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| ASFI > SEC Filings for ASFI > Form 10-Q on 11-Aug-2008 | All Recent SEC Filings |
11-Aug-2008
Quarterly Report
• 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 management's judgment
regarding future events. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to be correct. All statements other than statements
of historical fact included in this report regarding our financial position,
business strategy, 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 and
Form 10-K/A for the year ended September 30, 2007, 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 and Form 10-K/A, 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.
Critical Accounting Policies
We acquire accounts that have experienced deterioration of credit quality
between origination and the date of our acquisition of the accounts. The amount
paid for a portfolio of accounts reflects our determination that it is probable
we will be unable to collect all amounts due according to contractual terms of
the portfolio of accounts. We consider the expected payments and estimate the
amount and timing of undiscounted expected principal, interest and other cash
flows for each acquired portfolio coupled with expected cash flows from accounts
available for sales. The excess of this amount over the cost of the portfolio,
representing the excess of the account's cash flows expected to be collected
over the amount paid, is accreted into income recognized on finance receivables
over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain distressed
consumer receivable portfolios at a significant discount to the amount actually
owed by underlying debtors. We acquire these portfolios only after both
qualitative and quantitative analyses of the underlying receivables are
performed and a calculated purchase price is paid so that we believe our
estimated cash flow offers us an adequate return on our acquisition costs after
our servicing and financing expenses. Additionally, when considering larger
portfolio purchases of accounts, or portfolios from issuers from whom we have
little limited experience, we have the added benefit of soliciting our third
party servicers for their input on liquidation rates and, at times, incorporate
such input into the price we offer for a given portfolio and the estimates we
use for our expected cash flows.
Typically, when purchasing portfolios for which we have the experience
detailed above, we have expectations of achieving a 100% return on our invested
capital back within an 18-28 month time frame and expectations of generating in
the range of 130-150% of our invested capital over 3-5 years. Historically, we
have generally been able to achieve these results and we continue to use this as
our basis for establishing the original cash flow estimates for our portfolio
purchases. We routinely monitor these results against the actual cash flows and,
in the event the cash flows are below our expectations and we believe there are
no reasons relating to mere timing differences or explainable delays (such as
can occur particularly when the court system is involved) for the reduced
collections, an impairment would be recorded as a provision for credit losses.
Conversely, in the event the cash flows are in excess of our expectations and
the reason is due to timing, we would defer the "excess" collection as deferred
revenue.
We account for our investments in consumer receivable portfolios, using
either:
• the interest method; or
• the cost recovery method.
The Company's extensive liquidating experience is in the field of
distressed credit card receivables, telecom receivables, consumer loan
receivables, retail installment contracts, mixed consumer receivables, and auto
deficiency receivables. The Company uses the interest method for accounting for
a majority of asset acquisitions (exclusive of the purchase of $6.9 billion in
face value receivables for a purchase price of $300 million in March 2007 (the
"Portfolio Purchase"), as explained below) within these classes of receivables
when it believes it can reasonably estimate the timing of the cash flows. In
those situations where the Company diversifies the acquisitions into other asset
classes where the Company does not possess the same expertise or history, or the
Company cannot reasonably estimate the timing of the cash flows, the Company
utilizes the cost recovery method of accounting for those portfolios of
receivables.
Over time, as the Company continues to purchase asset classes in which it
believes it has the requisite expertise and experience, the Company is more
likely to utilize the interest method to account for such purchases.
Prior to October 1, 2005, the Company accounted for its investment in finance
receivables using the interest method under the guidance of Practice Bulletin 6.
Each purchase was treated as a separate portfolio of receivables and was
considered a separate financial investment, and accordingly the Company did not
aggregate such loans under Practice Bulletin 6 notwithstanding that the
underlying collateral may have had similar characteristics. After SOP 03-3 was
adopted by the Company beginning with the Company's fiscal year beginning
October 1, 2005, the Company began to aggregate portfolios of receivables
acquired sharing specific common characteristics which were acquired within a
given quarter. The Company currently considers for aggregation portfolios of
accounts, purchased within the same fiscal quarter, that generally meet the
following characteristics:
• same issuer/originator;
• same underlying credit quality;
• similar geographic distribution of the accounts;
• similar age of the receivables; and
• same type of asset class (credit cards, telecom etc.)
The Company uses a variety of qualitative and quantitative factors to
estimate collections and the timing thereof. This analysis includes the
following variables:
• the number of collection agencies previously attempting to collect the
receivables in the portfolio;
• the average balance of the receivables, as higher balances might be more difficult to collect while low balances might not be cost effective to collect;
• the age of the receivables, as older receivables might be more difficult to collect or might be less cost effective. On the other hand, the passage of time, in certain circumstances, might result in higher collections due to changing life events of some individual debtors;
• past history of performance of similar assets;
• number of days since charge-off;
• payments made since charge-off;
• the credit originator and its credit guidelines;
• our ability to analyze accounts and resell accounts that meet our criteria for resale;
• the locations of the debtors, as there are states that are a more favorable environment to attempt to collect in and ultimately the Company has better predictability of the liquidations and the expected cash flows. Conversely, there are also states where the liquidation rates are not as favorable and that is factored into our cash flow analysis;
• jobs or property of the debtors found within portfolios-with our business model, this is of particular importance. Debtors with jobs or property are more likely to repay their obligation and conversely, debtors without jobs or property are less likely to repay their obligation ; and
• the ability to obtain customer statements from the original issuer.
The Company obtains and utilizes, as appropriate, input from our third
party collection agencies and attorneys, as further evidentiary matter, to
assist in evaluating and developing collection strategies and in evaluating and
modeling the expected cash flows for a given portfolio.
In the third quarter ended June 30, 2008, the Company discontinued using the
interest method for income recognition under SOP 03-3, for the Portfolio
Purchase. The recognition of income under SOP 03-3 is dependent on the Company
having the ability to develop reasonable expectations of both the timing and
amount of cash flows to be collected. In the event the Company cannot develop a
reasonable expectation as to both the timing and amount of cash flows expected
to be collected, SOP 03-3 permits the use or the change to the cost recovery
method. Due to uncertainties related to the timing of the collections of the
older judgments purchased in this portfolio as a result of the economic
environment, to the lack of reasonable delivery of media requests, the lack of
validation of certain account components; the sale of the primary servicer,
(which was commonly owned by the seller), the Company determined that it no
longer has the ability to develop a reasonable expectation of the timing of the
cash flows to be collected and, therefore, transferred the Portfolio Purchase to
the cost recovery method, and the Company will recognize income only after it
has recovered its carrying value which, as of June 30, 2008, was $219 million.
If the Portfolio Purchase had not been transferred to the cost recovery method,
the anticipated finance income of approximately $7.3 million would have been
recognized during the third quarter of fiscal year 2008.
We have seen a decline in our collections in the first nine months of
fiscal 2008. We are experiencing the negative effects of a slowing economy, a
depressed housing market and the more liberal credit guidelines of the original
issuers. Our operating results have been and could continue to be negatively
influenced by economic events including: a further slowdown in the economy,
continued problems in the credit and housing markets, reductions in consumer
spending, changes in the underwriting criteria by originators and changes in
laws and regulations governing consumer lending.
In the following discussions, most percentages and dollar amounts have been
rounded to aid presentation. As a result, all figures are approximations.
Results of Operations
The nine-month period ended June 30, 2008, compared to the nine-month period
ended June 30, 2007
Finance income. During the nine-month period ended June 30, 2008, finance
income decreased $4.5 million or 4.8% to $91.6 million from $96.1 million for
the nine-month period ended June 30, 2007. Although the average outstanding
level of consumer receivable accounts acquired for liquidation increased from
$398.5 million for the nine month period ended June 30, 2007 to $516.0 million
for the nine month period ended June 30, 2008, the decrease in finance income
resulted primarily from the $6.9 billion face value portfolio purchased in the
second quarter of fiscal year 2007 (the "Portfolio Purchase") being transferred
from the interest method to the cost recovery method. The Portfolio Purchase
finance income recorded during the nine month period ended June 30, 2007 was
approximately $14.4 million (which relates to our ownership of the Portfolio
Purchase for only four months during that period), as compared to $17.7 million
recorded in the first six months of fiscal year 2008 prior to the transfer to
cost recovery. If the Portfolio Purchase had not been transferred to the cost
recovery method, the anticipated finance income of approximately $7.3 million
would have been recognized during the third quarter of fiscal year 2008. Because
of the transfer to cost recovery, no finance income was recognized on the
Portfolio Purchase during the third quarter of 2008. During the nine-month
period ended June 30, 2008, we acquired consumer receivable portfolios at a cost
of $48.9 million as compared to $402.3 million during the nine-month period
ended June 30, 2007, which included the Portfolio Purchase at a cost of
$300 million.. The portfolios acquired in fiscal year 2008 include a portfolio
purchase domiciled in South America at a cost of $8.6 million. The acquired
portfolios in 2007 include a portfolio with a cost of approximately $4.7 million
that has been returned to the seller for the same purchase value. The return was
completed on July 31, 2007. Further, as we have curtailed our purchases of new
portfolios of consumer receivables during the second and third quarters of 2008,
we expect to see a reduction in finance income in future quarters and future
years, to the extent we are not replacing our receivables acquired for
liquidation. Instead, we are focusing in the short term on reducing our debt and
being highly disciplined in our portfolio purchases. We continue to review
potential portfolio acquisitions regularly and will be buyers at the right
price, where we believe the purchase will yield our desired rate of return.
During the nine months ended June 30, 2008, gross collections decreased 16.4%
to $254.8 million from $304.7 million for the nine months ended June 30, 2007.
Commissions and fees associated with gross collections from our third party
collection agencies and attorneys increased $7.1 million, or 8.8%, for the nine
months ended June 30, 2008 as compared to the same period in the prior year. The
increase is indicative of a shift to the suit strategy implemented by the
Company and includes advances of court costs by our legal network, particularly
with respect to the Portfolio Purchase, coupled with an agreement consummated in
December 2007, negotiated with a third party servicer, to assist the Company in
asset location, skiptracing efforts and ultimately identifying debtors who can
be sued. The agreement calls for a 3% percent fee on substantially all gross
collections from the Portfolio Purchase on the first $500 million and 7% on
substantially all gross collections from the Portfolio Purchase in excess of
$500 million. These fees have increased our commissions and fees paid to
$98.1 million, or 38.5% of gross collections, compared to $91.1 million, or
29.9% of gross collections in the same period of the prior year. As a result,
net collections decreased by 26.7% to $156.7 million from $213.6 million for the
nine months ended June 30, 2007. The Company also pays this third party servicer
a fee of $275,000 per month for twenty four months for its consulting and
skiptracing efforts in connection with the Portfolio Purchase (the "Consulting
Fee"). This fee, which began in May 2007, is recorded as part of general and
administrative expenses. In addition, we do anticipate continuing to expend
court costs during fiscal year 2008 on the Portfolio Purchase in order to
accelerate the suit process, which should be financed from gross collections.
There were no adjustments to accretable yields during the nine months ended
June 30, 2008. We adjusted our accretable yields by $8.0 million for the nine
month period ended June 30, 2007. Finance income related to the accretable yield
reclassifications during the nine month period ended June 30, 2007 was
approximately $6.7 million. While our expectations on our third quarter
purchases are lower than in the prior period, they still fit our investment
criteria. Income recognized from fully amortized portfolios (zero based revenue)
was $34.3 million and $11.1 million for the nine month periods ended June 30,
2008 and 2007, respectively. Collections with regard to the Portfolio Purchase
were $33.9 million during the nine month period ended June 30, 2008 as compared
$34.4 million through June 30, 2007, (four months of ownership) which includes
approximately $5.5 million of accounts returned to the seller.
Other income. Other income of $156,000 for the nine month period ended
June 30, 2008 includes fee income and interest from banks. Other income of
$502,000 for the nine months ended June 30, 2007 included interest from banks,
interest on other loan investments and fee income.
General and Administrative Expenses. During the nine-month period ended
June 30, 2008, general and administrative expenses increased $3.1 million or
18.2% to $20.5 million from $17.4 million for the nine-month period ended
June 30, 2007, and represented 26.3% of total expenses (excluding income taxes)
for the nine-month period ended June 30, 2008 as compared to 54.8% for the nine
month period ended June 30, 2007. The increase in general and administrative
expenses was primarily due to an increase in receivable servicing expenses
during the nine-month period ended June 30, 2008, as compared to the same prior
year period. The increase in receivable servicing expenses resulted from the
substantial increase in our average number of accounts acquired for liquidation,
primarily due to the Portfolio Purchase in the second quarter of 2007. A
majority of the increased costs were from collection expenses including,
salaries, payroll taxes and benefits, professional fees, telephone charges and
travel costs as we are visiting our third party collection agencies and
attorneys on a more frequent basis for financial and operational audits. In
addition, an included in general and administrative expense is the Consulting
Fee, as described above. We have also experienced increased legal fees and
settlement expenses as the size of the debtor base has increased.
Interest Expense. During the nine-month period ended June 30, 2008, interest
expense increased 19.6% to $14.3 million from $11.9 million in the same prior
year period and represented 18.3% of total expenses (excluding income taxes) for
the nine-month period ended June 30, 2008, as compared to 37.6% for the nine
month period ended June 30, 2007. The increase was due to an increase in average
outstanding borrowings under our lines of credit during the nine-month period
ended June 30, 2008, as compared to the same period in the prior year. The
average interest rate for the nine month period ended June 30, 2008 was 6.19% as
compared to 7.23% for the same period of the prior year. The average outstanding
borrowings increased from $213.7 million to $300.8 million for the nine month
periods ended June 30, 2007 and 2008, respectively. Although the average
outstanding borrowing level has increased for the comparative nine month
periods, the actual debt balance has decreased from $326.5 at September 30, 2007
to $260.2 at June 30, 2008. The increase in the average borrowing level was
primarily due to the Portfolio Purchase.
Impairments. Net impairments of $43.2 million, of which $30.3 million is
related to the Portfolio Purchase, were recorded for the nine months ended
June 30, 2008 and represented 55.3% of total expenses (excluding income taxes)
for the nine month period ended June 30, 2008 as compared to $2.4 million
recorded in the nine month period ended June 30, 2007, which was 7.6% of total
expenses (excluding income taxes). As relative collections with respect to our
expectations on these portfolios were deteriorating, we believed that these
impairment charges and adjustments to our cash flow expectations became
necessary.
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 Company's share of the loss was $137,000 during the nine month
period ended June 30, 2008 as compared to income of $1,025,000 during the nine
months ended June 30, 2007. The Company has received approximately $7.8 million
in cash distributions from the inception of the venture through June 30, 2008.
The three-month period ended June 30, 2008 as compared to the three month period
ended June 30, 2007
Finance income. During the three-month period ended June 30, 2008, finance
income decreased $15.3 million or 39.4% to $23.6 million from $38.9 million for
the three-month period ended June 30, 2007. The decrease in finance income
primarily resulted from the Portfolio Purchase being transferred from the
interest method to the cost recovery method and lowered expectations on certain
portfolios (other than the Portfolio Purchase) as a result of impairments. The
Portfolio Purchase finance income for the six months ended March 31, 2008 was
$17.7 million. If the Portfolio Purchase had not been transferred to the cost
recovery method, the anticipated finance income of approximately $7.3 million
would have been recognized during the third quarter of fiscal year 2008. Because
of the transfer to cost recovery, no finance was recognized on the Portfolio
Purchase during the third quarter of fiscal year 2008. Income recognized from
fully amortized portfolios (zero based revenue) was $10.4 million and
$5.6 million for the three month periods ended June 30, 2008 and 2007,
respectively.
There were no accretable yield adjustments recorded during the third quarter
of fiscal year 2008. Accretable yields were adjusted by $5.7 million for the
three month period ended June 30, 2007. Finance income related to the accretable
yield reclassifications during the three month period ended June 30, 2007 was
approximately $2.3 million. Collections with regard to the Portfolio Purchase in
the third quarter of 2008 were $11.6 million as compared to $22.2 million for
the third quarter of fiscal year 2007, which included approximately $5.5 million
of accounts returned to the seller in the third quarter of fiscal 2007. Finance
income earned on the Portfolio Purchase in the third quarter of fiscal year 2007
was $8.8 million.
The average level of consumer receivables acquired for liquidation decreased
from $551.7 million for the three month period ended June 30, 2007 to
$523.2 million for the same period in 2008. During the three month period ended
June 30, 2008, we acquired consumer receivable portfolios at a cost of
$7.6 million as compared to $15.6 million during the three month period ended
June 30, 2007. While our expectations on our third quarter purchases are lower
than in the prior period, they still fit our investment criteria. Further, as we
have curtailed our purchases of new portfolios of consumer receivables during
the second and third quarters of 2008, we expect to see a reduction in finance
income in future quarters and future years, to the extent we are not replacing
our receivables acquired for liquidation. Instead, we are focusing in the short
term on reducing our debt and being highly disciplined in our portfolio
purchases. We continue to review potential portfolio acquisitions regularly and
will be buyers at the right price, where we believe the purchase will yield our
desired rate of return. During the three-month period ended June 30, 2008,
commissions and fees associated with gross collections from our third party
collection agencies and attorneys increased $1.1 million, or 3.4% to
$33.4 million from $32.3 million for the three month period ended June 30, 2007.
Other income. Other income of $12,000 for the three month period ended
June 30, 2008 includes interest income from banks and fee income as compared to
other income of $43,000 for the three month period ended June 30, 2007. Other
income included interest income from banks, interest income from other loan
instruments and fee income.
General and Administrative Expenses. During the three-month period ended
June 30, 2008, general and administrative expenses increased $1.1 million or
17.0% to $7.6 million from $6.5 million for the three-month period ended
June 30, 2007, and represented 39.2% of total expenses (excluding income taxes)
for the current three-month period as compared to 49.5% for the same prior year
period.. The increase in general and administrative expenses was primarily due
to an increase in receivable servicing expenses during the three-month period
ended June 30, 2008, as compared to the same prior year period. The increase in
receivable servicing expenses resulted from the substantial increase in the
average number of accounts acquired for liquidation over past year, particularly
the accounts acquired with the Portfolio Purchase. A majority of the increased
costs were from collection expenses including salaries, payroll taxes and
benefits, professional fees and telephone charges. In addition, an included in
general and administrative expense is the Consulting Fee, as described above. We
have also experienced increased legal fees and settlement expenses as the size
of the debtor base has increased.
Interest Expense. During the three-month period ended June 30, 2008, interest
expense decreased $3.0 million to $3.7 million from $6.7 million in the same
prior year period and represented 18.8% of total expenses (excluding income
taxes) for the three-month period ended June 30, 2008 as compared to 50.5% for
the same prior year period . The decrease was due to a decrease in average
outstanding borrowings under our line of credit during the three-month period
ended June 30, 2008 as compared to the same period in
. . .
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