-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JEG9gw0ysel+FA8P0raSy5Bz5eJKMQZ4cGK+6NTCwHyjon5n36Vw3JXY7Rh4C5HU 4BjlDCOXRgHA514baLvmwg== 0001125282-06-000638.txt : 20060209 0001125282-06-000638.hdr.sgml : 20060209 20060209165209 ACCESSION NUMBER: 0001125282-06-000638 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060209 DATE AS OF CHANGE: 20060209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASTA FUNDING INC CENTRAL INDEX KEY: 0001001258 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 223388607 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26906 FILM NUMBER: 06593673 BUSINESS ADDRESS: STREET 1: 210 SYLVAN AVE CITY: ENGLEWOOD CLIFFS STATE: NJ ZIP: 07632 BUSINESS PHONE: 2015675648 MAIL ADDRESS: STREET 1: 210 SYLVAN AVE CITY: ENGLEWOOD CLIFFS STATE: NJ ZIP: 07632 10-Q 1 b411540_10q.txt QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2005 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-26906 ASTA FUNDING, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-3388607 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 210 SYLVAN AVE., ENGLEWOOD CLIFFS, NEW JERSEY 07632 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER: (201) 567-5648 Former name, former address and former fiscal year, if changed since last report: N/A Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer as in Rule 12b-2 of the Exchange Act. Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes |_|No |X| As of February 1, 2006, the registrant had approximately 13,602,824 common shares outstanding. ================================================================================ ASTA FUNDING, INC. INDEX TO FORM 10-Q Part I. Financial Information............................................ 2 Item 1. Consolidated Financial Statements................................ 2 Consolidated Balance Sheets as of December 31, 2005 (unaudited) and September 30, 2005............................ 2 Consolidated Statements of Operations for the three month periods ended December 31, 2005 and 2004 (unaudited)........................ 3 Consolidated Statement of Stockholders' Equity for the three month period ending December 31, 2005 (unaudited)................................. 4 Consolidated Statements of Cash Flows for the three month periods ended December 31, 2005 and 2004 (unaudited)........................ 5 Condensed Notes to Consolidated Financial Statements (unaudited)........................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 24 Item 4. Controls and Procedures.......................................... 24 Part II. Other Information................................................ 25 Item 1. Legal Proceedings................................................ 25 Item 1A Risk Factors..................................................... 25 Item 2. Changes in Securities and Use of Proceeds........................ 25 Item 3. Defaults Upon Senior Securities.................................. 25 Item 4. Submission of Matters to a Vote of Security Holders.............. 25 Item 5. Other Information................................................ 25 Item 6. Exhibits......................................................... 25 Signatures .............................................................. 26 Section 302 Certificate of Principal Executive Officer.................... 27 Section 302 Certificate of Principal Financial Officer.................... 28 Section 906 Certificate of Principal Executive Officer.................... 29 Section 906 Certificate of Principal Financial Officer.................... 30 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ASTA FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, 2005 2005 ------------ ------------ (UNAUDITED) ASSETS Cash .................................................................... $ 3,347,000 $ 4,059,000 Consumer receivables acquired for liquidation ........................... 249,183,000 172,727,000 Due from third party collection agencies and attorneys................... 1,780,000 1,425,000 Furniture and equipment, net ............................................ 983,000 989,000 Other assets ............................................................ 785,000 838,000 ------------ ------------ Total assets .................................................. $256,078,000 $180,038,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Debt ................................................................. $ 91,720,000 $ 29,285,000 Other liabilities .................................................... 2,900,000 4,180,000 Income taxes payable ................................................. 7,221,000 1,243,000 Deferred income taxes ................................................ 153,000 153,000 ------------ ------------ Total liabilities ............................................. 101,994,000 34,861,000 ------------ ------------ Stockholders' Equity Preferred stock, $.01 par value; authorized 5,000,000; issued and outstanding -- none Common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding -- 13,603,000 at December 31, 2005 and 13,595,000 at September 30, 2005 ............ 136,000 136,000 Additional paid-in capital ........................................... 60,938,000 60,798,000 Retained earnings .................................................... 93,010,000 84,243,000 ------------ ------------ Total stockholders' equity .................................... 154,084,000 145,177,000 ------------ ------------ Total liabilities and stockholders' equity .............................. $256,078,000 $180,038,000 ============ ============
See accompanying notes to consolidated financial statements 2 ASTA FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2005 2004 ----------- ----------- Revenues Finance income, net ........................................... $20,260,000 $13,830,000 ----------- ----------- Expenses General and administrative..................................... 3,952,000 3,044,000 Interest ...................................................... 663,000 407,000 ----------- ----------- 4,615,000 3,451,000 ----------- ----------- Income before income taxes ....................................... 15,645,000 10,379,000 Income tax expense ............................................... 6,333,000 4,204,000 ----------- ----------- Net income ....................................................... $ 9,312,000 $ 6,175,000 =========== =========== Net income per share -- Basic .................................... $ 0.68 $ 0.46 ----------- ----------- Net income per share -- Diluted .................................. $ 0.64 $ 0.43 ----------- ----------- Weighted average number of shares outstanding: Basic ........................................................... 13,598,000 13,471,000 ----------- ----------- Diluted ......................................................... 14,474,000 14,303,000 ----------- -----------
See accompanying notes to consolidated financial statements 3 ASTA FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (UNAUDITED)
ADDITIONAL COMMON STOCK PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------------- ------------- ------------- ------------- ------------- Balance, September 30, 2005 ................. 13,595,000 $ 136,000 $ 60,798,000 $ 84,243,000 $ 145,177,000 Exercise of options.......................... 8,000 -- 140,000 -- 140,000 Dividends ................................... -- -- -- (545,000) (545,000) Net Income .................................. -- -- -- 9,312,000 9,312,000 ------------- ------------- ------------- ------------- ------------- Balance, December 31, 2005 .................. 13,603,000 $ 136,000 $ 60,938,000 $ 93,010,000 $ 154,084,000 ============= ============= ============= ============= =============
See accompanying notes to consolidated financial statements 4 ASTA FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2005 2004 ------------- ------------- Cash flows from operating activities: Net income ......................................................... $ 9,312,000 $ 6,175,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...................................... 132,000 118,000 Changes in: Other assets ....................................................... (3,000) 34,000 Due from third party collection agencies and attorneys .......... (355,000) 43,000 Income taxes payable ............................................... 5,978,000 1,881,000 Other liabilities ................................................... (1,348,000) (2,043,000) ------------- ------------- Net cash provided by operating activities ....................... 13,716,000 6,208,000 Cash flows from investing activities: Purchase of consumer receivables acquired for liquidation .......... (102,405,000) (36,542,000) Principal collected on receivables acquired for liquidation ........ 18,426,000 13,745,000 Principal collected on receivables accounts represented by account sales ................................................... 7,523,000 9,186,000 Deposit on receivable purchase .................................. -- 7,213,000 Capital expenditures ............................................... (71,000) (56,000) ------------- ------------- Net cash (used in) investing activities ......................... (76,527,000) (6,454,000) Cash flows from financing activities: Proceeds from exercise of options .................................. 140,000 1,223,000 Dividends paid ..................................................... (476,000) (470,000) Advances (payments) under line of credit, net ...................... 62,435,000 (2,001,000) ------------- ------------- Net cash provided by (used in) financing activities ............. 62,099,000 (1,248,000) ------------- ------------- (Decrease) in cash .................................................. (712,000) (1,494,000) Cash at the beginning of period ..................................... 4,059,000 3,344,000 ------------- ------------- Cash at end of period ............................................... $ 3,347,000 $ 1,850,000 ============= ============= Supplemental disclosure of cash flow information: Cash paid during the period Interest .......................................................... $ 492,000 $ 324,000 Income taxes ...................................................... $ 270,000 $ 2,200,000
5 ASTA FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1: BUSINESS AND BASIS OF PRESENTATION Business Asta Funding, Inc., together with its wholly owned subsidiaries, is engaged in the business of purchasing, managing and servicing non-conforming and distressed consumer receivables. Non-conforming consumer receivables are the obligations of individuals that have incurred credit impairment either at the time the obligation was originated or subsequent to origination. Distressed consumer receivables are the unpaid debts of individuals to banks, finance companies and other credit providers. A large portion of our distressed consumer receivables are MasterCard(R), Visa(R), other credit card accounts and telecommunication accounts which were charged-off by the issuers for non-payment. We acquire these portfolios at substantial discounts from their face values that are based on the characteristics of the underlying accounts of each portfolio. Basis of Presentation The consolidated balance sheet as of December 31, 2005, the consolidated statements of operations for the three month periods ended December 31, 2005 and 2004, and the consolidated statements of cash flows for the three month periods ended December 31, 2005 and 2004, have been prepared by us without an audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of us at December 31, 2005 and September 30, 2005, the results of operations for the three month periods ended December 31, 2005 and 2004 and cash flows for the three month periods ended December 31, 2005 and 2004 have been made. The results of operations for the three month periods ended December 31, 2005 and 2004 are not necessarily indicative of the operating results for any other interim period or the full fiscal year. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and therefore do not include all information and footnote disclosures required under generally accepted accounting principles. We suggest that these financial statements be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2005 filed with the Securities and Exchange Commission on January 20, 2006. NOTE 2: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Asta Funding, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. NOTE 3: CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION Accounts acquired for liquidation are stated at their net realizable value and consist of mainly defaulted consumer loans to individuals throughout the country. Prior to September 30, 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 American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 03-3, "Accounting for Loans or Certain Securities Acquired in a Transfer."Practice Bulletin 6 was amended by SOP 03-3 as described further in this note Under the guidance of SOP 03-3 (and the amended Practice Bulletin 6), static pools of accounts are established. These pools are aggregated 6 ASTA FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3: CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION- (CONTINUED) based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). SOP 03-3 (and the amended Practice Bulletin 6) requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. The SOP initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased as the basis for subsequent impairment testing. Significant increases in actual, or expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio's remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Effective for fiscal years beginning October 1, 2005 under SOP 03-3 and the amended Practice Bulletin 6, rather than lowering the estimated IRR if the collection estimates are not received or projected to be received, the carrying value of a pool would be written down to maintain the then current IRR. Income on finance receivables is earned based on each static pool's effective IRR. Under the interest method, income is recognized on the effective yield method based on the actual cash collected during a period and future estimated cash flows and timing of such collections and the portfolio's cost. Revenue arising from collections in excess of anticipated amounts attributable to timing differences is deferred. The estimated future cash flows are reevaluated quarterly. 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. 7 ASTA FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 3: CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION -- (CONTINUED) The following tables summarize the changes in the balance sheet of the investment in receivable portfolios during the following periods:
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 -------------------------------------------------------- ACCRUAL CASH BASIS BASIS PORTFOLIOS PORTFOLIOS TOTAL ------------- ------------- ------------- Balance, beginning of period ................................ $ 172,636,000 $ 91,000 $ 172,727,000 Acquisitions of receivable portfolios, net .................. 102,405,000 -- 102,405,000 Net cash collections from collection of consumer receivables acquired for liquidation .............. (31,062,000) (1,173,000) (32,235,000) Net cash collections represented by account sales of consumer receivables acquired for liquidation ..... (13,739,000) (235,000) (13,974,000) Transfer to cost recovery.................................... (529,000) 529,000 -- Finance income recognized ................................... 19,047,000 1,213,000 20,260,000 ------------- ------------- ------------- Balance, end of period ...................................... $ 248,758,000 $ 425,000 $ 249,183,000 ============= ============= ============= Revenue as a percentage of collections ...................... 42.5% 86.2% 43.8%
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 ------------------------------------------------------- ACCRUAL CASH BASIS BASIS PORTFOLIOS PORTFOLIOS TOTAL ------------- ------------- ------------- Balance, beginning of period ................................ $ 144,812,000 $ 1,353,000 $ 146,165,000 Acquisitions of receivable portfolios, net .................. 36,542,000 -- 36,542,000 Net cash collections from collection of consumer receivables acquired for liquidation ............... (20,456,000) (1,349,000) (21,805,000) Net cash collections represented by account sales of consumer receivables acquired for liquidation ..... (13,487,000) (1,499,000) (14,986,000) Finance income recognized ................................... 11,784,000 2,076,000 13,860,000 ------------- ------------- ------------- Balance, end of period ...................................... $ 159,195,000 $ 581,000 $ 159,776,000 ============= ============= ============= Revenue as a percentage of collections ...................... 34.7% 72.9% 37.7%
8 ASTA FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 3: CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION -- (CONTINUED) As of December 31, 2005 the Company had $249,183,000 in Consumer Receivables acquired for Liquidation. Based upon current projections, net cash collections, applied to principal for accrual basis portfolios will be as follows for the twelve months in the periods ending: December 31, 2006 $ 50,711,000 December 31, 2007 71,806,000 December 31, 2008 60,229,000 December 31, 2009 44,760,000 December 31, 2010 21,252,000 ------------ Total $248,758,000 ============ 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 December 31, 2005. The Company did not have any reclassifications from nonaccretable difference to accretable yield resulting from any increases in any estimates of future cash flows. Changes in accretable yield for the three months ended December 31, 2005 is as follows: THREE MONTHS ENDED DECEMBER 31, 2005 ----------------- Balance at beginning of period, September 30, 2005 $94,022,000 Income recognized on finance receivables, net (19,047,000) Additions representing expected revenue from purchases 60,331,000 Reclassifications from nonaccretable difference -- ------------ Balance at end of period, December 31, 2005 $135,306,000 ============ 9 ASTA FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 3: CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION -- (CONTINUED) During the three months ended December 31, 2005, the Company purchased $2.1 billion of face value of charged-off consumer receivables at a cost of $102.4 million. At December 31, 2005, the estimated remaining net collections on the receivables purchased in the three months ended September 30, 2005 is $162.1 million. The following table summarizes collections on a gross basis as received by our third-party collection agencies and attorneys, less commissions and direct costs for the three month periods ended December 31, 2005 and 2004, respectively. FOR THE THREE MONTHS ENDED DECEMBER 31, --------------------------------------- 2005 2004 ---- ---- Gross collections (1) $65,728,000 $53,431,000 Commissions and fees (2) 19,519,000 16,620,000 ---------- ---------- Net collections $46,209,000 $36,811,000 =========== =========== (1) Gross collections include: collection from third-party collection agencies and attorneys, collection from our in-house efforts and collections represented by account sales. (2) Commissions and fees are the contractual commission earned by third party collection agencies and attorneys, and direct costs associated with the collection effort- generally court costs. NOTE 4: FURNITURE AND EQUIPMENT Furniture and equipment consist of the following as of the dates indicated: DECEMBER 31, SEPTEMBER 30, 2005 2005 ------------- -------------- Furniture................................ $ 307,000 $ 307,000 Equipment................................ 2,179,000 2,108,000 ------------- -------------- 2,486,000 2,415,000 Less accumulated depreciation............ 1,503,000 1,426,000 ------------- -------------- Balance, end of period................... $ 983,000 $ 989,000 ============= ============ 10 ASTA FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Unaudited) NOTE 5: DEBT In December 2005, the Company entered into an amended and restated loan and security agreement that increased the line of credit with a lending institution from $80 million to $100 million with a feature that, under certain circumstances, provides for an increase the line of credit to $125 million. The amended and restated loan and security agreement expiration date remains May 11, 2006. The line of credit bears interest at the lesser of LIBOR plus an applicable margin, or the prime rate plus or minus an applicable margin based on certain leverage ratios (the applicable rate was 6.75% at December 31, 2005, with an average rate of 6.5% for the three month period ended December 31, 2005). The credit line is collateralized by all portfolios of consumer receivables acquired for liquidation and contains customary financial and other covenants (relative to tangible net worth, interest coverage, and leverage ratio, as defined) that must be maintained in order to borrow funds. As of December 31, 2005, $91.7 million was outstanding. In January 2006, the Company entered into an amended and restated loan and security agreement that increased the line of credit with a consortium of banks from $100 million to $125 million. The Company is currently in negotiations to renew its credit facility and anticipates renewing this arrangement in a short period of time. See Note 14- Subsequent Events. NOTE 6: COMMITMENTS AND CONTINGENCIES Employment Agreements We have an employment agreement with one executive and are in the process of finalizing new employment agreements with two other executive officers. Such agreement and anticipated agreements provide for base salary payments as well as bonuses. The agreements also contain confidentiality and non-compete provisions. Please refer to our definitive Proxy Statement, as filed with the Securities and Exchange Commission, under the caption "Executive Compensation" for additional information. Leases We are a party to two operating leases with respect to our facilities in Englewood Cliffs, New Jersey and Bethlehem, Pennsylvania. Please refer to our consolidated financial statements and notes thereto in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, for additional information. Litigation In the ordinary course of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using our network of third party law firms, against consumers. Also, consumers occasionally initiate litigation against us, in which they allege that we have violated a federal or state law in the process of collecting their account. We do not believe that these ordinary course matters are material to our business and financial condition. As of the date of this Form 10-Q, we were not involved in any material litigation in which we were a defendant. NOTE 7: INCOME RECOGNITION We recognize income on non-performing and performing consumer receivable portfolios, which are acquired for liquidation, using either the interest method or cost recovery method. Upon acquisition of a portfolio of receivables, management estimates the future anticipated cash flows and determines the allocation of payments based upon this estimate. If management can reasonably estimate the expected amount to be collected on a portfolio and can reasonably determine the timing of such payments based on historic experience and other factors, we use the interest method. If management cannot reasonably estimate the future cash flows, we use the cost recovery method. Under the interest method, we recognize income on the effective yield method based on the actual cash collected during a period and future estimated cash flows and timing of such estimated collections. 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 we have fully collected the cost of the portfolio. 11 ASTA FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 7: INCOME RECOGNITION-- (CONTINUED) We recognize income net of collection fees paid to third-party collection agencies. With respect to amounts collected in-house, such finance income is recognized at the gross amount collected. Income from finance receivables was recognized over the periods from the date of purchase to the estimated collection date. NOTE 8: INCOME TAXES The provision for income tax expense for the three month periods ending December 31, 2005 and 2004, reflects income tax expense at an effective rate of 40.5%. Deferred federal and state taxes arise from temporary differences resulting primarily from the provision for credit losses and depreciation expense. NOTE 9: NET INCOME PER SHARE Basic per share data is determined by dividing net income by the weighted average shares outstanding during the period. Diluted per share data is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. With respect to the assumed proceeds from the exercise of dilutive options, the treasury stock method is calculated using the average market price for the period. The following table presents the computation of basic and diluted per share data for the three months ended December 31, 2005 and 2004:
2005 2004 --------------------------------- ----------------------------------- WEIGHTED WEIGHTED NET AVERAGE PER SHARE NET AVERAGE PER SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT ------------ ---------- -------- ---------- ---------- -------- Basic............................ $9,312,000 13,598,000 $0.68 $6,175,000 13,471,000 $0.46 ======= ======== Effect of Dilutive Stock......... 876,000 832,000 ------------ ---------- ---------- ---------- -------- Diluted.......................... $9,312,000 14,474,000 $0.64 $6,175,000 14,303,000 $0.43 ============ ========== ======= ========== ========== ========
NOTE 10: STOCK BASED COMPENSATION The Company accounts for stock-based employee compensation under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123(Revised 2005), Share-Based Payment ("SFAS 123R"). SFAS 123R which the Company adopted October 1, 2005, requires that compensation expense associated with stock options be recognized in the statement of operations , rather than a disclosure in the notes to the Company's consolidated financial statements. 12 ASTA FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 10: STOCK BASED COMPENSATION-- (CONTINUED) Effective September 30, 2005, the Company accelerated the vesting of all unvested stock options previously awarded to employees, officers and directors under the Company's stock option plans. In order to prevent unintended personal benefits to employees, officers and directors, the Board imposed restrictions on any shares received through the exercise of accelerated options held by those individuals. These restrictions prevent the sale of any stock obtained through exercise of an accelerated option prior to the earlier of the original vesting date or the individual's termination of employment. Financial Accounting Standards Board ("FASB") Financial Interpretation No. 44 would require the Company to recognize compensation expense under certain circumstances, such as the change in the vesting schedule, that would allow an employee to vest in an option that would have otherwise been forfeited based on the award's original terms. The Company would be required to begin to recognize compensation expense over the new expected vesting periods based on estimates of the numbers of options that employees ultimately will retain that otherwise would have been forfeited, absent the modifications. The accelerated options, absent the acceleration, would substantially have vested over the next 9 to 21 months. Such estimates would be based on such factors such as historical and expected employee turnover rates and similar statistics. Of the 587,000 stock option that were affected by the acceleration of the vesting of all stock options as of September 30, 2005, 547,000 are attributable to officers and directors of the Company representing $9.0 million of the $9.7 million intrinsic value of the newly vested stock options. The Company is unable to estimate the number of options that employees will ultimately retain that otherwise would have been forfeited, absent the modification. Based on the current circumstances, market price above the grant price, concentration of options awarded to officers and directors and low historical turnover rates, no compensation expense resulting from the new measurement date has been recognized through December 31, 2005 or, prior to the employees' termination. The Company will recognize compensation expense in future periods, should a benefit be realized by the holders of the aforementioned options, which they would not otherwise have been entitled to. In the event the Company grants stock options under the stock option plans, the Company will recognize compensation expense in accordance with Financial Interpretation No. 44. The primary purpose of the accelerated vesting is to eliminate the compensation expense the Company would otherwise recognize in its income statement with respect to these accelerated stock options based upon the adoption of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123(Revised 2005), Share-Based Payment ("SFAS 123R"). There were no stock option grants during the quarter ended December 31, 2005. The weighted average fair value of the options granted during the quarter ended December 31, 2004 was $9.44 per share on the dates of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield 0.8289%, volatility 40.13%, expected life 10 years, risk free interest rate of 4.19%. Pro-forma net income for the three months ended December 31, 2004 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" was $5.6 million, or $0.42 per basic share outstanding and $0.39 per fully diluted share. 13 ASTA FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 11: STOCK OPTION PLANS Equity Compensation Plan On December 1, 2005, the Board of Directors adopted the Company's Equity Compensation Plan (the "Equity Compensation Plan"), subject to the approval of the stockholders of the Company. The Equity Compensation Plan was adopted to supplement the Company's existing 2002 Stock Option Plan. In addition to permitting the grant of stock options as are permitted under the 2002 Stock Option Plan, the Equity Compensation Plan allows the Company flexibility with respect to equity awards by also providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights and stock appreciation rights. The general purpose of the Equity Compensation Plan is to provide an incentive to our employees, directors and consultants, including executive officers, employees and consultants of any subsidiaries, by enabling them to share in the future growth of our business. The Board of Directors believes that the granting of stock options and other equity awards promotes continuity of management and increases incentive and personal interest in the welfare of the Company by those who are primarily responsible for shaping and carrying out our long range plans and securing our growth and financial success. The Board believes that the Equity Compensation Plan will advance our interests by enhancing our ability to (a) attract and retain employees, directors and consultants who are in a position to make significant contributions to our success; (b) reward employees, directors and consultants for these contributions; and (c) encourage employees, directors and consultants to take into account our long-term interests through ownership of our shares. 2002 Stock Option Plan On March 5, 2002, the Board of Directors adopted the Asta Funding, Inc. 2002 Stock Option Plan (the "2002 Plan"), which plan was approved by the Company's stockholders on May 1, 2002. The 2002 Plan was adopted in order to attract and retain qualified directors, officers and employees of, and consultants to, the Company. The following description does not purport to be complete and is qualified in its entirety by reference to the full text of the 2002 Plan, which is included as an exhibit to the Company's reports filed with the SEC. The 2002 Plan authorizes the granting of incentive stock options (as defined in Section 422 of the Code) and non-qualified stock options to eligible employees of the Company, including officers and directors of the Company (whether or not employees) and consultants of the Company. The Company has 1,000,000 shares of Common Stock authorized for issuance under the 2002 Plan and 404,667 were available as of December 31, 2005. As of December 31, 2005, approximately 140 of the Company's employees were eligible to participate in the 2002 Plan. Future grants under the 2002 Plan have not yet been determined. 1995 Stock Option Plan The 1995 Stock Option Plan expired on September 14, 2005. The plan was adopted in order to attract and retain qualified directors, officers and employees of, and consultants, to the Company. The following description does not purport to be complete and is qualified in its entirety by reference to the full text of the 1995 Stock Option Plan, which is included as an exhibit to the Company's reports filed with the SEC. 14 ASTA FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 11: STOCK OPTION PLANS-- (CONTINUED) 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 of the Company. The Company authorized 1,840,000 shares of Common Stock authorized for issuance under the 1995 Stock Option Plan. All but 96,002 shares were utilized. As of September 14, 2005, no more options could be issued under this plan. No option will vest more than ten years from the date of grant. The following table summarizes stock option transactions under the plans:
THREE MONTHS ENDED DECEMBER 31, -------------------------------------------------- 2005 2004 --------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE -------- -------- -------- -------- Outstanding options at the beginning of period.......... 1,580,605 $ 9.1082 1,364,171 $ 6.2657 Options granted......................................... -0- 0.00 402,500 18.2502 Options canceled........................................ -0- 0.00 (40,002) 11.7145 Options exercised....................................... (7,500) 18.7600 (118,453) 9.3135 --------- -------- --------- -------- Outstanding options at the end of period................ 1,573,105 $ 9.0622 1,608,216 $ 8.9051 ========= ========= Exercisable options at the end of period................ 1,573,105 $ 9.0622 1,011,005 $ 4.5229 ========= =========
The following table summarizes information about the Plans' outstanding options as of December 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- ------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE - -------------------- ----------- --------------- ---------- ------------ ---------- $0.0000 - $2.2360....................... 200,000 3.4 $ 0.8125 200,000 $ 0.8125 $2.2361 - $4.4720....................... 520,000 3.8 2.5644 520,000 2.5644 $4.4721 - $6.7080....................... 143,334 6.8 4.8284 143,334 4.8284 $6.7081 - $9.9440....................... 7,000 6.6 7.2307 7,000 7.2307 $13.4161 - $15.6520..................... 245,002 7.8 14.8700 245,002 14.8700 $15.6521 - $17.8880..................... 31,944 8.7 16.5347 31,944 16.5347 $17.8881 - $20.1240..................... 405,825 8.8 18.2309 405,825 18.2309 $20.1241 - $22.3600..................... 20,000 9.2 22.3600 20,000 22.3600 -------- ---- --------- --------- --------- 1,573,105 6.1 $ 9.0622 1,573,105 $ 9.0622 ========= =========
15 ASTA FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 12: STOCKHOLDERS EQUITY During August 2005 we declared a quarterly cash dividend aggregating $476,000 ($0.035 per share) which was paid November 1, 2005. In December 2005, the Board of Directors increased the dividend from $03.5 per share per, quarter, to $0.04 per share, per quarter and accrued $545,000 as of December 31, 2005, for record holders as of December 30, 2005 that was paid on February 1, 2006. NOTE 13: USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates including management's estimates of future cash flows and the allocation of collections between principal and interest resulting therefrom. NOTE 14: SUBSEQUENT EVENTS On January 20, 2006, Asta Funding, Inc. (the "Company") entered into the Third Amended and Restated Revolving Note with a consortium of banks. The Company expanded its credit facility and as a result, the credit facility is now $125 million, up from $100 million. The line of credit bears interest at the lesser of LIBOR plus an applicable margin, or the lesser of the prime rate plus or minus an applicable margin based on certain leverage ratios. The credit line is collateralized by all portfolios of consumer receivables acquired for liquidation and contains customary financial and other covenants (relative to tangible net worth, interest coverage, and leverage ratio, as defined) that must be maintained in order to borrow funds. On February 6, 2006 the Company announced it entered into a definitive agreement to acquire VATIV Recovery Solutions LLC ("VATIV"). VATIV, located in Sugar Land Texas, provides nationwide bankruptcy and deceased account servicing, and specializes in the intricate procedures that support maximum recovery for these difficult account segments. The acquisition is anticipated to close in the second quarter of fiscal year 2006 and is considered immaterial to the financial statements of the Company. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are primarily engaged in the business of acquiring, managing, servicing and recovering on portfolios of consumer receivables. These portfolios generally consist of one or more of the following types of consumer receivables: o charged-off receivables -- accounts that have been written-off by the originators and may have been previously serviced by collection agencies; o semi-performing receivables -- accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators; and o performing receivables -- accounts where the debtor is making regular monthly payments that may or may not have been delinquent in the past. We acquire these consumer receivable portfolios at a significant discount to the amount actually owed by the borrowers. We acquire these portfolios after a qualitative and quantitative analysis of the underlying receivables and calculate the purchase price so that our estimated cash flow offers us an adequate return on our acquisition costs and servicing expenses. After purchasing a portfolio, we actively monitor its performance and review and adjust our collection and servicing strategies accordingly. We purchase receivables from credit grantors and others through privately negotiated direct sales and auctions in which sellers of receivables seek bids from several pre-qualified debt purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis through: o our relationships with industry participants, collection agencies, investors and our financing sources; o brokers who specialize in the sale of consumer receivable portfolios; and o other sources. FORWARD LOOKING STATEMENTS This Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified by use of terms such as "may," "will," "should," "plan," "expect," "believe," "anticipate," "estimate" and similar expressions, although some forward-looking statements are expressed differently. Forward-looking statements represent our management's judgment regarding future events. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. All statements other than statements of historical fact included in this report regarding our financial position, business strategy, products, products under development and clinical trials, markets, budgets, plans, or objectives for future operations are forward-looking statements. We cannot guarantee the accuracy of the forward-looking statements, and you should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including the statements under "Risk Factors" and "Critical Accounting Policies" detailed in our Annual Report on Form 10-K/A for the year ended September 30, 2005, and other reports filed with the Securities and Exchange Commission. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other documents filed by the Company or with respect to its securities with the Securities and Exchange Commission are available free of charge through our website at www.astafunding.com. Information on our website does not constitute a part of this report. 17 CRITICAL ACCOUNTING POLICIES We account for our investments in consumer receivable portfolios, using either: o the interest method; or o the cost recovery method. Generally, each purchase is considered a separate portfolio of receivables and is considered a financial investment. Based upon the expected performance characteristics of the receivables in the portfolio, we determine whether the portfolio should be accounted for using the interest method or the cost recovery method. If we can reasonably estimate the amount to be collected on a portfolio and can reasonably determine the timing of such payments based on historic experience and other factors, we use the interest method. If we cannot reasonably estimate the future cash flows, we use the cost recovery method. The interest method allows us to recognize income on the effective yield of such portfolio based on the actual cash collected during a period and future estimated cash flows and the timing of such collections and the purchase of such portfolios. Revenue arising from collections is excess of anticipated amounts attributable to timing differences is deferred. Under this method, we periodically apply a portion of the actual funds collected as a reduction in the principal amount invested in each specific portfolio and the remainder is recognized as finance income. Generally, these portfolios are expected to amortize over a three to five year period based upon our estimated future cash flows. Historically, a majority of the cash we ultimately collect on a portfolio is received during the first 18-24 months after acquiring the portfolio, although significant additional amounts are collected over the remaining periods. The estimated future cash flows of the portfolios are evaluated or reevaluated quarterly. Under the cost recovery method of accounting, no income is recognized until the purchase price of a portfolio has been fully recovered by us. The estimated future cash flows are reevaluated quarterly. Income on finance receivables is earned based on each static pool's effective IRR. Under the interest method, income is recognized on the effective yield method based on the actual cash collected during a period and future estimated cash flows and timing of such collections and the portfolio's cost. We typically recognize finance income net of collection fees paid to third-party collection agencies and attorneys. In the following discussions, most percentages and dollar amounts have been rounded to aid presentation. As a result, all figures are approximations. RESULTS OF OPERATIONS The three-month period ended December 31, 2005, compared to the three-month period ended December 31, 2004 Finance income. During the three-month period ended December 31, 2005, finance income increased $6.4 million or 46.5 % to $20.3 million from $13.8 million for the three-month period ended December 31, 2004. The increase in finance income was primarily due to an increase in finance income earned on consumer receivables acquired for liquidation, which resulted from an increase in the average outstanding accounts acquired for liquidation during the three-months ended December 31, 2005 of approximately $211.0 million, as compared to approximately $153.0 million during the three month period ended December 31, 2004. Finance income as a percentage of collections increased to 43.8% from 37.7% in the first quarter of fiscal year 2006 as compared to the first fiscal quarter of 2005 due to the performance of portfolios purchased in 2004 and 2005, which we estimate will yield higher returns. These yields increased primarily due to the Company's increased focus on utilizing its attorney networks, which started in 2004. During the three months ended December 31, 2005, we acquired receivables at a cost of $102.4 million as compared to $36.5 million during the three months ended December 31, 2004 and for year ended September 30, 2005, we acquired receivables at a cost of $126.0 million as compared to $103.7 million for the year ended September 30, 2004. During the three-month period ended December 31, 2005, the commissions and fees associated with gross collections from our third-party collection agencies and attorneys increased $2.9 million or 17.4% to $19.5 million from $16.6 million for the three-month period ended December 31, 2004. The increase is indicative of a shift to the suit strategy implemented by the Company. As we continue to purchase portfolios and utilize our third party collection agencies and attorney networks, we anticipate these costs will rise. 18 General and Administrative Expenses. During the three-month period ended December 31, 2005, general and administrative expenses increased $908,000 or 29.8% to $3.9 million from $3.0 million for the three-months ended December 31, 2004, and represented 85.6% of total expenses for the three months ended December 31, 2005. The increase in general and administrative expenses was primarily due to an increase in receivable servicing expenses that resulted from the substantial increase in our average outstanding accounts acquired for liquidation during the three months ended December 31, 2005 of approximately $211.0 million, as compared to approximately $153.0 million during the three month period ended December 31, 2004. A majority of the increased costs were from collection expenses including, data processing costs, salaries, payroll taxes and benefits, professional fees, postage and telephone charges. Interest Expense. During the three-month period ended December 31, 2005, interest expense increased $256,000 to $663,000 from $407,000 as compared to the same period in the prior year and represented 14.4% of total expenses for the three-month period ended December 31, 2005. The increase was due to an increase in the average outstanding borrowings under our line of credit during the three-month period ended December 31, 2005, as compared to the same period in the prior year, and a higher rate of interest. The increase in borrowings was due to the increase in acquisitions of consumer receivables acquired for liquidation during the second half of our fiscal year ended September 30, 2005 and the first quarter of this fiscal year ended September 30, 2006. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of cash from operations include payments 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. While we maintain a $100 million line of credit for portfolio purchases, we also may arrange financing on a transactional basis. While we have historically been able to finance these purchases through cash flows from operating activities and financing activities, we do not have committed loan facilities, other than our $100 million line of credit with a consortium of banks. As of December 31, 2005, there was $91.7 million outstanding balance under this facility. As of December 31, 2005, our cash and cash equivalents decreased $700,000 to $3.4 million from $4.1 million at September 30, 2005. The decrease in cash and cash equivalents during the three month period ended December 31, 2005, was due to an increase in consumer receivable purchases, an increase in our dividend, and increase in interest during the three months ended December 31, 2005 as compared to the same period in the prior year. Net cash provided by operating activities was $13.7 million during the three-months ended December 31, 2005, compared to net cash provided by operating activities of $6.2 million during the three-months ended December 31, 2004. The increase in net cash provided by operating activities was primarily due to an increase in net income and income taxes payable which was partially offset by a decrease in other liabilities and the amount due from third party collection agencies and attorneys during the three-months ended December 31, 2005, as compared to the same prior year period. Net cash used in investing activities was $76.5 million and $6.5 million during the three-months ended December 31, 2005, and December 31, 2004, respectively. The increase in net cash used in investing activities was primarily due to an increase in the purchase of accounts acquired for liquidation during the three-months ended December 31, 2005, compared to the same period in the prior year. In addition there was an increase in cash collections as compared to the same period in the prior year. Net cash provided by financing activities was $62.1 million during the three-months ended December 31, 2005, compared to net cash used in financing activities of $1.2 million during the three-months December 31, 2004. The increase in net cash provided by financing activities was primarily due to the utilization of the credit facility to purchase consumer receivables acquired for liquidation. 19 During the quarter we had a $100 million line of credit with a consortium of banks with interest at the lesser of LIBOR plus an applicable margin, or the lesser of the prime rate plus or minus an applicable margin based on certain leverage ratios. The applicable rate was 6.75% at December 31, 2005. The advances under this credit line are collateralized by portfolios of consumer receivables acquired for liquidation, and the loan agreement contains customary financial and operating covenants that must be maintained in order for us to borrow funds. This line expires on May 11, 2006. As of December 31, 2005, there was $91.7 million outstanding balance under this line of credit and we were in compliance with all of the covenants under this line of credit. In January 2006, we increased our credit line from $100 million to $125 million. The Company is currently in negotiations to renew its credit facility and anticipates renewing this arrangement in a short period of time. (See Note 14: Subsequent Events in the Notes to the Consolidated Financial Statements for more information.) Our cash requirements have been and will continue to be significant. We depend on external financing and cash generated from operations to acquire consumer receivables. During the three-months ended December 31, 2005, we acquired consumer portfolios at a cost of approximately $102.4 million. These acquisitions were financed primarily through cash flows from operating activities and with our credit facility. We anticipate the funds available under our current credit facility as well as funds available from cash flows from operations will be sufficient to satisfy the 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. See Note 14 - Subsequent Events for recent information regarding acquisitions. The following tables summarize the changes in the balance sheet of the investment in receivable portfolios during the following periods:
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 ------------------------------------------------------- ACCRUAL CASH BASIS BASIS PORTFOLIOS PORTFOLIOS TOTAL ------------- ------------- ------------- Balance, beginning of period .................................. $ 172,636,000 $ 91,000 $ 172,727,000 Acquisitions of receivable portfolios, net .................... 102,405,000 -- 102,405,000 Net cash collections from collection of consumer receivables acquired for liquidation................. (31,062,000) (1,173,000) (32,235,000) Net cash collections represented by account sales of consumer receivables acquired for liquidation ....... (13,739,000) (235,000) (13,974,000) Transfer to cost recovery ..................................... (529,000) 529,000 -- Finance income recognized ..................................... 19,047,000 1,213,000 20,260,000 ------------- ------------- ------------- Balance, end of period ........................................ $ 248,758,000 $ 425,000 $ 249,183,000 ============= ============= ============= Revenue as a percentage of collections ........................ 42.5% 86.2% 43.8%
20
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 ------------------------------------------------------- ACCRUAL CASH BASIS BASIS PORTFOLIOS PORTFOLIOS TOTAL ------------- ------------- ----------- Balance, beginning of period ........................... $ 144,812,000 $ 1,353,000 $ 146,165,000 Acquisitions of receivable portfolios, net ............. 36,542,000 -- 36,542,000 Net cash collections from collection of consumer Receivables acquired for liquidation ................. (20,456,000) (1,349,000) (21,805,000) Net cash collections represented by account sales of Consumer receivables acquired for liquidation ........ (13,487,000) (1,499,000) (14,986,000) Finance income recognized .............................. 11,784,000 2,076,000 13,860,000 ------------- ------------- ------------- Balance, end of period ................................. $ 159,195,000 $ 581,000 $ 159,776,000 ============= ============= ============= Revenue as a percentage of collections ................. 34.7% 72.9% 37.7%
ADDITIONAL SUPPLEMENTARY INFORMATION: We do not anticipate collecting the majority of the purchased principal amounts. Accordingly, the difference between the carrying value of the portfolios and the gross receivables is not indicative of future revenues from these accounts acquired for liquidation. Since we purchased these accounts at significant discounts, we anticipate collecting only a portion of the face amounts. During the three months ended December 31, 2005, we purchased portfolios with an aggregate purchase price of $102.4 million with a face value of $2.1 billion. Prior to September 30, 2005, we 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, we adopted and began to account for its investment in finance receivables using the interest method under the guidance of American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 03-3, "Accounting for Loans or Certain Securities Acquired in a Transfer." Practice Bulletin 6 was amended by SOP 03-3 as described further. Under the guidance of SOP 03-3 (and the amended Practice Bulletin 6), static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). SOP 03-3 (and the amended Practice Bulletin 6) requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. The SOP initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased as the basis for subsequent impairment testing. Significant increases in actual, or expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio's remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Effective for fiscal years beginning October 1, 2005 under SOP 03-3 and the amended Practice Bulletin 6, rather than lowering the estimated IRR if the collection estimates are not received or projected to be received, the carrying value of a pool would be written down to maintain the then current IRR. Income on finance receivables is earned based on each static pool's effective IRR. Under the interest method, income is recognized on the effective yield method based on the actual cash collected during a period and future estimated cash flows and timing of such collections and the portfolio's cost. Revenue arising from collections in excess of anticipated amounts attributable to timing differences is deferred. The estimated future cash flows are reevaluated quarterly. Income derived under this method totaled $19 million. 21 COLLECTIONS REPRESENTED BY ACCOUNT SALES Collections Represented Finance By Account Income Period Sales Earned ------ ----------- ------- Three months ended December 31, 2005 $13,974,000 $6,451,000 Three months ended December 31, 2004 $14,987,000 $5,800,000 PORTFOLIO PERFORMANCE (1)
Total estimated # of Weighted Cash Collections Estimated Total Collections as a Average Days Purchase Including Cash Remaining Estimated Percentage of Held During First Purchase Period Price (2) Sales (3) Collections (4) Collections (5) Purchase Price Year Acquired - --------------- -------- ---------------- --------------- ----------------- ---------------- ----------------- 2001 $ 65,120,000 $ 94,259,000 $ 0 $ 94,259,000 145% 119 2002 36,557,000 51,342,000 79,000 51,421,000 141% 183 2003 115,626,000 143,813,000 31,881,000 175,694,000 152% 81 2004 103,743,000 105,529,000 48,651,000 154,180,000 149% 170 2005 126,023,000 58,768,000 141,321,000 200,089,000 159% 181 2006 (First Quarter) 102,405,000 604,000 162,132,000 162,736,000 159% 22
(1) Total collections do not represent full collections of the Company with respect to this or any other year. (2) Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase price refunded by a seller due to the return of non-compliant accounts (also defined as put-backs). (3) Net cash collections include: net collections from our third-party collection agencies and attorneys, net collections from our in-house efforts and collections represented by account sales. (4) Does not include collections from portfolios that are zero bases. (5) Total estimated collections refers to the actual net cash collections, including cash sales, plus estimated remaining net collections. 22 RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment ("SFAS No.123R"). This statement is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement supersedes the current method utilized by the Company of the disclosure-only provisions of the original SFAS No. 123. . The effective date for implementation of SFAS No. 123R for the Company was October 1, 2005. The Company had been disclosing the impact on net income and earnings per share since the adoption of the original SFAS No. 123 and its amendment, SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" in the notes to the financial statements. As permitted by SFAS 148 and SFAS 123, we continued to apply the accounting provisions of Accounting Principles Board Opinion Number 25, "Accounting for Stock Issued to Employees," and related interpretations, with regard to the measurement of compensation cost for options granted under our Stock Option Plans through September 30, 2005. No employee compensation expense has been recorded as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. No stock options were awarded during the three month period ended December 31, 2005. In October 2003, the American Institute of Certified Accountants issued Statement of Position ("SOP") 03-03, "Accounting for Loans or Certain Securities Acquired in a Transfer." This SOP proposes guidance on accounting for differences between contractual and expected cash flows from an investor's initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. Increases in expected cash flows should be recognized prospectively through an adjustment of the internal rate of return while decreases in expected cash flows should be recognized as impairment. This SOP became effective October 1, 2005. We believe the implementation of this SOP will make it more likely that an impairment loss may be recorded some time in the future, although to date no impairment loss has been recorded. SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29" ("SFAS 153") addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value accounting for nonmonetary exchange of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of an entity are expected to change significantly as a result of the exchange. This statement became effective October 1, 2005. . This statement is not expected to have an impact on the Company's financial results. In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections - - a replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS 154), which requires a retrospective application to prior periods' financial statements of changes in accounting principle for all periods presented. This statement replaces APB Opinion No. 20 which required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. The provisions of SFAS 154 are effective for fiscal years beginning after December 15, 2006, the Company's fiscal year 2008. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes and changes in corporate tax rates. A material change in these rates could adversely affect our operating results and cash flows. At December 31, 2005, our $100 million credit facility, all of which is variable debt, had an outstanding balance of $91.7 million. A 25 basis-point increase in interest rates would have increased our annual interest expense by $25,000 for each $10 million of variable debt outstanding for the entire fiscal year. We do not invest in derivative financial or commodity instruments. ITEM 4. CONTROLS AND PROCEDURES a. Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. b. Changes in Internal Controls Over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the ordinary course of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using our network of third party law firms, against consumers. Also, consumers occasionally initiate litigation against us, in which they allege that we have violated a federal or state law in the process of collecting their account. We do not believe that these ordinary course matters are material to our business and financial condition. As of the date of this Form 10-Q, we were not involved in any material litigation in which we were a defendant. ITEM 1A. RISK FACTORS There were no material changes in any risk factors previously disclosed in the Company's Report on Form 10-K/A filed with the Securities & Exchange Commission on January 20, 2006 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS (a) Exhibits 31.1 Certification of the Registrant's Chief Executive Officer, Gary Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Registrant's Chief Financial Officer, Mitchell Cohen, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Registrant's Chief Executive Officer, Gary Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Registrant's Chief Financial Officer, Mitchell Cohen, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ASTA FUNDING, INC. (Registrant) Date: February 9, 2005 By: /s/ Gary Stern ---------------------------------------------- Gary Stern, President, Chief Executive Officer (Principal Executive Officer) Date: February 9, 2005 By: /s/ Mitchell Cohen ---------------------------------------------- Mitchell Cohen, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 26 EX-31.1 2 b411540_ex31-1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION I, Gary Stern, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Asta Funding, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - 15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 9, 2005 /s/ Gary Stern ------------------------------- President and Chief Executive Officer A signed original of this written statement required by Section 302 has been provided to Asta Funding, Inc. and will be retained by Asta Funding, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 27 EX-31.2 3 b411540_ex31-2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, Mitchell Cohen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Asta Funding, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - 15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 9, 2005 /s/ Mitchell Cohen ------------------------------- Mitchell Cohen Chief Financial Officer, Secretary and Chief Accounting Officer A signed original of this written statement required by Section 302 has been provided to Asta Funding, Inc. and will be retained by Asta Funding, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 28 EX-32.1 4 b411540_ex32-1.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Asta Funding, Inc. (the "Company") on Form 10-Q for the quarter ended December 31, 2004, filed with the Securities and Exchange Commission (the "Report"), I, Gary Stern, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented. Dated: February 9, 2005 /s/ Gary Stern ------------------- Gary Stern Chief Executive Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to Asta Funding, Inc. and will be retained by Asta Funding, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 29 EX-32.2 5 b411540_ex32-2.txt CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Asta Funding, Inc. (the "Company") on Form 10-Q for the quarter ended December 31, 2004, filed with the Securities and Exchange Commission (the "Report"), I, Mitchell Herman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented. Dated: February 9, 2005 /s/ Mitchell Cohen ------------------- Mitchell Cohen Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to Asta Funding, Inc. and will be retained by Asta Funding, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 30 -----END PRIVACY-ENHANCED MESSAGE-----