SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 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
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Commission file number: 0-26906
ASTA FUNDING, INC.
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(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
DELAWARE 22-3388607
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
210 SYLVAN AVENUE, ENGLEWOOD CLIFFS, NJ 07632
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Issuer's telephone number, including area code: (201) 567-5648
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Act). Yes (X) No ( )
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes ( ) No (X)
The aggregate market value of voting and nonvoting common equity held
by non-affiliates of the registrant was approximately $205,035,000, as of the
last business day of the registrant's most recently completed second fiscal
quarter.
As of December 8, 2005, the registrant had 13,595,324 shares of Common Stock
issued and outstanding.
Documents Incorporated by Reference:
The information called for by Part III of this Form 10-K is
incorporated by reference from the Company's Proxy Statement to be filed with
the Commission on or before January 28, 2006.
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 4A. Executive Officers
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other information
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholders
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on 8-K
Signatures
Certifications
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CAUTION REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning 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", "anticipate", "estimate", and similar
words, although some forward-looking statements are expressed differently.
Forward looking statements represent our judgment regarding future events, but
we can give no assurance that such judgments will prove to be correct. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected in such forward-looking
statements. Certain factors which could materially affect our results and our
future performance are described below under "Risk Factors" and "Critical
Accounting Policies" in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. " See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward-Looking Statements." Forward-looking statements are inherently uncertain
as they are based on current expectations and assumptions concerning future
events and are subject to numerous known and unknown risks and uncertainties. We
caution you not to place undue reliance on these forward-looking statements,
which are only predictions and speak only as of the date of this report. Except
as required by law, we undertake no obligation to update or publicly announce
revisions to any forward-looking statements to reflect future events or
developments.
Part I
ITEM 1. DESCRIPTION OF BUSINESS.
Overview
Asta Funding, Inc. acquires, manages, collects and services 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 debtors. 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.
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We purchase receivables from creditors and others through privately negotiated
direct sales and auctions in which sellers of receivables seek bids from several
pre-qualified debt purchasers. These receivables consist primarily of
MasterCard(R), Visa(R), private label credit card accounts, telecom wireless
charge-offs, among other types of receivables. We pursue new acquisitions of
consumer receivable portfolios from originators of consumer debt, 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.
Our objective is to maximize our return on investment on acquired consumer
receivable portfolios. As a result, before acquiring a portfolio, we analyze the
portfolio to determine how to best maximize collections in a cost efficient
manner and decide whether to use our internal servicing and collection
department, or third-party collection agencies and attorneys.
If we elect to outsource the servicing of receivables, our senior management
typically determines the appropriate third-party collection agencies and
attorneys based on the type of receivables purchased. Once a group of
receivables is sent to third-party collection agencies and attorneys, our
management actively monitors and reviews the third-party collection agencies and
attorneys' performance on an ongoing basis. Based on portfolio performance
considerations, our management either will move certain receivables from one
third-party collection agency and attorney to another or to our internal
servicing department if it anticipates that this will result in an increase in
collections or it will sell the portfolio. In December 2002, we acquired a
collection center, which expanded our internal collection and servicing
capabilities. The collection center currently employs approximately 55 staff,
including senior management and has the capacity for more than 100 employees. We
believe that the retention of these employees, as well as the increased capacity
available at the collection center, will better assist us in monitoring our
third-party collection agencies and attorneys, while giving us greater
flexibility in the future for servicing in-house a larger percentage of our
consumer receivable portfolios.
We acquire portfolios through a combination of internally generated cash flow
and bank debt. In the past, on certain large portfolio acquisitions we have
partnered with a large financial institution in which we shared in the finance
income generated from the collections on the portfolios.
For the years ended September 30, 2005, 2004 and 2003, our finance income was
approximately $69.5 million, $51.2 million and $34.9 million respectively, and
our net income was approximately $31.0 million, $22.2 million and $11.6 million,
respectively. During these same years our net cash collections were
approximately $168.9 million, $114.0 million and $80.5 million respectively.
We were formed in 1994 as an affiliate of Asta Group, Incorporated, an entity
owned by Arthur Stern, our Chairman of the Board and an Executive Vice
President, Gary Stern, our President and Chief Executive Officer, and other
members of the Stern family, to purchase, at a small discount to face value,
retail installment sales contracts secured by motor vehicles. We became a public
company in November 1995. In 1999, we decided to capitalize on our management's
more than 40 years of experience and expertise in acquiring and managing
consumer receivable portfolios for Asta Group. As a result, we ceased purchasing
automobile contracts and, with the assistance and financial support of Asta
Group, purchased our first significant consumer receivable portfolio. Since
then, Asta Group ceased acquiring consumer receivable portfolios and,
accordingly, does not compete with us.
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Industry Overview
The purchasing, servicing and collection of charged-off, semi-performing and
performing consumer receivables is a growing industry that is driven by:
o increasing levels of consumer debt;
o increasing defaults of the underlying receivables; and
o increasing utilization of third-party providers to collect such
receivables.
According to the U.S. Federal Reserve Board, consumer credit has increased from
$1.2 trillion at December 31, 1997, to $2.2 trillion at August 31, 2005.
According to the Nilson Report, a credit card industry newsletter, the consumer
credit market will increase to $2.8 trillion by 2010 and credit card charge-offs
are predicted to reach $72.9 billion by 2005, up from $18.0 billion in 1995.
We believe that as a result of the difficulty in collecting these receivables
and the desire of originating institutions to focus on their core businesses and
to generate revenue from these receivables, originating institutions are
increasingly electing to sell these portfolios.
Strategy
Our primary objective is to utilize our management's experience and expertise to
effectively grow our business by identifying, evaluating, pricing and acquiring
consumer receivable portfolios and maximizing collections of such receivables in
a cost efficient manner. Our strategy includes:
o managing the collection and servicing of our consumer receivable
portfolios, including outsourcing a majority of those activities to
maintain low fixed overhead;
o selling accounts on an opportunistic basis, generally when our
efforts have been exhausted through traditional collecting methods,
or when pricing is at our indifference point;
o expanding financial flexibility through increased capital and lines
of credit;
o capitalizing on our strategic relationships to identify and acquire
consumer receivable portfolios; and
o expanding our business through the purchase of consumer receivables
from new and existing sources.
We believe that as a result of our management's experience and expertise, and
the fragmented yet growing market in which we operate, we are well-positioned to
successfully implement our strategy.
We are a Delaware corporation whose principal executive offices are located at
210 Sylvan Avenue, Englewood Cliffs, New Jersey 07632. We were incorporated in
New Jersey on July 7, 1994 and were reincorporated in Delaware on October 12,
1995 as a result of a merger with a Delaware corporation. Unless the context
otherwise requires, the terms "we", "us" or "our" as used herein refer to Asta
Funding, Inc. and our subsidiaries.
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CONSUMER RECEIVABLES BUSINESS
Receivables Purchase Program
We purchase bulk receivable portfolios that include charged-off receivables,
semi-performing receivables and performing receivables. These receivables
consist primarily of MasterCard(R), Visa(R), private label credit card accounts,
telecom wireless receivables, among other types of receivables.
From time to time, we may acquire directly, and indirectly through the consumer
receivable portfolios that we acquire, secured consumer asset portfolios.
We identify potential portfolio acquisitions 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.
Historically, the purchase prices of the consumer receivable portfolios that we
have acquired have ranged from less than $500,000 to more than $50 million. As a
part of our strategy to acquire consumer receivable portfolios, we have from
time to time entered into, and may continue to enter into, participation and
profit sharing agreements with our sources of financing and our third-party
collection agencies and attorneys. These arrangements may take the form of a
joint bid, with one of our third-party collection agencies and attorneys or
financing source who assists in the acquisition of a portfolio and provide us
with more favorable non-recourse financing terms or a discounted servicing
commission.
We utilize our relationships with brokers, third-party collection agencies and
attorneys, and sellers of portfolios to locate portfolios for purchase. Our
senior management is responsible for:
o coordinating due diligence, including in some cases on-site visits
to the seller's office;
o stratifying and analyzing the portfolio characteristics;
o valuing the portfolio;
o preparing bid proposals;
o negotiating pricing and terms;
o closing the purchase; and
o coordinating the receipt of account documentation for the acquired
portfolios.
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The seller or broker typically supplies us with either a sample listing or the
actual portfolio being sold on compact disk, a diskette or other form of media.
We analyze each consumer receivable portfolio to determine if it meets our
purchasing criteria. We may then prepare a bid or negotiate a purchase price. If
a purchase is completed, senior management monitors the portfolio's performance
and uses this information in determining future buying criteria and pricing.
We purchase receivables at substantial discounts from the balance actually owed
by the consumer. We determine how much to bid on a portfolio by evaluating many
different variables, such as:
o The number of collection agencies previously attempting to collect
the receivables in the portfolio;
o the average balance of the receivables;
o the age of the receivables;
o past history of performance of similar assets;
o number of days since charge-off;
o payments made since charge-off;
o the credit originator and their credit guidelines;
o the locations of the debtors; and
o assets found within portfolios.
Once a receivable portfolio has been identified for potential purchase, we
prepare various analyses based on extracting customer level data from external
sources, other than the issuer, to analyze the potential collectibility of the
portfolio. We also analyze the portfolio by comparing it to similar portfolios
previously acquired by us. In addition, we perform qualitative analyses of other
matters affecting the value of portfolios, including a review of the
delinquency, charge off, placement and recovery policies of the originator as
well as the collection authority granted by the originator to any third party
collection agencies, and, if possible, by reviewing their recovery efforts on
the particular portfolio. After these evaluations are completed, members of our
senior management discuss the findings, decide whether to make the purchase and
finalize the price at which we are willing to purchase the portfolio.
We purchase most of our consumer receivable portfolios directly from originators
and other sellers including, from time to time, our third-party collection
agencies and attorneys through privately negotiated direct sales and through
auction type sales in which sellers of receivables seek bids from several
pre-qualified debt purchasers. We also, from time to time, use the services of
brokers. In order for us to consider a potential seller as a source of
receivables, a variety of factors are considered. Sellers must demonstrate that
they have:
o adequate internal controls to detect fraud;
o the ability to provide post sale support; and
o the capacity to honor put-back and return warranty requests.
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Generally, our portfolio purchase agreements provide that we can return certain
accounts to the seller within a specified time period. However, in some
transactions, we may acquire a portfolio with few, if any, rights to return
accounts to the seller. After acquiring a portfolio, we conduct a detailed
analysis to determine which accounts in the portfolio should be returned to the
seller. Although the terms of each portfolio purchase agreement differ, examples
of accounts that may be returned to the seller include:
o debts paid prior to the cutoff date;
o debts in which the consumer filed bankruptcy prior to the cutoff
date;
o debts in which the consumer was deceased prior to cutoff date; and
o fraudulent accounts.
Accounts returned to sellers for the fiscal years ended 2005, 2004 and 2003 have
been determined to be immaterial. Our purchase agreements do not contain any
provision for a limitation on the number of accounts that can be returned to the
seller.
We generally use third-parties to determine bankrupt and deceased accounts,
which allows us to focus our resources on portfolio collections. Under a typical
portfolio purchase agreement, the seller refunds the portion of the purchase
price attributable to the returned accounts or delivers replacement receivables
to us. Occasionally, we will acquire a well seasoned, or older, portfolio at a
reduced price from a seller that is unable to meet all of our purchasing
criteria. When we acquire such portfolios, the purchase price is discounted
beyond the typical discounts we receive on the portfolios we purchase that meet
our purchasing criteria.
Receivable Servicing
Our objective is to maximize our return on investment on acquired consumer
receivable portfolios. As a result, before acquiring a portfolio, we analyze the
portfolio to determine how to best maximize collections in a cost efficient
manner and decide whether to use our internal servicing and collection
department or third-party collection agencies and attorneys.
Therefore, if we are successful in acquiring the portfolios, we can promptly
process the receivables that were purchased and commence the collection process.
Unlike collection agencies that typically have only a specified period of time
to recover a receivable, as the portfolio owners we have significantly more
flexibility and can establish payment programs.
Once a portfolio has been acquired, we or our third-party collection agencies or
attorneys generally download all receivable information provided by the seller
into our account management system and reconcile certain information with the
information provided by the seller in the purchase contract. We or our
third-party collection agencies or attorneys send notification letters to
obligors of each acquired account explaining, among other matters, our new
ownership and asking that the obligor contact us. In addition, we notify the
three major credit reporting agencies of our new ownership of the receivables.
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We presently outsource the majority of our receivable servicing to third-party
collection agencies and attorneys. Our senior management typically determines
the appropriate third-party collection agency and attorneys based on the type of
receivables purchased. Once a group of receivables is sent to a third-party
collection agency or attorney, our management actively monitors and reviews the
third-party collection agencies and attorneys' performance on an ongoing basis.
Our management receives detailed analyses, including collection activity and
portfolio performance, from our internal servicing departments to assist it in
evaluating the results of the efforts of the third-party collection agencies and
attorneys. Based on portfolio performance guidelines, our management will move
certain receivables from one third-party collection agency or attorney to
another, or to our internal servicing department if it anticipates that this
will result in an increase in collections.
In December 2002, we acquired a collection center that currently employs
approximately 55 experienced persons with the capacity for over 100 employees.
This facility expands our internal collection and servicing capabilities, gives
us greater flexibility and control over the servicing of our consumer
receivables portfolios and assists us in monitoring our third-party collection
agencies and attorneys..
We have four main internal servicing departments:
o collection/skiptrace;
o legal;
o customer service; and
o accounting.
Collection/Skiptrace. The collection/skiptrace department is responsible for
making contact with the obligors and collecting on our consumer receivable
portfolios that are not being serviced by third-party collection agencies and
attorneys. This department uses a friendly, customer service approach to collect
on receivables. Through the use of our collection software and telephone system,
each collector is responsible for:
o contacting customers;
o explaining the benefits of making payment on the obligations; and
o working with the customers to develop acceptable means to satisfy
their obligations.
We and our third-party collection agencies and attorneys have the flexibility to
structure repayment plans that accommodate the needs of obligors by:
o offering obligors a discount on the overall obligation; and
o tailoring repayment plans that provide for the payment of these
obligations as a component of the obligor's monthly budget.
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We also use a series of collection letters, late payment reminders, and
settlement offers that are sent out at specific intervals or at the request of a
member of our collection department. When the collection department cannot
contact the customer by either telephone or mail, the account is referred to the
skiptrace department.
The skiptrace department is responsible for locating and contacting customers
who could not be contacted by either the collection or legal departments. The
skiptrace employees use a variety of public and private third-party databases to
locate customers. Once a customer is located and contact is made by a
skiptracer, the account is then referred back to the collection or legal
department for follow-up. The skiptrace department is also responsible for
finding current employers and locating assets of obligors when this information
is deemed necessary.
Legal. If the collection department determines that the customer has the ability
to satisfy his obligation but our normal collection activities have not resulted
in any resolution of the customer's obligations, the account is referred to the
legal department, which consists of non-lawyer administrative staff experienced
in collection work. The legal department refers legal case proceedings to
outside counsel. The legal department also refers accounts to the skiptrace
department to obtain a current phone number, address, the location of assets of
the obligor or the identity of the obligor's employer. In addition, the legal
department communicates with the collection attorneys that we utilize throughout
the country. Over the past eighteen months, we have employed a more aggressive
legal strategy that will yield more collections over a longer period of time.
Customer Service. The customer service department is responsible for:
o handling incoming calls from debtors and third-party collection
agencies that are responsible for collecting on our consumer
receivable portfolios;
o coordinating customer inquiries and assisting the collection
agencies in the collection process;
o handling buy-back and information requests from companies who have
purchased receivables from us;
o working with the buyers during the transition period and post sale
process; and
o handling any issues that may arise once a receivable portfolio has
been sold.
Accounting. In addition to the customary accounting function, the accounting
department is responsible for:
o making daily deposits of customer payments;
o posting these payments to the customer's account;
o mailing monthly statements to customers; and
o in conjunction with the customer service department, providing
senior management with weekly and monthly receivable activity and
performance reports.
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Accounting employees also assist collection department employees in handling
customer disputes with regard to payment and balance information. The accounting
department also assists the customer service department in the handling of
buy-back requests from companies who have purchased receivables from us. In
addition, the accounting department reviews the results of the collection of
consumer receivable portfolios that are being serviced by third-party collection
agencies and attorneys.
Collections Represented by Account Sales
Certain collections represent account sales to other debt buyers to help
maximize revenue and cash flows. We feel that our business model of not having a
large number of collectors, coupled with a legal strategy where we try to attach
liens and judgments on obligors, allows us the flexibility to sell accounts at
prices that are attractive to us and as important, sell the less desirable
accounts within our collective portfolios. There are many factors that
contribute to the decision of which receivable to sell and which to service,
including:
o the age of the receivables;
o the status of the receivables -- whether paying or non-paying; and
o the selling price.
Collections represented by account sales for the fiscal years ended September
30, 2005, 2004 and 2003 were $64.7 million, $40.3 million and $21.5 million,
respectively. Collections represented by account sales as a percentage of total
collections for the fiscal years ended September 30, 2005, 2004 and 2003 were
38.3%, 35.3% and 26.8%, respectively.
Marketing
The Company has established relationships with brokers who market consumer
receivable portfolios from banks, finance companies and other credit providers.
In addition, the Company subscribes to national publications that list consumer
receivable portfolios for sale. The Company also directly contacts banks,
finance companies or other credit providers to solicit consumer receivables for
sale.
Competition
Our business of purchasing distressed consumer receivables is highly competitive
and fragmented, and we expect that competition from new and existing companies
will increase. We compete with:
o other purchasers of consumer receivables, including third-party
collection companies; and
o other financial services companies who purchase consumer
receivables.
Some of our competitors are larger and more established and may have
substantially greater financial, technological, personnel and other resources
than we have, including greater access to the capital market system. We believe
that no individual competitor or group of competitors has a dominant presence in
the market.
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We compete with our competitors for consumer receivable portfolios based on many
factors, including:
o purchase price;
o representations, warranties and indemnities requested;
o speed in making purchase decisions; and
o reputation of the purchaser.
Our strategy is designed to capitalize on the market's lack of a dominant
industry player. We believe that our management's experience and expertise in
identifying, evaluating, pricing and acquiring consumer receivable portfolios
and managing collections coupled with our strategic alliances with third-party
collection agencies and attorneys and our sources of financing give us a
competitive advantage. However, we cannot assure that we will be able to compete
successfully against current or future competitors or that competition will not
increase in the future.
Management Information Systems
We believe that a high degree of automation is necessary to enable us to grow
and successfully compete with other finance companies. Accordingly, we
continually upgrade our computer hardware and, when necessary, our software to
support the servicing and recovery of consumer receivables acquired for
liquidation. Our telecommunications and computer systems allow us to quickly and
accurately process large amounts of data necessary to purchase and service
consumer receivable portfolios. In addition, we rely on the information
technology of our third-party collection agencies and attorneys and periodically
review their systems to ensure that they can adequately service our consumer
receivable portfolios.
Due to our desire to increase productivity through automation, we periodically
review our systems for possible upgrades and enhancements.
Government Regulation
The relationship of a consumer and a creditor is extensively regulated by
federal, state and municipal laws, rules, regulations and ordinances. These laws
include, but are not limited to, the following federal statutes and regulations
: the Federal Truth-In-Lending Act, the Fair Credit Billing Act, the Equal
Opportunity Act and the Fair Credit Reporting Act, as well as comparable
statutes in states where consumers reside and/or where creditors are located.
Among other things, the laws and regulations applicable to various creditors
impose disclosure requirements regarding the advertisement, application,
establishment and operation of credit card accounts or other types of credit
programs. Federal law requires a creditor to disclose to consumers, among other
things, the interest rates, fees, grace periods and balance calculations methods
associated with their accounts. In addition, consumers are entitled to have
payments and credits applied to their accounts promptly, to receive prescribed
notices and to require billing errors to be resolved promptly. In addition, some
laws prohibit certain discriminatory practices in connection with the extension
of credit. Further, state laws may limit the interest rate and the fees that a
creditor may impose on consumers. Failure by the creditors to have complied with
applicable laws could create claims and rights to offset by consumers that would
reduce or eliminate their obligations, which could have a material adverse
effect on our operations. Pursuant to agreements under which we purchase
receivables, we are typically indemnified against losses resulting from the
failure of the creditor to have complied with applicable laws relating to the
receivables prior to our purchase of such receivables.
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Certain laws, including the laws described above, may limit our ability to
collect amounts owing with respect to the receivables regardless of any act or
omission on our part. For example, under the Federal Fair Credit Billing Act, a
credit card issuer may be subject to certain claims and defenses arising out of
certain transactions in which a credit card is used if the consumer has made a
good faith attempt to obtain satisfactory resolution of a problem relative to
the transaction and, except in cases where there is a specified relationship
between the person honoring the card and the credit card issuer, the amount of
the initial transaction exceeds $50 and the place where the initial transaction
occurred was in the same state as the consumer's billing address or within 100
miles of that address. Accordingly, as a purchaser of defaulted receivables, we
may purchase receivables subject to valid defenses on the part of the consumer.
Other laws provide that, in certain instances, consumers cannot be held liable
for, or their liability is limited to $50 with respect to, charges to the credit
card credit account that were a result of an unauthorized use of the credit card
account. No assurances can be given that certain of the receivables were not
established as a result of unauthorized use of a credit card account, and,
accordingly, the amount of such receivables may not be collectible by us.
Several federal, state and municipal laws, rules, regulations and ordinances,
including, but not limited to, the Federal Fair Debt Collection Practices Act
and the Federal Trade Commission Act and comparable state statutes regulate
consumer debt collection activity. Although, for a variety of reasons, we may
not be specifically subject to the FDCPA and certain state statutes specifically
addressing third-party debt collectors, it is our policy to comply with
applicable laws in our collection activities. Additionally, our Third-party
collection agencies and attorneys may be subject to these laws. To the extent
that some or all of these laws apply to our collection activities or our
third-party collection agencies and attorneys' collection activities, failure to
comply with such laws could have a materially adverse effect on us.
Additional laws may be enacted that could impose additional restrictions on the
servicing and collection of receivables. Such new laws may adversely affect the
ability to collect the receivables.
Because the receivables were originated and serviced pursuant to a variety of
federal and/or state laws by a variety of entities and involved consumers in all
50 states, the District of Columbia and Puerto Rico, there can be no assurance
that all original servicing entities have at all times been in substantial
compliance with applicable law. Additionally, there can be no assurance that we
or our third-party collection agencies and attorneys have been or will continue
to be at all times in substantial compliance with applicable law. The failure to
comply with applicable law could materially adversely affect our ability to
collect our receivables and could subject us to increased costs and fines and
penalties.
We currently hold a number of licenses issued under applicable consumer credit
laws. Certain of our current licenses and any licenses that we may be required
to obtain in the future may be subject to periodic renewal provisions and/or
other requirements. Our inability to renew licenses or to take any other
required action with respect to such licenses could have a material adverse
effect upon our results of operation and financial condition.
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Employees
As of September 30, 2005, we had 131 full-time employees. We are not a party to
any collective bargaining agreement.
Risk Factors
You should carefully consider these risk factors in evaluating the Company. In
addition to the following risks, there may also be risks that we do not yet know
of or that we currently think are immaterial that may also impair our business
operations. If any of the following risks occur, our business, results of
operation or financial condition could be adversely affected, the trading price
of our common stock could decline and shareholders might lose all or part of
their investment.
We may not be able to purchase consumer receivable portfolios at favorable
prices or on sufficiently favorable terms or at all.
Our success depends upon the continued availability of consumer receivable
portfolios that meet our purchasing criteria and our ability to identify and
finance the purchases of such portfolios. The availability of consumer
receivable portfolios at favorable prices and on terms acceptable to us depends
on a number of factors outside of our control, including:
o the continuation of the current growth trend in consumer debt;
o the continued volume of consumer receivable portfolios available for
sale; and
o competitive factors affecting potential purchasers and sellers of
consumer receivable portfolios.
o the change in the bankruptcy laws, which makes it more difficult for
an individual to file under Chapter 7 of the new bankruptcy law.
We have seen at certain times that the market for acquiring consumer receivable
portfolios becomes more competitive, thereby diminishing from time to time our
ability to acquire such receivables at prices we are willing to pay.
The growth in consumer debt may also be affected by:
o a slowdown in the economy;
o reductions in consumer spending;
o changes in the underwriting criteria by originators; and
o changes in laws and regulations governing consumer lending.
Any slowing of the consumer debt growth trend could result in a decrease in the
availability of consumer receivable portfolios for purchase that could affect
the purchase prices of such portfolios. Any increase in the prices we are
required to pay for such portfolios in turn will reduce the profit, if any, we
generate from such portfolios.
Our quarterly operating results may fluctuate and cause our stock price to
decline.
-14-
Because of the nature of our business, our quarterly operating results may
fluctuate, which may adversely affect the market price of our common stock. Our
results may fluctuate as a result of any of the following:
o the timing and amount of collections on our consumer receivable
portfolios;
o our inability to identify and acquire additional consumer receivable
portfolios;
o a decline in the estimated value of our consumer receivable
portfolio recoveries;
o increases in operating expenses associated with the growth of our
operations; and
o general and economic market conditions.
We may not be able to recover sufficient amounts on our consumer receivable
portfolios to recover the costs associated with the purchase of those portfolios
and to fund our operations.
We acquire and collect on consumer receivable portfolios that contain
charged-off, semi-performing and performing receivables. In order to operate
profitably over the long term, we must continually purchase and collect on a
sufficient volume of receivables to generate revenue that exceeds our costs. For
accounts that are charged-off or semi-performing, the originators or interim
owners of the receivables generally have:
o made numerous attempts to collect on these obligations, often using
both their in-house collection staff and third-party collection
agencies;
o subsequently deemed these obligations as uncollectible; and
o charged-off these obligations.
These receivable portfolios are purchased at significant discounts to the amount
the consumers owe. These receivables are difficult to collect and actual
recoveries may vary and be less than the amount expected. In addition, our
collections may worsen in a weak economic cycle. We may not recover amounts in
excess of our acquisition and servicing costs.
Our ability to recover on our portfolios and produce sufficient returns can be
negatively impacted by the quality of the purchased receivables. In the normal
course of our portfolio acquisitions, some receivables may be included in the
portfolios that fail to conform to certain terms of the purchase agreements and
we may seek to return these receivables to the seller for payment or replacement
receivables. However, we cannot guarantee that any of such sellers will be able
to meet their payment obligations to us. Accounts that we are unable to return
to sellers may yield no return. If cash flows from operations are less than
anticipated as a result of our inability to collect sufficient amounts on our
receivables, our ability to satisfy our debt obligations, purchase new
portfolios and our future growth and profitability may be materially adversely
affected.
We are subject to intense competition for the purchase of consumer receivable
portfolios.
-15-
We compete with other purchasers of consumer receivable portfolios, with
third-party collection agencies and with financial services companies that
manage their own consumer receivable portfolios. We compete on the basis of
reputation, industry experience and performance. Some of our competitors have
greater capital, personnel and other resources than we have. The possible entry
of new competitors, including competitors that historically have focused on the
acquisition of different asset types, and the expected increase in competition
from current market participants may reduce our access to consumer receivable
portfolios. Aggressive pricing by our competitors could raise the price of
consumer receivable portfolios above levels that we are willing to pay, which
could reduce the number of consumer receivable portfolios suitable for us to
purchase or if purchased by us, reduce the profits, if any, generated by such
portfolios. If we are unable to purchase receivable portfolios at favorable
prices or at all, our finance income and earnings could be materially reduced.
We are dependent upon third parties to service a majority of our consumer
receivable portfolios.
Although we utilize our in-house collection staff to collect some of our
receivables, we outsource a majority of our receivable servicing. As a result,
we are dependent upon the efforts of our third party-collection agencies and
attorneys to service and collect our consumer receivables. However, any failure
by our third party collection agencies and attorneys to adequately perform
collection services for us or remit such collections to us could materially
reduce our finance income and our profitability. In addition, our finance income
and profitability could be materially adversely affected if we are not able to
secure replacement third party collection agencies and attorneys and redirect
payments from the debtors to our new third party collection agencies and
attorneys promptly in the event our agreements with our third-party collection
agencies and attorneys are terminated, our third-party collection agencies and
attorneys fail to adequately perform their obligations or if our relationships
with such third-party collection agencies and attorneys adversely change.
Our collections may decrease if bankruptcy filings increase.
During times of economic recession, the amount of defaulted consumer receivables
generally increases, which contributes to an increase in the amount of personal
bankruptcy filings. Under certain bankruptcy filings, a debtor's assets are sold
to repay credit originators, but since the defaulted consumer receivables we
purchase are generally unsecured we often would not be able to collect on those
receivables. We cannot assure you that our collection experience would not
decline with an increase in bankruptcy filings. If our actual collection
experience with respect to a defaulted consumer receivables portfolio is
significantly lower than we projected when we purchased the portfolio, our
earnings could be negatively affected.
If we are unable to access external sources of financing, we may not be able to
fund and grow our operations.
We depend on loans from our credit facility and other external sources to fund
and expand our operations. Our ability to grow our business is dependent on our
access to additional financing and capital resources. The failure to obtain
financing and capital as needed would limit our ability to:
o purchase consumer receivable portfolios; and
o achieve our growth plans.
In addition, our financing source imposes certain restrictive covenants,
including financial covenants. Failure to satisfy any of these covenants could:
-16-
o cause our indebtedness to become immediately payable;
o preclude us from further borrowings from these existing sources; and
o prevent us from securing alternative sources of financing necessary
to purchase consumer receivable portfolios and to operate our
business.
We use estimates for recognizing finance income on substantially all of our
consumer receivable portfolio investments and our earnings would be reduced if
actual results are less than estimated.
We recognize finance income on substantially all of our consumer receivable
portfolios using the interest method. We only use this method if we can
reasonably estimate the expected amount and timing of cash to be collected on a
specific portfolio based on historic experience and other factors. Under the
interest method, we recognize finance income on the effective yield method based
on the actual cash collected during a period, future estimated cash flows and
the portfolio's carrying value prior to the application of the current quarter's
cash collections. The estimated future cash flows are reevaluated quarterly. If
future cash collections on these portfolios were less than what was estimated,
we would recognize less than anticipated finance income or possibly an expense
that would reduce our earnings during such periods. Any reduction in our
earnings could materially adversely affect our stock price.
We may rely on third parties to locate, identify and evaluate consumer
receivable portfolios available for purchase.
We may rely on third parties, including brokers and third-party collection
agencies and attorneys , to identify consumer receivable portfolios and, in some
instances, to assist us in our evaluation and purchase of these portfolios. As a
result, if such third parties fail to identify receivable portfolios or if our
relationships with such third parties are not maintained, our ability to
identify and purchase additional receivable portfolios could be materially
adversely affected. In addition, if we, or such parties fail to correctly or
adequately evaluate the value or collectibility of these consumer receivable
portfolios, we may pay too much for such portfolios and our earnings could be
negatively affected.
The loss of an asset type could impact our ability to acquire receivable
portfolios.
In the event one of our asset classes is no longer available to us, our
purchases may decline and our results might suffer.
We may not be successful at acquiring receivables of new asset types or in
implementing a new pricing structure.
We may pursue the acquisition of receivable portfolios of asset types in which
we have little current experience. We may not be successful in completing any
acquisitions of receivables of these asset types and our limited experience in
these asset types may impair our ability to collect on these receivables. This
may cause us to pay too much for these receivables, and consequently, we may not
generate a profit from these receivable portfolio acquisitions.
The loss of any of our executive officers may adversely affect our operations
and our ability to successfully acquire receivable portfolios.
-17-
Arthur Stern, our Chairman and Executive Vice President, Gary Stern, our
President and Chief Executive Officer, and Mitchell Cohen, our Chief Financial
Officer are responsible for making substantially all management decisions,
including determining which portfolios to purchase, the purchase price and other
material terms of such portfolio acquisitions. These decisions are instrumental
to the success of our business. The loss of the services of any of our executive
officers could disrupt our operations and adversely affect our ability to
successfully acquire receivable portfolios.
The Stern family effectively controls Asta, substantially reducing the influence
of our other stockholders.
Members of the Stern family including Arthur Stern, Gary Stern and Barbara
Marburger, daughter of Arthur Stern and sister of Gary Stern, trusts or
custodial accounts for the benefit of minor children of Barbara Marburger and
Gary Stern, Asta Group, Incorporated, and limited liability companies controlled
by Judith R. Feder, niece of Arthur Stern and cousin of Gary Stern, in which
Arthur Stern, Alice Stern (wife of Arthur Stern and mother of Gary Stern and
Barbara Marburger), Gary Stern and trusts for the benefit of the issue of Arthur
Stern and the issue of Gary Stern hold all economic interests, own in the
aggregate approximately 27.9% of our outstanding shares of common stock. In
addition, other members of the Stern Family, such as adult children of Gary
Stern and Barbara Marburger, own additional shares. As a result, the Stern
family is able to influence significantly the actions that require stockholder
approval, including:
o the election of a majority of our directors; and
o the approval of mergers, sales of assets or other corporate
transactions or matters submitted for stockholder approval.
As a result, our other stockholders may have little or no influence over matters
submitted for stockholder approval. In addition, the Stern family's influence
could preclude any unsolicited acquisition of us and consequently materially
adversely affect the price of our common stock.
We have experienced rapid growth over the past several years, which has placed
significant demands on our administrative, operational and financial resources
and could result in an increase in our expenses.
We plan to continue our growth, which could place additional demands on our
resources and cause our expenses to increase. Future internal growth will depend
on a number of factors, including:
o the effective and timely initiation and development of relationships
with sellers of consumer receivable portfolios and strategic
partners;
o our ability to maintain the collection of consumer receivables
efficiently; and
o the recruitment, motivation and retention of qualified personnel.
Sustaining growth will also require the implementation of enhancements to our
operational and financial systems and will require additional management,
operational and financial resources. There can be no assurance that we will be
able to manage our expanding operations effectively or that we will be able to
maintain or accelerate our growth and any failure to do so could adversely
affect our ability to generate finance income and control our expenses.
-18-
Government regulations may limit our ability to recover and enforce the
collection of our receivables.
Federal, state and municipal laws, rules, regulations and ordinances may limit
our ability to recover and enforce our rights with respect to the receivables
acquired by us. These laws include, but are not limited to, the following
federal statutes and regulations promulgated thereunder and comparable statutes
in states where consumers reside and/or where creditors are located:
o the Fair Debt Collection Practices Act;
o the Federal Trade Commission Act;
o the Truth-In-Lending Act;
o the Fair Credit Billing Act;
o the Equal Credit Opportunity Act; and
o the Fair Credit Reporting Act.
We may be precluded from collecting receivables we purchase where the creditor
or other previous owner or third-party collection agency and attorney failed to
comply with applicable law in originating or servicing such acquired
receivables. Laws relating to the collection of consumer debt also directly
apply to our business. Our failure to comply with any laws applicable to us,
including state licensing laws, could limit our ability to recover on
receivables and could subject us to fines and penalties, which could reduce our
earnings and result in a default under our loan arrangements. In addition, our
third-party collection agencies and attorneys may be subject to these and other
laws and their failure to comply with such laws could also materially adversely
affect our finance income and earnings.
Additional laws may be enacted that could impose additional restrictions on the
servicing and collection of receivables. Such new laws may adversely affect the
ability to collect on our receivables, which could also adversely affect our
finance income and earnings.
Because our receivables are generally originated and serviced pursuant to a
variety of federal and/or state laws by a variety of entities and may involve
consumers in all 50 states, the District of Columbia and Puerto Rico, there can
be no assurance that all original servicing entities have at all times been in
substantial compliance with applicable law. Additionally, there can be no
assurance that we, or our Third-party collection agencies and attorneys have
been or will continue to be at all times in substantial compliance with
applicable law. The failure to comply with applicable law could materially
adversely affect our ability to collect our receivables and could subject us to
increased costs, fines and penalties.
We may incur substantial debt from time to time in connection with our purchase
of consumer receivable portfolios which could affect our ability to obtain
additional funds and may increase our vulnerability to economic or business
downturns.
-19-
We may incur substantial indebtedness from time to time in connection with the
purchase of consumer receivable portfolios and would be subject to the risks
associated with incurring such indebtedness, including:
o we would be required to dedicate a portion of our cash flows from
operations to pay debt service costs and, as a result, we would have
less funds available for operations, future acquisitions of consumer
receivable portfolios, and other purposes;
o it may be more difficult and expensive to obtain additional funds
through financings, if available at all;
o we would be more vulnerable to economic downturns and fluctuations
in interest rates, less able to withstand competitive pressures and
less flexible in reacting to changes in our industry and general
economic conditions; and
o if we defaulted under our existing credit facility or if our
creditors demanded payment of a portion or all of our indebtedness,
we may not have sufficient funds to make such payments.
Our new amended and restated loan and security agreement increased our line of
credit to $80 million from $60 million and expires on May 11, 2006. We have
pledged all of our portfolios of consumer receivables to secure our borrowings
and are subject to covenants that may restrict our ability to operate our
business. In December 2005, the Company received a commitment from its lending
institution, which, subject to completion and execution of the formal documents,
will result in an increase in the line of credit from $80 million to $100
million with a feature that, under certain circumstances, allows us to increase
the line of credit to $125 million. The amended and restated loan and security
agreement's expiration date remains May 11, 2006.
Any indebtedness that we incur under our existing line of credit will be
collateralized by all of our portfolios of consumer receivables acquired for
liquidation. If we default under the indebtedness secured by our assets, those
assets would be available to the secured creditor to satisfy our obligations to
the secured creditor. In addition, our credit facility imposes certain
restrictive covenants, including financial covenants. Failure to satisfy any of
these covenants could result in all or any of the following:
o acceleration of the payment of our outstanding indebtedness;
o cross defaults to and acceleration of the payment under other
financing arrangements;
o our inability to borrow additional amounts under our existing
financing arrangements; and
o our inability to secure financing on favorable terms or at all from
alternative sources.
Any of these consequences could adversely affect our ability to acquire consumer
receivable portfolios and operate our business.
Class action suits and other litigation in our industry could divert our
management's attention from operating our business and increase our expenses.
-20-
Certain originators and third-party collection agencies and attorneys in the
consumer credit industry have been subject to class actions and other
litigation. Claims include failure to comply with applicable laws and
regulations and improper or deceptive origination and servicing practices. If we
become a party to such class action suits or other litigation, our results of
operations and financial condition could be materially adversely affected.
We may seek to make acquisitions that prove unsuccessful or strain or divert our
resources.
We may seek to grow Asta through acquisitions of related businesses. Such
acquisitions present risks that could materially adversely affect our business
and financial performance, including:
o the diversion of our management's attention from our everyday
business activities;
o the assimilation of the operations and personnel of the acquired
business;
o the contingent and latent risks associated with the past operations
of, and other unanticipated problems arising in, the acquired
business; and
o the need to expand management, administration and operational
systems.
If we make such acquisitions we cannot predict whether:
o we will be able to successfully integrate the operations of any new
businesses into our business;
o we will realize any anticipated benefits of completed acquisitions;
or
o there will be substantial unanticipated costs associated with
acquisitions.
In addition, future acquisitions by us may result in:
o potentially dilutive issuances of our equity securities;
o the incurrence of additional debt; and
o the recognition of significant charges for depreciation and
amortization related to goodwill and other intangible assets.
Although we have no present plans or intentions, we continuously evaluate
potential acquisitions of related businesses. However, we have not reached any
agreement or arrangement with respect to any particular future acquisition and
we may not be able to complete any acquisitions on favorable terms or at all.
Our investments in other businesses and entry into new business ventures may
adversely affect our operations.
-21-
We have and may continue to make investments in companies or commence operations
in businesses and industries that are not identical to those with which we have
historically been successful. If these investments or arrangements are not
successful, our earnings could be materially adversely affected by increased
expenses and decreased finance income.
If our technology and phone systems are not operational, our operations could be
disrupted and our ability to successfully acquire receivable portfolios could be
adversely affected.
Our success depends in part on sophisticated telecommunications and computer
systems. The temporary loss of our computer and telecommunications systems,
through casualty, operating malfunction or service provider failure, could
disrupt our operations. In addition, we must record and process significant
amounts of data quickly and accurately to properly bid on prospective
acquisitions of receivable portfolios and to access, maintain and expand the
databases we use for our collection or monitoring activities. Any failure of our
information systems and their backup systems would interrupt our operations. We
may not have adequate backup arrangements for all of our operations and we may
incur significant losses if an outage occurs. In addition, we rely on
third-party collection agencies and attorneys who also may be adversely affected
in the event of an outage in which the third-party collection agencies and
attorneys does not have adequate backup arrangements. Any interruption in our
operations or our third-party collection agencies and attorneys' operations
could have an adverse effect on our results of operations and financial
condition.
Our organizational documents and Delaware law may make it harder for us to be
acquired without the consent and cooperation of our board of directors and
management.
Several provisions of our organizational documents and Delaware law may deter or
prevent a takeover attempt, including a takeover attempt in which the potential
purchaser offers to pay a per share price greater than the current market price
of our common stock. Under the terms of our certificate of incorporation, our
board of directors has the authority, without further action by the
stockholders, to issue shares of preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions thereof. The ability to
issue shares of preferred stock could tend to discourage takeover or acquisition
proposals not supported by our current board of directors. In addition, we are
subject to Section 203 of the Delaware General Corporation Law, which restricts
business combinations with some stockholders once the stockholder acquires 15%
or more of our common stock.
Future sales of our common stock may depress our stock price.
Sales of a substantial number of shares of our common stock in the public market
could cause a decrease in the market price of our common stock. We had
13,595,324 shares of common stock issued and outstanding as of the date hereof.
Of these shares, 3,795,000 are held by our affiliates and are saleable under
Rule 144 of the Securities Act of 1933, as amended. The remainder of our
outstanding shares were freely tradeable. In addition, options to purchase
approximately 1,580,605 shares of our common stock were outstanding as of
September 30, 2005, all of which were vested due to the acceleration of all
unvested options as approved by the Board of Directors on September 30, 2005.
The exercise prices of such options were substantially lower than the current
market price of our common stock. We may also issue additional shares in
connection with our business and may grant additional stock options to our
employees, officers, directors and consultants under our present or future stock
option plans or warrants to third parties. As of September 30, 2005 there were
500,669 shares available for such purpose. If a significant portion of these
shares were sold in the public market, the market value of our common stock
could be adversely affected.
-22-
On September 15, 2005, the Company's Chairman, Arthur Stern and President and
Chief Executive Officer, Gary Stern, adopted a prearranged stock trading plan in
accordance with guidelines specified by Rule 10b5-1 under the Securities
Exchange Act of 1934. Mr. Arthur Stern and Mr. Gary Stern and his affiliates
will sell 160,970 shares and 250,000 shares, respectively. A total of 21,625
shares were sold pursuant to the plan as of September 30, 2005.
ITEM 2. PROPERTY.
Our executive and administrative offices are located in Englewood Cliffs, New
Jersey, where we lease approximately 12,000 square feet of general office space
for approximately $18,000 per month, plus utilities. The lease expires on July
31, 2010.
In addition, our call center is located in Bethlehem, Pennsylvania, where we
lease approximately 9,070 square feet of general office space for approximately
$9,000 per month. The lease expires on December 31, 2006.
We believe that our existing facilities are adequate for our current and
anticipated needs.
ITEM 3. 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 on 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-K, we were not involved in any
material litigation in which we were a defendant.
-23-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None
ITEM 4A. EXECUTIVE OFFICERS.
Arthur Stern is our Chairman of the Board of Directors and Executive Vice
President. From 1963 until December 1995, Mr. Stern was President of Asta Group,
Incorporated, a consumer finance company, and since 1996 has served as Vice
President of Asta Group. In such capacities, he has obtained substantial
experience in distressed consumer credit analysis and receivables collections.
Gary Stern is our President and Chief Executive Officer. Mr. Stern also
currently serves as President of Asta Group and has served in the capacities of
Vice President, Secretary, Treasurer and a director of Asta Group since 1980 and
held other positions with Asta Group from 1973 through 1980. In such capacities,
he has obtained substantial experience in distressed consumer credit analysis
and receivables collections.
Mitchell Cohen was appointed our Chief Financial Officer on October 1, 2004.
From November 2003 to September 2004, Mr. Cohen was the Chief Financial Officer
of Ramp Corporation, a publicly held software company. From May 2002 to October
2003 Mr. Cohen was a financial consultant. From November 1998 to May 2002, Mr.
Cohen was the Chief Financial Officer of Siebert Financial Corp, a publicly
traded financial services company.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since August 15, 2000, our common stock has been quoted on the Nasdaq National
Market system under the symbol "ASFI." On December 8, 2005 there were
approximately 23 holders of record of our common stock. High and low sales
prices of our common stock since October 1, 2003 as reported by NASDAQ are set
fourth below (such quotations reflect inter-dealer prices without retail markup,
markdown, or commission, and may not necessarily represent actual transactions):
High Low
---- ---
October 1, 2003 to December 31, 2003 17.32 12.53
January 1, 2004 to March 31, 2004 21.00 16.54
April 1, 2004 to June 30, 2004 19.65 15.45
July 1, 2004 to September 30, 2004 18.03 13.25
October 1, 2004 to December 31, 2004 28.28 15.82
January 1, 2005 to March 31, 2005 29.23 20.51
April 1, 2005 to June 30, 2005 29.65 19.06
July 1, 2005 to September 30, 2005 32.49 24.20
All stock prices have been retroactively restated to give effect to a 2:1 stock
split in March 2004.
-24-
Dividends
During the year ended September 30, 2005, the Company declared quarterly cash
dividends aggregating $1,901,000 ($0.035 per share, per quarter), of which
$476,000 was paid November 1, 2005. During the year ended September 30, 2004 the
Company declared quarterly cash dividends aggregating $1,606,000 ($0.035 per
share, per quarter) of which $470,000 was paid November 1, 2004. During the year
ended September 30, 2003, the Company declared a cash dividend of $330,000
($0.025 per share), which was paid November 1, 2003. We expect to pay a regular
cash dividend in future quarters. This will be at the discretion of the board of
directors and will depend upon our financial condition, operating results,
capital requirements and any other factors the board of directors deems
relevant. In addition, our agreements with our lenders may, from time to time,
may restrict our ability to pay dividends. All per share amounts have been
retroactively restated to give effect to a 2:1 stock split in March 2004.
In December 2005, the Board of Directors announced the annual dividend will be
increased from $0.14 to $0.16 per share effective with the next dividend payment
due February 1, 2006.
Sales of Unregistered Securities
In September 2003, we issued 6,000 shares of our common stock to a former
director. The shares of common stock were valued at $13.40 per share.
The above transaction was a private transaction not involving a public offering
and was exempt from the registration provisions of the Securities Act of 1933,
as amended (the "Act"), pursuant to Section 4(2) thereof. The sale of the
securities was without the use of an underwriter, and the shares of common stock
bear a restrictive legend permitting transfer thereof only upon registration or
an exemption under the Act.
- -------------------------------- ----------------------------- ----------------------------- -----------------------------
Equity compensation Plan Number of securities to be Weighted-average exercise Number of securities
information:Plan category issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and rights future issuance under equity
warrants and rights compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
- -------------------------------- ----------------------------- ----------------------------- -----------------------------
Equity compensation plans
approved by security holders 1,580,605 $9.1082 500,669
- -------------------------------- ----------------------------- ----------------------------- -----------------------------
Equity compensation plans not
approved by security holders
0 0 0
- -------------------------------- ----------------------------- ----------------------------- -----------------------------
Total 1,580,605 $9.1082 500,669
- -------------------------------- ----------------------------- ----------------------------- -----------------------------
-25-
Item 6. Selected Financial Data
The following tables set forth a summary of our consolidated financial data as
of and for the five fiscal years ended September 30, 2005. The selected
financial data for the five fiscal years ended September 30, 2005, have been
derived from our audited consolidated financial statements. The selected
financial data presented below should be read in conjunction with our
consolidated financial statements, related notes, other financial information
included elsewhere, and Item 7. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Annual Report. All share
and per share amounts have been retroactively restated to give effect to a 2:1
stock split in March 2004.
Year Ended September 30,
------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(in thousands, except per share data)
Operations Statement Data:
Finance income.......................................... $69,479 $51,175 $34,862 $35,793 $24,100
Servicing fee income.................................... - - - 219 14
------- ------- ------- ------- -------
Total revenue........................................... 69,479 51,175 34,862 36,012 24,114
------- ------- ------- ------- -------
Costs and expenses:
General and administrative.............................. 15,340 11,258 7,837 6,698 5,653
Interest expense........................................ 1,853 845 1,855 3,643 920
Third party servicing................................... - 1,316 5,564 7,433 2,757
Provision for credit losses............................. - 300 - 950 450
------- ------- ------- ------- -------
Total expenses.......................................... 17,193 13,719 15,256 18,724 9,780
------- ------- ------- ------- -------
Income before provisions for income taxes............... 52,286 37,456 19,606 17,288 14,334
Provisions for income taxes............................. 21,290 15,219 8,032 6,905 5,743
------- ------- ------- ------- -------
Net income ............................................. $30,996 $22,237 $11,574 $10,383 $8,591
======= ======= ======= ======= ======
Basic net income per share.............................. $2.29 $1.67 $1.23 $1.29 $1.08
===== ===== ===== ===== =====
Diluted net income per share............................ $2.15 $1.57 $1.13 $1.19 $1.03
===== ===== ===== ===== =====
Year Ended September 30,
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(in millions)
Other Financial Data:
Cash collections............................................ $168.9 $114.0 $80.5 $78.6 $47.5
Portfolio purchases, at cost................................ 126.0 103.7 115.6 36.6 65.1
Portfolio purchases, at face................................ 3,445.2 2,833.6 3,576.4 1,495.7 689.5
Cumulative aggregate managed portfolios..................... 13,507.9 10,062.7 7,349.0 3,772.7 2,277.0
Return on average assets (1)................................ 18.3% 16.3% 15.0% 21.6% 22.6%
Return on average stockholders' equity (1).................. 23.9% 21.5% 18.4% 36.9% 46.9%
(1) The return on average assets is computed by dividing net income by
average total assets for the period. The return on average stockholders' equity
is computed by dividing net income by the average stockholders' equity for the
period. Both ratios have been computed using beginning and period-end balances.
-26-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Caution Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning 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", "anticipate", "estimate", and similar
words, although some forward-looking statements are expressed differently.
Forward looking statements represent our judgment regarding future events, but
we can give no assurance that such judgments will prove to be correct. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected 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-K 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-K.
Overview
We acquire, manage, collect and service 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 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.
CRITICAL ACCOUNTING POLICIES
We account for our investments in consumer receivable portfolios, using either
the interest method or 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.
-27-
If the interest method is used in recognizing income on a portfolio, it is done
so in accordance with the AICPA's Practice Bulletin 6, "Amortization of
Discounts on Certain Acquired Loans." Practice Bulletin 6 requires that the
accrual basis of accounting be used at the time the amount and timing of cash
flows from an acquired portfolio can be reasonably estimated and collection is
probable. 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 period. The estimated future cash flows of the portfolios are
reevaluated quarterly. We, in most instances, try to recoup our initial cash
outlay on portfolios purchased in the first 18-24 months.
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. The Company uses both qualitative and quantitative
methods for evaluating the projected cash flows expected from our portfolio
purchases. We are constantly monitoring the facts and circumstances for each
portfolio. When a portfolio is outperforming or underperforming its projected
cash flows, we review the portfolio and its characteristics. If the Company
feels the portfolio will out perform the original discounted present value
calculation, we will raise the estimated cash flows over the future periods and
adjust the portfolio accordingly. If the Company feels there will be a
continuing under performance compared to the original discounted present value
calculation, we will lower the estimated cash flows over future periods and
adjust the portfolio accordingly. Additionally, as we have shifted to the suit
strategy as previously mentioned, we have made the determination that debtor
accounts that are sued, or have a lien or judgment, will ultimately have a
greater collection value over a longer period of time. In this case, we have
adjusted our original discounted present value calculation accordingly. Our suit
strategy has been validated by our historical experience as we have portfolios
dating back to 1999 and we have tried this strategy on a smaller scale with
success. We have now changed our business model to an aggressive suit strategy
and expect even better collections over the five year lives of the portfolios.
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. For the year ended September 30, 2005 we did not record a
write-off for any receivable portfolios. For the year ended September 30, 2004,
we recorded a $300,000 write-off on a receivable portfolio. Based on actual cash
flows and the change in strategy involving the increased use of attorneys and
the courts in order to maximize collections for the year ended September 30,
2004, and the resultant changes in projected future cash flows through September
30, 2007, on certain portfolios as compared to what we estimated at September
30, 2003, we revised our estimate of future collections. Such change in
accounting estimate has resulted in approximately a $9.8 million increase in
finance income recognized for the year ended September 30, 2004 for these
portfolios. For the estimates of expected cash flows, the Company takes into
consideration the quality of the underlying receivables constituting the
portfolio, the strategy involved to maximize the collections, thereof, including
collections represented by the sale of certain accounts, the time required to
implement the collection strategy and other factors.
-28-
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 internal rate of return 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
through September 30, 2005 there has been no impact on our results. We believe
the implementation of this SOP will make it more likely that an impairment loss
may be recorded some time in the future.
We originally set up a discounted present value calculation based on anticipated
cash flows based upon the characteristics of the portfolio purchased. Based on
our experience with the type of portfolio acquired, and based on the liquidation
rates expected, we then evaluate the performance of the actual cash flows to the
expected cash flows. In the event the actual cash flows are exceeding the
original expectations, and we believe this is indicative of a trend, we will
adjust the effective rate.
The significant portion of our portfolio purchases are credit card and wireless
telecom charge-offs from issuers whom we deal with regularly and for many years.
These portfolios generally have the same characteristics from purchase to
purchase and thus based on our experience, the risk characteristics have not
changed.
We typically recognize finance income net of collection fees paid to third-party
collection agencies and attorneys. With respect to a single portfolio purchased
in 2001 containing a significant amount of performing and semi-performing
accounts, we recognized finance income on accounts that were being serviced by
third-party collection agencies and attorneys at the gross amounts received by
the third-party collection agencies and attorneys. 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 interest
in this profit sharing arrangement held by our lender 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. During the year ended September 30, 2003, actual and estimated
collections have exceeded our estimates at September 30, 2002, and therefore we
revised our third-party profit allocation. Such change in accounting estimate
has resulted in approximately a $1.6 million interest expense charge during the
year ended September 30, 2003. As this charge was due to a specific portfolio,
no such charge was recorded during the year ended September 30, 2004.
-29-
Results of Operations
The following discussion of our operations and financial condition should be
read in conjunction with our financial statements and notes thereto included
elsewhere in this prospectus. In these discussions, most percentages and dollar
amounts have been rounded to aid presentation. As a result, all such figures are
approximations.
- ------------------------------------------- ------------------------------------
Years ending September 30
- ------------------------------------------- ------------------------------------
2005 2004 2003
- ------------------------------------------- ----------- ------------ -----------
Finance Income 100.0% 100.0% 100.0%
- ------------------------------------------- ----------- ------------ -----------
General and administrative 22.1% 22.0% 22.5%
- ------------------------------------------- ----------- ------------ -----------
Interest expense 2.7% 1.7% 5.3%
- ------------------------------------------- ----------- ------------ -----------
Provision for credit and other losses 0.0% 0.6% 0.0%
- ------------------------------------------- ----------- ------------ -----------
Third party servicing 0.0% 2.6% 16.0%
- ------------------------------------------- ----------- ------------ -----------
Income before provision for income taxes 75.3% 73.1% 56.2%
- ------------------------------------------- ----------- ------------ -----------
Provision for income taxes 30.6% 29.7% 23.0%
- ------------------------------------------- ----------- ------------ -----------
Net Income 44.6% 43.4% 33.2%
- ------------------------------------------- ----------- ------------ -----------
YEAR ENDED SEPTEMBER 30, 2005 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 2004
FINANCE INCOME.. For the year ended September 30, 2005, finance income increased
$18.3 million or 35.8% to $69.5 million from $51.2 million for the year ended
September 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 accounts
acquired for liquidation during the fiscal year ended September 30, 2005, as
compared to the same prior year period. For the fiscal year ended September 30,
2005, we acquired receivables at a cost of $126.0 million as compared to $103.7
million for the year ended September 30, 2004. For the fiscal year ended
September 30, 2005, we had an average of $159.4 million in consumer receivables
acquired for liquidation as compared to $125.9 million for the year ended
September 30, 2004, a 26.7% increase. Finance income recognized from collections
represented by account sales was $24.9 million and $14.9 million for the years
ended September 30, 2005 and 2004, respectively. Based on actual cash flows for
the year ended September 30, 2005, and projected cash flows we did not change
our estimates of collections during the year ended September 30, 2005. Based on
actual cash flows for the year ended September 30, 2004, and the then projected
future cash flows on certain portfolios as compared to what we estimated at
September 30, 2003, a revision was made to the estimated collections. Such
change in accounting estimate has resulted in approximately a $9.8 million
increase in finance income recognized for the year ended September 30, 2004 for
these portfolios. In 2004 The Company decided to increase its utilization of the
legal process to increase collections. This strategy has proven to be effective
and we will continue to utilize this strategy. The commissions and fees
associated with gross collections from our third-party collection agencies and
attorneys were approximately $49.9 million, or 22.8% of gross collections, in
the fiscal year ended September 30, 2005, as compared to $25.9 million, or 18.5%
of gross collections in the prior year.
-30-
GENERAL AND ADMINISTRATIVE EXPENSES. For the year ended September 30, 2005,
general and administrative expenses increased $4.0 million or 36.3% to $15.3
million from $11.3 million for the year ended September 30, 2004. The increase
was primarily due to an increase in the administrative costs associated with the
26.7% increase in the accounts acquired for liquidation. The increase in the
administrative expenses included court costs, data processing costs, salaries,
payroll taxes and benefits, professional fees, including implementation of the
Sarbanes-Oxley requirements, telephone charges and rent.
THIRD-PARTY SERVICING EXPENSES. Third-party servicing expenses related to a
specific portfolio serviced by an exclusive agent. The resulting decrease in
third party-party servicing expenses was due to the elimination of these
accounts and thus the exclusive relationship regarding these accounts no longer
exists. For the year ended September 30, 2005, third-party servicing expenses
decreased $1.3 million to $0 million from $1.3 million for the year ended
September 30, 2004. For the years ended September 30, 2005 and 2004, the total
gross finance income related to third party servicing costs, which is included
in finance income was $0 and $4.3 million, respectively.
INTEREST EXPENSE. For the year ended September 30, 2005, interest expense
increased $1.0 million or 119.3% to $1.9 million from $.8 million for the year
ended September 30, 2004. The increase was primarily due to the increase in the
average outstanding borrowings under our line of credit during the year ended
September 30, 2005, as compared to the same prior year period. The average
outstanding balance during the year ended September 30, 2005 was $34.3 million
as compared to $27.8 million for the period ended September 30, 2004. Also, the
average interest rate for the year increased slightly to 5.17%.
PROVISION FOR CREDIT LOSSES. For the year ended September 30, 2005, the
provision for credit losses decreased $.3 million to $0 from $.3 for the year
ended September 30, 2004. The provision during 2004 was due to a write down on
one of our financed portfolio of receivables.
NET INCOME. For the year ended September 30, 2005, net income increased $8.8
million or 39.4% to $31.0 million from $22.2 million for the year ended
September 30, 2004. Net income per share for the year ended September 30, 2005
increased $0.58 per diluted share or 36.9% to $2.15 per diluted share from $1.57
per diluted share for the year ended September 30, 2004
YEAR ENDED SEPTEMBER 30, 2004 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 2003
FINANCE INCOME.. For the year ended September 30, 2004, finance income increased
$16.3 million or 46.8% to $51.2 million from $34.9 million for the year ended
September 30, 2003. 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 accounts
acquired for liquidation during the fiscal year ended September 30, 2004, as
compared to the same prior year period. For the fiscal year ended September 30,
2004, we acquired receivables at a cost of $103.7 million as compared to $115.6
million for the year ended September 30, 2003. For the fiscal year ended
September 30, 2004, we had an average of $125.9 million in consumer receivables
acquired for liquidation as compared to $70.8 million for the year ended
September 30, 2003. Finance income recognized from collections represented by
account sales was $14.9 million and $3.4 million for the years ended September
30, 2004 and 2003, respectively. Based on actual cash flows for the year ended
September 30, 2004, and projected future cash flows on certain portfolios as
compared to what we estimated at September 30, 2003, we revised our estimate of
future collections. Management has decided in 2004 to implement a greater
collection effort utilizing legal networks and a suit strategy to collect. Such
change in accounting estimate has resulted in approximately a $9.8 million
increase in finance income recognized for the year ended September 30, 2004 for
these portfolios. The commissions and fees associated with gross collections
from our third-party collection agencies and attorneys were approximately $25.9
million, or 18.5% of gross collections, in the fiscal year ended September 30,
2004, as compared to $11.1 million, or 12.2% of gross collections in the prior
year, indicative our shift to the legal strategy.
-31-
GENERAL AND ADMINISTRATIVE EXPENSES. For the year ended September 30, 2004,
general and administrative expenses increased $3.4 million or 43.7% to $11.3
million from $7.8 million for the year ended September 30, 2003. The increase
was primarily due to an increase receivable servicing costs. The increase in
receivable servicing expenses resulted from the increase in our average
outstanding accounts acquired for liquidation during the year ended September
30, 2004 coupled with increased costs associated with our acquisition of a call
center in Bethlehem, PA in January 2003, that we use for servicing a portion of
our receivable, as compared to the same prior year period. Both resulted in
increased collection expenses including court costs, data processing costs,
salaries, payroll taxes and benefits, professional fees, telephone charges and
rent.
THIRD-PARTY SERVICING EXPENSES. Third-party servicing expenses related to a
specific portfolio serviced by an exclusive agent. The resulting decrease in
third-party servicing expenses was due to the elimination of these accounts and
thus the exclusive relationship regarding these accounts no longer exists. For
the year ended September 30, 2004, third-party servicing expenses decreased $4.2
million or 76.3% to $1.3 million from $5.6 million for the year ended September
30, 2003. For the years ended September 30, 2004 and 2003, total gross finance
income related to third party servicing costs, which is included in finance
income was $4.3 million and $11.1 million, respectively.
INTEREST EXPENSE. For the year ended September 30, 2004, interest expense
decreased $1.0 million or 54.4% to $845,000 from $1.9 million for the year ended
September 30, 2003. The decrease was primarily due to the decrease in the
average outstanding borrowings under our line of credit during the year ended
September 30, 2004, as compared to the same prior year period.
PROVISION FOR CREDIT LOSSES. For the year ended September 30, 2004, the
provision for credit losses increased $300,000 to $300,000 from $0 for the year
ended September 30, 2003. The increase was due to a write down on one of our
financed portfolio receivables during the year ended September 30, 2004.
NET INCOME. For the year ended September 30, 2004, net income increased $10.7
million or 92.1% to $22.2 million from $11.6 million for the year ended
September 30, 2003. Net income per share for the year ended September 30, 2004
increased $0.44 per diluted share or 38.9% to $1.57 per diluted share from $1.13
per diluted share for the year ended September 30, 2003. The increase in
earnings per share is a result of higher net income, partially offset by higher
weighted average number of diluted shares outstanding compared to the prior
period, primarily resulting from the secondary stock offering in June 2003.
-32-
Liquidity and Capital Resources
As of September 30, 2005, we had cash and cash equivalents of $4.0 million
compared to $3.3 million at September 30, 2004. The increase in cash and cash
equivalents at September 30, 2005, was primarily due to the timing of our credit
line payments, other liability payments and tax payments for the year ended
September 30, 2005 as compared to the prior year. Primary sources of cash from
operations include collections on the receivable portfolios that we have
acquired. Our primary uses of cash include our purchases of consumer receivable
portfolios. We rely significantly upon our lenders to provide the funds
necessary for the purchase of consumer and commercial accounts receivable
portfolios. In May of 2005, we entered into a new amended and restated loan and
security agreement increasing our line of credit to $80 million from $60 million
that expires on May 11, 2006. In December 2005, the Company received a
commitment from its lending institution, which, subject to completion and
execution of the formal documents, will result in an increase in the line of
credit from $80 million to $100 million with a feature that, under certain
circumstances, allows us to increase the line of credit to $125 million. The
amended and restated loan and security agreement's expiration date remains May
11, 2006. In addition, we may arrange for financing on a transactional basis.
While we have historically been able to finance portfolio purchases, we do not
have committed loan facilities, other than our line of credit with a financial
institution. As of December 12, 2005, September 30, 2005, and September 30,
2004, we had outstanding borrowings of $50.7, $29.3, and $39.4 million
respectively under this facility and we were in compliance with all of the
covenants under this line of credit.
The following table shows the changes in finance receivables, including amounts
paid to acquire new portfolios:
Year Ended September 30,
------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(in millions)
Balance at beginning of period.................................... $146.1 $105.6 $36.1 $43.8 $4.4
Acquisitions of finance receivables,
net of buybacks................................................... 126.0 103.7 115.6 36.6 65.1
Cash collections from debtors
applied to principal (1).......................................... (59.6) (37.6) (27.4) (44.3) (25.7)
Cash collections represented by account sales
applied to principal (1)....................................... (39.8) (25.3) (18.2)
Portfolio writedown............................................... -- (0.3) (0.5) -- --
------ ------ ------ ----- -----
Balance at end of period.......................................... $172.7 $146.1 $105.6 $36.1 $43.8
====== ====== ====== ===== =====
(1) Cash collections applied to principal consists of cash collections less
income recognized on finance receivables plus amounts received by us from the
sale of consumer receivable portfolios to third parties.
Net cash provided by operating activities was $32.1 million during the year
ended September 30, 2005, compared to $21.9 million during the year ended
September 30, 2004. The increase was primarily due to an increase in net income
partially offset by an increase in amount due from servicers and other assets at
September 30, 2005, compared to the prior year.
Net cash used in investing activities was $21.0 million during the year ended
September 30, 2005, compared to $48.3 million during the year ended September
30, 2004. The decrease in cash used in investing activities was primarily due to
an increase in principal payments on consumer receivables and a decrease in a
deposit on receivable purchase, slightly offset by the acquisition of Option
Card LLC. (See Note C of the Notes to the Financial Statements)
-33-
Net cash used by financing activities was $10.3 million during the year ended
September 30, 2005, compared to net cash provided by financing activities of
$22.9 million for the prior year. The increase in the net cash used by financing
was primarily due to a $10.1 million decrease in borrowings during the year
ended September 30, 2005, as compared to advances of $23.0 million in borrowings
in the prior year. On May 11, 2005, we entered into a new amended and restated
loan and security agreement increasing our line of credit from $60 million to
$80 million which expires on May 11, 2006. 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. As of
December 6, 2005, September 30, 2005, and September 30, 2004 ,we had outstanding
borrowings of $45.1, $29.3, and $39.4 million respectively under this line of
credit and we were in compliance with all of the covenants under this line of
credit.
Our cash requirements have been and will continue to be significant. We depend
on external financing to acquire consumer receivables. During the year ended
September 30, 2005, we acquired consumer portfolios at a cost of approximately
$126.0 million having an aggregate outstanding balance totaling approximately
$3.5 billion.
We anticipate 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, including acquisitions), we may be required to seek additional
funding.
We may consider possible acquisitions of, or investments in, complementary
businesses. Any such possible acquisitions or investments may be material and
may require us to incur a significant amount of debt or issue a significant
amount of equity securities. Further, any business that we acquire or invest in
will likely have its own capital needs, which may be significant, and which we
may be called upon to satisfy.
-34-
Supplementary Information on Consumer Receivables Portfolios:
PORTFOLIO PURCHASES
Year Ended September 30,
-----------------------------------
2005 2004 2003
------ ------ ------
(in millions)
Aggregate Purchase Price............. $126.0 $103.7 $115.6
Aggregate Portfolio Face Amount...... 3,445.2 2,833.5 3,576.4
SCHEDULE OF PORTFOLIOS BY INCOME RECOGNITION CATEGORY
September 30, 2005 September 30, 2004 September 30, 2003
------------------ ------------------ ------------------
Cost Interest Cost Interest Cost Interest
Recovery Method Recovery Method Recovery Method
Portfolios Portfolios Portfolios Portfolios Portfolios Portfolios
---------- ---------- ---------- ---------- ---------- ----------
(in millions)
Original Purchase
Price (at period end) $0.0 $126.0 $49.3 $328.8 $48.6 $171.7
Cumulative Aggregate
Managed Portfolios
(at period end)........ 2,168.4 11,339.5 2,168.4 7,894.3 2,147.9 5,201.1
Receivable Carrying
Value (at period end) 0.1 172.6 1.3 144.8 2.8 102.8
Finance Income Earned
(for the respective
period)................ 5.4 64.1 5.4 45.3 6.9 27.7
Total Cash Flows (for
the respective
period)................ 6.6 162.3 7.6 104.5 9.0 71.2
The original purchase price reflects what we paid for the receivables from 1998
through the end of the respective period. The cumulative aggregate managed
portfolio balance is the original aggregate amount owed by the borrowers at the
end of the respective period. 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.
COLLECTIONS REPRESENTED BY ACCOUNT SALES
Collections
Represented Finance
By account Income
Year Sales Recognized
- ---- ------------ ----------
2005 $64,731,000 $24,918,000
2004 40,260,000 14,948,000
2003 21,578,000 3,389,000
-35-
PORTFOLIO PERFORMANCE (1)
The following table summarizes our historical portfolio purchase price and cash
collections on an annual vintage basis since October 1, 2001 through September
30, 2005.
# of Weighted
Cash Collections Total Collections Average Days
Purchase Purchase Including Cash as a Percentage Held During First
Period Price(2) Sales (3) of Purchase Price Year Acquired
- ------ ---------- -------- ----------------- -----------------
2001 $65,120,000 $93,785,000 144% 119
2002 36,557,000 50,703,000 139% 183
2003 115,626,000 132,758,000 115% 81
2004 103,743,000 93,910,000 91% 170
2005 126,023,000 39,762,000 32% 181
(1) Total collections do not represent full collections of the Company with
respect to this or any other year.
(2) Purchase price refers to the cash paid to a seller to acquire a portfolio
less the purchase price refunded by a seller due to the return of
non-compliant accounts (also defined as put-backs).
(3) Cash collections include: collections from our third-party collection
agencies and attorneys, collections from our in-house efforts and
collections represented by account sales.
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 finance income 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 year ended September 30, 2005, we recognized revenue of $5.4 million
under the cost recovery method because we collected $5.4 million in excess of
our purchase price on certain receivable portfolios. In addition, we earned
$64.1 million of interest income under the interest method based on actuarial
computations on certain portfolios which are based on actual collections during
the period and on what we project to collect in future periods.
The sum of total cash flows of $168.9 million less the sum of total finance
income earned on consumer receivables acquired for liquidation of $69.5 million
is $99.4 million or the principal amortized on receivables acquired for
liquidation as per the statement of cash flows for the year ended September 30,
2005.
The Company is obligated under operating leases. It is anticipated that during
the year ending September 30, 2006, 2007 and 2008, $331,000, $245,000, and
$219,000 respectively will be required.
Additionally, the external professional fees for the implementation of Sarbanes
Oxley section 404 were approximately $300 thousand for the year ending September
30, 2005, including external audit fees.
-36-
New 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 and its amendment, SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" in the notes to the
financial statements. As permitted by SFAS 148 and SFAS 123, we continued to
apply the accounting provisions of Accounting Principles Board 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 through September 30, 2005. 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.
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 internal rate of return 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
through September 30, 2005 there has been no impact on our results. We believe
the implementation of this SOP will make it more likely that an impairment loss
may be recorded some time in the future.
SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No.
29" ("SFAS 153") addresses the measurement of exchanges of nonmonetary assets.
It eliminates the exception from fair value accounting for nonmonetary exchange
of similar productive assets and replaces it with an exception for exchanges
that do not have commercial substance. SFAS 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of an entity are
expected to change significantly as a result of the exchange. This statement is
effective beginning in fiscal 2006. This statement is not expected to have an
impact on the Company's financial results.
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections
- - a replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS 154),
which requires a retrospective application to prior periods' financial
statements of changes in accounting principle for all periods presented. This
statement replaces APB Opinion No. 20 which required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
The provisions of SFAS 154 are effective for fiscal years beginning after
December 15, 2006, the Company's fiscal year 2008.
-37-
Seasonality and Trends
Our management believes that our operations may, to some extent, be affected by
high delinquency rates and by lower recoveries on consumer receivables acquired
for liquidation during or shortly following certain holiday periods. In
addition, on occasion the market for acquiring distressed receivables does
become more competitive thereby possibly diminishing our ability to acquire such
distressed receivables at attractive prices in future periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes and changes in corporate tax
rates. A material change in these rates could adversely affect our operating
results and cash flows. At September 30, 2005, our $80 million credit facility,
all of which is variable debt, had an outstanding balance of $29.3 million. A 25
basis-point increase in interest rates would have increased our annual interest
expense by $97,500. We do not currently invest in derivative financial or
commodity instruments.
INFLATION:
We believe that inflation has not had a material impact on our results of
operations for the years ended September 30, 2005, 2004 and 2003.
ITEM 8. FINANCIAL STATEMENTS.
The Financial Statements of the Company, the Notes thereto and the Report of
Independent Auditors thereon required by this item appear in this report on the
pages indicated in the following index:
Index to Audited Financial Statements: Page
-------------------------------------- ----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - September 30, 2005 and 2004 F-3
Consolidated Statements of Operations - Years ended
September 30, 2005, 2004 and 2003 F-4
Consolidated Statements of Shareholders' Equity - Years ended
September 30, 2005, 2004 and 2003 F-5
Consolidated Statements of Cash Flows - Years ended
September 30, 2005, 2004 and 2003 F-6
Notes to Consolidated Financial Statements F-7
-38-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer have reviewed
and evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 240.13a-15(e) and 240.15d-15(e)) as
of the end of the period ended September 30, 2005. Based on that evaluation,
they have concluded that the Company's disclosure controls and procedures as of
the end of the period covered by this report are effective in timely providing
them with material information relating to the Company required to be disclosed
in the reports the Company files or submits under the Exchange Act.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act). Under the supervision and with the participation of the
Company's management, including its principal executive officer and principal
financial officer, the Company conducted an assessment of the effectiveness of
its internal control over financial reporting. In making this assessment, the
Company used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control - Integrated Framework. Based on
management's assessment the Company believes that, as of September 30, 2005, the
Company's internal control over financial reporting is effective based on those
criteria.
The Company's internal control system was designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles in the U.S. The Company's internal control over
financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the
U.S., and that receipts and expenditures of the Company are being
made only in accordance with authorization of management and
directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the
consolidated financial statements.
-39-
There are inherent limitations to the effectiveness of any control system. A
control system, no matter how well conceived and operated, can provide only
reasonable assurance that its objectives are met. No evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions or because the degree of
compliance with the policies and procedures may deteriorate.
There have not been any changes in the Company's internal controls over
financial reporting identified in connection with an evaluation thereof that
occurred during the Company's fourth fiscal quarter that have materially
affected, or are reasonable likely to materially affect the Company's internal
control over financial reporting. There were no significant deficiencies or
material weaknesses, and therefore no corrective actions were taken.
Eisner LLP, the independent registered public accounting firm who also audited
the Company's consolidated financial statements have issued an audit report on
management's assessment of the Company's internal control over financial
reporting as of September 30, 2005. Eisner's attestation report on management's
assessment of the Company's internal control over financial reporting is
included below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Asta Funding, Inc. and subsidiaries
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
Asta Funding, Inc. and subsidiaries maintained effective internal control over
financial reporting as of September 30, 2005, based on, criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Asta Funding, Inc. and
subsidiaries management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
-40-
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Asta Funding, Inc. and subsidiaries
maintained effective internal control over financial reporting as of September
30, 2005, is fairly stated, in all material respects, based on, the COSO
criteria. Also, in our opinion, Asta Funding, Inc. and subsidiaries maintained,
in all material respects, effective internal control over financial reporting as
of September 30, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Asta Funding, Inc. and subsidiaries as of September 30, 2005 and 2004, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended September
30, 2005, and our report dated November 23, 2005 (with respect to Note O (1),
December 9, 2005 and Note O (2), December 12, 2005) expressed an unqualified
opinion on those consolidated financial statements.
Eisner LLP
New York, New York
November 23, 2005
ITEM 9B. OTHER INFORMATION
Reports on 8-K
The registrant filed a report on Form 8-K on August 1, 2005, in which it
reported an Entry Into a Material Definitive Agreement, the extension of the
lease of its corporate headquarters in Englewood Cliffs, NJ. The registrant
filed a report on Form 8-K on August 10, 2005, in which it reported its earnings
for the third quarter and nine months ending June 30, 2005. The registrant filed
a report on Form 8-K on September 15, 2005, in which it announced the adoption
of a prearranged stock trading plan for Chairman Arthur Stern, and President and
CEO Gary Stern under Rule 10b5-1 of the securities and Exchange Act of 1934.
-41-
You can visit our web site at www.astafunding.com. Copies of our 10-Ks, 10-Qs,
8-Ks and other SEC reports are available there as soon as reasonably practical
after filing electronically with the SEC.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information contained under the caption "Directors, Executive Officers,
Promoters and Control Persons" in our definitive Proxy Statement to be filed
with the Commission on or before January 28, 2006, is incorporated by reference
in response to this Item 10.
We have adopted a Code of Ethics for our Senior Financial Officers that is
incorporated into this form 10-K in Exhibit 14.1.
ITEM 11. EXECUTIVE COMPENSATION.
Information contained under the caption "Executive Compensation" in our
definitive Proxy Statement to be filed with the Commission on or before January
28, 2006 is incorporated by reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in our definitive Proxy Statement to be filed
with the Commission on or before January 28, 2006 is incorporated herein by
reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "Certain Relationships and Related
Transactions" in our definitive Proxy Statement to be filed with the Commission
on or before January 28, 2006 is incorporated by reference in response to this
Item 13.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information contained under the caption "Certain Relationships and Related
Transactions" in our definitive Proxy Statement to be filed with the Commission
on or before January 28, 2006 is incorporated by reference in response to this
Item 14.
-42-
PART IV
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number
3.1 Certificate of Incorporation. (1)
3.1(a) Amendment to Certificate of Incorporation (7)
3.2 By laws. (2)
10.1 Stock Option Plan as Amended (1)
10.2 Employment Agreement dated October 1, 2001, by and between
Asta Funding, Inc. and Gary Stern. (3)
10.3 Employment Agreement dated October 1, 2001, by and between
Asta Funding, Inc. and Mitchell Herman. (3)
10.6 Common Stock Purchase Warrant dated October 12, 2000, issued by
Small Business Worldwide to AstaFunding.Com, LLC. (4)
10.7 Purchase Agreement dated January 18, 2001, between Asta
Funding, Inc. and Heilig Meyers Furniture. (5)
10.8 Purchase Agreement of a $191 million loan portfolio dated August
31, 2001, between Computer Finance, LLC, a subsidiary of the
Company and a major computer manufacturer/retailer. (6)
10.9 Amended Loan and Security Agreement dated November 15, 2001,
between the Company and Israel Discount Bank of NY. (3)
10.10 Amended Loan and Security Agreement dated January 28, 2003,
between the Company and Israel Discount Bank of NY. (9)
10.11 Amended Loan and Security Agreement dated June 27, 2003, between
the Company and Israel Discount Bank of NY. (10)
10.12 Amended Loan and Security Agreement dated November
24, 2003, between the Company and Israel Discount
Bank of NY (13)
10.13 Amended Loan and Security Agreement dated May 11,
2005, between the Company and Israel Discount Bank
of NY (16)
10.14 Asta Funding, Inc. 2002 Stock Option Plan. (7)
10.15 Servicing Agreement dated August 30, 2001 between Computer
Finance, LLC, Greenwich Capital Financial Products, Inc., Gulf
State Credit, L.L.C. and OSI Portfolio Services, Inc. (7)
10.16 Employment Agreement dated as of May 21, 2002 by and between
Asta Funding, Inc. and Arthur Stern. (8)
10.17 Employment Agreement dated as of November 11, 2003 by and
between Asta Funding, Inc. and Arthur Stern. (15)
14.1 Code of Ethics for Senior Financial Officers
21.1 Subsidiaries of the Company
-43-
31.1 Certification of Registrant's Chief Executive Officer, Gary
Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of 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.
(1) Incorporated by reference to Exhibit 3.1 from Asta Funding's Registration
Statement on Form SB-2 (File No. 33-97212).
(2) Incorporated by reference from Asta Funding's Annual Report on Form 10-KSB
for the year ended September 30, 1999.
(3) Incorporated by reference from Asta Funding's Annual Report on Form 10-KSB
for the year ended September 30, 2001.
(4) Incorporated by reference from Asta Funding's Current Report filed on Form
8-K/A on November 2, 2000.
(5) Incorporated by reference from Asta Funding's Quarterly Report on Form
10-QSB for the three months ended December 31, 2000.
(6) Incorporated by reference from Asta Funding's Current Report filed on Form
8-K on October 4, 2001.
(7) Incorporated by reference from Asta Funding's Quarterly Report on Form
10-QSB for the three months ended March 31, 2002.
(8) Incorporated by reference from Asta Funding's Quarterly Report on Form
10-QSB for the three months ended June 30, 2002.
(9) Incorporated by reference from Asta Funding's Quarterly Report on Form
10-QSB for the three months ended December 31, 2002.
(10) Incorporated by reference from Asta Funding's Quarterly Report on Form
10-QSB for the three months ended March 31, 2003.
(11) Incorporated by reference from Asta Funding's Registration Statement on
Form S-1 (File No. 333-105755).
(12) Incorporated by reference from Asta Funding's Quarterly Report on Form
10-QSB for the three months ended June 30, 2003.
(13) Incorpoated by reference from Asta Funding's Quarterly Report on Form 10-Q
for three months ended December 31, 2003.
(14) Incorpoated by reference from Asta Funding's Annual Report on form 10K for
the year ended September 30, 2004.
(15) Incorporated by reference from Asta Funding's Definitive Proxy Statement -
Schedule 14A Information dated August 31, 2004.
(16) Incorporated by reference from Asta Funding's Quarterly Report on Form
10-Q for the three months ended June 30, 2005.
-44-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ASTA FUNDING, INC.
Dated: December 13, 2005 By:/s/Gary Stern
---------------------------------
Gary Stern
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
Signature Title Date
- --------- ----- ----
/s/Gary Stern President, Chief Executive Officer and Director December13, 2005
- ---------------------------
Gary Stern
/s/Mitchell Cohen Chief Financial Officer December 13, 2005
- ---------------------------
Mitchell Cohen
/s/Arthur Stern Chairman of the Board and Executive December 13, 2005
- ---------------------------
Arthur Stern Vice President
/s/Herman Badillo Director December 13, 2005
- ---------------------------
Herman Badillo
/s/Edward Celano Director December 13, 2005
- ---------------------------
Edward Celano
/s/Harvey Leibowitz Director December 13, 2005
- ---------------------------
Harvey Leibowitz
/s/David Slackman Director December 13, 2005
- ---------------------------
David Slackman
/s/Alan Rivera Director December 13, 2005
- ---------------------------
Alan Rivera
/s/Louis A. Piccolo Director December 13, 2005
- ---------------------------
Louis A. Piccolo
-45-
ASTA FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
ASTA FUNDING, INC. AND SUBSIDIARIES
CONTENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-2
Balance sheets as of September 30, 2005 and 2004 F-3
Statements of operations for the years ended
September 30, 2005, 2004 and 2003 F-4
Statements of changes in stockholders' equity for the
years ended September 30, 2005, 2004 and 2003 F-5
Statements of cash flows for the years ended
September 30, 2005, 2004 and 2003 F-6
Notes to consolidated financial statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Asta Funding, Inc.
We have audited the accompanying consolidated balance sheets of Asta Funding,
Inc. and subsidiaries as of September 30, 2005 and 2004, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended September 30, 2005.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Asta Funding, Inc. as
of September 30, 2005 and 2004, and the consolidated results of their operations
and their consolidated cash flows for each of the years in the three-year period
ended September 30, 2005, in conformity with accounting principles generally
accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Asta Funding,
Inc.'s internal control over financial reporting as of September 30, 2005, based
on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated November 23, 2005 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
Eisner LLP
New York, New York
November 23, 2005
With respect to Note O (1), December 9, 2005
With respect to Note O (2), December 12, 2005
F-2
ASTA FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30
---------------------------
2005 2004
ASSETS
Cash and cash equivalents $ 4,059,000 $ 3,344,000
Consumer receivables acquired for liquidation (at net realizable value) 172,727,000 146,165,000
Due from third party collection agencies and attorneys 1,425,000 837,000
Deposit on receivable purchase - 7,288,000
Furniture and equipment (net of accumulated depreciation of $1,426,000
in 2005 and $1,036,000 in 2004) 989,000 596,000
Other assets 838,000 411,000
------------ ------------
$180,038,000 $158,641,000
============ ============
LIABILITIES
Advances under line of credit $ 29,285,000 $39,355,000
Other liabilities 4,180 ,000 3,351,000
Income taxes payable 1,243,000 1,425,000
Deferred income taxes 153,000 44,000
------------ ------------
Total liabilities 34,861,000 44,175,000
------------ ------------
Commitments
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 5,000,000;
issued - none
Common stock, $.01 par value, authorized 30,000,000 shares, issued
and outstanding 13,595,000 shares in 2005 and 13,432,000 in 2004 136,000 134,000
Additional paid-in capital 60,798,000 59,184,000
Retained earnings 84,243,000 55,148,000
------------ ------------
Total stockholders' equity 145,177,000 114,466,000
------------ -----------
$180,038,000 $158,641,000
============ ============
See notes to consolidated financial statements
F-3
ASTA FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED
SEPTEMBER 30,
-------------------------------------------------
2005 2004 2003
-------------------------------------------------
Finance income $ 69,479,000 $ 51,175,000 $ 34,862,000
-------------- -------------- --------------
General and administrative expenses 15,340,000 11,258,000 7,837,000
Interest expense 1,853,000 845,000 1,855,000
Provisions for credit and other losses - 300,000 -
Third-party servicing expenses 1,316,000 5,564,000
-------------- -------------- --------------
17,193,000 13,719,000 15,256,000
-------------- -------------- --------------
Income before provision for income taxes 52,286,000 37,456,000 19,606,000
Provision for income taxes 21,290,000 15,219,000 8,032,000
-------------- -------------- --------------
NET INCOME $ 30,996,000 $ 22,237,000 $ 11,574,000
============== ============== ==============
BASIC NET INCOME PER SHARE $2.29 $1.67 $1.23
===== ===== =====
DILUTED NET INCOME PER SHARE $2.15 $1.57 $1.13
===== ===== =====
WEIGHTED AVERAGE SHARES:
BASIC 13,544,000 13,346,000 9,464,000
DILUTED 14,410,000 14,154,000 10,302,000
See notes to consolidated financial statements
F-4
ASTA FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ---------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 2002 8,150,000 $ 82,000 $10,206,000 $ 23,273,000 $ 33,561,000
Exercise of options 94,000 275,000 275,000
Proceeds from common stock offering 4,950,000 50,000 47,246,000 47,296,000
Dividends (330,000) (330,000)
Cancellation of common stock (20,000) (90,000) (90,000)
Issuance of common stock to former Director 6,000 81,000 81,000
Net income 11,574,000 11,574,000
---------- --------- ------------ ----------- -----------
BALANCE, SEPTEMBER 30, 2003 13,180,000 132,000 57,718,000 34,517,000 92,367,000
Exercise of options 252,000 2,000 1,363,000 1,365,000
Tax benefit arising from exercise of
non qualified stock options 103,000 103,000
Dividends (1,606,000) (1,606,000)
Net income 22,237,000 22,237,000
---------- --------- ------------ ----------- -----------
BALANCE, SEPTEMBER 30, 2004 13,432,000 134,000 59,184,000 55,148,000 114,466,000
Exercise of options 163,000 2,000 1,417,000 1,419,000
Tax benefit arising from exercise of
non qualified stock options 197,000 197,000
Dividends (1,901,000) (1,901,000)
Net income 30,996,000 30,996,000
---------- --------- ------------- ----------- ------------
BALANCE, SEPTEMBER 30, 2005 13,595,000 $ 136,000 $ 60,798,000 $ 84,243,000 $145,177,000
========== ========= ============= ============ ============
See notes to consolidated financial statements
F-5
ASTA FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
2005 2004 2003
--------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,996,000 $22,237,000 $ 11,574,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 485,000 356,000 196,000
Deferred income taxes 109,000 (41,000) 350,000
Provision for credit and other losses 300,000
Cancellation of common shares (90,000)
Issuance of common shares to former Director 81,000
Changes in:
Due from third party collection agencies and attorneys (588,000) (777,000) 37,000
Other assets 622,000 (398,000) 534,000
Income taxes payable (182,000) 623,000 (691,000)
Other liabilities 615,000 (530,000) (100,000)
Restricted cash and cash equivalents 54,000
Repossessed automobiles held for sale 67,000
-------------- ------------- ------------
Net cash provided by operating activities 32,057,000 21,824,000 11,958,000
-------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit on receivable purchase 7,288,000 (7,288,000)
Purchase of consumer receivables acquired for liquidation (113,537,000) (103,743,000) (115,626,000)
Principal payments received from collection of consumer
receivables acquired for liquidation 59,648,000 37,558,000 27,426,000
Principal payments received from collections represented
by sales of consumer receivables acquired for liquidation 39,813,000 25,312,000 18,189,000
Acquisition of business - Option Card LLC (13,521,000)
Capital expenditures (685,000) (146,000) (561,000)
Auto loan principal payments collected 5,000 24,000
Finance receivables principal payments collected 1,443,000
-------------- ------------- ------------
Net cash (used in) investing activities (20,994,000) (48,302,000) (69,105,000)
-------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under line of credit, net (10,070,000) 22,974,000 14,209,000
Dividends paid (1,894,000) (1,466,000)
Proceeds from exercise of stock options 1,419,000 1,365,000 275,000
Tax benefit arising from exercise of non-qualified stock options 197,000 103,000
Proceeds from common stock offering 47,296,000
-------------- ------------- ------------
Net cash (used in) provided by financing activities (10,348,000) 22,976,000 61,780,000
-------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 715,000 (3,502,000) 4,633,000
Cash and cash equivalents at beginning of year 3,344,000 6,846,000 2,213,000
-------------- ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,059,000 $ 3,344,000 $ 6,846,000
============== ============= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 1,927,000 $766,600 $ 2,760,000
Income taxes $ 21,244,000 $14,534,000 $ 8,391,000
Certain 2004 and 2003 amounts have been reclassified to be comparative with 2005
See notes to consolidated financial statements
F-6
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
[1] THE COMPANY:
Asta Funding, Inc. and its wholly-owned subsidiaries (the "Company") is
primarily in the business of purchasing and liquidating performing and
nonperforming consumer loan portfolios. The Company attempts to collect
the loans constituting these portfolios by utilizing third party
collection agencies and through its own efforts.
[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.
[3] CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
The Company maintains cash balances in various financial institutions.
Management periodically evaluates the creditworthiness of such
institutions. Cash balances may, from time to time, exceed FDIC limits.
[4] INCOME RECOGNITION:
The Company recognizes income on performing and nonperforming consumer
receivable portfolios, which are acquired for liquidation, using either
the interest method or cost recovery method. Upon acquisition of a
portfolio of receivables, the Company's management estimates the future
anticipated cash flows and determines the allocation between principal
and interest of collections based upon this estimate. The Company takes
into consideration the relative credit quality of the underlying
receivables constituting the portfolio, the strategy involved to maximize
the collections thereof, the time required to implement the collection
strategy as well as other factors to estimate the anticipated cash flows.
The estimated future cash flows could change significantly in the near
term. If management cannot reasonably estimate the future cash flows, the
cost recovery method is used.
Under the interest method, income is recognized on the effective yield
method based on the actual cash collected during a period and future
estimated cash flows and timing of such collections and the portfolio's
cost. The estimated future cash flows are reevaluated quarterly. Under
the cost recovery method, no income is recognized until the cost of the
portfolio has been fully recovered.
The company recognizes finance income net of collection fees paid to
third-party collection agencies. With respect to amounts collected
through in-house efforts, such finance income is recognized as the gross
amount collected. The cost attributable to such in-house efforts are
included in the Company's general and administrative expenses.
Income from finance receivables was recognized over the periods from the
date of purchase to the estimated collection date.
[5] FURNITURE AND EQUIPMENT:
Furniture and equipment is stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets (5
to 7 years).
F-7
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[6] CREDIT LOSSES:
Provisions for credit losses are charged to operations in amounts
sufficient to maintain the allowance at a level considered adequate to
cover the losses of principal in the portfolios of auto loans and
finance receivables. The Company's charge-off policy is based on a
portfolio by portfolio review of consumer receivables acquired for
liquidation. Such receivables are charged-off when management deems
them to be uncollectible.
[7] INCOME TAXES:
Deferred federal and state taxes arise from temporary differences
resulting primarily from the provision for credit losses and
depreciation timing differences reported for financial accounting and
tax purposes in different periods.
[8] 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 years ended September 30, 2005, 2004 and 2003:
2005 2004 2003
--------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NET AVERAGE PER SHARE NET AVERAGE PER SHARE NET AVERAGE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------------------------------------------------------------------------------------------------------------------
Basic $ 30,996,000 13,544,000 $2.29 $22,237,000 13,346,000 $1.67 $11,574,000 9,464,000 $1.23
===== ===== =====
Effect of
dilutive
Stock 866,000 808,000 838,000
------------ ------------- ----------- ------------- ----------- -----------
Diluted $ 30,996,000 14,410,000 $2.15 $22,237,000 14,154,000 $1.57 $11,574,000 10,302,000 $1.13
============ ============= ===== =========== ============= ===== =========== =========== =====
[9] 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.
With respect to income recognition under the interest method, the
Company takes into consideration the relative credit quality of the
underlying receivables constituting the portfolio acquired, the
strategy involved to maximize the collections thereof, the time
required to implement the collection strategy as well as other factors
to estimate the anticipated cash flows. Actual results could differ
from those estimates including management's estimates of future cash
flows and the resultant allocation of collections between principal and
interest resulting there from.
F-8
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
NOTE A -THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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. 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.
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
2005 2004 2003
------------- -------------- -------------
Net income as reported $30,996,000 $ 22,237,000 $ 11,574,000
Stock based compensation expense
determined under fair value method, net
of related tax effects (3,746,000) (2,184,000) (1,060,000)
-------------- -------------- ------------
Pro forma net income $ 27,250,000 $ 20,053,000 $ 10,514,000
============== ============== ============
Earnings per share:
Basic - as reported $2.29 $1.67 $1.23
===== ===== =====
Basic - pro forma $2.01 $1.50 $1.11
===== ===== =====
Diluted - as reported $2.15 $1.57 $1.13
===== ===== =====
Diluted - pro forma $1.89 $1.42 $1.02
===== ===== =====
The weighted average fair value of the options granted during 2005, 2004 and
2003 were $18.44, $15.18 and $5.07 per share on the dates of grant,
respectively, using the Black-Scholes option pricing model with the following
assumptions: weighted average dividend yield of 0.8% for 2005 and 0.3% for 2004
and 0% 2003, weighted average volatility of 40% (2005) 41% (2004) and 56%
(2003), expected life 10 years, weighted average risk free interest rate of
4.19% in 2005, 4.28% in 2004 and 4.05% in 2003.
Effective September 30, 2005, the Company accelerated the vesting of all
unvested stock options previously awarded to employees, officers and directors
under the Company's stock option plans. The stock based compensation expense for
the year ended September 30, 2005 determined under the fair value method, net of
related tax effects, shown above includes the effect of acceleration of the
vesting of the options outstanding. The impact on the stock based compensation
expense disclosure above for fiscal year 2005 was an additional $1.4 million, or
$0.10 per fully diluted weighted average share.
Financial Accounting Standards Board ("FASB") Financial Interpretation No. 44
would require the Company to recognize compensation expense under certain
circumstances, such as the change in the vesting schedule, that would allow an
employee to vest in an option that would have otherwise been forfeited based on
the award's original terms. The Company would be required to begin to recognize
compensation expense over the new expected vesting periods based on estimates of
the numbers of options that employees ultimately will retain that otherwise
would have been forfeited, absent the modifications. The accelerated options,
absent the acceleration, would substantially have vested over the next 12 to 24
months. Such estimates would be based on such factors such as historical and
expected employee turnover rates and similar statistics. Of the 587,000
stock option that were affected by the acceleration of the vesting of all stock
options as of September 30, 2005, 547,000 are attributable to officers and
directors of the Company representing $9.0 million of the $9.7 million intrinsic
value of the newly vested stock options. The Company is unable to estimate the
number of options that employees will ultimately retain that otherwise would
have been forfeited, absent the modification. Based on the current
circumstances, market price above the grant price, concentration of options
awarded to officers and directors and low historical turnover rates, no
compensation expense resulting from the new measurement date has been recognized
at September 30, 2005 or, prior to the employees' termination. The Company will
recognize compensation expense in future periods, should a benefit be realized
by the holders of the aforementioned options, which they would not otherwise
have been entitled to.
F-9
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
The primary purpose of the accelerated vesting is to eliminate the compensation
expense the Company would otherwise recognize in its income statement with
respect to these accelerated stock options based upon the adoption of Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 123
(Revised 2005), Share-Based Payment ("SFAS 123R"). SFAS 123R is effective as of
the beginning of the first annual reporting period that begins after June 15,
2005, and will require that compensation expense associated with stock options
be recognized in the statement of operations , rather than a disclosure in the
notes to the Company's consolidated financial statements.
In order to prevent unintended personal benefits to employees, officers and
directors, the Board imposed restrictions on any shares received through the
exercise of accelerated options held by those individuals. These restrictions
prevent the sale of any stock obtained through exercise of an accelerated option
prior to the earlier of the original vesting date or the individual's
termination of employment.
[11] Impact of Recently Issued Accounting Standards
(a) SOP 03-03
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 internal rate of return 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 through September 30,
2005 there has been no impact on our results. We believe the implementation
of this SOP will make it more likely that an impairment loss may be
recorded some time in the future.
(b) SFAS 153
SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB
Opinion No. 29" ("SFAS 153") addresses the measurement of exchanges of
nonmonetary assets. It eliminates the exception from fair value accounting
for nonmonetary exchange of similar productive assets and replaces it with
an exception for exchanges that do not have commercial substance. SFAS 153
specifies that a nonmonetary exchange has commercial substance if the
future cash flows of an entity are expected to change significantly as a
result of the exchange. This statement is effective beginning in fiscal
2006. This statement is not expected to have an impact on the Company's
financial results.
F-10
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
(c) SFAS 154
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement
No. 3" (SFAS 154), which requires a retrospective application to prior
periods' financial statements of changes in accounting principle for all
periods presented. This statement replaces APB Opinion No. 20 which
required that most voluntary changes in accounting principle be recognized
by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. The provisions of SFAS
154 are effective for fiscal years beginning after December 15, 2006, the
Company's fiscal year 2008.
[12] RECLASSIFICATIONS:
Certain items in prior years' financial statements have been reclassified to
conform to current year's presentation.
NOTE B - 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 YEAR ENDED SEPTEMBER 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................ 126,023,000 126,023,000
Net cash collections from collection of consumer
receivables acquired for liquidation................ (99,438,000) (4,771,000) (104,209,000)
Net cash collections represented by account sales of
consumer receivables acquired for liquidation...... (62,817,000) (1,914,000) (64,731,000)
Finance income recognized................................. 64,056,000 5,423,000 69,479,000
------------- ------------- --------------
Balance, end of period.................................... $ 172,636,000 $ 91,000 $ 172,727,000
============= ============= ==============
Revenue as a percentage of collections........................ 39.5% 81.1% 41.1%
F-11
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
FOR THE YEAR ENDED SEPTEMBER 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................ 103,039,000 704,000 103,743,000
Net cash collections from collection of consumer
receivables acquired for liquidation............ (66,687,000) (7,098,000) (73,785,000)
Net cash collections represented by account sales of
consumer receivables acquired for liquidation......... (39,823,000) (437,000) (40,260,000)
Portfolio written down.......................................... (300,000) (300,000)
Finance income recognized................................. 45,774,000 5,401,000 51,175,000
------------- ------------ -------------
Balance, end of period.................................... $ 144,812,000 $ 1,353,000 $ 146,165,000
============= ============ =============
Revenue as a percentage of collections 43.0% 71.7% 44.9%
We presently outsource the majority of our receivables to third-party collection
agencies and attorneys. Third-party collection agencies and attorneys are
compensated on a contingency basis, earning a fee based on the amount collected
from a debtor. Third-party collection agencies and attorneys withhold their fees
and direct collection costs from the proceeds and are remitted to the Company.
The following table summarizes collections on a gross basis as received by our
third-party collection agencies and attorneys less commissions and direct costs
for the years ended September 30, 2005, 2004 and 2003.
2005 2004 2003
---- ----- ----
Gross collections (1) $218,919,000 $139,956,000 $91,638,000
Commissions and fees (2) 49,979,000 25,911,000 11,161,000
------------ ------------ -----------
Net collections $168,940,000 $114,045,000 $80,477,000
============ ============ ===========
(1) Gross collections include: collection from third-party collection
agencies and attorneys, collection from our in-house efforts and
collections represented by account sales.
(2) Commission and fees are the contractual commission earned by
third-party collection agencies and attorneys, and direct costs
associated with the collection effort - generally court costs.
Finance income recognized on collections represented by account sales was $24.9
million, $14.9 million and $3.4 million for the fiscal years ended September 30,
2005, 2004 and 2003, respectively.
F-12
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
NOTE C - ACQUISITION
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 which is leased on a month to month basis consisting of
approximately 3,200 square feet, 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.
The following table summarizes the estimated fair values of the assets acquired
and the liabilities assumed at the date of acquisition.
Consumer receivables acquired for liquidation $12,486,000
Other current assets 626,000
Fixed assets 98,000
Other assets 230,000
Goodwill (included in other assets) 288,000
------------
Total assets acquired 13,728,000
Current liabilities 207,000
------------
Net assets acquired $13,521,000
============
NOTE D - ALLOWANCES FOR CREDIT LOSSES
We purchase consumer receivables acquired for liquidation at a significant
discount to the amount actually owed by borrowers. In all instances of
charged-off receivable purchases, we anticipate collecting well in excess of our
purchase price. In the rare cases where the actual cash collections are tracking
below our expectations and some time has passed since the portfolio purchase and
we considered the lag in collections to be indicative of a trend, we will
consider that portfolio to be impaired and a provision for credit loss will be
established. During the year ended September 30, 2004, one such portfolio
underperformed expectations and an amount of $300,000 was provided for an
allowance for credit losses.
F-13
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
NOTE E - FURNITURE AND EQUIPMENT
Furniture and equipment as of September 30, 2005 and 2004 consist of the
following:
2005 2004
------------ -----------
Furniture $ 307,000 $ 307,000
Equipment 2,108,000 1,325,000
------------ -----------
2,415,000 1,632,000
Less accumulated depreciation 1,426,000 1,036,000
------------ -----------
Balance, end of period $ 989,000 $ 596,000
============ ===========
Depreciation expense for the years ended September 30, 2005, 2004 and 2003
aggregated $272,000, $260,000 and $196,000 respectively.
NOTE F - ADVANCES UNDER LINE OF CREDIT
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 and extended it to May 11, 2006. The 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
(The applicable rate was 6.25% at September 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. See Note O (2) - Subsequent Events, for
further information regarding the line of credit.
NOTE G - OTHER LIABILITIES
Other liabilities as of September 30, 2005 and 2004 are as follows:
2005 2004
------------ -----------
Accounts payable and accrued expenses $2,460,000 $769,000
Dividend payable 476,000 470,000
Other 1,244,000 112,000
Deposit due on cancelled sale (1) 2,000,000
------------ ----------
Total other liabilities $4,180,000 $3,351,000
============ ==========
(1) Deposit due on cancelled sale represents an amount due to a third
party in connection with a cancelled sale of consumer receivables
acquired. This amount was returned to the party in October 2004.
F-14
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
NOTE H - INCOME TAXES
The significant component of the Company's deferred tax liability as of
September 30, 2005 and 2004 is the depreciation temporary difference being
reported for financial accounting and tax purposes in different periods.
The components of the provision for income taxes for the years ended September
30, 2005, 2004 and 2003 are as follows:
2005 2004 2003
------------- ------------- -------------
Current:
Federal $ 15,947,000 $ 11,899,000 $ 5,982,000
State 5,234,000 3,361,000 1,700,000
------------- ------------- -------------
21,181,000 15,260,000 7,682,000
------------ ------------- -------------
Deferred:
Federal 82,000 (31,000) 295,000
State 27,000 (10,000) 55,000
------------- -------------- -------------
109,000 (41,000) 350,000
------------- -------------- -------------
Provision for income taxes $ 21,290,000 $ 15,219,000 $ 8,032,000
============= ============= =============
The difference between the statutory federal income tax rate on the Company's
pre-tax income and the Company's effective income tax rate is summarized as
follows:
2005 2004 2003
------------- ------------- -------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal benefit 5.8 5.8 5.9
Other (0.1) (0.1) 0.1
----- ----- -----
Effective income tax rate 40.7% 40.7% 41.0%
===== ===== =====
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company leases its facilities in Englewood Cliffs, New Jersey, Bethlehem,
Pennsylvania and Denver, Colorado. The leases are operating leases, and the
Company incurred related rent expense in the amounts of $381,000, $335,000 and
$271,000 during the years ended September 30, 2005, 2004 and 2003, respectively.
The future minimum lease payments are as follows:
YEAR
ENDING
SEPTEMBER 30,
-------------
2006 $331,000
2007 245,000
2008 219,000
2009 219,000
2010 182,000
----------
$1,196,000
==========
F-15
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
NOTE J - 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 nonincentive
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 2005 through February 2014. As of September 30, 2005, 96,002 shares of
common stock are reserved for the issuance and available for grant under the
stock option plan.
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 nonincentive 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 September 2014.
As of September 30, 2005, 404,667 shares of common stock are reserved for the
issuance and available for grant under the stock option plan.
The following table summarizes stock option transactions under the plans:
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
2005 2004 2003
------------------------ ------------------------- -------------------------
WEIGHTED WEIGHTED Weighted
AVERAGE AVERAGE Average
EXERCISE EXERCISE Exercise
SHARES PRICE SHARES PRICE Shares Price
------ ----- ------ ----- ------ -----
Outstanding options at the beginning of 1,364,171 $ 6.27 1,225,000 $ 3.24 1,109,000 $ 2.87
year
Options granted 422,500 18.44 392,833 15.18 260,000 5.07
Options cancelled (43,002) 12.21 (1,998) 7.50 (49,002) 5.19
Options exercised (163,064) 8.70 (251,664) 5.43 (94,998) 2.91
-------- ------ ----------- --------- ---------- --------
Outstanding options at the end of year 1,580,605 $ 9.11 1,364,171 $ 6.27 1,225,000 $ 3.24
============ ====== =========== ======= ========== ======
Exercisable options at the end of year 1,580,605 $9.11 934,290 $ 3.83 938,001 $ 2.66
============ ===== ========== ======= ========== ======
F-16
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
NOTE J - STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about the plans' outstanding options
as of September 30, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- --------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
-------------------------- -------------- ------------------ ------------ -------------- ---------------
$0.0000 - $ 2.2360 200,000 3.7 $ 0.8125 200,000 $ 0.8125
$2.2361 - $ 4.4720 520,000 4.0 2.5644 520,000 2.5644
$4.4721 - $ 6.7080 143,334 7.0 4.8284 143,334 4.8284
$6.7081 - $ 8.9440 7,000 6.9 7.2307 7,000 7.2307
$13.4161 - $15.6520 245,002 8.1 14.8700 245,002 14.8700
$15.6521 - $17.8880 31,944 8.9 16.5347 31,944 16.5347
$17.8881 - $20.1240 413,325 9.1 18.2405 413,325 18.2405
$20.1241 - $22.3600 20,000 9.4 22.3600 20,000 22.3600
--------- --- -------- --------- --------
1,580,605 6.4 $ 9.1082 1,580,605 $ 9.1082
========= === ======== ========= ========
NOTE K - STOCKHOLDERS' EQUITY
In July 2002, the Company issued 56,000 shares of common stock with a market
value of $4.50 per share for consulting services rendered during the course of
the year. In June 2003, 20,000 of these common shares were cancelled.
In September 2003, the Company issued 6,000 shares of common stock with a market
value of $13.40 per share to a former director.
During the year ended September 30, 2005, the Company declared quarterly cash
dividends aggregating $1,901,000 ($0.035 per share, per quarter), of which
$476,000 was paid November 1, 2005. During the year ended September 30, 2004 the
Company declared quarterly cash dividends aggregating $1,606,000 ($0.035 per
share, per quarter) of which $470,000 was paid November 1, 2004. During the year
ended September 30, 2003, the Company declared a cash dividend of $330,000
($0.025 per share), which was paid November 1, 2003. We expect to pay a regular
cash dividend in future quarters. This will be at the discretion of the board of
directors and will depend upon our financial condition, operating results,
capital requirements and any other factors the board of directors deems
relevant. In addition, our agreements with our lenders may, from time to time,
restrict our ability to pay dividends. All per share amounts have been
retroactively restated to give effect to a 2:1 stock split in March 2004.
F-17
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
NOTE L - RETIREMENT PLAN
The Company maintains a 401(k) Retirement Plan covering all of its eligible
employees. Matching contributions made by the employees to the plan are made at
the discretion of the board of directors each plan year. Contributions for the
years ended September 30, 2005, 2004 and 2003 were $70,000, $70,000 and $44,000,
respectively.
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Values of Financial Instruments" ("SFAS 107"), requires disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. Because there
are a limited number of market participants for certain of the Company's assets
and liabilities, fair value estimates are based upon judgments regarding credit
risk, investor expectation of economic conditions, normal cost of administration
and other risk characteristics, including interest rate and prepayment risk.
These estimates are subjective in nature and involve uncertainties and matters
of judgment, which significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
The tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on the fair value estimates and have not
been considered in the estimates.
The following summarizes the information as of September 30, 2005 and 2004 about
the fair value of the financial instruments recorded on the Company's financial
statements in accordance with SFAS 107:
2005 2004
----------------------------------- ----------------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
---------------- --------------- ------------------- -----------------
Cash, and
cash equivalents $4,059,000 $4,059,000 $ 3,300,000 $ 3,300,000
Consumer receivables
acquired for liquidation 172,727,000 193,454,000 146,200,000 163,900,000
Advances under lines of
credit, notes payable and
Due to affiliates 29,285,000 29,285,000 39,400,000 39,400,000
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments are as follows:
Cash and cash equivalents: The carrying amount approximates fair value.
Consumer receivables acquired for liquidation:
The Company has estimated the fair value based on the present value of expected
future cash flows.
Advances under lines of credit, notes payable and due to affiliates:
Since these are variable rate and short-term, the carrying amounts approximate
fair value.
F-18
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
NOTE N - SUMMARIZED QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
----------- ----------- ------------ ------------ ------------
2005
Total revenue $13,830,000 $16,662,000 $ 19,028,000 $ 19,959,000 $ 69,479,000
Income before provision for income
taxes 10,379,000 12,241,000 14,363,000 15,303,000 52,286,000
Net income 6,175,000 7,281,000 8,536,000 9,004,000 30,996,000
Basic net income per share $0.46 $0.54 $0.63 $0.66 $2.29
Diluted net income per share $0.43 $0.51 $0.59 $0.62 $2.15
2004
Total revenue $11,455,000 $ 12,864,000 $ 12,050,000 $ 14,806,000 $ 51,175,000
Income before provision for income
taxes 7,879,000 9,144,000 9,409,000 11,024,000 37,456,000
Net income 4,688,000 5,433,000 5,607,000 6,509,000 22,237,000
Basic net income per share $0.36 $0.41 $0.42 $0.48 $1.67
Diluted net income per share $0.34* $0.38 $0.40* $0.46 $1.57
2003
Total revenue $ 6,751,000 $ 7,720,000 $ 9,208,000 $ 11,183,000 $ 34,862,000
Income before provision for income 3,865,000 4,055,000 4,412,000 7,274,000 19,606,000
taxes
Net income 2,312,000 2,429,000 2,540,000 4,293,000 11,574,000
Basic net income per share $0.29 $0.30 $0.31 $0.33 $1.23
Diluted net income per share $0.27 $0.28 $0.28 $0.31 $1.13
* Diluted earnings per share has been modified to reflect a revised
number of diluted shares used in the computation.
NOTE O - SUBSEQUENT EVENTS
(1) In December 2005 the Company announced the increase of the annual dividend
from $0.14 to $0.16 per share, or 14.3%, effective with the next dividend
payment due on February 1, 2006. The increased quarterly payment will be $0.04
per share.
(2) Also, in December 2005, the Company received a commitment from its lending
institution, which, subject to completion and execution of the formal documents,
will result in an increase in the line of credit from $80 million to $100
million with a feature that, under certain circumstances, allows us to increase
the line of credit to $125 million. The amended and restated loan and security
agreement expiration date remains May 11, 2006.
F-19