SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commissions file number: 0-26906 ASTA FUNDING, INC. (Exact name of small business issuer as specified in its charter) Delaware 22-3388607 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 210 Sylvan Ave., Englewood Cliffs, New Jersey 07632 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (201) 567-5648 Former name, former address and former fiscal year, if changed since last report: N/A Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 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[X ] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of April 25, 2003, the registrant had approximately 4,088,000 common shares outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] Asta Funding, Inc. Form 10-QSB March 31, 2003 INDEX Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2003(unaudited) and September 30, 2002 Consolidated Statements of Operations for the six and three month periods ended March 31, 2003 and 2002 (unaudited) Consolidated Statements of Cash Flows for the six and three month periods ended March 31, 2003 and 2002 (unaudited) Notes to consolidated financial statements (unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures PART I. FINANCIAL INFORMATION Item 1. Financial Statements Asta Funding, Inc. and Subsidiaries Consolidated Balance Sheets March 31, September 30, --------- ------------- 2003 2002 ---- ---- Unaudited Assets Cash $14,927,000 $2,213,000 Restricted cash, net 54,000 54,000 Consumer receivables acquired for liquidation 26,668,000 36,079,000 Auto loans receivable, net - 29,000 Finance receivables - 1,443,000 Furniture and equipment, net 719,000 345,000 Repossessed automobiles, net 5,000 67,000 Deferred income taxes 218,000 265,000 Other assets 385,000 740,000 ----------- ----------- Total assets $42,976,000 $41,235,000 ============ =========== =========== Liabilities and Stockholders' Equity Liabilities Debt $ 1,790,000 $2,172,000 Other liabilities 2,798,000 4,009,000 Income taxes payable 25,000 1,493,000 ----------- ----------- Total liabilities 4,613,000 7,674,000 ----------------- ----------- ----------- Stockholders' Equity Preferred stock, $.01 par value; authorized 5,000,000; issued and outstanding - none Common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding - 4,088,000 at March 31, 2003 and 4,075,000 at September 30, 2002 41,000 41,000 Additional paid-in capital 10,308,000 10,247,000 Retained earnings 28,014,000 23,273,000 ----------- ----------- Total stockholders' equity 38,363,000 33,561,000 -------------------------- ----------- ----------- Total liabilities and stockholders' equity $42,976,000 $41,235,000 =========== =========== See accompanying notes to consolidated financial statements Asta Funding, Inc. and Subsidiaries Consolidated Statements of Operations Unaudited Three Months Ended Three Months Ended Six Months Ended Six Months Ended March 31, March 31, March 31, March 31, --------- --------- --------- --------- 2003 2002 2003 2002 ---- ---- ---- ---- Revenues: Finance income $7,720,000 $10,287,000 $14,471,000 $18,688,000 Other - 95,000 - 96,000 ------ ------ 7,720,000 10,382,000 14,471,000 18,784,000 --------- ---------- ---------- ---------- Expenses: General and administrative 2,009,000 1,887,000 3,362,000 3,330,000 Third-party servicing 1,645,000 2,371,000 3,176,000 4,722,000 Provision for losses - 325,000 - 400,000 Interest 11,000 1,387,000 13,000 2,095,000 ------ --------- ------ --------- 3,665,000 5,970,000 6,551,000 10,547,000 --------- --------- --------- ---------- Income before income taxes 4,055,000 4,412,000 7,920,000 8,237,000 Income tax expense 1,626,000 1,778,000 3,179,000 3,307,000 --------- --------- --------- --------- Net income $2,429,000 $2,634,000 $4,741,000 $4,930,000 ========== ========== ========== ========== Net income per share - Basic $0.59 $0.65 $1.16 $1.23 ----- ----- ----- ----- - Diluted $0.55 $0.59 $1.08 $1.12 --------- ----- ----- ----- ----- Weighted average number of shares outstanding - Basic 4,083,000 4,036,000 4,080,000 4,021,000 --------- --------- --------- --------- - Diluted 4,447,000 4,427,000 4,401,000 4,392,000 --------- --------- --------- --------- --------- See accompanying notes to consolidated financial statements Asta Funding, Inc. and Subsidiaries Consolidated Statements of Cash Flows Unaudited Six Months Ended Six Months Ended March 31, March 31, --------- --------- 2003 2002 ---- ---- Cash flows from operating activities: Net income $4,741,000 4,930,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 66,000 60,000 Provision for losses 400,000 Deferred income taxes 47,000 (116,000) Changes in: Restricted cash - (1,000) Repossessed automobiles held for sale 62,000 87,000 Prepaid income taxes - 596,000 Other assets 355,000 (865,000) Income taxes payable (1,468,000) 220,000 Other liabilities (1,211,000) 513,000 ---------- --------- Net cash provided by operating activities 2,592,000 5,824,000 Cash flows from investing activities: Auto loan principal payments 29,000 489,000 Purchase of consumer receivables acquired for liquidation (4,428,000) (17,032,000) Principal collected on receivables acquired for liquidation 13,839,000 23,039,000 Finance receivables 1,443,000 (38,000) Capital expenditures (440,000) (156,000) --------- --------- Net cash provided by investing activities 10,443,000 6,302,000 Cash flows from financing activities: Advances from affiliate - (10,000) Proceeds from exercise of options 61,000 228,000 (Repayments) Advances under lines of credit, net (382,000) 2,682,000 Repayments of notes payable, net - (15,782,000) ------------ Net cash (used in) financing activities (321,000) (12,882,000) ----------- ----------- Increase (Decrease) in cash 12,714,000 (756,000) Cash at the beginning of period 2,213,000 5,689,000 --------- --------- Cash at end of period $14,927,000 $4,933,000 ----------- ---------- Supplemental disclosure of cash flow information: Cash paid during the period Interest $7,000 $576,000 Income taxes $2,804,000 $2,607,000 Asta Funding, Inc. Notes to Consolidated Financial Statements Note 1: Basis of Presentation Asta Funding, Inc., together with its wholly owned subsidiaries, is a diversified consumer finance company that is engaged in the business of purchasing, managing and servicing non-conforming and distressed consumer receivables. Non-conforming consumer receivables are the obligations of individuals that have incurred credit impairment either at the time the obligation was originated or subsequent to origination. Distressed consumer receivables are the unpaid debts of individuals to banks, finance companies and other credit providers. A large portion of our distressed consumer receivables are MasterCard(R), Visa(R) and other credit card accounts which were charged-off by the issuing banks for non-payment. We also, to a lesser extent, factored commercial invoices to small companies with unique financing needs. On November 25, 2002, we sold a majority of our factored receivables and discontinued factoring new receivables. The consolidated balance sheet as of March 31, 2003, the consolidated statements of operations for the six and three month periods ended March 31, 2003 and 2002, and the consolidated statements of cash flows for the six and three month periods ended March 31, 2003 and 2002, have been prepared by us without an audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of us at March 31, 2003 and September 30, 2002, the results of operations for the six and three month periods ended March 31, 2003 and 2002 and cash flows for the six month periods ended March 31, 2003 and 2002 have been made. The results of operations for the six and three month periods ended March 31, 2003 and 2002 are not necessarily indicative of the operating results for any other interim period or the full fiscal year. Pursuant to the rules and regulations of the Securities and Exchange Commission, certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted from the presented financial statements. We suggest that these financial statements be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-KSB for the fiscal year ended September 30, 2002. Note 2: Principles of Consolidation The consolidated financial statements include the accounts of Asta Funding, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Note 3: Consumer Receivables Acquired for Liquidation: Accounts acquired for liquidation are stated at their net realizable value and consist of consumer loans to individuals throughout the country. Note 4: Finance Receivables: Finance receivables were factored accounts receivable primarily with full recourse. Note 5: Debt: We have a $25 million line of credit with a bank with interest at the prime rate which was 4.25% at March 31, 2003. The advances under the credit line are collateralized by portfolios of consumer receivables acquired for liquidation and the loan agreement contains customary financial and operating covenants that must be maintained in order for us to borrow funds. This line expires on January 31, 2004. As of March 31, 2003, there was approximately $1.8 million outstanding under this line of credit and we were in compliance with all of the covenants under this line of credit. In August 2001, an investment banking firm provided approximately $29.9 million of financing in exchange for a note with interest at LIBOR plus 2% and the right to receive 50% of subsequent collections, net of expenses, from the portfolio collateralizing the obligation, once the note and advances by one of our subsidiaries have been repaid. In December 2001, we purchased one-half of this right to receive subsequent collections for $1.5 million and a third party purchased the other one-half for $1.5 million. The 25% participation due a third party has been accrued and is included in other liabilities. This note was paid in full in September 2002. In January 2002, we purchased a thirty-five percent interest in a consumer receivable portfolio and financed the entire purchase price of $1.6 million through a note to the seller. The note bears interest at 15%. This note was paid in full in September 2002. Note 6: Income recognition: We recognize income on non-performing and performing consumer receivable portfolios, which are acquired for liquidation, using either the interest method or cost recovery method. Upon acquisition of a portfolio of receivables, management estimates the future anticipated cash flows and determines the allocation of payments based upon this estimate. If management can reasonably estimate the expected amount to be collected on a portfolio and can reasonably determine the timing of such payments based on historic experience and other factors, we use the interest method. If management cannot reasonably estimate the future cash flows, we use the cost recovery method. Under the interest method, we recognize income 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 portfolio's purchase. The estimated future cash flows are reevaluated quarterly. Under the cost recovery method, no income is recognized until we have fully collected the cost of the portfolio. Asta Funding, Inc. Notes to Consolidated Financial Statements Based on an increase in actual cash flows for the three and six months ended March 31, 2003, and projected future cash flows through September 30, 2005, on one of our portfolios as compared to what we estimated at September 30, 2002, we revised our estimate of future collections. Such change in accounting estimate has resulted in approximately a $1.4 million increase in finance income recognized for the three and six months ended March 31, 2003 for this portfolio. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview We are primarily engaged in the business of acquiring, managing, servicing and recovering on portfolios of consumer receivables. These portfolios generally consist of one or more of the following types of consumer receivables: o charged-off receivables - accounts that have been written-off by the originators and may have been previously serviced by collection agencies; o 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 o performing receivables - accounts where the debtor is making regular monthly payments that may or may not have been delinquent in the past. We acquire these consumer receivable portfolios at a significant discount to the amount actually owed by the borrowers. We acquire these portfolios after a qualitative and quantitative analysis of the underlying receivables and calculate the purchase price so that our estimated cash flow offers us an adequate return on our acquisition costs and servicing expenses. After purchasing a portfolio, we actively monitor its performance and review and adjust our collection and servicing strategies accordingly. We purchase receivables from credit grantors and others through privately negotiated direct sales and auctions in which sellers of receivables seek bids from several pre-qualified debt purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis through: o our relationships with industry participants, collection agencies, investors and our financing sources; o brokers who specialize in the sale of consumer receivable portfolios; and o other sources. This Form 10-QSB contains forward-looking statements within the meaning of the "safe harbor" provisions under section 21E of the Securities and Exchange Act of 1934 and the Private Securities Litigation Act of 1995. We use forward-looking statements in our description of our plans and objectives for future operations and assumptions underlying these plans and objectives. Forward-looking terminology includes the words "may", "expects", "believes", "anticipates", "intends", "forecasts", "projects", or similar terms, variations of such terms or the negative of such terms. These forward-looking statements are based on management's current expectations and are subject to factors and uncertainties which could cause actual results to differ materially from those described in such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this Form 10-QSB to reflect any change in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based. Factors which could cause such results to differ materially from those described in the forward-looking statements include those set forth under "Risk Factors" and elsewhere in, or incorporated by reference into, this Form 10-QSB or other reports filed by us with the Securities and Exchange Commission. These factors include the following: we may not be able to purchase receivables at favorable prices and are subject to competition for such receivables; we may not be able to recover sufficient amounts on our receivables to fund our operations; we are dependent on external sources of financing to fund our operations; debt that we may incur from time to time may adversely affect our ability to obtain additional funds and increase our vulnerability to economic and business downturns; the Stern family controls Asta; government regulations may limit our ability to recover and enforce receivables and other risks. Critical Accounting Policies We account for our investments in consumer receivable portfolios, using either: o the interest method; or o the cost recovery method. Generally, each purchase is considered a separate portfolio of receivables and is considered a financial investment. Based upon the expected performance characteristics of the receivables in the portfolio, we determine whether the portfolio should be accounted for using the interest method or the cost recovery method. If we can reasonably estimate the amount to be collected on a portfolio and can reasonably determine the timing of such payments based on historic experience and other factors, we use the interest method. If we cannot reasonably estimate the future cash flows, we use the cost recovery method. Asta Funding, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The interest method allows us to recognize income on the effective yield of such portfolio based on the actual cash collected during a period and future estimated cash flows and the timing of such collections and the purchase of such portfolios. Under this method, we periodically apply a portion of the actual funds collected as a reduction in the principal amount invested in each specific portfolio and the remainder is recognized as finance income. Generally, these portfolios are expected to amortize over a three to five year period based upon our estimated future cash flows. Historically, a majority of the cash we ultimately collect on a portfolio is received during the first 18 months after acquiring the portfolio, although additional amounts are collected over the remaining periods. The estimated future cash flows of the portfolios are reevaluated quarterly. Under the cost recovery method of accounting, no income is recognized until the purchase price of a portfolio has been fully recovered by us. We periodically review our receivable portfolios for impairment based on the estimated future cash flows. Provisions for losses are charged to operations when it is determined that the remaining investment in the receivable portfolio is greater than the estimated future collections. We have not recorded any impairment charges on our consumer receivable portfolios during the six-month period ended March 31, 2003. Based on an increases in actual cash flows for the three and six months ended March 31, 2003, and projected future cash flows through September 30, 2005, on one of our portfolios as compared to what we estimated at September 30, 2002, we revised our estimate of future collections. Such change in accounting estimate has resulted in approximately a $1.4 million increase in finance income recognized for the three and six months ended March 31, 2003 for this portfolio. We typically recognize finance income net of collection fees paid to third-party collection agencies. With respect to specific consumer receivable portfolios containing a significant amount of performing and semi-performing accounts, we recognize finance income on accounts that were being serviced by third-party servicers at the gross amounts received by the servicers. The servicing costs for these portfolios are reported as an expense on our income statement. In addition, with respect to specific consumer receivable portfolios we acquired, we agreed to a fifty percent profit sharing arrangement with our lender. However, the entire interest in this profit sharing arrangement was sold to us and a third-party in equal amounts in December 2001. The third-party profit allocation was recorded as interest expense over the estimated term of the related note payable which was paid in full in September 2002. In the following discussions, most percentages and dollar amounts have been rounded to aid presentation. As a result, all figures are approximations. Results of operations The six-month period ended March 31, 2003, compared to the six-month period ended March 31, 2002 Revenues. During the six-month period ended March 31, 2003, finance income decreased $4.2 million or 22.5% to $14.5 million from $18.7 million for the six-month period ended March 31, 2002. The decrease in finance income was primarily due to a decrease in finance income earned on consumer receivables acquired for liquidation, which resulted from a decrease in the average outstanding accounts acquired for liquidation during the six-months ended March 31, 2003, as compared to the same prior year period. In addition, the sale of most of the factored receivables on November 25, 2002, resulted in a decrease in finance earned on these receivables income during the six-months ended March 31, 2003, as compared to the six-months ended March 31, 2002. Based on an increases in actual cash flows for the three and six months ended March 31, 2003, and projected future cash flows through September 30, 2005, on one of our portfolios as compared to what we estimated at September 30, 2002, we revised our estimate of future collections. Such change in accounting estimate has resulted in approximately a $1.4 million increase in finance income recognized for the three and six months ended March 31, 2003 for this portfolio. General and Administrative Expenses. During the six-month period ended March 31, 2003, general and administrative expenses increased nominally or less than 1.0% to $3.4 million from $3.3 million for the six-months ended March 31, 2002, and represented 51.3 % of total expenses for the six months ended March 31, 2003. The increase in general and administrative expenses was primarily due to an increase in servicing expenses which was partially offset by a decrease in factoring expenses during the six-month period ended March 31, 2003, as compared to the same prior year period. The increase in servicing expenses resulted from the operating costs of our call center that was acquired in December 2002. The decrease in factoring expenses resulted from the sale of most of the factored receivables on November 25, 2002 and a reduction of some factoring receivable employees prior to the sale date. Third-Party Servicing Expenses. During the six-month period ended March 31, 2003, third-party servicing expenses decreased $1.5 million or 31.9% to $3.2 million from $4.7 for the six months ended March 31, 2002, and represented 48.5% of total expenses for the six months ended March 31, 2003. The decrease in third-party servicing expenses was primarily due to a reduction in the number of accounts being serviced on a portfolio that was purchased in August 2001 and the elimination of recording of third-party servicing expenses on a specific portfolio during the six months ended March 31, 2003, as compared to the same prior year period. Interest Expense. During the six-month period ended March 31, 2003, interest expense decreased $2.1 million or 100.0% to almost no interest expense from $2.1 million compared to the same period in the prior year and represented 0.2% of total expenses for the six-month period ended March 31, 2003. The decrease was due to an decrease in the outstanding borrowings by us under our lines of credit and notes payable and the discontinued accrual of interest expense that was due to a profit participation on a specific portfolio during the six-month period ended March 31, 2003, as compared to the same period in the prior year. The decrease in borrowings was due to the decrease in acquisitions of consumer receivables Asta Funding, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations acquired for liquidation during the fourth quarter of the fiscal year ended September 30, 2002 and the six-month period ended March 31, 2003, as compared to the same prior year periods. Provision for Credit Losses. During the six-month period ended March 31, 2003, the provision for credit losses decreased $0.4 million or 100.0% to $0.0 million from $0.4 million for the six-months ended March 31, 2002 and represented 0.0% of total expenses. The decrease was due to a decrease in the provision for credit losses on our financed receivables during the six months ended March 31, 2003, as compared to the same prior year period. The three-month period ended March 31, 2003, compared to the three-month period ended March 31, 2002 Revenues. During the three-month period ended March 31, 2003, finance income decreased $2.6 million or 25.3% to $7.7 million from $10.3 million for the three-month period ended March 31, 2002. The decrease in finance income was primarily due to a decrease in finance income earned on consumer receivables acquired for liquidation, which resulted from a decrease in the average outstanding accounts acquired for liquidation during the three-months ended March 31, 2003, as compared to the same prior year period. In addition, the sale of most of the factored receivables on November 25, 2002, resulted in a decrease in finance income earned on these receivables during the three-months ended March 31, 2003, as compared to the three-months ended March 31, 2002. Based on an increases in actual cash flows for the three and six months ended March 31, 2003, and projected future cash flows through September 30, 2005, on one of our portfolios as compared to what we estimated at September 30, 2002, we revised our estimate of future collections. Such change in accounting estimate has resulted in approximately a $1.4 million increase in finance income recognized for the three and six months ended March31, 2003 for this portfolio. General and Administrative Expenses. During the three-month period ended March 31, 2003, general and administrative expenses increased $100,000 or 5.3% to $2.0 million from $1.9 million for the three-months ended March 31, 2002, and represented 54.8% of total expenses for the three months ended March 31, 2003. The increase in general and administrative expenses was primarily due to an increase in servicing expenses which was partially offset by a decrease in factoring expenses during the three-month period ended March 31, 2003, as compared to the same prior year period. The increase in servicing expenses resulted from the operating costs of our call center that was acquired in December 2002. The decrease in factoring expenses resulted from the sale of most of the factored receivables on November 25, 2002 and a reduction of some factoring receivable employees prior to the sale date. Third-Party Servicing Expenses. During the three-month period ended March 31, 2003, third-party servicing expenses decreased $0.8 million or 33.3% to $1.6 million from $2.4 for the three months ended March 31, 2002, and represented 44.9% of total expenses for the three months ended March 31, 2003. The decrease in third-party servicing expenses was primarily due to a reduction in the number of accounts being serviced on a portfolio that was purchased in August 2001 and the elimination of recording of third-party servicing expenses on a specific portfolio during the three months ended March 31, 2003, as compared to the same prior year period. Interest Expense. During the three-month period ended March 31, 2003, interest expense decreased $1.4 million or 100.0% to almost no interest expense from $1.4 million compared to the same period in the prior year and represented 0.3% of total expenses for the three-month period ended March 31, 2003. The decrease was due to an decrease in the outstanding borrowings by us under our lines of credit and notes payable and the discontinued accrual of interest expense that was due to a profit participation on a specific portfolio during the three-month period ended March 31, 2003, as compared to the same period in the prior year. The decrease in borrowings was due to the decrease in acquisitions of consumer receivables acquired for liquidation during the fourth quarter of the fiscal year ended September 30, 2002 and the three-month period ended March 31, 2003, as compared to the same prior year periods. Provision for Credit Losses. During the three-month period ended March 31, 2003, the provision for credit losses decreased $0.3 million or 100.0% to $0.0 million from $0.3 million for the three-months ended March 31, 2002 and represented 0.0% of total expenses. The decrease was due to a decrease in the provision for credit losses on our financed receivables during the three months ended March 31, 2003, as compared to the same prior year period. Liquidity and Capital Resources Our primary sources of cash from operations include payments on the receivable portfolios that we have acquired. Our primary uses of cash include our purchases of consumer receivable portfolios. We rely significantly upon our lenders and others, including our affiliates, to provide the funds necessary for the purchase of consumer and commercial accounts receivable portfolios. While we maintain a $25 million line of credit, for portfolio purchases, we also may arrange financing on a transactional basis. While we have historically been able to finance these purchases, we do not have committed loan facilities, other than our $25 million line of credit with a financial institution. As of March 31, 2003, there was approximately 1.8 million outstanding balance under this facility. As of March 31, 2003, our cash and cash equivalents increased to $14.9 million from $2.2 million at September 30, 2002. The increase in cash and cash equivalents during the three month period ended March 31, 2003, was primarily due to a decrease in the repayment of debt, a reduction in consumer receivable purchases and the sale of most of our factoring receivables during the period. Net cash provided by operating activities was $2.6 million during the six-months ended March 31, 2003, compared to net cash provided by operating activities of $5.8 million during the six-months ended March 31, 2002. The decrease in net cash provided by operating activities was primarily due to a decrease in other liabilities and income taxes payable during the six-months ended March 31, 2003, as compared to the same period in the prior year. Net cash provided by investing activities was $10.4 million during the six-months ended March 31, 2003, compared to net cash provided by investing activities of $6.3 million during the six-months ended March 31, 2002. The increase in net cash provided by investing activities was primarily due to a decrease in the purchase of accounts acquired for liquidation and the sale of most of the factoring receivables which was offset by a decrease in collections of consumer receivables acquired for liquidation during the six-months ended March 31, 2003, compared to the same period in the prior year. Net cash used in financing activities was $0.3 million during the six-months ended March 31, 2003, compared to net cash used of Asta Funding, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations $12.9 million during the six-months March 31, 2002. The decrease in net cash used in financing activities was primarily due to an overall decrease in debt payments which was partially off-set by a decrease in borrowings during the six-months ended March 31, 2003, compared to the same prior year period. The decrease in debt payments was due to an increase in principal collections that was used to repay debt on accounts acquired for liquidation during the six-months ended March 31, 2003, as compared to the six-months ended March 31, 2002. The decrease in borrowings was due to a decrease in purchases of accounts acquired for liquidation during the six months ended March 31, 2003, as compared to the same prior year period. We have a $25 million line of credit with a bank with interest at the prime rate which was 4.25% at March 31, 2003. The advances under this credit line are collateralized by portfolios of consumer receivables acquired for liquidation and the loan agreement contains customary financial and operating covenants that must be maintained in order for us to borrow funds. This line expires on January 31, 2004. As of March 31, 2003, there was approximately $1.8 million outstanding under this line of credit and we were in compliance with all of the covenants under this line of credit. In August 2001, an investment banking firm provided approximately $29.9 million of financing in exchange for a note with interest at LIBOR plus 2% and the right to receive 50% of subsequent collections, net of expenses, from the portfolio collateralizing the obligation, once the note and advances by one of our subsidiaries have been repaid. In December 2001, we purchased one-half of this right to receive subsequent collections for $1.5 million and a third party purchased the other one-half for $1.5 million. The 25% participation due a third party has been accrued and is included in other liabilities. This note was paid in full in September 2002. In January 2002, we purchased a thirty-five percent interest in a consumer receivable portfolio and financed the entire purchase price of $1.6 million through a note to the seller. The note bears interest at 15%. The outstanding balance was payable from the cash flows of a specific portfolio. This note was paid in full in September 2002. Our cash requirements have been and will continue to be significant. We depend on external financing to acquire consumer receivables. During the six-months ended March 31, 2003, we acquired consumer portfolios at a cost of approximately $4.4 million. These acquisitions were financed with our cash on hand. We anticipate the funds available under our current credit facility as well as funds that may be made available by Asta Group, Incorporated, an affiliate of ours, and cash from operations will be sufficient to satisfy the our estimated cash requirements for at least the next 12 months. If for any reason our available cash otherwise proves to be insufficient to fund operations (because of future changes in the industry, general economic conditions, unanticipated increases in expenses, or other factors), we may be required to seek additional funding. From time to time, we evaluate potential acquisitions of related businesses. However, we have not reached any agreement or arrangement with respect to any particular acquisition and we may not be able to complete any acquisitions on favorable terms or at all. Supplementary Information on Accounts Acquired for Liquidation Schedule of Accounts Acquired for Liquidation by Income Recognition Category As of March 31, 2003 Cost Recovery Interest Method Portfolios Portfolios ---------- ---------- Cummulative Original Purchase Price $46,838,000 $116,317,000 Cummulative Aggregate Managed Portfolios $1,996,995,000 $1,863,765,000 Receivable Carrying Value at $2,560,000 $24,108,000 Finance Income Earned * $3,415,000 $10,899,000 (for the six months ended 3/31/03) Total cash flows * $4,420,000 $23,733,000 (for the six months ended 3/31/03) * The sum of total cash flows of $28,153,000 less the sum of total finance income earned on consumer receivables acquired for liquidation of $14,314,000, is $13,839,000 or the principal collected on receivables acquired for liquidation as per the statement of cash flows for the six months ended March 31, 2003. The original purchase price reflects what we paid for the receivables from 1998 through December 31, 2002. The cummulative aggregate managed portfolio balance is the original aggregate amount owed by the borrowers from 1998 through March 31, 2003 at the time of purchase. We purchase consumer receivables at substantial discounts from the face amount. We record interest income on our receivables under either the cost recovery or interest method. The receivable carrying value represents the current basis in the receivables after collections and amortization of the original price. Asta Funding, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations We do not anticipate collecting the majority of the purchased principal amounts. Accordingly, the difference between the carrying value of the portfolios and the gross receivables is not indicative of future revenues from these accounts acquired for liquidation. Since we purchased these accounts at significant discounts, we anticipate collecting only a portion of the face amounts. For the six-months ended March 31, 2003, we earned interest income of $3.4 million under the cost recovery method because we collected $3.4 million in excess of our purchase price on certain receivable portfolios. In addition, we earned $10.9 million of interest income under the interest method based on actuarial computations on certain portfolios based on actual collections during the period based on what we project to collect in future periods. New Accounting Pronouncements In April 2002, the FASB issued SFAS Statement No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections". SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB Opinion No. 30 will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4 and is no longer necessary because SFAS No. 4 has been rescinded.SFAS No. 145 amends SFAS Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. SFAS No. 145 is required to be applied for fiscal years after May 15, 2002. The adoption of this Statement is not expected to have a material effect on our financial statements. In June 2002, the FASB issued SFAS Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also established that fair value is the objective for initial measurement of the liability. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this Statement is not expected to have a material effect on our financial statements. Stock-Based Compensation We have adopted the disclosure requirements of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148") effective December 2002. SFAS 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and also amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the methods of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS 148 and SFAS 123, we continue to apply the accounting provisions of Accounting Principles Board ("APB") Opinion Number 25, "Accounting for Stock Issued to Employees", and related interpretations, with regard to the measurement of compensation cost for options granted under our Stock Option Plans. No employee compensation expense has been recorded as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Had expense been recognized using the fair value method described in SFAS 123, using the Black-Sholes option pricing model, we would have reported the following results of operations: Three Months Ended Six Months Ended March 31, March 31, 2003 2002 2003 2002 ---- ---- ---- ---- Net income, as reported $2,429,000 $2,634,000 $4,741,000 $4,930,000 Deduct: total stock-based compensation expense determined under the fair value method, net of tax ($265,000) ($188,000) ($530,000) ($377,000) ---------- ---------- ---------- ---------- Pro-forma net income $2,164,000 $2,446,000 $4,211,000 $4,553,000 Earnings per share: Basic - as reported $0.59 $0.65 $1.16 $1.23 Basic - pro forma $0.53 $0.61 $1.03 $1.13 Diluted - as reported $0.55 $0.59 $1.08 $1.12 Diluted - pro forma $0.49 $0.55 $0.96 $1.04 Asta Funding, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Controls and Procedures Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Asta Funding, Inc. Form 10-QSB March 31, 2003 Part II. OTHER INFORMATION Item 1. Legal Proceedings As of the date of this filing, we were not involved in any material litigation in which we are a defendant. We regularly initiate legal proceedings as a plaintiff concerning our routine collection activities. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders We held our annual meeting of stockholders on March 21, 2003. At the meeting, the following persons were elected directors, all of whom were incumbents: Arthur Stern, Gary Stern, Mitchell Herman, Herman Badillo, Edward Celano, David Slackman, Harvey Liebowitz and Michael Feinsod. Mr. Feinsod resigned from our Board of Directors to pursue other interests on February 12, 2003, and did not stand for re-election at our annual meeting of stockholders. Shares were voted for the election of directors as follows: Authority Director For Against Withheld (1) Gary Stern 3,931,597 3,974 0 (2) Mitchell Herman 3,931,597 3,974 0 (3) Arthur Stern 3,931,597 3,974 0 (4) Michael Feinsod 3,931,597 3,974 0 (5) Herman Badillo 3,931,597 3,974 0 (6) Edward Celano 3,931,597 3,974 0 (7) Harvey Leibowitz 3,931,597 3,974 0 (8) David Slackman 3,931,597 3,974 0 Item 5. Other Information We entered into an Amended Loan and Security Agreement dated as of January 28, 2003, between us and Israel Discount Bank of NY. This line of credit expires on January 31, 2004, and bears interest at the prime rate. The advances under this credit line are collateralized by portfolios of consumer receivables acquired for liquidation and the loan agreement contains customary financial and operating covenants that must be maintained in order for us to borrow funds. We are currently in compliance with all of the covenants under this line of credit. We have been informed that OSI Collection Services, Inc. and certain of its affiliates ("OSI"), which services a substantial amount of our consumer receivables, filed for a Chapter 11 reorganization on or about May 12, 2003. Based on information we have received to date, we believe that OSI will continue to operate in the ordinary course in servicing receivables through its Chapter 11 proceeding, and that OSI's filing will not have a material adverse effect on our operations. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.13 Amended Loan and Security Agreement dated as of January 28, 2003, between the Company and Israel Discount Bank of NY. 99.1 Certification of the Registrant's Chief Executive Officer, Gary Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of the Registrant's Chief Financial Officer, Mitchell Herman, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K We did not file any Reports of Form 8-K during the three-months ended March 31, 2003. Asta Funding, Inc. Form 10-QSB March 31, 2003 Signatures In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ASTA FUNDING, INC. (Registrant) Date: May 12, 2003 By: /s/ Gary Stern ------------------ Gary Stern, President, Chief Executive Officer (Principal Executive Officer) Date: May 12, 2003 By: /s/ Mitchell Herman ----------------------- Mitchell Herman, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Certifications Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 I, Gary Stern, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Asta Funding, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ Gary Stern - -------------- Gary Stern President and Chief Executive Officer Certifications Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 I, Mitchell Herman, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Asta Funding, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ Mitchell Herman - ------------------- Mitchell Herman Chief Financial Officer, Secretary and Chief Accounting Officer