Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-26906
ASTA FUNDING, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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22-3388607 |
(State or other jurisdiction
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(IRS Employer |
of incorporation or organization)
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Identification No.) |
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210 Sylvan Ave., Englewood Cliffs, New Jersey
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07632 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number: (201) 567-5648
Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files.)
Yes o No o
The registrant is not yet subject to this requirement.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer as in
Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act) Yes o No þ
As of August 09, 2010, the registrant had 14,600,323 common shares outstanding.
ASTA FUNDING, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, |
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September 30, |
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2010 |
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2009 |
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(Unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
77,996,000 |
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$ |
2,385,000 |
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Restricted cash |
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1,646,000 |
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2,130,000 |
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Consumer receivables acquired for liquidation (at net realizable value) |
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164,953,000 |
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208,261,000 |
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Due from third party collection agencies and attorneys |
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3,095,000 |
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2,573,000 |
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Prepaid and income taxes receivable |
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47,727,000 |
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Investment in venture |
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94,000 |
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168,000 |
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Furniture and equipment, net |
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363,000 |
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538,000 |
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Deferred income taxes |
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17,891,000 |
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24,072,000 |
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Other assets |
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3,378,000 |
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2,902,000 |
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Total assets |
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$ |
269,416,000 |
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$ |
290,756,000 |
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LIABILITIES |
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Debt |
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$ |
93,506,000 |
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$ |
122,622,000 |
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Subordinated debt related party |
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4,386,000 |
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8,246,000 |
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Other liabilities |
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1,478,000 |
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2,166,000 |
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Dividends payable |
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292,000 |
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286,000 |
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Income taxes payable |
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2,895,000 |
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Total liabilities |
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102,557,000 |
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133,320,000 |
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Commitments and contingencies |
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STOCKHOLDERS EQUITY |
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Preferred stock, $.01 par value; authorized 5,000,000 shares;
issued and outstanding none |
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Common stock, $.01 par value; authorized 30,000,000 shares; issued
and outstanding 14,600,323 at June 30, 2010 and 14,272,357 at
September 30, 2009 |
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146,000 |
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143,000 |
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Additional paid-in capital |
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72,076,000 |
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70,189,000 |
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Retained earnings |
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94,660,000 |
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87,058,000 |
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Accumulated other comprehensive (loss) income, net of tax |
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(23,000 |
) |
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46,000 |
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Total stockholders equity |
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166,859,000 |
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157,436,000 |
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Total liabilities and stockholders equity |
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$ |
269,416,000 |
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$ |
290,756,000 |
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See accompanying notes to condensed consolidated financial statements
3
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months |
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Three Months |
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Nine Months |
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Nine Months |
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Ended |
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Ended |
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Ended |
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Ended |
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June 30, 2010 |
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June 30, 2009 |
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June 30, 2010 |
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June 30, 2009 |
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Revenues: |
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Finance income, net |
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$ |
12,042,000 |
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$ |
17,202,000 |
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$ |
34,197,000 |
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$ |
53,722,000 |
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Other income |
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41,000 |
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36,000 |
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97,000 |
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90,000 |
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12,083,000 |
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17,238,000 |
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34,294,000 |
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53,812,000 |
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Expenses: |
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General and administrative |
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5,836,000 |
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6,634,000 |
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16,739,000 |
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20,006,000 |
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Interest (Related party Period
ended June 30, 2010 Three months,
$109,000; Nine months, $407,000;
Period ended June 30, 2009 Three
months, $128,000; Nine
months, $385,000) |
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1,019,000 |
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1,783,000 |
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3,365,000 |
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6,907,000 |
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Impairments of consumer receivables
acquired for liquidation |
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6,364,000 |
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46,208,000 |
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6,855,000 |
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14,781,000 |
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20,104,000 |
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73,121,000 |
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Income (loss) before equity in
earnings (loss) of venture and
income tax |
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5,228,000 |
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2,457,000 |
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14,190,000 |
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(19,309,000 |
) |
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Equity in earnings (loss) of venture |
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14,000 |
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34,000 |
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56,000 |
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(21,000 |
) |
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Income (loss) before income tax |
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5,242,000 |
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2,491,000 |
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14,246,000 |
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(19,330,000 |
) |
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Income tax expense (benefit) |
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2,121,000 |
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1,013,000 |
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5,775,000 |
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(7,803,000 |
) |
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Net income (loss) |
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$ |
3,121,000 |
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$ |
1,478,000 |
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$ |
8,471,000 |
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$ |
(11,527,000 |
) |
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Net income (loss) per share: |
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Basic |
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$ |
0.21 |
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$ |
0.10 |
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$ |
0.59 |
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$ |
(0.81 |
) |
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Diluted |
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$ |
0.21 |
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$ |
0.10 |
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$ |
0.58 |
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$ |
(0.81 |
) |
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Weighted average number of common
shares outstanding: |
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Basic |
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14,599,162 |
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14,271,946 |
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14,455,754 |
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|
14,271,931 |
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Diluted |
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14,806,756 |
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14,445,572 |
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14,544,757 |
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14,271,931 |
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See accompanying notes to condensed consolidated financial statements
4
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
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Accumulated |
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Additional |
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Other |
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Paid-in |
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Retained |
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Comprehensive |
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Shares |
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Amount |
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Capital |
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Earnings |
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Income (Loss) |
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Total |
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Balance, September 30, 2009 |
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14,272,357 |
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|
$ |
143,000 |
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|
$ |
70,189,000 |
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$ |
87,058,000 |
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|
$ |
46,000 |
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|
$ |
157,436,000 |
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Exercise of options |
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327,966 |
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3,000 |
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|
867,000 |
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870,000 |
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Stock based compensation expense |
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|
969,000 |
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|
969,000 |
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Tax benefit arising from vesting of
restricted stock awards |
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51,000 |
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51,000 |
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Dividends |
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(869,000 |
) |
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(869,000 |
) |
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Other comprehensive loss, net of tax |
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(69,000 |
) |
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|
(69,000 |
) |
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Net income |
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|
8,471,000 |
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8,471,000 |
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|
Balance, June 30, 2010 |
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|
14,600,323 |
|
|
$ |
146,000 |
|
|
$ |
72,076,000 |
|
|
$ |
94,660,000 |
|
|
$ |
(23,000 |
) |
|
$ |
166,859,000 |
|
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Comprehensive income (loss) is as follows:
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Nine Months |
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Nine Months |
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Ended |
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Ended |
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|
June 30, 2010 |
|
|
June 30, 2009 |
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Net income (loss) |
|
$ |
8,471,000 |
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|
$ |
(11,527,000 |
) |
Other comprehensive loss,
Net of tax Foreign
Currency translation |
|
|
(69,000 |
) |
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|
(47,000 |
) |
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|
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|
|
Comprehensive income (loss) |
|
$ |
8,402,000 |
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|
$ |
(11,574,000 |
) |
|
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|
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|
See accompanying notes to condensed consolidated financial statements
5
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months |
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Nine Months |
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Ended |
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Ended |
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|
June 30, 2010 |
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|
June 30, 2009 |
|
Cash flows from operating activities: |
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Net income (loss) |
|
$ |
8,471,000 |
|
|
$ |
(11,527,000 |
) |
|
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|
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|
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
|
|
785,000 |
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|
1,261,000 |
|
Deferred income taxes |
|
|
6,181,000 |
|
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|
(7,026,000 |
) |
Impairments of consumer receivables acquired for liquidation |
|
|
|
|
|
|
46,208,000 |
|
Stock based compensation |
|
|
969,000 |
|
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|
865,000 |
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Changes in: |
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|
Other assets |
|
|
(991,000 |
) |
|
|
(349,000 |
) |
Due from third party collection agencies and attorneys |
|
|
(522,000 |
) |
|
|
1,554,000 |
|
Income taxes payable and receivable |
|
|
50,622,000 |
|
|
|
(6,765,000 |
) |
Other liabilities |
|
|
(756,000 |
) |
|
|
(2,642,000 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
64,759,000 |
|
|
|
21,579,000 |
|
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Cash flows from investing activities: |
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Purchase of consumer receivables acquired for liquidation |
|
|
(3,334,000 |
) |
|
|
(16,501,000 |
) |
Principal collected on receivables acquired for liquidation |
|
|
44,613,000 |
|
|
|
57,545,000 |
|
Principal collected on receivable accounts represented by account sales |
|
|
2,076,000 |
|
|
|
5,317,000 |
|
Foreign exchange effect on receivables acquired for liquidation |
|
|
(51,000 |
) |
|
|
126,000 |
|
Cash distributions received from venture |
|
|
74,000 |
|
|
|
436,000 |
|
Capital expenditures |
|
|
(95,000 |
) |
|
|
(38,000 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
43,283,000 |
|
|
|
46,885,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of options |
|
|
870,000 |
|
|
|
|
|
Tax benefit arising from vesting of restricted stock awards |
|
|
51,000 |
|
|
|
74,000 |
|
Change in restricted cash |
|
|
484,000 |
|
|
|
791,000 |
|
Dividends paid |
|
|
(863,000 |
) |
|
|
(1,142,000 |
) |
Repayments of debt, net |
|
|
(32,973,000 |
) |
|
|
(68,574,000 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(32,431,000 |
) |
|
|
(68,851,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
75,611,000 |
|
|
|
(387,000 |
) |
Effect of foreign exchange on cash |
|
|
|
|
|
|
(13,000 |
) |
Cash at the beginning of period |
|
|
2,385,000 |
|
|
|
3,623,000 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
77,996,000 |
|
|
$ |
3,223,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period |
|
|
|
|
|
|
|
|
Interest (fiscal year 2010 Related Party $457,000; 2009 Related Party
$386,000) |
|
$ |
3,522,000 |
|
|
$ |
7,487,000 |
|
Income taxes |
|
$ |
2,052,000 |
|
|
$ |
5,885,000 |
|
See accompanying notes to condensed consolidated financial statements.
6
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Business and Basis of Presentation
Business
Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades
Collection LLC, Palisades Acquisition XVI, LLC (Palisades XVI), VATIV Recovery Solutions LLC
(VATIV) and other subsidiaries, not all wholly owned, and not considered material (the Company)
is engaged in the business of purchasing, managing for its own account and servicing distressed
consumer receivables, including charged-off receivables, semi-performing receivables and performing
receivables. The primary charged-off receivables are accounts that have been written-off by the
originators and may have been previously serviced by collection agencies. Semi-performing
receivables are accounts where the debtor is currently making partial or irregular monthly
payments, but the accounts may have been written-off by the originators. Performing receivables are
accounts where the debtor is making regular monthly payments that may or may not have been
delinquent in the past. Distressed consumer receivables are the unpaid debts of individuals to
banks, finance companies and other credit providers. A large portion of the Companys distressed
consumer receivables are MasterCard(R), Visa(R), other credit card accounts, and telecommunication
accounts which were charged-off by the issuers for non-payment. We are seeking to expand the range
or types of consumer receivables and consumer retail installment contracts which we might acquire.
The Company acquires these portfolios at substantial discounts from their face values. The
discounts are based on the characteristics (issuer, account size, debtor residence and age of debt)
of the underlying accounts of each portfolio.
Basis of Presentation
The condensed consolidated balance sheets as of June 30, 2010, the condensed consolidated
statements of operations for the nine and three month periods ended June 30, 2010 and 2009, the
condensed consolidated statement of stockholders equity as of and for the nine months ended June
30, 2010 and the condensed consolidated statements of cash flows for the nine month periods ended
June 30, 2010 and 2009, are unaudited. The September 30, 2009 financial information included in
this report has been extracted from our audited financial statements included in our Annual Report
on Form 10-K and Form 10-K/A. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly our financial position at June 30, 2010
and September 30, 2009, the results of operations for the nine and three month periods ended June
30, 2010 and 2009 and cash flows for the nine month periods ended June 30, 2010 and 2009 have been
made. The results of operations for the nine and three month periods ended June 30, 2010 and 2009
are not necessarily indicative of the operating results for any other interim period or the full
fiscal year.
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission
and, therefore, do not include all information and note disclosures required under generally
accepted accounting principles. The Company suggests that these financial statements be read in
conjunction with the financial statements and notes thereto included in our Annual Report on Form
10-K and Form 10-K/A for the fiscal year ended September 30, 2009 filed with the Securities and
Exchange Commission.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates including managements
estimates of future cash flows and the resulting rates of return.
7
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 1: Business and Basis of Presentation (continued)
Recent Accounting Pronouncements
In February 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-09, Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments
remove the requirement for an SEC registrant to disclose the date through which subsequent events
were evaluated as this requirement would have potentially conflicted with SEC reporting
requirements. Removal of the disclosure requirement is not expected to affect the nature or timing
of subsequent events evaluations performed by the Company. This ASU became effective upon issuance.
In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 generally
represents a revision to former FASB Interpretation No. 46 (Revised December 2003), Consolidation
of Variable Interest Entities, and changes how a reporting entity determines when an entity that
is insufficiently capitalized or is not controlled through voting (or similar rights) should be
consolidated. ASU 2009-17 also requires a reporting entity to provide additional disclosures about
its involvement with variable interest entities and any significant changes in risk exposure due to
that involvement. ASU 2009-17 is effective for fiscal years beginning after November 15, 2009 and
for interim periods within the first annual reporting period. The Company does not believe that the
adoption of ASU 2009-17 will have a significant effect on its consolidated financial statements.
Note 2: Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly
owned and majority owned subsidiaries. The Companys investment in a venture, representing a 25%
interest, is accounted for using the equity method. All significant intercompany balances and
transactions have been eliminated in consolidation.
8
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation
Accounts acquired for liquidation are stated at their net estimated realizable value and consist
primarily of defaulted consumer loans to individuals throughout the country and in Central and
South America.
The Company accounts for its investments in consumer receivable portfolios, using either:
|
|
The interest method; or |
|
|
|
The cost recovery method. |
The Company accounts for its investment in finance receivables using the interest method under the
guidance of FASB Accounting Standards Codifiction (ASC) 310, Receivables Loans and Debt
Securities Acquired with Deteriorated Credit Quality, (ASC 310). Under the guidance of ASC 310,
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). ASC 310 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. ASC 310 initially
freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are
purchased, as the basis for subsequent impairment testing. Significant increases in actual or
expected future cash flows may be recognized prospectively through an upward adjustment of the IRR
over a portfolios remaining life. Any increase to the IRR then becomes the new benchmark for
impairment testing. Rather than lowering the estimated IRR if the collection estimates are not
received or projected to be received, the carrying value of a pool would be impaired, or written
down to maintain the then current IRR. Under the interest method, income is recognized on the
effective yield method based on the actual cash collected during a period and future estimated cash
flows and timing of such collections and the portfolios cost. Revenue arising from collections in
excess of anticipated amounts attributable to timing differences is deferred until such time as a
review results in a change in the expected cash flows. The estimated future cash flows are
reevaluated quarterly.
The Company uses the cost recovery method when collections on a particular pool of accounts cannot
be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of
the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on
the balance sheet) while still generating cash collections. In this case, all cash collections are
recognized as revenue when received.
The Companys extensive liquidating experience is in the field of distressed credit card
receivables, telecommunication receivables, consumer loan receivables, retail installment
contracts, consumer receivables, and auto deficiency receivables. The Company uses the interest
method for accounting for asset acquisitions within these classes of receivables when it believes
it can reasonably estimate the timing of the cash flows. In those situations where the Company
diversifies its acquisitions into other asset classes where the Company does not possess the same
expertise or history, or the Company cannot reasonably estimate the timing of the cash flows, the
Company utilizes the cost recovery method of accounting for those portfolios of receivables. At
June 30, 2010, approximately $46.7 million of the consumer receivables acquired for liquidation are
accounted for using the interest method. Approximately $118.3 million are accounted for using the
cost recovery method, of which one portfolio, makes up $108.1 million of the value.
9
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
After ASC 310 was adopted, the Company aggregates portfolios of receivables acquired sharing
specific common characteristics which were acquired within a given quarter. The Company currently
considers for aggregation portfolios of accounts, purchased within the same fiscal quarter, that
generally meet the following characteristics:
|
|
same issuer/originator; |
|
|
|
same underlying credit quality; |
|
|
|
similar geographic distribution of the accounts; |
|
|
|
similar age of the receivable; and |
|
|
|
same type of asset class (credit cards, telecommunication, etc.). |
The Company uses a variety of qualitative and quantitative factors to estimate collections and the
timing thereof. This analysis includes the following variables:
|
|
the number of collection agencies previously attempting to collect the receivables in the portfolio; |
|
|
|
the average balance of the receivables, as higher balances might be more difficult to collect while
low balances might not be cost effective to collect; |
|
|
|
the age of the receivables, as older receivables might be more difficult to collect or might be
less cost effective. On the other hand, the passage of time, in certain circumstances, might result
in higher collections due to changing life events of some individual debtors; |
|
|
|
past history of performance of similar assets; |
|
|
|
time since charge-off; |
|
|
|
payments made since charge-off; |
|
|
|
the credit originator and its credit guidelines; |
|
|
|
our ability to analyze accounts and resell accounts that meet our criteria for resale; |
|
|
|
the locations of the debtors, as there are better states to attempt to collect in and ultimately
the Company has better predictability of the liquidations and the expected cash flows. Conversely,
there are also states where the liquidation rates are not as favorable and that is factored into
our cash flow analysis; |
|
|
|
jobs or property of the debtors found within portfolios. In our business model, this is of
particular importance. Debtors with jobs or property are more likely to repay their obligation and,
conversely, debtors without jobs or property are less likely to repay their obligation; and |
|
|
|
the ability to obtain timely customer statements from the original issuer. |
The Company obtains and utilizes, as appropriate, input, including, but not limited to, monthly
collection projections and liquidation rates from our third party collection agencies and
attorneys, as further evidentiary matter, to assist in evaluating and developing collection
strategies and in evaluating and modeling the expected cash flows for a given portfolio.
10
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
The following tables summarize the changes in the balance sheet of the investment in receivable
portfolios during the following periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended June 30, 2010 |
|
|
|
Interest |
|
|
Cost |
|
|
|
|
|
|
Method |
|
|
Recovery |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
70,650,000 |
|
|
$ |
137,611,000 |
|
|
$ |
208,261,000 |
|
Acquisitions of receivable portfolios, net |
|
|
3,043,000 |
|
|
|
291,000 |
|
|
|
3,334,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(56,801,000 |
) |
|
|
(20,908,000 |
) |
|
|
(77,709,000 |
) |
Net cash collections represented by account sales
of consumer receivables acquired for liquidation |
|
|
(3,173,000 |
) |
|
|
(4,000 |
) |
|
|
(3,177,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
47,000 |
|
|
|
47,000 |
|
Finance income recognized (1) |
|
|
32,975,000 |
|
|
|
1,222,000 |
|
|
|
34,197,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
46,694,000 |
|
|
$ |
118,259,000 |
|
|
$ |
164,953,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
55.0 |
% |
|
|
5.8 |
% |
|
|
42.3 |
% |
|
|
|
(1) |
|
Includes approximately $25.6 million
derived from fully amortized portfolios. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended June 30, 2009 |
|
|
|
Interest |
|
|
Cost |
|
|
|
|
|
|
Method |
|
|
Recovery |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
203,470,000 |
|
|
$ |
245,542,000 |
|
|
$ |
449,012,000 |
|
Acquisitions of receivable portfolios, net |
|
|
16,221,000 |
|
|
|
280,000 |
|
|
|
16,501,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(75,123,000 |
) |
|
|
(33,619,000 |
) |
|
|
(108,742,000 |
) |
Net cash collections represented by account sales
of consumer receivables acquired for liquidation |
|
|
(4,158,000 |
) |
|
|
(3,684,000 |
) |
|
|
(7,842,000 |
) |
Transfer to cost recovery (1) |
|
|
(10,128,000 |
) |
|
|
10,128,000 |
|
|
|
|
|
Impairments |
|
|
(46,208,000 |
) |
|
|
|
|
|
|
(46,208,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
(179,000 |
) |
|
|
(179,000 |
) |
Finance income recognized (2) |
|
|
52,366,000 |
|
|
|
1,356,000 |
|
|
|
53,722,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
136,440,000 |
|
|
$ |
219,824,000 |
|
|
$ |
356,264,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
66.1 |
% |
|
|
3.6 |
% |
|
|
46.1 |
% |
|
|
|
(1) |
|
During the nine months ended June 30, 2009, three
portfolios were transferred from the interest method to
the cost recovery method. Based on the nature of these
portfolios, the Companys estimates of the timing of
expected cash flows became uncertain. |
|
(2) |
|
Includes approximately $31.1 million
derived from fully amortized portfolios. |
11
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2010 |
|
|
|
Interest |
|
|
Cost |
|
|
|
|
|
|
Method |
|
|
Recovery |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
54,375,000 |
|
|
$ |
124,239,000 |
|
|
$ |
178,614,000 |
|
Acquisitions of receivable portfolios, net |
|
|
|
|
|
|
63,000 |
|
|
|
63,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(18,825,000 |
) |
|
|
(6,538,000 |
) |
|
|
(25,363,000 |
) |
Net cash collections represented by account sales
of consumer receivables acquired for liquidation |
|
|
(433,000 |
) |
|
|
|
|
|
|
(433,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
30,000 |
|
|
|
30,000 |
|
Finance income recognized (1) |
|
|
11,577,000 |
|
|
|
465,000 |
|
|
|
12,042,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
46,694,000 |
|
|
$ |
118,259,000 |
|
|
$ |
164,953,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
60.1 |
% |
|
|
7.1 |
% |
|
|
46.7 |
% |
|
|
|
(1) |
|
Includes approximately
$9.2 million derived
from fully amortized
portfolios. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2009 |
|
|
|
Interest |
|
|
Cost |
|
|
|
|
|
|
Method |
|
|
Recovery |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
137,497,000 |
|
|
$ |
230,726,000 |
|
|
$ |
368,223,000 |
|
Acquisitions of receivable portfolios, net |
|
|
13,540,000 |
|
|
|
273,000 |
|
|
|
13,813,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(23,660,000 |
) |
|
|
(12,766,000 |
) |
|
|
(36,426,000 |
) |
Net cash collections represented by account sales
of consumer receivables acquired for liquidation |
|
|
(1,083,000 |
) |
|
|
(112,000 |
) |
|
|
(1,195,000 |
) |
Impairments |
|
|
(6,364,000 |
) |
|
|
|
|
|
|
(6,364,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
1,011,000 |
|
|
|
1,011,000 |
|
Finance income recognized (1) |
|
|
16,510,000 |
|
|
|
692,000 |
|
|
|
17,202,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
136,440,000 |
|
|
$ |
219,824,000 |
|
|
$ |
356,264,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collection |
|
|
66.7 |
% |
|
|
5.4 |
% |
|
|
45.7 |
% |
|
|
|
(1) |
|
Includes approximately $10.5 million
derived from fully amortized portfolios. |
12
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
As of June 30, 2010, the Company had $164,953,000 in Consumer Receivables acquired for Liquidation,
of which $46,694,000 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, 2010 (three months ending) |
|
$ |
5,335,000 |
|
September 30, 2011 |
|
|
17,775,000 |
|
September 30, 2012 |
|
|
13,748,000 |
|
September 30, 2013 |
|
|
7,110,000 |
|
September 30, 2014 |
|
|
3,519,000 |
|
September 30, 2015 |
|
|
752,000 |
|
September 30, 2016 |
|
|
579,000 |
|
September 30, 2017 |
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
48,838,000 |
|
|
|
|
|
|
Deferred revenue |
|
|
(2,144,000 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,694,000 |
|
|
|
|
|
Accretable yield represents the amount of income the Company can expect to generate over the
remaining life of its existing portfolios based on estimated future net cash flows as of June 30,
2010. The Company adjusts the accretable yield upward when it believes, based on available
evidence, that portfolio collections will exceed amounts previously estimated. Changes in
accretable yield for the nine months and three months ended June 30, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
Balance at beginning of period |
|
$ |
25,875,000 |
|
|
$ |
58,134,000 |
|
Income recognized on finance receivables, net |
|
|
(32,975,000 |
) |
|
|
(52,366,000 |
) |
Additions representing expected revenue from
purchases |
|
|
1,080,000 |
|
|
|
4,937,000 |
|
Transfers to cost recovery |
|
|
|
|
|
|
(3,372,000 |
) |
Reclassifications from nonaccretable difference |
|
|
22,948,000 |
|
|
|
37,751,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
16,928,000 |
|
|
$ |
45,084,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
Balance at beginning of period |
|
$ |
20,513,000 |
|
|
$ |
48,071,000 |
|
Income recognized on finance receivables, net |
|
|
(11,577,000 |
) |
|
|
(16,510,000 |
) |
Additions representing expected revenue from
purchases |
|
|
|
|
|
|
4,035,000 |
|
Reclassifications from nonaccretable difference |
|
|
7,992,000 |
|
|
|
9,488,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
16,928,000 |
|
|
$ |
45,084,000 |
|
|
|
|
|
|
|
|
13
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
During the three and nine month periods ended June 30, 2010, the Company purchased $6.3 million and
$155.7 million, respectively, of face value of charged-off consumer receivables at a cost of
$0.1 million and $3.4 million, respectively. During the third quarter of fiscal year 2010, all of
the portfolios purchased were classified under the cost recovery method.
The following table summarizes collections on a gross basis as received by our third-party
collection agencies and attorneys, less commissions and direct costs for the nine and three month
periods ended June 30, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
Gross collections (1) |
|
$ |
123,590,000 |
|
|
$ |
176,709,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
42,704,000 |
|
|
|
60,125,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
80,886,000 |
|
|
$ |
116,584,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
Gross collections (1) |
|
$ |
39,828,000 |
|
|
$ |
53,484,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
14,032,000 |
|
|
|
15,863,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
25,796,000 |
|
|
$ |
37,621,000 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross collections include: collections by third-party collection agencies and attorneys, collections from our internal efforts and collections
represented by account sales.
|
|
(2) |
|
Commissions and fees are the contractual commission earned by third party collection agencies and attorneys, and direct costs associated with the
collection effort, generally court costs. Includes a 3% fee charged by a servicer on substantially all gross collections received by the Company in
connection with the Portfolio Purchase (see Note 5 Receivables Financing Agreement ). |
Note 4: Furniture and Equipment
Furniture and equipment consist of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Furniture |
|
$ |
310,000 |
|
|
$ |
310,000 |
|
Equipment |
|
|
2,845,000 |
|
|
|
2,783,000 |
|
Software |
|
|
150,000 |
|
|
|
117,000 |
|
Leasehold improvements |
|
|
86,000 |
|
|
|
86,000 |
|
|
|
|
|
|
|
|
|
|
|
3,391,000 |
|
|
|
3,296,000 |
|
Less accumulated
depreciation |
|
|
3,028,000 |
|
|
|
2,758,000 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
363,000 |
|
|
$ |
538,000 |
|
|
|
|
|
|
|
|
14
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 5: Debt and Subordinated Debt Related Party
Bank Leumi Credit Agreement
On December 14, 2009, Asta Funding, Inc. and its subsidiaries other than Palisades XVI, entered
into a new revolving credit agreement with Bank Leumi (the Leumi Credit Agreement), which permits
maximum principal advances of up to $6 million. The term of the agreement is through December 31,
2010. The interest rate is a floating rate equal to the Bank Leumi Reference Rate plus 2%, with a
floor of 4.5%. The loan is secured by collateral consisting of all of the assets of the Company
other than those of Palisades XVI. In addition, other collateral for the loan consists of a pledge
of cash and securities by GMS Family Investors, LLC, an investment company owned by members of the
Stern family. There are no financial covenant restrictions required by the Company for the Leumi
Credit Agreement. On December 14, 2009, approximately $3.6 million of the Bank Leumi credit line
was drawn and used to pay off, in full, the remaining balance on the credit facility the Company
formerly had with the IDB Bank Group (as described below). The Leumi Credit Agreement is the senior
facility of the Company. The balance outstanding on the Leumi Credit Agreement was reduced to zero
on January 14, 2010 with no further utilization through June 30, 2010.
Receivables Financing Agreement
In March 2007, Palisades XVI entered into a receivables financing agreement (the Receivables
Financing Agreement) with the Bank of Montreal (BMO). Palisades XVI borrowed approximately $227
million under this agreement, as amended in July 2007, December 2007, May 2008 and February 2009,
in order to finance the purchase of a $6.9 billion face value portfolio (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, which recovery has not yet
occurred). Prior to the modifications, discussed below, the debt was full recourse only to
Palisades XVI and bore an interest rate of approximately 170 basis points over LIBOR. The original
term of the agreement was three years. This term was extended by each of the Second, Third and
Fourth Amendments to the Receivables Financing Agreement as discussed below. The Receivables
Financing Agreement contains cross default provisions related to a senior credit facility. This
cross default could only occur in the event of a non-payment in excess of $2.5 million of such
credit facility. Proceeds received as a result of the net collections from the Portfolio Purchase
are applied to interest and principal of the underlying loan. The Portfolio Purchase is serviced by
Palisades Collection LLC, a wholly owned subsidiary of the Company, which has engaged unaffiliated
subservicers for a majority of the Portfolio Purchase.
Since the inception of the Receivables Financing Agreement, amendments have been signed to revise
various terms of the Receivables Financing Agreement. The following is a summary of the material
amendments:
Second Amendment Receivables Financing Agreement, dated December 27, 2007 revised the
amortization schedule of the loan from 25 months to approximately 31 months. BMO charged Palisades
XVI a fee of $475,000 which was paid on January 10, 2008. The fee was capitalized and is being
amortized over the remaining life of the Receivables Financing Agreement.
Third Amendment Receivables Financing Agreement, dated May 19, 2008 extended the payments of the
loan through December 2010. The lender also increased the interest rate from 170 basis points over
LIBOR to approximately 320 basis points over LIBOR, subject to automatic reduction in the future if
additional capital contributions are made by the parent of Palisades XVI.
Fourth Amendment Receivables Financing Agreement, dated February 20, 2009, among other things,
(i) lowered the collection rate minimum to $1 million per month (plus interest and fees) as an
average for each period of three consecutive months, (ii) provided for an automatic extension of
the maturity date from April 30, 2011 to April 30, 2012 should the outstanding balance be reduced
to $25 million or less by April 30, 2011 and (iii) permanently waived the previous termination
events. The interest rate remains unchanged at approximately 320 basis points over LIBOR, subject
to automatic reduction in the future should certain collection milestones be attained.
As additional credit support for repayment by Palisades XVI of its obligations under the
Receivables Financing Agreement and as an inducement for BMO to enter into the Fourth Amendment,
the Company provided BMO a limited recourse, subordinated guaranty, secured by the assets of the
Company, in an amount not to exceed $8.0 million plus reasonable costs of enforcement and
collection. Under the terms of the guaranty, BMO cannot exercise any recourse against the Company
until the earlier of (i) five years from the date of the Fourth Amendment and (ii) the termination
of the Companys existing senior lending facility or any successor senior facility.
15
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 5: Debt and Subordinated Debt Related Party (continued)
Receivables Financing Agreement (continued)
The aggregate minimum repayment obligations required under the Fourth Amendment including interest
and principal for fiscal years ending September 30, 2010 and 2011 (seven months), are $12.0 million
and $7.0 million, respectively, plus monthly interest and fees. While the Company believes payments
due under the new payment schedule will be made timely, it is likely the Company will not be able
to reduce the balance of the facility to $25 million by April 30, 2011, and there is no assurance
the loan will be extended. The Company is working with BMO to extend the facility by the expiration
date. At June 30, 2010 the Company was in compliance with covenants supporting the Receivables
Financing Agreement.
In addition, as further credit support under the Receivables Financing Agreement, Asta Group, Inc.
(the Family Entity) provided BMO a limited recourse, subordinated guaranty, secured solely by a
collateral assignment of $700,000 of the $8.2 million subordinated note executed by the Company for
the benefit of the Family Entity (See further discussion below on the Family Entity loan under
Subordinated Debt Related Party ). The subordinated note was separated into a $700,000 note and a
$7.5 million note for such purpose. Under the terms of the guaranty, except upon the occurrence of
certain termination events, BMO cannot exercise any recourse against the Family Entity until the
occurrence of a termination event under the Receivables Financing Agreement and an undertaking of
reasonable efforts to dispose of Palisades XVIs assets. As an inducement for agreeing to make such
collateral assignment, the Family Entity was also granted a subordinated guaranty by the Company
(other than Asta Funding, Inc.) for the performance by Asta Funding, Inc. of its obligation to
repay the $8.2 million note, secured by the assets of the Company (other than Asta Funding, Inc.),
and the Company agreed to indemnify the Family Entity to the extent that BMO exercises recourse in
connection with the collateral assignment. Without the consent of the agent under the senior
lending facility, the Family Entity will not be permitted to act on such guaranty, and cannot
receive payment under such indemnity, until the termination of the Companys senior lending
facility or any successor senior facility.
On June 30, 2010 and 2009, the outstanding balance on this loan was approximately $93.5 million,
and $109.4 million, respectively. The applicable interest rate at June 30, 2010 and 2009 was 3.85%
and 3.94%, respectively. The average interest rate of the Receivable Financing Agreement was 3.76%
and 5.13% for the nine-month periods ended June 30, 2010 and 2009, respectively. The average
interest of the Receivable Financing Agreement was 3.79% and 4.01% for the three-month period ended
June 30, 2010 and 2009, respectively.
The Companys average debt obligation (excluding the subordinated debt related party) for the
nine and three month periods ended June 30, 2010, was approximately $101.4 million and $94.8
million, respectively. The average interest rate for the nine and three month periods ended June
30, 2010 was 3.82% and 3.79%, respectively.
IDB Credit Facility
On July 11, 2006, the Company entered into an agreement with a consortium of banks (the IDB Bank
Group) for a $175 million revolving credit facility with availability subject to a borrowing base
(as amended, the IDB Credit Facility). Since 2006, there had been eight amendments to the IDB
Credit Facility that had, among other things, progressively lowered the borrowing base availability
and lowered the commitment level. On July 11, 2009, the Company entered into the Eighth Amendment
to the IDB Credit Facility that extended the Commitment Termination Date from July 11, 2009 to
December 31, 2009 and further reduced the commitment progressively to, during fiscal 2010, $22.9
million from September 30, 2009 through October 30, 2009; $15.0 million from October 31, 2009
through November 29, 2009; $7.4 million from November 30, 2009 through December 30, 2009; and then
Zero Dollars on December 31, 2009. The IDB Credit Facility bore interest at the lesser of LIBOR
plus an applicable margin, or the prime rate minus an applicable margin based on certain leverage
ratios, with a minimum rate of 5.5% per annum.
The IDB Credit Facility was collateralized by all assets of the Company, other than those of
Palisades XVI, the entity which owns the Portfolio Purchase, discussed above, and
contained customary financial and other covenants (relative to tangible net worth, interest
coverage, net loss and leverage ratio, as defined) that needed to be maintained in order to borrow
funds. On December 14, 2009, the remaining balance on the IDB Credit Facility was paid off by an
advance of approximately $3.6 million from the Leumi Credit Agreement. The outstanding balance on
this loan on June 30, 2010 and 2009 was zero and approximately $33.5 million, respectively. The
applicable interest rate at June 30, 2009 was 5.00%. The average interest rate, excluding unused
credit line fees, for the nine-month period ended June 30, 2010 and 2009, respectively, was 5.5%
and 4.32%.
16
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 5: Debt and Subordinated Debt Related Party (continued)
Subordinated Debt Related Party
On April 29, 2008, the Company obtained a subordinated loan pursuant to a subordinated promissory
note from the Family Entity. The Family Entity is a greater than 5%
shareholder of the Company,
beneficially owned and controlled by Arthur Stern, a Director of the Company, Gary Stern, the
Chairman, President and Chief Executive Officer of the Company, and members of their families. The
loan, originally in the aggregate principal amount of approximately $8.2 million, currently bears
interest at a rate of 10.0% per annum, is payable interest only each quarter until its maturity
date of December 31, 2010. The subordinated loan was incurred by the Company to resolve certain
issues related to the activities of one of the subservicers utilized by Palisades Collection LLC
under the Receivables Financing Agreement. Proceeds from the subordinated loan were used initially
to further collateralize the Companys revolving loan facility with the IDB Bank Group and was used
to reduce the balance due on that facility as of May 31, 2008. In December 2009, the subordinated
debt-related party maturity date was extended through December 31, 2010. In addition the interest
rate was changed to 10% per annum effective January 2010.
On January 27, 2010, the Company repaid approximately $860,740 of the subordinated loan, delivering
approximately $787,500 to the Family Entity and $73,240 to BMO to hold as collateral, as
approximately 8.5% of the loan to the family entity secures the obligations due to BMO by Palisades
XVI. The Family Entity then delivered its portion of the loan payment to Gary Stern, who used the
proceeds to exercise the 300,000 stock options awarded him in 2000. The Company made additional
loan repayments of $1.5 million each on February 17, 2010 and March 26, 2010. In each of these
instances, the Family Entity received approximately $1.4 million, while BMO received a collateral
assignment of approximately $0.1 million. The subordinated loan balance was approximately
$4.4 million and $8.2 million as of March 31, 2010 and September 30, 2009, respectively.
The Companys cash requirements have been and will continue to be significant. The Company has
depended on external financing to acquire consumer receivables. Portfolio acquisitions are financed
primarily through cash flows from operating activities and with the Companys Leumi Credit
Agreement. Availability under the Leumi Credit Agreement was $6.0 million at June 30, 2010. The
Company anticipates funding portfolio purchases through cash flow generated from operations;
however, for the right opportunities that fit our strict investment criteria for purchasing debt
portfolios, or pursuing other investment opportunities, we may consider seeking additional
financing.
The Companys debt and subordinated debt related party at June 30, 2010 and September 30, 2009
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Stated |
|
|
Average |
|
|
|
June 30, |
|
|
September 30, |
|
|
Interest |
|
|
Interest |
|
|
|
2010 |
|
|
2009 |
|
|
Rate |
|
|
Rate (1) |
|
Credit Facility IDB |
|
$ |
|
|
|
$ |
18,301,000 |
|
|
|
|
|
|
|
5.50 |
% |
Credit Agreement
Bank Leumi |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.50 |
% |
Receivables
Financing Agreement |
|
|
93,506,000 |
|
|
|
104,321,000 |
|
|
|
3.85 |
% |
|
|
3.76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
93,506,000 |
|
|
$ |
122,622,000 |
|
|
|
n/a |
|
|
|
3.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt
related party |
|
$ |
4,386,000 |
|
|
$ |
8,246,000 |
|
|
|
10.00 |
% |
|
|
8.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 6: Commitments and Contingencies
Employment Agreements
We had employment agreements with two executives which expired on December 31, 2009. The agreement
with Gary Stern, President and CEO of the Company, is in the process of being renewed and he will
continue in his role at the discretion of the Board of Directors until a new agreement is signed.
Gary Sterns agreement provided for base salary payments as well as bonuses. The agreement also
contained confidentiality and non-compete provisions. The contract of Cameron Williams, who had
served as our Chief Operating Officer, was not renewed on expiration as of December 31, 2009. On
November 30, 2009, the Company announced that it had entered into a one-year Consulting Services
Agreement with Mr. Williams, which expires on December 31, 2010.
Leases
The Company is a party to two continuing operating leases with respect to our facilities in
Englewood Cliffs, New Jersey and Sugar Land, Texas. The lease for the Englewood Cliffs, New Jersey
facility, which was to expire on July 31, 2010, was renewed in August 2010 for a term of five years (See
Note 14, Subsequent Events for additional information). In February 2009, the Company closed the
collection facility located in Bethlehem, Pennsylvania. The lease on the facility expired
December 31, 2009.
Litigation
In the ordinary course of its business, the Company is involved in numerous legal proceedings. The
Company regularly initiates collection lawsuits, using its network of third party law firms,
against consumers. Also, consumers occasionally initiate litigation against the Company, in which
they allege that the Company has violated a federal or state law in the process of collecting their
account. The Company does not believe that these matters will have a material impact on its
business or financial condition.
Note 7: Income Recognition and Impairments
Income Recognition
The Company accounts for its investment in consumer receivables acquired for liquidation using the
interest method under the guidance of FASB ASC 310. In ASC 310 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). ASC 310 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. ASC 310 initially
freezes the internal rate of return (IRR), estimated when the accounts receivable are purchased,
as the basis for subsequent impairment testing. Significant increases in actual, or expected future
cash flows may be recognized prospectively through an upward adjustment of the IRR over a
portfolios remaining life. Any increase to the IRR then becomes the new benchmark for impairment
testing. Under ASC 310, 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.
Finance income is recognized on cost recovery portfolios after the carrying value has been fully
recovered through collections or amounts written down.
18
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 7: Income Recognition and Impairments (continued)
Impairments
The Company accounts for its impairments in accordance with ASC 310, which provides guidance on how
to account for differences between contractual and expected cash flows from an investors initial
investment in loans or debt securities acquired in a transfer if those differences are
attributable, at least in part, to credit quality. Increases in expected cash flows are recognized
prospectively through an adjustment of the internal rate of return while decreases in expected cash
flows are recognized as impairments. All downward revisions in collection estimates will result in
impairment charges, given the requirement in ASC 310 that the IRR of the affected pool be held
constant. There were no impairments recorded during the nine and three month period ended June 30,
2010. As a result of the slower economy and other factors that resulted in slower collections on
certain portfolios, impairments of $46.2 million and $6.4 million were recorded during the nine
month and three month periods, respectively, ended June 30, 2009. The $46.2 million of impairments
included $9.9 million related to three portfolios transferred to the cost recovery method. Finance
income is not recognized on cost recovery method portfolios until the cost of the portfolio is
fully recovered. Collection projections are performed on both interest method and cost recovery
method portfolios. With regard to the cost recovery portfolios, if collection projections indicate
the carrying value will not be recovered, a write down in value is required.
Our analysis of the timing and amount of cash flows to be generated by our portfolio purchases are
based on the following attributes:
|
|
The type of receivable, the location of the debtor and the number of
collection agencies previously attempting to collect the receivables in
the portfolio. We have found that there are better states to try to
collect receivables and we factor in both better and worse states when
establishing our initial cash flow expectations; |
|
|
|
The average balance of the receivables influences our analysis in that
lower average balance portfolios tend to be more collectible in the
short-term and higher average balance portfolios are more appropriate for
our law suit strategy and thus yield better results over the longer term.
As we have significant experience with both types of balances, we are able
to factor these variables into our initial expected cash flows; |
|
|
|
The age of the receivables, the number of days since charge-off, any
payments since charge-off, and the credit guidelines of the credit
originator also represent factors taken into consideration in our
estimation process. For example, older receivables might be more difficult
and/or require more time and effort to collect; |
|
|
|
past history and performance of similar assets acquired. As we purchase
portfolios of like assets, we accumulate a significant historical data
base on the tendencies of debtor repayments and factor this into our
initial expected cash flows; |
|
|
|
Our ability to analyze accounts and resell accounts that meet our criteria; |
|
|
|
jobs or property of the debtors found within portfolios. With our business
model, this is of particular importance. Debtors with jobs or property are
more likely to repay their obligation through the suit strategy and,
conversely, debtors without jobs or property are less likely to repay
their obligation. We believe that debtors with jobs or property are more
likely to repay because courts have mandated the debtor must pay the debt.
Ultimately, the debtor will pay to clear title or release a lien. We also
believe that these debtors generally might take longer to repay and that
is factored into our initial expected cash flows; and |
|
|
|
credit standards of issuer. |
19
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 7: Income Recognition and Impairments (continued)
Impairments (continued)
We acquire accounts that have experienced deterioration of credit quality between origination and
the date of our acquisition of the accounts. The amount paid for a portfolio of accounts reflects
our determination that it is probable we will be unable to collect all amounts due according to the
portfolio of accounts contractual terms. We consider the expected payments and estimate the amount
and timing of undiscounted expected principal, interest and other cash flows for each acquired
portfolio, coupled with expected cash flows from accounts available for sales. The excess of this
amount over the cost of the portfolio, representing the excess of the accounts cash flows expected
to be collected over the amount paid, is accreted into income recognized on finance receivables
over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain distressed consumer receivable
portfolios at a significant discount to the amount actually owed by underlying debtors. We acquire
these portfolios only after both qualitative and quantitative analyses of the underlying
receivables are performed and a calculated purchase price is paid, so that we believe our estimated
cash flow offers us an adequate return on our acquisition costs after our servicing expenses.
Additionally, when considering larger portfolio purchases of accounts, or portfolios from issuers
with whom we have limited experience, we have the added benefit of soliciting our third party
servicers for their input on liquidation rates and, at times, incorporate such input into the
estimates we use for our expected cash flows.
As a result of the recent and current challenging economic environment and the impact it has had on
the collections, for portfolios purchases acquired since the beginning of fiscal year 2009, we have
extended our time frame of the expectation of recovering 100% of our invested capital to within a
24-29 month period from an 18-28 month period, and the expectation of recovering 130-140% of
invested capital to a period of 7 years, which is an increase from the previous 5-year expectation.
We routinely monitor these expectations against the actual cash flows and, in the event the cash
flows are below our expectations and we believe there are no reasons relating to mere timing
differences or explainable delays (such as can occur particularly when the court system is
involved) for the reduced collections, an impairment 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.
Commissions and fees
Commissions and fees are the contractual commissions earned by third party collection agencies and
attorneys, and direct costs associated with the collection effort- generally court costs. The
Company expects to continue to purchase portfolios and utilize third party collection agencies and
attorney networks.
Note 8: Income Taxes
Deferred federal and state taxes principally arise from (i) recognition of finance income collected
for tax purposes, but not yet recognized for financial reporting; and (ii) provision for
impairments/credit losses, both resulting in timing differences between financial accounting and
tax reporting. The provision for income tax expense for the three month periods ending June 30,
2010 and 2009 reflects income tax expense at an effective rate of 40.5% and 40.7%, respectively.
The provision for income tax expense for the nine month periods ending June 30, 2010 and 2009
reflects income tax expense at an effective rate of 40.5% and 40.8%, respectively. Prepaid and
income taxes receivable represented taxes due at September 30, 2009 for overpayment of federal
income taxes. Upon the completion of our Federal tax return for fiscal year 2009 and the
application for the tax refund completed earlier in the second quarter, the Federal tax refund
estimate of $46 million had been revised upward to approximately $52 million. This change was due
to a combination of applying the Federal tax net operating loss carryback and the recognition of
the benefit of the state net operating loss carryforwards for federal tax purposes, and other
timing differences applied to the current year tax return. These adjustments did not affect the
statement of operations and yielded a net adjustment between the federal income tax receivable and
the deferred tax asset. In June 2010, the Company received an aggregate tax refund of
approximately $52.7 million.
The corporate federal income tax returns of the Company for 2006, 2007, 2008 and 2009 are subject
to examination by the IRS, generally for three years after they are filed. The state income tax
returns and other state filings of the Company are subject to examination by the state taxing
authorities, for various periods generally up to four years after they are filed.
In April 2010, the Company received notification from the IRS that the Companys 2008 and 2009
federal income tax returns will be audited. This audit is currently in progress.
20
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 9: Net Income Per Share
Basic per share data is determined by dividing net income by the weighted average shares
outstanding during the period. Diluted per share data is computed by dividing net income by the
weighted average shares outstanding, assuming all dilutive potential common shares were issued.
With respect to the assumed proceeds from the exercise of dilutive options, the treasury stock
method is calculated using the average market price for the period.
The following table presents the computation of basic and diluted per share data for the nine and
three months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
(Loss) |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
8,471,000 |
|
|
|
14,455,754 |
|
|
$ |
0.59 |
|
|
$ |
(11,527,000 |
) |
|
|
14,271,931 |
|
|
$ |
(0.81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Stock |
|
|
|
|
|
|
89,003 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
8,471,000 |
|
|
|
14,544,757 |
|
|
$ |
0.58 |
|
|
$ |
(11,527,000 |
) |
|
|
14,271,931 |
|
|
$ |
(0.81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010, 715,345 options at a weighted average exercise price of $15.88 were not included
in the diluted earnings per share calculation as they were antidilutive.
At June 30, 2009, 913,004 options at a weighted average exercise price of $12.79 were not included
in the diluted earnings per share calculation as they were antidilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
(Loss) |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
3,121,000 |
|
|
|
14,599,162 |
|
|
$ |
0.21 |
|
|
$ |
1,478,000 |
|
|
|
14,271,946 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Stock |
|
|
|
|
|
|
207,594 |
|
|
|
|
|
|
|
|
|
|
|
173,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
3,121,000 |
|
|
|
14,806,756 |
|
|
$ |
0.21 |
|
|
$ |
1,478,000 |
|
|
|
14,445,572 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010, 747,771 options at a weighted average exercise price of $15.54 were not included
in the diluted earnings per share calculation as they were antidilutive.
At June 30, 2009, 911,338 options at a weighted average exercise price of $12.81 were not included
in the diluted earnings per share calculation as they were antidilutive.
21
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 10: Stock-based Compensation
The Company accounts for stock-based employee compensation under ASC 718, Compensation Stock
Compensation. ASC 718 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.
For the three month and nine month periods ended June 30, 2010, $206,000 and $969,000,
respectively, of stock based compensation expense was recognized. For the three and nine month
periods ended June 30, 2009, $216,000 and $865,000, respectively of stock based compensation
expense was recorded. See Note 11 Stock Option Plans for more information.
On December 11, 2009, the Compensation Committee of the Board of Directors of the Company granted
25,000 stock options to each director of the Company other than the Chief Executive Officer, for a
total of 150,000 options, and 8,900 stock options to full time employees of the Company, who had
been employed at the Company for at least six months prior to December 11, 2009. The grants to
employees excluded officers of the Company. The exercise price of these options was $8.07, the fair
market value on the date of the grant. The weighted average assumptions used in the option pricing
model were as follows:
|
|
|
|
|
Risk-free interest rate |
|
|
0.17 |
% |
Expected term (years) |
|
|
10.0 |
|
Expected volatility |
|
|
110.2 |
% |
Dividend yield |
|
|
1.12 |
% |
On May 5, 2009, the Compensation Committee awarded 122,000 stock options to employees of the
Company, of which 45,673 vested immediately. The remaining shares vest in two equal annual
installments starting on May 5, 2010. The grant price of these options was $2.95, the fair market
value on the date of the grant. The weighted average assumptions used in the option pricing models
were as follows:
|
|
|
|
|
Risk-free interest rate |
|
|
0.18 |
% |
Expected term (years) |
|
|
10.0 |
|
Expected volatility |
|
|
111.7 |
% |
Dividend yield |
|
|
1.145 |
% |
22
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 11: Stock Option Plans
Equity Compensation Plan
On December 1, 2005, the Board of Directors adopted the Companys Equity Compensation Plan (the
Equity Compensation Plan), approved by the stockholders of the Company on March 1, 2006. The
Equity Compensation Plan was adopted to supplement the Companys existing 2002 Stock Option Plan.
In addition to permitting the grant of stock options as are permitted under the 2002 Stock Option
Plan, the Equity Compensation Plan allows the Company flexibility with respect to equity awards by
also providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights
and stock appreciation rights. One million shares were authorized for issuance under the Equity
Compensation Plan. The following description does not purport to be complete and is qualified in
its entirety by reference to the full text of the Equity Compensation Plan, which is included as an
exhibit to the Companys reports filed with the SEC.
The general purpose of the Equity Compensation Plan is to provide an incentive to our employees,
directors and consultants, including executive officers, employees and consultants of any
subsidiaries, by enabling them to share in the future growth of our business. The Board of
Directors believes that the granting of stock options and other equity awards promotes continuity
of management and increases incentive and personal interest in the welfare of the Company by those
who are primarily responsible for shaping and carrying out our long range plans and securing our
growth and financial success.
The Board believes that the Equity Compensation Plan will advance our interests by enhancing our
ability to (a) attract and retain employees, directors and consultants who are in a position to
make significant contributions to our success; (b) reward employees, directors and consultants for
these contributions; and (c) encourage employees, directors and consultants to take into account
our long-term interests through ownership of our shares.
The Company has 1,000,000 shares of Common Stock authorized for issuance under the Equity
Compensation Plan and 878,334 shares were available as of June 30, 2010. 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. As of June 30, 2010, approximately 101 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 133,934 were available as of June 30, 2010. As of June 30, 2010,
approximately 101 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.
23
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 11: Stock Option Plans (continued)
The following table summarizes stock option transactions under the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding options at the beginning of
period |
|
|
1,157,905 |
|
|
$ |
10.76 |
|
|
|
1,037,438 |
|
|
$ |
11.69 |
|
Options granted |
|
|
158,900 |
|
|
|
8.07 |
|
|
|
122,000 |
|
|
|
2.95 |
|
Options exercised |
|
|
(327,966 |
) |
|
|
2.65 |
|
|
|
(100 |
) |
|
|
2.95 |
|
Options forfeited |
|
|
(20,500 |
) |
|
|
16.24 |
|
|
|
(1,000 |
) |
|
|
28.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of period |
|
|
968,339 |
|
|
$ |
12.95 |
|
|
|
1,158,338 |
|
|
$ |
10.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of period |
|
|
838,677 |
|
|
$ |
13.89 |
|
|
|
1,082,345 |
|
|
$ |
11.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding options at the beginning of
period |
|
|
970,538 |
|
|
$ |
12.93 |
|
|
|
1,036,438 |
|
|
$ |
11.68 |
|
Options granted |
|
|
|
|
|
|
|
|
|
|
122,000 |
|
|
|
2.95 |
|
Options exercised |
|
|
(2,199 |
) |
|
|
2.95 |
|
|
|
(100 |
) |
|
|
2.95 |
|
Options forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of period |
|
|
968,339 |
|
|
$ |
12.95 |
|
|
|
1,158,338 |
|
|
$ |
10.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of period |
|
|
838,677 |
|
|
$ |
13.89 |
|
|
|
1,082,345 |
|
|
$ |
11.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $902,000 and $184,000 of compensation expense related to stock options
during the nine month and three month periods ended June 30, 2010. The Company recognized $164,000
and $121,000 of compensation expense related to stock options during the nine month and three month
periods ended June 30, 2009. As of June 30, 2010, there was $446,000 of unrecognized compensation
expense related to stock option awards. There is no intrinsic value of the outstanding and
exercisable options as of June 30, 2010. The intrinsic value of the stock options exercised during
the nine and three month period ended June 30, 2010 was $1,291,000 and $13,000, respectively. The
intrinsic value of the stock options exercised during the third quarter of fiscal year 2009 was not
material.
24
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 11: Stock Option Plans (continued)
The following table summarizes information about the Plans outstanding options as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$2.8751 $5.7500 |
|
|
199,668 |
|
|
|
5.4 |
|
|
$ |
3.90 |
|
|
|
170,002 |
|
|
$ |
4.06 |
|
$5.7501 $8.6250 |
|
|
170,900 |
|
|
|
8.9 |
|
|
|
7.92 |
|
|
|
70,904 |
|
|
|
7.71 |
|
$14.3751 $17.2500 |
|
|
198,611 |
|
|
|
3.4 |
|
|
|
14.88 |
|
|
|
198,611 |
|
|
|
14.88 |
|
$17.2501 $20.1250 |
|
|
382,160 |
|
|
|
4.3 |
|
|
|
18.22 |
|
|
|
382,160 |
|
|
|
18.22 |
|
$25.8751 $28.7500 |
|
|
17,000 |
|
|
|
6.5 |
|
|
|
28.75 |
|
|
|
17,000 |
|
|
|
28.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
968,339 |
|
|
|
5.2 |
|
|
$ |
12.95 |
|
|
|
838,677 |
|
|
$ |
13.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about restricted stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
|
|
|
Average Grant |
|
|
|
|
|
|
|
Date Fair |
|
|
|
|
|
|
Date Fair |
|
|
|
Shares |
|
|
Value |
|
|
Shares |
|
|
Value |
|
Unvested at the beginning of period |
|
|
35,338 |
|
|
$ |
19.73 |
|
|
|
80,667 |
|
|
$ |
22.26 |
|
Awards granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
(17,669 |
) |
|
|
19.73 |
|
|
|
(40,995 |
) |
|
|
24.50 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
(4,334 |
) |
|
|
21.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at the end of period |
|
|
17,669 |
|
|
$ |
19.73 |
|
|
|
35,338 |
|
|
$ |
19.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
|
|
|
Average Grant |
|
|
|
|
|
|
|
Date Fair |
|
|
|
|
|
|
Date Fair |
|
|
|
Shares |
|
|
Value |
|
|
Shares |
|
|
Value |
|
Unvested at the beginning of
period |
|
|
17,669 |
|
|
$ |
19.73 |
|
|
|
35,338 |
|
|
$ |
19.73 |
|
Awards granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at the end of period |
|
|
17,669 |
|
|
$ |
19.73 |
|
|
|
35,338 |
|
|
$ |
19.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $67,000 and $22,000 of compensation expense related to the restricted stock
awards during the nine month and three month periods ended June 30, 2010. The Company recognized
$701,000 and $95,000 of compensation expense related to restricted stock awards during the nine and
three month periods ended June 30, 2009. As of June 30, 2010, there was $244,000 of unrecognized
compensation cost related to unvested restricted stock.
25
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 12: Stockholders Equity
For the nine months ended June 30, 2010, the Company declared dividends of $869,000, or $.02 per
share. Of this amount $577,000 was paid during the nine months ended June 30, 2010 and $292,000 was
accrued as of June 30, 2010 and paid August 2, 2010. For the nine months ended June 30, 2010, the
Company recorded $(69,000), net of taxes, in cumulative translation adjustments related to its
investment in South America.
Note 13: Fair Value of Financial Instruments
FASB ASC 718, Compensation Stock Compensation, (ASC 718), requires disclosure of fair value
information about financial instruments, whether or not recognized on the balance sheet, for which
it is practicable to estimate that value. Because there are a limited number of market participants
for certain of the Companys assets and liabilities, fair value estimates are based upon judgments
regarding credit risk, investor expectation of economic conditions, normal cost of administration
and other risk characteristics, including interest rate and prepayment risk. These estimates are
subjective in nature and involve uncertainties and matters of judgment, which significantly affect
the value of the estimates.
The
carrying value of consumer receivables acquired for liquidation was $164,953,000 at June 30,
2010. The Company computed the fair value of the consumer receivables acquired for liquidation
using its forecasting model and the fair value approximated $211,887,000 at June 30, 2010. The
Companys forecasting model utilizes a discounted cash flow analysis. The Companys cash flows are
an estimate of collections for all of our consumer receivables based on variables fully described
in Note 3: Consumer Receivables Acquired for Liquidation. These cash flows are then discounted
using our estimated weighted average cost of capital to determine the fair value. At September 30,
2009, the carrying value of consumer receivables acquired for liquidation was $208,261,000 and the
fair value approximated $277,000,000.
The aggregate carrying value of debt and subordinated debt (related party) was $97,892,000 and $130,868,000
at June 30, 2010 and September 30, 2009, respectively. The majority of these loans are variable
rate and short-term; therefore, the carrying amounts approximate fair value.
Note 14: Subsequent Events
On August 2, 2010, the Company entered into a lease agreement (the Lease) with ESL 200, LLC, to
continue leasing office space in the building known as 210 Sylvan Avenue (the Premises), the
Companys headquarters. The term of the lease begins on August 1, 2010 and ends on July 31, 2015.
The Lease contains a two (2) year renewal option. The base rent for the Premises during the first
year of the Lease is approximately $236,000 per annum. Effective August 1, 2011 and annually
thereafter, an adjustment will be applied to the base rent, increasing the base rent by the
Consumer Price Index issued by the United States Department of Labor. In addition to the base
rent, the Company will be responsible for utility charges and maintenance.
26
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Caution Regarding Forward Looking Statements
This Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are
identified by use of terms such as may, will, should, plan, expect, believe,
anticipate, estimate and similar expressions, although some forward-looking statements are
expressed differently. Forward-looking statements represent our managements judgment regarding
future events. Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will prove to be
correct. All statements, other than statements of historical fact, included in this report
regarding our financial position, business strategy, products, products under development and
clinical trials, markets, budgets, plans, or objectives for future operations are forward-looking
statements. We cannot guarantee the accuracy of the forward-looking statements, and you should be
aware that our actual results could differ materially from those contained in the forward-looking
statements due to a number of factors, including the statements under Risk Factors and Critical
Accounting Policies detailed in our Annual Report on Form 10-K and Form 10-K/A for the year ended
September 30, 2009, and other reports filed with the Securities and Exchange Commission (SEC),
and the additional Risk Factors detailed in Part II Item 1A, herein.
Our annual report on Form 10-K and Form 10-K/A, quarterly reports on Form 10-Q, current reports on
Form 8-K and all other documents filed by the Company or with respect to its securities with the
SEC are available free of charge through our website at www.astafunding.com. Information on our
website does not constitute a part of this report. The SEC also maintains an internet site
(www.sec.gov) that contains reports and information statements and other information
regarding issuers, such as ourselves, who file electronically with the SEC.
Overview
We are primarily engaged in the business of acquiring, managing, servicing and recovering on
portfolios of consumer receivables. These portfolios generally consist of one or more of the
following types of consumer receivables:
|
|
charged-off receivables accounts that have been written-off by the
originators and may have been previously serviced by collection
agencies; |
|
|
|
semi-performing receivables accounts where the debtor is currently
making partial or irregular monthly payments, but the accounts may
have been written-off by the originators; and |
|
|
|
performing receivables accounts where the debtor is making regular
monthly payments that may or may not have been delinquent in the past. |
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 Master
Card®, Visa®, other credit card accounts, and telecommunication accounts
which were charged-off by the issuer for non-payment. We are seeking to expand the range or types
of consumer receivables and consumer retail installment contracts which we might acquire.
We acquire these consumer receivable portfolios at a significant discount to the amount actually
owed by the borrowers. We acquire these portfolios after a qualitative and quantitative analysis of
the underlying receivables and calculate the purchase price so that our estimated cash flow offers
us an adequate return on our acquisition costs and servicing expenses. After purchasing a
portfolio, we actively monitor its performance and review and adjust our collection and servicing
strategies accordingly.
We purchase receivables from credit grantors and others through privately negotiated direct sales
and auctions in which sellers of receivables seek bids from several pre-qualified debt purchasers.
We pursue new acquisitions of consumer receivable portfolios on an ongoing basis through:
|
|
our relationships with industry participants, collection agencies,
investors and our financing sources; |
|
|
|
Brokers who specialize in the sale of consumer receivable portfolios; and |
|
|
|
other sources. |
27
Critical Accounting Policies
Accounts acquired for liquidation are stated at their net estimated realizable value and consist
primarily of defaulted consumer loans to individuals throughout the country and in Central and
South America. The Company accounts for its investments in consumer receivable portfolios, using
either:
|
|
the interest method; or |
|
|
|
the cost recovery method. |
The Company accounts for its investment in finance receivables using the interest method under the
guidance of FASB Accounting Standards Codification (ASC) 310, Receivables Loans and Debt
Securities Acquired with Deteriorating Credit Quality, (ASC 310). Under the guidance of ASC 310,
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). ASC 310 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. ASC 310 initially
freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are
purchased, as the basis for subsequent impairment testing. Significant increases in actual or
expected future cash flows may be recognized prospectively through an upward adjustment of the IRR
over a portfolios remaining life. Any increase to the IRR then becomes the new benchmark for
impairment testing. Rather than lowering the estimated IRR if the collection estimates are not
received or projected to be received, the carrying value of a pool would be impaired, or written
down to maintain the then current IRR. Under the interest method, income is recognized on the
effective yield method based on the actual cash collected during a period and future estimated cash
flows and timing of such collections and the portfolios cost. Revenue arising from collections in
excess of anticipated amounts attributable to timing differences is deferred until such time as a
review results in a change in the expected cash flows. The estimated future cash flows are
reevaluated quarterly.
The Company uses the cost recovery method when collections on a particular pool of accounts cannot
be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of
the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on
the balance sheet) while still generating cash collections. In this case, all cash collections are
recognized as revenue when received.
The Companys extensive liquidating experience is in the field of distressed credit card
receivables, telecommunication receivables, consumer loan receivables, retail installment
contracts, consumer receivables, and auto deficiency receivables. The Company uses the interest
method for accounting for asset acquisitions within these classes of receivables when it believes
it can reasonably estimate the timing of the cash flows. In those situations where the Company
diversifies its acquisitions into other asset classes where the Company does not possess the same
expertise or history, or the Company cannot reasonably estimate the timing of the cash flows, the
Company utilizes the cost recovery method of accounting for those portfolios of receivables. At
June 30, 2010, approximately $46.7 million of the consumer receivables acquired for liquidation are
accounted for using the interest method. Approximately $118.3 million are accounted for using the
cost recovery method, of which one portfolio, makes up $108.1 million of the value.
After ASC 310 was adopted, the Company aggregates portfolios of receivables acquired sharing
specific common characteristics which were acquired within a given quarter. The Company currently
considers for aggregation portfolios of accounts, purchased within the same fiscal quarter, that
generally meet the following characteristics:
|
|
same issuer/originator; |
|
|
|
same underlying credit quality; |
|
|
|
similar geographic distribution of the accounts; |
|
|
|
similar age of the receivable; and |
|
|
|
same type of asset class (credit cards, telecommunications, etc.). |
28
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 instances, might result in
higher collections due to changing life events of some individual debtors; |
|
|
|
past history of performance of similar assets; |
|
|
|
time since charge-off; |
|
|
|
payments made since charge-off; |
|
|
|
the credit originator and its credit guidelines; |
|
|
|
Our ability to analyze accounts and resell accounts that meet our criteria for resale; |
|
|
|
the locations of the debtors as there are better states to attempt to collect in and ultimately we
have better predictability of the liquidations and the expected cash flows. Conversely, there are
also states where the liquidation rates are not as favorable and that is factored into our cash
flow analysis; |
|
|
|
jobs or property of the debtors found within portfolios-with our business model, this is of
particular importance. Debtors with jobs or property are more likely to repay their obligation and
conversely, debtors without jobs or property are less likely to repay their obligation ; and |
|
|
|
the ability to obtain customer statements from the original issuer. |
The Company obtains and utilizes, as appropriate, input, including, but not limited to, monthly
collection projections and liquidation rates, from our third party collection agencies and
attorneys, as further evidentiary matter, to assist us in evaluating and developing collection
strategies and in evaluating and modeling the expected cash flows for a given portfolio.
We acquire accounts that have experienced deterioration of credit quality between origination and
the date of our acquisition of the accounts. The amount paid for a portfolio of accounts reflects
our determination that it is probable we will be unable to collect all amounts due according to the
portfolio of accounts contractual terms. We consider the expected payments and estimate the amount
and timing of undiscounted expected principal, interest and other cash flows for each acquired
portfolio coupled with expected cash flows from accounts available for sales. The excess of this
amount over the cost of the portfolio, representing the excess of the accounts cash flows expected
to be collected over the amount paid, is accreted into income recognized on finance receivables
over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain distressed consumer receivable
portfolios at a significant discount to the amount actually owed by underlying debtors. We acquire
these portfolios only after both qualitative and quantitative analyses of the underlying
receivables are performed and a calculated purchase price is paid so that we believe our estimated
cash flow offers us an adequate return on our costs including servicing expenses. Additionally,
when considering larger portfolio purchases of accounts, or portfolios from issuers from whom we
have little or limited experience, we have the added benefit of soliciting our third party
collection agencies and attorneys for their input on liquidation rates and, at times, incorporate
such input into the price we offer for a given portfolio and the estimates we use for our expected
cash flows.
As a result of the recent and current challenging economic environment and the impact it has had on
the collections, for portfolios purchases acquired since the beginning of fiscal year 2009, we have
extended our time frame of the expectation of recovering 100% of our invested capital to within a
24-29 month period from an 18-28 month period, and the expectation of recovering 130-140% of
invested capital to a period of 7 years, which is an increase from the previous 5-year expectation.
We routinely monitor these expectations against the actual cash flows and, in the event the cash
flows are below our expectations and we believe there are no reasons relating to mere timing
differences or explainable delays (such as can occur particularly when the court system is
involved) for the reduced collections, an impairment 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.
In the following discussions, most percentages and dollar amounts have been rounded to aid in the
presentation. As a result, all figures are approximations.
29
Results of Operations
The nine month period ended June 30, 2010, compared to the nine month period ended June 30,
2009
Finance income. For the nine month period ended June, 2010, finance income decreased $19.5 million
or 36.3% to $34.2 million from $53.7 million for the nine month period ended June 30, 2009. Finance
income has decreased primarily due to the lower level of portfolio purchases over the last two
years and, as a result, an increased percentage of our portfolio balances are in the later stages
of their yield curves. The average balance of consumer receivables acquired for liquidation
decreased from $402.6 million for the nine month period ended June 30, 2009 to $186.6 million for
the nine month period ended June 30, 2010. The decrease in the average balance was attributable to
reduced level of portfolio purchases and the impairments recorded in the second half of fiscal year
2009 in the amount of $143.7 million. The Company purchased $155.7 million in face value of new
portfolios at a cost of $3.4 million in the first nine months of fiscal year 2010 as compared to
$427.1 million and $16.5 million, respectively, in the same prior year period. Finance income
recognized from fully amortized portfolios (zero based revenue) was $25.6 million and $31.1 million
for the nine months ended June 30, 2010 and 2009, respectively.
Net collections decreased 30.6% to $80.9 million from $116.6 million for the nine months ended
June 30, 2009. During the first nine months of fiscal year 2010, gross collections decreased 30.1%
to $123.6 million from $176.7 million for the nine months ended June 30, 2009, reflecting the lower
level of purchases, the age of our portfolios and the slowdown in the economy. Commissions and fees
associated with gross collections from our third party collection agencies and attorneys decreased
$17.4 million, or 29.0% for the nine months ended June 30, 2010 as compared to the same period in
the prior year and averaged 34.6% of collections for the nine months ended June 30, 2010 as
compared to 34.0% in the same prior year period.
Other income. Other income of $97,000 and $90,000 for the nine months ended June 30, 2010 and 2009,
respectively, includes interest income and service fee income.
General and administrative expenses. During the nine months ended June 30, 2010, general and
administrative expenses decreased $3.3 million, or 16.4% to $16.7 million from $20.0 million for
the nine months ended June 30, 2009. The decrease in general and administrative expenses is
attributable to the closure of the Pennsylvania call center in February 2009, lower collection
expenses, primarily the discontinuation of the $275,000 monthly management fee in May 2009, paid to
a significant servicer relative to the purchase of a $6.9 billion face value portfolio in March
2007 (the Portfolio Purchase), lower amortization expense resulting from the expiration of the
IDB Credit Facility in December 2009 and lower professional fees.
Interest expense. During the nine month period ended June 30, 2010, interest expense decreased
$3.5 million or 51.3% from $6.9 million in the same prior year period. The decrease in interest
expense is primarily the result of a reduction in the average loan balance from $172.7 million for
the nine month period ended June 30, 2009 to $101.4 million for the same current year period, as we
continued our program of reducing debt. Additionally, the average interest rate in the nine-month
period ended June 30, 2010 was 3.8% as compared to 4.9% for the same prior year period.
Impairments. There were no impairments recorded during the nine months ended June 30, 2010.
Impairments of $46.2 million were recorded by the Company during the nine months ended June 30,
2009. Included in impairments is $8.9 million related to three portfolios transferred to the cost
recovery method. As relative collections with respect to our expectations on these portfolios were
deteriorating, we believed that these impairment charges and adjustments to our cash flow
expectations became necessary.
Income tax expense (benefit). Income tax expense, consisting of federal and state income taxes, was
$5.8 million for the nine months ended June 30, 2010, as compared to an income tax (benefit) of
$7.8 million for the comparable 2009 period.
Net income (loss). For the nine months ended June 30, 2010, net income was $8.5 million, as
compared to a net loss of $11.5 million for the nine month period ended June 30, 2010. The
improvement in net income is primarily due to no impairments, during the nine month period ended
June 30, 2010 as compared to $46.2 million in the same prior year period. In addition, there were
lower general and administrative expenses and lower interest expense during the nine month period
ended June 30, 2010 as compared to the same period of the prior year. This was partially offset by
lower finance income and higher income taxes in the current nine month period.
30
The three-month period ended June 30, 2010, compared to the three-month period ended June 30,
2009
Finance income. For the three month period ended June 30, 2010, finance income decreased
$5.2 million or 30.0% to $12.0 million from $17.2 million for the three month period ended June 30,
2009. Finance income has decreased primarily due to the lower level of portfolio purchases over the
last two years and, as a result, the increased number of our portfolios that are in the later
stages of their yield curves. The average balance of consumer receivables acquired for liquidation
decreased from $362.2 million for the three month period ended June 30, 2009 to $171.8 million for
the three month period ended June 30, 2010. The decrease in the average balance was primarily
attributable to the $137.3 million of impairments recorded in the fourth quarter of fiscal year
2009. The Company purchased $6.3 million in face value of new portfolios at a cost of $0.1 million
in the third quarter of fiscal year 2010 as compared to $335.6 million and $13.8 million,
respectively, in the same prior year period. Income recognized from fully amortized portfolios
(zero based revenue) was $9.2 million and $10.5 million for the three months ended June 30, 2010
and 2009, respectively.
Net collections decreased by 31.4% to $25.8 million from $37.6 million for the three months ended
June 30, 2009. During the third quarter of fiscal year 2010, gross collections decreased 25.6% to
$39.8 million from $53.5 million for the three months ended June 30, 2009. Commissions and fees
associated with gross collections from our third party collection agencies and attorneys decreased
$1.8 million, or 11.5%, for the three months ended June 30, 2010 as compared to the same period in
the prior year and averaged 35.2% of collections during the three-month period ended June, 2010.
Other income. Other income of $41,000 and $36,000 for the three months ended June 30, 2010 and
2009, respectively, includes interest income and service fee income.
General and administrative expenses. During the three-month period ended June 30, 2010, general
and administrative expenses decreased $0.8 million or 12.0% to $5.8 million from $6.6 million for
the three months ended June 30, 2009. The decrease is the result of lower collection expenses,
primarily the discontinuation of the $275,000 management fee in May 2009, paid to a significant
servicer in connection with the Portfolio Purchase. These were partially offset by higher
professional fees and outside services, utilized in connection with the bankruptcy filing of a
significant servicer in December 2009. In addition, there will be additional expenses related to
working with the trustee in finalizing the bankrupty action.
Interest expense. During the three-month period ended June 30, 2010, interest expense was
$1.0 million compared to $1.8 million in the same period in the prior year. The decrease in
interest expense is primarily the result the decrease in the average loan balance from $152.4
million for the three-month period ended June 30, 2009 to $94.8 million for the same current year
period as we continue our program of reducing debt. Additionally, the average interest rate in the
three-month period ended June 30, 2010 was 3.8% as compared to 4.3% for the same prior year period.
Impairments. There were no impairment charges during the same current year period. Impairments of
$6.4 million were recorded by the Company during the three months ended June 30, 2009. As relative
collections with respect to our expectations on these portfolios deteriorated, we believed that
these impairment charges and adjustments to our cash flow expectations were necessary.
Income tax expense. Income tax expense was $2.1 million for the three month period ended June 30,
2010, as compared to $1.0 million for the comparable 2009 period.
Net income. For the quarter ended June 30, 2010, net income was $3.1 million as compared to
$1.5 million in the quarter ended June 30, 2009. The improvement in net income is primarily due to
no impairments recorded in the third quarter of fiscal year 2010 as compared to $6.4 million of
impairments recorded in the same 2009 period. In addition there were lowere general and
administrative expenses and lower interest expense in the three month period ended June 30, 2010
as compared to the same period of the prior year. This was partially offset by lower finance income
and higher income taxes during the current quarter.
31
Liquidity and Capital Resources
Our primary source of cash from operations is collections on the receivable portfolios we have
acquired. Our primary uses of cash include repayments of debt, our purchases of consumer receivable
portfolios, interest payments, costs involved in the collections of consumer receivables, taxes and
dividends, if approved. In the past, we relied significantly upon our lenders to provide the funds
necessary for the purchase of consumer receivables acquired for liquidation.
Leumi Credit Agreement
On December 14, 2009 Asta Funding, Inc. and its subsidiaries other than Palisades XVI, entered into
the Leumi Credit Agreement which permits maximum principal advances of up to $6 million. The term
of the agreement is through December 31, 2010. The interest rate is a floating rate equal to the
Bank Leumi Reference Rate plus 2%, with a floor of 4.5%. The loan is secured by collateral
consisting of all of the assets of the Company other than those of Palisades XVI. In addition,
other collateral for the loan consists of a pledge by GMS Family Investors, LLC, an investment
company owned by members of the Stern family in the form of cash and securities with a value of
133% of the loan commitment. There are no financial covenant restrictions for the Leumi Credit
Agreement. On December 14, 2009 approximately $3.6 million of the Bank Leumi credit line was used
to reduce to zero the remaining balance of the IDB Credit Facility described below. The Leumi
Credit Agreement is the current senior facility of the Company. The Leumi Credit Agreement balance
was reduced to zero in January 2010; however, the $6 million of availability remains. We are
currently working with our bank on a new credit facility with a larger credit limit.
Receivables Financing Agreement
In March 2007, Palisades XVI consummated the Portfolio Purchase. The Portfolio Purchase is made up
of predominantly credit card accounts and includes accounts in collection litigation and accounts
as to which the sellers have been awarded judgments and other traditional charge-offs. The
Companys line of credit with the Bank Group was fully utilized, as modified in February 2007, with
the aggregate deposit of $75 million paid for the Portfolio Purchase.
The remaining $225 million was paid on March 5, 2007 by borrowing approximately $227 million
(inclusive of transaction costs) under a new Receivables Financing Agreement entered into by
Palisades XVI with BMO as the funding source, and consists of debt with full recourse only to
Palisades XVI, and, as of June 30, 2008, bore an interest rate of approximately 320 basis points
over LIBOR. The term of the original agreement was three years. All proceeds received as a result
of the net collections from the Portfolio Purchase are applied to interest and principal of the
underlying loan. The Company made certain representations and warranties to the lender to support
the transaction. The Portfolio Purchase is serviced by Palisades Collection, LLC, a wholly owned
subsidiary of the Company, which has also engaged several unrelated subservicers.
On February 20, 2009, the Company entered into the Fourth Amendment Receivables Financing
Agreement. The effect of this Fourth Amendment is, among other things, to (i) lower the collection
rate minimum to $1 million per month (plus interest and fees) as an average for each period of
three consecutive months, (ii) provide for an automatic extension of the maturity date from April
30, 2011 to April 30, 2012 should the outstanding balance be reduced to $25 million or less by
April 30, 2011 and (iii) permanently waive the previous termination events. The interest rate
remained unchanged at approximately 320 basis points over LIBOR, subject to automatic reduction in
the future should certain collection milestones be attained.
As additional credit support for repayment by Palisades XVI of its obligations under the
Receivables Financing Agreement and as an inducement for BMO to enter into the Fourth Amendment,
the Company provided BMO a limited recourse, subordinated guaranty, secured by the assets of the
Company, in an amount not to exceed $8 million plus reasonable costs of enforcement and collection.
Under the terms of the guaranty, BMO cannot exercise any recourse against the Company until the
earlier of (i) five years from the date of the Fourth Amendment and (ii) termination of the
Companys existing senior lending facility or any successor senior facility.
The aggregate minimum repayment obligations required under the Fourth Amendment to the Receivables
Financing Agreement entered into on February 20, 2009 with Palisades XVI including interest and
principal for fiscal years ending September 30, 2010 and September 30, 2011 (seven months), are
$12.0 million and $7.0 million, respectively, plus monthly interest and fees. There is an
additional requirement that the balance of the facility be reduced to $25 million by April 30,
2011. While the Company believes it will be able to make all payments due under the payment
schedule, it is likely we will not be able to reduce the balance of the facility to $25 million by
April 30, 2011, and there is no assurance the loan will be extended. We are working with BMO on a
plan to extend the facility by before expiration date and new terms going forward.
On June 30, 2010 and 2009, the outstanding balance on the Receivable Financing Agreement loan was
approximately $93.5 million and $109.4 million, respectively. The average interest rate of the
Receivable Financing Agreement was 3.76% and 5.13% for the nine month periods ended June 30, 2010
and 2009, respectively. The Company was in compliance with all covenants at June 30, 2010.
32
IDB Credit Facility
The Eighth Amendment to the IDB Credit Facility entered into on July 10, 2009, granted an initial
$40 million line of credit from the Bank Group for portfolio purchases and working capital and was
scheduled to reduce to zero by December 31, 2009. The IDB Credit Facility bore interest at the
lesser of LIBOR plus an applicable margin, or the prime rate minus an applicable margin based on
certain leverage ratios, with a minimum rate of 5.5%. The IDB Credit Facility was collateralized by
all assets of the Company other than the assets of Palisades XVI and contained financial and other
covenants. The IDB Credit Facilitys commitment termination date was December 31, 2009. This IDB
Credit Facility was repaid on December 14, 2009.
Subordinated Debt Related Party
On April 29, 2008, the Company obtained a subordinated loan pursuant to a subordinated promissory
note from the Family Entity. The Family Entity is a greater than 5% shareholder of the Company
beneficially owned and controlled by Arthur Stern, a director of the Company, Gary Stern, the
President, Chairman and Chief Executive Officer of the Company, and members of their families. The
loan, originally in the aggregate principal amount of $8,246,000, currently bears interest at a
rate of 10.0% per annum, is payable interest only each quarter until its maturity date of December
31, 2010, subject to repayment in full of the Companys loan facility.
The Family Entity loan was extended in December 2009 to December 31, 2010 with a new interest rate
(effective January 2010) of 10.0% per annum (formerly the rate was 6.25%). On January 27, 2010, the
Company repaid approximately $860,740 of the subordinated loan, delivering approximately $787,500
to the Family Entity, which, the Family Entity delivered its portion of the loan payment to Gary
Stern, who used the proceeds to exercise the 300,000 stock options awarded him in 2000. The Company
made additional loan repayments of $1.5 million each on February 17, 2010 and March 26, 2010. The
subordinated loan balance was approximately $4.4 million and $8.2 million as of June 30, 2010 and
September 30, 2009, respectively.
The subordinated loan was incurred by the Company to resolve certain issues with a significant
servicer. Proceeds of the subordinated loan were used to reduce the balance due on our line of
credit with the IDB Bank Group on June 13, 2008. This facility was secured by substantially all of
the assets of the Company and its subsidiaries, other than the assets of Palisades XVI.
As of June 30, 2010, our cash increased $75.6 million to $78.0 million, up from $2.4 million
at September 30, 2009. The increase in cash was primarily the result of receiving a $52.7 million
tax refund paying off the senior debt and reduced portfolio purchases.
Net cash provided by operating activities was $64.8 million during the nine month period ended
June 30, 2010, compared to $21.6 million for the nine months ended June 30, 2009. The increase in
net cash provided by operating activities is primarily attributable to receipt of the tax refund,
partially offset by lower net income (excluding non-cash items). Net cash provided by investing
activity was $43.3 million during the nine months ended June 30, 2010 compared to $46.9 million
provided by investing activities for the nine months ended June 30, 2009. The reduction in net cash
provided by investing activity is a reflection of lower collections, partially offset by lower
purchases in the 2010 fiscal period compared to that in 2009. Net cash used in financing
activities decreased to $32.4 million for the nine months ended June 30, 2010 from $68.9 million
for the same prior year period. The decrease in net cash used in financing activities reflects the
reduced repayment of debt as a result of the completion of senior debt repayment during the first
two quarters of fiscal year 2010.
Our cash requirements have been and will continue to be significant. Our primary uses of cash
include repayments of our debt, purchases of consumer receivable portfolios, interest payments,
costs involved in the collections of consumer receivables, income taxes and dividends, if approved.
We have depended on external financing and cash generated from operations to acquire consumer
receivables. These acquisitions have historically been financed primarily through cash flows from
operating activities and with our former IDB Credit Facility and current Leumi Credit Agreement. We
anticipate funding portfolio purchases through cash flows from operations; however, for the right
opportunities that fit our strict investment criteria for debt portfolios, and other investment
opportunities, we may consider seeking additional financing. From time to time, we evaluate
potential acquisitions of related businesses but we may not be able to complete any acquisitions on
favorable terms, or at all. We may consider possible acquisition of, or investment in,
complementary businesses. Any such possible acquisition, or investments, may be material and may
require us to incur a significant amount of debt or issue a significant amount of equity
securities. Further, any business that we acquire or in which we invest, will likely have its own
capital needs that may be significant, and that we may be called on to satisfy.
Upon the completion of our Federal tax return for fiscal year 2009, the Company applied for a tax
refund and received $52.7 million in the third quarter of fiscal year 2010. The corporate federal
income tax returns of the Company for 2006, 2007, 2008 and 2009 are subject to examination by the
IRS, generally for three years after they are filed. In April 2010, we received notification from
the IRS our income tax returns for 2008 and 2009 will be audited. The audit of those tax returns is
currently in progress. The state income tax
returns and other state filings of the Company are subject to examination by the state taxing
authorities, for various periods generally up to four years after they are filed.
33
The following tables summarize the changes in the balance sheet of the investment in receivable
portfolios during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended June 30, 2010 |
|
|
|
Interest |
|
|
Cost |
|
|
|
|
|
|
Method |
|
|
Recovery |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
70,650,000 |
|
|
$ |
137,611,000 |
|
|
$ |
208,261,000 |
|
Acquisitions of receivable portfolios, net |
|
|
3,043,000 |
|
|
|
291,000 |
|
|
|
3,334,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(56,801,000 |
) |
|
|
(20,908,000 |
) |
|
|
(77,709,000 |
) |
Net cash collections represented by account sales
of consumer receivables acquired for liquidation |
|
|
(3,173,000 |
) |
|
|
(4,000 |
) |
|
|
(3,177,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
47,000 |
|
|
|
47,000 |
|
Finance income recognized (1) |
|
|
32,975,000 |
|
|
|
1,222,000 |
|
|
|
34,197,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
46,694,000 |
|
|
$ |
118,259,000 |
|
|
$ |
164,953,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
55.0 |
% |
|
|
5.8 |
% |
|
|
42.3 |
% |
|
|
|
(1) |
|
Includes approximately $25.6 million
derived from fully amortized portfolios. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended June 30, 2009 |
|
|
|
Interest |
|
|
Cost |
|
|
|
|
|
|
Method |
|
|
Recovery |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
203,470,000 |
|
|
$ |
245,542,000 |
|
|
$ |
449,012,000 |
|
Acquisitions of receivable portfolios, net |
|
|
16,221,000 |
|
|
|
280,000 |
|
|
|
16,501,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(75,123,000 |
) |
|
|
(33,619,000 |
) |
|
|
(108,742,000 |
) |
Net cash collections represented by account sales
of consumer receivables acquired for liquidation |
|
|
(4,158,000 |
) |
|
|
(3,684,000 |
) |
|
|
(7,842,000 |
) |
Transfer to Cost Recovery (1) |
|
|
(10,128,000 |
) |
|
|
10,128,000 |
|
|
|
|
|
Impairments |
|
|
(46,208,000 |
) |
|
|
|
|
|
|
(46,208,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
(179,000 |
) |
|
|
(179,000 |
) |
Finance income recognized (2) |
|
|
52,366,000 |
|
|
|
1,356,000 |
|
|
|
53,722,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
136,440,000 |
|
|
$ |
219,824,000 |
|
|
$ |
356,264,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
66.1 |
% |
|
|
3.6 |
% |
|
|
46.1 |
% |
|
|
|
(1) |
|
During the nine months ended June 30,
2009, three portfolios were transferred
from the interest method to the cost
recovery method. Based on the nature of
these portfolios, the Companys
estimates of the timing of expected cash
flows became uncertain. |
|
(2) |
|
Includes approximately $31.1 million
derived from fully amortized portfolios. |
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2010 |
|
|
|
Interest |
|
|
Cost |
|
|
|
|
|
|
Method |
|
|
Recovery |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
54,375,000 |
|
|
$ |
124,239,000 |
|
|
$ |
178,614,000 |
|
Acquisitions of receivable portfolios, net |
|
|
|
|
|
|
63,000 |
|
|
|
63,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(18,825,000 |
) |
|
|
(6,538,000 |
) |
|
|
(25,363,000 |
) |
Net cash collections represented by account sales
of consumer receivables acquired for liquidation |
|
|
(433,000 |
) |
|
|
|
|
|
|
(433,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
30,000 |
|
|
|
30,000 |
|
Finance income recognized (1) |
|
|
11,577,000 |
|
|
|
465,000 |
|
|
|
12,042,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
46,694,000 |
|
|
$ |
118,259,000 |
|
|
$ |
164,953,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
60.1 |
% |
|
|
7.1 |
% |
|
|
46.7 |
% |
|
|
|
(1) |
|
Includes approximately
$9.2 million derived
from fully amortized
portfolios. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2009 |
|
|
|
Interest |
|
|
Cost |
|
|
|
|
|
|
Method |
|
|
Recovery |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
137,497,000 |
|
|
$ |
230,726,000 |
|
|
$ |
368,223,000 |
|
Acquisitions of receivable portfolios, net |
|
|
13,540,000 |
|
|
|
273,000 |
|
|
|
13,813,000 |
|
Net cash collections from collections of consumer
receivables acquired for liquidation |
|
|
(23,660,000 |
) |
|
|
(12,766,000 |
) |
|
|
(36,426,000 |
) |
Net cash collections represented by account sales
of consumer receivables acquired for liquidation |
|
|
(1,083,000 |
) |
|
|
(112,000 |
) |
|
|
(1,195,000 |
) |
Impairments |
|
|
(6,364,000 |
) |
|
|
|
|
|
|
(6,364,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
1,011,000 |
|
|
|
1,011,000 |
|
Finance income recognized (1) |
|
|
16,510,000 |
|
|
|
692,000 |
|
|
|
17,202,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
136,440,000 |
|
|
$ |
219,824,000 |
|
|
$ |
356,264,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
66.7 |
% |
|
|
5.4 |
% |
|
|
45.7 |
% |
|
|
|
(1) |
|
Includes approximately $10.5 million
derived from fully amortized portfolios. |
Supplementary Information:
We do not anticipate collecting the majority of the principal amounts of the portfolios purchased.
Accordingly, the difference between the carrying value of the portfolios and the gross receivables
is not indicative of future revenues from these accounts acquired for liquidation. Since we
purchased these accounts at significant discounts, we anticipate collecting only a small portion of
the face amounts. During the nine months ended June 30, 2010, we purchased portfolios with a face
value of $155.7 million for an aggregate purchase price of $3.4 million.
35
Collections Represented by Account Sales
|
|
|
|
|
|
|
|
|
|
|
Collections |
|
|
|
|
|
|
Represented |
|
|
Finance |
|
|
|
By Account |
|
|
Income |
|
Period |
|
Sales |
|
|
Earned |
|
Nine months ended June 30, 2010 |
|
$ |
3,177,000 |
|
|
$ |
1,100,000 |
|
Three months ended June 30, 2010 |
|
$ |
433,000 |
|
|
$ |
152,000 |
|
Nine months ended June 30, 2009 |
|
$ |
7,842,000 |
|
|
$ |
2,525,000 |
|
Three months ended June, 2009 |
|
$ |
1,195,000 |
|
|
$ |
734,000 |
|
Portfolio Performance (1)
(Interest method portfolios only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
105,525,000 |
|
|
|
|
|
|
$ |
105,525,000 |
|
|
|
162 |
% |
2002 |
|
|
36,557,000 |
|
|
|
48,107,000 |
|
|
|
|
|
|
|
48,107,000 |
|
|
|
132 |
% |
2003 |
|
|
115,626,000 |
|
|
|
214,295,000 |
|
|
$ |
641,000 |
|
|
|
214,936,000 |
|
|
|
186 |
% |
2004 |
|
|
103,743,000 |
|
|
|
183,123,000 |
|
|
|
348,000 |
|
|
|
183,471,000 |
|
|
|
177 |
% |
2005 |
|
|
126,023,000 |
|
|
|
210,096,000 |
|
|
|
6,640,000 |
|
|
|
216,736,000 |
|
|
|
172 |
% |
2006 |
|
|
163,392,000 |
|
|
|
243,395,000 |
|
|
|
13,977,000 |
|
|
|
257,372,000 |
|
|
|
158 |
% |
2007 |
|
|
109,235,000 |
|
|
|
87,606,000 |
|
|
|
27,939,000 |
|
|
|
115,545,000 |
|
|
|
106 |
% |
2008 |
|
|
26,626,000 |
|
|
|
36,543,000 |
|
|
|
2,165,000 |
|
|
|
38,708,000 |
|
|
|
145 |
% |
2009 |
|
|
19,127,000 |
|
|
|
16,978,000 |
|
|
|
10,735,000 |
|
|
|
27,713,000 |
|
|
|
145 |
% |
2010 |
|
|
3,043,000 |
|
|
|
2,802,000 |
|
|
|
1,177,000 |
|
|
|
3,979,000 |
|
|
|
131 |
% |
|
|
|
(1) |
|
Total collections do not represent full collections of the Company with respect to this or any other year.
|
|
(2) |
|
Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase price refunded by a seller due to the return of non-compliant accounts (also defined as put-backs). |
|
(3) |
|
Net cash collections include: net collections from our third-party collection agencies and attorneys, net collections from our in-house efforts and collections represented by account sales. |
|
(4) |
|
Does not include estimated collections from portfolios that are zero basis. |
|
(5) |
|
Total estimated collections refers to the actual net cash collections, including cash sales, plus estimated remaining net collections. |
36
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various types of market risk in the normal course of business, including the
impact of interest rate changes and changes in corporate tax rates. A material change in these
rates could adversely affect our operating results and cash flows. At June 30, 2010, our Leumi
Credit Agreement and our Receivable Financing Agreement, all of which is variable debt, had an
outstanding balance of $0.0 million and $93.5 million, respectively. A 25 basis-point increase in
interest rates would have increased our interest expense for the nine month period ended June 30,
2010 by approximately $190,000 based on the average debt outstanding during the period. We do not
currently invest in derivative financial or commodity instruments.
Item 4. Controls and Procedures
a. Disclosure Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an
evaluation, with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures are effective in
ensuring that information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms and is accumulated and communicated to our
management, including our principal executive officers and our principal financial officer, or
persons performing similar functions, as appropriate, to allow timely decisions regarding required
disclosure.
b. Changes in Internal Controls Over Financial Reporting.
There have been no changes in our internal controls over financial reporting that occurred during
our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
37
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 are not involved in any material litigation in which we are a defendant. There
is, however, a matter with respect to a former significant servicer of the Company which filed for
bankruptcy in December 2009. The Company has made certain claims with the receivership in an
attempt to recover its files and funds in the receiverships possession. Although it is premature
to ascertain the outcome with any degree of certainty, the Company anticipates that it might cost
between $0.2 million and $0.3 million to accomplish its objective.
Item 1A. Risk Factors
There were no material changes in any risk factors previously disclosed in the Companys Report on
Form 10-K filed with the Securities & Exchange Commission on December 29, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and reserved)
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
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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, Robert J.
Michel, 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, Robert J.
Michel, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
38
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: August 12, 2010
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By:
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/s/ Gary Stern
Gary Stern, Chairman, President, Chief Executive Officer
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(Principal Executive Officer) |
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Date: August 12, 2010
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By:
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/s/ Robert J. Michel
Robert J. Michel, Chief Financial Officer
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(Principal Financial Officer and |
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Principal Accounting Officer) |
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39
EXHIBIT INDEX
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Exhibit |
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No. |
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Description |
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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,
Robert J. Michel, 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,
Robert J. Michel, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
40