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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-26906
ASTA FUNDING, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3388607
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
210 SYLVAN AVE., ENGLEWOOD CLIFFS, NEW JERSEY 07632
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER: (201) 567-5648
Former name, former address and former fiscal year, if changed since last
report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer as in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act) Yes |_|No |X|
As of August 1, 2006, the registrant had 13,694,490 common shares outstanding.
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ASTA FUNDING, INC.
INDEX TO FORM 10-Q
Part I. Financial Information...................................................................... 2
Item 1. Condensed Consolidated Financial Statements................................................ 2
Condensed Consolidated Balance Sheets as of June 30, 2006 (unaudited)
and September 30, 2005.................................................................. 2
Condensed Consolidated Statements of Operations for the nine and three month periods ended
June 30, 2006 and 2005 (unaudited)....................................................... 3
Condensed Consolidated Statement of Stockholders' Equity for the nine month period ending
June 30, 2006 (unaudited)................................................................ 4
Condensed Consolidated Statements of Cash Flows for the nine month periods ended
June 30, 2006 and 2005 (unaudited)....................................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited)........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 26
Item 4. Controls and Procedures.................................................................... 26
Part II. Other Information.......................................................................... 27
Item 1. Legal Proceedings.......................................................................... 27
Item 1A Risk Factors............................................................................... 27
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds................................. 27
Item 3. Defaults Upon Senior Securities............................................................ 27
Item 4. Submission of Matters to a Vote of Security Holders........................................ 27
Item 5. Other Information.......................................................................... 27
Item 6. Exhibits................................................................................... 27
Signatures .......................................................................................... 28
Exhibit 31.1 - Section 302 Certification of Chief Executive Officer................................... 29
Exhibit 31.2 - Section 302 Certification of Chief Financial Officer................................... 30
Exhibit 32.1 - Section 906 Certification of Chief Executive Officer................................... 31
Exhibit 32.2 - Section 906 Certification of Chief Financial Officer................................... 32
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
2006 2005
----------- -------------
(UNAUDITED)
ASSETS
Cash .................................................................. $ 4,710,000 $ 4,059,000
Consumer receivables acquired for liquidation, net (Note 5)............ 236,039,000 172,727,000
Due from third party collection agencies and attorneys ................ 1,738,000 1,425,000
Furniture and equipment, net .......................................... 1,123,000 989,000
Other assets .......................................................... 2,198,000 838,000
------------ ------------
Total assets ................................................ $245,808,000 $180,038,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Debt ............................................................... $ 65,287,000 $ 29,285,000
Other liabilities .................................................. 3,167,000 4,180,000
Income taxes payable ............................................... 769,000 1,243,000
Deferred income taxes .............................................. 153,000 153,000
------------ ------------
Total liabilities ........................................... 69,376,000 34,861,000
------------ ------------
Stockholders' Equity
Preferred stock, $.01 par value; authorized 5,000,000; issued and
outstanding -- none
Common stock, $.01 par value; authorized 30,000,000 shares; issued
and outstanding -- 13,634,490 at
June 30, 2006 and 13,595,324 at September 30, 2005 ................ 136,000 136,000
Additional paid-in capital ......................................... 61,493,000 60,798,000
Retained earnings .................................................. 114,803,000 84,243,000
------------ ------------
Total stockholders' equity .................................. 176,432,000 145,177,000
------------ ------------
Total liabilities and stockholders' equity ............................ $245,808,000 $180,038,000
============ ============
See accompanying notes to condensed consolidated financial statements
2
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Revenues:
Finance income $26,090,000 $19,028,000 $71,179,000 $49,520,000
Other income 336,000 -- 336,000 --
----------- ----------- ----------- -----------
26,426,000 19,028,000 71,515,000 49,520,000
Expenses:
General and administrative 4,692,000 4,153,000 13,492,000 11,122,000
Interest 1,249,000 512,000 3,214,000 1,415,000
Impairment 675,000 -- 675,000 --
----------- ----------- ----------- -----------
6,616,000 4,665,000 17,381,000 12,537,000
----------- ----------- ----------- -----------
Income before income taxes 19,810,000 14,363,000 54,134,000 36,983,000
Income tax expense 8,030,000 5,827,000 21,939,000 14,991,000
----------- ----------- ----------- -----------
Net income $11,780,000 $ 8,536,000 $32,195,000 $21,992,000
----------- ----------- ----------- -----------
Net income per share:
Basic $ 0.86 $ 0.63 $ 2.37 $ 1.63
----------- ----------- ----------- -----------
Diluted $ 0.80 $ 0.59 $ 2.20 $ 1.53
----------- ----------- ----------- -----------
Weighted average number of shares outstanding:
Basic 13,628,776 13,569,128 13,611,915 13,528,513
----------- ----------- ----------- -----------
Diluted 14,639,432 14,424,266 14,604,678 14,377,402
----------- ----------- ----------- -----------
See accompanying notes to condensed consolidated financial statements
3
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ---------- ------------ ------------ ------------
Balance, September 30, 2005 ................. 13,595,324 $ 136,000 $ 60,798,000 $ 84,243,000 $ 145,177,000
Exercise of options ......................... 39,166 -- 590,000 -- 590,000
Stock based compensation expense ............ 105,000 105,000
Dividends ................................... -- -- -- (1,635,000) (1,635,000)
Net Income .................................. -- -- -- 32,195,000 32,195,000
---------- ------------- ------------- ------------- -------------
Balance, June 30, 2006 ...................... 13,634,490 $ 136,000 $ 61,493,000 $ 114,803,000 $ 176,432,000
========== ============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements
4
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2006 JUNE 30, 2005
----------------- -----------------
Cash flows from operating activities:
Net income ............................................................ $ 32,195,000 $ 21,992,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ......................................... 382,000 372,000
Impairment of consumer receivables acquired for liquidation ........... 675,000 --
Stock based compensation expense ...................................... 105,000 --
Changes in:
Income taxes payable .................................................. (474,000) (1,427,000)
Due from third party collection agencies and attorneys ................ (313,000) (740,000)
Other assets .......................................................... (133,000) 1,382,000
Other liabilities ..................................................... (1,082,000) 288,000
------------- -------------
Net cash provided by operating activities .......................... 31,355,000 21,867,000
Cash flows from investing activities:
Purchase of consumer receivables acquired for liquidation ............. (155,361,000) (81,004,000)
Principal collected on receivables acquired for liquidation ........... 58,323,000 44,873,000
Principal collected on receivable accounts represented by
account sales ....................................................... 33,051,000 28,054,000
Acquisition of businesses, net of cash acquired ....................... (1,406,000) (13,521,000)
Deposit on receivable purchase ........................................ -- 7,288,000
Capital expenditures .................................................. (338,000) (309,000)
------------- -------------
Net cash (used in) investing activities ............................ (65,731,000) (14,619,000)
Cash flows from financing activities:
Proceeds from exercise of options ..................................... 590,000 1,283,000
Tax benefit arising from exercise of non-qualified options ............ -- 119,000
Dividends ............................................................. (1,565,000) (1,419,000)
Advances (Payments) under line of credit, net ......................... 36,002,000 (8,655,000)
------------- -------------
Net cash provided by (used in) financing activities ................ 35,027,000 (8,672,000)
------------- -------------
Increase (Decrease) in cash ............................................ 651,000 (1,424,000)
Cash at the beginning of period ........................................ 4,059,000 3,344,000
------------- -------------
Cash at end of period .................................................. $ 4,710,000 $ 1,920,000
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period
Interest ............................................................. $ 3,132,000 $ 1,515,000
Income taxes ......................................................... $ 22,322,000 $ 16,294,000
Certain 2005 amounts have been reclassified to be comparative to 2006.
See accompanying notes to condensed consolidated financial statements.
5
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS AND BASIS OF PRESENTATION
Business
Asta Funding, Inc., together with its wholly owned subsidiaries, is engaged
in the business of purchasing, managing for their own account and servicing
non-conforming and distressed consumer receivables. Non-conforming consumer
receivables are the obligations of individuals that have incurred credit
impairment either at the time the obligation was originated or subsequent to
origination. Distressed consumer receivables are the unpaid debts of individuals
to banks, finance companies and other credit providers. A large portion of our
distressed consumer receivables are MasterCard(R), Visa(R), other credit card
accounts and telecommunication accounts which were charged-off by the issuers
for non-payment. We acquire these portfolios at substantial discounts from their
face values that are based on the characteristics (issuer, account size, debtor
location and age of debt) of the underlying accounts of each portfolio.
Basis of Presentation
The condensed consolidated balance sheets as of June 30, 2006, and the
consolidated balance sheets as of September 30, 2005, (the September 30, 2005
financial information included in this report has been extracted from our
audited financial statements included in our Annual Report on Form 10K/A) the
condensed consolidated statements of operations for the nine and three month
periods ended June 30, 2006 and 2005, respectively, the condensed consolidated
statement of stockholders' equity as of and for the nine months ended June 30,
2006 and the condensed consolidated statements of cash flows for the nine month
periods ended June 30, 2006 and 2005, have been prepared by us without an audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly our financial position at
June 30, 2006 and September 30, 2005, the results of operations for the nine and
three month periods ended June 30, 2006 and 2005 and cash flows for the nine
month periods ended June 30, 2006 and 2005 have been made. The results of
operations for the nine and three month periods ended June 30, 2006 and 2005 are
not necessarily indicative of the operating results for any other interim period
or the full fiscal year.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the
Securities and Exchange Commission and therefore do not include all information
and note disclosures required under generally accepted accounting principles. We
suggest that these financial statements be read in conjunction with the
financial statements and notes thereto included in our Annual Report on Form
10-K/A for the fiscal year ended September 30, 2005 filed with the Securities
and Exchange Commission.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates including management's estimates of future cash flows and the
allocation of collections between principal and interest resulting therefrom.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. We do not expect the adoption of FIN 48 to have a material impact on our
financial reporting, and we are currently evaluating the impact, if any, the
adoption of FIN 48 will have on our disclosure requirements.
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. Currently there is no impact on the Company.
6
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1: BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
In December 2004, the 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 method
utilized by the Company in prior fiscal years of the disclosure-only provisions
of the original SFAS No. 123. The effective date for implementation of SFAS No.
123R for the Company was October 1, 2005. The Company disclosed 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.During fiscal year 2006, with regard to an
exercise of stock options that would have otherwise been forfeited by an
employee that terminated employment, the Company recognized $105,000 in
stock based compensation expense in accordance with Financial Interpretation No.
44. No stock options were awarded during the nine month period ended June 30,
2006.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB
Opinion No. 29" ("SFAS 153"). This statement 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 became effective October 1, 2005. This statement is not
expected to have an impact on the Company's financial results.
In October 2003, the American Institute of Certified Accountants
("AICPA") issued Statement of Position ("SOP") 03-3, "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 became effective October 1, 2005.
Implementation of this SOP will make it more likely that impairment losses and
accretable yield adjustments will be recorded, because all downward revisions in
collection estimates will result in impairment charges, given the requirement
that the IRR of the affected pool be held constant.
Reclassifications
Certain items in prior year's financial statements have been reclassified
to conform to current period's presentation.
NOTE 2: PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Asta Funding,
Inc. and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
NOTE 3: CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION
Accounts acquired for liquidation are stated at their net realizable value
and consist mainly of defaulted consumer loans to individuals throughout the
country.
Prior to October 1, 2005, the Company accounted for its investment in
finance receivables using the interest method under the guidance of Practice
Bulletin 6, "Amortization of Discounts on Certain Acquired Loans." Effective
October 1, 2005, the Company adopted and began to account for its investment in
finance receivables using the interest method under the guidance of AICPA
Statement of Position ("SOP") 03-3, "Accounting for Loans or Certain Securities
Acquired in a Transfer." Practice Bulletin 6 was amended by SOP 03-3 as
described further in this note. Under the guidance of SOP 03-3 (and the amended
Practice Bulletin 6); static pools of accounts are established. These pools are
aggregated based on certain common risk criteria. Each static pool is recorded
at cost and is accounted for as a single unit for the recognition of income,
7
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3: CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION- (CONTINUED)
principal payments and loss provision. Once a static pool is established for a
quarter, individual receivable accounts are not added to the pool (unless
replaced by the seller) or removed from the pool (unless sold or returned to the
seller). SOP 03-3 (and the amended Practice Bulletin 6) requires that the excess
of the contractual cash flows over expected cash flows not be recognized as an
adjustment of revenue or expense or on the balance sheet. The SOP initially
freezes the internal rate of return, referred to as IRR, estimated when the
accounts receivable are purchased as the basis for subsequent impairment
testing. Significant increases in actual, or expected future cash flows may be
recognized prospectively through an upward adjustment of the IRR over a
portfolio's remaining life. Any increase to the IRR then becomes the new
benchmark for impairment testing. Effective for fiscal years beginning October
1, 2005 under SOP 03-3 and the amended Practice Bulletin 6, rather than lowering
the estimated IRR if the collection estimates are not received or projected to
be received, the carrying value of a pool would be written down to maintain the
then current IRR. If cash collections increase subsequent to recording an
impairment, reversal of the previously recognized impairment is made prior to
any increase to the IRR. For the three month period and nine month period ended
June 30, 2006, the Company recorded an impairment of $675,000 applicable to one
of its portfolio pools. No impairments were taken in the comparable periods in
the prior year. Income on finance receivables is earned based on each static
pool's effective IRR. Under the interest method, income is recognized on the
effective yield method based on the actual cash collected during a period and
future estimated cash flows and timing of such collections and the portfolio's
cost. Revenue arising from collections in excess of anticipated amounts
attributable to timing differences is deferred. The estimated future cash flows
are reevaluated quarterly. Under the cost recovery method, no income is
recognized until the cost of the portfolio has been fully recovered. A pool can
become fully amortized (zero carrying balance on the balance sheet) while still
generating cash collections. In this case, all cash collections are recognized
as revenue when received. Additionally, the Company uses the cost recovery
method when collections on a particular pool of accounts cannot be reasonably
predicted.
The following tables summarize the changes in the balance sheet of the
investment in receivable portfolios during the following periods:
FOR THE NINE MONTHS ENDED JUNE 30, 2006
-----------------------------------------------
COST
INTEREST RECOVERY
METHOD METHOD TOTAL
----------- ----------- -------------
Balance, beginning of period ............................. $ 172,636,000 $ 91,000 $ 172,727,000
Acquisitions of receivable portfolios, net ............... 155,361,000 -- 155,361,000
Net cash collections from collections of consumer
receivables acquired for liquidation ................ (116,464,000) (2,820,000) (119,284,000)
Net cash collections represented by accounts sales of
consumer receivables acquired for liquidation ........ (43,034,000) (235,000) (43,269,000)
Transfer to cost recovery ................................ (529,000) 529,000 --
Impairment ............................................... (675,000) -- (675,000)
Finance income recognized ................................ 68,415,000 2,764,000 71,179,000
------------- ----------- -------------
Balance, end of period ................................... $ 235,710,000 $ 329,000 $ 236,039,000
============= ============ =============
Revenue as a percentage of collections ................... 42.9% 90.5% 43.8%
8
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3: CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION- (CONTINUED)
FOR THE NINE MONTHS ENDED JUNE 30, 2005
-----------------------------------------------
COST
INTEREST RECOVERY
METHOD METHOD TOTAL
----------- ----------- -----------
Balance, beginning of period ............................. $ 144,812,000 $ 1,353,000 $ 146,165,000
Acquisitions of receivable portfolios, net ............... 93,490,000 -- 93,490,000
Net cash collections from collections of consumer
receivables acquired for liquidation ................ (72,545,000) (3,644,000) (76,189,000)
Net cash collections represented by account sales of
consumer receivables acquired for liquidation ...... (44,448,000) (1,810,000) (46,258,000)
Finance income recognized ................................ 45,121,000 4,399,000 49,520,000
------------- ------------- -------------
Balance, end of period ................................... $ 166,430,000 $ 298,000 $ 166,728,000
============= ============= =============
Revenue as a percentage of collections ................... 38.6% 80.7% 40.4%
FOR THE THREE MONTHS ENDED JUNE 30, 2006
-----------------------------------------------
COST
INTEREST RECOVERY
METHOD METHOD TOTAL
----------- ----------- ------------
Balance, beginning of period ............................. $ 236,821,000 $ 385,000 $ 237,206,000
Acquisitions of receivable portfolios, net ............... 34,173,000 -- 34,173,000
Net cash collections from collections of consumer
receivables acquired for liquidation ................. (42,994,000) (798,000) (43,792,000)
Net cash collections represented by account sales of
consumer receivables acquired for liquidation ........ (16,963,000) -- (16,963,000)
Impairment ............................................... (675,000) -- (675,000)
Finance income recognized ................................ 25,348,000 742,000 26,090,000
------------- ------------- -------------
Balance, end of period ................................... $ 235,710,000 $ 329,000 $ 236,039,000
============= ============= =============
Revenue as a percentage of collections ................... 42.3% 93.0% 42.9%
FOR THE THREE MONTHS ENDED JUNE 30, 2005
-----------------------------------------------
COST
INTEREST RECOVERY
METHOD METHOD TOTAL
----------- ----------- -----------
Balance, beginning of period ............................. $ 170,494,000 $ 527,000 $ 171,021,000
Acquisitions of receivable portfolios, net ............... 20,153,000 -- 20,153,000
Net cash collections from collections of consumer
receivables acquired for liquidation ................. (20,565,000) (1,192,000) (21,757,000)
Net cash collections represented by account sales of
consumer receivables acquired for liquidation ........ (21,406,000) (311,000) (21,717,000)
Finance income recognized ................................ 17,754,000 1,274,000 19,028,000
------------- ------------- -------------
Balance, end of period ................................... $ 166,430,000 $ 298,000 $ 166,728,000
============= ============= =============
Revenue as a percentage of collections ................... 42.3% 84.8% 43.8%
9
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3: CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION- (CONTINUED)
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 included portfolios of
distressed consumer receivable debt of approximately $197 million that consisted
of paying accounts, accounts already within a legal network, and non paying
accounts, a facility in Denver and a computer software system that may have
features that could be incorporated into the Company's existing computer system.
The purchase price, substantially all of which was applied to the cost of the
portfolios, was approximately $13.5 million in cash.
As of June 30, 2006 the Company had $236,039,000 in consumer
receivables acquired for liquidation, of which $235,710,000 are accounted for on
the interest method. Based upon current projections, net cash collections,
applied to principal for interest method portfolios will be as follows for the
twelve months in the periods ending:
September 30, 2006 (three months remaining) $ 8,722,000
September 30, 2007 77,158,000
September 30, 2008 71,004,000
September 30, 2009 56,042,000
September 30, 2010 34,540,000
September 30, 2011 5,153,000
------------
252,619,000
Cash collections in advance of projected amounts
(deferred revenue) (16,909,000)
------------
Total $235,710,000
============
Accretable yield represents the amount of income the Company can expect to
generate over the remaining life of its existing portfolios based on estimated
future net cash flows as of June 30, 2006. The Company adjusts the accretable
yield upward when it believes, based on available evidence, that portfolio
collections will exceed amounts previously estimated. Changes in accretable
yield for the nine and three months ended June 30, 2006 are as follows:
NINE MONTHS
ENDED
JUNE 30, 2006
-------------
Balance at beginning of period, September 30, 2005 $ 94,022,000
Income recognized on finance receivables, net (68,415,000)
Additions representing expected revenue from purchases 85,252,000
Impairment (600,000)
Reclassifications from nonaccretable difference 33,734,000
--------------
Balance at end of period, June 30, 2006 $ 143,993,000
=============
THREE MONTHS
ENDED
JUNE 30, 2006
-------------
Balance at beginning of period, March 31, 2006 $ 153,859,000
Income recognized on finance receivables, net (25,348,000)
Additions representing expected revenue from purchases 13,582,000
Impairment (600,000)
Reclassifications from nonaccretable difference 2,500,000
--------------
Balance at end of period, June 30, 2006 $ 143,993,000
=============
10
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3: CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION- (CONTINUED)
During the nine months ended June 30, 2006, the Company purchased $3.7
billion of face value charged-off consumer receivables at a cost of $155.4
million. During the three months ended June 30, 2006 the Company purchased $1.3
billion of face value charged-off consumer receivables at a cost of $34.2
million. At June 30, 2006, the estimated remaining net collections on the
receivables purchased in the nine months ended June 30, 2006 are $196.9 million.
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 three and nine month periods ended June 30, 2006 and 2005,
respectively.
FOR THE NINE MONTHS ENDED JUNE 30,
2006 2005
---- ----
Gross collections (1) $238,054,000 $160,546,000
Commissions and fees (2) 75,501,000 38,099,000
------------ ------------
Net collections $162,553,000 $122,447,000
============ ============
FOR THE THREE MONTHS ENDED JUNE 30,
2006 2005
---- ----
Gross collections (1) $93,022,000 $55,615,000
Commissions and fees (2) 32,267,000 12,141,000
----------- -----------
Net collections $60,755,000 $43,474,000
=========== ===========
(1) Gross collections include: collections from third-party collection
agencies and attorneys, collections from our in-house efforts and collections
represented by account sales.
(2) Commissions and fees are the contractual commission earned by third
party collection agencies and attorneys, and direct costs associated with the
collection effort- generally court costs.
NOTE 4: FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following as of the dates indicated:
JUNE 30, SEPTEMBER 30,
2006 2005
---------- --------------
Furniture .................................... $ 307,000 $ 307,000
Equipment .................................... 2,478,000 2,108,000
---------- ----------
2,785,000 2,415,000
Less accumulated depreciation ................ 1,662,000 1,426,000
---------- ----------
Balance, end of period ....................... $1,123,000 $ 989,000
========== ==========
11
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: DEBT
In January 2006, the Company entered into an amended and restated loan and
security agreement that increased the line of credit with a consortium of banks
from $100 million to $125 million. The amended and restated loan and security
agreement had an original expiration date of May 11, 2006, which was extended 60
days to July 11, 2006 to finalize negotiations on the new agreement. (See Note
15 - Subsequent Event for information on the renewal of the credit line.) The
line of credit bears interest at the lesser of LIBOR plus an applicable margin,
or the prime rate minus an applicable margin based on certain leverage ratios
(the applicable rate was 7.75% at June 30, 2006, with an average rate of 6.86%
for the nine month period ended June 30, 2006). The credit line is
collateralized by all portfolios of consumer receivables acquired for
liquidation and contains customary financial and other covenants (relative to
tangible net worth, interest coverage, and leverage ratio, as defined) that must
be maintained in order to borrow funds. As of June 30, 2006, $65.3 million was
outstanding.
NOTE 6: COMMITMENTS AND CONTINGENCIES
Employment Agreements
We have an employment agreement with one executive. Please refer to our
definitive Proxy Statement, as filed with the Securities and Exchange
Commission, under the caption "Executive Compensation" for additional
information.
Leases
We are a party to three operating leases with respect to our facilities in
Englewood Cliffs, New Jersey; Bethlehem, Pennsylvania and Sugar Land, Texas. The
Sugar Land, Texas lease was acquired with the acquisition of Vativ Recovery
Solutions, LLC. See Note 13 - Acquisition. The Sugar Land, Texas lease covers
approximately one thousand four hundred square feet at a cost of approximately
$28,000 per year. The lease is for three years and expires October 31, 2007.
Please refer to our consolidated financial statements and notes thereto in our
Annual Report on Form 10-K/A, as filed with the Securities and Exchange
Commission, for additional information.
Litigation
In the ordinary course of our business, we are involved in numerous legal
proceedings. We regularly initiate collection lawsuits, using our network of
third party law firms, against consumers. Also, consumers occasionally initiate
litigation against us, in which they allege that we have violated a federal or
state law in the process of collecting their account. We do not believe that
these ordinary course matters are material to our business and financial
condition. As of June 30, 2006, we were not involved in any material litigation
in which we were a defendant.
NOTE 7: INCOME RECOGNITION
We recognize income on non-performing and performing consumer receivable
portfolios, which are acquired for liquidation, using either the interest method
or cost recovery method. Upon acquisition of a portfolio of receivables,
management estimates the future anticipated cash flows and determines the
allocation of payments based upon this estimate. If management can reasonably
estimate the expected amount to be collected on a portfolio and can reasonably
determine the timing of such payments based on historic experience and other
factors, we use the interest method. If management cannot reasonably estimate
the future cash flows, we use the cost recovery method.
Under the interest method, we recognize income on the effective yield
method based on the actual cash collected during a period and future estimated
cash flows and timing of such collections and the portfolio's purchase. The
estimated future cash flows are reevaluated quarterly. Under the cost recovery
method, no income is recognized until we have fully collected the cost of the
portfolio.
We recognize income net of collection fees paid to third-party collection
agencies. With respect to amounts collected in-house, such finance income is
recognized at the gross amount collected. Income from finance receivables was
recognized over the periods from the date of purchase to the estimated
collection date.
12
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8: INCOME TAXES
The provision for income tax expense reflects income tax expense at an
effective rate of approximately 40.5% for the nine and three month periods
ending June 30, 2006 and 2005.
Deferred federal and state taxes arise from temporary differences resulting
primarily from the provision for credit losses and depreciation timing
differences.
NOTE 9: NET INCOME PER SHARE
Basic per share data is determined by dividing net income by the weighted
average shares outstanding during the period. Diluted per share data is computed
by dividing net income by the weighted average shares outstanding, assuming all
dilutive potential common shares were issued. With respect to the assumed
proceeds from the exercise of dilutive options, the treasury stock method is
calculated using the average market price for the period.
The following table presents the computation of basic and diluted per share
data for the nine and three months ended June 30, 2006 and 2005:
NINE MONTHS ENDED JUNE 30,
2006 2005
--------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
NET AVERAGE PER SHARE NET AVERAGE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ---------- --------- -----------
Basic ....................... $32,195,000 13,611,915 $2.37 $21,992,000 13,528,513 $1.63
===== =====
Effect of Dilutive Stock .... 992,763 848,889
----------- ---------- ----------- ----------
Diluted ..................... $32,195,000 14,604,678 $2.20 $21,992,000 14,377,402 $1.53
=========== =========== ===== =========== =========== =====
THREE MONTHS ENDED JUNE 30,
2006 2005
--------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
NET AVERAGE PER SHARE NET AVERAGE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ---------- --------- -----------
Basic ....................... $11,780,000 13,628,776 $0.86 $ 8,536,000 13,569,128 $0.63
===== =====
Effect of Dilutive Stock .... 1,010,656 855,138
----------- ---------- ----------- ----------
Diluted ..................... $11,780,000 14,639,432 $0.80 $ 8,536,000 14,424,266 $0.59
=========== =========== ===== =========== =========== =====
NOTE 10: STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation under Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 123
(Revised 2005), Share-Based Payment ("SFAS 123R"). SFAS 123R which the Company
adopted October 1, 2005, requires 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.
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. 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.
13
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 10: STOCK-BASED COMPENSATION (CONTINUED)
Financial Accounting Standards Board ("FASB") Financial Interpretation No.
44 requires 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 is required 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 period October 1, 2005
through April 30, 2007. Such estimates would be based on such factors such as
historical and expected employee turnover rates and similar statistics. Of the
587,000 stock options 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 applicable to current officers and directors resulting from
the new measurement date has been recognized through June 30, 2006. With regard
to an exercise of stock options that would have otherwise been forfeited by an
employee that terminated employment, the Company recognized $105,000 in stock
based compensation expense in accordance with Financial Interpretation No. 44.
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").
Pro-forma net income for the nine and three months ended June 30, 2005 if
the fair value based method as prescribed by 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" is displayed in the following table.
NINE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2005
-------------- --------------
Net income as reported ............................................. $ 21,992,000 $ 8,536,000
Stock based compensation expense
Determined under fair value method, net of related tax effects .... (1,670,000) (556,000)
------------- -------------
Pro forma net income ............................................... $ 20,322,000 $ 7,980,000
============= =============
Earnings per share:
Basic -- as reported .............................................. $ 1.63 $ 0.63
============= =============
Basic -- pro forma ................................................ $ 1.50 $ 0.59
============= =============
Diluted -- as reported ............................................ $ 1.53 $ 0.59
============= =============
Diluted -- pro forma .............................................. $ 1.41 $ 0.55
============= =============
The weighted average fair value of the options granted during 2005 was $18.25
per share on the dates of grant, using the Black-Scholes option pricing model
with the following assumptions: dividend yield 0.8289% (2005) weighted average
volatility 40.128% (2005), expected life 10 years, weighted average risk free
interest rate of 4.1900% in 2005.
14
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: STOCK OPTION PLANS
Equity Compensation Plan
On December 1, 2005, the Board of Directors adopted the Company's
Equity Compensation Plan (the "Equity Compensation Plan"), subject to the
approval of the stockholders of the Company. The Equity Compensation Plan was
adopted to supplement the Company's existing 2002 Stock Option Plan. In addition
to permitting the grant of stock options as are permitted under the 2002 Stock
Option Plan, the Equity Compensation Plan allows the Company flexibility with
respect to equity awards by also providing for grants of stock awards (i.e.
restricted or unrestricted), stock purchase rights and stock appreciation
rights. The Equity Compensation Plan was ratified by the shareholders on March
1, 2006.
The general purpose of the Equity Compensation Plan is to provide an
incentive to our employees, directors and consultants, including executive
officers, employees and consultants of any subsidiaries, by enabling them to
share in the future growth of our business. The Board of Directors believes that
the granting of stock options and other equity awards promotes continuity of
management and increases incentive and personal interest in the welfare of the
Company by those who are primarily responsible for shaping and carrying out our
long range plans and securing our growth and financial success.
The Board believes that the Equity Compensation Plan will advance our
interests by enhancing our ability to (a) attract and retain employees,
directors and consultants who are in a position to make significant
contributions to our success; (b) reward employees, directors and consultants
for these contributions; and (c) encourage employees, directors and consultants
to take into account our long-term interests through ownership of our shares.
2002 Stock Option Plan
On March 5, 2002, the Board of Directors adopted the Asta Funding, Inc.
2002 Stock Option Plan (the "2002 Plan"), which plan was approved by the
Company's stockholders on May 1, 2002. The 2002 Plan was adopted in order to
attract and retain qualified directors, officers and employees of, and
consultants to, the Company. The following description does not purport to be
complete and is qualified in its entirety by reference to the full text of the
2002 Plan, which is included as an exhibit to the Company's reports filed with
the SEC.
The 2002 Plan authorizes the granting of incentive stock options (as
defined in Section 422 of the Code) and non-qualified stock options to eligible
employees of the Company, including officers and directors of the Company
(whether or not employees) and consultants of the Company.
The Company has 1,000,000 shares of Common Stock authorized for
issuance under the 2002 Plan and 404,667 were available as of June 30, 2006. As
of June 30, 2006, approximately 140 of the Company's employees were eligible to
participate in the 2002 Plan. Future grants under the 2002 Plan have not yet
been determined.
1995 Stock Option Plan
The 1995 Stock Option Plan expired on September 14, 2005. The plan was
adopted in order to attract and retain qualified directors, officers and
employees of, and consultants, to the Company. The following description does
not purport to be complete and is qualified in its entirety by reference to the
full text of the 1995 Stock Option Plan, which is included as an exhibit to the
Company's reports filed with the SEC.
The 1995 Stock Option Plan authorized the granting of incentive stock
options (as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code")) and non-qualified stock options to eligible employees of
the Company, including officers and directors of the Company (whether or not
employees) and consultants to the Company.
The Company authorized 1,840,000 shares of Common Stock authorized for
issuance under the 1995 Stock Option Plan. All but 96,002 shares were utilized.
As of September 14, 2005, no more options could be issued under this plan.
15
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THE FOLLOWING TABLE SUMMARIZES STOCK OPTION TRANSACTIONS UNDER THE PLANS:
NINE MONTHS ENDED JUNE 30,
------------------------------------------------------
2006 2005
------------------------ --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
Outstanding options at the beginning of period...... 1,580,605 $ 9.1082 1,364,171 $ 6.2657
Options granted..................................... 402,500 18.2502
Options exercised................................... (39,166) 15.0582 (145,120) 8.8328
Options cancelled................................... (6,667) 22.3600 (40,002) 11.7144
--------- --------
Outstanding options at the end of period................ 1,534,772 $ 8.8988 1,581,549 $ 8.9423
--------- ---------
Exercisable options at the end of period 1,534,772 $ 8.8988 1,001,281 $ 4.5941
--------- ---------
The aggregate intrinsic value of the outstanding and exercisable options as of
June 30, 2006 is $43.7 million.
The following table summarizes information about the Plans outstanding
options as of June 30, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
- -------------------- ------------ --------------- -------- ----------- --------
$0.0000 - $2.2360....................... 200,000 2.9 $ 0.8125 200,000 $ 0.8125
$2.2361 - $4.4720....................... 520,000 3.3 2.5644 520,000 2.5644
$4.4721 - $6.7080....................... 135,334 6.3 4.8345 135,334 4.8345
$13.4161 - $15.6520..................... 245,002 7.3 14.8700 245,002 14.8700
$15.6521 - $17.8880..................... 31,944 8.2 16.5347 31,944 16.5347
$17.8881 - $20.1240..................... 402,492 8.3 18.2266 402,492 18.2266
--------- ---------
1,534,772 5.6 $ 8.8988 1,534,772 $ 8.8988
========= =========
NOTE 12: STOCKHOLDERS' EQUITY
During the nine-month period ended June 30, 2006, we declared dividends in
the amount of $1,635,000, of which $545,000 was accrued as of June 30, 2006 and
was paid on August 1, 2006.
NOTE 13: ACQUISITION
In February 2006, the Company acquired VATIV Recovery Solutions, LLC
("VATIV") for approximately $1.4 million in cash. VATIV provides nationwide
bankruptcy and deceased account servicing. The purchase price has been
allocated to goodwill. The revenue and operating results of VATIV are immaterial
to the Company.
NOTE 14: CONTINGENCIES
A subsidiary of the Company received subpoenas from two jurisdictions
to produce information in connection with debt collection practices in those
jurisdictions. It is our understanding that similar requests have been made to
other debt buyers and/or debt collectors in those jurisdictions.
16
NOTE 15: SUBSEQUENT EVENT
On July 11, 2006, the Company entered into the Fourth Amended and
Restated Loan Agreement with a consortium of banks, and as a result the credit
facility is now $175 million, up from $125 million with an expandable feature
which allows the Company the ability to increase the line to $225 million with
the consent of the banks. The line of credit bears interest at the lesser of
LIBOR plus an applicable margin, or the prime rate minus an applicable margin
based on certain leverage ratios. The credit line is collateralized by all
portfolios of consumer receivables acquired for liquidation 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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are primarily engaged in the business of acquiring, managing, servicing
and recovering on portfolios of consumer receivables. These portfolios generally
consist of one or more of the following types of consumer receivables:
o charged-off receivables -- accounts that have been written-off by the
originators and may have been previously serviced by collection
agencies;
o semi-performing receivables -- accounts where the debtor is currently
making partial or irregular monthly payments, but the accounts may
have been written-off by the originators; and
o performing receivables -- accounts where the debtor is making regular
monthly payments that may or may not have been delinquent in the past.
We acquire these consumer receivable portfolios at a significant discount
to the amount actually owed by the borrowers. We acquire these portfolios after
a qualitative and quantitative analysis of the underlying receivables and
calculate the purchase price so that our estimated cash flow offers us an
adequate return on our acquisition costs and servicing expenses. After
purchasing a portfolio, we actively monitor its performance and review and
adjust our collection and servicing strategies accordingly.
We purchase receivables from credit grantors and others through privately
negotiated direct sales and auctions in which sellers of receivables seek bids
from several pre-qualified debt purchasers. We pursue new acquisitions of
consumer receivable portfolios on an ongoing basis through:
o our relationships with industry participants, collection agencies,
investors and our financing sources;
o brokers who specialize in the sale of consumer receivable portfolios;
and
o other sources.
CAUTIONS WITH RESPECT TO FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements typically are identified by use of terms such as
"may," "will," "should," "plan," "expect," "believe," "anticipate," "estimate"
and similar expressions, although some forward-looking statements are expressed
differently. Forward-looking statements represent our management's judgment
regarding future events. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to be correct. All statements other than statements
of historical fact included in this report regarding our financial position,
business strategy, products, markets, budgets, plans, or objectives for future
operations are forward-looking statements. We cannot guarantee the accuracy of
the forward-looking statements, and you should be aware that our actual results
could differ materially from those contained in the forward-looking statements
due to a number of factors, including the statements under "Risk Factors" and
"Critical Accounting Policies" detailed in our annual report on Form 10-K/A for
the year ended September 30, 2005, and other reports filed with the Securities
and Exchange Commission ("SEC").
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all other documents filed by the Company or with respect
to its securities with SEC are available free of charge through our website at
www.astafunding.com. Information on our website does not constitute a part of
this report. The SEC also maintains an internet site (www.sec.gov) that contains
reports and information statements and other information regarding issuers such
as ourselves who file electronically with the SEC.
CRITICAL ACCOUNTING POLICIES
We account for our investments in consumer receivable portfolios, using
either:
o the interest method; or
o the cost recovery method.
Generally, each purchase is considered a separate portfolio of receivables
and is considered a financial investment. Based upon the expected performance
characteristics of the receivables in the portfolio, we determine whether the
portfolio should be accounted for using the interest method or the cost recovery
method. If we can reasonably estimate the amount to be collected on a portfolio
and can reasonably determine the timing of such payments based on historic
experience and other factors, we use the interest method. If we cannot
reasonably estimate the future cash flows, we use the cost recovery method.
18
The interest method allows us to recognize income on the effective yield of
such portfolio based on the actual cash collected during a period and future
estimated cash flows and the timing of such collections and the purchase of such
portfolios. Under this method, we periodically apply a portion of the actual
funds collected as a reduction in the principal amount invested in each specific
portfolio and the remainder is recognized as finance income. Generally, these
portfolios are expected to amortize over a three to five year period based upon
our estimated future cash flows. Historically, a majority of the cash we
ultimately collect on a portfolio is received during the first 18 to 24 months
after acquiring the portfolio, although additional amounts are collected over
the remaining periods. The estimated future cash flows of the portfolios are
reevaluated quarterly.
Under the cost recovery method of accounting, no income is recognized until
the purchase price of a portfolio has been fully recovered by us.
The estimated future cash flows are reevaluated quarterly. Income on
finance receivables is earned based on each static pool's effective IRR. Under
the interest method, income is recognized on the effective yield method based on
the actual cash collected during a period and future estimated cash flows and
timing of such collections and the portfolio's cost. We typically recognize
finance income net of collection fees paid to third-party collection agencies
and attorneys.
In the following discussions, most percentages and dollar amounts have been
rounded to aid presentation. As a result, all figures are approximations.
RESULTS OF OPERATIONS
THE NINE-MONTH PERIOD ENDED JUNE 30, 2006, COMPARED TO THE NINE-MONTH
PERIOD ENDED JUNE 30, 2005
Finance income. During the nine-month period ended June 30, 2006, finance
income increased $21.7 million or 43.7% to $71.2 million from $49.5 million for
the nine-month period ended June 30, 2005. The increase in finance income
primarily resulted from an increase in the average outstanding level of consumer
receivable accounts acquired for liquidation during the nine-month period ended
June 30, 2006, as compared to the same prior year period, coupled with the
effect of adjustments to accretable yields on certain portfolios. The average
level of consumer receivables acquired for liquidation increased from $156.4
million for the nine month period ended June 30, 2005 to $204.4 for the same
period in 2006. During the nine-month period ended June 30, 2006, we acquired
consumer receivable portfolios at a cost of $155.4 million as compared to $93.5
million during the nine-month period ended June 30, 2005. During the nine-month
period ended June 30, 2006, commissions and fees associated with gross
collections from our third party collection agencies and attorneys increased
$37.4 million, or 98.2 % to $75.5 million from $38.1 million for the nine month
period ended June 30, 2005. The increase is indicative of a shift to the suit
strategy implemented by the Company and includes advances of court costs to our
legal network. As we continue to purchase portfolios and utilize our third party
collection agencies and attorney networks, we anticipate these costs will rise;
however the contingency fees should stabilize in the range of 30% to 32% of
gross collections based upon the current mix of portfolios. Other income
includes primarily service fee income.
Adjustments to accretable yields on certain portfolios were made based on
available information, and based on improved liquidation rates from our third
party collection agencies and attorneys. Management believes the anticipated
collections on these portfolios to be in excess of our original projections. As
we believe these improved liquidation rates will continue, we adjusted our
accretable yields by $33.7 million which will primarily impact revenue in future
years.
General and Administrative Expenses. During the nine-month period ended
June 30, 2006, general and administrative expenses increased $2.4 million or
21.3% to $13.5 million from $11.1 million for the nine-month period ended June
30, 2005, and represented 77.6% of total expenses (excluding income taxes) for
the nine-month period ended June 30, 2006. The increase in general and
administrative expenses was primarily due to an increase in receivable servicing
expenses during the nine-month period ended June 30, 2006, as compared to the
same prior year period. The increase in receivable servicing expenses resulted
from the substantial increase in our average outstanding accounts acquired for
liquidation during the nine-month period ended June 30, 2006. Compared to the
same prior year period, the average balance in receivable accounts increased
30.6%. A majority of the increased costs were from collection expenses including
court costs, postage and delivery costs, salaries, payroll taxes and benefits,
professional fees, including Sarbanes-Oxley costs related to the independent
audit of the Company's financial statements, and telephone charges and travel
costs as we are visiting our third party collection agencies and attorneys on a
more frequent basis for financial and operational audits.
Interest Expense. During the nine-month period ended June 30, 2006,
interest expense increased to $3.2 million from $1.4 million in the same prior
year period and represented 18.5% of total expenses (excluding income taxes) for
the nine-month period ended June 30, 2006. The increase was due to an increase
in average outstanding borrowings under our line of credit during the nine-month
period ended June 30, 2006, as compared to the same period in the prior year
coupled with higher interest rates during the nine month period ended June 30,
2006. The average rate for the nine month period ended June 30, 2006 was 6.86%
as compared to 4.92% for the same period of the prior year. The average
outstanding borrowings increased from $35.0 million to $47.3 million for the
nine month periods ended June 30, 2005 and 2006, respectively. The increase in
borrowings was due to the increase in acquisitions of consumer receivables
acquired for liquidation during the nine months ended June 30, 2006, as compared
to the same period last year.
19
Impairment. A net impairment of $675,000 was recorded by the Company during
the third quarter of fiscal year 2006 and represented 3.9% of total expenses
(excluding income taxes) for the nine month period ended June 30, 2006. Based on
lower than expected cash collections on a certain portfolio, and reduced forward
expectations, we concluded that an impairment charge should be recorded. There
was no impairment charge recorded in the comparable period of the prior year.
THE THREE-MONTH PERIOD ENDED JUNE 30, 2006 AS COMPARED TO THE THREE-MONTH PERIOD
ENDED JUNE 30, 2005.
Finance income. During the three-month period ended June 30, 2006, finance
income increased $7.1 million or 37.1% to $26.1 million from $19.0 million for
the three-month period ended June 30, 2005. The increase in finance income
primarily resulted from an increase in the average outstanding level of consumer
receivable accounts acquired for liquidation during the three month period ended
June 30, 2006, as compared to the same prior year period, coupled with the
effect of adjustments to accretable yields on a portfolio.
Adjustments to accretable yields on certain portfolios were made based on
available information, and based on improved liquidation rates from our third
party collection agencies and attorneys. Management believes the anticipated
collections on these portfolios to be in excess of our original projection. As
we believe these improved liquidation rates will continue, we adjusted our
accretable yields by $2.5 million which will primarily impact revenue in future
years.
The average level of consumer receivables acquired for liquidation
increased from $168.9 million for the three month period ended June 30, 2005 to
$236.6 million for the same period in 2006. During the three month period ended
June 30, 2006, we acquired consumer receivable portfolios at a cost of $34.2
million as compared to $20.2 million during the three month period ended June
30, 2005. We have lower expectations on our third quarter purchases as compared
to the prior quarters in fiscal year 2006. The receivables acquired during the
three month period ended June 30, 2006 were primarily from new sources in newer
geographic markets where our initial expectations were somewhat reduced. During
the three-month period ended June 30, 2006, commissions and fees associated with
gross collections from our third party collection agencies and attorneys
increased $20.1 million, or 165.8% to $32.3 million from $12.1 million for the
three month period ended June 30, 2005. Other income includes primarily service
fee income.
General and Administrative Expenses. During the three-month period ended
June 30, 2006, general and administrative expenses increased $0.5 million or
13.0% to $4.7 million from $4.2 million for the three-month period ended June
30, 2005, and represented 70.9% of total expenses (excluding income taxes) for
the current three-month period. The increase in general and administrative
expenses was primarily due to an increase in receivable servicing expenses
during the three-month period ended June 30, 2006, as compared to the same prior
year period. The increase in receivable servicing expenses resulted from the
substantial increase in our average outstanding accounts acquired for
liquidation during the three-month period ended June 30, 2006, as compared to
the same prior year period. The average balance in receivable accounts increased
40.1% in the current period as compared to the same period in the prior year. A
majority of the increased costs were from collection expenses including
salaries, payroll taxes and benefits, professional fees, including
Sarbanes-Oxley costs related to the independent audit of the Company's financial
statements, and postage costs and telephone charges.
Interest Expense. During the three-month period ended June 30, 2006,
interest expense increased to $1.2 million from $0.5 million in the same prior
year period and represented 18.9% of total expenses (excluding income taxes) for
the three-month period ended June 30, 2006. The increase was due to an increase
in average outstanding borrowings under our line of credit during the
three-month period ended June 30, 2006, coupled with a slightly higher interest
rate, as compared to the same period in the prior year. The average outstanding
borrowing increased to $68.6 million for the three month period ended June 30,
2006, from $41.4 million for the three month period ended June 30, 2005. The
average interest rate for the three month period ended June 30, 2006 was 7.2% as
compared to 5.41% in the same period of the prior year. The increase in
borrowings was due to the increase in acquisitions of consumer receivables
acquired for liquidation during the third quarter ended June 30, 2006, as
compared to the same quarter last year.
Impairment. A net impairment of $675,000 was recorded by the Company during
the third quarter of fiscal year 2006 and represented 10.2% of total expenses
(excluding income taxes) for the three month period ended June 30, 2006. Based
on lower than expected cash collections on a certain portfolio, and reduced
forward expectations, we concluded that an impairment charge should be recorded.
There was no impairment charge recorded in the comparable period of the prior
year.
20
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of cash from operations include payments on the
receivable portfolios that we have acquired and borrowings under our line of
credit. Our primary use of cash includes our purchases of consumer receivable
portfolios. We rely significantly upon our lenders to provide the funds
necessary for the purchase of consumer receivable portfolios. While we maintain
a $175 million line of credit with the ability to increase the line to $225
million, with consent of the lenders for portfolio purchases, we also may
arrange financing on a transactional basis (See Note 15 to the condensed
financial statements - Subsequent Event). While we have historically been able
to finance these purchases, we do not have committed loan facilities, other than
our $175 million line of credit with a consortium of banks. As of June 30, 2006,
there was $65.3 million outstanding balance under this facility. As of June 30,
2006, our cash increased slightly to $4.7 million from $4.0 million at September
30, 2005. The increase in cash during the nine-month period ended June 30, 2006
was primarily due to an increase in cash provided by operating activities,
increase in the use of the credit facility offset by an increase in the purchase
of consumer receivables during the nine-month period ended June 30, 2006 as
compared to the same prior year period.
Net cash provided by operating activities was $31.4 million during the
nine-month period ended June 30, 2006, compared to net cash provided by
operating activities of $21.9 million during the nine-month period ended June
30, 2005. The increase in net cash provided by operating activities was
primarily due to an increase in net income. In addition, there was a non-cash
impairment recorded in the amount of $675,000 during the three and nine month
periods ended June 30, 2006. Also, during the three and nine month periods ended
June 30, 2006 a non-cash stock based compensation expense arising from the
acceleration of the vesting of stock options, was recorded in the amount of
$105,000. Net cash used in investing activities was $65.7 million during the
nine-month period ended June 30, 2006, compared to net cash used of $14.6
million during the nine-month period ended June 30, 2005. The increase in net
cash used in investing activities was primarily due to an increase in the
purchase of accounts acquired for liquidation partially offset by an increase in
principal collected during the nine-month period ended June 30, 2006, compared
to the same period in the prior year. Net cash provided by financing activities
was $35.0 million during the nine-month period ended June 30, 2006, compared to
net cash used of $8.7 million during the nine-month period June 30, 2005. The
increase in net cash provided by financing activities was primarily due to an
increase use of our line of credit to purchase consumer accounts acquired for
liquidation. In addition, we declared and paid dividends of $1.6 million during
the nine-month period ended June 30, 2006, compared with $1.4 million of
dividends paid in the comparable period of the prior year.
On July 11, 2006, the Company entered into the Fourth Amended and
Restated Loan Agreement with a consortium of banks, and as a result the credit
facility is now $175 million, up from $125 million with an expandable feature
which allows the Company the ability to increase the line to $225 million with
the consent of the banks. The line of credit bears interest at the lesser of
LIBOR plus an applicable margin, or the prime rate minus an applicable margin
based on certain leverage ratios. The credit line is collateralized by all
portfolios of consumer receivables acquired for liquidation 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.
Our cash requirements have been and will continue to be significant. We
depend on external financing to acquire consumer receivables. During the
nine-month period ended June 30, 2006, we acquired consumer receivable
portfolios at a cost of approximately $155.4 million. These acquisitions were
financed with our cash flows from operating activities and our credit facility.
We anticipate the funds available under our current credit facility and
cash from operations will be sufficient to satisfy our estimated cash
requirements for at least the next 12 months. If for any reason our available
cash otherwise proves to be insufficient to fund operations (because of future
changes in the industry, general economic conditions, unanticipated increases in
expenses, or other factors), we may be required to seek additional funding.
From time to time, we evaluate potential acquisitions of related businesses
but we may not be able to complete any acquisitions on favorable terms or at
all.
21
The following tables summarize the changes in the balance sheet of the
investment in receivable portfolios during the following periods:
FOR THE NINE MONTHS ENDED JUNE 30, 2006
-----------------------------------------------
COST
INTEREST RECOVERY
METHOD METHOD TOTAL
----------- ----------- -------------
Balance, beginning of period ............................. $ 172,636,000 $ 91,000 $ 172,727,000
Acquisitions of receivable portfolios, net ............... 155,361,000 -- 155,361,000
Net cash collections from collections of consumer
receivables acquired for liquidation ................ (116,464,000) (2,820,000) (119,284,000)
Net cash collections represented by accounts sales of
consumer receivable acquired for liquidation ......... (43,034,000) (235,000) (43,269,000)
Transfer to cost recovery ................................ (529,000) 529,000 --
Impairment ............................................... (675,000) -- (675,000)
Finance income recognized ................................ 68,415,000 2,764,000 71,179,000
------------- ----------- -------------
Balance, end of period ................................... $ 235,710,000 $ 329,000 $ 236,039,000
============= =========== =============
Revenue as a percentage of collections ................... 42.9% 90.5% 43.8%
FOR THE NINE MONTHS ENDED JUNE 30, 2005
-----------------------------------------------
COST
INTEREST RECOVERY
METHOD METHOD TOTAL
----------- ----------- -------------
Balance, beginning of period ............................. $ 144,812,000 $ 1,353,000 $ 146,165,000
Acquisitions of receivable portfolios, net ............... 93,490,000 -- 93,490,000
Net cash collections from collections of consumer
receivables acquired for liquidation ................ (72,545,000) (3,644,000) (76,189,000)
Net cash collections represented by account sales of
consumer receivables acquired for liquidation ...... (44,448,000) (1,810,000) (46,258,000)
Finance income recognized ................................ 45,121,000 4,399,000 49,520,000
------------- ------------- -------------
Balance, end of period ................................... $ 166,430,000 $ 298,000 $ 166,728,000
============= ============= =============
Revenue as a percentage of collections ................... 38.6% 80.7% 40.4%
22
FOR THE THREE MONTHS ENDED JUNE 30, 2006
-----------------------------------------------
COST
INTEREST RECOVERY
METHOD METHOD TOTAL
------------ ------------ -------------
Balance, beginning of period ............................. $ 236,821,000 $ 385,000 $ 237,206,000
Acquisitions of receivable portfolios, net ............... 34,173,000 -- 34,173,000
Net cash collections from collections of consumer
receivables acquired for liquidation ................. (42,994,000) (798,000) (43,792,000)
Net cash collections represented by account sales of
consumer receivables acquired for liquidation ........ (16,963,000) -- (16,963,000)
Impairment ............................................... (675,000) -- (675,000)
Finance income recognized ................................ 25,348,000 742,000 26,090,000
------------- ----------- -------------
Balance, end of period ................................... $ 235,710,000 $ 329,000 $ 236,039,000
============= =========== =============
Revenue as a percentage of collections ................... 42.3% 93.0% 42.9%
FOR THE THREE MONTHS ENDED JUNE 30, 2005
------------------------------------------------
COST
INTEREST RECOVERY
METHOD METHOD TOTAL
------------ ------------ -------------
Balance, beginning of period ............................. $ 170,494,000 $ 527,000 $ 171,021,000
Acquisitions of receivable portfolios, net ............... 20,153,000 -- 20,153,000
Net cash collections from collections of consumer
receivables acquired for liquidation ................. (20,565,000) (1,192,000) (21,757,000)
Net cash collections represented by account sales of
consumer receivables acquired for liquidation ........ (21,406,000) (311,000) (21,717,000)
Finance income recognized ................................ 17,754,000 1,274,000 19,028,000
------------- ------------- -------------
Balance, end of period ................................... $ 166,430,000 $ 298,000 $ 166,728,000
============= ============= =============
Revenue as a percentage of collections ................... 42.3% 84.8% 43.8%
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 included portfolios of
distressed consumer receivable debt of approximately $197 million that consisted
of paying accounts, accounts already within a legal network, and non paying
accounts, a facility in Denver and a computer software system that may have
features that could be incorporated into the Company's existing computer system.
The purchase price, substantially all of which was applied to the cost of the
portfolios, was approximately $13.5 million in cash.
ADDITIONAL SUPPLEMENTARY INFORMATION:
We do not anticipate collecting the majority of the purchased principal
amounts of consumer receivables. Accordingly, the difference between the
carrying value of the portfolios and the gross receivables is not indicative of
future revenues from these accounts acquired for liquidation. Since we purchased
these accounts at significant discounts, we anticipate collecting only a portion
of the face amounts. During the nine months ended June 30, 2006, we purchased
portfolios with an aggregate purchase price of $155.4 million with a face value
of $3.7 billion.
Prior to October 1, 2005, we accounted for our investment in finance
receivables using the interest method under the guidance of Practice Bulletin 6,
"Amortization of Discounts on Certain Acquired Loans." Effective October 1,
2005, we adopted and began to account for its investment in finance receivables
using the interest method under the guidance of American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") 03-3, "Accounting for
Loans or Certain Securities Acquired in a Transfer." Practice Bulletin 6 was
amended by SOP 03-3 as described further. Under the guidance of SOP 03-3 (and
the amended Practice Bulletin 6), static pools of accounts are established.
These pools are aggregated based on certain common risk criteria. Each static
pool is recorded at cost and is accounted for as a single unit for the
recognition of income, principal payments and loss provision. Once a static pool
is established for a quarter, individual receivable accounts are not added to
the pool (unless replaced by the seller) or removed from the pool (unless sold
or returned to the seller). SOP 03-3 (and the amended Practice Bulletin 6)
requires that the excess of the contractual cash flows over expected cash flows
not be recognized as an adjustment of revenue or expense or on the balance
sheet. The SOP initially freezes the internal rate of return, referred to as
IRR, estimated when the accounts receivable are purchased as the basis for
subsequent impairment testing. Significant increases in actual, or expected
future cash flows may be recognized prospectively through an upward adjustment
of the IRR over a portfolio's remaining life. Any increase to the IRR then
becomes the new benchmark for impairment testing. Effective for fiscal years
beginning October 1, 2005 under SOP 03-3 and the amended Practice Bulletin 6,
rather than lowering the estimated IRR if the collection estimates are not
received or projected to be received, the carrying value of a pool would be
written down to maintain the then current IRR. Income on finance receivables is
earned based on each static pool's effective IRR. Under the interest method,
income is recognized on the effective yield method based on the actual cash
collected during a period and future estimated cash flows and timing of such
collections and the portfolio's cost. Revenue arising from collections in excess
of anticipated amounts attributable to timing differences is deferred. The
estimated future cash flows are reevaluated quarterly.
23
COLLECTIONS REPRESENTED BY ACCOUNT SALES
Collections
Represented Finance
By Account Income
Period Sales Earned
- ------ ------------ -----------
Nine months ended June 30, 2006 $43,269,000 $24,464,000
Three months ended June 30, 2006 $16,963,000 $10,218,000
Nine months ended June 30, 2005 $46,258,000 $18,205,000
Three months ended June 30, 2005 $21,717,000 $8,802,000
PORTFOLIO PERFORMANCE (1)
Net Total estimated
Cash Collections Estimated Total Collections as a
Purchase Including Cash Remaining Estimated Percentage of
Purchase Period Price (2) Sales(3) Collections (4) Collections (5) Purchase Price
- --------------- --------- ---------------- --------------- --------------- ------------------
2001 $ 65,120,000 $ 94,500,000 $ 0 $ 94,500,000 145%
2002 36,557,000 51,666,000 0 51,666,000 141%
2003 115,626,000 162,939,000 33,750,000 196,689,000 170%
2004 103,743,000 123,546,000 39,651,000 163,197,000 157%
2005 126,023,000 91,065,000 109,400,000 200,465,000 159%
2006 (Through 3rd Quarter) 155,361,000 44,262,000 196,902,000 241,164,000 155%
(1) Total collections do not represent full collections of the Company with
respect to this or any other year.
(2) Purchase price refers to the cash paid to a seller to acquire a
portfolio less the purchase price refunded by a seller due to the return of
non-compliant accounts (also defined as put-backs).
(3) Net cash collections include: net collections from our third-party
collection agencies and attorneys, net collections from our in-house efforts and
collections represented by account sales.
(4) Does not include estimated collections from portfolios that are zero
basis.
(5) Total estimated collections refers to the actual net cash collections,
including cash sales, plus estimated remaining net collections.
24
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. We do not expect the adoption of FIN 48 to have a material impact on our
financial reporting, and we are currently evaluating the impact, if any, the
adoption of FIN 48 will have on our disclosure requirements.
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.
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 method utilized by the Company in
prior fiscal years of the disclosure-only provisions of the original SFAS No.
123. The effective date for implementation of SFAS No. 123R for the Company was
October 1, 2005. The Company disclosed 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.During fiscal
year 2006, with regard to an exercise of stock options that would have otherwise
been forfeited by an employee that terminated employment, the Company recognized
$105,000 in stock based compensation expense in accordance with Financial
Interpretation No. 44. No stock options were awarded during the nine month
period ended June 30, 2006.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB
Opinion No. 29" ("SFAS 153"). This statement 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 became effective October 1, 2005. This statement is not
expected to have an impact on the Company's financial results.
In October 2003, the American Institute of Certified Accountants issued
Statement of Position ("SOP") 03-3, "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 became effective October 1, 2005. We believe
the implementation of this SOP will make it more likely that impairment
losses and accretable yield adjustments will be recorded. Through June 30, 2006,
the Company recorded an impairment of $675,000.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of
business, including the impact of interest rate changes and changes in corporate
tax rates. A material change in these rates could adversely affect our operating
results and cash flows. A 25 basis-point increase in interest rates could
increase our annual interest expense by $25,000 for each $10 million of variable
debt outstanding for the entire fiscal year. We do not invest in derivative
financial or commodity instruments.
ITEM 4. CONTROLS AND PROCEDURES
a. Disclosure Controls and Procedures.
During the nine month period ended June 30, 2006, our management, including
the principal executive officer and principal financial officer, evaluated our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) related to the recording, processing,
summarization and reporting of information in our reports that we file with the
SEC. These disclosure controls and procedures have been designed to ensure that
material information relating to us, including our subsidiaries, is made known
to our management, including these officers, by other of our employees, and that
this information is recorded, processed, summarized, evaluated and reported, as
applicable, within the time periods specified in the SEC rules and forms. Due to
the inherent limitations of control systems, not all misstatements may be
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of a simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons; by collusion of two or more people, or by management
override of the control. Our controls and procedures can only provide
reasonable, not absolute, assurance that the above objectives have been met.
Based on their evaluation as of June 30, 2006, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) are effective to reasonably ensure that the
information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.
b. Changes in Internal Controls Over Financial Reporting.
There have been no changes in our internal control over financial reporting
that occurred during our last fiscal quarter to which this Quarterly Report on
Form 10-Q relates that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of our business, we are involved in numerous legal
proceedings. We regularly initiate collection lawsuits, using our network of
third party law firms, against consumers. Also, consumers occasionally initiate
litigation against us, in which they allege that we have violated a federal or
state law in the process of collecting their account. We do not believe that
these ordinary course matters are material to our business and financial
condition. As of the date of this Form 10-Q, we were not involved in any
material litigation in which we were a defendant.
ITEM 1A. RISK FACTORS
There were no material changes in any risk factors previously disclosed
in the Company's Report on Form 10-K/A filed with the Securities & Exchange
Commission.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of the Registrant's Chief Executive Officer, Gary
Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Registrant's Chief Financial Officer, Mitchell
Cohen, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Registrant's Chief Executive Officer, Gary
Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Registrant's Chief Financial Officer, Mitchell
Cohen, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ASTA FUNDING, INC.
(Registrant)
Date: August 9, 2006 By: /s/ Gary Stern
--------------------------------------
Gary Stern, President, Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2006 By: /s/ Mitchell Cohen
--------------------------------------
Mitchell Cohen, Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
28