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ASFI > SEC Filings for ASFI > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for ASTA FUNDING INC


10-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Caution Regarding Forward Looking Statements

This report contains "forward-looking statements" - that is, statements related to future , not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," or "will." These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For us, particular uncertainties that might cause our actual results to be materially different than those expressed in our forward-looking statements include: our ability purchase defaulted consumer receivables at appropriate prices, changes in government regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables, our ability to employ and retain qualified employees, changes in the credit or capital markets, changes in interest rates, deterioration in economic conditions, negative press on the debt collection industry which may have a negative impact on a debtor's willingness to pay the debt we acquire, potential regulation or limitation of interest rates and other fees advanced by Pegasus under federal and/or state regulation, a change in statutory or case law which limits or restricts the ability of Pegasus to charge or collect fees and interest at anticipated levels, plaintiff's being unsuccessful in whole or in part in the litigation upon which our funds are provided, the continued services of the senior management of Pegasus to source and analyze cases in accordance with the underwriting guidelines of Pegasus, and such other factors that may be identified from time to time in our Securities and Exchange Commission ("SEC") filings and other public announcements, including those set forth under the caption"Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2012. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Readers are cautioned not to place undue reliance on our forward-looking statements, as they speak only as of the date made. Except as required by law, we assume no duty to update or revise our forward-looking statements.

Overview

Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades Collection LLC, Palisades Acquisition XVI, LLC ("Palisades XVI"), VATIV Recovery Solutions LLC ("VATIV"), ASFI Pegasus Holdings, LLC ("APH"), Fund Pegasus, LLC ("Fund Pegasus"), Pegasus Funding, LLC ("Pegasus") and other subsidiaries, not all wholly owned, and not considered material (the "Company," "we" or "us"), is 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 (i) privately negotiated direct sales and (ii) 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.


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Personal Injury Litigation Funding Business

We entered into a joint venture with Pegasus Legal Funding, LLC ("PLF"), pursuant to which we purchase interests in personal injury claims from claimants who are a party to personal injury litigation with the expectation of a settlement in the future. Through the joint venture, we advance, to each personal injury claimant, funds on a non-recourse basis, at an agreed upon interest rate, in anticipation of a future settlement. The interest purchased by us in each claim consists of the right to receive from such claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant's claim.

Matrimonial Claims

On May 18, 2012, we formed BP Case Management, LLC ("BPCM"), a joint venture with a California-based Balance Point Divorce Funding, LLC ("BP Divorce Funding"). BPCM provides non-recourse funding to a spouse in a matrimonial action.

Critical Accounting Policies

We account for our investments in consumer receivable portfolios, using either:

the interest method; or

the cost recovery method.

As we believe our liquidating experience in certain asset classes such as distressed credit card receivables, telecom receivables, consumer loan receivables and mixed consumer receivables has matured, we use the interest method when we believe we can reasonably estimate the timing of the cash flows. In those situations where we diversify our acquisitions into other asset classes and we do not possess the same expertise, or we cannot reasonably estimate the timing of the cash flows, we utilize the cost recovery method of accounting for those portfolios of receivables.

We account for our investment in finance receivables using the interest method under the guidance of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 310, Receivables - Loans and Debt Securities Acquired with Deteriorating Credit Quality, ("ASC 310"). Static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. We currently consider for aggregation portfolios of accounts, purchased within the same fiscal quarter, that generally have the following characteristics:

same issuer/originator;

same underlying credit quality;

similar geographic distribution of the accounts;

similar age of the receivable; and

same type of asset class (credit cards, telecommunications, etc.).

After determining that an investment will yield an adequate return on our acquisition cost after servicing fees, including court costs which are expensed as incurred, we use a variety of qualitative and quantitative factors to determine the estimated cash flows. Included in our analysis for purchasing a portfolio of receivables and determining a reasonable estimate of collections and the timing thereof, the following variables are analyzed and factored into our original estimates:

the number of collection agencies previously attempting to collect the receivables in the portfolio;

the average balance of the receivables;

the age of the receivables (as older receivables might be more difficult to collect or might be less cost effective);

past history of performance of similar assets - as we purchase portfolios of similar assets, we believe we have built significant history on how these receivables will liquidate and factor this into our initial expected cash flows;

number of months since charge-off;


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payments made since charge-off;

the credit originator and their credit guidelines;

the locations of the debtors, as there are better states to attempt to collect in and ,ultimately, we have better predictability of the liquidations and the expected cash flows. Conversely, there are also states where the liquidation rates are not as good and that is factored into our cash flow analysis;

financial wherewithal of the seller;

jobs or property of the debtors found within portfolios-with our business model, this is of particular importance as debtors with jobs or property are more likely to repay their obligation and, conversely, debtors without jobs or property are less likely to repay their obligation; and

the ability to obtain customer statements from the original issuer.

We will obtain and utilize, as appropriate, input including, but not limited to, monthly collection projections and liquidation rates, from our third party collection agencies and attorneys, as further evidentiary matter, to assist us in developing collection strategies and in modeling the expected cash flows for a given portfolio.

We acquire accounts that have experienced deterioration of credit quality between origination and the date of our acquisition of the accounts. The amount paid for a portfolio of accounts reflects our determination that it is probable we will be unable to collect all amounts due according to the portfolio of accounts' contractual terms. We consider the expected payments and estimate the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio coupled with expected cash flows from accounts available for sale. The excess of this amount over the cost of the portfolio, representing the excess of the accounts' cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the expected remaining life of the portfolio.

We believe we have significant experience in acquiring certain distressed consumer receivable portfolios at a significant discount to the amount actually owed by underlying debtors. We acquire these portfolios only after both qualitative and quantitative analyses of the underlying receivables are performed and a calculated purchase price is paid so that we believe our estimated cash flow offers us an adequate return on our costs, including servicing expenses. Additionally, when considering purchases of accounts, or portfolios from issuers from whom we have little or limited experience, we have the added benefit of soliciting our third party collection agencies and attorneys for their input on liquidation rates and, at times, incorporate such input into the price we offer for a given portfolio and the estimates we use for our expected cash flows.

As a result of the recent and current challenging economic environment and the impact it has had on the collections, for the non medical account portfolio purchases acquired since the beginning of fiscal year 2009, we have extended our time frame of the expectation of recovering 100% of our invested capital to within a 24-29 month period from an 18-28 month period, and the expectation of recovering 130-140% of invested capital to a period of seven years, which is an increase from the previous five year expectation. The medical accounts are accounted for using the cost recovery method. We routinely monitor these expectations against the actual cash flows and, in the event the cash flows are below our expectations and we believe there are no reasons relating to mere timing differences or explainable delays (such as can occur particularly when the court system is involved) for the reduced collections, an impairment would be recorded as a provision for credit losses. Conversely, in the event the cash flows are in excess of our expectations and the reason is due to timing, we would defer the "excess" collection as deferred revenue.

We use the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received.

In the following discussions, most percentages and dollar amounts have been rounded to aid presentation. As a result, all figures are approximations.


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Results of Operations

The six-month period ended March 31, 2013, compared to the six-month period ended March 31, 2012

Finance income. For the six month period ended March 31, 2013, finance income decreased $3.5 million or 17.3% to $16.8 million from $20.3 million for the six month period ended March 31, 2012. Finance income decreased primarily due to the lower level of portfolio purchases and, as a result, the increased percentage of our portfolio balances are in the later stages of their yield curves. We purchased $6.0 million in face value of new portfolios at a cost of $2.7 million in the first six months of fiscal year 2012. We made no portfolio purchases for the first six months of fiscal year 2013.

During the first six months of fiscal year 2013, gross collections decreased 22.4% to $42.9 million from $55.4 million for the six months ended March 31, 2012, reflecting the lower level of purchases, and the age of our portfolios. Commissions and fees associated with gross collections from our third party collection agencies and attorneys decreased $3.3 million, or 17.0% for the six months ended March 31, 2013 as compared to the same period in the prior year and averaged 38.0% of collections for the six months ended March 31, 2013 as compared to 35.5% for the same prior year period. Net collections decreased 25.4% to $26.6 million from $35.7 million for the six months ended March 31, 2012. Income recognized from fully amortized portfolios (zero based revenue) was $16.1 million for the six month period ended March 31, 2013 compared to $17.8 million for the six month period ended March 31, 2012.

Other income. The following table summarizes other income for the six month periods ended :

                                                           March 31,
                                                     2013            2012
         Interest and dividend income             $   830,000     $   803,000
         Personal injury fee income                 2,634,000         492,000
         Matrimonial fee income                            -          165,000
         Realized gain (including capital gain)       400,000         117,000
         Service fee income                           16 ,000          54,000
         Other                                          4,000          18,000

                                                  $ 3,884,000     $ 1,649,000

The change in the personal injury fee income component of other income for the six month period ended March 31, 2013 as compared to the six month period ended March 31, 2012 is primarily due to the increased level of investment in personal injury cases since the inception of the personal injury business in December 2011. Investments in personal injury cases increased by $8.2 million to $16.0 million during the first six months of fiscal year 2013 from $7.8 million in the first six months of fiscal year 2012. The net investment level in personal injury cases was $28.2 million at March 31, 2013 compared to $7.7 million at March 31, 2012.

General and administrative expenses. During the six months ended March 31, 2013, general and administrative expenses increased $0.6 million, or 5.4%, to $11.4 million from $10.8 million for the six months ended March 31, 2012. The increase in general and administrative expenses is primarily attributable to the inclusion of Pegasus for six months in the current period as compared to only three months in the same prior year period, as the business began on December 28, 2011.

Interest expense. During the six month period ended March 31, 2013, interest expense decreased $0.2 million, or 16.4%, to $1.1 million from $1.3 million in the same prior year period. The decrease in interest expense is primarily the result of the continued repayment of our non-recourse debt.

Impairments. Impairments of $2.2 million were recorded in the six month period ended March 31, 2013 as compared to an impairment of $0.6 million recorded during the six month period ended March 31, 2012. Although in the latter stages of the collection curves, cash flows on three portfolios slowed to a level that warranted an impairment during the second quarter of fiscal year 2013.

Income tax expense. Income tax expense, consisting of federal and state income taxes, was $2.4 million for the six months ended March 31, 2013, as compared to income tax expense of $3.7 million for the comparable 2012 period.

Income attributable to non-controlling interest. The income attributable to non-controlling interest of $123,000 in fiscal year 2013, and $49,000 in fiscal year 2012, related to PLF's 20% interest in Pegasus.

Net income attributable to Asta Funding, Inc. For the six months ended March 31, 2013, net income was $3.5 million, as compared to net income of $5.4 million for the six month period ended March 31, 2012.


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The three-month period ended March 31, 2013, compared to the three-month period ended March 31, 2012

Finance income. For the three month period ended March 31, 2013, finance income was $8.3 million as compared to $10.5 million for the three month period ended March 31, 2012, a decrease of $2.2 million. We purchased $2.9 million in face value of new portfolios at a cost of $1.3 million in the second quarter of fiscal year 2012. There were no portfolio purchases during the same current year period.

During the second quarter of fiscal year 2013, gross collections decreased 29.0% to $20.9 million from $29.4 million for the three months ended March 31, 2012. Commissions and fees associated with gross collections from our third party collection agencies and attorneys decreased $2.8 million, or 26.5%, for the three months ended March 31, 2013 as compared to the same period in the prior year, and averaged 37.6% of collections during the three-month period ended March 31, 2013. Net collections decreased by 30.5% to $13.0 million in the current quarter from $18.7 million for the three months ended March 31, 2012 Income recognized from fully amortized portfolios (zero based revenue) was $7.9 million and $9.2 million for the three months ended March 31, 2013 and 2012, respectively.

Other income. The following table summarizes other income for the three month periods ended:

                                                      March 31,
                                                2013             2012
             Interest and dividend income   $     420,000     $   358,000
             Personal injury fee income         1,392,000         492,000
             Realized gain                             -          117,000
             Service fee income                     8,000          30,000
             Other                                  2,000           3,000

                                              $ 1,822,000     $ 1,000,000

The change in the personal injury fee income component of other income for the three month period ended March 31, 2013 as compared to the three month period ended March 31, 2012 is primarily due to the increased level of investment in personal injury cases since the inception of the personal injury business in December 2011. Investments in personal injury cases increased by $5.0 million to $8.4 million during the three month period ended March 31, 2013 from $3.4 million during the three month period ended March 31, 2012. The net investment level in personal injury cases was $28.2 million at March 31, 2013, compared to $7.7 million at March 31, 2012.

General and administrative expenses. During the three-month period ended March 31, 2013, general and administrative expenses decreased $244,000, or 4.1%, to $5.8 million from $6.0 million for the three months ended March 31, 2012. The decrease is related to a reduced headcount in our Collection Department and lower collection expenses including postage and telecommunication costs.

Interest expense. During the three-month period ended March 31, 2013, interest expense was $534,000 compared to $646,000 in the same period in the prior year. The decrease in interest expense is the result of the continued repayment of our non-recourse debt.

Impairments. Impairments of 2.2 million were recorded in the three month period ended March 31, 2013 as compared to an impairment of $0.6 million recorded during the three month period ended March 31, 2012. Although in the latter stages of the collection curves, cash flows on three portfolios slowed to level that warranted an impairment during the second quarter of fiscal year 2013.

Income tax expense. Income tax expense was $0.6 million for the three month period ended March 31, 2013 as compared to $1.7 million for the three month period ended March 31, 2012.

Income attributable to non-controlling interest. The income attributable to non-controlling interest of $78,000 and $49,000 in fiscal years 2013 and 2012, respectively, related to PLF's 20% interest in Pegasus.

Net income attributable to Asta Funding, Inc. Net income was $0.9 million for the three month period ended March 31, 2013 as compared to $2.5 million for the three month period ended March 31, 2012.


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Liquidity and Capital Resources

Our primary source of cash from operations is collections on the receivable portfolios we have acquired. Our primary uses of cash include our acquisition of consumer receivable portfolios, interest payments, costs involved in the collections of consumer receivables, taxes and dividends, if approved, and repayment of debt. We currently rely on cash provided by operations to fund the acquisition of consumer receivables and general operations of the business.

Receivables Financing Agreement

In March 2007, Palisades XVI entered into a receivables financing agreement (the "Receivables Financing Agreement") with the Bank of Montreal ("BMO"), as amended in July 2007, December 2007, May 2008, February 2009 and October 2010 in order to finance the Portfolio Purchase. The Portfolio Purchase had a purchase price of $300 million (plus 20% of net payments after Palisades XVI recovers 150% of its purchase price plus cost of funds, which recovery has not yet occurred). Prior to the modifications, discussed below, the debt was full recourse only to Palisades XVI and accrued interest at the rate of approximately 170 basis points over LIBOR. The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth and Fifth Amendments to the Receivables Financing Agreement as discussed below.

On October 26, 2010, Palisades XVI entered into the Fifth Amendment to the Receivables Financing Agreement (the "Fifth Amendment"). The effective date of the Fifth Amendment was October 14, 2010. The Fifth Amendment (i) extends the expiration date of the Receivables Financing Agreement to April 14, 2014;
(ii) reduces the minimum monthly payment to $750,000; (iii) accelerated our guaranty credit enhancement of $8,700,000, which was paid upon the execution of the Fifth Amendment; (iv) eliminated our limited guaranty of repayment of the loans outstanding by Palisades XVI; and (v) revises the definition of "Borrowing Base Deficit", as defined in the Receivables Financing Agreement, to mean the excess, if any, of 105% of the loans outstanding over the borrowing base.

In connection with the Fifth Amendment, on October 26, 2010, we entered into the Omnibus Termination Agreement (the "Termination Agreement"). The limited recourse subordinated guaranty discussed under the Fourth Amendment was eliminated upon signing the Termination Agreement.

The aggregate minimum repayment obligations required under the Fifth Amendment, including interest and principal for fiscal years ending September 30, 2013 (six months ending) and 2014, is $4.5 million and $52.3 million, respectively.

On March 31, 2013 and September 30, 2012, the outstanding balance on this loan was approximately $56.8 million and $61.5 million, respectively. The applicable interest rate at March 31, 2013 and September 30, 2012, was 3.70% and 3.73%, respectively. The average interest rate of the Receivable Financing Agreement was 3.71% for the six-month periods ended March 31, 2013 as compared to 3.76% for the fiscal year ended September 30, 2012. We were in compliance with all covenants at March 31, 2013.

Other significant amendments to the Receivables Financing Agreement are as follows:

Second Amendment - Receivables Financing Agreement, dated December 27, 2007, revised the amortization schedule of the loan from 25 months to approximately 31 months. BMO charged Palisades XVI a fee of $475,000 which was paid on January 10, 2008. The fee was capitalized and is being amortized over the remaining life of the Receivables Financing Agreement.

Third Amendment - Receivables Financing Agreement, dated May 19, 2008, extended the payments of the loan through December 2010. The lender also increased the interest rate from 170 basis points over LIBOR to approximately 320 basis points over LIBOR, subject to automatic reduction in the future if additional capital contributions are made by the parent of Palisades XVI.

Fourth Amendment - Receivables Financing Agreement, dated February 20, 2009, among other things, (i) lowered the collection rate minimum to $1 million per month (plus interest and fees) as an average for each period of three consecutive months, (ii) provided for an automatic extension of the maturity date from April 30, 2011 to April 30, 2012 should the outstanding balance be reduced to $25 million or less by April 30, 2011 and (iii) permanently waived the previous termination events. The interest rate remained unchanged at approximately 320 basis points over LIBOR, subject to automatic reduction in the future should certain collection milestones be attained.

As additional credit support for repayment by Palisades XVI of its obligations under the Receivables Financing Agreement and as an inducement for BMO to enter into the Fourth Amendment, we provided BMO a limited recourse, subordinated guaranty, secured by our assets, in an amount not to exceed $8.0 million plus reasonable costs of enforcement and collection. Under the terms of the guaranty, BMO cannot exercise any recourse against us until the earlier of (i) five years from the date of the Fourth Amendment and (ii) the termination of our existing . . .

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