,302 |
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Harvey Leibowitz |
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9,704,283 |
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2,874,026 |
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Alan Rivera |
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10,205,721 |
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2,372,588 |
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Louis A. Piccolo |
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10,204,646 |
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2,373,663 |
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-48-
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
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10.1
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Third Amendment to the Receivables Financing Agreement |
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10.2
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Amended and Restated Servicing Agreement dated May 12, 2008 |
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31.1
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Certification of the Registrants Chief Executive Officer, Gary Stern, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Registrants Chief Financial Officer, Mitchell Cohen, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of the Registrants Chief Executive Officer, Gary Stern, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2
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Certification of the Registrants Chief Financial Officer, Mitchell Cohen, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
-49-
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.
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ASTA FUNDING, INC. |
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(Registrant) |
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Date: May 19, 2008
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By: /s/ Gary Stern |
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Gary Stern, President, Chief Executive Officer
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(Principal Executive Officer) |
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Date: May 19, 2008
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By: /s/ Mitchell Cohen |
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Mitchell Cohen, Chief Financial Officer
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(Principal Financial Officer and |
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Principal Accounting Officer) |
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-50-