FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-26906
ASTA FUNDING, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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22-3388607 |
(State or other jurisdiction
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(IRS Employer |
of incorporation or organization)
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Identification No.) |
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210 Sylvan Ave., Englewood Cliffs, New Jersey
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07632 |
(Address of principal executive offices)
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(Zip Code) |
Registrants 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 þ No o
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 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
As of February 1, 2007, the registrant had approximately 13,833,157 common shares outstanding.
ASTA FUNDING, INC.
INDEX TO FORM 10-Q
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3 |
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3 |
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3 |
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4 |
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5 |
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6 |
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7 |
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25 |
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33 |
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33 |
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35 |
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35 |
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35 |
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36 |
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36 |
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36 |
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37 |
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37 |
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38 |
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Exhibit 31.1 - Section 302 Certificate of Principal Executive Officer |
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Exhibit 31.2 - Section 302 Certificate of Principal Financial Officer |
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Exhibit 32.1 - Section 906 Certificate of Principal Executive Officer |
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Exhibit 32.2 - Section 906 Certificate of Principal Financial Officer |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31, |
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September 30, |
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2006 |
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2006 |
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(Unaudited) |
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Assets |
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Cash |
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$ |
7,436,000 |
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$ |
7,826,000 |
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Consumer receivables acquired for liquidation (at net realizable value) |
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285,523,000 |
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257,275,000 |
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Due from third party collection agencies and attorneys |
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3,788,000 |
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3,062,000 |
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Investment in venture |
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4,340,000 |
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5,965,000 |
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Furniture and equipment, net |
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1,118,000 |
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1,101,000 |
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Deferred income taxes |
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10,391,000 |
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7,577,000 |
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Other assets and investments |
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8,264,000 |
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5,034,000 |
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Total assets |
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$ |
320,860,000 |
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$ |
287,840,000 |
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Liabilities and Stockholders Equity |
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Liabilities |
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Advances under line of credit |
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$ |
109,330,000 |
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$ |
82,811,000 |
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Other liabilities |
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3,773,000 |
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4,338,000 |
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Dividends payable |
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552,000 |
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6,052,000 |
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Income taxes payable |
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11,897,000 |
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10,377,000 |
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Total liabilities |
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125,552,000 |
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103,578,000 |
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Stockholders Equity |
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Preferred stock, $.01 par value; authorized 5,000,000; issued
and outstanding none |
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Common stock, $.01 par value; authorized 30,000,000 shares; issued
and outstanding 13,833,157 at December 31, 2006 and 13,755,157
at September 30, 2006 |
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138,000 |
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138,000 |
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Additional paid-in capital |
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62,075,000 |
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61,803,000 |
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Retained earnings |
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133,095,000 |
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122,321,000 |
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Total stockholders equity |
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195,308,000 |
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184,262,000 |
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Total liabilities and stockholders equity |
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$ |
320,860,000 |
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$ |
287,840,000 |
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See accompanying notes to condensed consolidated financial statements
3
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Three Months Ended |
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December 31, |
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December 31, |
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2006 |
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2005 |
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Revenues |
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Finance income, net |
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$ |
24,941,000 |
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$ |
20,260,000 |
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Other income |
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204,000 |
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Equity in earnings of venture |
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500,000 |
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25,645,000 |
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20,260,000 |
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Expenses |
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General and administrative |
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5,088,000 |
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3,952,000 |
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Interest |
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1,519,000 |
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663,000 |
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6,607,000 |
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4,615,000 |
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Income before income taxes |
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19,038,000 |
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15,645,000 |
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Income tax expense |
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7,712,000 |
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6,333,000 |
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Net income |
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$ |
11,326,000 |
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$ |
9,312,000 |
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Net income per share Basic |
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$ |
0.82 |
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$ |
0.68 |
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Net income per share Diluted |
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$ |
0.77 |
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$ |
0.64 |
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Weighted average number of shares outstanding: |
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Basic |
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13,765,048 |
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13,598,096 |
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Diluted |
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14,651,215 |
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14,474,105 |
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See accompanying notes to condensed consolidated financial statements
4
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
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Additional |
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Common Stock |
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Paid-in |
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Retained |
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Shares |
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Amount |
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Capital |
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Earnings |
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Total |
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Balance, September 30, 2006 |
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13,755,157 |
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$ |
138,000 |
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$ |
61,803,000 |
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$ |
122,321,000 |
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$ |
184,262,000 |
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Exercise of options |
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10,000 |
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166,000 |
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166,000 |
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Restricted common stock issuable |
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68,000 |
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Stock based compensation expense |
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106,000 |
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106,000 |
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Dividends |
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(552,000 |
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(552,000 |
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Net Income |
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11,326,000 |
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11,326,000 |
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Balance, December 31, 2006 |
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13,833,157 |
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$ |
138,000 |
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$ |
62,075,000 |
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$ |
133,095,000 |
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$ |
195,308,000 |
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See accompanying notes to condensed consolidated financial statements
5
ASTA FUNDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended |
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Three Months Ended |
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December 31, |
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December 31, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net income |
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$ |
11,326,000 |
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$ |
9,312,000 |
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Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation and amortization |
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101,000 |
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132,000 |
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Deferred income taxes |
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(2,564,000 |
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Equity in earnings of venture |
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(500,000 |
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Cash distribution from venture |
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500,000 |
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Stock based compensation |
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106,000 |
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Changes in: |
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Other assets |
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(21,000 |
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(3,000 |
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Due from third party collection agencies and attorneys |
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(726,000 |
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(355,000 |
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Income taxes payable |
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1,270,000 |
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5,978,000 |
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Other liabilities |
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(565,000 |
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(1,348,000 |
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Net cash provided by operating activities |
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8,927,000 |
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13,716,000 |
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Cash flows from investing activities: |
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Purchase of consumer receivables acquired for liquidation |
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(62,267,000 |
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(102,405,000 |
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Principal collected on receivables acquired for liquidation |
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25,896,000 |
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18,426,000 |
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Principal collected on receivables accounts represented by
account sales |
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8,123,000 |
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7,523,000 |
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Purchase of other investments |
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(5,771,000 |
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Collections of other investments |
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2,524,000 |
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Cash distribution from venture |
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1,625,000 |
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Capital expenditures |
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(80,000 |
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(71,000 |
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Net cash used in investing activities |
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(29,950,000 |
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(76,527,000 |
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Cash flows from financing activities: |
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Proceeds from exercise of options |
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166,000 |
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140,000 |
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Dividends paid |
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(6,052,000 |
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(476,000 |
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Advances under line of credit, net |
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26,519,000 |
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62,435,000 |
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Net cash provided by financing activities |
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20,633,000 |
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62,099,000 |
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Decrease in cash |
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(390,000 |
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(712,000 |
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Cash at the beginning of period |
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7,826,000 |
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4,059,000 |
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Cash at end of period |
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$ |
7,436,000 |
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$ |
3,347,000 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period |
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Interest |
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$ |
1,393,000 |
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$ |
492,000 |
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Income taxes |
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$ |
9,007,000 |
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$ |
270,000 |
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See notes to condensed consolidated financial statements
6
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Business and Basis of Presentation
Business
Asta Funding, Inc., together with its wholly owned subsidiaries, (the Company) is engaged in
the business of purchasing, managing for their own account and servicing 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 are accounts where the debtor is currently making partial or
irregular monthly payments, but the accounts may have been written-off by the originators.
Performing receivables are accounts where the debtor is making regular monthly payments that may or
may not have been delinquent in the past. Distressed consumer receivables are the unpaid debts of
individuals to banks, finance companies and other credit providers. A large portion of our
distressed consumer receivables are MasterCard ®, Visa ®, other credit card accounts and
telecommunication accounts which were charged-off by the issuers for non-payment. We acquire these
portfolios at substantial discounts from their face values that are based on the characteristics
(issuer, account size, debtor location and age of debt) of the underlying accounts of each
portfolio.
Basis of Presentation
The condensed consolidated balance sheet as of December 31, 2006, the consolidated balance
sheets as of September 30, 2006, (the September 30, 2006 financial information included in this
report has been extracted from our audited financial statements included in our Annual Report on
Form 10-K) the condensed consolidated statements of operations for the three month periods ended
December 31, 2006 and 2005, the condensed consolidated statement of stockholders equity as of and
for the three months ended December 31, 2006, and the condensed consolidated statements of cash
flows for the three month periods ended December 31, 2006 and 2005, have been prepared by us
without an audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of us at December 31,
2006 and September 30, 2006, the results of operations for the three month periods ended December
31, 2006 and 2005 and cash flows for the three month periods ended December 31, 2006 and 2005 have
been made. The results of operations for the three month periods ended December 31, 2006 and 2005
are not necessarily indicative of the operating results for any other interim period or the full
fiscal year.
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission
and therefore do not include all information and 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 for the
fiscal year ended September 30, 2006 filed with the Securities and Exchange Commission.
Recent Accounting Pronouncements
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.
7
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 1: Business and Basis of Presentation (Continued)
In September 2006, the Financial Accounting Standards Board (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). This Statement 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. This Statement 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. The Company believes
that the statement, when adopted, will not impact the Company.
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.
In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of Financial
Assets an amendment of FASB Statement No. 140. This Statement:
1. |
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Requires an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a servicing contract
under certain situations. |
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2. |
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Requires all separately recognized servicing assets and servicing liabilities to be
initially measured at fair value, if practicable. |
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3. |
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Permits an entity to choose either the amortization method or the fair value
measurement method as subsequent measurement methods for each class of separately recognized
servicing assets and servicing liabilities. |
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4. |
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At its initial adoption, permits a one-time reclassification of available-for-sale
securities to trading securities by entities with recognized servicing rights, without calling
into question the treatment of other available-for-sale securities under Statement 115,
provided that the available-for-sale securities are identified in some manner as offsetting
the entitys exposure to changes in fair value of servicing assets or servicing liabilities
that a servicer elects to subsequently measure at fair value. |
8
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 1: Business and Basis of Presentation (Continued)
5. |
|
Requires separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial position and additional
disclosures for all separately recognized servicing assets and servicing liabilities. |
This statement became effective for us on October 1, 2006. Adoption had no current impact on
the Company.
In February 2006, the FASB issued FASB Statement No. 155, Accounting for Certain Hybrid
Financial Instruments an amendment of FASB Statements No. 133 and 140. This Statement:
|
a. |
|
Permits fair value remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation. |
|
|
b. |
|
Clarifies which interest-only strips and principal-only strips are not subject to the
requirements of Statement 133. |
|
|
c. |
|
Establishes a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation. |
|
|
d. |
|
Clarifies that concentrations of credit risk in the form of subordination are not
embedded derivatives. |
|
|
e. |
|
Amends Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. |
The statement became effective for us on October 1, 2006. Adoption had no current impact on the
Company.
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 became effective for us on October 1, 2006. Adoption had no current impact on the
Company.
Reclassifications
Certain items in prior years financial statements have been reclassified to conform to
current periods presentation.
Note 2: Principles of Consolidation
The condensed 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.
9
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation
Accounts
acquired for liquidation are stated at their net realizable value and
consist mainly of defaulted consumer loans to individuals throughout the country.
Prior to October 1, 2005, the Company accounted for its investment in finance receivables
using the interest method under the guidance of Practice Bulletin 6, Amortization of Discounts on
Certain Acquired Loans. Effective October 1, 2005, the Company adopted and began to account for
its investment in finance receivables using the interest method under the guidance of AICPA
Statement of Position 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. If cash collections increase subsequent to
recording an impairment, reversal of the previously recognized impairment(s) is made prior to any
increase to the IRR. No impairments were recorded during the three month periods ended December 31,
2006 and 2005. 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.
10
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (Continued)
The following tables summarize
the changes in the balance sheet of the investment in
consumer receivables acquired for liquidation during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31, 2006 |
|
|
|
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 |
|
|
57,574,000 |
|
|
|
4,693,000 |
|
|
|
62,267,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(41,250,000 |
) |
|
|
(628,000 |
) |
|
|
(41,878,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(14,929,000 |
) |
|
|
(2,153,000 |
) |
|
|
(17,082,000 |
) |
Finance income recognized |
|
|
24,258,000 |
|
|
|
683,000 |
|
|
|
24,941,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
281,852,000 |
|
|
$ |
3,671,000 |
|
|
$ |
285,523,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
43.2 |
% |
|
|
24.6 |
% |
|
|
42.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
11
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (Continued)
As of December 31, 2006 the Company had $285,523,000 in Consumer Receivables acquired for
Liquidation. Based upon current projections, net cash collections, applied to principal for accrual
basis portfolios of $281,852,000, will be as follows for the twelve months in the periods ending:
|
|
|
|
|
September 30, 2007 (nine months remaining) |
|
$ |
58,320,000 |
|
September 30, 2008 |
|
|
101,114,000 |
|
September 30, 2009 |
|
|
77,754,000 |
|
September 30, 2010 |
|
|
51,906,000 |
|
September 30, 2011 |
|
|
16,416,000 |
|
|
|
|
|
Total |
|
$ |
305,510,000 |
|
|
|
|
|
|
Deferred revenue |
|
|
(23,658,000 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
281,852,000 |
|
|
|
|
|
Accretable yield represents the amount of income the Company can expect to generate over the
remaining life of its existing accrual basis portfolios based on estimated future net cash flows as of December
31, 2006. 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 month periods ended December 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
December 31, 2006 |
|
|
December 31, 2005 |
|
Balance at beginning of period |
|
$ |
143,800,000 |
|
|
$ |
94,022,000 |
|
|
Income recognized on finance receivables, net |
|
|
(24,258,000 |
) |
|
|
(19,047,000 |
) |
Additions representing expected revenue from purchases |
|
|
19,424,000 |
|
|
|
60,331,000 |
|
Reclassifications from nonaccretable difference |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
138,966,000 |
|
|
$ |
135,306,000 |
|
|
|
|
|
|
|
|
12
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3: Consumer Receivables Acquired for Liquidation (Continued)
During the three months ended December 31, 2006, the Company purchased $1.3 billion of face value
of charged-off consumer receivables at a cost of $62.3 million, of which $57.6 million are
classified under the interest method. At December 31, 2006, the estimated remaining net collections
on the receivables purchased in the three months ended December 31, 2006 is $76.8 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, 2006 and 2005, respectively.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
Gross collections (1) |
|
$ |
86,696,000 |
|
|
$ |
65,728,000 |
|
Commissions and fees (2) |
|
|
27,736,000 |
|
|
|
19,519,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections |
|
$ |
58,960,000 |
|
|
$ |
46,209,000 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross collections include: collections from third-party collection agencies and attorneys,
collections from our in-house efforts and collections represented by account sales. |
|
(2) |
|
Commissions and fees are the contractual commission earned by third party collection
agencies and attorneys, and direct costs associated with the
collection effort, generally court
costs. |
Note 4: 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 24 to 36 months.
Through December 31, 2006, the venture made distributions to the
Company of $4,520,000. Subsequent to December 31, 2006 and through February 6, 2007, the
venture distributed an additional $250,000 to the Company.
Note 5: Furniture and Equipment
Furniture and equipment consist of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December31, |
|
|
September 30, |
|
|
|
2006 |
|
|
2006 |
|
Furniture |
|
$ |
307,000 |
|
|
$ |
307,000 |
|
Equipment |
|
|
2,644,000 |
|
|
|
2,563,000 |
|
|
|
|
|
|
|
|
|
|
|
2,951,000 |
|
|
|
2,870,000 |
|
Less accumulated depreciation |
|
|
1,833,000 |
|
|
|
1,769,000 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
1,118,000 |
|
|
$ |
1,101,000 |
|
|
|
|
|
|
|
|
13
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 6: Debt
On July 11, 2006, the Company entered into the Fourth Amended and Restated Loan Agreement with
a consortium of banks, and as a result the credit facility is now $175 million, up from $125
million with an expandable feature which allows the Company the ability to increase the line to
$225 million with the consent of the banks. The line of credit bears interest at the lesser of
LIBOR plus an applicable margin, or the prime rate minus an applicable margin based on certain
leverage ratios. The credit line is collateralized by all portfolios of consumer receivables
acquired for liquidation and contains 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 ends July 11, 2009. The balance outstanding at December 31,
2006 was $109.3 million. The applicable rate at December 31, 2006 and 2005, respectively, was 7.25%
and 6.75%. The average interest rate excluding unused credit line fees for the years ended December
31, 2006 and 2005, respectively was 7.16% and 6.5%. The average rate is a combination of both
applicable rates. See Note 15 Subsequent Events for more information related to the line of
credit.
Note 7: Commitments and Contingencies
Employment Agreements
On January 25, 2007, the Company entered into an employment agreement (the 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. See Note 15
Subsequent Events, for more information.
Leases
We are a party to three operating leases with respect to our facilities in Englewood Cliffs,
New Jersey, Bethlehem, Pennsylvania and Sugar Land, Texas. 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.
14
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 7:
Commitments and Contingencies (Continued)
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 matters are material to our business and financial condition. As
of February 13, 2007, 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 as it deemed penalties, if any, to
be immaterial.
Note 8: Income Recognition and Impairments
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.
15
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
8: Income Recognition and Impairments (Continued)
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.
Impairments
SOP 03-3 requires we account for differences between contractual and expected cash flows from
an investors initial investment in loans or debt securities acquired in a transfer if those
differences are attributable, at least in part, to credit quality. Increases in expected cash flows
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. SOP 03-3 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. No
impairments were recorded in the three month periods ended December 31, 2006 and 2005,
respectively.
Note 9: Income Taxes
Deferred federal and state taxes principally arise from (i) recognition of finance income
collected for tax purposes, but not yet recognized for financial reporting; (ii) provision for
impairments/credit losses, and (iii) investee income recognized on the equity method, all resulting
in timing differences between financial accounting and tax reporting. The provision for income tax
expense for the three month periods ending December 31, 2006 and 2005, respectively, reflects
income tax expense at an effective rate of 40.5%.
16
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 10: Net Income Per Share
Basic per share data is calculated by dividing net income by the weighted average shares
outstanding during the period. Diluted earnings per share is calculated similarly, except that it includes the dilutive
effect of the assumed exercise of outstanding options and the effect of shares issuable under the Companys stock based compensation plans.
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, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
Net |
|
|
Average |
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
11,326,000 |
|
|
|
13,765,048 |
|
|
$ |
0.82 |
|
|
$ |
9,312,000 |
|
|
|
13,598,096 |
|
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Stock |
|
|
|
|
|
|
886,167 |
|
|
|
|
|
|
|
|
|
|
|
876,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
11,326,000 |
|
|
|
14,651,215 |
|
|
$ |
0.77 |
|
|
$ |
9,312,000 |
|
|
|
14,474,105 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11: 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 and other stock based awards be recognized in
the statement of operations, rather than a disclosure in the notes to the Companys consolidated
financial statements.
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 prevent 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 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. The accelerated options, absent the acceleration, would substantially
have vested over the period October 1, 2005 through April 30, 2007. Such estimates are based on
such factors such as historical and expected employee turnover rates and similar statistics. Of the
587,000 stock options that were affected by the acceleration of the vesting of all stock options as
of September 30, 2005, 143,175 shares would not have vested at December 31, 2006, had it not been
for the acceleration of the vesting of these shares. Of the 143,174 shares, 136,672, or 95.5%, are
attributable to officers and directors of the Company representing $1.3 million of the $1.4 million
intrinsic value of the vested stock options. The Company is unable to estimate the number of stock
options issued that employees will ultimately retain that otherwise would have been forfeited,
absent the modification. Based on the current circumstances, market price above the grant price,
concentration of options awarded to officers and directors and low historical turnover rates, no
compensation expense applicable to current officers
17
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 11: Stock Based Compensation (Continued)
and directors resulting from the new measurement date of the stock option issued prior to October
1, 2005 has been recognized through December 31, 2006. In December of 2006, 18,000 stock options
and 68,000 restricted shares were granted to directors, officers and
other employees. The stock options and restricted shares vest over a
twenty seven month period with the first one third of the stock
options and restricted shares vesting on March 19, 2007 and the
remaining vesting on the first and second anniversary dates of March
19, 2007. For the three
month period ended December 31, 2006, $106,000 of stock based
compensation expense was recorded. See Note 12 Stock Option Plans.
In
the first quarter of fiscal year 2007, the weighted average
assumptions used in the option pricing models were as follows:
|
Risk free interest rate |
|
4.94% |
|
|
Expected term (years) |
|
10.0 |
|
|
Expected volatility |
|
36.3% |
|
|
Dividend yield |
|
0.47% |
|
There were no stock option grants in the first
quarter of fiscal year 2006.
Note 12: 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 were authorized for issuance under the Equity
Compensation Plan. The Equity Compensation Plan was ratified by the shareholders on March 1, 2006.
The following description does not purport to be complete and is qualified in its entirety by
reference to the full text of the Equity Compensation Plan, which is included as an exhibit to the
Companys reports filed with the SEC. The shares authorized for issuance under the Equity
Compensation Plan have not been registered with the SEC.
The general purpose of the Equity Compensation Plan is to provide an incentive to our
employees, directors and consultants, including executive officers, employees and consultants of
any subsidiaries, by enabling them to share in the future growth of our business. The Board of
Directors believes that the granting of stock options and other equity awards promotes continuity
of management and increases incentive and personal interest in the welfare of the Company by those
who are primarily responsible for shaping and carrying out the Companys long
range plans and securing the Companys 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 the Companys success; (b) reward employees, directors and consultants for
these contributions; and (c) encourage employees, directors and consultants to take into account
our long-term interests through ownership of our shares.
The Company has 1,000,000 shares of Common Stock authorized for issuance under the Equity
Compensation Plan and 932,000 were available as of December 31, 2006. 68,000 restricted shares were
granted in the first quarter of fiscal year 2007. As of December 31, 2006, approximately 160 of the
Companys employees were eligible to participate in the Equity Compensation Plan.
18
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 12: Stock Option Plans (Continued)
2002 Stock Option Plan
On March 5, 2002, the Board of Directors adopted the Asta Funding, Inc. 2002 Stock Option Plan
(the 2002 Plan), which plan was approved by the Companys stockholders on May 1, 2002. The 2002
Plan was adopted in order to attract and retain qualified directors, officers and employees of, and
consultants to, the Company. The following description does not purport to be complete and is
qualified in its entirety by reference to the full text of the 2002 Plan, which is included as an
exhibit to the Companys reports filed with the SEC.
The 2002 Plan authorizes the granting of incentive stock options (as defined in Section 422 of
the Internal Revenue Code of 1986, as amended (the Code)) and non-qualified stock options to
eligible employees of the Company, including officers and directors of the Company(whether or not
employees) and consultants of the Company.
The Company has 1,000,000 shares of Common Stock authorized for issuance under the 2002 Plan
and 393,334 were available as of September 30, 2006. 18,000 stock options were granted in the first
quarter of fiscal year 2007. As of December 31, 2006 approximately 160 of the Companys employees
were eligible to participate in the 2002 Plan.
1995 Stock Option Plan
The 1995 Stock Option Plan expired on September 14, 2005. The plan was adopted in order to
attract and retain qualified directors, officers and employees of, and consultants, to the Company.
The following description does not purport to be complete and is qualified in its entirety by
reference to the full text of the 1995 Stock Option Plan, which is included as an exhibit to the
Companys reports filed with the SEC.
The 1995 Stock Option Plan authorized the granting of incentive stock options (as defined in
Section 422 of the Code) and non-qualified stock options to eligible employees of the Company,
including officers and directors of the Company (whether or not employees) and consultants to the
Company.
The Company authorized 1,840,000 shares of Common Stock 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.
19
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 12: Stock Option Plans (Continued)
Compensation expense for stock options and restricted stock is recognized over the vesting
period. Compensation expense for restricted stock is based upon the market price of the
shares underlying the awards on the grant date.
The following table summarizes stock option transactions under the 2002 Stock Option Plan
and the 1995 Stock Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding options at the beginning of period |
|
|
1,414,439 |
|
|
$ |
9.4511 |
|
|
|
1,580,605 |
|
|
|
9.1082 |
|
Options granted |
|
|
18,000 |
|
|
|
28.7500 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(10,000 |
) |
|
|
16.5700 |
|
|
|
(7,500 |
) |
|
|
18.7600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of period |
|
|
1,422,439 |
|
|
$ |
9.6452 |
|
|
|
1,573,105 |
|
|
$ |
9.0622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of period |
|
|
1,404,439 |
|
|
$ |
9.4004 |
|
|
|
1,573,105 |
|
|
$ |
9.0622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about the 2002 Stock Option Plan and the 1995 Stock
Option Plan outstanding options as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Contractual |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
Range of Exercise Price |
|
Outstanding |
|
|
Life (in Years) |
|
|
Price |
|
|
Exercisable |
|
|
Price |
|
$ 0.8125 $ 2.8750 |
|
|
600,000 |
|
|
|
3.3 |
|
|
$ |
2.0208 |
|
|
|
600,000 |
|
|
$ |
2.0208 |
|
$ 2.8751 $ 5.7500 |
|
|
123,334 |
|
|
|
5.8 |
|
|
|
4.7250 |
|
|
|
123,334 |
|
|
|
4.7250 |
|
$ 5.7501 $ 8.6250 |
|
|
12,000 |
|
|
|
4.9 |
|
|
|
5.9600 |
|
|
|
12,000 |
|
|
|
5.9600 |
|
$14.3751 $17.2500 |
|
|
266,946 |
|
|
|
6.9 |
|
|
|
15.0055 |
|
|
|
266,946 |
|
|
|
15.0055 |
|
$17.2501 $20.1250 |
|
|
402,159 |
|
|
|
7.8 |
|
|
|
18.2261 |
|
|
|
402,159 |
|
|
|
18.2261 |
|
$25.8751 $28.7500 |
|
|
18,000 |
|
|
|
10.0 |
|
|
|
28.7500 |
|
|
|
|
|
|
|
0.0000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,422,439 |
|
|
|
5.6 |
|
|
$ |
9.6452 |
|
|
|
1,404,439 |
|
|
$ |
9.4003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 12: Stock Option Plans (Continued)
The Company recognized $13,000 of compensation expense related to the stock options granted
during the first quarter of fiscal year 2007. As of December 31, 2006 there was $263,000 of
unrecognized compensation cost related to unvested stock options.
The aggregate intrinsic value of the outstanding and exercisable options as of December 31,
2006 is $29.6 million.
The following table summarizes information about restricted stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Three Months |
|
Average |
|
|
Ended |
|
Grant Date |
|
|
December 31, 2006 |
|
Fair Value |
|
|
|
Unvested at beginning of period |
|
|
0 |
|
|
$ |
0.00 |
|
Awards granted |
|
|
68,000 |
|
|
|
28.75 |
|
Vested |
|
|
0 |
|
|
|
0.00 |
|
Forfeited |
|
|
0 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
Unvested at end of period |
|
|
68,000 |
|
|
$ |
28.75 |
|
|
|
|
|
|
|
|
|
|
The Company recognized $93,000 of compensation expense related to the restricted stock awarded
during the first quarter of fiscal year 2007. As of December 31, 2006 there was $1,862,000 of
unrecognized compensation cost related to unvested restricted stock.
21
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 13: Stockholders Equity
During September 2006 we declared a cash dividend aggregating $6,052,000 ($0.44 per share) of
which $0.04 represented the regular quarterly dividend and $0.40 represented a special dividend.
The special dividend was approved by the Board of Directors on September 7, 2006. The regular
quarterly dividend and the special dividend were paid November 1, 2006. In December 2006, the
Company declared a regular quarterly dividend of $0.04 per share, or $552,000, for shareholders of
record as of December 30, 2006, which was paid on February 1, 2007.
Note 14: 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
managements estimates of future cash flows and the allocation of collections between principal and
interest resulting therefrom.
Note 15: Subsequent Events
Employment Agreements
On January 25, 2007, the Company entered into an employment agreement (an Employment
Agreement) with each of Gary Stern, the Companys President and Chief Executive Officer, Arthur
Stern, the Companys Executive Vice President and Mitchell Cohen, 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.
The following is a summary of the material terms the Employment Agreements with each of the
Executives:
The Executive shall receive a base annual salary and an annual bonus to be determined at the
discretion of the Compensation Committee of the Board of Directors. If the Executives employment
is terminated as of the termination date of the Employment Agreement, the Executive shall still be
entitled to receive a bonus payment for the bonus earned during the Executives last year of
employment.
The Executive is eligible to receive stock option grants or restricted stock grants in amounts
to be determined by the Compensation Committee of the Board of Directors. The Executive may also
participate in all of the Companys employee benefit plans and programs generally available to
other employees. The Company shall also provide the Executive with life insurance in an amount to
be set by the Company and has agreed to explore the possibility of providing the Executive with
personal disability insurance.
If the Executives employment is terminated for disability or Without Cause by the Company
(as such terms are defined in the Employment Agreement), subject to the execution of a general
release agreement by the Executive in favor of the Company, the Executive shall continue to receive
his base salary for 12 months following the effective date of termination plus maintain insurance
benefits for that period, provided that the Companys payment obligation shall be reduced by any
disability payments received by the Executive. Upon termination Without Cause, the Executive will
not be eligible to participate in the Companys benefit plans and
22
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 15: Subsequent Events (Continued)
programs as of the last day of his employment by the Company; provided, however that he will not be
precluded from exercising his rights, if any, under COBRA or with respect to grants made under the
Companys 1995 Stock Option Plan, the 2002 Plan, or the Equity Compensation Plan, pursuant to the
terms of such plans and the applicable grant agreements thereunder. The Company must provide the
Executive either ninety days prior written notice of such termination or an amount equal to ninety
days of his base salary in lieu of such notice of termination.
If the Executives employment with the Company is terminated for any reason within 180 days
following a change of control of the Company, the Company is required to pay:
|
|
|
a lump sum amount in cash equal to two (2) times the sum of the Executives
base salary in effect on the date of termination and the highest annual bonus
earned by the Executive during his employment with the Company, |
|
|
|
|
any unpaid reimbursable expenses outstanding, |
|
|
|
|
compensation for any unused accrued vacation, as of the date of termination, and |
23
|
|
|
continue to provide the Executive with the benefits and perquisites as
provided in the Employment Agreement for two years from the date of
termination. |
The term change in control has the same meaning assigned such term under the terms of the
Companys 2002 Stock Option Plan. If the executive is terminated by the Company Without Cause
prior to the date of a change in control, but the executive reasonably demonstrates that the
termination (A) was at the request of a third party who indicated an intention or taken steps
reasonably calculated to effect a change in control or (B) otherwise arose in connection with, or
in anticipation of, a change in control which has been threatened or proposed, such termination
shall be deemed to have occurred after such change in control occurs.
The Executives are subject to standard non-compete and confidentiality provisions contained in
the Employment Agreements.
Portfolio Purchase
On February 5, 2007, Palisades Acquisition XV, LLC, an indirect wholly-owned subsidiary of the
Company (the Subsidiary), 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) 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
predominantly consists of credit card accounts and includes some accounts in collection litigation
and accounts as to which the Sellers have been awarded judgments.
We made a $60 million deposit on February 5, 2007. Such deposit utilized substantially all of
the availability under our existing credit facilities. At February 5, we needed to borrow or raise
an additional $15 million of financing to make a second deposit due on February 16, 2007 and $225
million beyond that to make the final payment on the Closing Date, which is also February 16, 2007,
however we have the continuing right to postpone the Closing Date until March 31, 2007, which we
might exercise in whole or in part.
Any extensions of the
Closing Date beyond March 31, 2007 must be by mutual consent. If we
extend the closing beyond March 5, 2007, the cut-off date for
the Portfolio will move from February 2 to the closing date, so
that the Company will lose collections in the interim period. If we default
and such default is not cured within any applicable cure period, the agreement states that the
Sellers may terminate the agreement and retain the deposit as damages. The purchase agreement does
not have a financing contingency. No assurances can be given that we will be able to secure such
financing on favorable terms or at all, nor with respect to the timing of any such financing.
Through
February 14, 2007, we have
taken a number of steps towards securing the financing needed to consummate
the transaction contemplated by the Portfolio Purchase Agreement. Our
Subsidiary has received a preliminary form of a term sheet for up to $240 million of term loan financing to
complete the purchase from an institutional lender that is an
affiliate of one of the members of our current lending group. We
also have entered into a First Amendment to Fourth Amended and Restated Loan Agreement with our
current lending group (the Loan Amendment), which increases on a temporary basis the Revolving
Loan Commitment from $175 million to $190 million, and provides for the lenders to make a temporary
overadvance of up to $15 million, which will allow us to make the second deposit on February 16.
The temporary advance must be repaid in two installments by
April 17, 2007. As it relates to the
Portfolio purchase, our current credit facility also requires lender consent to our purchase of a
portfolio in excess of $25 million and to an affiliate that is not a party to the existing credit
facility (a Non-credit Party Affiliate) receiving a loan in excess of $200,000,000 and to our
capitalizing that affiliate with more that 10% of our tangible net worth (as defined in the credit
facility). Subject to our lenders accepting the terms and conditions
of the term loan, pursuant to the Loan Amendment, our lenders approved the acquisition of the Portfolio by a Non-credit Party Affiliate and our use
of up to $75 million of advances under the credit facility to capitalize the Non-credit Party
Affiliate. As we do not yet have a binding commitment letter with respect to the term loan financing
of up to $240 million, we cannot yet obtain such acceptance.
We are actively
negotiating the $240 million stand-alone term loan facility for our
Subsidiary. Our current credit facility permits stand-alone financing for a portfolio purchase by
an affiliate that would not be part of the existing credit facility up to certain limits. We are
currently negotiating with our current lenders for an increase in the amount of permitted
stand-alone financing and generally for approval of the terms and conditions of the proposed term
loan facility and for any conforming amendments needed in our credit facility documents. Further,
issues may arise between our current lenders and the stand-alone lender which need to
be resolved. In the event that we are unable to receive a binding commitment or reach final
documentation with respect to the stand-alone term loan facility for our Subsidiary, we have had
preliminary and productive conversations with other financing
sources, including conversations regarding possible joint venture
arrangements, which we believe would be available to permit us to complete the Portfolio
acquisition, albeit on less favorable terms than under the non-binding term sheet. In the event
we cannot secure our current lenders consent to the increase in the amount of permitted
stand-alone financing, the terms of the financing for our Subsidiary,
further the conforming amendments
to our credit facility and/or any other issues with the Subsidiarys stand-alone lender,
or if there were a default with respect to the Portfolio Purchase
Agreement, we then also would be in
default of our existing credit facility. However, in any of those circumstances, we believe we
will be able to renegotiate the covenants in our current credit facility, or replace our current
credit facility with alternative financing and/or sell sufficient amounts of our portfolio assets to enable us to pay down our
current facility to a level so as to enable us to secure any necessary consents and/or repay any
dissenting member of our lending group. No such alternative
arrangements have yet been negotiated or put in place. While no assurances can be given, based on progress in
the
few days since we entered into the Portfolio Purchase Agreement, we believe we will be able to
secure all requisite funds and consents. No assurances can be given with respect to the terms of
the currently proposed or alternative financing, if obtained, or the timing or costs of the consents.
Under the Portfolio Purchase Agreement, we assume certain risks associated with the Portfolio.
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 are being sold as is. We also have the risk of not
recovering our deposit if the Sellers fail to deliver the required assets at closing.
24
Item 2. Managements 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:
|
|
|
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 currently 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. |
Caution Regarding 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 managements 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 for the year ended
September 30, 2006, and other reports filed with the Securities and Exchange Commission (SEC),
and the additional Risk Factors detailed in Part II Item 1A, herein.
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 SEC are
available free of charge through our website at www.astafunding.com. Information on our website
does not constitute a part of this report. The SEC also maintains an
internet site (www.sec.gov)
that contains reports and information statements and other information regarding issuers, such as
ourselves, who file electronically with the SEC.
25
Critical Accounting Policies
We account for our investments in consumer receivable portfolios, using either:
|
|
|
the interest method; or |
|
|
|
|
the cost recovery method. |
Generally, each purchase is considered a separate portfolio of receivables and is considered a
financial investment. Based upon the expected performance characteristics of the receivables in the
portfolio, we determine whether the portfolio should be accounted for using the interest method or
the cost recovery method. If we can reasonably estimate the amount to be collected on a portfolio
and can reasonably determine the timing of such payments based on historic experience and other
factors, we use the interest method. If we cannot reasonably estimate the future cash flows, we use
the cost recovery method.
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 price of such portfolios. Revenue arising from collections in
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 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. 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, 2006, compared to the three-month period ended
December 31, 2005
Finance income. During the three-month period ended December 31, 2006, total finance
income increased
$4.6 million, or 23.1% to $24.9 million from $20.3 million for the three-month period ended
December 31, 2005. The increase in finance income was primarily due to an increase in finance
income earned on the interest method portfolios of consumer receivables acquired for liquidation,
which resulted from an increase in the average outstanding accounts acquired for liquidation
accounted for on the interest method during the three-months ended December 31, 2006 of
approximately $269.0 million, as compared to approximately $211.0 million during the three month
period ended December 31, 2005. During the three months ended December 31, 2006, we acquired
interest method portfolios at a cost of $57.6 million as compared to $102.4 million during the
three months ended December 31, 2005. In addition, during the first quarter of fiscal 2007, we
acquired approximately $4.7 million of cost method portfolios. For 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. The Company earned approximately $700,000 in finance income on the cost
method portfolios during the fist quarter of fiscal year 2007. During the three-month period ended
December 31, 2006, the commissions and fees associated with gross collections from our third-party
collection agencies and attorneys increased $8.2 million or 42.1% to $27.7 million from $19.5
million for the three-month period ended December 31, 2005. 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 stabilize
in the range of 33% to 34% of gross amounts collected.
26
Other income. Other income of $204,000 for the year ended September 30, 2006
includes 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 $500,000 in 2007 is primarily due to
sales of the higher valued inventory early in the ventures life. The Company has received
approximately $4.5 million through December 31, 2006 in cash distributions from the venture and an
additional $250,000 through February 6, 2007 as returns of its investment.
General and Administrative Expenses. During the three-month period ended December 31, 2006,
general and administrative expenses increased $1.2 million or 28.7% to $5.1 million from $3.9
million for the
three-months ended December 31, 2005, and represented 77.0% of total expenses (excluding income
taxes) for the three months ended December 31, 2006. 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, 2006 of approximately $271.4 million, as compared to approximately $211.0
million during the three month period ended December 31, 2005, a 28.7% increase. A majority of the
increased costs were from collection expenses including, technology costs, salaries, payroll taxes
and benefits, professional fees, postage and telephone charges. Additionally, we recorded $106,000
in stock based compensation expense as a result of 18,000 stock grants, and 68,000 restricted stock
grants awarded in the first quarter of fiscal year 2007.
Interest Expense. During the three-month period ended December 31, 2006, interest expense
increased $856,000 to $1.5 million from $663,000 as compared to the same period in the prior year
and represented 23.0% of total expenses (excluding income taxes) for the three-month period ended
December 31, 2006. 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, 2006, as compared to the same
period in the prior year, and also a higher rate of interest. The average rate of interest,
excluding unused credit line fees, was 7.16% compared to 6.5% from the same period of the prior
year. The increase in borrowings was due to the increase in acquisitions of consumer receivables
acquired for liquidation during the second half of our fiscal year ended September 30, 2006 and the
first quarter of this fiscal year ended September 30, 2007.
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 $175 million line of credit,
with an expandable feature to $225 million, with the consent of the banks 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 $175 million line of credit with a consortium
of banks. As of December 31, 2006, there was $109.3 million outstanding balance under this
facility. As of December 31, 2006, our cash decreased $400,000 to $7.4 million
from $7.8 million at September 30, 2006. The decrease in cash during the three
month period ended December 31, 2006, was due to an increase in consumer receivable purchases, an
increase in our dividend, including the special dividend, and an increase in interest expense
during the three months ended December 31, 2006 as compared to the same period in the prior year.
27
Net cash provided by operating activities was $8.9 million during the three-months ended
December 31, 2006, compared to net cash provided by operating activities of $13.7 million during
the three-months ended December 31, 2005. The decrease in net cash provided by operating activities
was primarily due to an increase in deferred taxes offset by the increase in net income and income
taxes payable which was partially offset by a decrease in other liabilities during the three-months
ended December 31, 2006, as compared to the same prior year period. Net cash used in investing
activities was $30.0 million and $76.5 million during the three-months ended December 31, 2006 and
December 31, 2005, respectively. The decrease in net cash used in investing activities was
primarily due to a decrease in the purchase of accounts acquired for liquidation during the
three-months ended December 31, 2006, compared to the same period in the prior year partially
offset by an increase in cash collections. Net cash provided by financing activities was $20.6
million during the three-months ended December 31, 2006, compared to net cash provided by financing
activities of $62.1 million during the three-months December 31, 2005. The decrease in net cash
provided by financing activities was primarily due to the lower level of utilization of the credit
facility to purchase consumer receivables acquired for liquidation.
During the first quarter of fiscal year 2007, we had a $175 million line of credit, with an
expandable feature for up to $225 million, with a consortium of banks bearing 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 7.25% at December 31,
2006. The advances under this credit line are collateralized by portfolios of consumer receivables
acquired for liquidation, and the loan agreement contains customary financial and operating
covenants that must be maintained in order for us to borrow funds. This line expires on July 11,
2009. As of December 31, 2006, there was $109.3 million outstanding balance under this line of
credit and we were in compliance with all of the covenants under this line of credit.
Our cash requirements have been and will continue to be significant. We depend on external
financing and cash generated from operations to acquire consumer receivables. During the
three-months ended December 31, 2006, we acquired consumer portfolios at a cost of approximately
$62.3 million. These acquisitions were financed primarily through cash flows from operating
activities and with our credit facility.
Portfolio Purchase
On February 5, 2007, Palisades Acquisition XV, LLC, an indirect wholly-owned subsidiary of the
Company (the Subsidiary), 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) 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
predominantly consists of credit card accounts and includes some accounts in collection litigation
and accounts as to which the Sellers have been awarded judgments.
We made a $60 million deposit on February 5, 2007. Such deposit utilized substantially all of
the availability under our existing credit facilities. At February 5, we needed to borrow or raise
an additional $15 million of financing to make a second deposit due on February 16, 2007 and $225
million beyond that to make the final payment on the Closing Date, which is also February 16, 2007,
however we have the continuing right to postpone the Closing Date until March 31, 2007, which we
might exercise in whole or in part.
Any extensions of the
Closing Date beyond March 31, 2007 must be by mutual consent. If we
extend the closing beyond March 5, 2007, the cut-off date for
the Portfolio will move from February 2 to the closing date, so
that the Company will lose collections in the interim period. If we default
and such default is not cured within any applicable cure period, the agreement states that the
Sellers may terminate the agreement and retain the deposit as damages. The purchase agreement does
not have a financing contingency. No assurances can be given that we will be able to secure such
financing on favorable terms or at all, nor with respect to the timing of any such financing.
Through
February 14, 2007, we have
taken a number of steps towards securing the financing needed to consummate
the transaction contemplated by the Portfolio Purchase Agreement. Our
Subsidiary has received a preliminary form of a term sheet for up to $240 million of term loan financing to
complete the purchase from an institutional lender that is an
affiliate of one of the members of our current lending group. We
also have entered into a First Amendment to Fourth Amended and Restated Loan Agreement with our
current lending group (the Loan Amendment), which increases on a temporary basis the Revolving
Loan Commitment from $175 million to $190 million, and provides for the lenders to make a temporary
overadvance of up to $15 million, which will allow us to make the second deposit on February 16.
The temporary advance must be repaid in two installments by
April 17, 2007. As it relates to the
Portfolio purchase, our current credit facility also requires lender consent to our purchase of a
portfolio in excess of $25 million and to an affiliate that is not a party to the existing credit
facility (a Non-credit Party Affiliate) receiving a loan in excess of $200,000,000 and to our
capitalizing that affiliate with more that 10% of our tangible net worth (as defined in the credit
facility). Subject to our lenders accepting the terms and conditions
of the term loan, pursuant to the Loan Amendment, our lenders approved the acquisition of the Portfolio by a Non-credit Party Affiliate and our use
of up to $75 million of advances under the credit facility to capitalize the Non-credit Party
Affiliate. As we do not yet have a binding commitment letter with respect to the term loan financing
of up to $240 million, we cannot yet obtain such acceptance.
We are actively
negotiating the $240 million stand-alone term loan facility for our
Subsidiary. Our current credit facility permits stand-alone financing for a portfolio purchase by
an affiliate that would not be part of the existing credit facility up to certain limits. We are
currently negotiating with our current lenders for an increase in the amount of permitted
stand-alone financing and generally for approval of the terms and conditions of the proposed term
loan facility and for any conforming amendments needed in our credit facility documents. Further,
issues may arise between our current lenders and the stand-alone lender which need to
be resolved. In the event that we are unable to receive a binding commitment or reach final
documentation with respect to the stand-alone term loan facility for our Subsidiary, we have had
preliminary and productive conversations with other financing
sources, including conversations regarding possible joint venture
arrangements, which we believe would be available to permit us to complete the Portfolio
acquisition, albeit on less favorable terms than under the non-binding term sheet. In the event
we cannot secure our current lenders consent to the increase in the amount of permitted
stand-alone financing, the terms of the financing for our Subsidiary,
further the conforming amendments
to our credit facility and/or any other issues with the Subsidiarys stand-alone lender,
or if there were a default with respect to the Portfolio Purchase
Agreement, we then also would be in
default of our existing credit facility. However, in any of those circumstances, we believe we
will be able to renegotiate the covenants in our current credit facility, or replace our current
credit facility with alternative financing and/or sell sufficient amounts of our portfolio assets to enable us to pay down our
current facility to a level so as to enable us to secure any necessary consents and/or repay any
dissenting member of our lending group. No such alternative
arrangements have yet been negotiated or put in place. While no assurances can be given, based on progress in
the
few days since we entered into the Portfolio Purchase Agreement, we believe we will be able to
secure all requisite funds and consents. No assurances can be given with respect to the terms of
the currently proposed or alternative financing, if obtained, or the timing or costs of the consents.
Under the Portfolio Purchase Agreement, we assume certain risks associated with the Portfolio.
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 are being sold as is. We also have the risk of not
recovering our deposit if the Sellers fail to deliver the required assets at closing. See also
Part II. Item 1A Risk Factors.
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.
28
The following tables
summarize the changes in the balance sheet of the investment in
consumer receivables acquired for liquidation during the following
periods as described in Note 3 of the Notes to Condensed Consolidated
Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31, 2006 |
|
|
|
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 |
|
|
57,574,000 |
|
|
|
4,693,000 |
|
|
|
62,267,000 |
|
Net cash collections from collection of consumer
receivables acquired for liquidation |
|
|
(41,250,000 |
) |
|
|
(628,000 |
) |
|
|
(41,878,000 |
) |
Net cash collections represented by account sales of
consumer receivables acquired for liquidation |
|
|
(14,929,000 |
) |
|
|
(2,153,000 |
) |
|
|
(17,082,000 |
) |
Finance income recognized |
|
|
24,258,000 |
|
|
|
683,000 |
|
|
|
24,941,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
281,852,000 |
|
|
$ |
3,671,000 |
|
|
$ |
285,523,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections |
|
|
43.2 |
% |
|
|
24.6 |
% |
|
|
42.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
29
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, 2006, we purchased portfolios with an aggregate
purchase price of $62.3 million with a face value of $1.3 billion.
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.
30
Collections Represented by Account Sales
|
|
|
|
|
|
|
|
|
|
|
Collections |
|
|
|
|
Represented |
|
Finance |
|
|
By Account |
|
Income |
Period |
|
Sales |
|
Earned |
Three months ended December 31, 2006 |
|
$ |
17,082,000 |
|
|
$ |
8,959,000 |
|
Three months ended December 31, 2005 |
|
$ |
13,974,000 |
|
|
$ |
6,451,000 |
|
Portfolio Performance (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
estimated |
|
|
|
|
|
|
Cash Collections |
|
Estimated |
|
Total |
|
Collections as a |
|
|
Purchase |
|
Including Cash |
|
Remaining |
|
Estimated |
|
Percentage of |
Purchase Period |
|
Price (2) |
|
Sales (3) |
|
Collections (4) |
|
Collections (5) |
|
Purchase Price |
2001 |
|
$ |
65,120,000 |
|
|
$ |
94,872,000 |
|
|
$ |
0 |
|
|
$ |
94,872,000 |
|
|
|
146 |
% |
2002 |
|
|
36,557,000 |
|
|
|
51,954,000 |
|
|
|
0 |
|
|
|
51,954,000 |
|
|
|
142 |
% |
2003 |
|
|
115,626,000 |
|
|
|
179,493,000 |
|
|
|
18,031,000 |
|
|
|
197,524,000 |
|
|
|
171 |
% |
2004 |
|
|
103,743,000 |
|
|
|
143,322,000 |
|
|
|
19,845,000 |
|
|
|
163,167,000 |
|
|
|
157 |
% |
2005 |
|
|
126,023,000 |
|
|
|
118,264,000 |
|
|
|
86,836,000 |
|
|
|
205,100,000 |
|
|
|
163 |
% |
2006 |
|
|
200,237,000 |
|
|
|
86,893,000 |
|
|
|
219,306,000 |
|
|
|
306,199,000 |
|
|
|
153 |
% |
2007 (First quarter) |
|
|
57,574,000 |
|
|
|
198,000 |
|
|
|
76,800,000 |
|
|
|
76,998,000 |
|
|
|
134 |
% |
(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, net collections from our in-house efforts and collections represented by account
sales.
(4) Does not include collections from portfolios that are zero basis.
(5) Total estimated collections refers to the actual net cash collections, including cash
sales, plus estimated remaining net collections.
31
Recent Accounting Pronouncements
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.
In September 2006, the Financial Accounting Standards Board (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). This Statement 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. This Statement 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. The Company believes
that the statement, when adopted, will not impact the Company.
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.
In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of Financial
Assets an amendment of FASB Statement No. 140. This Statement:
1. |
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Requires an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a servicing
contract under certain situations. |
2. |
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Requires all separately recognized servicing assets and servicing liabilities to be
initially measured at fair value, if practicable. |
3. |
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Permits an entity to choose either the amortization method or the fair value measurement
method as subsequent measurement methods for each class of separately recognized servicing
assets and servicing liabilities: |
4. |
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At its initial adoption, permits a one-time reclassification of available-for-sale securities
to trading securities by entities with recognized servicing rights, without calling into
question the treatment of other available-for-sale securities under Statement 115, provided
that the available-for-sale securities are identified in some manner as offsetting the
entitys exposure to changes in fair value of servicing assets or servicing liabilities that a
servicer elects to subsequently measure at fair value. |
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5. |
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Requires separate presentation of servicing assets and servicing liabilities subsequently
measured at fair value in the statement of financial position and additional disclosures for
all separately recognized servicing assets and servicing liabilities. |
This statement became effective for us on October 1, 2006. Adoption had no current impact on
the Company.
In February 2006, the FASB issued FASB Statement No. 155, Accounting for Certain Hybrid
Financial Instruments and amendment of
FASB Statements No. 133 and 140. This Statement:
a |
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Permits fair value remeasurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation. |
b |
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Clarifies which interest-only strips and principal-only strips are not subject to
the requirements of Statement 133. |
c. |
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Establishes a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation. |
d. |
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Clarifies that concentrations of credit risk in the form of subordination are not
embedded derivatives. |
e. |
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Amends Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. |
The statement became effective for us on October 1, 2006. Adoption had no current impact on the
Company.
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 became effective for us October 1, 2006. Adoption has had no current impact on the Company.
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, 2006, our $175
million credit facility, all of which is variable debt, had an outstanding balance of $109.3
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 SECs rules and forms.
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b. Changes in Internal Controls Over Financial Reporting.
During the first quarter of fiscal year 2007, the Company upgraded the reporting system
through which we record and report cash receipts. Additional controls were added to streamline the
process. The system was tested by management and there were no material weaknesses noted during
testing.
There have been no other 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.
34
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
The following are additional risk factors that should be considered in conjunction with risk
factors previously disclosed in the Companys Annual Report on Form 10-K filed with the Securities
& Exchange Commission.
The Company may be unable to secure satisfactory financing to consummate the 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) 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 predominantly consists of credit card accounts and includes some accounts in
collection litigation and accounts as to which the Sellers have been awarded judgments.
We
made the required $60 million deposit on February 5, 2007. Such deposit utilized
substantially all of the availability under our existing credit facilities. We need to borrow or
raise an additional $15 million of financing to make a second deposit due on February 16, 2007 and
$225 million beyond that to make the final payment on the Closing Date, which is also February 16,
2007, but we have the continuing right to postpone the Closing Date until March 31, 2007, which we
anticipate exercising in whole or in part. Any extensions thereafter must be by mutual consent.
If we extend the closing beyond March 5, 2007, the cut-off date
for the Portfolio will move from February 2 to the closing date,
so that the Company will lose collections in the interim period. If we
default and such default is not cured within any applicable cure period, the agreement states that
the Sellers may terminate the agreement and retain the deposit as damages. The purchase agreement
does not have a financing contingency, and we are seeking an increase in our current credit
facility and/or other sources of financing to fund the additional deposit and the remainder of the
purchase price. No assurances can be given that we will be able to secure such financing on
favorable terms or at all.
Under the Portfolio Purchase Agreement, we assume certain risks associated with the Portfolio.
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 are being sold as is. We also have the risk of
recovering our deposit if the Sellers fail to deliver the required assets at closing.
35
The terms of any financing may adversely affect our ability to generate profits from the new
portfolio.
Our decision to enter into the Portfolio Purchase Agreement was based in part on certain
assumptions we have made about the range of the terms we expect to receive for the financing needed
to consummate the Portfolio Purchase Agreement (the Requisite Financing). As we do not yet have
a commitment for the Requisite Financing, no assurances can be given that financing terms offered
to us will not be materially less favorable to us than we anticipated when bidding on the
Portfolio, which would adversely affect the net returns we realize with respect to the Portfolio.
Further, while we have the unilateral right to postpone the closing to March 31, 2007 (and may
defer it longer with the Sellers consent), if we postpone the closing beyond March 5, 2007, we
will incur a financial penalty.
The anticipated benefits of the Portfolio may not meet our expectations.
The purchase of the Portfolio will increase our assets acquired for liquidation by more than
100%, so that our near term future operating results will be highly dependent on the returns
realized from the Portfolio. While we believe that we have the capability to manage such a
significantly increased asset base, no assurances that we will not experience operational
difficulties internally or with our third party servicers in managing an asset base of this size.
Further, while we believe that the returns on the Portfolio will be at least as favorable as our
historic returns on smaller portfolio purchases, no assurances can be given with respect to initial
evaluation of the quality of the assets in the Portfolio nor with respect to our ability to manage
the Portfolio profitably.
The terms of the Portfolio Purchase Agreement may not protect us against all risks associated with
the Portfolio.
Under the Portfolio Purchase Agreement, we assume certain risks associated with the Portfolio,
including the risk of recovering our deposit if the Sellers fail to deliver the required assets at
closing. 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 requirement
that we bear the first $1.5 million of loss 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. 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.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3.
Defaults Upon Senior Securities.
None.
Item 4.
Submission of Matters to a Vote of Security Holders.
None.
36
Item 5. Other Information
Portfolio Purchase
On February 5, 2007, Palisades Acquisition XV, LLC, an indirect wholly-owned subsidiary of the
Company (the Subsidiary), 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) 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
predominantly consists of credit card accounts and includes some accounts in collection litigation
and accounts as to which the Sellers have been awarded judgments.
We made a $60 million deposit on February 5, 2007. Such deposit utilized substantially all of
the availability under our existing credit facilities. At February 5, we needed to borrow or raise
an additional $15 million of financing to make a second deposit due on February 16, 2007 and $225
million beyond that to make the final payment on the Closing Date, which is also February 16, 2007,
however we have the continuing right to postpone the Closing Date until March 31, 2007, which we
might exercise in whole or in part.
Any extensions of the Closing
Date beyond March 31, 2007 must be by mutual consent. If we
extend the closing beyond March 5, 2007, the cut-off date for the
Portfolio will move from February 2 to the closing date, so that
the Company will lose collections in the interim period. If we default
and such default is not cured within any applicable cure period, the agreement states that the
Sellers may terminate the agreement and retain the deposit as damages. The purchase agreement does
not have a financing contingency. No assurances can be given that we will be able to secure such
financing on favorable terms or at all, nor with respect to the timing of any such financing.
Through
February 14, 2007, we have
taken a number of steps towards securing the financing needed to consummate
the transaction contemplated by the Portfolio Purchase Agreement. Our
Subsidiary has received a preliminary form of a term sheet for up to $240 million of term loan financing to
complete the purchase from an institutional lender that is an
affiliate of one of the members of our current lending group. We
also have entered into a First Amendment to Fourth Amended and Restated Loan Agreement with our
current lending group (the Loan Amendment), which increases on a temporary basis the Revolving
Loan Commitment from $175 million to $190 million, and provides for the lenders to make a temporary
overadvance of up to $15 million, which will allow us to make the second deposit on February 16.
The temporary advance must be repaid in two installments by
April 17, 2007. As it relates to the
Portfolio purchase, our current credit facility also requires lender consent to our purchase of a
portfolio in excess of $25 million and to an affiliate that is not a party to the existing credit
facility (a Non-credit Party Affiliate) receiving a loan in excess of $200,000,000 and to our
capitalizing that affiliate with more that 10% of our tangible net worth (as defined in the credit
facility). Subject to our lenders accepting the terms and conditions
of the term loan, pursuant to the Loan Amendment, our lenders approved the acquisition of the Portfolio by a
Non-credit Party Affiliate and our use
of up to $75 million of advances under the credit facility to capitalize the Non-credit Party
Affiliate. As we do not yet have a binding commitment letter with respect to the term loan financing
of up to $240 million, we cannot yet obtain such acceptance.
We are actively
negotiating the $240 million stand-alone term loan facility for our
Subsidiary. Our current credit facility permits stand-alone financing for a portfolio purchase by
an affiliate that would not be part of the existing credit facility up to certain limits. We are
currently negotiating with our current lenders for an increase in the amount of permitted
stand-alone financing and generally for approval of the terms and conditions of the proposed term
loan facility and for any conforming amendments needed in our credit facility documents. Further,
issues may arise between our current lenders and the stand-alone lender which need to
be resolved. In the event that we are unable to receive a binding commitment or reach final
documentation with respect to the stand-alone term loan facility for our Subsidiary, we have had
preliminary and productive conversations with other financing
sources, including conversations regarding possible joint venture
arrangements, which we believe would be available to permit us to complete the Portfolio
acquisition, albeit on less favorable terms than under the non-binding term sheet. In the event
we cannot secure our current lenders consent to the increase in the amount of permitted
stand-alone financing, the terms of the financing for our Subsidiary,
further the conforming amendments
to our credit facility and/or any other issues with the Subsidiarys stand-alone lender,
or if there were a default with respect to the Portfolio Purchase
Agreement, we then also would be in
default of our existing credit facility. However, in any of those circumstances, we believe we
will be able to renegotiate the covenants in our current credit facility, or replace our current
credit facility with alternative financing and/or sell sufficient amounts of our portfolio assets to enable us to pay down our
current facility to a level so as to enable us to secure any necessary consents and/or repay any
dissenting member of our lending group. No such alternative
arrangements have yet been negotiated or put in place. While no assurances can be given, based on progress in
the
few days since we entered into the Portfolio Purchase Agreement, we believe we will be able to
secure all requisite funds and consents. No assurances can be given with respect to the terms of
the currently proposed or alternative financing, if obtained, or the timing or costs of the consents.
Under the Portfolio Purchase Agreement, we assume certain risks associated with the Portfolio.
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 are being sold as is. We also have the risk of not
recovering our deposit if the Sellers fail to deliver the required assets at closing.
Item 6. Exhibits
(a) Exhibits
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31.1 |
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Certification of the Registrants Chief Executive Officer, Gary Stern, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of the Registrants Chief Financial Officer, Mitchell Cohen, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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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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32.2 |
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Certification of the Registrants Chief Financial Officer, Mitchell Cohen, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ASTA FUNDING, INC. |
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(Registrant) |
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Date: February 14, 2007
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By: /s/ Gary Stern
Gary Stern, President, Chief Executive Officer
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(Principal Executive Officer) |
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Date: February 14, 2007
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By: /s/ Mitchell Cohen
Mitchell Cohen, Chief Financial Officer
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(Principal Financial Officer and |
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Principal Accounting Officer) |
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38