Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-26906
ASTA FUNDING, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
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22-3388607
(IRS Employer
Identification No.) |
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210 Sylvan Ave., Englewood Cliffs, New Jersey
(Address of Principal Executive Offices)
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07632
(Zip Code) |
Registrants Telephone Number, Including Area Code: (201) 567-5648
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes þ No
o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated
filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes o No þ
As of May 9, 2011, the registrant had 14,634,122 common shares
outstanding.
ASTA FUNDING, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
2
PART I. FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, |
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September 30, |
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2011 |
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2010 |
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(Unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
91,787,000 |
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$ |
84,235,000 |
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Restricted cash |
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1,428,000 |
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1,304,000 |
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Consumer receivables acquired for liquidation (at net realizable value) |
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130,904,000 |
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147,031,000 |
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Due from third party collection agencies and attorneys |
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2,576,000 |
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3,528,000 |
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Prepaid and income taxes receivable |
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196,000 |
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Furniture and equipment, net |
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411,000 |
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338,000 |
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Deferred income taxes |
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17,850,000 |
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18,762,000 |
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Other assets |
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4,574,000 |
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3,770,000 |
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Total assets |
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$ |
249,530,000 |
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$ |
259,164,000 |
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LIABILITIES |
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Debt |
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$ |
76,860,000 |
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$ |
90,483,000 |
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Subordinated debt related party |
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4,386,000 |
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Other liabilities |
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1,497,000 |
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2,105,000 |
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Dividends payable |
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293,000 |
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292,000 |
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Income taxes payable |
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2,662,000 |
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Total liabilities |
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81,312,000 |
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97,266,000 |
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Commitments and contingencies |
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STOCKHOLDERS EQUITY |
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Preferred stock, $.01 par value; authorized 5,000,000 shares;
issued and outstanding none |
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Common stock, $.01 par value; authorized 30,000,000 shares; issued
and outstanding 14,634,122 at March 31, 2011 and 14,600,423 at
September 30, 2010 |
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146,000 |
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146,000 |
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Additional paid-in capital |
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74,025,000 |
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72,717,000 |
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Retained earnings |
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93,962,000 |
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89,026,000 |
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Accumulated other comprehensive income, net of tax |
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85,000 |
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9,000 |
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Total stockholders equity |
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168,218,000 |
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161,898,000 |
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Total liabilities and stockholders equity |
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$ |
249,530,000 |
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$ |
259,164,000 |
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See accompanying notes to condensed consolidated financial statements
3
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months |
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Three Months |
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Six Months |
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Six Months |
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Ended |
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Ended |
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Ended |
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Ended |
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March 31, 2011 |
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March 31, 2010 |
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March 31, 2011 |
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March 31, 2010 |
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Revenues: |
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Finance income, net |
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$ |
11,137,000 |
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$ |
11,181,000 |
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$ |
21,896,000 |
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$ |
22,155,000 |
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Other income |
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97,000 |
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19,000 |
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176,000 |
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98,000 |
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11,234,000 |
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11,200,000 |
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22,072,000 |
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22,253,000 |
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Expenses: |
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General and administrative |
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5,651,000 |
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5,274,000 |
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11,132,000 |
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10,903,000 |
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Interest (Related party
Period ended March 31,
2011 Three months, $0;
Six months, $86,000;
Period ended March 31,
2010 Three months,
$168,000; Six months,
$298,000) |
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739,000 |
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1,087,000 |
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1,618,000 |
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2,346,000 |
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Impairments of consumer
receivables acquired for
liquidation |
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49,000 |
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49,000 |
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6,439,000 |
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6,361,000 |
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12,799,000 |
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13,249,000 |
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Income before income tax |
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4,795,000 |
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4,839,000 |
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9,273,000 |
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9,004,000 |
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Income tax expense |
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1,940,000 |
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1,964,000 |
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3,752,000 |
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3,654,000 |
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Net income |
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$ |
2,855,000 |
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$ |
2,875,000 |
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$ |
5,521,000 |
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$ |
5,350,000 |
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Net income per share: |
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Basic |
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$ |
0.20 |
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$ |
0.20 |
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$ |
0.38 |
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$ |
0.37 |
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Diluted |
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$ |
0.19 |
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$ |
0.20 |
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$ |
0.37 |
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$ |
0.37 |
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Weighted average number
of common shares
outstanding: |
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Basic |
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14,633,655 |
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14,498,161 |
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14,619,917 |
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14,384,050 |
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Diluted |
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14,876,437 |
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14,504,398 |
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14,825,060 |
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14,570,901 |
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See accompanying notes to condensed consolidated financial statements
4
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
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Accumulated |
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Additional |
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Other |
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Paid-in |
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Retained |
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Comprehensive |
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Shares |
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Amount |
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Capital |
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Earnings |
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Income |
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Total |
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Balance, September
30, 2010 |
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14,600,423 |
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$ |
146,000 |
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$ |
72,717,000 |
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$ |
89,026,000 |
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$ |
9,000 |
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$ |
161,898,000 |
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Restricted common
stock |
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32,765 |
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Exercise of options |
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934 |
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5,000 |
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5,000 |
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Stock based
compensation
expense |
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1,303,000 |
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1,303,000 |
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Dividends |
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(585,000 |
) |
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(585,000 |
) |
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Accumulated Other
comprehensive
income, net of tax |
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76,000 |
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76,000 |
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Net income |
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5,521,000 |
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5,521,000 |
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Balance, March 31,
2011 |
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14,634,122 |
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$ |
146,000 |
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|
$ |
74,025,000 |
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$ |
93,962,000 |
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$ |
85,000 |
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$ |
168,218,000 |
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Comprehensive income (loss) is as follows:
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Six Months |
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Six Months |
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Ended |
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Ended |
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March 31, 2011 |
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March 31, 2010 |
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Net income |
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$ |
5,521,000 |
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$ |
5,350,000 |
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Other comprehensive income (loss), net of tax foreign currency translation |
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76,000 |
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(58,000 |
) |
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Comprehensive income |
|
$ |
5,597,000 |
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$ |
5,292,000 |
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See accompanying notes to condensed consolidated financial statements
5
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months |
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Six Months |
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Ended |
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Ended |
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|
March 31, 2011 |
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March 31, 2010 |
|
Cash flows from operating activities: |
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Net income |
|
$ |
5,521,000 |
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$ |
5,350,000 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
|
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125,000 |
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|
546,000 |
|
Deferred income taxes |
|
|
912,000 |
|
|
|
5,770,000 |
|
Impairments of consumer receivables acquired for liquidation |
|
|
49,000 |
|
|
|
|
|
Stock based compensation |
|
|
1,303,000 |
|
|
|
763,000 |
|
|
|
|
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|
|
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Changes in: |
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Other assets |
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|
(816,000 |
) |
|
|
(440,000 |
) |
Due from third party collection agencies and attorneys |
|
|
952,000 |
|
|
|
(184,000 |
) |
Income taxes payable and receivable |
|
|
2,858,000 |
|
|
|
(1,700,000 |
) |
Other liabilities |
|
|
(532,000 |
) |
|
|
(658,000 |
) |
|
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|
|
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|
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|
|
|
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|
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|
Net cash provided by operating activities |
|
|
10,372,000 |
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|
|
9,447,000 |
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Cash flows from investing activities: |
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Purchase of consumer receivables acquired for liquidation |
|
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(5,003,000 |
) |
|
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(3,271,000 |
) |
Principal collected on receivables acquired for liquidation |
|
|
20,955,000 |
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|
31,140,000 |
|
Principal collected on receivable accounts represented by account sales |
|
|
152,000 |
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|
1,795,000 |
|
Foreign exchange effect on receivables acquired for liquidation |
|
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(26,000 |
) |
|
|
(17,000 |
) |
Capital expenditures |
|
|
(186,000 |
) |
|
|
(75,000 |
) |
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|
Net cash provided by investing activities |
|
|
15,892,000 |
|
|
|
29,572,000 |
|
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|
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|
|
|
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|
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|
|
|
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|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of options |
|
|
5,000 |
|
|
|
863,000 |
|
Tax benefit arising from vesting of restricted stock awards |
|
|
|
|
|
|
51,000 |
|
Change in restricted cash |
|
|
(124,000 |
) |
|
|
868,000 |
|
Dividends paid |
|
|
(584,000 |
) |
|
|
(571,000 |
) |
Repayments of debt, net |
|
|
(18,009,000 |
) |
|
|
(29,969,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(18,712,000 |
) |
|
|
(28,758,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
7,552,000 |
|
|
|
10,261,000 |
|
|
|
|
|
|
|
|
|
|
Cash at the beginning of period |
|
|
84,235,000 |
|
|
|
2,385,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
91,787,000 |
|
|
$ |
12,646,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period |
|
|
|
|
|
|
|
|
Interest (fiscal year 2011 Related Party $122,000; 2010 Related Party
$387,000) |
|
$ |
1,689,000 |
|
|
$ |
2,532,000 |
|
Income taxes |
|
$ |
33,000 |
|
|
$ |
|
|
See accompanying notes to condensed consolidated financial statements.
6
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 significant operating
subsidiaries Palisades Collection LLC, Palisades Acquisition XVI, LLC (Palisades XVI),
VATIV Recovery Solutions LLC (VATIV) and other subsidiaries, not all wholly owned, and
not considered material (the Company, we or us ) is engaged in the business of
purchasing, managing for its own account and servicing distressed consumer receivables,
including charged-off receivables, semi-performing receivables and performing
receivables. The primary charged-off receivables are accounts that have been written-off
by the originators and may have been previously serviced by collection agencies.
Semi-performing receivables are accounts where the debtor is currently making partial or
irregular monthly payments, but the accounts may have been written-off by the
originators. Performing receivables are accounts where the debtor is making regular
monthly payments that may or may not have been delinquent in the past. Distressed
consumer receivables are the unpaid debts of individuals to banks, finance companies and
other credit providers. A large portion of the Companys distressed consumer receivables
are MasterCard(R), Visa(R), other credit card accounts, and telecommunication accounts
which were charged-off by the issuers for non-payment. The Company acquires these
portfolios at substantial discounts from their face values. The discounts are based on
the characteristics (issuer, account size, debtor residence and age of debt) of the
underlying accounts of each portfolio.
Basis of Presentation
The condensed consolidated balance sheet as of March 31, 2011, the condensed
consolidated statements of operations for the six and three month periods ended March 31,
2011 and 2010, the condensed consolidated statement of stockholders equity as of and for
the six months ended March 31, 2011 and the condensed consolidated statements of cash
flows for the six month periods ended March 31, 2011 and 2010, are unaudited. The
September 30, 2010 financial information included in this report has been extracted from
our audited financial statements included in our Annual Report on Form 10-K for the
fiscal year ended September 30, 2010. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly our
financial position at March 31, 2011 and September 30, 2010, the results of operations
for the six and three month periods ended March 31, 2011 and 2010 and cash flows for the
six month periods ended March 31, 2011 and 2010 have been made. The results of operations
for the six and three month periods ended March 31, 2011 and 2010 are not necessarily
indicative of the operating results for any other interim period or the full fiscal year.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities
and Exchange Commission and, therefore, do not include all information and note
disclosures required under generally accepted accounting principles. The Company suggests
that these financial statements be read in conjunction with the financial statements and
notes thereto included in its Annual Report on Form 10-K for the fiscal year ended
September 30, 2010 filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates including managements estimates of future cash flows
and the resulting rates of return.
Recent Accounting Pronouncements
In December 2009, the Financial Accounting Standards Board (FASB) issued ASU
2009-17, Consolidations (Topic 810) Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities. ASU 2009-17 generally represents a
revision to former FASB Interpretation No. 46 (Revised December 2003), Consolidation of
Variable Interest Entities, and changes how a reporting entity determines when an entity
that is insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. ASU 2009-17 also requires a reporting entity to provide
additional disclosures about its involvement with variable interest entities and any
significant changes in risk exposure due to that involvement. ASU 2009-17 is effective
for fiscal years beginning after November 15, 2009 and for interim periods within the
first annual reporting period. The Company adopted ASU 2009-17 as of October 1, 2010,
which did not have a significant effect on its financial statements.
Subsequent Events
The Company has evaluated events and transactions occurring subsequent to the
Condensed Balance Sheet date of March 31, 2011, for items that should potentially be
recognized or disclosed in these financial statements. The Company did not identify any
items which would require disclosure in or adjustment to the Financial Statements.
7
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
Note 1: Business and Basis of Presentation (continued)
Reclassifications
Certain items in the prior periods financial statements have been reclassified to
conform to the current periods presentation.
Note 2: Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company
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 estimated realizable value
and consist primarily of defaulted consumer loans to individuals throughout the country
and in Central and South America.
The Company accounts for its investments in consumer receivable portfolios, using
either:
|
|
|
the interest method; or |
|
|
|
|
the cost recovery method. |
The Company accounts for its investment in finance receivables using the interest
method under the guidance of FASB Accounting Standards Codification (ASC), Receivables
Loans and Debt Securities Acquired with Deteriorated Credit Quality, (ASC 310).
Under the guidance of ASC 310, static pools of accounts are established. These pools are
aggregated based on certain common risk criteria. Each static pool is recorded at cost
and is accounted for as a single unit for the recognition of income, principal payments
and loss provision.
Once a static pool is established for a quarter, individual receivable accounts are
not added to the pool (unless replaced by the seller) or removed from the pool (unless
sold or returned to the seller). ASC 310 requires that the excess of the contractual cash
flows over expected cash flows not be recognized as an adjustment of revenue or expense
or on the balance sheet. ASC 310 initially freezes the internal rate of return, referred
to as IRR, estimated when the accounts receivable are purchased, as the basis for
subsequent impairment testing. Significant increases in actual or expected future cash
flows may be recognized prospectively through an upward adjustment of the IRR over a
portfolios remaining life. Any increase to the IRR then becomes the new benchmark for
impairment testing. Rather than lowering the estimated IRR if the collection estimates
are not received or projected to be received, the carrying value of a pool would be
impaired, or written down to maintain the then current IRR. Under the interest method,
income is recognized on the effective yield method based on the actual cash collected
during a period and future estimated cash flows and timing of such collections and the
portfolios cost. Revenue arising from collections in excess of anticipated amounts
attributable to timing differences is deferred until such time as a review results in a
change in the expected cash flows. The estimated future cash flows are reevaluated
quarterly.
The Company uses the cost recovery method when collections on a particular pool of
accounts cannot be reasonably predicted. Under the cost recovery method, no income is
recognized until the cost of the portfolio has been fully recovered. A pool can become
fully amortized (zero carrying balance on the balance sheet) while still generating cash
collections. In such case, all cash collections are recognized as revenue when received.
The Company has liquidating experience in the fields of distressed credit card
receivables, telecommunication receivables, consumer loan receivables, retail installment
contracts, consumer receivables, litigation-related medical accounts, and auto
deficiency receivables. The Company uses the interest method for accounting for asset
acquisitions within these classes of receivables when it believes it can reasonably
estimate the timing of the cash flows. In those situations where the Company diversifies
its acquisitions into other asset classes in which the Company does not possess the same
expertise or history, or the Company cannot reasonably estimate the timing of the cash
flows, the Company utilizes the cost recovery method of accounting for those portfolios
of receivables. At March 31, 2011, approximately $38.8 million of the consumer
receivables acquired for liquidation are accounted for using the interest method, while
approximately $92.1 million are accounted for using the cost
recovery method, of which $84.4 million is concentrated in one portfolio, a $300 million
portfolio purchase in March 2007 (the Portfolio Purchase).
8
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
The Company aggregates portfolios of receivables acquired sharing specific common
characteristics which were acquired within a given quarter. The Company currently
considers for aggregation portfolios of accounts, purchased within the same fiscal
quarter, that generally meet the following characteristics:
|
|
|
same issuer/originator; |
|
|
|
|
same underlying credit quality; |
|
|
|
|
similar geographic distribution of the accounts; |
|
|
|
|
similar age of the receivable; and |
|
|
|
|
same type of asset class (credit cards, telecommunication, etc.) |
The Company uses a variety of qualitative and quantitative factors to estimate
collections and the timing thereof. This analysis includes the following variables:
|
|
|
the number of collection agencies previously attempting to collect the receivables in the portfolio; |
|
|
|
|
the average balance of the receivables, as higher balances might be more difficult to collect while
low balances might not be cost effective to collect; |
|
|
|
|
the age of the receivables, as older receivables might be more difficult to collect or might be
less cost effective. On the other hand, the passage of time, in certain circumstances, might result
in higher collections due to changing life events of some individual debtors; |
|
|
|
|
past history of performance of similar assets; |
|
|
|
|
time since charge-off; |
|
|
|
|
payments made since charge-off; |
|
|
|
|
the credit originator and its credit guidelines; |
|
|
|
|
our ability to analyze accounts and resell accounts that meet our criteria for resale; |
|
|
|
|
the locations of the debtors, as there are better states to attempt to collect in and ultimately
the Company has better predictability of the liquidations and the expected cash flows. Conversely,
there are also states where the liquidation rates are not as favorable and that is factored into
our cash flow analysis; |
|
|
|
|
financial condition of the seller; |
|
|
|
|
jobs or property of the debtors found within portfolios. In our business model, this is of
particular importance. Debtors with jobs or property are more likely to repay their obligation and,
conversely, debtors without jobs or property are less likely to repay their obligation; and |
|
|
|
|
the ability to obtain timely customer statements from the original issuer. |
The Company obtains and utilizes, as appropriate, input, including, but not limited
to, monthly collection projections and liquidation rates from our third party collection
agencies and attorneys, as further evidentiary matter, to assist in evaluating and
developing collection strategies and in evaluating and modeling the expected cash flows
for a given portfolio.
9
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (continued)
The following tables summarize the changes in the balance sheet of the investment in
receivable portfolios during the following periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2011 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
46,348,000 |
|
|
$ |
100,683,000 |
|
|
$ |
147,031,000 |
|
Acquisitions of receivable portfolios, net |
|
|
4,530,000 |
|
|
|
473,000 |
|
|
|
5,003,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(32,281,000 |
) |
|
|
(10,479,000 |
) |
|
|
(42,760,000 |
) |
Net cash collections represented by account sales
of consumer receivables acquired for liquidation |
|
|
(243,000 |
) |
|
|
|
|
|
|
(243,000 |
) |
Impairment |
|
|
(49,000 |
) |
|
|
|
|
|
|
(49,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
26,000 |
|
|
|
26,000 |
|
Finance income recognized (1) |
|
|
20,509,000 |
|
|
|
1,387,000 |
|
|
|
21,896,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
38,814,000 |
|
|
$ |
92,090,000 |
|
|
$ |
130,904,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
63.1 |
% |
|
|
13.2 |
% |
|
|
50.9 |
% |
|
|
|
(1) |
|
Includes approximately $17.8 million derived from fully amortized portfolios. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2010 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
70,650,000 |
|
|
$ |
137,611,000 |
|
|
$ |
208,261,000 |
|
Acquisitions of receivable portfolios, net |
|
|
3,043,000 |
|
|
|
228,000 |
|
|
|
3,271,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(37,976,000 |
) |
|
|
(14,370,000 |
) |
|
|
(52,346,000 |
) |
Net cash collections represented by account sales
of consumer receivables acquired for liquidation |
|
|
(2,740,000 |
) |
|
|
(4,000 |
) |
|
|
(2,744,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
17,000 |
|
|
|
17,000 |
|
Finance income recognized (1) |
|
|
21,398,000 |
|
|
|
757,000 |
|
|
|
22,155,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
54,375,000 |
|
|
$ |
124,239,000 |
|
|
$ |
178,614,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
52.6 |
% |
|
|
5.3 |
% |
|
|
40.2 |
% |
|
|
|
(1) |
|
Includes approximately $16.4 million derived from fully amortized portfolios. |
10
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation ( continued )
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2011 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
43,338,000 |
|
|
$ |
96,241,000 |
|
|
$ |
139,579,000 |
|
Acquisitions of receivable portfolios, net |
|
|
1,871,000 |
|
|
|
249,000 |
|
|
|
2,120,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(16,702,000 |
) |
|
|
(5,108,000 |
) |
|
|
(21,810,000 |
) |
Net cash collections represented by account
sales of consumer receivables acquired for
liquidation |
|
|
(88,000 |
) |
|
|
|
|
|
|
(88,000 |
) |
Impairment |
|
|
(49,000 |
) |
|
|
|
|
|
|
(49,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
15,000 |
|
|
|
15,000 |
|
Finance income recognized (1) |
|
|
10,444,000 |
|
|
|
693,000 |
|
|
|
11,137,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
38,814,000 |
|
|
$ |
92,090,000 |
|
|
$ |
130,904,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
62.2 |
% |
|
|
13.6 |
% |
|
|
50.9 |
% |
|
|
|
(1) |
|
Includes approximately $9.0 million derived from fully amortized portfolios. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2010 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
61,776,000 |
|
|
$ |
130,350,000 |
|
|
$ |
192,126,000 |
|
Acquisitions of receivable portfolios, net |
|
|
895,000 |
|
|
|
76,000 |
|
|
|
971,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(18,929,000 |
) |
|
|
(6,584,000 |
) |
|
|
(25,513,000 |
) |
Net cash collections represented by account
sales of consumer receivables acquired for
liquidation |
|
|
(147,000 |
) |
|
|
|
|
|
|
(147,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
(4,000 |
) |
|
|
(4,000 |
) |
Finance income recognized (1) |
|
|
10,780,000 |
|
|
|
401,000 |
|
|
|
11,181,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
54,375,000 |
|
|
$ |
124,239,000 |
|
|
$ |
178,614,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
56.5 |
% |
|
|
6.1 |
% |
|
|
43.6 |
% |
|
|
|
(1) |
|
Includes approximately $8.3 million derived from fully amortized portfolios. |
11
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation ( continued )
As of March 31, 2011, the Company had $130,904,000 in Consumer Receivables acquired
for Liquidation, of which $38,814,000 are being accounted for on the accrual basis. Based
upon current projections, net cash collections, applied to principal for accrual basis
portfolios will be as follows for the twelve months in the periods ending:
|
|
|
|
|
September 30, 2011 (six months ending) |
|
$ |
10,138,000 |
|
September 30, 2012 |
|
|
16,668,000 |
|
September 30, 2013 |
|
|
7,941,000 |
|
September 30, 2014 |
|
|
3,945,000 |
|
September 30, 2015 |
|
|
1,039,000 |
|
September 30, 2016 |
|
|
751,000 |
|
September 30, 2017 |
|
|
188,000 |
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
40,670,000 |
|
|
|
|
|
|
Deferred revenue |
|
|
(1,856,000 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
38,814,000 |
|
|
|
|
|
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 March 31, 2011. 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 six months and three months
ended March 31, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
Balance at beginning of period |
|
$ |
15,255,000 |
|
|
$ |
25,875,000 |
|
Income recognized on finance receivables, net |
|
|
(20,510,000 |
) |
|
|
(21,398,000 |
) |
Additions representing expected revenue from purchases |
|
|
1,238,000 |
|
|
|
1,080,000 |
|
Reclassifications from nonaccretable difference |
|
|
16,359,000 |
|
|
|
14,956,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
12,342,000 |
|
|
$ |
20,513,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
Balance at beginning of period |
|
$ |
13,874,000 |
|
|
$ |
23,656,000 |
|
Income recognized on finance receivables, net |
|
|
(10,445,000 |
) |
|
|
(10,780,000 |
) |
Additions representing expected revenue from purchases |
|
|
506,000 |
|
|
|
271,000 |
|
Reclassifications from nonaccretable difference |
|
|
8,407,000 |
|
|
|
7,366,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
12,342,000 |
|
|
$ |
20,513,000 |
|
|
|
|
|
|
|
|
12
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation ( continued )
During the three and six month periods ended March 31, 2011, the Company purchased
$6.1 million and $13.7 million, respectively, of face value of charged-off consumer
receivables at a cost of $2.1 million and $5.0 million, respectively. During the second
quarter of fiscal year 2011, most of the portfolios purchased were classified under the
interest method.
The following table summarizes collections on a gross basis as received by our
third-party collection agencies and attorneys, less commissions and direct costs for the
six and three month periods ended March 31, 2011 and 2010, respectively:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Gross collections (1) |
|
$ |
67,007,000 |
|
|
$ |
83,762,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
24,004,000 |
|
|
|
28,672,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
43,003,000 |
|
|
$ |
55,090,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Gross collections (1) |
|
$ |
33,623,000 |
|
|
$ |
40,035,000 |
|
|
|
|
|
|
|
|
|
|
Commissions and fees (2) |
|
|
11,725,000 |
|
|
|
14,375,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
21,898,000 |
|
|
$ |
25,660,000 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross collections include: collections by third-party collection agencies and attorneys, collections
from our internal efforts and collections represented by account sales. |
|
(2) |
|
Commissions and fees are the contractual commission earned by third party collection agencies and
attorneys, and direct costs associated with the collection effort, generally court costs. Includes a
3% fee charged by a servicer on substantially all gross collections received by the Company in
connection with the Portfolio Purchase (see Note 5). |
Note 4: Furniture and Equipment
Furniture and equipment consist of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
Furniture |
|
$ |
310,000 |
|
|
$ |
310,000 |
|
Equipment |
|
|
3,010,000 |
|
|
|
2,855,000 |
|
Software |
|
|
180,000 |
|
|
|
153,000 |
|
Leasehold improvements |
|
|
90,000 |
|
|
|
86,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,590,000 |
|
|
|
3,404,000 |
|
Less accumulated depreciation |
|
|
3,179,000 |
|
|
|
3,066,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
411,000 |
|
|
$ |
338,000 |
|
|
|
|
|
|
|
|
13
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 5: Debt and Subordinated Debt Related Party
The Companys debt and subordinated debt related party at March 31, 2011 and September 30,
2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Stated |
|
|
Average |
|
|
Stated |
|
|
Average |
|
|
|
March 31, |
|
|
September 30, |
|
|
Interest |
|
|
Interest |
|
|
Interest |
|
|
Interest |
|
|
|
2011 |
|
|
2010 |
|
|
Rate |
|
|
Rate (1) |
|
|
Rate |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables Financing Agreement |
|
$ |
76,860,000 |
|
|
$ |
90,483,000 |
|
|
|
3.76 |
% |
|
|
3.77 |
% |
|
|
3.76 |
% |
|
|
3.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt related party |
|
$ |
|
|
|
$ |
4,386,000 |
|
|
|
|
|
|
|
10.0 |
% |
|
|
10.00 |
% |
|
|
8.69 |
% |
Receivables Financing Agreement
In March 2007, Palisades XVI entered into a receivables financing agreement (the
Receivables Financing Agreement) with the Bank of Montreal (BMO), as amended in July
2007, December 2007, May 2008, February 2009 and October 2010 in order to finance the
Portfolio Purchase. The Portfolio Purchase had a purchase price of $300 million (plus
20% of net payments after Palisades XVI recovers 150% of its purchase price plus cost of
funds, which recovery has not yet occurred). Prior to the modifications, discussed below,
the debt was full recourse only to Palisades XVI and accrued interest at the rate of
approximately 170 basis points over LIBOR. The original term of the agreement was three
years. This term was extended by each of the Second, Third Fourth and Fifth Amendments to
the Receivables Financing Agreement as discussed below. Proceeds received as a result of
the net collections from the Portfolio Purchase are applied to interest and principal of
the underlying loan. The Portfolio Purchase is serviced by Palisades Collection LLC, a
wholly owned subsidiary of the Company, which has engaged unaffiliated subservicers for a
majority of the Portfolio Purchase.
Since the inception of the Receivables Financing Agreement amendments have been
signed to revise various terms of the Receivables Financing Agreement. The following is a
summary of the material amendments:
Second Amendment Receivables Financing Agreement, dated December 27, 2007 revised
the amortization schedule of the loan from 25 months to approximately 31 months. BMO
charged Palisades XVI a fee of $475,000 which was paid on January 10, 2008. The fee was
capitalized and is being amortized over the remaining life of the Receivables Financing
Agreement.
Third Amendment Receivables Financing Agreement, dated May 19, 2008 extended the
payments of the loan through December 2010. The lender also increased the interest rate
from 170 basis points over LIBOR to approximately 320 basis points over LIBOR, subject to
automatic reduction in the future if additional capital contributions are made by the
parent of Palisades XVI.
14
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5: Debt and Subordinated Debt Related Party (continued)
Receivables Financing Agreement (continued)
Fourth Amendment Receivables Financing Agreement, dated February 20, 2009, among
other things, (i) lowered the collection rate minimum to $1 million per month (plus
interest and fees) as an average for each period of three consecutive months, (ii)
provided for an automatic extension of the maturity date from April 30, 2011 to April 30,
2012 should the outstanding balance be reduced to $25 million or less by April 30, 2011
and (iii) permanently waived the previous termination events. The interest rate remained
unchanged at approximately 320 basis points over LIBOR, subject to automatic reduction in
the future should certain collection milestones be attained.
As additional credit support for repayment by Palisades XVI of its obligations under
the Receivables Financing Agreement and as an inducement for BMO to enter into the Fourth
Amendment, the Company provided BMO a limited recourse, subordinated guaranty, secured by
the assets of the Company, in an amount not to exceed $8.0 million plus reasonable costs
of enforcement and collection. Under the terms of the guaranty, BMO cannot exercise any
recourse against the Company until the earlier of (i) five years from the date of the
Fourth Amendment and (ii) the termination of the Companys existing senior lending
facility or any successor senior facility.
On October 26, 2010, Palisades XVI entered into the Fifth Amendment to the
Receivables Financing Agreement (the Fifth Amendment). The effective date of the Fifth
Amendment was October 14, 2010. The Fifth Amendment (i) extended the expiration date of
the Receivables Financing Agreement to April 14, 2014; (ii) reduced the minimum monthly
payment to $750,000; (iii) accelerated the Companys guaranty credit enhancement of
$8,700,000, which was paid upon the execution of the Fifth Amendment; (iv) eliminated the
Companys limited guaranty of repayment of the loans outstanding by Palisades XVI; and
(v) revised the definition of Borrowing Base Deficit, as defined in the Receivables
Financing Agreement, to mean the excess, if any, of 105% of the loans outstanding over
the borrowing base.
In connection with the Fifth Amendment, on October 26, 2010, the Company entered
into the Omnibus Termination Agreement (the Termination Agreement). The Termination
Agreement provides that, upon payment of $8,700,000 to the Lender and execution of the
Fifth Amendment, the following agreements, which were entered into by the Company and
certain of its affiliated entities in connection with the guaranty of the outstanding
loans under the Receivables Financing Agreement, were terminated: (i) the Subordinated
Limited Recourse Guaranty Agreement, dated February 20, 2009, among the Company, its
subsidiaries and BMO; (ii) the Subordinated Guarantor Security Agreement, dated February
20, 2009; (iii) the Limited Recourse Guaranty Agreement, dated as of February 20, 2009;
and (iv) the Intercreditor Agreement, dated February 20, 2009. The Termination Agreement
was effective as of October 14, 2010.
The aggregate minimum repayment obligations required under the Fifth Amendment,
including interest and principal, for fiscal years ending September 30, 2011 through
2013, is $9 million annually, and, for the fiscal year ending September 30, 2014, is
approximately $5 million (seven months).
On March 31, 2011 and 2010, the outstanding balance on this loan was approximately
$76.9 million, and $96.5 million, respectively. The applicable interest rate at March 31,
2011 and 2010 was 3.76% and 3.73%, respectively. The average interest rate of the
Receivable Financing Agreement was 3.77% and 3.75% for the six-month periods ended March
31, 2011 and 2010, respectively.
The Companys average debt obligation (excluding the subordinated debt related
party) for the six and three month periods ended March 31, 2011, was approximately $80.3
million and $77.9 million, respectively. The average interest rate for the six and three
month periods ended March 31, 2011 was 3.77% and 3.79%, respectively.
15
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5: Debt and Subordinated Debt Related Party (continued)
Bank Leumi Credit Agreement
On December 14, 2009, the Company and its subsidiaries other than Palisades XVI,
entered into a revolving credit agreement with Bank Leumi (the Leumi Credit Agreement),
which permitted maximum principal advances of up to $6 million. This agreement expired on
December 31, 2010. The interest rate was a floating rate equal to the Bank Leumi
Reference Rate plus 2%, with a floor of 4.5%. The loan was secured by collateral
consisting of all of the assets of the Company other than those of Palisades XVI. In
addition, other collateral for the loan consisted of a pledge of cash and securities by
GMS Family Investors, LLC, an investment company owned by members of the Stern family.
There were no financial covenant restrictions. On December 14, 2009, approximately $3.6
million of the Bank Leumi credit line was drawn and used to reduce to zero the remaining
balance on the IDB Credit Facility described below. The balance
outstanding on the Leumi Credit Agreement was reduced to zero on January 14, 2010 and
remained at zero until its expiration on December 31, 2010. Currently, the Company does
not have a new agreement in place, and there can be no assurance that a new agreement
will be reached, but the Company has maintained ongoing discussions with Bank Leumi
regarding entering into a new and more substantial credit agreement.
IDB Credit Facility
The Eighth Amendment to the IDB Credit Facility, entered into on July 10, 2009,
granted an initial $40 million line of credit from a consortium of banks (the Bank
Group) for portfolio purchases and working capital and was scheduled to reduce to zero
by December 31, 2009. The IDB Credit Facility accrued interest at the lesser of LIBOR
plus an applicable margin, or the prime rate minus an applicable margin based on certain
leverage ratios, with a minimum rate of 5.5% per annum. The IDB Credit Facility was
collateralized by all assets of the Company, other than those of Palisades XVI and
contained financial and other covenants. The IDB Credit Facilitys commitment
termination date was December 31, 2009. This IDB facility was repaid in full on December
14, 2009.
Subordinated Debt Related Party
On April 29, 2008, the Company obtained a subordinated loan pursuant to a
subordinated promissory note from an entity (the Family Entity). The Family Entity is a
greater than 5% shareholder of the Company and is beneficially owned and controlled by
Arthur Stern, a Director of the Company, Gary Stern, the Chairman, President and Chief
Executive Officer of the Company, and members of their families. The loan was in the
aggregate principal amount of approximately $8.2 million, accrued interest at a rate of
6.25% per annum and was payable interest only each quarter until its maturity date of
January 9, 2010, subject to prior repayment in full of the IDB Credit Facility. The
subordinated loan was incurred by the Company to resolve certain issues related to the
activities of one of the subservicers utilized by Palisades Collection LLC under the
Receivables Financing Agreement. Proceeds from the subordinated loan were initially
used to further collateralize the Companys IDB Credit Facility and to reduce the balance
due on that facility as of May 31, 2008. In December 2009, the subordinated debt-related
party maturity date was extended through December 31, 2010. In addition the interest rate
was changed to 10% per annum effective January 2010. Approximately $3.8 million of the
loan was repaid in fiscal year 2010, with the remaining $4.4 million repaid during the
first quarter of fiscal year 2011, including the final payment of $2.4 million on
December 30, 2010, reducing the balance to zero.
16
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6: Commitments and Contingencies
Employment Agreements
In January 2007, the Company entered into an employment agreement (the Employment
Agreement) with Gary Stern, its Chairman, President and Chief Executive, which expired
on December 31, 2009. This Employment Agreement was not renewed and Mr. Stern is
continuing in his current roles at the discretion of the Board of Directors until a new
agreement is signed. The Company intends to negotiate a new employment agreement with
Mr. Stern during fiscal year 2011.
On November 30, 2009, the Company entered into a consulting services agreement with
Cameron Williams, its former Chief Operating Officer. Under the terms of the agreement,
the Company paid Mr. Williams a monthly fee of $20,833.33 for the one year period ended
December 31, 2010 in exchange for certain consulting services. In addition, in exchange
for a release of all claims and liabilities, the Company paid Mr. Williams a fee of
$100,000, reimbursed his COBRA costs up to $1,000 per month, and accelerated vesting of
16,667 stock options held by Mr. Williams, exercisable at $2.95 per share. Also Mr.
Williams signed another release in favor of the Company and was paid $20,833.37 at the
end of this consulting term in December 2010.
Leases
The Company leases its facilities in Englewood Cliffs, New Jersey and Houston,
Texas. Please refer to our consolidated financial statements and notes thereto in our
Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, for
additional information.
Litigation
In the ordinary course of its business, the Company is involved in numerous legal
proceedings. The Company regularly initiates collection lawsuits against consumers, using
its network of third party law firms. In addition, consumers occasionally initiate
litigation against the Company, alleging that the Company has violated a federal or state
law in the process of collecting their account. The Company does not believe that these
matters are material to its business and financial condition. The Company is not involved
in any material litigation in which it was a defendant.
Note 7: Income Recognition and Impairments
Income Recognition
The Company accounts for its investment in consumer receivables acquired for
liquidation using the interest method under the guidance of ASC 310. In ASC 310 static
pools of accounts are established. These pools are aggregated based on certain common
risk criteria. Each static pool is recorded at cost and is accounted for as a single unit
for the recognition of income, principal payments and loss provision.
Once a static pool is established for a quarter, individual receivable accounts are
not added to the pool (unless replaced by the seller) or removed from the pool (unless
sold or returned to the seller). ASC 310 requires that the excess of the contractual cash
flows over expected cash flows not be recognized as an adjustment of revenue or expense
or on the balance sheet. ASC 310 initially freezes the internal rate of return (IRR),
estimated when the accounts receivable are purchased, as the basis for subsequent
impairment testing. Significant increases in actual, or expected future cash flows may be
recognized prospectively through an upward adjustment of the IRR over a portfolios
remaining life. Any increase to the IRR then becomes the new benchmark for impairment
testing. Under ASC 310, rather than lowering the estimated IRR if the collection
estimates are not received or projected to be received, the carrying value of a pool
would be written down to maintain the then current IRR.
Finance income is recognized on cost recovery portfolios after the carrying value
has been fully recovered through collections or amounts written down.
17
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 7: Income Recognition and Impairments (continued)
Impairments
The Company accounts for its impairments in accordance with ASC 310, which provides
guidance on how to account for differences between contractual and expected cash flows
from an investors initial investment in loans or debt securities acquired in a transfer
if those differences are attributable, at least in part, to credit quality. Increases in
expected cash flows are recognized prospectively through an adjustment of the internal
rate of return while decreases in expected cash flows are recognized as impairments. ASC
310 makes it more likely that impairment losses and accretable yield adjustments for
portfolios performances which exceed original collection projections will be recorded,
as all downward revisions in collection estimates will result in impairment charges,
given the requirement that the IRR of the affected pool be held constant. There was an
impairment of $49 thousand recorded during the three and six month periods ended March
31, 2011. No impairments were recorded during the three and six month periods ended March
31, 2010. Finance income is not recognized on cost recovery method portfolios until the
cost of the portfolio is fully recovered. Collection projections are performed on both
interest method and cost recovery method portfolios. With regard to the cost recovery
portfolios, if collection projections indicate the carrying value will not be recovered a
write down in value is required.
Our analysis of the timing and amount of cash flows to be generated by our portfolio
purchases are based on the following attributes:
|
|
|
the type of receivable, the location of the debtor and the number of
collection agencies previously attempting to collect the receivables in
the portfolio. We have found that there are better states to try to
collect receivables and we factor in both better and worse states when
establishing our initial cash flow expectations; |
|
|
|
|
the average balance of the receivables influences our analysis in that
lower average balance portfolios tend to be more collectible in the
short-term and higher average balance portfolios are more appropriate for
our law suit strategy and thus yield better results over the longer term.
As we have significant experience with both types of balances, we are able
to factor these variables into our initial expected cash flows; |
|
|
|
|
the age of the receivables, the number of days since charge-off, any
payments since charge-off, and the credit guidelines of the credit
originator also represent factors taken into consideration in our
estimation process. For example, older receivables might be more difficult
and/or require more time and effort to collect; |
|
|
|
|
past history and performance of similar assets acquired. As we purchase
portfolios of like assets, we accumulate a significant historical data
base on the tendencies of debtor repayments and factor this into our
initial expected cash flows; |
|
|
|
|
our ability to analyze accounts and resell accounts that meet our criteria; |
|
|
|
|
jobs or property of the debtors found within portfolios. With our business
model, this is of particular importance. Debtors with jobs or property are
more likely to repay their obligation through the suit strategy and,
conversely, debtors without jobs or property are less likely to repay
their obligation. We believe that debtors with jobs or property are more
likely to repay because courts have mandated the debtor must pay the debt.
Ultimately, the debtor will pay to clear title or release a lien. We also
believe that these debtors generally might take longer to repay and that
is factored into our initial expected cash flows; and |
|
|
|
|
credit standards of issuer. |
18
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 7: Income Recognition and Impairments (continued)
Impairments (continued)
We acquire accounts that have experienced deterioration of credit quality between
origination and the date of our acquisition of the accounts. The amount paid for a
portfolio of accounts reflects our determination that it is probable we will be unable to
collect all amounts due according to the portfolio of accounts contractual terms. We
consider the expected payments and estimate the amount and timing of undiscounted
expected principal, interest and other cash flows for each acquired portfolio, coupled
with expected cash flows from accounts available for sales. The excess of this amount
over the cost of the portfolio, representing the excess of the accounts cash flows
expected to be collected over the amount paid, is accreted into income recognized on
finance receivables over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain distressed consumer
receivable portfolios at a significant discount to the amount actually owed by underlying
debtors. We acquire these portfolios only after both qualitative and quantitative
analyses of the underlying receivables are performed and a calculated purchase price is
paid, so that we believe our estimated cash flow offers us an adequate return on our
acquisition costs after our servicing expenses. Additionally, when considering larger
portfolio purchases of accounts, or portfolios from issuers with whom we have limited
experience, we have the added benefit of soliciting our third party servicers for their
input on liquidation rates and, at times, incorporate such input into the estimates we
use for our expected cash flows. As a result of the recent and current challenging
economic environment and the impact it has had on the collections, for portfolios
purchases acquired since the beginning of fiscal year 2009, we have extended our time
frame of the expectation of recovering 100% of our invested capital to within a 24-29
month period from an 18-28 month period, and the expectation of recovering 130-140% of
invested capital to a period of 7 years, which is an increase from the previous 5-year
expectation. Portfolios acquired during the first six months of fiscal year 2011 include
semi-performing litigation-related medical accounts receivable portfolios whereby the
Company is assigned the revenue stream. As a portion of the accounts are performing, the
cost of the portfolio is higher than the traditional charged off non-performing assets.
The expectation of recovering 130% of our investment is projected to be over a three year
period. We routinely monitor expectations against the actual cash flows and, in the event
the cash flows are below our expectations and we believe there are no reasons relating to
mere timing differences or explainable delays (such as can occur particularly when the
court system is involved) for the reduced collections, an impairment would be recorded as
a provision for credit losses. Conversely, in the event the cash flows are in excess of
our expectations and the reason is due to timing, we would defer the excess collection
as deferred revenue.
Commissions and fees
Commissions and fees are the contractual commissions earned by third party
collection agencies and attorneys, and direct costs associated with the collection
effort- generally court costs. The Company expects to continue to purchase portfolios and
utilize third party collection agencies and attorney networks.
Note 8: Income Taxes
Deferred federal and state taxes principally arise from (i) recognition of finance
income collected for tax purposes, but not yet recognized for financial reporting; (ii)
provision for impairments/credit losses; and (iii) stock based compensation for stock
option grants and restricted stock awards recorded in the statement of operations for
which no cash distribution has been made. Other components consist of state net
operating loss (NOL) carryforwards. The provision for income tax expense for the three
month periods ending March 31, 2011 and 2010, respectively, reflects income tax expense
at an effective rate of 40.5% and 40.6%. The provision for income tax expense for the
six month periods ending March 31, 2011 and 2010, reflects income tax expense at an
effective rate of 40.5% for both periods.
The corporate federal income tax returns of the Company for 2006 through 2009 are
subject to examination by the IRS, generally for three years after they are filed. The
state income tax returns and other state filings of the Company are subject to
examination by the state taxing authorities, for various periods generally up to four
years after they are filed.
In April 2010, the Company received notification from the IRS the Companys 2008 and
2009 federal income tax returns would be audited. This audit is currently in progress.
19
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 9: Net Income Per Share
Basic per share data is determined by dividing net income by the weighted average shares outstanding during the period. Diluted per share data is computed by dividing net
income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. With respect to the assumed proceeds from the exercise of dilutive
options, the treasury stock method is calculated using the average market price for the
period.
The following table presents the computation of basic and diluted per share data for
the six and three months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
Weighted |
|
|
Per |
|
|
|
|
|
|
Weighted |
|
|
Per |
|
|
|
Net |
|
|
Average |
|
|
Share |
|
|
Net |
|
|
Average |
|
|
Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
5,521,000 |
|
|
|
14,619,917 |
|
|
$ |
0.38 |
|
|
$ |
5,350,000 |
|
|
|
14,384,050 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive
Stock |
|
|
|
|
|
|
205,143 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
186,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
5,521,000 |
|
|
|
14,825,060 |
|
|
$ |
0.37 |
|
|
$ |
5,350,000 |
|
|
|
14,570,901 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011, 914,646 options at a weighted average exercise price of $13.55 were
not included in the diluted earnings per share calculation as they were antidilutive.
At March 31, 2010, 694,683 options at a weighted average exercise price of $16.11 were
not included in the diluted earnings per share calculation as they were antidilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
Weighted |
|
|
Per |
|
|
|
|
|
|
Weighted |
|
|
Per |
|
|
|
Net |
|
|
Average |
|
|
Share |
|
|
Net |
|
|
Average |
|
|
Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic |
|
$ |
2,855,000 |
|
|
|
14,633,655 |
|
|
$ |
0.20 |
|
|
$ |
2,875,000 |
|
|
|
14,498,161 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive
Stock |
|
|
|
|
|
|
242,782 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
6,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
2,855,000 |
|
|
|
14,876,437 |
|
|
$ |
0.19 |
|
|
$ |
2,875,000 |
|
|
|
14,504,398 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011, 1,021,049 options at a weighted average exercise price of $12.93
were not included in the diluted earnings per share calculation as they were
antidilutive.
At March 31, 2010, 756,671 options at a weighted average exercise price of $15.45 were
not included in the diluted earnings per share calculation as they were antidilutive.
20
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 10: Stock-based Compensation
The Company accounts for stock-based employee compensation under ASC 718,
Compensation Stock Compensation (ASC 718). ASC 718 requires that compensation
expense associated with stock options and other stock based awards be recognized in the
statement of operations, rather than a disclosure in the notes to the Companys
consolidated financial statements.
In March 2011, the Compensation Committee of the Board of Directors of the Company
(the Compensation Committee) granted 10,000 stock options to an employee. The exercise
price of these options was at the market price on the date of the grant. The weighted
average assumptions used in the option pricing model were as follows:
|
|
|
|
|
Risk-free interest rate |
|
|
0.10 |
% |
Expected term (years) |
|
|
10.0 |
|
Expected volatility |
|
|
106.2 |
% |
Dividend yield |
|
|
0.94 |
% |
In December 2010, the Compensation Committee granted 324,800 stock options, of which
30,000 options were issued to each non-employee independent director for a total of
150,000 stock options. 60,000 stock options were awarded to the Chief Executive Officer
and 30,000 stock options were awarded to the Chief Financial Officer and the Senior Vice
President. The remaining 54,800 stock options were granted to full time employees of the
Company, who had been employed at the Company for at least six months prior to the date
of grant. The grants to employees excluded officers of the Company. The exercise price of
these options was at the market price on the date of the grant. Additionally, in
December 2010, the Compensation Committee issued 32,765 shares of restricted stock to the
Chief Executive Officer. The exercise price of all stock options was at the market price
on the date of the grant. The weighted average assumptions used in the option pricing
model were as follows:
|
|
|
|
|
Risk-free interest rate |
|
|
0.17 |
% |
Expected term (years) |
|
|
10.0 |
|
Expected volatility |
|
|
106.9 |
% |
Dividend yield |
|
|
0.98 |
% |
In December 2009, the Compensation Committee granted 25,000 stock options to each
director of the Company other than the Chief Executive Officer, for a total of 150,000
options, and 8,900 stock options to full time employees of the Company who had been
employed at the Company for at least six months prior to the date of grant. The grants to
employees excluded officers of the Company. The exercise price of these options was at
the market price on the date of the grant. The weighted average assumptions used in the
option pricing model were as follows:
|
|
|
|
|
Risk-free interest rate |
|
|
0.17 |
% |
Expected term (years) |
|
|
10.0 |
|
Expected volatility |
|
|
110.2 |
% |
Dividend yield |
|
|
1.12 |
% |
21
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 11: Stock Option Plans
Equity Compensation Plan
On December 1, 2005, the Board of Directors adopted the Companys Equity
Compensation Plan (the Equity Compensation Plan), approved by the stockholders of the
Company on March 1, 2006. The Equity Compensation Plan was adopted to supplement the
Companys existing 2002 Stock Option Plan. In addition to permitting the grant of stock
options as permitted under the 2002 Stock Option Plan, the Equity Compensation Plan
allows the Company flexibility with respect to equity awards by also providing for grants
of stock awards (i.e. restricted or unrestricted), stock purchase rights and stock
appreciation rights. One million shares were authorized for issuance under the Equity
Compensation Plan. The following description does not purport to be complete and is
qualified in its entirety by reference to the full text of the Equity Compensation Plan,
which is included as an exhibit to the Companys reports filed with the SEC.
The general purpose of the Equity Compensation Plan is to provide an incentive to
our employees, directors and consultants, including executive officers, employees and
consultants of any subsidiaries, by enabling them to share in the future growth of our
business. The Board of Directors believes that the granting of stock options and other
equity awards promotes continuity of management and increases incentive and personal
interest in the welfare of the Company by those who are primarily responsible for shaping
and carrying out our long range plans and securing our growth and financial success.
The Board believes that the Equity Compensation Plan will advance our interests by
enhancing our ability to (a) attract and retain employees, directors and consultants who
are in a position to make significant contributions to our success; (b) reward employees,
directors and consultants for these contributions; and (c) encourage employees, directors
and consultants to take into account our long-term interests through ownership of our shares.
The Company has 1,000,000 shares of Common Stock authorized for issuance under the
Equity Compensation Plan and 545,569 shares were available as of March 31, 2011. As of
March 31, 2011, approximately 103 of the Companys employees were eligible to participate
in the Equity Compensation Plan.
2002 Stock Option Plan
On March 5, 2002, the Board of Directors adopted the Asta Funding, Inc. 2002 Stock
Option Plan (the 2002 Plan), which plan was approved by the Companys stockholders on
May 1, 2002. The 2002 Plan was adopted in order to attract and retain qualified
directors, officers and employees of, and consultants to, the Company. The following
description does not purport to be complete and is qualified in its entirety by reference
to the full text of the 2002 Plan, which is included as an exhibit to the Companys
reports filed with the SEC.
The 2002 Plan authorizes the granting of incentive stock options (as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the Code)) and
non-qualified stock options to eligible employees of the Company, including officers and
directors of the Company(whether or not employees) and consultants of the Company.
The Company has 1,000,000 shares of Common Stock authorized for issuance under the
2002 Plan and 129,734 were available as of March 31, 2010. As of March 31, 2011,
approximately 103 of the Companys employees were eligible to participate in the 2002
Plan.
1995 Stock Option Plan
The 1995 Stock Option Plan expired on September 14, 2005. The plan was adopted in
order to attract and retain qualified directors, officers and employees of, and
consultants, to the Company. The following description does not purport to be complete
and is qualified in its entirety by reference to the full text of the 1995 Stock Option
Plan, which is included as an exhibit to the Companys reports filed with the SEC.
The 1995 Stock Option Plan authorized the granting of incentive stock options (as
defined in Section 422 of the Code) and non-qualified stock options to eligible employees
of the Company, including officers and directors of the Company (whether or not
employees) and consultants to the Company.
The Company authorized 1,840,000 shares of Common Stock for issuance under the 1995
Stock Option Plan. All but 96,002 shares were utilized. As of September 14, 2005, no more
options could be issued under this plan.
22
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Note 11: Stock Option Plans (continued)
The following table summarizes stock option transactions under the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding options at the beginning of period |
|
|
922,039 |
|
|
$ |
12.70 |
|
|
|
1,157,905 |
|
|
$ |
10.76 |
|
Options granted |
|
|
334,800 |
|
|
|
6.94 |
|
|
|
158,900 |
|
|
|
8.07 |
|
Options exercised |
|
|
(934 |
) |
|
|
5.61 |
|
|
|
(325,767 |
) |
|
|
2.65 |
|
Options forfeited |
|
|
(1,400 |
) |
|
|
5.79 |
|
|
|
(20,500 |
) |
|
|
16.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of period |
|
|
1,254,505 |
|
|
$ |
11.17 |
|
|
|
970,538 |
|
|
$ |
12.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of period |
|
|
953,175 |
|
|
$ |
12.56 |
|
|
|
811,215 |
|
|
$ |
14.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding options at the beginning of period |
|
|
1,245,439 |
|
|
$ |
11.18 |
|
|
|
1,316,705 |
|
|
$ |
10.44 |
|
Options granted |
|
|
10,000 |
|
|
|
8.52 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(934 |
) |
|
|
5.61 |
|
|
|
(325,667 |
) |
|
|
2.65 |
|
Options forfeited |
|
|
|
|
|
|
|
|
|
|
(20,500 |
) |
|
|
16.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of period |
|
|
1,254,505 |
|
|
$ |
11.17 |
|
|
|
970,538 |
|
|
$ |
12.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of period |
|
|
953,175 |
|
|
$ |
12.56 |
|
|
|
811,215 |
|
|
$ |
14.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $1,015,000 and $163,000 of compensation expense related
to stock options during the six month and three month periods ended March 31, 2011. The
Company recognized $668,000 and $182,000 of compensation expense related to stock options
during the six month and three month periods ended March 31, 2010. As of March 31, 2011,
there was $1,405,000 of unrecognized compensation expense related to stock option awards.
There is no intrinsic value of the outstanding and exercisable options as of March 31,
2011. The intrinsic value of the stock options exercised during the three month period
ended March 31, 2011 was approximately $3,000.
23
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 11: Stock Option Plans (continued)
The following table summarizes information about the Plans outstanding options as of
March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Contractual |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
Range of Exercise Price |
|
Outstanding |
|
|
Life (in Years) |
|
|
Price |
|
|
Exercisable |
|
|
Price |
|
$2.8751 $5.7500 |
|
|
197,834 |
|
|
|
4.6 |
|
|
$ |
3.91 |
|
|
|
168,168 |
|
|
$ |
4.08 |
|
$5.7501 $8.6250 |
|
|
503,400 |
|
|
|
8.9 |
|
|
|
7.27 |
|
|
|
231,736 |
|
|
|
7.39 |
|
$14.3751 $17.2500 |
|
|
198,611 |
|
|
|
2.6 |
|
|
|
14.88 |
|
|
|
198,611 |
|
|
|
14.88 |
|
$17.2501 $20.1250 |
|
|
339,660 |
|
|
|
3.6 |
|
|
|
18.23 |
|
|
|
339,660 |
|
|
|
18.23 |
|
$25.8751 $28.7500 |
|
|
15,000 |
|
|
|
5.7 |
|
|
|
28.75 |
|
|
|
15,000 |
|
|
|
28.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,254,505 |
|
|
|
5.8 |
|
|
$ |
11.17 |
|
|
|
953,175 |
|
|
$ |
12.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about restricted stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant |
|
|
|
|
|
|
Grant |
|
|
|
|
|
|
|
Date Fair |
|
|
|
|
|
|
Date Fair |
|
|
|
Shares |
|
|
Value |
|
|
Shares |
|
|
Value |
|
Unvested at the beginning of period |
|
|
17,669 |
|
|
$ |
19.73 |
|
|
|
35,338 |
|
|
$ |
19.73 |
|
Awards granted |
|
|
32,765 |
|
|
|
7.63 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(28,591 |
) |
|
|
15.11 |
|
|
|
(17,669 |
) |
|
|
19.73 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at the end of period |
|
|
21,843 |
|
|
$ |
7.63 |
|
|
|
17,669 |
|
|
$ |
19.73 |
|
|
|
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Three Months Ended March 31, |
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2011 |
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2010 |
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Weighted |
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Weighted |
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Average |
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Average |
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Grant |
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Grant |
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Date Fair |
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Date Fair |
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Shares |
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Value |
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Value |
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Unvested at the beginning of period |
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21,843 |
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$ |
7.63 |
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17,669 |
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$ |
19.73 |
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Awards granted |
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Vested |
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Forfeited |
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Unvested at the end of period |
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21,843 |
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$ |
7.63 |
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17,669 |
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$ |
19.73 |
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The Company recognized $288,000 and $142,000 of compensation expense related to
the restricted stock awards during the six-month and three month periods ended March 31,
2011. The Company recognized $94,000 and $22,000 of compensation expense related to
restricted stock awards during the six and three month periods ended March 31, 2010. As
of March 31, 2011, there was $238,000 of unrecognized compensation cost related to
unvested restricted stock.
24
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 12: Stockholders Equity
For the six months ended March 31, 2011, the Company declared dividends of $585,000,
or $.02 per share. Of this amount $292,000 was paid during the six months ended March 31,
2011 and $293,000 was accrued as of March 31, 2011 and paid May 2, 2011. As of March 31,
2011, stockholders equity includes an amount for other comprehensive income of $85,000,
which relates to the Companys investment in a company domiciled in South America.
Note 13: Fair Value of Financial Instruments
FASB ASC 825, Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized on the balance sheet, for which it
is practicable to estimate that value. Because there are a limited number of market
participants for certain of the Companys assets and liabilities, fair value estimates
are based upon judgments regarding credit risk, investor expectation of economic
conditions, normal cost of administration and other risk characteristics, including
interest rate and prepayment risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment, which significantly affect the value of the
estimates.
The carrying value of consumer receivables acquired for liquidation was $130,904,000
and $147,031,000 at March 31, 2011 and September 30, 2010, respectively. The Company
computed the fair value of the consumer receivables acquired for liquidation using its
forecasting model and the fair value approximated $156,373,000 and $179,730,000 at March
31, 2011 and September 30, 2010, respectively. The Companys forecasting model utilizes a
discounted cash flow analysis. The Companys cash flows are an estimate of collections
for all of our consumer receivables based on variables fully described in Note 3:
Consumer Receivables Acquired for Liquidation. These cash flows are then discounted using
our estimated weighted average cost of capital to determine the fair value.
The carrying value of debt and subordinated debt (related party) was $76,860,000 and
$94,869,000 at March 31, 2011 and September 30, 2010, respectively. The majority of these
loans are variable rate and short-term; therefore, the carrying amounts approximate fair
value.
25
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Item 2. |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
Caution Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical facts included or incorporated by
reference in this annual report on Form 10-K, including without limitation, statements
regarding our future financial position, business strategy, budgets, projected revenues,
projected costs and plans and objective of management for future operations, are
forward-looking statements. Forward-looking statements generally can be identified by the
use of forward-looking terminology such as may, will, expects, intends, plans,
projects, estimates, anticipates, or believes or the negative thereof or any
variation there on or similar terminology or expressions.
We have based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are not guarantees and
are subject to known and unknown risks, uncertainties and assumptions about us that may
cause our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Important factors
which could materially affect our results and our future performance include, without
limitation, our ability to purchase defaulted consumer receivables at appropriate prices,
changes in government regulations that affect our ability to collect sufficient amounts
on our defaulted consumer receivables, our ability to employ and retain qualified
employees, changes in the credit or capital markets, changes in interest rates,
deterioration in economic conditions, negative press regarding the debt collection
industry which may have a negative impact on a debtors willingness to pay the debt we
acquire, and statements of assumption underlying any of the foregoing, as well as other
factors set forth under Item 1A. Risk Factors in our annual report on Form 10-K for the
fiscal year ended September 30, 2010.
All subsequent written and oral forward-looking statements attributable to us, or
persons acting on our behalf, are expressly qualified in their entirety by the foregoing.
Except as required by law, we assume no duty to update or revise any forward-looking
statements.
Overview
Asta Funding, Inc., together with its wholly owned significant operating
subsidiaries Palisades Collection LLC, Palisades Acquisition XVI, LLC (Palisades XVI),
VATIV Recovery Solutions LLC (VATIV) and other subsidiaries, not all wholly owned, and
not considered material (the Company, we or us), 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:
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charged-off receivables accounts that have been written-off by the originators
and may have been previously serviced by collection agencies; |
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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 |
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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:
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our relationships with industry participants, collection agencies, investors and
our financing sources; |
26
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brokers who specialize in the sale of consumer receivable portfolios; and |
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other sources. |
Critical Accounting Policies
We account for our investments in consumer receivable portfolios, using either:
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the interest method; or |
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the cost recovery method. |
As we believe our liquidating experience in certain asset classes such as distressed
credit card receivables, telecom receivables, consumer loan receivables,
litigation-related medical accounts and mixed consumer receivables has matured, we use
the interest method when we believe we can reasonably estimate the timing of the cash
flows. In those situations where we diversify our acquisitions into other asset classes
and we do not possess the same expertise, or we cannot reasonably estimate the timing of
the cash flows, we utilize the cost recovery method of accounting for those portfolios of
receivables.
We account for our investment in finance receivables using the interest method under
the guidance of FASB Accounting Standards Codification (ASC) 310, Receivables Loans
and Debt Securities Acquired with Deteriorating Credit Quality, (ASC 310). 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. We currently consider
for aggregation portfolios of accounts, purchased within the same fiscal quarter, that
generally have the following characteristics:
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same issuer/originator |
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same underlying credit quality |
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similar geographic distribution of the accounts |
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similar age of the receivable and |
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same type of asset class (credit cards, telecommunications, etc.) |
After determining that an investment will yield an adequate return on our
acquisition cost after servicing fees, including court costs which are expensed as
incurred, we use a variety of qualitative and quantitative factors to determine the
estimated cash flows. As previously mentioned, included in our analysis for purchasing a
portfolio of receivables and determining a reasonable estimate of collections and the
timing thereof, the following variables are analyzed and factored into our original
estimates:
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the number of collection agencies previously attempting to collect the receivables
in the portfolio; |
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the average balance of the receivables; |
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the age of the receivables (as older receivables might be more
difficult to collect or might be less cost effective); |
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past history of performance of similar assets as we
purchase portfolios of similar assets, we believe we have built significant
history on how these receivables will liquidate and cash flow; |
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number of months since charge-off; |
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payments made since charge-off; |
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the credit originator and their credit guidelines; |
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the locations of the debtors as there are better states to
attempt to collect in and ultimately we have better predictability of the
liquidations and the expected cash flows. Conversely, there are also states
where the liquidation rates are not as good and that is factored into our
cash flow analysis; |
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financial wherewithal of the seller; |
27
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jobs or property of the debtors found within portfolios-with
our business model, this is of particular importance as debtors with jobs
or property are more likely to repay their obligation and conversely,
debtors without jobs or property are less likely to repay their obligation; and |
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the ability to obtain customer statements from the original issuer. |
We will obtain and utilize as appropriate input including, but not limited to,
monthly collection projections and liquidation rates, from our third party collection
agencies and attorneys, as further evidentiary matter, to assist us in developing
collection strategies and in modeling the expected cash flows for a given portfolio.
We acquire accounts that have experienced deterioration of credit quality between
origination and the date of our acquisition of the accounts. The amount paid for a
portfolio of accounts reflects our determination that it is probable we will be unable to
collect all amounts due according to the portfolio of accounts contractual terms. We
consider the expected payments and estimate the amount and timing of undiscounted
expected principal, interest and other cash flows for each acquired portfolio coupled
with expected cash flows from accounts available for sales. The excess of this amount
over the cost of the portfolio, representing the excess of the accounts cash flows
expected to be collected over the amount paid, is accreted into income recognized on
finance receivables over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain distressed consumer
receivable portfolios at a significant discount to the amount actually owed by underlying
debtors. We acquire these portfolios only after both qualitative and quantitative
analyses of the underlying receivables are performed and a calculated purchase price is
paid so that we believe our estimated cash flow offers us an adequate return on our
costs, including servicing expenses. Additionally, when considering portfolio purchases
of accounts, or portfolios from issuers from whom we have little or limited experience,
we have the added benefit of soliciting our third party collection agencies and attorneys
for their input on liquidation rates and, at times, incorporate such input into the price
we offer for a given portfolio and the estimates we use for our expected cash flows.
As a result of the recent and current challenging economic environment and the
impact it has had on the collections, for the non medical account portfolio purchases
acquired since the beginning of fiscal year 2009, we have extended our time frame of the
expectation of recovering 100% of our invested capital to within a 24-29 month period
from an 18-28 month period, and the expectation of recovering 130-140% of invested
capital to a period of seven years, which is an increase from the previous five year
expectation. The medical accounts have a shorter three year collection curve based on the
nature of these accounts. We routinely monitor these expectations against the actual cash
flows and, in the event the cash flows are below our expectations and we believe there
are no reasons relating to mere timing differences or explainable delays (such as can
occur particularly when the court system is involved) for the reduced collections, an
impairment would be recorded as a provision for credit losses. Conversely, in the event
the cash flows are in excess of our expectations and the reason is due to timing, we
would defer the excess collection as deferred revenue.
We use the cost recovery method when collections on a particular pool of accounts
cannot be reasonably predicted. Under the cost recovery method, no income is recognized
until the cost of the portfolio has been fully recovered. A pool can become fully
amortized (zero carrying balance on the balance sheet) while still generating cash
collections. In this case, all cash collections are recognized as revenue when received.
28
Results of Operations
The six-month period ended March 31, 2011, compared to the six-month period ended
March 31, 2010
Finance income. For the six month period ended March 31, 2011, finance income
decreased $0.3 million or 1.2% to $21.9 million from $22.2 million for the six month
period ended March 31, 2010. Finance income has decreased primarily due to the lower
level of portfolio purchases and, as a result, the increased percentage of our portfolio
balances are in the later stages of their yield curves. The Company purchased $13.7
million in face value of new portfolios at a cost of $5.0 million in the first six months
of fiscal year 2011 as compared to purchased $3.3 million in face value at a cost of
$971,000, in the same prior year period.
During the first six months of fiscal year 2011, gross collections decreased 20.0%
to $67.0 million from $83.8 million for the six months ended March 31, 2010, reflecting
the lower level of purchases, the age of our portfolios and the slow down in the economy.
Commissions and fees associated with gross collections from our third party collection
agencies and attorneys decreased $4.7 million, or 16.3% for the six months ended March
31, 2011 as compared to the same period in the prior year and averaged 35.8% of
collections for the six months ended March 31, 2011 as compared to 34.2% in the same
prior year period. Net collections decreased 21.9% to $43.0 million from $55.1 million
for the six months ended March 31, 2010. Income recognized from fully amortized
portfolios (zero based revenue) was $17.8 million and $16.4 million for the six months
ended March 31, 2011 and 2010, respectively.
Other income. Other income of $176,000 and $98,000 for the six months ended March
31, 2011 and 2010, respectively, includes interest income and service fee income.
General and administrative expenses. During the six months ended March 31, 2011,
general and administrative expenses increased $229 thousand, or 2% to $11.1 million from
$10.9 million for the six months ended March 31, 2010. The slight increase in general
and administrative expenses is attributable to, among other items, the increase in the
non-cash expense of stock based compensation expense, and postage expense as a mailing
campaign urging debtors to utilize their tax refunds to pay down their debt was utilized,
offset by lower professional fees.
Interest expense. During the six month period ended March 31, 2011, interest expense
decreased $.7 million to $1.6 million or 31% from $2.3 million in the same prior year
period. The decrease in interest expense is primarily the result of a reduction in the
average loan balance from $104.7 million for the six-month period ended March 31, 2010 to
$80.3 million for the same current year period, as we continue our program of reducing
debt.
Impairment.
An impairment of $49,000 was recorded in the first quarter of fiscal
year 2011 as one portfolio was adjusted to its net realizable value. There were no
impairments recorded during the six months ended March 31, 2010.
Income
tax expense. Income tax expense, consisting of federal and state income
taxes, was $3.8 million for the six months ended March 31, 2011, as compared to income
tax expense of $3.7 million for the comparable 2010 period.
Net
income. For the six months ended March 31, 2011, net income was $5.5 million, as
compared to net income of $5.4 million for the six month period ended March 31, 2010.
The three-month period ended March 31, 2011, compared to the three-month period ended
March 31, 2010
Finance income. For the three month period ended March 31, 2011, finance income of
$11.1 million was flat as compared to the same three month period of the prior year.
Although portfolio purchases have been limited and has produced lower finance income,
this lower level of finance income was offset by increased zero based income. The Company
purchased $6.1 million in face value of new portfolios at a cost of $2.1 million in the
second quarter of fiscal year 2011 as compared to the purchase of portfolios with a face
value of $33.1 million at a cost of $971,000 in the same prior year period.
During the second quarter of fiscal year 2010, gross collections decreased 16.0% to
$33.6 million from $40.0 million for the three months ended March 31, 2010. Commissions
and fees associated with gross collections from our third party collection agencies and
attorneys decreased $2.7 million, or 18.4%, for the three months ended March 31, 2011 as
compared to the same period in the prior year and averaged 34.9% of collections during
the three-month period ended March 31, 2011. Net collections decreased by 14.7% to $21.9
million from $25.7 million for the three months ended March 31, 2010. Income recognized
from fully amortized portfolios (zero based revenue) was $9.0 million and $8.3 million
for the three months ended March 31, 2011 and 2010, respectively.
Other income. Other income of $97,000 and $19,000 for the three months ended March
31, 2011 and 2010, respectively, includes interest income and service fee income.
29
General and administrative expenses. During the three-month period ended March 31,
2011, general and administrative expenses increased $377 thousand or 7% to $5.7 million
from $5.3 million for the three months ended March 31, 2010. The increase is primarily
the result of non-cash stock based compensation and postage expense substantially offset
by lower professional fees.
Interest expense. During the three-month period ended March 31, 2011, interest
expense was $739 thousand compared to $1.1 million in the same period in the prior year.
The decrease in interest expense is primarily the result the decrease in the average loan
balance from $98.7 million for the three-month period ended March 31, 2010 to $77.9
million for the same current year period as we continue our program of reducing debt.
Impairments. An impairment of $49,000 was recorded in the second quarter of fiscal
year 2011 as one portfolio was adjusted to its net realizable value. There were no
impairments charged during the same period of the prior year.
Income tax expense. Income tax expense was $4.8 million for both three month periods
ended March 31, 2011 and 2010.
Net income. For both quarters ended March 31, 2011 and 2010, net income was $2.9
million.
Liquidity and Capital Resources
Our primary source of cash from operations is collections on the receivable
portfolios we have acquired. Our primary uses of cash include repayments of debt, our
purchases of consumer receivable portfolios, interest payments, costs involved in the
collections of consumer receivables, taxes and dividends, if approved. In the past, we
relied significantly upon our lenders to provide the funds necessary for the purchase of
consumer receivables acquired for liquidation.
Receivables Financing Agreement
In March 2007, Palisades XVI entered into a receivables financing agreement (the
Receivables Financing Agreement) with the Bank of Montreal (BMO), as amended in July
2007, December 2007, May 2008, February 2009 and October 2010 in order to finance the
Portfolio Purchase. The Portfolio Purchase had a purchase price of $300 million (plus
20% of net payments after Palisades XVI recovers 150% of its purchase price plus cost of
funds, which recovery has not yet occurred). Prior to the modifications, discussed below,
the debt was full recourse only to Palisades XVI and accrued interest at the rate of
approximately 170 basis points over LIBOR. The original term of the agreement was three
years. This term was extended by each of the Second, Third Fourth and Fifth Amendments to
the Receivables Financing Agreement as discussed below. Proceeds received as a result of
the net collections from the Portfolio Purchase are applied to interest and principal of
the underlying loan. The Portfolio Purchase is serviced by Palisades Collection LLC, a
wholly owned subsidiary of the Company, which has engaged unaffiliated subservicers for a
majority of the Portfolio Purchase.
Since the inception of the Receivables Financing Agreement amendments have been
signed to revise various terms of the Receivables Financing Agreement. The following is a
summary of the material amendments:
Second Amendment Receivables Financing Agreement, dated December 27, 2007 revised
the amortization schedule of the loan from 25 months to approximately 31 months. BMO
charged Palisades XVI a fee of $475,000 which was paid on January 10, 2008. The fee was
capitalized and is being amortized over the remaining life of the Receivables Financing
Agreement.
Third Amendment Receivables Financing Agreement, dated May 19, 2008 extended the
payments of the loan through December 2010. The lender also increased the interest rate
from 170 basis points over LIBOR to approximately 320 basis points over LIBOR, subject to
automatic reduction in the future if additional capital contributions are made by the
parent of Palisades XVI.
Fourth Amendment Receivables Financing Agreement, dated February 20, 2009, among
other things, (i) lowered the collection rate minimum to $1 million per month (plus
interest and fees) as an average for each period of three consecutive months, (ii)
provided for an automatic extension of the maturity date from April 30, 2011 to April 30,
2012 should the outstanding balance be reduced to $25 million or less by April 30, 2011
and (iii) permanently waived the previous termination events. The interest rate remained
unchanged at approximately 320 basis points over LIBOR, subject to automatic reduction in
the future should certain collection milestones be attained.
As additional credit support for repayment by Palisades XVI of its obligations under
the Receivables Financing Agreement and as an inducement for BMO to enter into the Fourth
Amendment, the Company provided BMO a limited recourse, subordinated guaranty, secured by
the assets of the Company, in an amount not to exceed $8.0 million plus reasonable costs
of enforcement and collection. Under the terms of the guaranty, BMO cannot exercise any
recourse against the Company until the earlier of (i) five years from the date of the
Fourth Amendment and (ii) the termination of the Companys existing senior lending
facility or any successor senior facility.
30
On October 26, 2010, Palisades XVI entered into the Fifth Amendment to the
Receivables Financing Agreement (the Fifth Amendment). The effective date of the Fifth
Amendment was October 14, 2010. The Fifth Amendment (i) extended the expiration date of
the Receivables Financing Agreement to April 14, 2014; (ii) reduced the minimum monthly
payment to $750,000; (iii) accelerated the Companys guaranty credit enhancement of
$8,700,000, which was paid upon the execution of the Fifth Amendment; (iv) eliminated the
Companys limited guaranty of repayment of the loans outstanding by Palisades XVI; and
(v) revised the definition of Borrowing Base Deficit, as defined in the Receivables
Financing Agreement, to mean the excess, if any, of 105% of the loans outstanding over
the borrowing base.
In connection with the Fifth Amendment, on October 26, 2010, the Company entered
into the Omnibus Termination Agreement (the Termination Agreement). The Termination
Agreement provides that, upon payment of $8,700,000 to the Lender and execution of the
Fifth Amendment, the following agreements, which were entered into by the Company and
certain of its affiliated entities in connection with the guaranty of the outstanding
loans under the Receivables Financing Agreement, were terminated: (i) the Subordinated
Limited Recourse Guaranty Agreement, dated February 20, 2009, among the Company, its
subsidiaries and BMO; (ii) the Subordinated Guarantor Security Agreement, dated February
20, 2009; (iii) the Limited Recourse Guaranty Agreement, dated as of February 20, 2009;
and (iv) the Intercreditor Agreement, dated February 20, 2009. The Termination Agreement
was effective as of October 14, 2010.
The aggregate minimum repayment obligations required under the Fifth Amendment,
including interest and principal, for fiscal years ending September 30, 2011 through
2013, is $9 million annually, and, for the fiscal year ending September 30, 2014, is
approximately $5 million (seven months).
On March 31, 2011 and 2010, the outstanding balance on this loan was approximately
$76.9 million and $96.5 million, respectively. The applicable interest rate at March 31,
2011 and 2010 was 3.76% and 3.73%, respectively. The average interest rate of the
Receivable Financing Agreement was 3.77% and 3.75% for the six-month periods ended March
31, 2011 and 2010, respectively. The Company was in compliance with all covenants that
support the Receivables Financing Agreement at March 31, 2011.
Bank Leumi Credit Agreement
On December 14, 2009, Asta Funding, Inc. and its subsidiaries other than Palisades
XVI, entered into a revolving credit agreement with Bank Leumi (the Leumi Credit
Agreement), which permitted maximum principal advances of up to $6 million. This
agreement expired on December 31, 2010. The interest rate was a floating rate equal to
the Bank Leumi Reference Rate plus 2%, with a floor of 4.5%. The loan was secured by
collateral consisting of all of the assets of the Company other than those of Palisades
XVI. In addition, other collateral for the loan consisted of a pledge of cash and
securities by GMS Family Investors, LLC, an investment company owned by members of the
Stern family. There were no financial covenant restrictions for the Leumi Credit
Agreement. On December 14, 2009, approximately $3.6 million of the Bank Leumi credit line
was drawn and used to reduce to zero the remaining balance on the Companys previous Credit Facility. The balance outstanding on the Leumi Credit Agreement
was reduced to zero on January 14, 2010 and remained at zero until its expiration on
December 31, 2010. Currently, the Company does not have a new agreement in place, and
there can be no assurance that a new agreement will be reached, but the Company has
maintained ongoing discussions with Bank Leumi regarding entering into a new and more
substantial credit agreement.
Subordinated Debt Related Party
On April 29, 2008, the Company obtained a subordinated loan pursuant to a
subordinated promissory note from an entity (the Family Entity). The Family Entity is a
greater than 5% shareholder of the Company beneficially owned and controlled by Arthur
Stern, a director of the Company, Gary Stern, the President, Chairman and Chief Executive
Officer of the Company, and members of their families. The loan was in the aggregate
principal amount of approximately $8.2 million, accrued interest at a rate of 6.25% per
annum, and was payable interest only each quarter until its maturity date of January 9,
2010,, subject to prior repayment in full of the IDB Credit Facility. The subordinated
loan was incurred by us to resolve certain issues related to the activities of one of the
subservicers utilized by Palisades Collection LLC under the Receivables Financing
Agreement. Proceeds from the subordinated loan were used initially to further
collateralize our previous Credit Facility and to reduce the balance due on that facility
as of May 31, 2008. In December 2009, the subordinated debt-related party maturity date
was extended through December 31, 2010. In addition, the interest rate was changed to
10% per annum effective January 2010. Approximately $3.8 million of the loan was repaid
in fiscal year 2010, with the remaining $4.4 million repaid during the first quarter of
fiscal year 2011, including the final payment of $2.4 million on December 30, 2010,
reducing the balance to zero.
31
Cash Flow
As of March 31, 2011, our cash increased $7.6 million to $91.8 million, up from
$84.2 million at September 30, 2010. The increase in cash was primarily the result of
paying off the senior debt earlier in the second quarter and reduced portfolio purchases.
Net cash provided by operating activities was $10.4 million during the six month
period ended March 31, 2011, compared to $9.4 million for the six months ended March 31,
2010. The increase in net cash provided by operating activities is primarily attributable
to increased net income (excluding impairments, a non-cash item), and lower income taxes
payable, partially offset by higher deferred income taxes, during the six months ended
March 31, 2011 compared to the same prior year period. Net cash provided by investing
activity was $15.9 million during the six months ended March 31, 2011 compared to $29.6
million provided by investing activities for the six months ended March 31, 2010. The
reduction in net cash provided by investing activity is a reflection of lower
collections, largely attributable to reduced purchase levels compared to recent years and
a continued difficult collection environment. Net cash used in financing activities
decreased to $18.7 million for the six months ended March 31, 2011 from $28.8 million for
the same prior year period. The decrease reflects the continuation of our plan to reduce
debt.
Our cash requirements have been and will continue to be significant and have, in the past,
depended on external financing to acquire consumer receivables and operate the business.
Significant requirements include repayments under our debt facilities, purchase of consumer
receivable portfolios, interest payments, costs involved in the collections of consumer
receivables, and taxes. In addition, dividends are paid if approved by the Board of Directors.
Acquisitions have been financed primarily through cash flows from operating activities and a
credit facility. We believe we will be less dependent on a credit facility in the short-term as
our cash flow from operations will be sufficient to purchase portfolios and operate the
business. However, as the collection environment remains challenging, we may seek additional
financing.
We are cognizant of the current market fundamentals in the debt purchase and company
acquisition markets which, because of significant supply and tight capital availability, could
result in increased buying opportunities. Accordingly, we filed a $100 million shelf
registration statement with the SEC which was declared effective during the third quarter of
2010. As of the date of this report, we have not issued any securities under this registration
statement. The outcome of any future transaction(s) is subject to market conditions. In
addition, due to these opportunities, we continue to work on a new and expanded loan facility.
Our business model affords us the ability to sell accounts on an opportunistic basis;
however, account sales have been immaterial in recent quarters.
The following tables summarize the changes in the balance sheet of the investment in
consumer receivables acquired for liquidation during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2011 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
46,348,000 |
|
|
$ |
100,683,000 |
|
|
$ |
147,031,000 |
|
Acquisitions of receivable portfolios, net |
|
|
4,530,000 |
|
|
|
473,000 |
|
|
|
5,003,000 |
|
Net cash collections from collection of
consumer receivables acquired for
liquidation |
|
|
(32,281,000 |
) |
|
|
(10,479,000 |
) |
|
|
(42,760,000 |
) |
Net cash collections represented by account
sales of consumer receivables acquired for
liquidation |
|
|
(243,000 |
) |
|
|
|
|
|
|
(243,000 |
) |
Impairments |
|
|
(49,000 |
) |
|
|
|
|
|
|
(49,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
26,000 |
|
|
|
26,000 |
|
Finance income recognized (1) |
|
|
20,509,000 |
|
|
|
1,387,000 |
|
|
|
21,896,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
38,814,000 |
|
|
$ |
92,090,000 |
|
|
$ |
130,904,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
63.1 |
% |
|
|
13.2 |
% |
|
|
50.9 |
% |
|
|
|
(1) |
|
Includes approximately $17.8 million derived from fully amortized portfolios. |
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2010 |
|
|
|
Accrual |
|
|
Cash |
|
|
|
|
|
|
Basis |
|
|
Basis |
|
|
|
|
|
|
Portfolios |
|
|
Portfolios |
|
|
Total |
|
Balance, beginning of period |
|
$ |
70,650,000 |
|
|
$ |
137,611,000 |
|
|
$ |
208,261,000 |
|
Acquisitions of receivable portfolios, net |
|
|
3,043,000 |
|
|
|
228,000 |
|
|
|
3,271,000 |
|
Net cash collections from collection of
consumer receivables acquired for
liquidation |
|
|
(37,976,000 |
) |
|
|
(14,370,000 |
) |
|
|
(52,346,000 |
) |
Net cash collections represented by account
sales of consumer receivables acquired for
liquidation |
|
|
(2,740,000 |
) |
|
|
(4,000 |
) |
|
|
(2,744,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
17,000 |
|
|
|
17,000 |
|
Finance income recognized (1) |
|
|
21,398,000 |
|
|
|
757,000 |
|
|
|
22,155,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
54,375,000 |
|
|
$ |
124,239,000 |
|
|
$ |
178,614,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
52.6 |
% |
|
|
5.3 |
% |
|
|
40.2 |
% |
|
|
|
(1) |
|
Includes approximately $16.4 million derived from fully amortized portfolios. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2011 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
43,338,000 |
|
|
$ |
96,241,000 |
|
|
$ |
139,579,000 |
|
Acquisitions of receivable portfolios, net |
|
|
1,871,000 |
|
|
|
249,000 |
|
|
|
2,120,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(16,702,000 |
) |
|
|
(5,108,000 |
) |
|
|
(21,810,000 |
) |
Net cash collections represented by account
sales of consumer receivables acquired for
liquidation |
|
|
(88,000 |
) |
|
|
|
|
|
|
(88,000 |
) |
Impairments |
|
|
(49,000 |
) |
|
|
|
|
|
|
(49,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
15,000 |
|
|
|
15,000 |
|
Finance income recognized (1) |
|
|
10,444,000 |
|
|
|
693,000 |
|
|
|
11,137,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
38,814,000 |
|
|
$ |
92,090,000 |
|
|
$ |
130,904,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
62.2 |
% |
|
|
13.6 |
% |
|
|
50.9 |
% |
|
|
|
(1) |
|
Includes approximately $9.0 million derived from fully amortized portfolios. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2010 |
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
Interest |
|
|
Recovery |
|
|
|
|
|
|
Method |
|
|
Method |
|
|
Total |
|
Balance, beginning of period |
|
$ |
61,776,000 |
|
|
$ |
130,350,000 |
|
|
$ |
192,126,000 |
|
Acquisitions of receivable portfolios, net |
|
|
895,000 |
|
|
|
76,000 |
|
|
|
971,000 |
|
Net cash collections from collections of
consumer receivables acquired for
liquidation |
|
|
(18,929,000 |
) |
|
|
(6,584,000 |
) |
|
|
(25,513,000 |
) |
Net cash collections represented by account
sales of consumer receivables acquired for
liquidation |
|
|
(147,000 |
) |
|
|
|
|
|
|
(147,000 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
(4,000 |
) |
|
|
(4,000 |
) |
Finance income recognized (1) |
|
|
10,780,000 |
|
|
|
401,000 |
|
|
|
11,181,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
54,375,000 |
|
|
$ |
124,239,000 |
|
|
$ |
178,614,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections |
|
|
56.5 |
% |
|
|
6.1 |
% |
|
|
43.6 |
% |
|
|
|
(1) |
|
Includes approximately $8.3 million derived from fully amortized portfolios. |
33
Off Balance Sheet Arrangements
As of March 31, 2011, we did not have any relationships with unconsolidated entities or
financial partners, such as entities often referred to as structured finance or special purpose
entities, established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged in such
relationships.
Additional Supplementary Information:
We do not anticipate collecting the majority of the purchased principal amounts.
Accordingly, the difference between the carrying value of the portfolios and the gross
receivables is not indicative of future revenues from these accounts acquired for
liquidation. Since we purchased these accounts at significant discounts, we anticipate
collecting only a small portion of the face amounts. During the six months ended March
31, 2011, we purchased portfolios with a face value of $13.7 million for an aggregate
purchase price of $5.0 million.
For additional information regarding our methods of accounting for our investment in
finance receivables, the qualitative and quantitative factors we use to determine
estimated cash flows, and our performance expectations of our portfolios, see Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies above.
Collections Represented by Account Sales
|
|
|
|
|
|
|
|
|
|
|
Collections |
|
|
|
|
|
|
Represented |
|
|
Finance |
|
|
|
By Account |
|
|
Income |
|
Period |
|
Sales |
|
|
Earned |
|
Six months ended March 31, 2011 |
|
$ |
243,000 |
|
|
$ |
91,000 |
|
Three months ended March 31, 2011 |
|
$ |
88,000 |
|
|
$ |
36,000 |
|
Six months ended March 31, 2010 |
|
$ |
2,744,000 |
|
|
$ |
948,000 |
|
Three months ended March 31, 2010 |
|
$ |
147,000 |
|
|
$ |
52,000 |
|
34
Collections Represented by Account Sales
Portfolio Performance (1)
(Interest method portfolios only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
Total estimated |
|
|
|
|
|
|
|
Collections |
|
|
Estimated |
|
|
Total |
|
|
Collections as a |
|
|
|
Purchase |
|
|
Including Cash |
|
|
Remaining |
|
|
Estimated |
|
|
Percentage of |
|
Purchase Period |
|
Price (2) |
|
|
Sales (3) |
|
|
Collections (4) |
|
|
Collections (5) |
|
|
Purchase Price |
|
2001 |
|
$ |
65,120,000 |
|
|
$ |
105,591,000 |
|
|
|
|
|
|
$ |
105,591,000 |
|
|
|
162 |
% |
2002 |
|
|
36,557,000 |
|
|
|
48,197,000 |
|
|
|
|
|
|
|
48,197,000 |
|
|
|
132 |
% |
2003 |
|
|
115,626,000 |
|
|
|
216,909,000 |
|
|
$ |
236,000 |
|
|
|
217,145,000 |
|
|
|
188 |
% |
2004 |
|
|
103,743,000 |
|
|
|
186,266,000 |
|
|
|
165,000 |
|
|
|
186,431,000 |
|
|
|
180 |
% |
2005 |
|
|
126,023,000 |
|
|
|
216,031,000 |
|
|
|
4,080,000 |
|
|
|
220,111,000 |
|
|
|
175 |
% |
2006 |
|
|
163,392,000 |
|
|
|
252,834,000 |
|
|
|
8,671,000 |
|
|
|
261,505,000 |
|
|
|
160 |
% |
2007 |
|
|
109,235,000 |
|
|
|
95,165,000 |
|
|
|
20,506,000 |
|
|
|
115,671,000 |
|
|
|
106 |
% |
2008 |
|
|
26,626,000 |
|
|
|
42,399,000 |
|
|
|
775,000 |
|
|
|
43,174,000 |
|
|
|
162 |
% |
2009 |
|
|
19,127,000 |
|
|
|
24,733,000 |
|
|
|
6,847,000 |
|
|
|
31,580,000 |
|
|
|
165 |
% |
2010 |
|
|
7,698,000 |
|
|
|
7,847,000 |
|
|
|
4,437,000 |
|
|
|
12,284,000 |
|
|
|
160 |
% |
2011 |
|
|
4,530,000 |
|
|
|
451,000 |
|
|
|
5,439,000 |
|
|
|
5,890,000 |
|
|
|
130 |
% |
|
|
|
(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. |
Recent Accounting Pronouncements
In December 2009, the Financial Accounting Standards Board (FASB) issued ASU 2009-17,
Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities. ASU 2009-17 generally represents a revision to
former FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable
Interest Entities, and changes how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar rights) should
be consolidated. ASU 2009-17 also requires a reporting entity to provide additional
disclosures about its involvement with variable interest entities and any significant
changes in risk exposure due to that involvement. ASU 2009-17 is effective for fiscal
years beginning after November 15, 2009 and for interim periods within the first annual
reporting period. The Company adopted ASU 2009-17 as of October 1, 2010, which did not
have a significant effect on its financial statements.
35
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes and changes in corporate tax rates. A
material change in these rates could adversely affect our operating results and cash
flows. At March 31, 2011, our Receivable Financing Agreement, which is variable debt, had
an outstanding balance of $76.9 million. A 25 basis-point increase in interest rates
would have increased our interest expense for the six month period ended March 31, 2011
by approximately $100,000 based on the average debt outstanding during the period. We do
not currently invest in derivative financial or commodity instruments.
|
|
|
Item 4. |
|
Controls and Procedures |
a. Disclosure Controls and Procedures.
As of March 31, 2011, we carried out an evaluation, with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures pursuant to Securities Exchange
Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures as of March 31,
2011 are effective to provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the Securities Exchange Act
is recorded, processed, summarized and reported, within the time periods specified in the
SECs rules and forms and is accumulated and communicated to our management, including
our principal executive officers and our principal financial officer, or persons
performing similar functions, as appropriate, to allow timely decisions regarding
required disclosure.
b. Changes in Internal Controls Over Financial Reporting.
There have been no changes in our internal controls over financial reporting that
occurred during our fiscal quarter ended March 31, 2011 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
36
PART II. OTHER INFORMATION
(a) Exhibits
|
|
|
|
|
|
31.1 |
|
|
Certification of the Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Registrants Chief Financial Officer, Robert J.
Michel, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of the Registrants Chief Financial Officer, Robert J.
Michel, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
37
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: May 10, 2011 |
By: |
/s/ Gary Stern
|
|
|
|
Gary Stern, Chairman, President, |
|
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: May 10, 2011 |
By: |
/s/ Robert J. Michel
|
|
|
|
Robert J. Michel, Chief Financial Officer |
|
|
|
(Principal Financial Officer and
Principal Accounting Officer) |
|
|
38
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
31.1 |
|
|
Certification of the Registrants Chief Executive Officer,
Gary Stern, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Registrants Chief Financial Officer,
Robert J. Michel, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the Registrants Chief Executive Officer,
Gary Stern, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of the Registrants Chief Financial Officer,
Robert J. Michel, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
39