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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-26906
ASTA FUNDING, INC.
(Exact name of small business issuer as specified in its charter)
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
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 |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act) Yes |X| No |_|
As of August 1, 2005, the registrant had approximately 13,577,000
common shares outstanding.
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ASTA FUNDING, INC.
INDEX TO FORM 10-Q
Part I. Financial Information...................................................................... 2
Item 1. Consolidated Financial Statements.......................................................... 2
Consolidated Balance Sheets as of June 30, 2005 (unaudited) and September 30, 2004........ 2
Consolidated Statements of Operations for the nine and three month periods ended
June 30, 2005 and 2004 (unaudited)...................................................... 3
Consolidated Statement of Stockholders' Equity for the nine month period ending
June 30, 2005 (unaudited)............................................................... 4
Consolidated Statements of Cash Flows for the nine month periods ended
June 30, 2005 and 2004 (unaudited)...................................................... 5
Condensed Notes to Consolidated Financial Statements (unaudited)........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 19
Item 4. Controls and Procedures.................................................................... 19
Part II. Other Information.......................................................................... 20
Item 1. Legal Proceedings.......................................................................... 20
Item 2. Changes in Securities and Use of Proceeds.................................................. 20
Item 3. Defaults Upon Senior Securities............................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders........................................ 20
Item 5. Other Information.......................................................................... 20
Item 6. Exhibits................................................................................... 20
Signatures ........................................................................................ 21
Section 302 Certification of Chief Executive Officer................................................ 22
Section 302 Certification of Chief Financial Officer................................................ 23
Section 906 Certification of Chief Executive Officer................................................ 24
Section 906 Certification of Chief Financial Officer................................................ 25
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASTA FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
2005 2004
-------------- --------------
(UNAUDITED)
ASSETS
Cash.................................................................... $ 1,920,000 $ 3,344,000
Consumer receivables acquired for liquidation........................... 166,728,000 146,165,000
Deposit on receivable purchase.......................................... -- 7,288,000
Furniture and equipment, net............................................ 678,000 596,000
Due from servicers...................................................... 740,000 --
Prepaid income taxes.................................................... 713,000 --
Other assets............................................................ 961,000 1,248,000
-------------- --------------
Total assets.................................................. $ 171,740,000 $ 158,641,000
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Debt................................................................. $ 30,700,000 $ 39,355,000
Other liabilities ................................................... 3,850,000 3,351,000
Income taxes payable ................................................ 711,000 1,425,000
Deferred income taxes................................................ 44,000 44,000
-------------- --------------
Total liabilities............................................. 35,305,000 44,175,000
-------------- --------------
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 -- 13,577,000 at June 30, 2005 and 13,432,000
at September 30, 2004............................................... 136,000 134,000
Additional paid-in capital........................................... 60,584,000 59,184,000
Retained earnings.................................................... 75,715,000 55,148,000
-------------- --------------
Total stockholders' equity.................................... 136,435,000 114,466,000
-------------- --------------
Total liabilities and stockholders' equity.............................. $ 171,740,000 $ 158,641,000
============== ==============
See accompanying notes to consolidated financial statements
2
ASTA FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Revenues:
Finance income $19,028,000 $12,050,000 $ 49,520,000 $36,369,000
----------- ----------- ------------ -----------
Expenses:
General and administrative 4,153,000 2,474,000 11,122,000 7,998,000
Interest 512,000 167,000 1,415,000 623,000
Third-party servicing - - - 1,316,000
----------- ----------- ------------ -----------
4,665,000 2,641,000 12,537,000 9,937,000
Income before income taxes 14,363,000 9,409,000 36,983,000 26,432,000
Income tax expense 5,827,000 3,802,000 14,991,000 10,704,000
----------- ----------- ------------ -----------
Net income $ 8,536,000 $ 5,607,000 $21,992,000 $15,728,000
----------- ----------- ------------ -----------
Net income per share:
Basic $ 0.63 $ 0.42 $ 1.63 $ 1.18
----------- ----------- ------------ -----------
Diluted $ 0.59 $ 0.39 $ 1.53 $ 1.10
----------- ----------- ------------ -----------
Weighted average number of shares outstanding:
Basic 13,569,000 13,403,000 13,529,000 13,318,000
----------- ----------- ------------ -----------
Diluted 14,424,000 14,286,000 14,377,000 14,248,000
----------- ----------- ------------ -----------
See accompanying notes to consolidated financial statements
3
ASTA FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------- -------- -----
Balance, September 30, 2004................. 13,432,000 $134,000 $59,184,000 $55,148,000 $114,466,000
Exercise of options.......................... 145,000 2,000 1,281,000 -- 1,283,000
Tax benefit arising from exercise of non-
qualified stock option................... 119,000 119,000
Dividends ................................... -- -- -- (1,425,000) (1,425,000)
Net Income................................... -- -- -- 21,992,000 21,992,000
---------- -------- ----------- ----------- ------------
Balance, June 30, 2005....................... 13,577,000 $136,000 $60,584,000 $75,715,000 $136,435,000
========== ========= =========== =========== ============
See accompanying notes to consolidated financial statements
4
ASTA FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004
------------- -------------
Cash flows from operating activities:
Net income ......................................................... $ 21,992,000 $ 15,728,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ...................................... 372,000 203,000
Deferred income taxes .............................................. -- (30,000)
Changes in:
Prepaid & income taxes payable ..................................... (1,427,000) (451,000)
Due from servicers .............................................. (740,000) --
Other assets .................................................... 238,000 (1,054,000)
Other liabilities ............................................... 495,000 (2,908,000)
------------ ------------
Net cash provided by operating activities ....................... 20,930,000 11,488,000
Cash flows from investing activities:
Auto loan principal payments ....................................... -- 4,000
Purchase of consumer receivables acquired for liquidation .......... (93,490,000) (55,584,000)
Principal collected on receivables acquired for liquidation ........ 72,927,000 48,988,000
Deposit on receivable purchase .................................. 7,288,000 --
Capital expenditures ............................................... (407,000) (141,000)
------------ ------------
Net cash (used in) investing activities ......................... (13,682,000) (6,733,000)
Cash flows from financing activities:
Proceeds from exercise of options ............................... 1,283,000 1,343,000
Tax benefit arising from exercise of non-qualified options....... 119,000 --
Dividends ....................................................... (1,419,000) (1,062,000)
(Payments) under line of credit, net ............................... (8,655,000) (10,681,000)
------------ ------------
Net cash (used in) financing activities ......................... (8,672,000) (10,400,000)
------------ ------------
(Decrease) in cash .................................................. (1,424,000) (5,645,000)
Cash at the beginning of period ..................................... 3,344,000 6,846,000
------------ ------------
Cash at end of period ............................................... $ 1,920,000 $ 1,201,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period
Interest .......................................................... $ 1,515,000 $ 598,000
Income taxes ...................................................... $ 16,294,000 $ 9,850,000
See accompanying notes to consolidated financial statements.
5
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS AND BASIS OF PRESENTATION
Business
Asta Funding, Inc., together with its wholly owned subsidiaries, is engaged
in the business of purchasing, managing and servicing non-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), other credit card accounts and
telecommunication accounts which were charged-off by the issuers for
non-payment. We acquire these portfolios at substantial discounts from their
face values that are based on the characteristics of the underlying accounts of
each portfolio.
Basis of Presentation
The consolidated balance sheet as of June 30, 2005, the consolidated
statements of operations for the nine and three month periods ended June 30,
2005 and 2004, and the consolidated statements of cash flows for the nine month
periods ended June 30, 2005 and 2004, have been prepared by us without an audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly our financial position at
June 30, 2005 and September 30, 2004, the results of operations for the nine and
three month periods ended June 30, 2005 and 2004 and cash flows for the nine
month periods ended June 30, 2005 and 2004 have been made. The results of
operations for the nine and three month periods ended June 30, 2005 and 2004 are
not necessarily indicative of the operating results for any other interim period
or the full fiscal year.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the
Securities and Exchange Commission and therefore do not include all information
and footnote disclosures required under generally accepted accounting
principles. We suggest that these financial statements be read in conjunction
with the financial statements and notes thereto included in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2004 filed with the Securities
and Exchange Commission on December 14, 2004.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based
Payment ("SFAS No.123R"). This statement is a revision of FASB Statement No.
123, Accounting for Stock-Based Compensation. This Statement supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. This Statement requires that the cost resulting from
all share-based payment transactions be recognized in the financial statements.
This Statement supersedes the current method utilized by the Company of the
disclosure-only provisions of the original SFAS No. 123. The original effective
date of this Statement was to be as of the beginning of the first interim or
annual period that begins after June 15, 2004. In April 2005, The Securities and
Exchange Commission revised the effective date to implement SFAS No.123R to the
beginning of the next fiscal year. The effective date for implementation of SFAS
No. 123R for the Company will be October 1, 2005. The Company has been
disclosing the impact on net income and earnings per share since the adoption of
the original SFAS No. 123 in the notes to the financial statements.
In October 2003, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 03-03, "Accounting for Loans or Certain
Securities Acquired in a Transfer." This SOP provides guidance on accounting for
differences between contractual and expected cash flows from an investor's
initial investment in loans or debt securities acquired in a transfer if those
differences are attributable, at least in part, to credit quality. This SOP
became effective for portfolios acquired after December 15, 2004. We do not
believe the adoption of this SOP has a material impact on the Company.
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.
6
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION
Accounts acquired for liquidation are stated at their net realizable value
and consist mainly of defaulted consumer loans to individuals throughout the
country. We account for the investment in receivable portfolios on the "accrual
basis" or "cost recovery basis" of accounting in accordance with the provisions
of the AICPA's Practice Bulletin 6, "Amortization of Discounts on Certain
Acquired Loans". Static pools are established for each portfolio acquired. Once
a static pool is established, the receivables are permanently assigned to the
pool. The discount (i.e. the difference between the cost of each static pool and
the related gross aggregate receivable balance) is not recorded because we
expect to collect substantially less than the gross receivable balance. As a
result, we record these receivable portfolios at cost at the time of
acquisition.
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, 2005
-----------------------------------------------
ACCRUAL CASH
BASIS BASIS
PORTFOLIOS PORTFOLIOS TOTAL
----------- ----------- ------------
Balance, beginning of period.............................. $ 144,812,000 $ 1,353,000 $ 146,165,000
Acquisitions of receivable portfolios, net................ 93,490,000 -- 93,490,000
Gross cash collections including sales proceeds........... (116,993,000) (5,454,000) (122,447,000)
Finance income recognized................................. 45,121,000 4,399,000 49,520,000
--------------- ------------- -------------
Balance, end of period.................................... $ 166,430,000 $ 298,000 $ 166,728,000
=============== ============ =============
Revenue as a percentage of collections........................ 38.6% 80.7% 40.4%
FOR THE NINE MONTHS ENDED JUNE 30, 2004
-----------------------------------------------
ACCRUAL CASH
BASIS BASIS
PORTFOLIOS PORTFOLIOS TOTAL
----------- ----------- -----------
Balance, beginning of period.............................. $ 102,809,000 $ 2,783,000 $ 105,592,000
Acquisitions of receivable portfolios, net................ 54,880,000 704,000 55,584,000
Gross cash collections including sales proceeds........... (79,713,000) (5,563,000) (85,276,000)
Finance income recognized................................. 32,458,000 3,830,000 36,288,000
------------- ------------ -------------
Balance, end of period.................................... $ 110,434,000 $ 1,754,000 $ 112,188,000
============= ============ =============
Revenue as a percentage of collections........................ 40.7% 68.8% 42.6%
7
FOR THE THREE MONTHS ENDED JUNE 30, 2005
-----------------------------------------------
ACCRUAL CASH
BASIS BASIS
PORTFOLIOS PORTFOLIOS TOTAL
----------- ----------- ------------
Balance, beginning of period.............................. $170,494,000 $ 527,000 $171,021,000
Acquisitions of receivable portfolios, net................ 20,153,000 -- 20,153,000
Gross cash collections including sales proceeds........... (41,971,000) (1,503,000) (43,474,000)
Finance income recognized................................. 17,754,000 1,274,000 19,028,000
------------ ----------- ------------
Balance, end of period.................................... $166,430,000 $ 298,000 $166,728,000
============ =========== ============
Revenue as a percentage of collections........................ 42.3% 84.8% 43.8%
FOR THE THREE MONTHS ENDED JUNE 30, 2004
-----------------------------------------------
ACCRUAL CASH
BASIS BASIS
PORTFOLIOS PORTFOLIOS TOTAL
----------- ----------- -----------
Balance, beginning of period.............................. $ 117,910,000 $ 2,134,000 $ 120,044,000
Acquisitions of receivable portfolios, net................ 6,144,000 -- 6,144,000
Gross cash collections including sales proceeds........... (24,439,000) (1,581,000) (26,020,000)
Finance income recognized................................. 10,819,000 1,201,000 12,020,000
------------- ------------ -------------
Balance, end of period.................................... $ 110,434,000 $ 1,754,000 $ 112,188,000
============= ============ =============
Revenue as a percentage of collections........................ 44.3% 76.0% 46.2%
In March 2005, through a wholly owned subsidiary, the Company acquired Option
Card, LLC, a Denver, Colorado based consumer debt buyer and debt management
company. Benefits accruing to the Company include portfolios of distressed
consumer receivable debt of approximately $197 million that consist of paying
accounts, accounts already within a legal network, and non paying accounts, a
facility in Denver and a computer software system that may have features that
could be incorporated into the Company's existing computer system. The purchase
price, substantially all of which was applied to the cost of the portfolios, was
approximately $13.5 million in cash.
NOTE 4: FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following as of the dates indicated:
JUNE 30, SEPTEMBER 30,
2005 2004
------------- --------------
Furniture................................................. $ 307,000 $ 307,000
Equipment................................................. 1,732,000 1,325,000
------------- ------------
2,039,000 1,632,000
Less accumulated depreciation............................. 1,361,000 1,036,000
------------- ------------
Balance, end of period.................................... $ 678,000 $ 596,000
============= ============
8
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: DEBT
In May 2005, the Company entered into an amended and restated loan and
security agreement that increased the line of credit with a lending institution
from $60 million to $80 million. The line of credit bears interest at the lesser
of LIBOR plus an applicable margin, or the prime rate plus or minus an
applicable margin based on certain leverage ratios (the applicable rate was
4.75% at June 30, 2005). The credit line is collateralized by all portfolios of
consumer receivables acquired for liquidation and contains customary financial
and other covenants (relative to tangible net worth, interest coverage, and
leverage ratio, as defined) that must be maintained in order to borrow funds. As
of June 30, 2005, $30.7 million was outstanding. On August 2, 2005 the loan
outstanding balance was $22.6 million.
NOTE 6: COMMITMENTS AND CONTINGENCIES
Employment Agreements
We have an employment agreement with one executive and are in the process
of formalizing new employment agreements with two other executives. Such
agreement and anticipated agreements provide for base salary payments as well as
bonuses. The agreement and anticipated agreements also contain confidentiality
and non-compete provisions. Please refer to our definitive Proxy Statement, as
filed with the Securities and Exchange Commission, under the caption "Executive
Compensation" for additional information.
Leases
We are a party to operating leases with respect to our facilities. Please
refer to our consolidated financial statements and notes thereto in our Annual
Report on Form 10-K, as filed with the Securities and Exchange Commission, for
additional information. See Note 14 - Subsequent Event.
Litigation
In the ordinary course of our business, we are involved in numerous legal
proceedings. We regularly initiate collection lawsuits, using our network of
third party law firms, against consumers. Also, consumers occasionally initiate
litigation against us, in which they allege that we have violated a federal or
state law in the process of collecting their account. We do not believe that
these ordinary course matters are material to our business and financial
condition. As of the date of this Form 10-Q, we were not involved in any
material litigation in which we were a defendant.
NOTE 7: 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.
We recognize income net of collection fees paid to third-party collection
agencies. With respect to amounts collected in-house, such finance income is
recognized at the gross amount collected.
NOTE 8: INCOME TAXES
The provision for income tax expense reflects income tax expense at an
effective rate of approximately 40.5% for the nine and three month periods
ending June 30, 2005. For the nine and three month periods ended June 30, 2004,
the effective income tax rate was also approximately 40.5%.
Deferred federal and state taxes arise from temporary differences resulting
primarily from the provision for credit losses and depreciation timing
differences.
9
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2005 and 2004:
NINE MONTHS ENDED JUNE 30,
2005 2004
------------------------------------- -------------------------------------
WEIGHTED WEIGHTED
NET AVERAGE PER SHARE NET AVERAGE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
Basic............................ $21,992,000 13,529,000 $1.63 $15,728,000 13,318,000 $1.18
Effect of Dilutive Stock......... 848,000 ===== 930,000 =====
----------- ---------- ----------- ----------
Diluted.......................... $21,992,000 14,377,000 $1.53 $15,728,000 14,248,000 $1.10
=========== ========== ===== =========== ========== =====
THREE MONTHS ENDED JUNE 30,
2005 2004
----------------------------------- -----------------------------------
WEIGHTED WEIGHTED
NET AVERAGE PER SHARE NET AVERAGE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
Basic............................ $8,536,000 13,569,000 $0.63 $5,607,000 13,403,000 $0.42
===== =====
Effect of Dilutive Stock......... 855,000 883,000
---------- ---------- ---------- ----------
Diluted.......................... $8,536,000 14,424,000 $0.59 $5,607,000 14,286,000 $0.39
========== ========== ===== ========== ========== =====
NOTE 10: STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure", which
was released in December 2002 as an amendment of SFAS No. 123. See also Note 1,
under Recent Accounting Pronouncements for more on Accounting for Stock Based
Compensation. The following table illustrates the effect on net income and
earnings per share if the fair value based method had been applied to all
awards.
10
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: STOCK-BASED COMPENSATION - (CONTINUED)
NINE MONTHS ENDED JUNE 30,
------------------------------------
2005 2003
------------ --------------
Net income as reported ........................................ $ 21,992,000 $ 15,728,000
Stock based compensation expense
Determined under fair value method, net of related tax effects (1,670,000) (1,632,000)
------------- --------------
Pro forma net income .......................................... $ 20,322,000 $ 14,096,000
============= ==============
Earnings per share:
Basic -- as reported ......................................... $ 1.63 $ 1.18
============= ==============
Basic -- pro forma ........................................... $ 1.50 $ 1.06
============= ==============
Diluted -- as reported ....................................... $ 1.53 $ 1.10
============= ==============
Diluted -- pro forma ......................................... $ 1.41 $ 0.99
============= ==============
THREE MONTHS ENDED JUNE 30,
------------------------------------
2005 2004
------------- ------------
Net income as reported ........................................ $ 8,536,000 $ 5,607,000
Stock-based compensation expense
Determined under fair value method, net of related tax effects (556,000) (544,000)
------------- -------------
Pro forma net income .......................................... $ 7,980,000 $ 5,063,000
============= =============
Earnings per share:
Basic -- as reported ......................................... $ 0.63 $ 0.42
============= =============
Basic -- pro forma ........................................... $ 0.59 $ 0.38
============= =============
Diluted -- as reported ....................................... $ 0.59 $ 0.39
============= =============
Diluted -- pro forma ......................................... $ 0.55 $ 0.35
============= =============
The weighted average fair value of the options granted during 2005 and 2004 were
$18.25 and $8.66 per share on the dates of grant, respectively, using the
Black-Scholes option pricing model with the following assumptions: dividend
yield 0.8289% (2005) and dividend yield 0.2508% (2004), weighted average
volatility 40.128% (2005) and 41.507% (2004), expected life 10 years, weighted
average risk free interest rate of 4.1900% in 2005 and 4.2966% in 2004.
NOTE 11: STOCK OPTION PLANS
1995 Stock Option Plan
The Company has a stock option plan under which 1,840,000 shares of common
stock are reserved for issuance upon exercise of either incentive or
non-incentive stock options, which may be granted from time to time by the Board
of Directors to employees and others. The Board of Directors determines the
option price (not to be less than fair market value for incentive options) at
the date of grant. The options have a maximum term of 10 years and outstanding
options expire from August 2006 through February 2014. As of June 30, 2005,
92,002 shares of common stock were available for issuance under this stock
option plan.
11
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: STOCK OPTION PLANS- (CONTINUED)
2002 Stock Option Plan
During May 2002, the Company approved a new stock option plan under which
1,000,000 shares of common stock are reserved for issuance upon the exercise of
either incentive or non-incentive stock options, which may be granted from time
to time by the Board of Directors to employees and others. The Board of
Directors determines the option price (not to be less than fair market value for
incentive options) at the date of grant. The options have a maximum term of 10
years and outstanding options expire from November 2013 through November 2014.
As of June 30, 2005, 421,667 shares of common stock were available for
issuance under this stock option plan.
THE FOLLOWING TABLE SUMMARIZES STOCK OPTION TRANSACTIONS UNDER THE PLANS:
NINE MONTHS ENDED JUNE 30,
----------------------------------------------------
2005 2004
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
Outstanding options at the beginning of period.......... 1,364,171 $ 6.2657 1,225,000 $ 3.2377
Options granted......................................... 402,500 18.2502 363,000 15.0643
Options exercised....................................... (145,120) 8.8328 (248,000) 5.4221
Options cancelled....................................... (40,002) 11.7144 (2,000) 7.5050
--------- -------- --------- --------
Outstanding options at the end of period................ 1,581,549 $ 8.9423 1,338,000 $ 6.0337
--------- ---------
Exercisable options at the end of period 1,001,281 $ 4.5941 939,000 $ 3.8411
--------- ---------
The following table summarizes information about the Plans outstanding
options as of June 30, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
- -------------------- ----------- -------------- ---------- ------------ ----------
$0.0000 - $1.8760....................... 200,000 3.9 $ 0.8125 200,000 $ 0.8125
$1.8761 - $3.7520....................... 520,000 4.3 2.5644 520,000 2.5644
$3.7521 - $5.6280....................... 131,334 7.3 4.7250 81,333 4.7250
$5.6281 - $7.5040....................... 33,000 6.6 6.4441 33,000 6.4441
$7.50410 - $9.3800...................... 2,000 7.7 7.7450 2,000 7.7450
$13.1321 - $15.008...................... 245,002 8.3 14.8700 151,670 14.8700
$15.0081 - $16.884...................... 33,888 9.2 16.5035 1,944 15.9900
$16.8841 - $18.760...................... 416,325 9.3 18.2443 11,334 18.1000
-------- ---- -------- --------- --------
1,581,549 6.6 $8.9423 1,001,281 $ 4.5941
========= =========
NOTE 12: STOCKHOLDERS' EQUITY
During the nine-month period ended June 30, 2005, we declared dividends in
the amount of $1,425,000, of which $475,000 was unpaid and accrued as of June
30, 2005.
12
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13: USE OF ESTIMATES
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 management's estimates of future cash flows and the
allocation of collections between principal and interest resulting therefrom.
NOTE 14: SUBSEQUENT EVENT
In July 2005, the Company entered into a lease extension agreement (the
"Lease") with 210 Sylvan Avenue LLC, to continue leasing office space in the
building known as 210 Sylvan Avenue (the "Premises"), which is the Company's
headquarters. The new lease includes the addition of approximately 1,800 square
feet. The term of the Lease shall begin on August 1, 2005 and end on July 31,
2010. The Lease contains a five (5) year option provision to renew the Lease.
The base rent for the Premises during the first two years of the Lease is
approximately $219,000 per annum. Effective August 1, 2007 and annually
thereafter, an adjustment will be applied to the base rent increasing the base
rent by a certain Consumer Price Index issued by the Bureau of Labor Statistics
of the United States Department of Labor. In addition to the base rent, the
Company will be responsible for utility charges.
13
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.
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 management's 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, markets, budgets, plans, or objectives for future operations
are forward-looking statements. We cannot guarantee the accuracy of the
forward-looking statements, and you should be aware that our actual results
could differ materially from those contained in the forward-looking statements
due to a number of factors, including the statements under "Risk Factors" and
"Critical Accounting Policies" detailed in our annual report on Form 10-K for
the year ended September 30, 2004, and other reports filed with the Securities
and Exchange Commission.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all other documents filed by the Company or with respect
to its securities with the Securities and Exchange Commission are available free
of charge through our website at www.astafunding.com. Information on our website
does not constitute a part of this report.
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.
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 to 24 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.
14
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 nine-month
periods ended June 30, 2005 and 2004. We typically recognize finance income net
of collection fees paid to third-party collection agencies. With respect to a
specific consumer receivable portfolio containing a significant amount of
performing and semi-performing accounts, we recognized finance income on these
accounts that were being serviced by a third-party servicer at the gross amounts
received by the servicer. The servicing cost for this portfolio was reported as
an expense on our income statement as third-party service expense. There was no
change to projected portfolio collections for the nine months ended June 30,
2005. In the prior year, based on an increase in projected portfolio collections
on certain portfolios as compared to what we estimated at September 30, 2003, we
revised our estimates. Such change in accounting estimates resulted in
approximately a $5.9 million increase in finance income recognized during the
nine months ended June 30, 2004.
In the following discussions, most percentages and dollar amounts have been
rounded to aid presentation. As a result, all figures are approximations.
RESULTS OF OPERATIONS
THE NINE-MONTH PERIOD ENDED JUNE 30, 2005, COMPARED TO THE NINE-MONTH
PERIOD ENDED JUNE 30, 2004
Revenues. During the nine-month period ended June 30, 2005, finance income
increased $13.1 million or 36.2% to $49.5 million from $36.4 million for the
nine-month period ended June 30, 2004. The increase in finance income was
primarily due to an increase in finance income earned on consumer receivables
acquired for liquidation, which resulted from an increase in the average
outstanding level of accounts acquired for liquidation during the nine-month
period ended June 30, 2005, as compared to the same prior year period. The
average level of consumer receivables acquired for liquidation increased from
$108.9 million for the nine month period ended June 30, 2004 to $156.5 for the
same period in 2005. During the nine-month period ended June 30, 2005, we
acquired consumer receivable portfolios at a cost of $93.5 million as compared
to $55.6 million during the nine-month period ended June 30, 2004.
There were no changes to portfolio projections in the nine-month period
ended June 30, 2005. For the same comparative period in 2004, based on an
increase in projected portfolio collections on certain portfolios as compared to
what we estimated at September 30, 2003 and June 30, 2004, we revised our
accounting estimates. Such change in accounting estimates resulted in
approximately a $5.9 million increase in finance income recognized during the
nine-month period ended June 30, 2004. The changes in projected portfolio
collections for the period ended June 30, 2004, were primarily due to changes in
our servicing strategy in which we transferred a substantial number of accounts
from collection agencies to collection attorneys, a change that has been
successfully continued into the current period.
General and Administrative Expenses. During the nine-month period ended
June 30, 2005, general and administrative expenses increased $3.1 million or
39.1% to $11.1 million from $8.0 million for the nine-month period ended June
30, 2004, and represented 88.7% of total expenses for the nine-month period
ended June 30, 2005. The increase in general and administrative expenses was
primarily due to an increase in receivable servicing expenses during the
nine-month period ended June 30, 2005, as compared to the same prior year
period. The increase in receivable servicing expenses resulted from the
substantial increase in our average outstanding accounts acquired for
liquidation during the nine-month period ended June 30, 2005. Compared to the
same prior year period, the average balance in receivable accounts increased
43.7%. A majority of the increased costs were from collection expenses including
court costs, postage and delivery costs, salaries, payroll taxes and benefits,
professional fees, including Sarbanes-Oxley costs, and telephone charges and
travel costs as we are visiting our servicers on a more frequent basis for
financial and operational audits.
Third-Party Servicing Expenses. During the nine-month period ended June 30,
2005, third-party servicing expenses decreased $1.3 million or 100% to $0
million from $1.3 million for the nine-month period ended June 30, 2004. This
expense related to a specific portfolio which was sold in February of 2004.
15
Interest Expense. During the nine-month period ended June 30, 2005,
interest expense increased to $1.4 million from $0.6 million in the same prior
year period and represented 11.3% of total expenses for the nine-month period
ended June 30, 2005. The increase was due to an increase in average outstanding
borrowings under our line of credit during the nine-month period ended June 30,
2005, as compared to the same period in the prior year. The average outstanding
borrowings increased from $11.0 million to $35.0 million for the nine month
periods ended June 30, 2004 and 2005, respectively. The increase in borrowings
was due to the increase in acquisitions of consumer receivables acquired for
liquidation during the nine months ended June 30, 2005, as compared to the same
period last year.
THE THREE-MONTH PERIOD ENDED JUNE 30, 2005 AS COMPARED TO THE THREE-MONTH PERIOD
ENDED JUNE 30, 2004.
Revenues. During the three-month period ended June 30, 2005, finance income
increased $7.0 million or 58.0% to $19.0 million from $12.0 million for the
three-month period ended June 30, 2004. The increase in finance income was
primarily due to an increase in finance income earned on consumer receivables
acquired for liquidation, which resulted from an increase in the average
outstanding level of accounts acquired for liquidation during the three month
period ended June 30, 2005, as compared to the same prior year period. The
average level of consumer receivables acquired for liquidation increased from
$116.1 million for the three month period ended June 30, 2004 to $168.9 million
for the same period in 2005. During the three month period ended June 30, 2005,
we acquired consumer receivable portfolios at a cost of $20.2 million as
compared to $6.1 million during the three month period ended June 30, 2004.
There were no changes to portfolio projections in the three-month period
ended June 30, 2005. For the same comparative period in the prior year, based on
an increase in projected portfolio collections on certain portfolios as compared
to what we estimated at September 30, 2003, December 31, 2003 and March 31,
2004, we revised our accounting estimates. Such change in accounting estimates
has resulted in approximately a $3.1 million increase in finance income
recognized during the three- month period ended June 30, 2004. The changes in
projected portfolio collections were primarily due to changes in our servicing
strategy in which we transferred a substantial number of accounts from
collection agencies to collection attorneys, a change that has been successfully
continued into the current period.
General and Administrative Expenses. During the three-month period ended
June 30, 2005, general and administrative expenses increased $1.7 million or
67.9% to $4.2 million from $2.5 million for the three-month period ended June
30, 2004, and represented 89.0% of total expenses for the current three-month
period. The increase in general and administrative expenses was primarily due to
an increase in receivable servicing expenses during the three-month period ended
June 30, 2005, as compared to the same prior year period. The increase in
receivable servicing expenses resulted from the substantial increase in our
average outstanding accounts acquired for liquidation during the three-month
period ended June 30, 2005, as compared to the same prior year period. The
average balance in receivable accounts increased 45.4% in the current period as
compared to the same period in the prior year. A majority of the increased costs
were from collection expenses including salaries, payroll taxes and benefits,
professional fees, including Sarbanes-Oxley costs, postage costs and telephone
charges.
Interest Expense. During the three-month period ended June 30, 2005,
interest expense increased to $0.5 million from $0.2 million in the same prior
year period and represented 11.0% of total expenses for the three-month period
ended June 30, 2005. The increase was due to an increase in average outstanding
borrowings under our line of credit during the three-month period ended June 30,
2004, as compared to the same period in the prior year. The average outstanding
borrowing increased to $41.4 million for the three month period ended June 30,
2005, from $14.4 million for the three month period ended June 30, 2004 The
increase in borrowings was due to the increase in acquisitions of consumer
receivables acquired for liquidation during the third quarter ended June 30,
2005, as compared to the same quarter last year.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of cash from operations include payments on the
receivable portfolios that we have acquired and borrowings under our line of
credit. Our primary use of cash includes our purchases of consumer receivable
portfolios. We rely significantly upon our lenders to provide the funds
necessary for the purchase of consumer receivable portfolios. While we maintain
a $80 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 $80 million line of credit with a financial institution. As of June 30,
2005, there was $30.7 million outstanding balance under this facility. As of
June 30, 2005, our cash decreased to $1.9 million from $3.3 million at September
30, 2004. The decrease in cash during the nine-month period ended June 30, 2005
was primarily due to an increase in our credit line payments, income tax
payments and dividends during the nine-month period ended June 30, 2005 as
compared to the same prior year period.
16
Net cash provided by operating activities was $21.0 million during the
nine-month period ended June 30, 2005, compared to net cash provided by
operating activities of $11.5 million during the nine-month period ended June
30, 2004. The increase in net cash provided by operating activities was
primarily due to an increase in net income which was partially offset by an
increase in the amount due from servicers, prepaid income taxes, and a decrease
in income taxes payable during the nine-month period ended June 30, 2005, as
compared to the same prior year period. Net cash used in investing activities
was $13.7 million during the nine-month period ended June 30, 2005, compared to
net cash used of $6.7 million during the nine-month period ended June 30, 2004.
The increase in net cash used in investing activities was primarily due to an
increase in the purchase of accounts acquired for liquidation partially offset
by an increase in principal collected during the nine-month period ended June
30, 2005, compared to the same period in the prior year. Net cash used in
financing activities was $8.7 million during the nine-month period ended June
30, 2005, compared to net cash used of $10.4 million during the nine-month
period June 30, 2004. The decrease in net cash used in financing activities was
primarily due to a slight decrease in payments under our line of credit. In
addition, we declared and paid dividends of $1.4 million during the nine-month
period ended June 30, 2005, compared with $1.1 million of dividends paid in the
comparable period of the prior year.
In May 2005, we entered into an amended and restated loan and security
agreement that increased our line of credit with a lending institution from $60
million to $80 million. This line of credit bears interest at the lesser of
LIBOR plus an applicable margin, or the lesser of the Prime Rate plus or minus
an applicable margin based on certain leverage ratios (4.75% at June 30, 2005),
and includes additional financial covenants as defined in the agreement. As of
June 30, 2005, there was $30.7 million outstanding balance under this line of
credit and we were in compliance with all of the covenants under this line of
credit. On August 2, 2005 the loan outstanding balance was $22.6 million.
Our cash requirements have been and will continue to be significant. We
depend on external financing to acquire consumer receivables. During the
nine-month period ended June 30, 2005, we acquired consumer receivable
portfolios at a cost of approximately $93.5 million. These acquisitions were
financed with our cash flows from operating activities and our credit facility.
We anticipate the funds available under our current credit facility, and
cash from operations will be sufficient to satisfy our estimated cash
requirements for at least the next 12 months. If for any reason our available
cash otherwise proves to be insufficient to fund operations (because of future
changes in the industry, general economic conditions, unanticipated increases in
expenses, or other factors), we may be required to seek additional funding.
From time to time, we evaluate potential acquisitions of related businesses
but we may not be able to complete any acquisitions on favorable terms or at
all.
The following tables summarize the changes in the balance sheet of the
investment in receivable portfolios during the following periods:
FOR THE NINE MONTHS ENDED JUNE 30, 2005
-----------------------------------------------
ACCRUAL CASH
BASIS BASIS
PORTFOLIOS PORTFOLIOS TOTAL
----------- ----------- ------------
Balance, beginning of period.............................. $ 144,812,000 $ 1,353,000 $146,165,000
Acquisitions of receivable portfolios, net................ 93,490,000 - 93,490,000
Gross cash collections including sales proceeds........... (116,993,000) (5,454,000) (122,447,000)
Finance income recognized................................. 45,121,000 4,399,000 49,520,000
-------------- ------------ ------------
Balance, end of period.................................... $ 166,430,000 $ 298,000 $166,728,000
============== ============ ============
Revenue as a percentage of collections.................... 38.6% 80.7% 40.4%
FOR THE NINE MONTHS ENDED JUNE 30, 2004
-----------------------------------------------
ACCRUAL CASH
BASIS BASIS
PORTFOLIOS PORTFOLIOS TOTAL
----------- ----------- ------------
Balance, beginning of period.............................. $102,809,000 $ 2,783,000 $105,592,000
Acquisitions of receivable portfolios, net................ 54,880,000 704,000 55,584,000
Gross cash collections including sales proceeds........... (79,713,000) (5,563,000) (85,276,000)
Finance income recognized................................. 32,458,000 3,830,000 36,288,000
------------ ------------ ------------
Balance, end of period.................................... $110,434,000 $ 1,754,000 $112,188,000
============ ============ ============
Revenue as a percentage of collections.................... 40.7% 68.8% 42.6%
17
FOR THE THREE MONTHS ENDED JUNE 30, 2005
---------------------------------------------
ACCRUAL CASH
BASIS BASIS
PORTFOLIOS PORTFOLIOS TOTAL
----------- ----------- ------------
Balance, beginning of period.............................. $170,494,000 $ 527,000 $171,021,000
Acquisitions of receivable portfolios, net................ 20,153,000 - 20,153,000
Gross cash collections including sales proceeds........... (41,971,000) (1,503,000) (43,474,000)
Finance income recognized................................. 17,754,000 1,274,000 19,028,000
------------ ----------- ------------
Balance, end of period.................................... $166,430,000 $ 298,000 $166,728,000
============ =========== ============
Revenue as a percentage of collections.................... 42.3% 84.8% 43.8%
FOR THE THREE MONTHS ENDED JUNE 30, 2004
---------------------------------------------
ACCRUAL CASH
BASIS BASIS
PORTFOLIOS PORTFOLIOS TOTAL
----------- ----------- ------------
Balance, beginning of period.............................. $117,910,000 $ 2,134,000 $120,044,000
Acquisitions of receivable portfolios, net................ 6,144,000 - 6,144,000
Gross cash collections including sales proceeds........... (24,439,000) (1,581,000) (26,020,000)
Finance income recognized................................. 10,819,000 1,201,000 12,020,000
----------- ----------- -----------
Balance, end of period.................................... $110,434,000 $ 1,754,000 $112,188,000
============ ============ ============
Revenue as a percentage of collections........................ 44.3% 76.0% 46.2%
ADDITIONAL SUPPLEMENTARY INFORMATION ON ACCOUNTS ACQUIRED FOR LIQUIDATION
AS OF JUNE 30, 2005
-----------------------------------
COST RECOVERY INTEREST METHOD
PORTFOLIOS PORTFOLIOS
---------------- ----------------
Cumulative Original Purchase Price......................................... $ 49,300,000 $ 422,200,000
Cumulative Aggregate Managed Portfolios.................................... $ 2,168,400,000 $ 10,200,200,000
The original purchase price reflects what we paid for the receivables from
1998 through June 30, 2005. The cumulative aggregate managed portfolio balance
is the original aggregate amount owed by the borrowers from 1998 through June
30, 2005 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 interest or cost recovery method.
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 nine-month period ended June 30, 2005, we earned interest income of
$4.4 million under the cost recovery method because we collected $4.4 million in
excess of our purchase price on certain receivable portfolios. In addition, we
earned $45.1 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based
Payment ("SFAS No.123R"). This statement is a revision of FASB Statement No.
123, Accounting for Stock-Based Compensation. This Statement supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. This Statement requires that the cost resulting from
all share-based payment transactions be recognized in the financial statements.
This Statement supersedes the current method utilized by the Company of the
disclosure-only provisions of the original SFAS No. 123. The original effective
date of this Statement was to be as of the beginning of the first interim or
annual period that begins after June 15, 2004. In April 2005, The Securities and
Exchange Commission revised the effective date to implement SFAS No.123R to the
beginning of the next fiscal year. The effective date for implementation of SFAS
No. 123R for the Company will be October 1, 2005. The Company has been
disclosing the impact on net income and earnings per share since the adoption of
the original SFAS No. 123 in the notes to the financial statements.
18
In October 2003, the American Institute of Certified Accountants issued
Statement of Position ("SOP") 03-03, "Accounting for Loans or Certain Securities
Acquired in a Transfer." This SOP proposes guidance on accounting for
differences between contractual and expected cash flows from an investor's
initial investment in loans or debt securities acquired in a transfer if those
differences are attributable, at least in part, to credit quality. Increases in
expected cash flows should be recognized prospectively through an adjustment of
the IRR while decreases in expected cash flows should be recognized as
impairment. This SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004. We have implemented this SOP and there is no impact
on our results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of
business, including the impact of interest rate changes and changes in corporate
tax rates. A material change in these rates could adversely affect our operating
results and cash flows. A 25 basis-point increase in interest rates could
increase our annual interest expense by $25,000 for each $10 million of variable
debt outstanding for the entire fiscal year. We do not invest in derivative
financial or commodity instruments.
ITEM 4. CONTROLS AND PROCEDURES
a. Disclosure Controls and Procedures.
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 SEC's rules and forms.
b. Changes in Internal Controls Over Financial Reporting.
There have been no changes in our internal control over financial reporting
that occurred during our last fiscal quarter to which this Quarterly Report on
Form 10-Q relates that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of our business, we are involved in numerous legal
proceedings. We regularly initiate collection lawsuits, using our network of
third party law firms, against consumers. Also, consumers occasionally initiate
litigation against us, in which they allege that we have violated a federal or
state law in the process of collecting their account. We do not believe that
these ordinary course matters are material to our business and financial
condition. As of the date of this Form 10-Q, we were not involved in any
material litigation in which we were a defendant.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of the Registrant's Chief Executive Officer, Gary Stern,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Registrant's Chief Financial Officer, Mitchell
Cohen, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Registrant's Chief Executive Officer, Gary Stern,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Registrant's Chief Financial Officer, Mitchell
Cohen, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ASTA FUNDING, INC.
(Registrant)
Date: August 9, 2005 By: /s/ Gary Stern
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Gary Stern, President, Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2005 By: /s/ Mitchell Cohen
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Mitchell Cohen, Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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