10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 0-26906
ASTA FUNDING, INC.
(Exact Name of Registrant
Specified in its Charter)
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Delaware
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22-3388607
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.
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210 Sylvan Avenue, Englewood
Cliffs, NJ
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07632
(Zip Code
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(Address of principal executive
offices)
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Issuers telephone number, including area code:
(201) 567-5648
Securities registered pursuant to Section 12(b) of the
Exchange Act: None
Securities registered pursuant to Section 12(g) of the
Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act Yes o No þ
Indicate by check mark whether the
registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in
Rule 12b-2
of the Exchange Act
Large
accelerated
filer o
Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of voting and nonvoting common equity
held by non-affiliates of the registrant was approximately
$456,419,000, as of the last business day of the
registrants most recently completed second fiscal quarter.
As of December 26, 2007, the registrant had
13,918,158 shares of Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The information called for by Part III of this
Form 10-K
is incorporated by reference from the Companys Proxy
Statement to be filed with the Commission on or before
January 28, 2008.
FORM 10-K
TABLE OF CONTENTS
2
Caution
Regarding Forward Looking Statements
This Annual Report on
Form 10-K
contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements typically are identified by use of
terms such as may, will,
should, plan, expect,
anticipate, estimate, and similar words,
although some forward-looking statements are expressed
differently. Forward looking statements represent our judgment
regarding future events, but we can give no assurance that such
judgments will prove to be correct. Such statements are subject
to risks and uncertainties that could cause actual results to
differ materially from those projected in such forward-looking
statements. Certain factors which could materially affect our
results and our future performance are described below under
Risk Factors and Critical Accounting
Policies in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations. Forward-looking statements are inherently
uncertain as they are based on current expectations and
assumptions concerning future events and are subject to numerous
known and unknown risks and uncertainties. We caution you not to
place undue reliance on these forward-looking statements, which
are only predictions and speak only as of the date of this
report. Except as required by law, we undertake no obligation to
update or publicly announce revisions to any forward-looking
statements to reflect future events or developments. Unless the
context otherwise requires, the terms we,
us, the Company, or our as
used herein refer to Asta Funding, Inc. and our subsidiaries.
3
Overview
The Company acquires, manages, collects and services portfolios
of consumer receivables for its own account. 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.
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We acquire these consumer receivable portfolios at a significant
discount to the total amounts actually owed by the debtors. We
acquire these portfolios after a qualitative and quantitative
analysis of the underlying receivables and calculate the
purchase price so that our estimated cash flow offers us an
adequate return on our investment after 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 creditors and others through
privately negotiated direct sales, brokered transactions and
auctions in which sellers of receivables seek bids from several
pre-qualified debt purchasers. These receivables consist
primarily of MasterCard(R), Visa(R), private label credit card
accounts, and telecommunication charge-offs, among other types
of receivables. We pursue new acquisitions of consumer
receivable portfolios from originators of consumer debt, on an
ongoing basis through:
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our relationships with industry participants, collection
agencies, investors and our financing sources;
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brokers who specialize in the sale of consumer receivable
portfolios; and
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other sources.
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Our objective is to maximize our return on investment in
acquired consumer receivable portfolios. As a result, before
acquiring a portfolio, we analyze the portfolio to determine how
to best maximize collections in a cost efficient manner and
decide whether to use our internal servicing and collection
department, third-party collection agencies and attorneys, or a
combination of all three options.
If we elect to outsource the servicing of receivables, our
management typically determines the appropriate third-party
collection agencies and attorneys based on the type of
receivables purchased. Once a group of receivables is sent to
third-party collection agencies and attorneys, our management
actively monitors and reviews the third-party collection
agencies and attorneys performance on an ongoing
basis. Based on portfolio performance considerations, our
management either will move certain receivables from one
third-party collection agency or attorney to another or to our
internal servicing department if it anticipates that this will
result in an increase in collections or it will sell the
portfolio. Additionally, we have a collection center, which
currently employs approximately 65 staff, including senior
management and has the capacity for more than
100 employees. These employees assist us in monitoring our
third-party collection agencies and attorneys, and give us
greater flexibility for servicing a percentage of our consumer
receivable portfolios in-house.
We acquire portfolios through a combination of internally
generated cash flow and bank debt. In the past, on certain large
portfolio acquisitions we have partnered with a large financial
institution in which we shared in the finance income generated
from the collections on the portfolios.
For the years ended September 30, 2007, 2006 and 2005, our
finance income was approximately $138.4 million,
$101.0 million and $69.5 million, respectively, and
our net income was approximately $52.9 million,
$45.8 million and $31.0 million, respectively. During
these same years our net cash collections were approximately
$281.8 million, $214.5 million and
$168.9 million, respectively.
4
We were formed in 1994 as an affiliate of Asta Group,
Incorporated, an entity owned by Arthur Stern, our Chairman of
the Board and an Executive Vice President, Gary Stern, our
President and Chief Executive Officer, and other members of the
Stern family, to purchase, at a small discount to face value,
retail installment sales contracts secured by motor vehicles. We
became a public company in November 1995. In 1999, we decided to
capitalize on our managements more than 40 years of
experience and expertise in acquiring and managing consumer
receivable portfolios for Asta Group. As a result, we ceased
purchasing automobile contracts and, with the assistance and
financial support of Asta Group and a partner, purchased our
first significant consumer receivable portfolio. Since then,
Asta Group ceased acquiring consumer receivable portfolios and,
accordingly, does not compete with us.
Industry
Overview
The purchasing, servicing and collection of charged-off,
semi-performing and performing consumer receivables is a growing
industry that is driven by:
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increasing levels of consumer debt;
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increasing defaults of the underlying receivables; and
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increasing utilization of third-party providers to collect such
receivables.
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We believe that as a result of the difficulty in collecting
these receivables and the desire of originating institutions to
focus on their core businesses and to generate revenue from
these receivables, originating institutions are increasingly
electing to sell these portfolios.
Strategy
Our primary objective is to utilize our managements
experience and expertise to effectively grow our business by
identifying, evaluating, pricing and acquiring consumer
receivable portfolios and maximizing collections of such
receivables in a cost efficient manner. Our strategy includes:
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managing the collection and servicing of our consumer receivable
portfolios, including outsourcing a majority of those activities
to maintain low fixed overhead;
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selling accounts on an opportunistic basis, generally when our
efforts have been exhausted through traditional collecting
methods, when pricing is at our indifference point, or when we
can capitalize on pricing during times when we feel the pricing
environment is high;
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expanding financial flexibility through increased capital and
lines of credit;
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capitalizing on our strategic relationships to identify and
acquire consumer receivable portfolios; and
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expanding our business through the purchase of consumer
receivables from new sources and consisting of different asset
classes.
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We believe that as a result of our managements experience
and expertise, and the fragmented yet growing market in which we
operate, we are well-positioned to successfully implement our
strategy.
We are a Delaware corporation whose principal executive offices
are located at 210 Sylvan Avenue, Englewood Cliffs, New Jersey
07632. We were incorporated in New Jersey on July 7, 1994
and were reincorporated in Delaware on October 12, 1995 as
a result of a merger with a Delaware corporation.
Consumer
Receivables Business
Receivables
Purchase Program
We purchase bulk receivable portfolios that include charged-off
receivables, semi-performing receivables and performing
receivables. These receivables consist primarily of
MasterCard(R), Visa(R), private label credit card accounts, and
telecom receivables, among other types of receivables.
From time to time, we may acquire directly, and indirectly
through the consumer receivable portfolios that we acquire,
secured consumer asset portfolios.
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We identify potential portfolio acquisitions on an ongoing basis
through:
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our relationships with industry participants, collection
agencies, investors and our financing sources;
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brokers who specialize in the sale of consumer receivable
portfolios; and
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other sources.
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Historically, the purchase prices of the consumer receivable
portfolios we have acquired have ranged from less than $500,000
to approximately $15,000,000, however we acquired one portfolio
in March 2007 for $300 million. As a part of our strategy
to acquire consumer receivable portfolios, we have, from time to
time, entered into, and may continue to enter into,
participation and profit sharing agreements with our sources of
financing and our third-party collection agencies and attorneys.
These arrangements may take the form of a joint bid, with one of
our third-party collection agencies and attorneys or financing
source who assists in the acquisition of a portfolio and
provides us with more favorable non-recourse financing terms or
a discounted servicing commission.
We utilize our relationships with brokers, third-party
collection agencies and attorneys, and sellers of portfolios to
locate portfolios for purchase. Our senior management is
responsible for:
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coordinating due diligence, including, in some cases,
on-site
visits to the sellers office;
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stratifying and analyzing the portfolio characteristics;
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valuing the portfolio;
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preparing bid proposals;
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negotiating pricing and terms;
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negotiating and executing a purchase contract;
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closing the purchase; and
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coordinating the receipt of account documentation for the
acquired portfolios.
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The seller or broker typically supplies us with either a sample
listing or the actual portfolio being sold through an electronic
form of media. We analyze each consumer receivable portfolio to
determine if it meets our purchasing criteria. We may then
prepare a bid or negotiate a purchase price. If a purchase is
completed, management monitors the portfolios performance
and uses this information in determining future buying criteria
and pricing.
After determining that an investment will yield an adequate
return on our acquisition cost after servicing fees, 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 days 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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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 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.
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We will obtain and utilize as appropriate input 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.
Once a receivable portfolio has been identified for potential
purchase, we prepare various analyses based on extracting
customer level data from external sources, other than the
issuer, to analyze the potential collectibility of the
portfolio. We also analyze the portfolio by comparing it to
similar portfolios previously acquired by us. In addition, we
perform qualitative analyses of other matters affecting the
value of portfolios, including a review of the delinquency,
charge off, placement and recovery policies of the originator as
well as the collection authority granted by the originator to
any third party collection agencies, and, if possible, by
reviewing their recovery efforts on the particular portfolio.
After these evaluations are completed, members of our senior
management discuss the findings, decide whether to make the
purchase and finalize the price at which we are willing to
purchase the portfolio.
We purchase most of our consumer receivable portfolios directly
from originators and other sellers including, from time to time,
our third-party collection agencies and attorneys through
privately negotiated direct sales and through auction type sales
in which sellers of receivables seek bids from several
pre-qualified debt purchasers. We also, from time to time, use
the services of brokers for sourcing consumer receivable
portfolios. In order for us to consider a potential seller as a
source of receivables, a variety of factors are considered.
Sellers must demonstrate that they have:
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adequate internal controls to detect fraud;
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the ability to provide post sale support; and
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the capacity to honor put-back and return warranty requests.
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Generally, our portfolio purchase agreements provide that we can
return certain accounts to the seller within a specified time
period. However, in some transactions, we may acquire a
portfolio with few, if any, rights to return accounts to the
seller. After acquiring a portfolio, we conduct a detailed
analysis to determine which accounts in the portfolio should be
returned to the seller. Although the terms of each portfolio
purchase agreement differ, examples of accounts that may be
returned to the seller include:
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debts paid prior to the cutoff date;
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debts in which the consumer filed bankruptcy prior to the cutoff
date;
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debts in which the consumer was deceased prior to cutoff
date; and
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fraudulent accounts.
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Significant accounts returned to sellers for the fiscal year
ended 2007 amounted to approximately $10.0 million for two
portfolio purchases. Such accounts were non-compliant accounts.
Accounts returned to sellers for fiscal years 2006 and 2005 have
been determined to be immaterial. Our purchase agreements
generally do not contain any provision for a limitation on the
number of accounts that can be returned to the seller.
We generally use third-parties to determine bankrupt and
deceased accounts, which allows us to focus our resources on
portfolio collections. Under a typical portfolio purchase
agreement, the seller refunds the portion of the purchase price
attributable to the returned accounts or delivers replacement
receivables to us. Occasionally, we will acquire a well
seasoned, or older, portfolio at a reduced price from a seller
that is unable to meet all of our purchasing criteria. When we
acquire such portfolios, the purchase price is discounted beyond
the typical discounts we receive on the portfolios we purchase
that meet our purchasing criteria.
In February 2006, we acquired VATIV Recovery LLC,
(VATIV) located in Sugar Land, Texas. VATIV Recovery
Systems LLC provides bankruptcy and deceased account servicing.
The acquisition of VATIV provides
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Asta with internal experience and proprietary systems in support
of servicing our own bankruptcy and deceased accounts, while
also affording us the opportunity to enter new markets for
acquisitions in the bankruptcy and deceased account fields.
Receivable
Servicing
Our objective is to maximize our return on investment on
acquired consumer receivable portfolios. As a result, before
acquiring a portfolio, we analyze the portfolio to determine how
to best maximize collections in a cost efficient manner and
decide whether to use our internal servicing and collection
department or third-party collection agencies and attorneys.
Therefore, if we are successful in acquiring the portfolios, we
can promptly process the receivables that were purchased and
commence the collection process. Unlike collection agencies that
typically have only a specified period of time to recover a
receivable, as the portfolio owners we have significantly more
flexibility and can establish payment programs.
Once a portfolio has been acquired, we or our third-party
collection agencies or attorneys generally download all
receivable information provided by the seller into our account
management system and reconcile certain information with the
information provided by the seller in the purchase contract. We
or our third-party collection agencies or attorneys send
notification letters to obligors of each acquired account
explaining, among other matters, our new ownership and asking
that the obligor contact us. In addition, we notify the three
major credit reporting agencies of our new ownership of the
receivables.
We presently outsource the majority of our receivable servicing
to third-party collection agencies and attorneys. Our senior
management typically determines the appropriate third-party
collection agency and attorneys based on the type of receivables
purchased. Once a group of receivables is sent to a third-party
collection agency or attorney, our management actively monitors
and reviews the third-party collection agencies and
attorneys performance on an ongoing basis. Our management
receives detailed analyses, including collection activity and
portfolio performance, from our internal servicing departments
to assist it in evaluating the results of the efforts of the
third-party collection agencies and attorneys. Based on
portfolio performance guidelines, our management will move
certain receivables from one third-party collection agency or
attorney to another, or to our internal servicing department if
it anticipates that this will result in an increase in
collections.
We have a collection center that currently employs approximately
65 experienced persons with the capacity for over
100 employees. This facility provides the majority of our
internal collection and servicing capabilities, giving us
flexibility and control over the servicing of our consumer
receivables portfolios and assists us in monitoring our
third-party collection agencies and attorneys.
We have four main internal servicing departments:
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collection/skiptrace;
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legal;
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customer service; and
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accounting.
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Collection/Skiptrace. The collection/skiptrace
department is responsible for making contact with the obligors
and collecting on our consumer receivable portfolios that are
not being serviced by third-party collection agencies and
attorneys. This department uses a friendly, customer service
approach to collect on receivables. Through the use of our
collection software and telephone system, each collector is
responsible for:
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contacting customers;
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explaining the benefits of making payment on the
obligations; and
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working with the customers to develop acceptable means to
satisfy their obligations.
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We and our third-party collection agencies and attorneys have
the flexibility to structure repayment plans that accommodate
the needs of obligors by:
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offering obligors a discount on the overall obligation; and/or
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tailoring repayment plans that provide for the payment of these
obligations as a component of the obligors monthly budget.
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We also use a series of collection letters, late payment
reminders, and settlement offers that are sent out at specific
intervals or at the request of a member of our collection
department. When the collection department cannot contact the
customer by either telephone or mail, the account is referred to
the skiptrace department.
The skiptrace department is responsible for locating and
contacting customers who could not be contacted by either the
collection or legal departments. The skiptrace employees use a
variety of public and private third-party databases to locate
customers. Once a customer is located and contact is made by a
skiptracer, the account is then referred back to the collection
or legal department for
follow-up.
The skiptrace department is also responsible for finding current
employers and locating assets of obligors when this information
is deemed necessary.
Legal. If the collection department determines
that the customer has the ability to satisfy his obligation but
our normal collection activities have not resulted in any
resolution of the customers obligations, the account is
referred to the legal department, which consists of non-lawyer
administrative staff experienced in collection work. The legal
department refers legal case proceedings to outside counsel. The
legal department also refers accounts to the skiptrace
department to obtain a current phone number, address, the
location of assets of the obligor or the identity of the
obligors employer. In addition, the legal department
communicates with the collection attorneys that we utilize
throughout the country. Over the past two and a half years, we
have employed a more aggressive legal strategy that we believe
will yield more collections over a longer period of time.
Customer Service. The customer service
department is responsible for:
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handling incoming calls from debtors and third-party collection
agencies that are responsible for collecting on our consumer
receivable portfolios;
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coordinating customer inquiries and assisting the collection
agencies in the collection process;
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handling buy-back and information requests from companies who
have purchased receivables from us;
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working with the buyers during the transition period and post
sale process; and
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handling any issues that may arise once a receivable portfolio
has been sold.
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Accounting. In addition to the customary
accounting activities, the Accounting department is responsible
for:
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making daily deposits of customer payments;
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posting these payments to the customers account;
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mailing monthly statements to customers; and
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in conjunction with the customer service department, providing
senior management with weekly and monthly receivable activity
and performance reports.
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Accounting employees also assist collection department employees
in handling customer disputes with regard to payment and balance
information. The accounting department also assists the customer
service department in the handling of buy-back requests from
companies who have purchased receivables from us. In addition,
the accounting department reviews the results of the collection
of consumer receivable portfolios that are being serviced by
third-party collection agencies and attorneys.
Collections
Represented by Account Sales
Certain collections represent account sales to other debt buyers
to help maximize revenue and cash flows. We feel that our
business model of not having a large number of collectors,
coupled with a legal strategy which is
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focused on attempting to attach liens and judgments on obligors,
allows us the flexibility to sell accounts at prices that are
attractive to us and as important, sell the less desirable
accounts within our collective portfolios. There are many
factors that contribute to the decision of which receivable to
sell and which to service, including:
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the age of the receivables;
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the status of the receivables whether paying or
non-paying; and
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the selling price.
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Collections represented by account sales for the fiscal years
ended September 30, 2007, 2006 and 2005 were
$54.2 million, $55.0 million and $64.7 million,
respectively. Collections represented by account sales as a
percentage of total collections for the fiscal years ended
September 30, 2007, 2006 and 2005 were 19.2%, 25.7% and
38.3%, respectively.
Marketing
The Company has established relationships with brokers who
market consumer receivable portfolios from banks, finance
companies and other credit providers. In addition, the Company
subscribes to national publications that list consumer
receivable portfolios for sale. The Company also directly
contacts banks, finance companies or other credit providers to
solicit consumer receivables for sale.
Competition
Our business of purchasing distressed consumer receivables is
highly competitive and fragmented, and we expect that
competition from new and existing companies will increase. We
compete with:
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other purchasers of consumer receivables, including third-party
collection companies; and
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other financial services companies who purchase consumer
receivables.
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Some of our competitors are larger and more established and may
have substantially greater financial, technological, personnel
and other resources than we have, including greater access to
the capital market system. We believe that no individual
competitor or group of competitors has a dominant presence in
the market.
We compete with our competitors for consumer receivable
portfolios based on many factors, including:
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purchase price;
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representations, warranties and indemnities requested;
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speed in making purchase decisions; and
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reputation of the purchaser.
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Our strategy is designed to capitalize on the markets lack
of a dominant industry player. We believe that our
managements experience and expertise in identifying,
evaluating, pricing and acquiring consumer receivable portfolios
and managing collections coupled with our strategic alliances
with third-party collection agencies and attorneys and our
sources of financing give us a competitive advantage. However,
we cannot assure that we will be able to compete successfully
against current or future competitors or that competition will
not increase in the future.
Management
Information Systems
We believe that a high degree of automation is necessary to
enable us to grow and successfully compete with other finance
companies. Accordingly, we continually upgrade our computer
hardware and, when necessary, our software to support the
servicing and recovery of consumer receivables acquired for
liquidation. Our telecommunications and computer systems allow
us to quickly and accurately process large amounts of data
necessary to purchase and service consumer receivable
portfolios. In addition, we rely on the information technology
of our third-party collection agencies and attorneys and
periodically review their systems to ensure that they can
adequately service our consumer receivable portfolios.
10
Due to our desire to increase productivity through automation,
we periodically review our systems for possible upgrades and
enhancements.
Government
Regulation
The relationship of a consumer and a creditor is extensively
regulated by federal, state and municipal laws, rules,
regulations and ordinances. These laws include, but are not
limited to, the following federal statutes and regulations: the
federal
Truth-In-Lending
Act, the Fair Credit Billing Act, the Equal Credit Opportunity
Act and the Fair Credit Reporting Act, as well as comparable
statutes in states where consumers reside
and/or where
creditors are located. Among other things, the laws and
regulations applicable to various creditors impose disclosure
requirements regarding the advertisement, application,
establishment and operation of credit card accounts or other
types of credit programs. Federal law requires a creditor to
disclose to consumers, among other things, the interest rates,
fees, grace periods and balance calculation methods associated
with their accounts. In addition, consumers are entitled to have
payments and credits applied to their accounts promptly, to
receive proscribed notices and to require billing errors to be
resolved promptly. In addition, some laws prohibit certain
discriminatory practices in connection with the extension of
credit. Further, state laws may limit the interest rate and the
fees that a creditor may impose on consumers. Failure by the
creditors to have complied with applicable laws could create
claims and rights of offset by consumers that would reduce or
eliminate their obligations, which could have a material adverse
effect on our operations. Pursuant to agreements under which we
purchase receivables, we are typically indemnified against
losses resulting from the failure of the creditor to have
complied with applicable laws relating to the receivables prior
to our purchase of such receivables.
Certain laws, including the laws described above, may limit our
ability to collect amounts owing with respect to the receivables
regardless of any act or omission on our part. For example,
under the federal Fair Credit Billing Act, a credit card issuer
may be subject to certain claims and defenses arising out of
certain transactions in which a credit card is used if the
consumer has made a good faith attempt to obtain satisfactory
resolution of a problem relative to the transaction and, except
in cases where there is a specified relationship between the
person honoring the card and the credit card issuer, the amount
of the initial transaction exceeds $50 and the place where the
initial transaction occurred was in the same state as the
consumers billing address or within 100 miles of that
address. Accordingly, as a purchaser of defaulted receivables,
we may purchase receivables subject to valid defenses on the
part of the consumer. Other laws provide that, in certain
instances, consumers cannot be held liable for, or their
liability is limited to $50 with respect to, charges to the
credit card credit account that were a result of an unauthorized
use of the credit card account. No assurances can be given that
certain of the receivables were not established as a result of
unauthorized use of a credit card account, and, accordingly, the
amount of such receivables may not be collectible by us.
Several federal, state and municipal laws, rules, regulations
and ordinances, including, but not limited to, the federal Fair
Debt Collection Practices Act (FDCPA) and the
Federal Trade Commission Act and comparable state statutes
regulate consumer debt collection activity. Although, for a
variety of reasons, we may not be specifically subject to the
FDCPA and certain state statutes specifically addressing
third-party debt collectors, it is our policy to comply with
applicable laws in our collection activities. Additionally, our
third-party collection agencies and attorneys may be subject to
these laws. To the extent that some or all of these laws apply
to our collection activities or our third-party collection
agencies and attorneys collection activities,
failure to comply with such laws could have a material adverse
effect on us.
Additional laws may be enacted that could impose additional
restrictions on the servicing and collection of receivables.
Such new laws may adversely affect the ability to collect the
receivables.
We currently hold a number of licenses issued under applicable
consumer credit laws. Certain of our current licenses and any
licenses that we may be required to obtain in the future may be
subject to periodic renewal provisions
and/or other
requirements. Our inability to renew licenses or to take any
other required action with respect to such licenses could have a
material adverse effect upon our results of operation and
financial condition.
Employees
As of September 30, 2007, we had 172 full-time
employees. We are not a party to any collective bargaining
agreement.
11
You can visit our web site at www.astafunding.com. Copies
of our
10-Ks,
10-Qs,
8-Ks and
other SEC reports are available there as soon as reasonably
practical after filing electronically with the SEC. The Asta
Funding, Inc. web site is not incorporated by reference in this
section.
You should carefully consider these risk factors in
evaluating the Company. In addition to the following risks,
there may also be risks that we do not yet know of or that we
currently think are immaterial that may also impair our business
operations. If any of the following risks occur, our business,
results of operation or financial condition could be adversely
affected, the trading price of our common stock could decline
and shareholders might lose all or part of their investment.
The
Company has risks associated with its recent Portfolio Purchase
Agreement.
On February 5, 2007, Palisades Acquisition XV, LLC, a
wholly-owned subsidiary of the Company, entered into a Purchase
and Sale Agreement (the Portfolio Purchase
Agreement) with Great Seneca Financial Corporation,
Platinum Financial Services Corporation, Monarch Capital
Corporation, Colonial Credit Corporation, Centurion Capital
Corporation, Sage Financial Corporation and Hawker Financial
Corporation (collectively, the Sellers), under which
we agreed to acquire a portfolio of approximately
$6.9 billion in face value receivables (the Portfolio
Purchase) for a purchase price of $300 million plus
20% of any future Net Payments (as defined in the Portfolio
Purchase Agreement) received by the Company after the Company
has received Net Payments equal to 150% of the purchase price
plus our cost of funds. The Portfolio (now owned by Palisades
Acquisition XVI, LLC (Palisades XVI)) predominantly
consists of credit card accounts and includes some accounts in
collection litigation and accounts as to which the Sellers have
been awarded judgments. The transaction was consummated on
March 5, 2007.
Under the Portfolio Purchase Agreement, we assumed certain risks
associated with the Portfolio Purchase. The representations and
warranties with respect to the Portfolio which we received from
the Sellers have limitations both in scope and, in certain
cases, duration, including a limitation of our put-back rights
with respect to certain types of claims, a requirement that
certain claims be brought within 120 days of closing or be
deemed waived, and a limitation with respect to the
Sellers responsibilities for acts of prior owners. Other
than the representations contained in the Portfolio Purchase
Agreement, the accounts were sold as is. No assurances can be
given that we will have an adequate remedy if our understandings
about the quality, quantity and characteristics of the Accounts
in the Portfolio prove to be contrary to our expectations.
We may
not be able to satisfy our obligation under our Receivable
Financing Agreement.
The Receivable Financing Agreement required that the principal
amount thereunder be reduced under a schedule tied to projected
collections on the Portfolio Purchase. As we fell behind the
minimum required amortization schedule, principally as a result
of sales of accounts that were built into that schedule, and
since currently we believe that our strategy of suing debtors
will ultimately realize more than the sales of these accounts
would produce, the Company and its lender entered into an
amendment dated December 27, 2007. The amendment allows us
greater flexibility to use our strategy and substantially
eliminates any scheduled sales of accounts used in the original
expectations. Additionally, the amendment effectively extends
the repayment schedule from 25 months to 31 months. While we
believe that we will be able to satisfy the new collection
schedule, no assurances can be given that collections will not
slow further, notwithstanding our recent engagement of a
sub-servicer to assist with collection of this Portfolio
Purchase, as described in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations. Such slowing of collections could cause us to fall
behind the schedule and default on our obligations under the
amended Receivable Financing Agreement.
The
anticipated benefits of the Portfolio Purchase may not meet our
expectations.
The Portfolio Purchase increased our assets acquired for
liquidation by more than 100%, so that our near term future
operating results are highly dependent on the returns realized
from the Portfolio Purchase. While we believe that we have the
capability to manage such a significantly increased asset base,
no assurances can be given that we will not experience
operational difficulties internally or with our third party
collection agencies and attorneys in managing an asset base of
this size. Further, while we believe that the returns on the
Portfolio Purchase will be at least as favorable as our historic
12
returns on smaller portfolio purchases, no assurances can be
given with respect to our initial evaluation of the quality of
the assets in the Portfolio nor with respect to our ability to
manage the Portfolio profitably.
We
have incurred substantial debt from time to time in connection
with our purchase of consumer receivable portfolios,
particularly with respect to the Portfolio Purchase Agreement,
and may incur further debt in the future which could affect our
ability to obtain additional funds and may increase our
vulnerability to economic or business downturns.
To finance the Portfolio Purchase, we needed to incur
substantial indebtedness. On February 5, 2007, upon
execution of the Portfolio Purchase Agreement, we were required
to provide the Seller with a $60 million deposit, which we
did by utilizing substantially all of the availability under our
existing $175 million credit facility. We made a second
deposit payment of $15 million on February 16, 2007,
which we did by amending our existing line of credit to increase
availability temporarily from $175 million to
$190 million, with reduction targets set to April 17,
2007 which were met.
The remaining $225 million was paid in full at the closing
of the Portfolio Purchase on March 5, 2007, by borrowing
approximately $227 million (inclusive of transaction costs)
under a new Receivables Financing Agreement entered into by
Palisades XVI, with a major financial institution as the funding
source, consisting of debt with full recourse only to Palisades
XVI, and bearing an interest rate which approximates
170 basis points over LIBOR. The term of the agreement is
three years. All assets of Palisades XVI, principally the
Portfolio Purchase, are pledged to secure such borrowing, and
all proceeds received as a result of the net collections from
this Portfolio Purchase are to be applied to interest and
principal of the underlying loan. The Company made certain
representations and warranties to the lender to support the
transaction. As of September 30, 2007 the balance due on
the Receivable Financing Agreement was $184.8 million.
On December 4, 2007, we signed the Sixth Amendment to the
Fourth Amended and Restated Loan Agreement with a consortium of
banks that temporarily increases the total revolving loan
commitment from $175,000,000 to $185,000,000. The temporary
increase of $10,000,000 is required to be repaid by
February 29, 2008. In the event the increase is not repaid
by February 29, 2008, the then outstanding portion of the
temporary increase shall be repaid over a six month period. The
outstanding balance under this line of credit at
September 30, 2007 was approximately $141.7 million. Our
ability to grow through this line may be limited as we are
approaching the upper limit of our borrowing availability and we
may need to seek additional financing.
As of September 30, 2007, Palisade XVI, the Companys
indirect wholly-owned subsidiary, was required to remit an
additional $13.1 million to its lender in order to be in
compliance under the Receivable Financing Agreement. The Company
facilitated the ability of Palisades XVI to make this payment by
borrowing $13.1 million under its current revolving credit
facility and causing another of its subsidiaries to purchase a
portion of the Portfolio Purchase from Palisade XVI at a price
of $13.1 million prior to the measurement date under the
Receivable Financing Agreement.
The Receivable Financing Agreement required that the principal
amount thereunder be reduced under a schedule tied to projected
collections on the Portfolio Purchase. As we fell behind the
minimum required amortization schedule, principally as a result
of sales of accounts that were built into that schedule, and
since currently we believe that our strategy of suing debtors
will ultimately realize more than the sales of these accounts
would produce, the Company and its lender entered into an
amendment dated December 27, 2007. The amendment allows us
greater flexibility to use our strategy and substantially
eliminates any scheduled sales of accounts used in the original
expectations. Additionally, the amendment effectively extends
the repayment schedule from 25 months to 31 months.
While we believe that we will be able to satisfy the new
collection schedule, no assurance can be given that collections
will not slow further, notwithstanding our recent engagement of
a sub-servicer to assist with collection of this Portfolio
Purchase, as described in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations. Such slowing of collections could cause us to fall
behind the schedule and default on our obligations under the
amended Receivable Financing Agreement.
13
By incurring such substantial indebtedness and by incurring
additional indebtedness from time to time in connection with the
purchase of consumer receivable portfolios in the future, we are
subject to the risks associated with incurring such
indebtedness, including:
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we are required to dedicate a significant portion of our cash
flows from operations to pay debt service costs and, as a
result, we will have less funds available for operations, future
acquisitions of consumer receivable portfolios, and other
purposes;
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it may be more difficult and expensive to obtain additional
funds through financings, if available at all;
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we are more vulnerable to economic downturns and fluctuations in
interest rates, less able to withstand competitive pressures and
less flexible in reacting to changes in our industry and general
economic conditions; and
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if we defaulted under our existing credit facilities or if our
creditors demanded payment of a portion or all of our
indebtedness, we may not have sufficient funds to make such
payments.
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We have pledged all of our portfolios of consumer receivables to
secure our borrowings and are subject to covenants that may
restrict our ability to operate our business.
As we borrow funds to purchase portfolios we may fully utilize
our availability under that facility and no future borrowings
are permitted under the new Receivables Financing Agreement.
This may place us at a competitive disadvantage as compared to
less leveraged companies.
Any indebtedness that we incur under our existing line of credit
is collateralized by all of our portfolios of consumer
receivables acquired for liquidation, except the Portfolio
Purchase only collateralizes the Receivables Financing
Agreement. If we default under the indebtedness secured by our
assets, including failure to comply with borrowing base
requirements, those assets would be available to the secured
creditor to satisfy our obligations to the secured creditor. In
addition, our credit facility imposes certain restrictive
covenants, including financial covenants and borrowing base
requirements. Failure to satisfy any of these covenants could
result in all or any of the following:
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acceleration of the payment of our outstanding indebtedness;
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cross defaults to and acceleration of the payment under other
financing arrangements;
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our inability to borrow additional amounts under our existing
financing arrangements; and
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our inability to secure financing on favorable terms or at all
from alternative sources.
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Any of these consequences could adversely affect our ability to
acquire consumer receivable portfolios and operate our business.
We may
not be able to purchase consumer receivable portfolios at
favorable prices or on sufficiently favorable terms or at
all.
Our success depends upon the continued availability of consumer
receivable portfolios that meet our purchasing criteria and our
ability to identify and finance the purchases of such
portfolios. The availability of consumer receivable portfolios
at favorable prices and on terms acceptable to us depends on a
number of factors outside of our control, including:
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the continuation of the current growth trend in consumer debt;
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the continued volume of consumer receivable portfolios available
for sale;
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competitive factors affecting potential purchasers and sellers
of consumer receivable portfolios; and
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possible future changes in the bankruptcy laws, state laws and
homestead acts which could make it more difficult for us to
collect.
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14
We may
not be able to continually replace our defaulted consumer
receivables.
To operate profitably, we must continually acquire a sufficient
amount of distressed consumer receivables to generate continued
revenue. Furthermore, we cannot predict how our ability to
identify and purchase receivables and the quality of those
receivables would be affected if there is a shift in consumer
lending practices whether caused by changes in the regulations
or accounting practices applicable to debt buying and sustained
economic downturn.
We
have seen at certain times that the market for acquiring
consumer receivable portfolios has become more competitive,
thereby diminishing from time to time our ability to acquire
such receivables at prices we are willing to pay.
The growth in consumer debt may also be affected by:
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a slowdown in the economy;
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problems in the credit and housing markets;
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reductions in consumer spending;
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changes in the underwriting criteria by originators; and
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changes in laws and regulations governing consumer lending.
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Any slowing of the consumer debt growth trend could result in a
decrease in the availability of consumer receivable portfolios
for purchase that could affect the purchase prices of such
portfolios.
Any increase in the prices we are required to pay for such
portfolios in turn will reduce the profit, if any, we generate
from such portfolios.
Our
quarterly operating results may fluctuate and cause our stock
price to decline.
Because of the nature of our business, our quarterly operating
results may fluctuate, which may adversely affect the market
price of our common stock. Our results may fluctuate as a result
of any of the following:
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the timing and amount of collections on our consumer receivable
portfolios;
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our inability to identify and acquire additional consumer
receivable portfolios;
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a decline in the estimated future value of our consumer
receivable portfolio recoveries;
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increases in operating expenses associated with the growth of
our operations;
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general and economic market conditions; and
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prices we are willing to pay for consumer receivable portfolios.
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Our
projections of future cash flows from our portfolio purchases
may prove to be inaccurate, which could result in reduced
revenues or the recording of an impairment charge if we do not
achieve the collections forecasted by our model.
We use qualitative and quantitative analysis to project future
cash flows from our portfolio purchases. There can be no
assurance, however, that we will be able to achieve the
collections forecasted by our analysis. If we are not able to
achieve these levels of forecasted collection, our revenues will
be reduced or we may be required to record an impairment charge,
which could result in a reduction of our earnings. For the year
ended September 30, 2007, we recorded impairment charges of
$9.1 million. Impairments were taken on eleven portfolios
as relative collections compared to our expectations on these
portfolios were deteriorating, and this deterioration was
confirmed by our third party collection agencies and attorneys.
Accordingly, we believed that impairment charges were necessary.
15
We may
not be able to recover sufficient amounts on our consumer
receivable portfolios to recover the costs associated with the
purchase of those portfolios and to fund our
operations.
We acquire and collect on consumer receivable portfolios that
contain charged-off, semi-performing and performing receivables.
In order to operate profitably over the long term, we must
continually purchase and collect on a sufficient volume of
receivables to generate revenue that exceeds our costs. For
accounts that are charged-off or semi-performing, the
originators or interim owners of the receivables generally have:
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made numerous attempts to collect on these obligations, often
using both their in-house collection staff and third-party
collection agencies;
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subsequently deemed these obligations as uncollectible; and
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charged-off these obligations.
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These receivable portfolios are purchased at significant
discounts to the amount the consumers owe. These receivables are
difficult to collect and actual recoveries may vary and be less
than the amount expected. In addition, our collections may
worsen in a weak economic cycle. We may not recover amounts in
excess of our acquisition and servicing costs.
Our ability to recover on our portfolios and produce sufficient
returns can be negatively impacted by the quality of the
purchased receivables. In the normal course of our portfolio
acquisitions, some receivables may be included in the portfolios
that fail to conform to certain terms of the purchase agreements
and we may seek to return these receivables to the seller for
payment or replacement receivables. However, we cannot guarantee
that any of such sellers will be able to meet their payment
obligations to us. Accounts that we are unable to return to
sellers may yield no return. If cash flows from operations are
less than anticipated as a result of our inability to collect
sufficient amounts on our receivables, our ability to satisfy
our debt obligations, purchase new portfolios and our future
growth and profitability may be materially adversely affected.
We are
subject to intense competition for the purchase of consumer
receivable portfolios.
We compete with other purchasers of consumer receivable
portfolios, with third-party collection agencies and with
financial services companies that manage their own consumer
receivable portfolios. We compete on the basis of price,
reputation, industry experience and performance. Some of our
competitors have greater capital, personnel and other resources
than we have. The possible entry of new competitors, including
competitors that historically have focused on the acquisition of
different asset types, and the expected increase in competition
from current market participants may reduce our access to
consumer receivable portfolios. Aggressive pricing by our
competitors could raise the price of consumer receivable
portfolios above levels that we are willing to pay, which could
reduce the number of consumer receivable portfolios suitable for
us to purchase or if purchased by us, reduce the profits, if
any, generated by such portfolios. If we are unable to purchase
receivable portfolios at favorable prices or at all, our finance
income and earnings could be materially reduced.
We are
dependent upon third parties to service a majority of our
consumer receivable portfolios.
Although we utilize our in-house collection staff to collect
some of our receivables, we outsource a majority of our
receivable servicing. As a result, we are dependent upon the
efforts of our third- party collection agencies and attorneys to
service and collect our consumer receivables. However, any
failure by our third party collection agencies and attorneys to
adequately perform collection services for us or remit such
collections to us could materially reduce our finance income and
our profitability. In addition, our finance income and
profitability could be materially adversely affected if we are
not able to secure replacement third party collection agencies
and attorneys and redirect payments from the debtors to our new
third party collection agencies and attorneys promptly in the
event our agreements with our third-party collection agencies
and attorneys are terminated, our third-party collection
agencies and attorneys fail to adequately perform their
obligations or if our relationships with such third-party
collection agencies and attorneys adversely change.
16
We
rely on our third party collectors to comply with all rules and
regulations and maintain proper internal controls over their
accounting and operations.
Because the receivables were originated and serviced pursuant to
a variety of federal
and/or state
laws by a variety of entities and involved consumers in all
50 states, the District of Columbia, Puerto Rico and
outside the United States, there can be no assurance that all
original servicing entities have at all times been in
substantial compliance with applicable law. Additionally, there
can be no assurance that we or our third-party collection
agencies and attorneys have been or will continue to be at all
times in substantial compliance with applicable law. The failure
to comply with applicable law and not maintain proper controls
in their accounting and operations could materially adversely
affect our ability to collect our receivables and could subject
us to increased costs and fines and penalties.
Our
collections may decrease if bankruptcy filings
increase.
During times of economic recession, the amount of defaulted
consumer receivables generally increases, which contributes to
an increase in the amount of personal bankruptcy filings. Under
certain bankruptcy filings, a debtors assets are sold to
repay credit originators, but since the defaulted consumer
receivables we purchase are generally unsecured we often would
not be able to collect on those receivables. We cannot assure
you that our collection experience would not decline with an
increase in bankruptcy filings. If our actual collection
experience with respect to a defaulted consumer receivables
portfolio is significantly lower than we projected when we
purchased the portfolio, our earnings could be negatively
affected.
If we
are unable to access external sources of financing, we may not
be able to fund and grow our operations.
We depend on loans from our credit facility and other external
sources in part, to fund and expand our operations. Our ability
to grow our business is dependent on our access to additional
financing and capital resources. The failure to obtain financing
and capital as needed would limit our ability to:
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purchase consumer receivable portfolios; and
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achieve our growth plans.
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In addition, our financing sources impose certain restrictive
covenants, including financial covenants. Failure to satisfy any
of these covenants could:
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cause our indebtedness to become immediately payable;
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preclude us from further borrowings from these existing
sources; and
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prevent us from securing alternative sources of financing
necessary to purchase consumer receivable portfolios and to
operate our business.
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We use
estimates for recognizing finance income on substantially all of
our consumer receivable portfolio investments and our earnings
would be reduced if actual results are less than
estimated.
We utilize the interest method of revenue recognition for
determining our income recognized on finance receivables, which
is based on projected cash flows that may prove to be less than
anticipated and could lead to reductions in revenue or
impairment charges under the American Institute of Certified
Public Accountants (AICPA) Statement of Position
(SOP)
03-3
Accounting for Loans or Certain Securities Acquired in a
Transfer. Under the guidance of
SOP 03-3
(and the amended Practice Bulletin 6), static pools of
accounts are established. These pools are aggregated based on
certain common risk criteria. Each static pool is recorded at
cost and is accounted for as a single unit for the recognition
of income, principal payments and loss provision. Once a static
pool is established for a quarter, individual receivable
accounts are not added to the pool (unless replaced by the
seller) or removed from the pool (unless sold or returned to the
seller).
SOP 03-3
(and the amended Practice Bulletin 6) requires that
the excess of the contractual cash flows over expected cash
flows not be recognized as an adjustment of revenue or expense
or on the balance sheet. The SOP initially freezes the internal
rate of return, referred to as IRR, estimated when the accounts
receivable are purchased as the basis for subsequent impairment
testing. Significant increases in actual, or expected future
cash flows may be recognized prospectively through an
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upward adjustment of the IRR over a portfolios remaining
life. Any increase to the IRR then becomes the new benchmark for
impairment testing. Effective for fiscal years beginning
October 1, 2005 under
SOP 03-3
(and the amended Practice Bulletin 6), rather than lowering
the estimated IRR if the collection estimates are not received
or projected to be received, the carrying value of a pool would
be written down to maintain the then current IRR. Any reduction
in our earnings could materially adversely affect our stock
price.
We may
rely on third parties to locate, identify and evaluate consumer
receivable portfolios available for purchase.
We may rely on third parties, including brokers and third-party
collection agencies and attorneys, to identify consumer
receivable portfolios and, in some instances, to assist us in
our evaluation and purchase of these portfolios. As a result, if
such third parties fail to identify receivable portfolios or if
our relationships with such third parties are not maintained,
our ability to identify and purchase additional receivable
portfolios could be materially adversely affected. In addition,
if we, or such parties fail to correctly or adequately evaluate
the value or collectibility of these consumer receivable
portfolios, we may pay too much for such portfolios and suffer
an impairment and our earnings could be negatively affected.
The
loss of an asset type could impact our ability to acquire
receivable portfolios.
In the event one of the asset classes of receivables which we
purchase is no longer available to us, our purchases may decline
and our results might suffer.
We may
not be successful at acquiring receivables of new asset types or
in implementing a new pricing structure.
We may pursue the acquisition of receivable portfolios of asset
types in which we have little current experience. We may not be
successful in completing any acquisitions of receivables of
these asset types and our limited experience in these asset
types may impair our ability to collect on these receivables.
This may cause us to pay too much for these receivables, and
consequently, we may not generate a profit from these receivable
portfolio acquisitions.
The
loss of any of our executive officers may adversely affect our
operations and our ability to successfully acquire receivable
portfolios.
Arthur Stern, our Chairman and Executive Vice President, Gary
Stern, our President and Chief Executive Officer, and Mitchell
Cohen, our Chief Financial Officer are responsible for making
substantially all management decisions, including determining
which portfolios to purchase, the purchase price and other
material terms of such portfolio acquisitions. These decisions
are instrumental to the success of our business. The loss of the
services of any of our executive officers could disrupt our
operations and adversely affect our ability to successfully
acquire receivable portfolios.
The
Stern family effectively controls Asta, substantially reducing
the influence of our other stockholders.
Members of the Stern family including Arthur Stern, Gary Stern
and Barbara Marburger, daughter of Arthur Stern and sister of
Gary Stern, trusts or custodial accounts for the benefit of
minor children of Barbara Marburger and Gary Stern, Asta Group,
Incorporated, and limited liability companies controlled by
Judith R. Feder, niece of Arthur Stern and cousin of Gary Stern,
in which Arthur Stern, Alice Stern (wife of Arthur Stern and
mother of Gary Stern and Barbara Marburger), Gary Stern and
trusts for the benefit of the issue of Arthur Stern and the
issue of Gary Stern hold all economic interests, own in the
aggregate approximately 24.0% of our outstanding shares of
common stock. In addition, other members of the Stern Family,
such as adult children of Gary Stern and Barbara Marburger, own
additional shares. As a result, the Stern family is able to
influence significantly the actions that require stockholder
approval, including:
|
|
|
|
|
the election of a majority of our directors; and
|
|
|
|
the approval of mergers, sales of assets or other corporate
transactions or matters submitted for stockholder approval.
|
18
As a result, our other stockholders may have little or no
influence over matters submitted for stockholder approval. In
addition, the Stern familys influence could preclude any
unsolicited acquisition of us and consequently materially
adversely affect the price of our common stock.
We have experienced rapid growth over the past several
years, which has placed significant demands on our
administrative, operational and financial resources and could
result in an increase in our expenses.
We plan to continue our growth, which could place additional
demands on our resources and cause our expenses to increase.
Future internal growth will depend on a number of factors,
including:
|
|
|
|
|
the effective and timely initiation and development of
relationships with sellers of consumer receivable portfolios and
strategic partners;
|
|
|
|
our ability to maintain the collection of consumer receivables
efficiently; and
|
|
|
|
the recruitment, motivation and retention of qualified personnel.
|
Sustaining growth will also require the implementation of
enhancements to our operational and financial systems and will
require additional management, operational and financial
resources. There can be no assurance that we will be able to
manage our expanding operations effectively or that we will be
able to maintain or accelerate our growth or attract additional
management talent and any failure to do so could adversely
affect our ability to generate finance income and control our
expenses.
Government
regulations may limit our ability to recover and enforce the
collection of our receivables.
Federal, state and municipal laws, rules, regulations and
ordinances may limit our ability to recover and enforce our
rights with respect to the receivables acquired by us. These
laws include, but are not limited to, the following federal
statutes and regulations promulgated thereunder and comparable
statutes in states where consumers reside
and/or where
creditors are located:
|
|
|
|
|
the Fair Debt Collection Practices Act;
|
|
|
|
the Federal Trade Commission Act;
|
|
|
|
the
Truth-In-Lending
Act;
|
|
|
|
the Fair Credit Billing Act;
|
|
|
|
the Equal Credit Opportunity Act; and
|
|
|
|
the Fair Credit Reporting Act.
|
We may be precluded from collecting receivables we purchase
where the creditor or other previous owner or third-party
collection agency and attorney failed to comply with applicable
law in originating or servicing such acquired receivables. Laws
relating to the collection of consumer debt also directly apply
to our business. Our failure to comply with any laws applicable
to us, including state licensing laws, could limit our ability
to recover on receivables and could subject us to fines and
penalties, which could reduce our earnings and result in a
default under our loan arrangements. In addition, our
third-party collection agencies and attorneys may be subject to
these and other laws and their failure to comply with such laws
could also materially adversely affect our finance income and
earnings.
Additional laws may be enacted that could impose additional
restrictions on the servicing and collection of receivables.
Such new laws may adversely affect the ability to collect on our
receivables, which could also adversely affect our finance
income and earnings.
Because our receivables are generally originated and serviced
pursuant to a variety of federal
and/or state
laws by a variety of entities and may involve consumers in all
50 states, the District of Columbia and Puerto Rico, there
can be no assurance that all original servicing entities have at
all times been in substantial compliance with applicable law.
Additionally, there can be no assurance that we or our
third-party collection agencies and attorneys have been or will
continue to be at all times in substantial compliance with
applicable law. Failure to comply with
19
applicable law could materially adversely affect our ability to
collect our receivables and could subject us to increased costs,
fines and penalties.
Class
action suits and other litigation in our industry could divert
our managements attention from operating our business and
increase our expenses.
Certain originators and third-party collection agencies and
attorneys in the consumer credit industry have been subject to
class actions and other litigation. Claims include failure to
comply with applicable laws and regulations and improper or
deceptive origination and servicing practices. If we become a
party to such class action suits or other litigation, our
results of operations and financial condition could be
materially adversely affected.
We may
seek to make acquisitions that prove unsuccessful or strain or
divert our resources.
We may seek to grow Asta through acquisitions of related
businesses. Such acquisitions present risks that could
materially adversely affect our business and financial
performance, including:
|
|
|
|
|
the diversion of our managements attention from our
everyday business activities;
|
|
|
|
the assimilation of the operations and personnel of the acquired
business;
|
|
|
|
the contingent and latent risks associated with the past
operations of, and other unanticipated problems arising in, the
acquired business; and
|
|
|
|
the need to expand management, administration and operational
systems.
|
If we make such acquisitions we cannot predict whether:
|
|
|
|
|
we will be able to successfully integrate the operations of any
new businesses into our business;
|
|
|
|
we will realize any anticipated benefits of completed
acquisitions; or
|
|
|
|
there will be substantial unanticipated costs associated with
acquisitions.
|
In addition, future acquisitions by us may result in:
|
|
|
|
|
potentially dilutive issuances of our equity securities;
|
|
|
|
the incurrence of additional debt; and
|
|
|
|
the recognition of significant charges for depreciation and
amortization related to goodwill impairment and other intangible
assets.
|
Although we have no present plans or intentions, we continuously
evaluate potential acquisitions of related businesses. However,
we have not reached any agreement or arrangement with respect to
any particular future acquisition and we may not be able to
complete any acquisitions on favorable terms or at all.
Our
investments in other businesses and entry into new business
ventures may adversely affect our operations.
We have and may continue to make investments in companies or
commence operations in businesses and industries that are not
identical to those with which we have historically been
successful. If these investments or arrangements are not
successful, our earnings could be materially adversely affected
by increased expenses and decreased finance income.
If our
technology and phone systems are not operational, our operations
could be disrupted and our ability to successfully acquire
receivable portfolios could be adversely affected.
Our success depends, in part, on sophisticated
telecommunications and computer systems. The temporary loss of
our computer and telecommunications systems, through casualty,
operating malfunction or service provider failure, could disrupt
our operations. In addition, we must record and process
significant amounts of data quickly and accurately to properly
bid on prospective acquisitions of receivable portfolios and to
access, maintain and
20
expand the databases we use for our collection and monitoring
activities. Any failure of our information systems and their
backup systems would interrupt our operations. We may not have
adequate backup arrangements for all of our operations and we
may incur significant losses if an outage occurs. In addition,
we rely on third-party collection agencies and attorneys who
also may be adversely affected in the event of an outage in
which the third-party collection agencies and attorneys do not
have adequate backup arrangements. Any interruption in our
operations or our third-party collection agencies and
attorneys operations could have an adverse effect on our
results of operations and financial condition.
Our
organizational documents and Delaware law may make it harder for
us to be acquired without the consent and cooperation of our
board of directors and management.
Several provisions of our organizational documents and Delaware
law may deter or prevent a takeover attempt, including a
takeover attempt in which the potential purchaser offers to pay
a per share price greater than the current market price of our
common stock. Under the terms of our certificate of
incorporation, our board of directors has the authority, without
further action by the stockholders, to issue shares of preferred
stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof. The ability to issue shares
of preferred stock could tend to discourage takeover or
acquisition proposals not supported by our current board of
directors. In addition, we are subject to Section 203 of
the Delaware General Corporation Law, which restricts business
combinations with some stockholders once the stockholder
acquires 15% or more of our common stock.
Future
sales of our common stock may depress our stock
price.
Sales of a substantial number of shares of our common stock in
the public market could cause a decrease in the market price of
our common stock. We had 13,918,158 shares of common stock
issued and outstanding as of the date hereof. Of these shares,
3,341,008 are held by our affiliates and are saleable under
Rule 144 of the Securities Act of 1933, as amended. The
remainder of our outstanding shares were freely tradeable. In
addition, options to purchase approximately
1,337,438 shares of our common stock were outstanding as of
September 30, 2007, of which 1,325,438 were vested. The
exercise prices of such options were substantially lower than
the current market price of our common stock. We may also issue
additional shares in connection with our business and may grant
additional stock options or restricted shares to our employees,
officers, directors and consultants under our present or future
equity compensation plans or we may issue warrants to third
parties outside of such plans. As of September 30, 2007
there were 1,325,334 shares available for such purpose with
such shares available under the Equity Compensation Plan and the
2002 Stock Option Plan. No more options are available for
issuance under the 1995 Stock Option Plan. If a significant
portion of these shares were sold in the public market, the
market value of our common stock could be adversely affected.
From time to time, the Companys Chairman, Arthur Stern and
President and Chief Executive Officer, Gary Stern adopted
prearranged stock trading plans in accordance with guidelines
specified by
Rule 10b5-1
under the Securities Exchange Act of 1934, as amended. While no
such plans are in effect at present, significant sales by the
Stern family could have an adverse effect on market prices for
our common stock.
The
Company recently purchased a portfolio in a South American
country exposing the Company to currency rate
fluctuations.
As a result of this purchase, the Company will be exposed to
currency rate fluctuations as the collections on this portfolio
will be denominated in the local currency of the South American
country. Additionally, our investment could also be exposed to
the same currency risk. A strengthened U.S. dollar could
decrease the U.S. dollar equivalent of the local currency
collections, and our currency conversion to U.S. dollars
would suffer.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
The Company has received no written comments regarding its
periodic or current reports from the staff of the Securities and
Exchange Commission that were issued 180 days or more
preceding the end of its 2007 fiscal year and that remain
unresolved.
21
Our executive and administrative offices are located in
Englewood Cliffs, New Jersey, where we lease approximately
13,000 square feet of general office space for
approximately $20,000 per month, plus utilities. The lease
expires on July 31, 2010.
In addition, our call center is located in Bethlehem,
Pennsylvania, where we lease approximately 9,070 square
feet of general office space for approximately $10,000 per
month. The lease expires on December 31, 2009. Our office
in Sugarland, Texas occupies approximately 3,600 square
feet of general office space for approximately $6,000 per month.
The lease expires February 28, 2011.
We believe that our existing facilities are adequate for our
current and anticipated needs.
|
|
Item 3.
|
Legal
Proceedings.
|
In the ordinary course of our business, we are involved in
numerous legal proceedings. We regularly initiate collection
lawsuits, using our network of third party law firms, against
consumers. Also, consumers occasionally initiate litigation
against us, in which they allege that we have violated a federal
or state law in the process of collecting on their account. We
do not believe that these ordinary course matters are material
to our business and financial condition. As of the date of this
Form 10-K,
we were not involved in any material litigation in which we were
a defendant.
In the fourth quarter of fiscal year 2006, a subsidiary of the
Company received subpoenas from three jurisdictions to produce
information in connection with debt collection practices in
those jurisdictions. The Company has fully cooperated with the
issuing agencies and has provided the requested documentation.
One jurisdiction has closed the case with no action taken
against the Company. The Company has not made any provision with
respect to the remaining matters in the financial statements as
the nature of these matters constitute information requests only.
In the course of conducting its business, the Company is
required by certain of the jurisdictions within which it
operates to obtain licenses and permits to conduct its
collection activities. The Company has been notified by one such
jurisdiction that it did not operate for a period of time from
February 1, 2005 to April 17, 2006 with the proper
license. The Company did not make any provision for such matter
in its financial statements. There has been no communication
from the jurisdiction regarding this matter for over a year and
we consider this matter closed. Currently we are properly
licensed and in good standing with the jurisdiction.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None.
22
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Since August 15, 2000, our common stock has been quoted on
the NASDAQ National Market system under the symbol
ASFI. On December 8, 2007 there were
approximately 29 holders of record of our common stock. High and
low sales prices of our common stock since October 1, 2005
as reported by NASDAQ are set fourth below (such quotations
reflect inter-dealer prices without retail markup, markdown, or
commission, and may not necessarily represent actual
transactions):
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
October 1, 2005 to December 31, 2005
|
|
|
33.45
|
|
|
|
23.25
|
|
January 1, 2006 to March 31, 2006
|
|
|
35.36
|
|
|
|
26.80
|
|
April 1, 2006 to June 30, 2006
|
|
|
43.29
|
|
|
|
30.67
|
|
July 1, 2006 to September 30, 2006
|
|
|
39.30
|
|
|
|
31.67
|
|
|
|
|
|
|
|
|
|
|
October 1, 2006 to December 31, 2006
|
|
|
37.25
|
|
|
|
27.63
|
|
January 1, 2007 to March 31, 2007
|
|
|
43.89
|
|
|
|
29.03
|
|
April 1, 2007 to June 30, 2007
|
|
|
46.50
|
|
|
|
36.90
|
|
July 1, 2007 to September 30, 2007
|
|
|
43.80
|
|
|
|
31.85
|
|
Dividends
During the year ended September 30, 2007, the Company
declared quarterly cash dividends aggregating $2,221,000 ($0.04
per share, per quarter), of which $557,000 was paid
November 1, 2007. During the year ended September 30,
2006 the Company declared quarterly cash dividends aggregating
$7,687,000 which includes $0.04 per share, per quarter, plus a
one time special dividend declared September 11, 2006 of
$0.40 per share of which $6,052,000 was paid November 1,
2006. During the year ended September 30, 2005, the Company
declared quarterly cash dividends of $1,901,000 ($0.035 per
share, per quarter), of which $476,000 was paid November 1,
2005. We expect to pay a regular cash dividend in future
quarters. This will be at the discretion of the board of
directors and will depend upon our financial condition,
operating results, capital requirements and any other factors
the board of directors deems relevant. In addition, our
agreements with our lenders may, from time to time, restrict our
ability to pay dividends.
Securities
Authorized for Issuance under Equity Compensation
Plans
Included in the following table are the number of options
outstanding, the average price and the number of available
options remaining available for future issuance under equity
compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
Number of
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Securities to be
|
|
|
|
|
|
Under Equity
|
|
|
|
Issued Upon
|
|
|
Weighted-Average
|
|
|
Compensation Plans
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
(Excluding
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Securities
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Reflected in Column
|
|
Equity Compensation Plan
|
|
and Rights
|
|
|
and Rights
|
|
|
(a))
|
|
Information:Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
1,337,438
|
|
|
$
|
9.39
|
|
|
|
1,325,334
|
|
Equity compensation plans not approved by security holders
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,337,438
|
|
|
$
|
9.39
|
|
|
|
1,325,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Performance
Graph
Notwithstanding anything to the contrary set forth in any of
our filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might
incorporate by reference this
Form 10-K
Statement, in whole or in part, the following Performance Graph
shall not be incorporated by reference into any such filings.
The following graph compares the cumulative total shareholder
return on our Common Stock since September 30, 2002, with
the cumulative return for the NASDAQ Stock Market (US) Index and
five stocks comprising our peer group index over the same
period, assuming the investment of $100 on September 30,
2002, and the reinvestment of all dividends. We declared
dividends of $0.12 per share in fiscal 2004 of which $0.035 was
paid November 1, 2004. During the year ended
September 30, 2005, we declared quarterly cash dividends
aggregating $0.16 per share, of which $0.04 per share was paid
November 1, 2005. During the year ended September 30,
2006, we declared quarterly cash dividends aggregating $0.56 per
share, of which $0.44 per share was paid November 1, 2006.
Included in the $0.44 was a special dividend of $0.40 per share.
During the year ended September 30, 2007, we declared
quarterly cash dividends aggregating $0.16 per share, of which
$0.04 per share was paid November 1, 2007.
COMPARE
5-YEAR CUMULATIVE TOTAL RETURN
AMONG ASTA FUNDING, INC.,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
ASSUMES $100
INVESTED ON SEPT. 30, 2002
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING SEPT. 30, 2007
24
|
|
Item 6.
|
Selected
Financial Data.
|
The following tables set forth a summary of our consolidated
financial data as of and for the five fiscal years ended
September 30, 2007. The selected financial data for the
five fiscal years ended September 30, 2007, have been
derived from our audited consolidated financial statements. The
selected financial data presented below should be read in
conjunction with our consolidated financial statements, related
notes, other financial information included elsewhere, and
Item 7. See Managements Discussion and
Analysis of Financial Condition and Results of Operations
in this Annual Report. All share and per share amounts have been
retroactively restated to give effect to a 2:1 stock split in
March 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Operations Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income
|
|
$
|
138,356
|
|
|
$
|
101,024
|
|
|
$
|
69,479
|
|
|
$
|
51,175
|
|
|
$
|
34,862
|
|
Other income.
|
|
|
2,181
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of venture
|
|
|
225
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue.
|
|
|
140,762
|
|
|
|
101,979
|
|
|
|
69,479
|
|
|
|
51,175
|
|
|
|
34,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
25,450
|
|
|
|
18,268
|
|
|
|
15,340
|
|
|
|
11,258
|
|
|
|
7,837
|
|
Interest expense.
|
|
|
18,246
|
|
|
|
4,641
|
|
|
|
1,853
|
|
|
|
845
|
|
|
|
1,855
|
|
Impairments
|
|
|
9,097
|
|
|
|
2,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third party servicing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,316
|
|
|
|
5,564
|
|
Provision for credit losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
52,793
|
|
|
|
25,154
|
|
|
|
17,193
|
|
|
|
13,719
|
|
|
|
15,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provisions for income taxes.
|
|
|
87,969
|
|
|
|
76,825
|
|
|
|
52,286
|
|
|
|
37,456
|
|
|
|
19,606
|
|
Provisions for income taxes.
|
|
|
35,703
|
|
|
|
31,060
|
|
|
|
21,290
|
|
|
|
15,219
|
|
|
|
8,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
52,266
|
|
|
$
|
45,765
|
|
|
$
|
30,996
|
|
|
$
|
22,237
|
|
|
$
|
11,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
3.79
|
|
|
$
|
3.36
|
|
|
$
|
2.29
|
|
|
$
|
1.67
|
|
|
$
|
1.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
3.56
|
|
|
$
|
3.13
|
|
|
$
|
2.15
|
|
|
$
|
1.57
|
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections
|
|
$
|
281.8
|
|
|
$
|
214.5
|
|
|
$
|
168.9
|
|
|
$
|
114.0
|
|
|
$
|
80.5
|
|
Portfolio purchases, at cost
|
|
|
440.9
|
|
|
|
200.2
|
|
|
|
126.0
|
|
|
|
103.7
|
|
|
|
115.6
|
|
Portfolio purchases, at face
|
|
|
10,891.9
|
|
|
|
5,194.0
|
|
|
|
3,445.2
|
|
|
|
2,833.6
|
|
|
|
3,576.4
|
|
Return on average assets(1)
|
|
|
12.0
|
%
|
|
|
19.6
|
%
|
|
|
18.3
|
%
|
|
|
16.3
|
%
|
|
|
15.0
|
%
|
Return on average stockholders equity(1)
|
|
|
24.8
|
%
|
|
|
27.8
|
%
|
|
|
23.9
|
%
|
|
|
21.5
|
%
|
|
|
18.4
|
%
|
Dividends declared per share(2)
|
|
$
|
0.16
|
|
|
$
|
0.56
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
|
$
|
0.025
|
|
At September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
580.3
|
|
|
|
287.8
|
|
|
|
180.0
|
|
|
|
158.6
|
|
|
|
113.4
|
|
Total debt
|
|
|
326.5
|
|
|
|
82.8
|
|
|
|
29.3
|
|
|
|
39.4
|
|
|
|
16.4
|
|
Total stockholders equity
|
|
|
237.5
|
|
|
|
184.3
|
|
|
|
145.2
|
|
|
|
114.5
|
|
|
|
92.4
|
|
Inception to date September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative aggregate purchases, at face
|
|
|
29,593.8
|
|
|
|
18,701.9
|
|
|
|
13,507.9
|
|
|
|
10,062.7
|
|
|
|
7,349.0
|
|
|
|
|
(1) |
|
The return on average assets is computed by dividing net income
by average total assets for the fiscal year. The return on
average stockholders equity is computed by dividing net
income by the average stockholders equity for the fiscal
year. Both ratios have been computed using beginning and
period-end balances. |
|
(2) |
|
Includes a special dividend of $0.40 per share in 2006. |
25
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation.
|
Cautions
Regarding Forward-Looking Statements
This Annual Report on
Form 10-K
contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements typically are identified by use of
terms such as may, will,
should, plan, expect,
anticipate, estimate, and similar words,
although some forward-looking statements are expressed
differently. Forward looking statements represent our judgment
regarding future events, but we can give no assurance that such
judgments will prove to be correct. Such statements are subject
to risks and uncertainties that could cause actual results to
differ materially from those projected in such forward-looking
statements. Certain factors which could materially affect our
results and our future performance are described above under
Item 1A Risk Factors and below
underCritical Accounting Policies in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Forward-looking statements are inherently uncertain as they are
based on current expectations and assumptions concerning future
events and are subject to numerous known and unknown risks and
uncertainties. We caution you not to place undue reliance on
these forward-looking statements, which are only predictions and
speak only as of the date of this report. Except as required by
law, we undertake no obligation to update or publicly announce
revisions to any forward-looking statements to reflect future
events or developments. Unless the context otherwise requires,
the terms we, us the
Company, or our as used herein refer to Asta
Funding, Inc. and our subsidiaries.
Overview
We are primarily engaged in the business of acquiring, managing,
servicing and recovering on portfolios of consumer receivables.
These portfolios generally consist of one or more of the
following types of consumer receivables:
|
|
|
|
|
charged-off receivables accounts that have
been written-off by the originators and may have been previously
serviced by collection agencies;
|
|
|
|
semi-performing receivables accounts where
the debtor is making partial or irregular monthly payments, but
the accounts may have been written-off by the
originators; and
|
|
|
|
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:
|
|
|
|
|
our relationships with industry participants, collection
agencies, investors and our financing sources;
|
|
|
|
brokers who specialize in the sale of consumer receivable
portfolios; and
|
|
|
|
other sources.
|
Critical
Accounting Policies
We account for our investments in consumer receivable
portfolios, using either:
|
|
|
|
|
The interest method; or
|
|
|
|
The cost recovery method.
|
As we believe our extensive liquidating experience in certain
asset classes such as distressed credit card receivables,
telecom receivables, consumer loan receivables, retail
installment contracts, mixed consumer
26
receivables, and auto deficiency receivables has matured, we use
the interest method for accounting for substantially all asset
acquisitions within these classes of receivables 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 where we do not possess the same expertise or
history, or we cannot reasonably estimate the timing of the cash
flows, we utilize the cost recovery method of accounting for
those portfolios of receivables.
Over time, as we continue to purchase asset classes to the point
where we believe we have developed the requisite expertise and
experience, we are more likely to utilize the interest method to
account for such purchases.
Prior to October 1, 2005, the Company accounted for its
investment in finance receivables using the interest method
under the guidance of Practice Bulletin 6. Each purchase
was treated as a separate portfolio of receivables and was
considered a separate financial investment, and accordingly we
did not aggregate such loans under Practice Bulletin 6 as
the underlying collateral had similar characteristics. As
SOP 03-3
was adopted by the Company for our fiscal year beginning
October 1, 2005, we began aggregating portfolios of
receivables acquired sharing specific common characteristics
which were acquired within a given quarter. We currently
consider 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, telecom 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:
|
|
|
|
|
the number of collection agencies previously attempting to
collect the receivables in the portfolio;
|
|
|
|
the average balance of the receivables;
|
|
|
|
the age of the receivables (as older receivables might be more
difficult to collect or might be less cost effective);
|
|
|
|
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;
|
|
|
|
number of days since charge-off;
|
|
|
|
payments made since charge-off;
|
|
|
|
the credit originator and their credit guidelines;
|
|
|
|
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;
|
|
|
|
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 and
conversely, debtors without jobs or property are less likely to
repay their obligation ; and
|
|
|
|
the ability to obtain customer statements from the original
issuer.
|
We will obtain and utilize as appropriate input 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
27
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 larger 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.
Typically, when purchasing portfolios for which we have the
experience detailed above, we have expectations of recovering
100% return of our invested capital back within an
18-28 month
time frame and expectations of collecting in the range of
130-150% of
our invested capital over 3-5 years. Historically, we have
generally been able to achieve these results and we continue to
use this as our basis for establishing the original cash flow
estimates for our portfolio purchases. We routinely monitor
these results 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.
Results
of Operations
The following discussion of our operations and financial
condition should be read in conjunction with our financial
statements and notes thereto included elsewhere in this
prospectus. In these discussions, most percentages and dollar
amounts have been rounded to aid presentation. As a result, all
such figures are approximations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Finance income
|
|
|
98.3
|
%
|
|
|
99.1
|
%
|
|
|
100.0
|
%
|
Other income
|
|
|
1.5
|
%
|
|
|
0.4
|
%
|
|
|
0.0
|
%
|
Equity in earnings of venture
|
|
|
0.2
|
%
|
|
|
0.5
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
18.1
|
%
|
|
|
17.9
|
%
|
|
|
22.1
|
%
|
Interest expense
|
|
|
13.0
|
%
|
|
|
4.6
|
%
|
|
|
2.7
|
%
|
Impairments
|
|
|
6.5
|
%
|
|
|
2.2
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
62.4
|
%
|
|
|
75.3
|
%
|
|
|
75.3
|
%
|
Provision for income taxes
|
|
|
25.4
|
%
|
|
|
30.5
|
%
|
|
|
30.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
37.0
|
%
|
|
|
44.9
|
%
|
|
|
44.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended September 30, 2007 Compared to the Year Ended
September 30, 2006
Finance income. For the year ended
September 30, 2007, finance income increased
$37.3 million or 37.0% to $138.4 million from
$101.0 million for the year ended September 30, 2006.
The increase in finance income primarily resulted from an
increase in the average outstanding level of consumer receivable
accounts acquired for liquidation during the year ended
September 30, 2007, as compared to the prior year, coupled
with the effect of adjustments to accretable yields on certain
portfolios. The average level of consumer receivables acquired
for liquidation increased from $215.0 million for the year
ended September 30, 2006 to $401.4 million for the
same
28
period in 2007. The increase in the average level of consumer
receivables acquired for liquidation is due primarily to the
Portfolio Purchase in March 2007. During the year ended
September 30, 2007, we acquired consumer receivable
portfolios at a cost of $440.9 million as compared to
$200.2 million during the prior year. During the year ended
September 30, 2007, commissions and fees associated with
gross collections from our third party collection agencies and
attorneys increased $10.9 million, or 10.3%, to
$116.6 million from $105.7 million for year ended
September 30, 2006. The increase is indicative of a shift
to the suit strategy implemented by the Company and includes
advances of court costs by our legal network, and by us. While
the dollar amount has increased, the cost as a percentage of
collections decreased during the year ended 2007. The slight
percentage decrease reflects slightly lower rates charged by the
servicers of the large portfolio and other portfolios they
service for us. Our network of attorneys typically advance the
cost of suing debtors. These court costs are recovered by our
attorneys from collections received from debtor payments. During
the fourth quarter ended September 30, 2007, the Company
accrued $1.8 million for lawsuits commenced against
debtors, primarily for the Portfolio Purchase. We do anticipate
expending court costs during fiscal year 2008 on the Portfolio
Purchase in order to accelerate the suit process. As we continue
to purchase portfolios and utilize our third party collection
agencies and attorney networks, the contingency fees should
stabilize in the 30%-33% range of gross collections based upon
the current mix of portfolios.
Adjustments to accretable yields on certain portfolios were made
based on available information, and based on improved
liquidation rates from our third party collection agencies and
attorneys. Management believes the anticipated collections on
these portfolios to be in excess of our original projections. As
we believe these improved liquidation rates will continue on
these portfolios, we adjusted our accretable yields by
$16.6 million and $44.5 million for the years ended
September 30, 2007 and 2006, respectively. Finance income
related to the accretable yield reclassifications during the
year ended September 30, 2007 was approximately
$11.1 million. While our expectations on our fiscal year
2007 purchases are lower than in the prior year, the portfolios
still fit our investment criteria. Income recognized from fully
amortized portfolios (zero based revenue) was $23.9 million
and $4.4 million for the years ended September 30,
2007 and 2006, respectively. The increase is due primarily to
more pools which were fully amortized in the forth quarter of
2007, and were predominantly derived from credit card purchases
from one issuer made in 2003 and 2004 and telecom portfolios
purchased from 2004 through 2005. Collections with regard to the
$6.9 billion face value portfolio purchased in the second
quarter of fiscal year 2007, (the Portfolio
Purchase) were $55.0 million through
September 30, 2007, which includes approximately
$5.5 million of accounts returned to the seller, and
finance income earned was $20.4 million.
Other income. Other income of
$2.2 million for the year ended September 30, 2007
includes interest income from banks and other loan instruments
substantially acquired in 2007, which were collected during the
fourth quarter of 2007.
Equity in earnings of venture. In August 2006,
the Company invested approximately $7.8 million for a 25%
interest in a newly formed venture. The venture invested in a
bankruptcy liquidation that will collect on existing rental
contracts and the liquidation of inventory. The investment is
expected to return to the Company its normal expected investment
result over a two to three year period. The Companys share
of the income was $225,000 during the year ended
September 30, 2007. The Company has received approximately
$6.6 million in cash distributions from the inception of
the venture through September 30, 2007. Subsequent to
September 30, 2007, and through December 6, 2007 an
additional $350,000 has been received by the Company.
General and administrative expenses. For the
year ended September 30, 2007, general and administrative
expenses increased $7.2 million or 39.3% to
$25.5 million from $18.3 million for the year ended
September 30, 2006, and represented 48.2% of total expenses
(excluding income taxes) for the year ended September 30,
2007. The increase in general and administrative expenses was
primarily due to an increase in receivable servicing expenses
during the year ended September 30, 2007, as compared to
the year ended September 30, 2006. The increase in
receivable servicing expenses resulted from the substantial
increase in our average number of accounts acquired for
liquidation, primarily due to the Portfolio Purchase in the
second quarter of 2007. A majority of the increased costs were
from collection expenses, consulting and skiptracing fees
(further described below.), salaries, payroll taxes and
benefits, professional fees, telephone charges and travel costs,
as we are visiting our third party collection agencies and
attorneys on a more frequent basis for financial and operational
audits.
29
In December 2007, the Company negotiated an agreement with
a third party servicer, to assist the Company in the asset
location, skiptracing efforts and ultimately the suing of
debtors with respect to the Portfolio Purchase. The agreement
calls for a 3% percent fee on substantially all gross
collections from the Portfolio Purchase on the first
$500 million and 7% on substantially all collections from
the Portfolio Purchase in excess of $500 million. This fee will
be charged from March 2007 and we believe this arrangement
will enhance our collection efforts. Additionally, the Company
will pay this third party servicer a monthly fee of
$275,000 per month for twenty four months for its
consulting and skiptracing efforts in connection with the
Portfolio Purchase. This fee began in May 2007.
Interest expense. For the year ended
September 30, 2007, interest expense increased to
$18.2 million from $4.6 million during the year ended
September 30, 2006, and represented 34.6% of total expenses
(excluding income taxes) for the year ended September 30,
2007. The increase was due to an increase in average outstanding
borrowings under our line of credit and our new
$227 million Receivables Financing Agreement during the
year ended September 30, 2007, as compared to the average
outstanding borrowings during the year ended September 30,
2006, coupled with higher interest rates during the year ended
September 30, 2007. The average interest rate (excluding
unused credit line fees) for the year ended September 30,
2007 was 7.34% as compared to 6.97% during the year ended
September 30, 2006. The average outstanding borrowings
increased from $63.2 million to $241.5 million for the
years ended September 30, 2006 and 2007, respectively. The
increase in borrowings was due to the increase in acquisitions
of consumer receivables acquired for liquidation during the year
ended September 30, 2007, as compared to the year ended
September 30, 2006.
Impairments. Impairments of $9.1 million
were recorded by the Company during the year ended
September 30, 2007 as compared to $2.2 million for the
year ended September 30, 2006, and represented 17.2% of
total expenses (excluding income taxes) for the year ended
September 30, 2007. Impairments were taken on eleven
portfolios during the year ended 2007 including nine portfolios
in the fourth quarter of 2007. As relative collections with
respect to our expectations on these portfolios were
deteriorating in the fourth quarter, and this deterioration was
confirmed by our third party collection agencies and attorneys,
we believed that impairment charges became necessary.
Net income. For the year ended
September 30, 2007, net income increased $6.5 million,
or 14.2% to $52.3 million from $45.8 million for the
year ended September 30, 2006. Net income per share for the
year ended September 30, 2007 increased $0.43 per diluted
share, or 13.7% to $3.56 per diluted share, from $3.13 per
diluted share for the year ended September 30, 2006.
Year
Ended September 30, 2006 Compared to the Year Ended
September 30, 2005
Finance income. For the year ended
September 30, 2006, finance income increased
$31.5 million or 45.4% to $101.0 million from
$69.5 million for the year ended September 30, 2005.
The increase in finance income was primarily due to an increase
in finance income earned on consumer receivables acquired for
liquidation, which resulted from an increase in the average
outstanding accounts acquired for liquidation during the fiscal
year ended September 30, 2006, as compared to the same
prior year period, coupled with the effect of increased yields
on certain portfolios. For the fiscal year ended
September 30, 2006, we acquired receivables at a cost of
$200.2 million as compared to $126.0 million for the
year ended September 30, 2005. For the fiscal year ended
September 30, 2006, we had an average of
$215.0 million in consumer receivables acquired for
liquidation as compared to $159.4 million for the year
ended September 30, 2005, a 34.8% increase. Finance income
recognized from collections represented by account sales was
$32.0 million and $24.9 million for the years ended
September 30, 2006 and 2005, respectively, while
collections represented by account sales decreased by 15.0%, or
$9.7 million from $64.7 million to $55.0 million.
This decrease is primarily due to the sales of certain
portfolios purchased in 2004 with higher rates of return
primarily recognized in 2006.
Adjustments to accretable yields on certain portfolios were made
based on available information, and based on improved
liquidation rates attained and forecasted to be attained by our
third party collection agencies and attorneys. Management
believes the anticipated collections on these portfolios to be
in excess of our original projections. As we believe these
improved liquidation rates will continue, we adjusted our
accretable yields by $44.5 million which impacted revenue
this year and will impact revenue in future years as well.
Income recognized from fully amortized portfolios (zero based
revenue) was $4.4 million and $8.8 million for the
years ended September 30, 2006 and 2005, respectively. The
decrease was due primarily to the sale of fully amortized pools
during 2005.
30
In 2004 the Company decided to increase its utilization of the
legal process to increase collections. This strategy has proven
to be effective to date, as we continue to utilize this
strategy. The commissions and fees associated with gross
collections from our third-party collection agencies and
attorneys were approximately $105.7 million, or 33.0% of
gross collections, in the fiscal year ended September 30,
2006, as compared to $49.9 million, or 22.8% of gross
collections in the prior year. As we continue to purchase
portfolios and utilize our third party collection agencies and
attorney networks, we anticipate these costs will rise; however
the contingency fees should stabilize in the range of 30% to 33%
of gross collections based upon the current mix of portfolios.
Other income. Other income of $405,000 for the
year ended September 30, 2006 includes service fee income
generated by VATIV and interest income from banks and other loan
instruments.
Equity in earnings of venture. In August 2006
the Company invested approximately $7.8 million for a 25%
interest in a newly formed venture. The venture invested in a
bankruptcy liquidation that will collect on existing rental
contracts and the liquidation of inventory. The investment is
expected to return to the Company its normal expected investment
results over a two to three year period. The Companys
share of the income of $550,000 in 2006 is primarily due to
sales of the higher valued inventory early in the ventures
life. The Company received approximately $2.4 million
through September 30, 2006 in cash distributions from the
venture and an additional $1.8 million through
November 30, 2006 as returns of its investment.
General and administrative expenses. For the
year ended September 30, 2006, general and administrative
expenses increased $3.0 million or 19.1% to
$18.3 million from $15.3 million for the year ended
September 30, 2005. The increase was primarily due to an
increase in the administrative costs associated with the 34.9%
increase in the accounts acquired for liquidation. The increase
in the administrative expenses included increased media costs,
technology costs, salaries, and related benefits, professional
fees, telephone charges and rent.
Interest Expense. For the year ended
September 30, 2006, interest expense increased
$2.7 million or 150.5% to $4.6 million from
$1.9 million for the year ended September 30, 2005.
The increase was primarily due to the increase in the average
outstanding borrowings under our line of credit during the year
ended September 30, 2006, as compared to the same prior
year period. The average outstanding balance during the year
ended September 30, 2006 was $63.2 million as compared
to $34.3 million for the period ended September 30,
2005. Also, the average interest rate for the year, excluding
unused credit line fees, increased to 6.97% from 5.17% in 2005
Net income. For the year ended
September 30, 2006, net income increased $14.8 million
or 47.7% to $45.8 million from $31.0 million for the
year ended September 30, 2005. Net income per share for the
year ended September 30, 2006 increased $0.98 per diluted
share or 45.6% to $3.13 per diluted share from $2.15 per diluted
share for the year ended September 30, 2005.
Liquidity
and Capital Resources
Our primary sources of cash from operations include collections
on the receivable portfolios that we have acquired. Our primary
uses of cash include our purchases of consumer receivable
portfolios. We rely significantly upon our lenders to provide
the funds necessary for the purchase of consumer and commercial
accounts receivable portfolios. As of September 30, 2007, we had
a $175 million line of credit for portfolio purchases, with
an expandable feature which allows the Company the ability to
increase the line to $225 million with consent of the
banks. As of September 30, 2007, there was a
$141.7 million outstanding balance under this facility.
Although we are within the borrowing limits of this facility,
there are certain restrictions in place with regard to
collateralization whereby the Company may be limited in its
ability to borrow funds to purchase additional portfolios. On
March 30, 2007 the Company signed the Third Amendment to
Fourth Amended and Restated Loan Agreement (the Credit
Agreement) with a consortium of banks that amended certain
terms of the Credit Agreement, whereby the parties agreed to a
Temporary Overadvance of $16 million to be reduced to zero
on or before May 17, 2007. In addition, the parties agreed
to an increase in interest rate, to LIBOR plus 275 basis
points for LIBOR loans, an increase from 175 basis points.
The rate is subject to adjustment each quarter upon delivery of
results that evidence a need for an adjustment. As of
May 7, 2007, the Temporary Overadvance was approximately
$12 million. On May 10, 2007, the Company signed the
Fourth Amendment to the Credit Agreement whereby the parties
agreed to revise certain terms of the agreement which eliminated
the Temporary Overadvance provision. On June 26, 2007 the
Company signed the Fifth Amendment to the Fourth Amended and
Restated Loan Agreement (the Credit Agreement) with
a
31
consortium of banks that amended certain terms of the Credit
Agreement whereby the parties agreed to further amend the
definition of the Borrowing Base and increase the advance rates
on portfolio purchases allowing the Company more borrowing
availability. On December 4, 2007, the Company signed the
Sixth Amendment to the Fourth Amended and Restated Loan
Agreement (the Credit Agreement) with a consortium
of banks that temporarily increases the total revolving loan
commitment from $175,000,000 to $185,000,000. The increase of
$10,000,000 is required to be repaid by February 29, 2008.
In the event the increase is not repaid by February 29,
2008, the then outstanding portion of the temporary increase
shall be repaid over a six month period. During the first
quarter of fiscal 2008, we made purchases totaling
$33.4 million, which put us close to the upper limit of our
credit line. The increase will enable us to make more portfolio
acquisitions as the opportunity arises.
In March 2007, Palisades Acquisition XVI, LLC (Palisades
XVI), an indirect wholly-owned subsidiary of the Company
purchased a portfolio of approximately $6.9 billion in face
value receivables for a purchase price of $300 million plus
20% of net payments after we recover 150% of the purchase price
plus our cost of funds. The portfolio is made up of
predominantly credit card accounts and includes accounts in
collection litigation and accounts as to which the sellers have
been awarded judgments and other traditional charge-offs. The
Company paid a deposit of $75 million, fully using its
existing credit facility, as modified in February 2007.
The remaining $225 million was paid on March 5, 2007,
by borrowing approximately $227 million (inclusive of
transaction costs) under a new Receivables Financing Agreement
entered into by Palisades XVI with a major financial institution
as the funding source, and consists of debt with full recourse
only to Palisades XVI, bearing an interest rate of approximately
170 basis points over LIBOR. The term of the agreement is
three years. All proceeds received as a result of the net
collections from this portfolio are applied to interest and
principal of the underlying loan. The Company made certain
representations and warranties to the lender to support the
transaction. The portfolio is serviced by Palisades Collection,
LLC, a wholly own subsidiary of the Company, which has engaged a
subservicer for the portfolio. As of September 30, 2007,
there was a $184.8 million outstanding balance under this
facility.
As of September 30, 2007, our cash and cash equivalents
decreased $3.3 million to $4.5 million from
$7.8 million at September 30, 2006. The decrease in
cash and cash equivalents during the year ended
September 30, 2007, was due to an increase in cash flows
used in investing activities primarily due to the increase in
purchases of consumer receivables acquired for liquidation, a
special dividend paid and higher interest payments, offset by an
increase in cash provided by operating activities due to
primarily an increase in net income for the year and an increase
in cash provided by financing activities, primarily due to the
increase in borrowings under lines of credit during the year
ended September 30, 2007, as compared to the year 2006.
Net cash provided by operating activities was $55.6 million
during the year ended September 30, 2007, compared to net
cash provided by operating activities of $48.9 million
during the year ended September 30, 2006. The increase in
net cash provided by operating activities was primarily due to
the increase in net income, an increase in interest payable as a
result of higher borrowings, offset a decrease in income taxes
payable and an increase in amounts due from third party
collection agencies and attorneys, and an increase in deferred
income taxes. Net cash used in investing activities was
$291.2 million during the year ended September 30,
2007, compared to net cash used in investing activities of
$97.4 million during the year ended September 30,
2006. The increase in net cash used in investing activities was
primarily due to an increase in the purchase of accounts
acquired for liquidation, including the Portfolio Purchase of
$6.9 billion of face value consumer receivables at a cost
of approximately $300 million. Net cash provided by
financing activities was $232.3 million during the year
ended September 30, 2007, as compared to cash provided by
financing activities of $52.3 million during the year ended
September 30, 2006. The increase in net cash provided by
financing activities was primarily due to an increase in
borrowings under our lines of credit and our new Receivable
Financing Agreement to finance the Portfolio Purchase. In
addition, there was $5.7 million of cash designated as
restricted cash at September 30, 2007. There was no
restricted cash at the end of the prior year.
As of September 30, 2007, Palisade XVI, the Companys
indirect wholly-owned subsidiary, was required to remit and
additional $13.1 million to its lender in order to be in
compliance under the Receivable Financing Agreement. The Company
facilitated the ability of Palisades XVI to make this payment
by borrowing $13.1 million under its current revolving
credit facility and causing another of its subsidiaries to
purchase a portion of the
32
Portfolio Purchase from Palisade XVI at a price of $13.1
million prior to the measurement date under the Receivable
Financing Agreement.
Our cash requirements have been and will continue to be
significant. We depend on external financing to acquire consumer
receivables. During the year ended September 30, 2007, we
acquired consumer receivable portfolios at a cost of
approximately $440.9 million. These acquisitions were
financed with our cash flows from operating activities and
primarily with our existing and new credit facilities. As we
are approaching the upper limit of our borrowing availability,
we may seek additional financing for further growth.
The Receivable Financing Agreement required that the principal
amount thereunder be reduced under a schedule tied to projected
collections on the Portfolio Purchase. As we fell behind the
minimum required amortization schedule, principally as a result
of sales of accounts that were built into that schedule, and
since currently we believe that our strategy of suing debtors
will ultimately realize more than the sales of these accounts
would produce, the Company and its lender entered into an
amendment dated December 27, 2007. The amendment allows us
greater flexibility to use our strategy and substantially
eliminates any scheduled sales of accounts used in the original
expectations. Additionally, the amendment effectively extends
the repayment schedule from 25 months to 31 months.
While we believe that we will be able to satisfy the new
collection schedule, no assurances can be given that collections
will not slow further, notwithstanding our recent engagement of
a sub-servicer to assist with collection of this Portfolio
Purchase, as described in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations. Such slowing of collections could cause us to fall
behind the schedule and default on our obligations under the
amended Receivable Financing Agreement.
We anticipate the funds available under our current credit
facility and cash from operations will be sufficient to satisfy
our estimated cash requirements for at least the next
12 months. If for any reason our available cash otherwise
proves to be insufficient to fund operations (because of future
changes in the industry, general economic conditions,
unanticipated increases in expenses, or other factors), we may
be required to seek additional funding.
From time to time, we evaluate potential acquisitions of related
businesses but we may not be able to complete any acquisitions
on favorable terms or at all. We may consider possible
acquisitions of, or investments in, complementary businesses.
Any such possible acquisitions or investments may be material
and may require us to incur a significant amount of debt or
issue a significant amount of equity securities. Further, any
business that we acquire or invest in will likely have its own
capital needs, which may be significant, and which we may be
called upon to satisfy.
The following table shows the changes in finance receivables,
including amounts paid to acquire new portfolios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Balance at beginning of period
|
|
$
|
257.3
|
|
|
$
|
172.7
|
|
|
$
|
146.1
|
|
|
$
|
105.6
|
|
|
$
|
36.1
|
|
Acquisitions of finance receivables, net of buybacks
|
|
|
440.9
|
|
|
|
200.2
|
|
|
|
126.0
|
|
|
|
103.7
|
|
|
|
115.6
|
|
Cash collections from debtors applied to principal(1)
|
|
|
(114.4
|
)
|
|
|
(90.4
|
)
|
|
|
(59.6
|
)
|
|
|
(37.6
|
)
|
|
|
(27.4
|
)
|
Cash collections represented by account sales applied to
principal(1)
|
|
|
(29.1
|
)
|
|
|
(23.0
|
)
|
|
|
(39.8
|
)
|
|
|
(25.3
|
)
|
|
|
(18.2
|
)
|
Impairment/Portfolio writedown
|
|
|
(9.1
|
)
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
545.6
|
|
|
$
|
257.3
|
|
|
$
|
172.7
|
|
|
$
|
146.1
|
|
|
$
|
105.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cash collections applied to principal consists of cash
collections less income recognized on finance receivables plus
amounts received by us from the sale of consumer receivable
portfolios to third parties. |
33
Supplementary Information on Consumer Receivables Portfolios:
Portfolio
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Aggregate Purchase Price
|
|
$
|
440.9
|
|
|
$
|
200.2
|
|
|
$
|
126.0
|
|
Aggregate Portfolio Face Amount
|
|
|
10,891.9
|
|
|
|
5,194.0
|
|
|
|
3,445.2
|
|
The prices we pay for our consumer receivable portfolios are
dependent on many criteria including the age of the portfolio,
the number of third party collection agencies and attorneys that
have been involved in the collection process and the
geographical distribution of the portfolio. When we pay higher
prices for portfolios which are performing or fresher, we
believe it is not at the sacrifice of our expected returns.
Price fluctuations for portfolio purchases from quarter to
quarter or year over year are indicative of the overall mix of
the types of portfolios we are purchasing.
Schedule
of Portfolios by Income Recognition Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
September 30, 2005
|
|
|
|
Cost
|
|
|
Interest
|
|
|
Cost
|
|
|
Interest
|
|
|
Cost
|
|
|
Interest
|
|
|
|
Recovery
|
|
|
Method
|
|
|
Recovery
|
|
|
Method
|
|
|
Recovery
|
|
|
Method
|
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
|
(In millions)
|
|
|
Original Purchase Price (at period end)
|
|
$
|
101.1
|
|
|
$
|
1,045.4
|
|
|
$
|
50.6
|
|
|
$
|
655.0
|
|
|
$
|
49.3
|
|
|
$
|
454.8
|
|
Cumulative Aggregate Managed Portfolios (at period end)
|
|
|
3,961.5
|
|
|
|
25,464.7
|
|
|
|
2,205.0
|
|
|
|
16,332.8
|
|
|
|
2,168.4
|
|
|
|
11,339.5
|
|
Receivable Carrying Value (at period end)
|
|
|
32.0
|
|
|
|
513.6
|
|
|
|
1.1
|
|
|
|
256.3
|
|
|
|
0.1
|
|
|
|
172.6
|
|
Finance Income Earned (for the respective period)
|
|
|
2.2
|
|
|
|
136.2
|
|
|
|
3.4
|
|
|
|
97.6
|
|
|
|
5.4
|
|
|
|
64.1
|
|
Total Cash Flows (for the respective period)
|
|
|
21.2
|
|
|
|
260.6
|
|
|
|
3.7
|
|
|
|
210.8
|
|
|
|
6.6
|
|
|
|
162.3
|
|
The original purchase price reflects what we paid for the
receivables from 1998 through the end of the respective period.
The cumulative aggregate managed portfolio balance is the
original aggregate amount owed by the borrowers at the end of
the respective period. Additional differences between year to
year period end balances may result from the transfer of
portfolios between the interest method and the cost recovery
method. We purchase consumer receivables at substantial
discounts from the face amount. We record finance income on our
receivables under either the cost recovery or interest method.
The receivable carrying value represents the current basis in
the receivables after collections and amortization of the
original price.
Collections
Represented by Account Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections
|
|
|
|
|
|
|
|
|
|
Represented
|
|
|
Finance
|
|
|
|
|
|
|
By account
|
|
|
Income
|
|
|
|
|
Year
|
|
Sales
|
|
|
Recognized
|
|
|
|
|
|
2007
|
|
$
|
54,193,000
|
|
|
$
|
25,164,000
|
|
|
|
|
|
2006
|
|
|
55,035,000
|
|
|
|
32,041,000
|
|
|
|
|
|
2005
|
|
|
64,731,000
|
|
|
|
24,918,000
|
|
|
|
|
|
34
Portfolio
Performance (1)
The following table summarizes our historical portfolio purchase
price and cash collections on accrual basis portfolios on an
annual vintage basis since October 1, 2001 through
September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Net Cash
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Collections
|
|
|
Estimated
|
|
|
Total
|
|
|
Collections
|
|
Purchase
|
|
Purchase
|
|
|
Including
|
|
|
Remaining
|
|
|
Estimated
|
|
|
as a Percentage
|
|
Period
|
|
Price(2)
|
|
|
Cash Sales(3)
|
|
|
Collections(4)
|
|
|
Collections(5)
|
|
|
of Purchase Price
|
|
|
2001
|
|
$
|
65,120,000
|
|
|
$
|
95,340,000
|
|
|
|
|
|
|
|
95,340,000
|
|
|
|
146
|
%
|
2002
|
|
|
36,557,000
|
|
|
|
52,346,000
|
|
|
|
|
|
|
|
52,346,000
|
|
|
|
143
|
%
|
2003
|
|
|
115,626,000
|
|
|
|
195,051,000
|
|
|
|
3,535,000
|
|
|
|
198,586,000
|
|
|
|
172
|
%
|
2004
|
|
|
103,743,000
|
|
|
|
160,767,000
|
|
|
|
1,210,000
|
|
|
|
161,977,000
|
|
|
|
156
|
%
|
2005
|
|
|
126,023,000
|
|
|
|
155,789,000
|
|
|
|
59,267,000
|
|
|
|
215,056,000
|
|
|
|
171
|
%
|
2006
|
|
|
200,237,000
|
|
|
|
149,368,000
|
|
|
|
160,913,000
|
|
|
|
310,281,000
|
|
|
|
155
|
%
|
2007
|
|
|
384,850,000
|
|
|
|
69,409,000
|
|
|
|
460,205,000
|
|
|
|
529,614,000
|
|
|
|
138
|
%
|
|
|
|
(1) |
|
Total collections do not represent full collections of the
Company with respect to this or any other year. |
|
(2) |
|
Purchase price refers to the cash paid to a seller to acquire a
portfolio less the purchase price refunded by a seller due to
the return of non-compliant accounts (also defined as put-backs). |
|
(3) |
|
Cash collections include: net collections from our third-party
collection agencies and attorneys, 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
collections. |
We do not anticipate collecting the majority of the purchased
principal amounts. Accordingly, the difference between the
carrying value of the portfolios and the gross receivables is
not indicative of future finance income from these accounts
acquired for liquidation. Since we purchased these accounts at
significant discounts, we anticipate collecting only a portion
of the face amounts.
For the year ended September 30, 2007, we recognized
finance income of $2.2 million under the cost recovery
method because we collected $2.2 million in excess of our
purchase price on certain of these portfolios. In addition, we
earned $136.2 million of finance income under the interest
method based on actuarial computations which, in turn, are based
on actual collections during the period and on what we project
to collect in future periods. During the year ended
September 30, 2007, we purchased portfolios with an
aggregate purchase price of $440.9 million with a face
value (gross contracted amount) of $10.9 billion.
New
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 141 (revised
2007) Business Combinations (FASB Statement
No. 141R).FASB Statement No, 141 replaces FASB
Statement No. 141 Business
Combinations(FASB Statement No. 141) The
objective of FASB Statement No. 141R, is to improve the
relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its
financial reports about a business combination and its effects.
To accomplish that, this Statement establishes principles and
requirements for how the acquirer:
a. recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree
b. recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase
c. determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial
effects of the business combination.
35
FASB Statement No. 141R applies to all transactions or
other events in which an entity (the acquirer) obtains control
of one or more businesses (the acquirer), including those
sometimes referred to as true mergers or
mergers of equals and combinations achieved without
the transfer of consideration, for example, by contract alone or
through the lapse of minority veto rights. FASB Statement
No. 141R applies to all business entities, including mutual
entities that previously used the pooling-of-interests method of
accounting for some business combinations. It does not apply to:
a. the formation of a joint venture
b. the acquisition of an asset or a group of assets that
does not constitute a business
c. a combination between entities or businesses under
common control
d. a combination between not-for-profit organizations or
the acquisition of a for-profit business by a not-for-profit
organization.
FASB Statement No. 141R retains the guidance in FASB
Statement No. 141 for identifying and recognizing
intangible assets separately from goodwill. FASB Statement
No. 141R requires an acquirer to recognize the assets
acquired, the liabilities assumed and any non-controlling
interest in the acquiree at the acquisition date, measured at
their fair values at that date.
FASB Statement No. 141 R applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. An entity may not apply it before
that date. Currently, the Company does not anticipate FASB
Statement No. 141R will have an impact on the
Companys financial statements.
In December 2007, the FASB issued FASB Statement
No. 160 Noncontrolling Interests in
Consolidated Financial Statements an Amendment of
ARB No. 51 . (FASB Statement No. 160)
A noncontrolling interest, sometimes called a minority interest,
is the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. The objective of FASB
Statement No. 160 is to improve the relevance,
comparability, and transparency of the financial information
that a reporting entity provides in its consolidated financial
statements by establishing accounting and reporting standards
that require:
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the ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled, and presented in
the consolidated statement of financial position within equity,
but separate from the parents equity.
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the amount of consolidated net income attributable to the parent
and to the noncontrolling interest be clearly identified and
presented on the face of the consolidated statement of income.
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changes in a parents ownership interest while the parent
retains its controlling financial interest in its subsidiary be
accounted for consistently. A parents ownership interest
in a subsidiary changes if the parent purchases additional
ownership interests in its subsidiary or if the parent sells
some of its ownership interests in its subsidiary. It also
changes if the subsidiary reacquires some of its ownership
interests or the subsidiary issues additional ownership
interests. All of those transactions are economically similar,
and this Statement requires that they be accounted for
similarly, as equity transactions.
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when a subsidiary is deconsolidated, any retained noncontrolling
equity investment in the former subsidiary be initially measured
at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any
noncontrolling equity investment rather than the carrying amount
of that retained investment.
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entities provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the
interests of the noncontrolling owners.
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FASB Statement No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries
or that deconsolidate a subsidiary.
36
FASB Statement No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited.
FASB Statement No. 160 shall be applied prospectively as of
the beginning of the fiscal year in which this Statement is
initially applied, except for the presentation and disclosure
requirements. The presentation and disclosure requirements shall
be applied retrospectively for all periods presented. .
Currently the Company does not anticipate FASB Statement
No. 160 will have an impact on the Companys financial
statements.
In February 2007, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115, this Statement permits entities to choose to
measure many financial instruments and certain other items at
fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the
use of fair value measurement, which is consistent with the
Boards long-term measurement objectives for accounting for
financial instruments. This Statement is effective for the
Companys fiscal year that begins October 1, 2008. The
Company believes that the statement, when adopted, will not
impact the Company.
In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (SAB 108). SAB 108 was
issued in order to eliminate the diversity in practice
surrounding how public companies quantify financial statement
misstatements. SAB 108 requires that registrants quantify
errors using both a balance sheet and income statement approach
and evaluate whether either approach results in a misstated
amount that, when all relevant quantitative and qualitative
factors are considered, is material. SAB 108 became
effective for the Company in the current fiscal year. Adoption
had no material impact on the Company.
In September 2006, the FASB issued FASB Statement No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106 and 132(R) (FASB
158). FASB 158 improves financial reporting by requiring
an employer to recognize the overfunded or underfunded status of
a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded
status in the year in which the changes occur through
comprehensive income of a business entity. FASB 158 also
improves financial reporting by requiring an employer to measure
the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. FASB
158 was required to be implemented by the end of our fiscal year
2007. At this time, the Company does not sponsor a defined
benefit plan; therefore, there is no impact on the Company with
regard to FASB 158.
In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements. This Statement defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or
permit fair value measurements, the Board having previously
concluded in those accounting pronouncements that fair value is
the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements. FASB Statement
No. 157 will be effective for our financial statements
issued for our fiscal year beginning October 1, 2008. We do
not expect the adoption of FASB Statement No. 157 to have a
material impact on our financial reporting, and we are currently
evaluating the impact, if any, the adoption of FASB Statement
No. 157 will have on our disclosure requirements.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109
(FIN 48), which prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 will be effective for our fiscal year beginning
October 1, 2007. We do not expect the adoption of
FIN 48 to have a material impact on our financial reporting
and disclosure.
37
Inflation:
We believe that inflation has not had a material impact on our
results of operations for the years ended September 30,
2007, 2006 and 2005.
Seasonality
and Trends
Our management believes that our operations may, to some extent,
be affected by high delinquency rates and by lower recoveries on
consumer receivables acquired for liquidation during or shortly
following certain holiday periods and during the summer months.
In addition, on occasion the market for acquiring distressed
receivables does become more competitive thereby possibly
diminishing our ability to acquire such distressed receivables
at attractive prices in such periods.
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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We are exposed to various types of market risk in the normal
course of business, including the impact of interest rate
changes and changes in corporate tax rates. A material change in
these rates could adversely affect our operating results and
cash flows. At September 30, 2007, our $175 million
credit facility, all of which is variable rate debt, had an
outstanding balance of $141.7 million and our Receivable
Financing Agreement, all of which is variable rate debt, had an
outstanding balance of $184.8 million . A 25 basis-point
increase in interest rates would have increased our annual
interest expense by approximately $600,000 based on the average
debt obligation outstanding during the fiscal year. We do not
currently invest in derivative financial or commodity
instruments.
38
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Item 8.
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Financial
Statements And Supplementary Data.
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The Financial Statements of the Company, the Notes thereto and
the Report of Independent Registered Public Accounting Firm
thereon required by this item appear in this report on the pages
indicated in the following index:
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Index to Audited Financial Statements:
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Page
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7
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Item 9.
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Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure.
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None.
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Item 9A.
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Controls
and Procedures.
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Disclosure
Controls and Procedures
a) Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our disclosure controls and procedures, as such
term is defined under
Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended (the
Exchange Act), as of the end of the period covered by this
report. Based on this evaluation, our Chief Executive Officer
and our Chief Financial Officer concluded that our disclosure
controls and procedures were not effective as of the end of the
period covered by this Annual Report on
Form 10-K
because of the material weaknesses in internal control over
financial reporting discussed below.
b) We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in
our reports under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms, and
that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures. Any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives. Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as of
September 30, 2007. Based upon that evaluation and subject
to the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were deficient.
A material weakness is a control deficiency, or combination of
deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial
statements will not be prevented or detected. In connection with
the preparation of our consolidated financial statements for the
year ended September 30, 2007, the Company noted the
following material weaknesses that became evident to management:
1. The Company had insufficient controls and procedures in
place to ensure that information relating to all material
arrangements critical to accounting and effective review were
available on a timely basis to appropriate financial and
accounting personnel, and
2. The Company did not have effective policies and
procedures in place to assess the Companys liquidity and
compliance with debt covenants.
Changes
in Internal Controls over Financial Reporting
There have been no changes in internal controls over financial
reporting in the Companys fourth fiscal quarter of 2007.
39
The Company intends to take a number of corrective actions to
address the above mentioned material weaknesses as promptly as
practicable. These actions are expected to include the
establishment of an oversight committee comprised of the Chief
Financial Officer and other key management personnel, and if
appropriate, members of the audit committee. This committee will
review all material transactions with a view to ensuring
complete, accurate and timely financial accounting and related
disclosure. In addition the Company will undertake a review of
its financial reporting processes with an outside consultant and
adopt such other procedures as might be necessary.
40
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Asta Funding, Inc.
We have audited managements assessment, included in the
accompanying annual report on
Form 10-K,
that Asta Funding, Inc. did not maintain effective internal
control over financial reporting as of September 30, 2007,
based on, criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Asta Funding, Inc.
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
Companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in managements assessment as of September 30, 2007:
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The Company had insufficient controls and procedures in place to
assess whether information critical to accurate accounting and
disclosure and for the effective review of all material
arrangements were available on a timely basis to appropriate
financial accounting personnel. Specifically, this control
deficiency permitted the following:
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A material error in accounting for an arrangement with a
third-party collection agency for commissions and fees resulting
in an understatement of these costs.
Critical analysis of the timing and amount of cash flows to be
generated by certain portfolios were not sufficiently accurate
to determine (i) the completeness of the forecasted cash
flows included in projections; and (ii) the sufficiency and
appropriateness of related disclosures.
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As a result of this deficiency, it was necessary for management
to incorporate significant additional data that was obtained
subsequent to the preparation of their initial projections and
disclosures.
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The Company did not have effective policies and procedures in
place to assess and disclose the Companys liquidity and
compliance with debt covenants. As a result of this deficiency,
the Company did not previously amend or disclose the need to
amend certain debt covenants to facilitate compliance with
existing agreements.
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The deficiencies noted above resulted in an audit adjustment to
the Companys September 30, 2007 consolidated
financial statements.
These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the September 30, 2007 consolidated financial
statements, and this report does not affect our report dated
December 27, 2007 which expressed an unqualified opinion on
those financial statements.
In our opinion, managements assessment that Asta Funding,
Inc. did not maintain effective internal control over financial
reporting as of September 30, 2007, is fairly stated, in
all material respects, based on, the COSO criteria. Also, in our
opinion, because of the effect of the material weaknesses
described above on the achievement of the objectives of the
control criteria, Asta Funding, Inc. has not maintained
effective internal control over financial reporting as of
September 30, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Asta Funding, Inc. and
subsidiaries as of September 30, 2007 and 2006, and the
related consolidated statements of operations,
stockholders equity, and cash flows for each of the years
in the three-year period ended September 30, 2007.
EISNER LLP
New York, New York
December 27, 2007
42
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Item 9B.
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Other
Information.
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None.
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Item 10.
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Directors,
Executive Officers and Corporate Governance.
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Information contained under the caption Directors,
Executive Officers, and Corporate Governance in our definitive
Proxy Statement to be filed with the Commission on or before
January 28, 2008, is incorporated by reference in response
to this Item 10.
We have adopted a Code of Ethics for our Senior Financial
Officers that is incorporated into this
Form 10-K
in Exhibit 14.1.
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Item 11.
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Executive
Compensation.
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Information contained under the caption Executive
Compensation in our definitive Proxy Statement to be filed
with the Commission on or before January 28, 2008 is
incorporated by reference in response to this Item 11.
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
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Information contained under the caption Security Ownership
of Certain Beneficial Owners and Management in our
definitive Proxy Statement to be filed with the Commission on or
before January 28, 2008 is incorporated herein by reference
in response to this Item 12.
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Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Information contained under the caption Certain
Relationships and Related Transactions in our definitive
Proxy Statement to be filed with the Commission on or before
January 28, 2008 is incorporated by reference in response
to this Item 13.
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Item 14.
|
Principal
Accounting Fees and Services.
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Information contained under the caption Principal
Accounting Fees and Services in our definitive Proxy
Statement to be filed with the Commission on or before
January 28, 2008 is incorporated by reference in response
to this Item 14.
43
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Item 15.
|
Exhibits,
Financial Statement Schedules.
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Exhibits designated by the symbol * are filed with this Annual
Report on
Form 10-K.
All exhibits not so designated are incorporated by reference to
a prior filing as indicated.
Exhibits designated by the symbol are management
contracts or compensatory plans or arrangements that are
required to be filed with this report pursuant to this
Item 15.
The Company undertakes to furnish to any stockholder so
requesting a copy of any of the following exhibits upon payment
to us of the reasonable costs incurred by us in furnishing any
such exhibit.
(a) The following documents are filed as part of this report
1. Financial Statements See Index to
Consolidated Financial Statements in Part II, Item 8
2. Exhibits
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Exhibit
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Number
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3
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.1
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Certificate of Incorporation.(1)
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3
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.2
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Amendment to Certificate of Incorporation(3)
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3
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.3
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By laws.(2)
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10
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.1
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Asta Funding, Inc 1995 Stock Option Plan as Amended(1)
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10
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.2
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Asta Funding, Inc. 2002 Stock Option Plan(3)
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10
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.3
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Asta Funding, Inc. Equity Compensation Plan(6)
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10
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.4
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Third Amended and Restated Loan and Security Agreement dated
May 11, 2004, between the Company and Israel Discount Bank
of NY(5)
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10
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.5
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Fourth Amended and Restated Loan and Security Agreement dated
July 10, 2006, between the Company and Israel Discount Bank
of NY(7)
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10
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.6
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Lease agreement between the Company and 210 Sylvan Avenue LLC
dated July 29, 2005(8)
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10
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.7
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Receivables Finance Agreement dated March 2, 2007 between
Company and the Bank of Montreal(10)
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10
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.8
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Subservicing Agreement between the Company and the Subservicer
dated March 2, 2007(17)
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10
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.9
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Purchase and Sale Agreement dated February 5, 2007(11)
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10
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.10
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Third Amendment to the Fourth Amended and Restated Loan and
Security Agreement dated March 30, 2007, between the
Company and Israel Discount Bank(12)
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10
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.11
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Fourth Amendment to the Fourth Amended and Restated Loan and
Security Agreement dated May 10, 2007, between the Company
and Israel Discount Bank(13)
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10
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.12
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Fifth Amendment to the Fourth Amended and Restated Loan and
Security Agreement dated June 27, 2007, between the Company
and Israel Discount Bank(14)
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10
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.13
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First Amendment to the Receivables Finance Agreement dated
July 1, 2007 between the Company and Bank of Montreal(15)
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10
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.14
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Sixth Amendment to the Fourth Amended and Restated Loan and
Security Agreement dated December 4, 2007, between the
Company and Israel Discount Bank(16)
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10
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.15
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Second Amendment to the Receivables Financing Agreement dated
December 27, 2007*
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14
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.1
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Code of Ethics for Senior Financial Officers(4)
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21
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.1
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Subsidiaries of the Company(9)
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23
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.1
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Consent of Independent Registered Public Accounting Firm*
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31
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.1
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Certification of Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
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31
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.2
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Certification of Registrants Chief Financial Officer,
Mitchell Cohen, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
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44
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Exhibit
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Number
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32
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.1
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Certification of the Registrants Chief Executive Officer,
Gary Stern, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
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32
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.2
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Certification of the Registrants Chief Financial Officer,
Mitchell Cohen, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
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(1) |
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Incorporated by reference to an Exhibit to Asta Fundings
Registration Statement on
Form SB-2
(File No. 33-97212). |
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(2) |
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Incorporated by reference to an Exhibit to Asta Fundings
Annual Report on
Form 10-KSB
for the year ended September 30, 1999. |
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(3) |
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Incorporated by reference to an Exhibit to Asta Fundings
Quarterly Report on
Form 10-QSB
for the three months ended March 31, 2002. |
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(4) |
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Incorporated by reference to Exhibit 14.1 to Asta
Fundings Annual Report on
form 10-K
for the year ended September 30, 2004. |
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(5) |
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Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed May 19, 2004. |
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(6) |
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Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed March 3, 2006. |
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(7) |
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Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed July 12, 2006. |
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(8) |
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Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed August 2, 2005. |
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(9) |
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Incorporated by reference to Exhibit 21.1 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2006. |
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(10) |
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Incorporated by reference to Exhibit 10.1 to Asta
Fundings Quarterly Report on
Form 10-Q
for the three months ended March 31, 2007. |
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(11) |
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Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed February 9, 2007 |
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(12) |
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Incorporated by reference to Exhibit 10.2 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended March 31, 2007 |
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(13) |
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Incorporated by reference to Exhibit 10.3 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended March 31, 2007 |
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(14) |
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Incorporated by reference to Exhibit 10.1 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended June 30, 2007 |
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(15) |
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Incorporated by reference to Exhibit 10.2 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended June 30, 2007. |
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(16) |
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Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed December 10, 2007 |
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(17) |
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Incorporated by reference to Exhibit 10.4 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended March 31, 2007 |
45
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ASTA FUNDING, INC.
Gary Stern
President and Chief Executive Officer
(Principal Executive Officer)
Dated: December 28, 2007
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
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|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Gary
Stern
Gary
Stern
|
|
President, Chief Executive Officer and Director
|
|
December 28, 2007
|
|
|
|
|
|
/s/ Mitchell
Cohen
Mitchell
Cohen
|
|
Chief Financial Officer
Principal Financial and Accounting Officer
|
|
December 28, 2007
|
|
|
|
|
|
/s/ Arthur
Stern
Arthur
Stern
|
|
Chairman of the Board and Executive Vice President
|
|
December 28, 2007
|
|
|
|
|
|
/s/ Herman
Badillo
Herman
Badillo
|
|
Director
|
|
December 28, 2007
|
|
|
|
|
|
/s/ Edward
Celano
Edward
Celano
|
|
Director
|
|
December 28, 2007
|
|
|
|
|
|
/s/ Harvey
Leibowitz
Harvey
Leibowitz
|
|
Director
|
|
December 28, 2007
|
|
|
|
|
|
/s/ David
Slackman
David
Slackman
|
|
Director
|
|
December 28, 2007
|
|
|
|
|
|
/s/ Alan
Rivera
Alan
Rivera
|
|
Director
|
|
December 28, 2007
|
|
|
|
|
|
/s/ Louis
A. Piccolo
Louis
A. Piccolo
|
|
Director
|
|
December 28, 2007
|
46
ASTA FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 and 2006
ASTA
FUNDING, INC. AND SUBSIDIARIES
Contents
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Asta Funding, Inc.
We have audited the accompanying consolidated balance sheets of
Asta Funding, Inc. and subsidiaries as of September 30,
2007 and 2006, and the related consolidated statements of
operations, stockholders equity and cash flows for each of
the years in the three-year period ended September 30,
2007. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above
present fairly, in all material respects, the consolidated
financial position of Asta Funding, Inc. as of
September 30, 2007 and 2006, and the consolidated results
of their operations and their consolidated cash flows for each
of the years in the three-year period ended September 30,
2007, in conformity with accounting principles generally
accepted in the United States of America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Asta Funding, Inc.s internal control over
financial reporting as of September 30, 2007, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated December 27, 2007
expressed an unqualified opinion on managements assessment
of, and an adverse opinion on the effectiveness of internal
control over financial reporting.
EISNER LLP
New York, New York
December 27, 2007
F-2
ASTA
FUNDING, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
4,525,000
|
|
|
$
|
7,826,000
|
|
Restricted cash
|
|
|
5,694,000
|
|
|
|
|
|
Consumer receivables acquired for liquidation (at net realizable
value)
|
|
|
545,623,000
|
|
|
|
257,275,000
|
|
Due from third party collection agencies and attorneys
|
|
|
4,909,000
|
|
|
|
3,062,000
|
|
Investment in venture
|
|
|
2,040,000
|
|
|
|
5,965,000
|
|
Furniture and equipment (net of accumulated depreciation of
$2,048,000 in 2007 and $1,769,000 in 2006)
|
|
|
793,000
|
|
|
|
1,101,000
|
|
Deferred income taxes
|
|
|
12,349,000
|
|
|
|
7,577,000
|
|
Other assets
|
|
|
4,323,000
|
|
|
|
5,034,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
580,256,000
|
|
|
$
|
287,840,000
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Advances under lines of credit
|
|
$
|
326,466,000
|
|
|
$
|
82,811,000
|
|
Other liabilities
|
|
|
7,537,000
|
|
|
|
4,338,000
|
|
Dividends payable
|
|
|
557,000
|
|
|
|
6,052,000
|
|
Income taxes payable
|
|
|
8,161,000
|
|
|
|
10,377,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
342,721,000
|
|
|
|
103,578,000
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; authorized 5,000,000;
Issued none Common stock, $.01 par value,
authorized 30,000,000 shares, issued and outstanding
13,918,158 shares in 2007 and 13,755,157 in 2006
|
|
|
139,000
|
|
|
|
138,000
|
|
Additional paid-in capital
|
|
|
65,030,000
|
|
|
|
61,803,000
|
|
Retained earnings
|
|
|
172,366,000
|
|
|
|
122,321,000
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
237,535,000
|
|
|
|
184,262,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
580,256,000
|
|
|
$
|
287,840,000
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statement
F-3
ASTA
FUNDING, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income
|
|
$
|
138,356,000
|
|
|
$
|
101,024,000
|
|
|
$
|
69,479,000
|
|
Other income
|
|
|
2,181,000
|
|
|
|
405,000
|
|
|
|
|
|
Equity in earnings of venture
|
|
|
225,000
|
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,762,000
|
|
|
|
101,979,000
|
|
|
|
69,479,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
25,450,000
|
|
|
|
18,268,000
|
|
|
|
15,340,000
|
|
Interest expense
|
|
|
18,246,000
|
|
|
|
4,641,000
|
|
|
|
1,853,000
|
|
Impairments
|
|
|
9,097,000
|
|
|
|
2,245,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,793,000
|
|
|
|
25,154,000
|
|
|
|
17,193,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
87,969,000
|
|
|
|
76,825,000
|
|
|
|
52,286,000
|
|
Provision for income taxes
|
|
|
35,703,000
|
|
|
|
31,060,000
|
|
|
|
21,290,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
52,266,000
|
|
|
$
|
45,765,000
|
|
|
$
|
30,996,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
3.79
|
|
|
$
|
3.36
|
|
|
$
|
2.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
3.56
|
|
|
$
|
3.13
|
|
|
$
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,807,838
|
|
|
|
13,637,406
|
|
|
|
13,543,580
|
|
Diluted
|
|
|
14,691,861
|
|
|
|
14,615,148
|
|
|
|
14,410,275
|
|
See Notes to Consolidated Financial Statement
F-4
ASTA
FUNDING, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
Balance, September 30, 2004
|
|
|
13,432,594
|
|
|
$
|
134,000
|
|
|
$
|
59,184,000
|
|
|
$
|
55,148,000
|
|
|
$
|
114,466,000
|
|
Exercise of options
|
|
|
162,730
|
|
|
|
2,000
|
|
|
|
1,417,000
|
|
|
|
|
|
|
|
1,419,000
|
|
Tax benefit arising from exercise of non qualified stock options
|
|
|
|
|
|
|
|
|
|
|
197,000
|
|
|
|
|
|
|
|
197,000
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,901,000
|
)
|
|
|
(1,901,000
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,996,000
|
|
|
|
30,996,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
|
13,595,324
|
|
|
|
136,000
|
|
|
|
60,798,000
|
|
|
|
84,243,000
|
|
|
|
145,177,000
|
|
Exercise of options
|
|
|
159,833
|
|
|
|
2,000
|
|
|
|
870,000
|
|
|
|
|
|
|
|
872,000
|
|
Tax benefit arising from exercise of non qualified stock options
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
|
|
30,000
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,687,000
|
)
|
|
|
(7,687,000
|
)
|
Compensation expense
|
|
|
|
|
|
|
|
|
|
|
105,000
|
|
|
|
|
|
|
|
105,000
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,765,000
|
|
|
|
45,765,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006
|
|
|
13,755,157
|
|
|
|
138,000
|
|
|
|
61,803,000
|
|
|
|
122,321,000
|
|
|
|
184,262,000
|
|
Exercise of options
|
|
|
95,001
|
|
|
|
1,000
|
|
|
|
1,328,000
|
|
|
|
|
|
|
|
1,329,000
|
|
Restricted stock granted
|
|
|
68,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,140,000
|
|
|
|
|
|
|
|
1,140,000
|
|
Tax benefit arising from exercise of non-qualified stock options
and vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
759,000
|
|
|
|
|
|
|
|
759,000
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,221,000
|
)
|
|
|
(2,221,000
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,266,000
|
|
|
|
52,266,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
|
13,918,158
|
|
|
$
|
139,000
|
|
|
$
|
65,030,000
|
|
|
$
|
172,366,000
|
|
|
$
|
237,535,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statement
F-5
ASTA
FUNDING, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
52,266,000
|
|
|
$
|
45,765,000
|
|
|
$
|
30,996,000
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
841,000
|
|
|
|
575,000
|
|
|
|
485,000
|
|
Deferred income taxes
|
|
|
(4,772,000
|
)
|
|
|
(7,730,000
|
)
|
|
|
109,000
|
|
Impairments of consumer receivables acquired for liquidation
|
|
|
9,097,000
|
|
|
|
2,245,000
|
|
|
|
|
|
Stock based compensation
|
|
|
1,140,000
|
|
|
|
105,000
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from third party collection agencies and attorneys
|
|
|
(1,847,000
|
)
|
|
|
(1,637,000
|
)
|
|
|
(588,000
|
)
|
Other assets
|
|
|
(2,324,000
|
)
|
|
|
(191,000
|
)
|
|
|
622,000
|
|
Income taxes payable
|
|
|
(2,216,000
|
)
|
|
|
9,134,000
|
|
|
|
(182,000
|
)
|
Other liabilities
|
|
|
3,390,000
|
|
|
|
632,000
|
|
|
|
615,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
55,575,000
|
|
|
|
48,898,000
|
|
|
|
32,057,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of consumer receivables acquired for liquidation
|
|
|
(440,895,000
|
)
|
|
|
(200,237,000
|
)
|
|
|
(113,537,000
|
)
|
Principal payments received from collection of consumer
receivables acquired for liquidation
|
|
|
114,421,000
|
|
|
|
90,450,000
|
|
|
|
59,648,000
|
|
Principal payments received from collections represented by
sales of consumer receivables acquired for liquidation
|
|
|
29,029,000
|
|
|
|
22,994,000
|
|
|
|
39,813,000
|
|
Investment in venture
|
|
|
|
|
|
|
(7,810,000
|
)
|
|
|
|
|
Cash distribution received from venture
|
|
|
3,925,000
|
|
|
|
1,845,000
|
|
|
|
|
|
Purchase of other investments
|
|
|
(5,777,000
|
)
|
|
|
(2,862,000
|
)
|
|
|
|
|
Collections on other investments
|
|
|
8,251,000
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
|
|
|
|
(1,406,000
|
)
|
|
|
(13,521,000
|
)
|
Capital expenditures
|
|
|
(163,000
|
)
|
|
|
(423,000
|
)
|
|
|
(685,000
|
)
|
Deposit on receivable purchase
|
|
|
|
|
|
|
|
|
|
|
7,288,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(291,209,000
|
)
|
|
|
(97,449,000
|
)
|
|
|
(20,994,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings (repayments) under lines of credit, net
|
|
|
243,655,000
|
|
|
|
53,526,000
|
|
|
|
(10,070,000
|
)
|
Change in restricted cash
|
|
|
(5,694,000
|
)
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(7,716,000
|
)
|
|
|
(2,110,000
|
)
|
|
|
(1,894,000
|
)
|
Proceeds from exercise of stock options
|
|
|
1,329,000
|
|
|
|
872,000
|
|
|
|
1,419,000
|
|
Tax benefit arising from exercise of non-qualified stock options
|
|
|
759,000
|
|
|
|
30,000
|
|
|
|
197,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
232,333,000
|
|
|
|
52,318,000
|
|
|
|
(10,348,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(3,301,000
|
)
|
|
|
3,767,000
|
|
|
|
715,000
|
|
Cash and cash equivalents at beginning of year
|
|
|
7,826,000
|
|
|
|
4,059,000
|
|
|
|
3,344,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
4,525,000
|
|
|
$
|
7,826,000
|
|
|
$
|
4,059,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
16,644,000
|
|
|
$
|
4,766,000
|
|
|
$
|
1,927,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
41,932,000
|
|
|
$
|
29,535,000
|
|
|
$
|
21,244,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-6
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007 and 2006
|
|
Note A
|
The
Company and its Significant Accounting Policies
|
[1]
The Company:
Asta Funding, Inc., together with its wholly owned subsidiaries,
(the Company) 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. 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 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 location and age of debt) of the underlying
accounts of each portfolio.
[2]
Principles of consolidation:
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. The
Companys investment in a venture, representing a 25%
interest, is accounted for using the equity method. All
significant intercompany balances and transactions have been
eliminated in consolidation.
[3]
Cash and cash equivalents and restricted cash:
The Company considers all highly liquid investments with a
maturity of three months or less at the date of purchase to be
cash equivalents.
The Company maintains cash balances in various financial
institutions. Management periodically evaluates the
creditworthiness of such institutions. Cash balances may, from
time to time, exceed FDIC limits.
On February 5, 2007, Palisades Acquisition XV, LLC, a
wholly-owned subsidiary of the Company, entered into a Purchase
and Sale Agreement (the Portfolio Purchase
Agreement) with Great Seneca Financial Corporation, and
other affiliates (collectively, the Sellers), under
which we agreed to acquire a portfolio of approximately
$6.9 billion in face value receivables (the Portfolio
Purchase) for a purchase price of $300 million plus
20% of any future Net Payments (as defined in the Portfolio
Purchase Agreement) received by the Company after the Company
has received Net Payments equal to 150% of the purchase price
plus our cost of funds. The Portfolio Purchase (now owned by
Palisades Acquisition XVI, LLC (Palisades XVI))
predominantly consists of credit card accounts and includes some
accounts in collection litigation and accounts as to which the
Sellers have been awarded judgments. The transaction was
consummated on March 5, 2007. To finance this purchase, the
Company entered into a Receivables Financing Agreement with a
major financial institution as the funding source, consisting of
debt with full recourse only to Palisades XVI, and bearing an
interest rate which approximates 170 basis points over
LIBOR. The term of the agreement is three years. All assets of
Palisades XVI, principally the Portfolio, are pledged to secure
such borrowing.
As part of the Receivables Financing Agreement all proceeds
received as a result of the net collections from the Portfolio
Purchase are to be applied to interest and principal of the
underlying loan. The restricted cash at September 30, 2007
represents cash on hand designated to be paid to our lender on
the tenth day of the subsequent month of the collections
received.
F-7
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
[4]
Income recognition:
Prior to October 1, 2005, the Company accounted for its
investment in finance receivables using the interest method
under the guidance of Practice Bulletin 6,
Amortization of Discounts on Certain Acquired Loans.
Effective October 1, 2005, the Company adopted and began to
account for its investment in finance receivables using the
interest method under the guidance of AICPA Statement of
Position
03-3,
Accounting for Loans or Certain Securities Acquired in a
Transfer
(SOP 03-3).
Practice Bulletin 6 was amended by
SOP 03-3.
Under the guidance of
SOP 03-3
(and the amended Practice Bulletin 6), static pools of
accounts are established. These pools are aggregated based on
certain common risk criteria. Each static pool is recorded at
cost and is accounted for as a single unit for the recognition
of income, principal payments and loss provision. Once a static
pool is established for a quarter, individual receivable
accounts are not added to the pool (unless replaced by the
seller) or removed from the pool (unless sold or returned to the
seller).
SOP 03-3
(and the amended Practice Bulletin 6) requires that
the excess of the contractual cash flows over expected cash
flows not be recognized as an adjustment of revenue or expense
or on the balance sheet.
SOP 03-3
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. Effective
for fiscal years beginning October 1, 2005 under
SOP 03-3
and the amended Practice Bulletin 6, rather than lowering
the estimated IRR if the collection estimates are not received
or projected to be received, the carrying value of a pool would
be written down to maintain the then current IRR. Such write
down is classified as an impairment. See Note A [6] for
more information on impairments. Income on finance receivables
is earned based on each static pools effective IRR. Under
the interest method, income is recognized on the effective yield
method based on the actual cash collected during a period and
future estimated cash flows and timing of such collections and
the portfolios cost. Revenue arising from collections in
excess of anticipated amounts attributable to timing differences
is deferred. The estimated future cash flows are reevaluated
quarterly.
The Companys analysis of the timing and amount of cash
flows to be generated by the 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. The Company has found that
certain states have exhibited better collection histories than
others and this characteristic is factored in when estimating
the initial cash flow expectations.
|
|
|
|
the average balance of the receivables influences the analysis
as that lower average balance portfolios tend to be more
collectible in the short-term and higher average balance
portfolios are more suitable for a suit strategy and thus yield
better results over the longer term. As the Company has
significant experience with both types of balances, the Company
is able to factor these variables into the initial estimate of
cash flows;
|
|
|
|
the age of the receivables, the number of days since charge-off,
the payments, if any, since charge-off, and the credit
guidelines of the credit originator also represent factors taken
into consideration in the estimation process since, for example,
older receivables might be more difficult to collect in amount
and/or
require more time to collect;
|
|
|
|
past history and performance of similar assets acquired. As the
Company purchases portfolios of like assets, it analyzes the
like tendencies of debtor repayments and factors this into the
initial estimate of expected cash flows;
|
|
|
|
the Companys ability to analyze accounts and resell
accounts that meet certain criteria, such as the age of the
receivable, the status of the receivables (paying or non-paying)
and the selling price it can obtain; and
|
|
|
|
estimating the Companys ability to locate debtors to their
jobs, properties and other assets found within portfolios. With
the Companys 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. While the Company believes that debtors with jobs or
property are more likely to repay, it also believes that these
debtors generally might take longer to repay and that is
factored into the initial expected cash flows.
|
F-8
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
The Company acquires accounts that have experienced
deterioration of credit quality between origination and the date
of the Companys acquisition of the accounts. The amount
paid for a portfolio of accounts reflects the determination that
it is probable the Company will be unable to collect all amounts
due according to the portfolio of accounts contractual terms.
The Company considers the expected payments and estimates 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.
The Company acquires these portfolios only after both
qualitative and quantitative analyses of the underlying
receivables are performed and a calculated purchase price is
paid so that the Company believes the estimated cash flow offers
an adequate return on the Companys acquisition costs after
servicing expenses. Additionally, when considering larger
portfolio purchases of accounts, or portfolios from issuers from
whom the Company has limited experience, the Company solicits
third party servicers input on liquidation rates and, at times,
incorporates such input into the estimates used for the expected
cash flows.
Typically, when purchasing portfolios for which the Company has
the experience detailed above, the Company has expectations of
achieving a 100% return on its invested capital back within an
18-28 month
time frame and expectations of generating in the range of
130-150% of
the invested capital over 3-5 years. Currently, the Company
uses this as the basis for establishing the original cash flow
estimates for portfolio purchases. The Company routinely
monitors these results against the actual cash flows and, in the
event the cash flows are below expectations and the Company
believes 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 expectations and the reason is due to timing, the
Company would defer the recognition of the excess
collections by recording such excess as deferred revenue. Such
excess is presented in the accompanying balance sheet as a
reduction of the carrying amount of the consumer receivables
acquired for liquidation.
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.
The Company uses the cost recovery method when collections on a
particular pool of accounts cannot be reasonably predicted.
[5]
Furniture and equipment:
Furniture and equipment is stated at cost. Depreciation is
provided using the straight-line method over the estimated
useful lives of the assets (5 to 7 years).
[6]
Impairments:
The Company accounts for its impairments in accordance with
SOP 03-3.
This SOP proposes guidance on accounting 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 should
be recognized prospectively through an adjustment of the
internal rate of return while decreases in expected cash flows
should be recognized as an impairment. This SOP became effective
October 1, 2005. Implementation of this SOP will make it
more likely that impairment losses and accretable yield
adjustments will be recorded, 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. Impairments of $9.1 million were recorded during
the fiscal year ended September 30, 2007 as compared to
$2.2 million in the prior year.
F-9
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
[7]
Income taxes:
Deferred federal and state taxes 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) investee income
recognized on the equity method, all resulting in timing
differences between financial accounting and tax reporting.
[8]
Net income per share:
Basic per share data is determined by dividing net income by the
weighted average shares outstanding during the period. Diluted
per share data is computed by dividing net income by the
weighted average shares outstanding, assuming all dilutive
potential common shares were issued. The assumed proceeds from
the exercise of dilutive options are calculated using the
treasury stock method based on the average market price for the
period.
The following table presents the computation of basic and
diluted per share data for the years ended September 30,
2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
Net
|
|
|
Average
|
|
|
Share
|
|
|
Net
|
|
|
Average
|
|
|
Share
|
|
|
Net
|
|
|
Average
|
|
|
Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic
|
|
$
|
52,266,000
|
|
|
|
13,807,838
|
|
|
$
|
3.79
|
|
|
$
|
45,765,000
|
|
|
|
13,637,406
|
|
|
$
|
3.36
|
|
|
$
|
30,996,000
|
|
|
|
13,543,580
|
|
|
$
|
2.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock Options
|
|
|
|
|
|
|
884,023
|
|
|
|
|
|
|
|
|
|
|
|
977,742
|
|
|
|
|
|
|
|
|
|
|
|
866,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
52,266,000
|
|
|
|
14,691,861
|
|
|
$
|
3.56
|
|
|
$
|
45,765,000
|
|
|
|
14,615,148
|
|
|
$
|
3.13
|
|
|
$
|
30,996,000
|
|
|
|
14,410,275
|
|
|
$
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[9]
Use of estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. With respect to income
recognition under the interest method, the Company takes into
consideration the relative credit quality of the underlying
receivables constituting the portfolio acquired, the strategy
involved to maximize the collections thereof, the time required
to implement the collection strategy as well as other factors to
estimate the anticipated cash flows. Actual results could differ
from those estimates including managements estimates of
future cash flows and the resultant allocation of collections
between principal and interest resulting therefrom. Downward
revisions to estimated cash flows will result in impairments.
[10]
Stock-based compensation:
The Company accounts for stock-based employee compensation under
Financial Accounting Standards Boards Statement of
Financial Accounting Standards No. 123 (Revised 2005),
Share-Based Payment (SFAS 123R).
SFAS 123R, which the Company adopted October 1, 2005,
requires that compensation expense associated with stock options
be recognized in the statement of operations, rather than a
disclosure in the notes to the Companys consolidated
financial statements.
Effective September 30, 2005, the Company accelerated the
vesting of all unvested stock options previously awarded to
employees, officers and directors under the Companys stock
option plans. In order to prevent unintended personal benefits
to employees, officers and directors, the Board imposed
restrictions on any shares received through the exercise of
accelerated options held by those individuals. These
restrictions prevented the sale of any stock obtained through
exercise of an accelerated option prior to the earlier of the
original vesting date or the individuals termination of
employment. Financial Accounting Standards Board
(FASB) Financial Interpretation No. 44 requires
the Company to recognize compensation expense under certain
circumstances, such as the change in the vesting schedule, that
would allow an employee to vest in an option that would have
otherwise been forfeited
F-10
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
based on the awards original terms. The Company is
required to recognize compensation expense over the new expected
vesting periods based on estimates of the numbers of options
that employees ultimately will retain that otherwise would have
been forfeited, absent the modifications. Of the 587,000 stock
options that were affected by the acceleration of the vesting of
all stock options as of September 30, 2005,
133,000 shares would not have vested at September 30,
2007, had it not been for the acceleration of the vesting. Of
the 133,000 shares, 127,000, or 95.1%, are attributable to
officers and directors of the Company. All of the accelerated
options, absent the acceleration, vested effective
November 16, 2007. The primary purpose of the accelerated
vesting was to eliminate the compensation expense the Company
would otherwise have recognized in its income statement with
respect to these accelerated stock options based upon the
adoption of SFAS 123R.
Pro-forma net income for the year ended September 30, 2005
if the fair value based method as prescribed by disclosure only
provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock Based
Compensation and SFAS No. 148 Accounting for Stock
Based Compensation Transition and Disclosure
is displayed in the following table.
|
|
|
|
|
|
|
Year
|
|
|
|
Ended September 30,
|
|
|
|
2005
|
|
|
Net income as reported
|
|
$
|
30,996,000
|
|
Stock based compensation expense determined under fair value
method, net of related tax effects
|
|
|
(3,746,000
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
27,250,000
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic as reported
|
|
$
|
2.29
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
2.01
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
2.15
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
1.89
|
|
|
|
|
|
|
The weighted average fair value of the options granted during
2005 was $18.44 per share on the dates of grant using the
Black-Scholes option pricing model with the following
assumptions: dividend yield 0.8%, weighted average volatility
40%, expected life 10 years, weighted average risk free
interest rate of 4.19%.
[11]
Impact of Recently Issued Accounting Standards
In December 2007, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 141 (revised
2007) Business Combinations (FASB Statement
No. 141R). FASB Statement No, 141R replaces FASB
Statement No. 141 Business Combinations
(FASB Statement No. 141) The objective of
FASB Statement No. 141R is to improve the relevance,
representational faithfulness, and comparability of the
information that a reporting entity provides in its financial
reports about a business combination and its effects. To
accomplish that, this Statement establishes principles and
requirements for how the acquirer:
a. recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree;
b. recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and
c. determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial
effects of the business combination.
F-11
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
FASB Statement No. 141R applies to all transactions or
other events in which an entity (the acquirer) obtains control
of one or more businesses (the acquiree), including those
sometimes referred to as true mergers or
mergers of equals and combinations achieved without
the transfer of consideration, for example, by contract alone or
through the lapse of minority veto rights. FASB Statement
No. 141R applies to all business entities, including mutual
entities that previously used the pooling-of-interests method of
accounting for some business combinations. It does not apply to:
a. the formation of a joint venture;
b. the acquisition of an asset or a group of assets that
does not constitute a business;
c. a combination between entities or businesses under
common control; and
d. a combination between not-for-profit organizations or
the acquisition of a for-profit business by a not-for-profit
organization.
FASB Statement No. 141R retains the guidance in FASB
Statement No. 141 for identifying and recognizing
intangible assets separately from goodwill. . FASB Statement
No. 141R requires an acquirer to recognize the assets
acquired, the liabilities assumed and any non-controlling
interest in the acquiree at the acquisition date, measured at
their fair values at that date.
FASB Statement No. 141 R applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. An entity may not apply it before
that date. Currently the Company does not anticipate that FASB
Statement No. 141R will have an impact on the
Companys financial statements.
In December 2007, the FASB issued FASB Statement
No. 160 Noncontrolling Interests in
Consolidated Financial Statements an Amendment of
ARB No. 51 . (FASB Statement No. 160)
A noncontrolling interest, sometimes called a minority interest,
is the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. The objective of FASB
Statement No. 160 is to improve the relevance,
comparability, and transparency of the financial information
that a reporting entity provides in its consolidated financial
statements by establishing accounting and reporting standards
that require:
|
|
|
|
|
the ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled, and presented in
the consolidated statement of financial position within equity,
but separate from the parents equity.
|
|
|
|
the amount of consolidated net income attributable to the parent
and to the noncontrolling interest be clearly identified and
presented on the face of the consolidated statement of income.
|
|
|
|
changes in a parents ownership interest while the parent
retains its controlling financial interest in its subsidiary be
accounted for consistently. A parents ownership interest
in a subsidiary changes if the parent purchases additional
ownership interests in its subsidiary or if the parent sells
some of its ownership interests in its subsidiary. It also
changes if the subsidiary reacquires some of its ownership
interests or the subsidiary issues additional ownership
interests. All of those transactions are economically similar,
and this Statement requires that they be accounted for
similarly, as equity transactions.
|
|
|
|
when a subsidiary is deconsolidated, any retained noncontrolling
equity investment in the former subsidiary be initially measured
at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any
noncontrolling equity investment rather than the carrying amount
of that retained investment.
|
|
|
|
entities provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the
interests of the noncontrolling owners.
|
F-12
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
FASB Statement No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries
or that deconsolidate a subsidiary.
FASB Statement No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited.
FASB Statement No. 160 shall be applied prospectively as of
the beginning of the fiscal year in which this Statement is
initially applied, except for the presentation and disclosure
requirements. The presentation and disclosure requirements shall
be applied retrospectively for all periods presented. Currently
the Company does not anticipate that FASB Statement No. 160
will have an impact on the Companys financial statements.
In February 2007, the FASB issued FASB Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115, this Statement permits entities to choose to
measure many financial instruments and certain other items at
fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the
use of fair value measurement, which is consistent with the
Boards long-term measurement objectives for accounting for
financial instruments. This Statement is effective for the
Companys fiscal year that begins October 1, 2008. The
Company believes that the statement, when adopted, will not
impact the Company.
In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (SAB 108). SAB 108 was
issued in order to eliminate the diversity in practice
surrounding how public companies quantify financial statement
misstatements. SAB 108 requires that registrants quantify
errors using both a balance sheet and income statement approach
and evaluate whether either approach results in a misstated
amount that, when all relevant quantitative and qualitative
factors are considered, is material. SAB 108 became
effective for the Company in the current fiscal year. Adoption
had no material impact on the Company.
In September 2006, the FASB issued FASB Statement No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106 and 132(R) (FASB
158) FASB 158 improves financial reporting by requiring an
employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan (other than a multiemployer
plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the
year in which the changes occur through comprehensive income of
a business entity. FASB 158 also improves financial reporting by
requiring an employer to measure the funded status of a plan as
of the date of its year-end statement of financial position,
with limited exceptions. FASB 158 was required to be implemented
by the end of the Companys fiscal year 2007. At this time,
the Company does not sponsor a defined benefit plan; therefore
there is no impact on the Company with regard to FASB 158.
In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements. This Statement defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or
permit fair value measurements, the Board having previously
concluded in those accounting pronouncements that fair value is
the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements. FASB Statement
No. 157 will be effective for the Companys financial
statements issued for the fiscal year beginning October 1,
2008. The Company does not expect the adoption of FASB Statement
No. 157 to have a material impact on its financial
reporting, and is currently evaluating the impact, if any, the
adoption of FASB Statement No. 157 will have on the
disclosure requirements.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109
(FIN 48), which prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in
F-13
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
interim periods, disclosure and transition. FIN 48 will be
effective for the fiscal year beginning October 1, 2007.
The Company does not expect the adoption of FIN 48 to have
a material impact on the financial reporting and disclosure.
[12]
Reclassifications:
Certain items in prior years financial statements have
been reclassified to conform to current years presentation.
|
|
Note B
|
Consumer
Receivables Acquired For Liquidation
|
Accounts acquired for liquidation are stated at their net
realizable value and consist primarily of defaulted consumer
loans to individuals throughout the country.
Prior to October 1, 2005, the Company accounted for its
investment in finance receivables using the interest method
under the guidance of Practice Bulletin 6,
Amortization of Discounts on Certain Acquired Loans.
Effective October 1, 2005, the Company adopted and began to
account for its investment in finance receivables using the
interest method under the guidance of
SOP 03-3.
Practice Bulletin 6 was amended by
SOP 03-3.
Under the guidance of
SOP 03-3
(and the amended Practice Bulletin 6); static pools of
accounts are established. These pools are aggregated based on
certain common risk criteria. Each static pool is recorded at
cost and is accounted for as a single unit for the recognition
of income, principal payments and loss provision. Once a static
pool is established for a quarter, individual receivable
accounts are not added to the pool (unless replaced by the
seller) or removed from the pool (unless sold or returned to the
seller).
SOP 03-3
(and the amended Practice Bulletin 6) requires that
the excess of the contractual cash flows over expected cash
flows not be recognized as an adjustment of revenue or expense
or on the balance sheet.
SOP 03-3
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. Effective
for fiscal years beginning October 1, 2005 under
SOP 03-3
and the amended Practice Bulletin 6, rather than lowering
the estimated IRR if the collection estimates are not received
or projected to be received, the carrying value of a pool would
be written down to maintain the then current IRR. Income on
finance receivables is earned based on each static pools
effective IRR. Under the interest method, income is recognized
on the effective yield method based on the actual cash collected
during a period and future estimated cash flows and timing of
such collections and the portfolios cost. Revenue arising
from collections in excess of anticipated amounts attributable
to timing differences is deferred. The estimated future cash
flows are reevaluated quarterly.
Under the cost recovery method, no income is recognized until
the cost of the portfolio has been fully recovered. A pool can
become fully amortized (zero carrying balance on the balance
sheet) while still generating cash collections. In this case,
all cash collections are recognized as revenue when received.
Additionally, the Company uses the cost recovery method when
collections on a particular pool of accounts cannot be
reasonably predicted.
The Company accounts for its investments in consumer receivable
portfolios, using either:
|
|
|
|
|
the interest method; or
|
|
|
|
the cost recovery method.
|
The Companys extensive liquidating experience is in the
field of distressed credit card receivables, telecom
receivables, consumer loan receivables, retail installment
contracts, mixed consumer receivables, and auto deficiency
receivables. The Company uses the interest method for accounting
for substantially all asset acquisitions within these classes of
receivables when it believe it can reasonably estimate the
timing of the cash flows. In those situations where the Company
diversifies the acquisitions into other asset classes where 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.
F-14
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Over time, as the Company continues to purchase asset classes in
which it believes it has the requisite expertise and experience,
the Company is more likely to utilize the interest method to
account for such purchases.
Prior to October 1, 2005, the Company accounted for its
investment in finance receivables using the interest method
under the guidance of Practice Bulletin 6. Each purchase
was treated as a separate portfolio of receivables and was
considered a separate financial investment, and accordingly the
Company did not aggregate such loans under Practice
Bulletin 6 as the underlying collateral had similar
characteristics. After
SOP 03-3
was adopted by the Company beginning with the Companys
fiscal year 2006, the Company began to aggregate portfolios of
receivables acquired sharing specific common characteristics
which were acquired within a given quarter. The Company
currently consider for aggregation portfolios of accounts,
purchased within the same fiscal quarter, that generally meet
the following characteristics:
|
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|
|
|
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, telecom etc.)
|
The Company uses a variety of qualitative and quantitative
factors to estimate collections and the timing thereof. The
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;
|
|
|
|
number of days since charge-off;
|
|
|
|
payments made since charge-off;
|
|
|
|
the credit originator and its credit guidelines;
|
|
|
|
the Companys ability to analyze accounts and resell
accounts that meet the 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 the cash flow
analysis;
|
|
|
|
jobs or property of the debtors found within portfolios-with the
Companys 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 customer statements from the original
issuer.
|
The Company obtains and utilizes as appropriate input from 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.
F-15
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
The following tables summarize the changes in the balance sheet
of the investment in receivable portfolios during the following
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2007
|
|
|
|
Accrual
|
|
|
Cash
|
|
|
|
|
|
|
Basis
|
|
|
Basis
|
|
|
|
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
256,199,000
|
|
|
$
|
1,076,000
|
|
|
$
|
257,275,000
|
|
Acquisitions of receivable portfolios, net
|
|
|
390,350,000
|
|
|
|
50,545,000
|
|
|
|
440,895,000
|
|
Net cash collections from collection of consumer receivables
acquired for liquidation(1)
|
|
|
(213,135,000
|
)
|
|
|
(14,478,000
|
)
|
|
|
(227,613,000
|
)
|
Net cash collections represented by account sales of consumer
receivables acquired for liquidation
|
|
|
(47,502,000
|
)
|
|
|
(6,691,000
|
)
|
|
|
(54,193,000
|
)
|
Transfer to cost recovery(2)
|
|
|
(4,478,000
|
)
|
|
|
4,478,000
|
|
|
|
|
|
Impairments
|
|
|
(9,097,000
|
)
|
|
|
|
|
|
|
(9,097,000
|
)
|
Finance income recognized(3)
|
|
|
136,178,000
|
|
|
|
2,178,000
|
|
|
|
138,356,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
508,515,000
|
|
|
$
|
37,108,000
|
|
|
$
|
545,623,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections
|
|
|
52.2
|
%
|
|
|
10.3
|
%
|
|
|
49.1
|
%
|
|
|
|
(1) |
|
Includes put backs of purchased accounts returned to the seller
totaling $5.5 million. |
|
(2) |
|
Represents a portfolio acquired during the three months ended
December 31, 2006 which the Company has successfully
negotiated the return to the seller. The portfolio was returned
on July 31, 2007. |
|
(3) |
|
Includes $23.9 million derived from fully amortized
interest method pools. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2006
|
|
|
|
Accrual
|
|
|
Cash
|
|
|
|
|
|
|
Basis
|
|
|
Basis
|
|
|
|
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
172,636,000
|
|
|
$
|
91,000
|
|
|
$
|
172,727,000
|
|
Acquisitions of receivable portfolios, net
|
|
|
200,237,000
|
|
|
|
|
|
|
|
200,237,000
|
|
Net cash collections from collection of consumer receivables
acquired for liquidation
|
|
|
(155,960,000
|
)
|
|
|
(3,473,000
|
)
|
|
|
(159,433,000
|
)
|
Net cash collections represented by account sales of consumer
receivables acquired for liquidation
|
|
|
(54,800,000
|
)
|
|
|
(235,000
|
)
|
|
|
(55,035,000
|
)
|
Transfer to cost recovery
|
|
|
(1,291,000
|
)
|
|
|
1,291,000
|
|
|
|
|
|
Impairments
|
|
|
(2,245,000
|
)
|
|
|
|
|
|
|
(2,245,000
|
)
|
Finance income recognized(4)
|
|
|
97,622,000
|
|
|
|
3,402,000
|
|
|
|
101,024,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
256,199,000
|
|
|
$
|
1,076,000
|
|
|
$
|
257,275,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections
|
|
|
46.3
|
%
|
|
|
91.7
|
%
|
|
|
47.1
|
%
|
|
|
|
(4) |
|
Includes $4.4 million derived from fully amortized interest
method pools. |
F-16
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
As of September 30, 2007 the Company had $545,623,000 in
consumer receivables acquired for liquidation, of which
$508,515,000 are accounted for on the interest method. Based
upon current projections, net cash collections, applied to
principal for interest method portfolios will be as follows for
the twelve months in the periods ending:
|
|
|
|
|
September 30, 2008
|
|
$
|
180,559,000
|
|
September 30, 2009
|
|
|
156,531,000
|
|
September 30, 2010
|
|
|
123,420,000
|
|
September 30, 2011
|
|
|
63,864,000
|
|
September 30, 2012
|
|
|
2,820,000
|
|
|
|
|
|
|
|
|
|
527,194,000
|
|
Deferred revenue
|
|
|
(18,679,000
|
)
|
|
|
|
|
|
Total
|
|
$
|
508,515,000
|
|
|
|
|
|
|
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
September 30, 2007. 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 fiscal year ended
September 30, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Balance at beginning of period, October 1, 2006
|
|
$
|
148,900,000
|
*
|
Income recognized on finance receivables, net
|
|
|
(136,178,000
|
)
|
Additions representing expected revenue from purchases
|
|
|
144,764,000
|
|
Impairments
|
|
|
(3,345,000
|
)
|
Reclassifications from nonaccretable difference
|
|
|
22,474,000
|
|
|
|
|
|
|
Balance at end of period, September 30, 2007
|
|
$
|
176,615,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Balance at beginning of period, October 1, 2005
|
|
$
|
94,022,000
|
|
Income recognized on finance receivables, net
|
|
|
(97,622,000
|
)
|
Additions representing expected revenue from purchases
|
|
|
103,061,000
|
|
Impairments
|
|
|
(151,000
|
)
|
Reclassifications from nonaccretable difference
|
|
|
49,590,000
|
*
|
|
|
|
|
|
Balance at end of period, September 30, 2006
|
|
$
|
148,900,000
|
*
|
|
|
|
|
|
|
|
|
* |
|
Revised to reflect zero basis income recognized. |
During the year ended September 30, 2007, the Company
purchased $10.9 billion of face value charged-off consumer
receivables at a cost of approximately $440.9 million. This
includes a portfolio with an approximate value of
$4.5 million that was recently returned to the seller at
the Companys original cost and put backs of purchased
accounts returned to the seller totaling $5.5 million.
During the year ended September 30, 2006, the Company
purchased $5.2 billion of face value charged-off consumer
receivables at a cost of $200.2 million. At
September 30, 2007, the estimated remaining net collections
on the receivables purchased during the fiscal year ended
September 30, 2007 are $460.2 million.
F-17
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
The following table summarizes collections on a gross basis as
received by the Companys third-party collection agencies
and attorneys, less commissions and direct costs for the years
ended September 30, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended, September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Gross collections(1)
|
|
$
|
398,432,000
|
|
|
$
|
320,203,000
|
|
Commissions and fees(2)
|
|
|
116,626,000
|
|
|
|
105,735,000
|
|
|
|
|
|
|
|
|
|
|
Net collections
|
|
$
|
281,806,000
|
|
|
$
|
214,468,000
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Gross collections include: collections from third-party
collection agencies and attorneys, collections from in-house
efforts and collections represented by account sales.
|
|
(2)
|
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.
|
Finance income recognized on collections represented by account
sales was $25.2 million, $32.0 million and
$24.9 million for the fiscal years ended September 30,
2007, 2006 and 2005, respectively.
In February 2006, the Company acquired VATIV Recovery Solutions,
LLC (VATIV) for approximately $1.4 million in
cash. VATIV provides bankruptcy and deceased account servicing.
The purchase price has been allocated to goodwill. The revenue
and operating results of VATIV are immaterial to the Company.
|
|
Note D
|
Investment
In Venture
|
In August 2006, the Company acquired a 25% interest in a newly
formed venture for $7,810,000. The Company accounts for its
investment in the venture using the equity method. This venture
is in business to liquidate the assets of a retail business
which it acquired through bankruptcy proceedings. It is
anticipated the liquidation will be completed over the next 12
to 24 months. From the inception of the venture in 2006,
through September 30, 2007, distributions from the venture
to the Company were $6,545,000. During fiscal year 2007, the
Company received distributions in the amount of $4,150,000, of
which $3,925,000 has been classified as investing activities.
Note E
Furniture and Equipment
Furniture and equipment as of September 30, 2007 and 2006
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Furniture
|
|
$
|
307,000
|
|
|
$
|
307,000
|
|
Equipment
|
|
|
2,534,000
|
|
|
|
2,563,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,841,000
|
|
|
|
2,870,000
|
|
Less accumulated depreciation
|
|
|
2,048,000
|
|
|
|
1,769,000
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
793,000
|
|
|
$
|
1,101,000
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended September 30,
2007, 2006 and 2005 aggregated $279,000, $324,000 and $272,000,
respectively.
F-18
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
|
|
Note F
|
Advances
Under Lines of Credit
|
On July 11, 2006, the Company entered into the Fourth
Amended and Restated Loan Agreement with a consortium of banks,
and as a result the credit facility increased to
$175 million, up from $125 million with an expandable
feature which allows the Company the ability to increase the
line to $225 million with the consent of the banks. The
line of credit bears interest at the lesser of LIBOR plus an
applicable margin, or the prime rate minus an applicable margin
based on certain leverage ratios. The credit line is
collateralized by all portfolios of consumer receivables
acquired for liquidation, other than the Portfolio Purchase
discussed below, and contains customary financial and other
covenants (relative to tangible net worth, interest coverage,
and leverage ratio, as defined) that must be maintained in order
to borrow funds. The term of the agreement is three years. The
applicable rate at September 30, 2007 and 2006 respectively
was 7.75% and 7.25%. The average interest rate excluding unused
credit line fees for the years ended September 30, 2007 and
2006, respectively was 7.61% and 6.97%. The outstanding balance
on this line of credit was approximately $141.7 million as
of September 30, 2007.
On December 4, 2007, the Company entered in to the Sixth
Amendment to the Fourth Restated Loan Agreement temporarily
increasing the line of credit from $175 million to
$185 million. See Note O Subsequent Events
for more information.
Additionally, in March 2007, Palisades Acquisition XVI, LLC
(Palisades XVI), an affiliate of the Company,
borrowed approximately $227 million under a new Receivables
Financing Agreement, as amended in July 2007, with a major
financial institution, in order to purchase a portfolio of
approximately $6.9 billion in face value receivables for a
purchase price of $300 million (plus 20% of net payments
after the Company recovers 150% of its purchase price plus cost
of funds). The debt is full recourse only to Palisades XVI, and
bears an interest rate of approximately 170 basis points
over LIBOR. The applicable rate at September 30, 2007 was
7.46%. The average interest rate from the inception of the
Receivable Financing Agreement through September 30, 2007
was 7.06%. The term of the agreement is three years. All
proceeds received as a result of the net collections from this
portfolio are applied to interest and principal of the
underlying loan. The portfolio is serviced by Palisades
Collection LLC, a wholly owned subsidiary of the Company, which
has engaged a subservicer for the portfolio. As of
September 30, 2007, the outstanding balance on this loan
was approximately $184.8 million and the carrying amount of
the portfolios assets collateralizing this debt was
$265.5 million.
See Note O Subsequent Events for paydown of
Receivable Financing Agreement by a subsidiary and amendment to
the Receivable Financing Agreement.
The Companys total average debt obligation for the year
ended September 30, 2007 was approximately
$241.5 million, with an average interest rate of 7.34%.
|
|
Note G
|
Other
Liabilities
|
Other liabilities as of September 30, 2007 and 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Accounts payable and accrued expenses
|
|
$
|
6,998,000
|
|
|
$
|
3,205,000
|
|
Other
|
|
|
539,000
|
|
|
|
1,133,000
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
7,537,000
|
|
|
$
|
4,338,000
|
|
|
|
|
|
|
|
|
|
|
F-19
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
The components of the provision for income taxes for the years
ended September 30, 2007, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
30,476,000
|
|
|
$
|
29,206,000
|
|
|
$
|
15,947,000
|
|
State
|
|
|
9,999,000
|
|
|
|
9,584,000
|
|
|
|
5,234,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,475,000
|
|
|
|
38,790,000
|
|
|
|
21,181,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,593,000
|
)
|
|
|
(5,820,000
|
)
|
|
|
82,000
|
|
State
|
|
|
(1,179,000
|
)
|
|
|
(1,910,000
|
)
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,772,000
|
)
|
|
|
(7,730,000
|
)
|
|
|
109,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
35,703,000
|
|
|
$
|
31,060,000
|
|
|
$
|
21,290,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the statutory federal income tax rate on
the Companys pre-tax income and the Companys
effective income tax rate is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income tax, net of federal benefit
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
5.8
|
|
Other
|
|
|
(0.2
|
)
|
|
|
(0.4
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
40.6
|
%
|
|
|
40.4
|
%
|
|
|
40.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized a net deferred tax asset of $12,349,000
and $7,577,000 as of September 30, 2007 and 2006,
respectively. The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred revenue
|
|
$
|
7,564,000
|
|
|
|
7,062,000
|
|
Impairments
|
|
|
4,594,000
|
|
|
|
909,000
|
|
Compensation expense
|
|
|
505,000
|
|
|
|
|
|
Equity in venture
|
|
|
(314,000
|
)
|
|
|
(223,000
|
)
|
Other
|
|
|
|
|
|
|
(171,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred asset
|
|
$
|
12,349,000
|
|
|
$
|
7,577,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Note I
|
Commitments
and Contingencies
|
Employment
Agreements
January 25, 2007, the Company entered into employment
agreements (each as Employment Agreement) with the
Companys President and Chief Executive Officer, the
Companys Executive Vice President and the Companys
Chief Financial Officer (each, an Executive). Each
of Gary Sterns and Mitchell Cohens Employment
Agreements expire on December 31, 2009, and Arthur
Sterns Employment Agreement expires on December 31,
2007, provided, however, that the parties are required to
provide ninety days prior written notice if they do not
intend to seek an extension or renewal of the Employment
Agreement. If each Employment Agreement is not renewed by the
expiration dates each executive will continue in their
respective roles as officers of the Company at the discretion of
the Board of Directors.
F-20
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Leases
The Company leases its facilities in Englewood Cliffs, New
Jersey; Bethlehem, Pennsylvania; and Sugar Land, Texas. The
leases are operating leases, and the Company incurred related
rent expense in the amounts of $526,000, $381,000 and $381,000
during the years ended September 30, 2007, 2006 and 2004,
respectively. The future minimum lease payments are as follows:
|
|
|
|
|
Year
|
|
|
|
Ending
|
|
|
|
September 30,
|
|
|
|
|
2008
|
|
$
|
446,000
|
|
2009
|
|
|
445,000
|
|
2010
|
|
|
313,000
|
|
2011
|
|
|
31,000
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,235,000
|
|
|
|
|
|
|
Contingencies
In the ordinary course of its business, the Company is involved
in numerous legal proceedings. The Company regularly initiates
collection lawsuits, using its network of third party law firms,
against consumers. Also, consumers occasionally initiate
litigation against the Company, in which they allege 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. As of September 30, 2007, the Company was not
involved in any material litigation in which it was a defendant.
During 2006, a subsidiary of the Company received subpoenas from
three jurisdictions to produce information in connection with
debt collection practices in those jurisdictions. The Company
has fully cooperated with the issuing agencies and has provided
the requested documentation. One jurisdiction has closed the
case with no action taken against the Company. The Company has
not made any provision with respect to the remaining matters in
the financial statements as the nature of these matters
constitute information requests only.
In the course of conducting its business, the Company is
required by certain of the jurisdictions within which it
operates to obtain licenses and permits to conduct its
collection activities. The Company has been notified by one such
jurisdiction that it did not operate for a period of time from
February 1, 2005 to April 17, 2006 with the proper
license. The Company did not make any provision for such matter
in its financial statements. There has been no communication
from the jurisdiction regarding this matter for over a year.
Currently, the Company is properly licensed in this jurisdiction.
|
|
Note J
|
Stock
Option Plans
|
Equity
Compensation Plan
On December 1, 2005, the Board of Directors adopted the
Companys Equity Compensation Plan (the Equity
Compensation Plan), subject to the approval of the
stockholders of the Company. The Equity Compensation Plan was
adopted to supplement the Companys existing 2002 Stock
Option Plan. In addition to permitting the grant of stock
options as are permitted under the 2002 Stock Option Plan, the
Equity Compensation Plan allows the Company flexibility with
respect to equity awards by also providing for grants of stock
awards (i.e. restricted or unrestricted), stock purchase rights
and stock appreciation rights. One million shares are available
for issuance under the Equity Compensation Plan. The Equity
Compensation Plan was ratified by the shareholders on
March 1, 2006.
F-21
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
The general purpose of the Equity Compensation Plan is to
provide an incentive to the Companys employees, directors
and consultants, including executive officers, employees and
consultants of any subsidiaries, by enabling them to share in
the future growth of the 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 the long
range plans and securing growth and financial success.
The Board believes that the Equity Compensation Plan will
advance the Companys interests by enhancing its ability to
(a) attract and retain employees, directors and consultants
who are in a position to make significant contributions to the
Companys success; (b) reward employees, directors and
consultants for these contributions; and (c) encourage
employees, directors and consultants to take into account the
Companys long-term interests through ownership of the
Companys shares.
The Company has 1,000,000 shares of Common Stock authorized
for issuance under the Equity Compensation Plan and 932,000 were
available as of September 30, 2007. As of
September 30, 2007, approximately 172 of the Companys
employees were eligible to participate in the Equity
Compensation Plan. Future grants under the Equity Compensation
Plan have not yet been determined.
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 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 393,334 were available as
of September 30, 2007. As of September 30, 2007,
approximately 172 of the Companys employees were eligible
to participate in the 2002 Plan. Future grants under the 2002
Plan have not yet been determined.
1995
Stock Option Plan
The 1995 Stock Option Plan expired on September 14, 2005.
The plan was adopted in order to attract and retain qualified
directors, officers and employees of, and consultants, to the
Company. The following description does not purport to be
complete and is qualified in its entirety by reference to the
full text of the 1995 Stock Option Plan, which is included as an
exhibit to the 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 Internal
Revenue Code of 1986, as amended (the Code)) and
non-qualified stock options to eligible employees of the
Company, including officers and directors of the Company
(whether or not employees) and consultants to the Company.
The Company authorized 1,840,000 shares of Common Stock 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.
F-22
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
The following table summarizes stock option transactions under
the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding options at the beginning of year
|
|
|
1,414,439
|
|
|
$
|
9.45
|
|
|
|
1,580,605
|
|
|
$
|
9.11
|
|
|
|
1,364,171
|
|
|
$
|
6.27
|
|
Options granted
|
|
|
18,000
|
|
|
|
28.75
|
|
|
|
|
|
|
|
0.00
|
|
|
|
422,500
|
|
|
|
18.44
|
|
Options cancelled
|
|
|
|
|
|
|
0.00
|
|
|
|
(6,333
|
)
|
|
|
22.36
|
|
|
|
(43,002
|
)
|
|
|
12.21
|
|
Options exercised
|
|
|
(95,001
|
)
|
|
|
13.99
|
|
|
|
(159,833
|
)
|
|
|
5.51
|
|
|
|
(163,064
|
)
|
|
|
8.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of year
|
|
|
1,337,438
|
|
|
$
|
9.39
|
|
|
|
1,414,439
|
|
|
$
|
9.45
|
|
|
|
1,580,605
|
|
|
$
|
9.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of year
|
|
|
1,325,438
|
|
|
$
|
9.21
|
|
|
|
1,414,439
|
|
|
$
|
9.45
|
|
|
|
1,580,605
|
|
|
$
|
9.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $141,000 of compensation expense related
to 18,000 stock options granted during the fiscal year ended
September 30, 2007. As of September 30, 2007, there
was $135,000 of unrecognized compensation cost related to
unvested stock options. The Company recognized $105,000 of stock
based compensation expense in fiscal year 2006.
The intrinsic value of options exercised during the fiscal years
ended September 30, 2007 and 2006, was $2.1 million
and $4.6 million, respectively.
The aggregate intrinsic value of the outstanding and exercisable
options as of September 30, 2007 and 2006 was
$38.6 million and $40.4 million, respectively.
The following table summarizes information about the plans
outstanding options as of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life (In Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$ 0.8100 - $ 2.8750
|
|
|
600,000
|
|
|
|
2.5
|
|
|
$
|
2.0208
|
|
|
|
600,000
|
|
|
$
|
2.0208
|
|
$ 2.8751 - $ 5.7500
|
|
|
106,667
|
|
|
|
5.1
|
|
|
|
4.7250
|
|
|
|
106,667
|
|
|
|
4.7250
|
|
$ 5.7501 - $ 8.6250
|
|
|
12,000
|
|
|
|
4.1
|
|
|
|
5.9600
|
|
|
|
12,000
|
|
|
|
5.9600
|
|
$14.3751 - $17.2500
|
|
|
218,611
|
|
|
|
6.2
|
|
|
|
15.0355
|
|
|
|
218,611
|
|
|
|
15.0355
|
|
$17.2501 - $20.1250
|
|
|
382,160
|
|
|
|
7.0
|
|
|
|
18.2217
|
|
|
|
382,160
|
|
|
|
18.2217
|
|
$25.8751 - $28.7500
|
|
|
18,000
|
|
|
|
9.2
|
|
|
|
28.7500
|
|
|
|
6,000
|
|
|
|
28.7500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,337,438
|
|
|
|
5.8
|
|
|
$
|
9.3881
|
|
|
|
1,325,438
|
|
|
$
|
9.2128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
The following table summarizes information about restricted
stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Weighted
|
|
|
|
September 30, 2007
|
|
|
Average Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at the beginning of period
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
|
|
Awards granted
|
|
|
68,000
|
|
|
|
28.75
|
|
|
|
|
|
Vested
|
|
|
(22,667
|
)
|
|
|
28.75
|
|
|
|
|
|
Forfeited
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at the end of period
|
|
|
45,333
|
|
|
$
|
28.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $999,000 of compensation expense related
to 68,000 shares of restricted stock granted during the
fiscal year ended September 30, 2007. As of
September 30, 2007, there was $956,000 of unrecognized
compensation cost related to unvested restricted stock.
The Company recognized a total of $1,140,000 in compensation
expense in fiscal year 2007 for both stock options and
restricted stock grants. As of September 30, 2007, there
was a total of $1,091,000 of unrecognized compensation cost
related to unvested stock options and restricted stock grants.
|
|
Note K
|
Stockholders
Equity
|
During the year ended September 30, 2007, the Company
declared quarterly cash dividends aggregating $2,221,000 which
includes $0.04 per share, per quarter, of which $557,000 was
accrued as of September 30, 2007 and paid November 1,
2007. During the year ended September 30, 2006, the Company
declared quarterly cash dividends aggregating $7,687,000 which
includes $0.04 per share, per quarter, plus a special dividend
of $0.40 per share which in total amounted to $6,052,000 and was
paid November 1, 2006. During the year ended
September 30, 2005 the Company declared quarterly cash
dividends aggregating $1,901,000 ($0.035 per share, per quarter)
of which $476,000 was paid November 1, 2005. The Company
expects to pay a regular cash dividend in future quarters.
This will be at the discretion of the board of directors and
will depend upon the Companys financial condition,
operating results, capital requirements and any other factors
the board of directors deems relevant. In addition, agreements
with the Companys lenders may, from time to time, restrict
the ability to pay dividends.
The Company maintains a 401(k) Retirement Plan covering all of
its eligible employees. Matching contributions made by the
employees to the plan are made at the discretion of the board of
directors each plan year. Contributions for the years ended
September 30, 2007, 2006 and 2005 were $117,000, $96,000
and $70,000, respectively.
|
|
Note M
|
Fair
Value of Financial Instruments
|
Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Values of Financial
Instruments (SFAS 107), requires
disclosure of fair value information about financial
instruments, whether or not recognized on the balance sheet, for
which it is practicable to estimate that value. Because there
are a limited number of market participants for certain of the
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 estimates.
F-24
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Fair value estimates are based on existing balance sheet
financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. The
tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on the fair value
estimates and have not been considered in the estimates.
The following summarizes the information as of
September 30, 2007 and 2006 about the fair value of the
financial instruments recorded on the Companys financial
statements in accordance with SFAS 107:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Cash, and cash equivalents
|
|
$
|
4,525,000
|
|
|
$
|
4,525,000
|
|
|
$
|
7,826,000
|
|
|
$
|
7,826,000
|
|
Consumer receivables acquired for liquidation
|
|
|
545,623,000
|
|
|
|
604,000,000
|
|
|
|
257,275,000
|
|
|
|
346,300,000
|
|
Advances under lines of credit, notes payable and Due to
affiliates
|
|
|
326,466,000
|
|
|
|
326,466,000
|
|
|
|
82,811,000
|
|
|
|
82,811,000
|
|
The methodology and assumptions utilized to estimate the fair
value of the Companys financial instruments are as follows:
Cash and cash equivalents:
The carrying amount approximates fair value.
Consumer receivables acquired for liquidation:
The Company has estimated the fair value based on the present
value of expected future cash flows.
Advances under lines of credit, notes payable and due to
affiliates:
Since these are variable rate and short-term, the carrying
amounts approximate fair value.
F-25
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Note
N Summarized Quarterly Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Full
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
25,645,000
|
|
|
$
|
33,083,000
|
|
|
$
|
38,938,000
|
|
|
$
|
43,096,000
|
|
|
$
|
140,762,000
|
|
Income before provision for income taxes
|
|
|
19,038,000
|
|
|
|
21,102,000
|
|
|
|
25,777,000
|
|
|
|
22,052,000
|
|
|
|
87,969,000
|
|
Net income
|
|
|
11,326,000
|
|
|
|
12,552,000
|
|
|
|
15,308,000
|
|
|
|
13,080,000
|
|
|
|
52,266,000
|
|
Basic net income per share
|
|
$
|
0.82
|
|
|
$
|
0.91
|
|
|
$
|
1.10
|
|
|
$
|
0.94
|
|
|
$
|
3.79
|
|
Diluted net income per share
|
|
$
|
0.77
|
|
|
$
|
0.85
|
|
|
$
|
1.03
|
|
|
$
|
0.88
|
|
|
$
|
3.56
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
20,260,000
|
|
|
$
|
24,829,000
|
|
|
$
|
26,426,000
|
|
|
$
|
30,464,000
|
|
|
$
|
101,979,000
|
|
Income before provision for income taxes
|
|
|
15,645,000
|
|
|
|
18,679,000
|
|
|
|
19,810,000
|
|
|
|
22,691,000
|
|
|
|
76,825,000
|
|
Net income
|
|
|
9,312,000
|
|
|
|
11,103,000
|
|
|
|
11,780,000
|
|
|
|
13,570,000
|
|
|
|
45,765,000
|
|
Basic net income per share
|
|
$
|
0.68
|
|
|
$
|
0.82
|
|
|
$
|
0.86
|
|
|
$
|
0.99
|
|
|
$
|
3.36
|
|
Diluted net income per share
|
|
$
|
0.64
|
|
|
$
|
0.76
|
|
|
$
|
0.80
|
|
|
$
|
0.93
|
|
|
$
|
3.13
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
13,830,000
|
|
|
$
|
16,662,000
|
|
|
$
|
19,028,000
|
|
|
$
|
19,959,000
|
|
|
$
|
69,479,000
|
|
Income before provision for income taxes
|
|
|
10,379,000
|
|
|
|
12,241,000
|
|
|
|
14,363,000
|
|
|
|
15,303,000
|
|
|
|
52,286,000
|
|
Net income
|
|
|
6,175,000
|
|
|
|
7,281,000
|
|
|
|
8,536,000
|
|
|
|
9,004,000
|
|
|
|
30,996,000
|
|
Basic net income per share
|
|
$
|
0.46
|
|
|
$
|
0.54
|
|
|
$
|
0.63
|
|
|
$
|
0.66
|
|
|
$
|
2.29
|
|
Diluted net income per share
|
|
$
|
0.43
|
|
|
$
|
0.51
|
|
|
$
|
0.59
|
|
|
$
|
0.62
|
|
|
$
|
2.15
|
|
|
|
|
* |
|
Due to rounding the sum of quarterly totals for earnings per
share may not add to the yearly total. |
|
|
Note O
|
Subsequent
events
|
The Company purchased portfolios of consumer receivables with a
face value of $965 million and a purchase price of
$33.4 million subsequent to September 30, 2007.
Included in the portfolio purchases is one portfolio purchased
from a major financial institution located in a South American
country in the amount of approximately $8.0 million. As a
result of this purchase, the Company will be exposed to currency
rate fluctuations as the collections on this portfolio will be
denominated in the local currency of the South American country.
Additionally, our investment could also be exposed to the same
currency risk. A strengthened U.S. dollar could decrease
the U.S. dollar equivalent of the local currency
collections, and our currency conversion to U.S. dollars
would suffer.
As of September 30, 2007, Palisade XVI, the Companys
indirect wholly-owned subsidiary, was required to remit an
additional $13.1 million to its lender in order to be in
compliance under the Receivable Financing Agreement. The Company
facilitated the ability of Palisades XVI to make this payment by
borrowing $13.1 million under its current revolving credit
facility and causing another of its subsidiaries to purchase a
portion of the Portfolio from Palisade XVI at a price of
$13.1 million prior to the measurement date under the
Receivable Financing Agreement.
F-26
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
On December 4, 2007, the Company signed the Sixth Amendment
to the Fourth Amended and Restated Loan Agreement (the
Credit Agreement) with a consortium of banks that
temporarily increases the total revolving loan commitment from
$175,000,000 to $185,000,000. The temporary increase of
$10,000,000 is required to be repaid by February 29, 2008.
In the event the increase is not repaid by February 29,
2008, the then outstanding portion of the temporary increase
shall be repaid over a six month period.
In December, 2007, the Company negotiated an agreement with a
third party servicer, to assist the Company in the asset
location, skiptracing efforts and ultimately the suing of
debtors with respect to the Portfolio Purchase. The agreement
calls for a 3% percent fee on substantially all gross
collections from the Portfolio Purchase on the first
$500 million and 7% on substantially all collections from
the Portfolio Purchase in excess of $500 million. Additionally,
the Company will pay this third party servicer a monthly fee of
$275,000 per month for twenty four months for its consulting and
skiptracing efforts in connection with the Portfolio Purchase.
This fee began in May 2007.
On December 27, 2007, the Company entered into the second
amendment of its Receivable Financing Agreement. As the actual
collections have been slower than the minimum collections
scheduled under the original agreement, which contemplated sales
of accounts which have not occurred, the lender and the Company
agreed to a lower amortization schedule which does not
contemplate the sales of accounts. The effect of this reduction
is to extend the payments of the loan from approximately 25
months to approximately 31 months. The lender has charged the
Company a fee of $475,000.
F-27