ASTA Funding Releases Annual Report for Year Ending Sept 30, 2003

Overview
We acquire, manage, collect and service portfolios of consumer receivables. These portfolios generally consist of one or more of the following types of consumer receivables:

• charged-off receivables – accounts that have been written-off by the originators and may have been previously serviced by collection agencies;

• semi-performing receivables – accounts where the debtor is making partial or irregular monthly payments, but the accounts may have been written-off by the originators; and

• performing receivables – accounts where the debtor is making regular monthly payments that may or may not have been delinquent in the past.

We acquire these consumer receivable portfolios at a significant discount to the amount actually owed by the borrowers. We acquire these portfolios after a qualitative and quantitative analysis of the underlying receivables and calculate the purchase price so that our estimated cash flow offers us an adequate return on our acquisition costs and servicing expenses. After purchasing a portfolio, we actively monitor its performance and review and adjust our collection and servicing strategies accordingly.

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.

If the interest method is used in recognizing income on a portfolio, it is done so in accordance with the AICPA’s Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans.” Practice Bulletin 6 requires that the accrual basis of accounting be used at the time the amount and timing of cash flows from an acquired portfolio can be reasonably estimated and collection is probable. The interest method allows us to recognize income on the effective yield of such portfolio based on the actual cash collected during a period and future estimated cash flows and the timing of such collections and the purchase of such portfolios. 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 months after acquiring the portfolio, although additional amounts are collected over the remaining period. The estimated future cash flows of the portfolios are 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.

We periodically review our receivable portfolios for impairment based on the estimated future cash flows. Provisions for losses are charged to operations when it is determined that the remaining investment in the receivable portfolio is greater than the estimated future collections. For the year ended September 30, 2003, we recorded $498,000 write-off on a receivable portfolio against a reserve previously established.

Based on increases in actual cash flows for the year ended September 30, 2003, and projected future cash flows through September 30, 2005, on certain portfolios as compared to what we estimated at September 30, 2002, we revised our estimate of future collections. Such change in accounting estimate has resulted in approximately an $8.1 million increase in finance income recognized for the year ended September 30, 2003 for these portfolios.

We typically recognize finance income net of collection fees paid to third- party collection agencies. With respect to several recent purchases of consumer receivable portfolios containing a significant amount of performing and semi-performing accounts, we recognize finance income on accounts that were being serviced by third-party servicers at the gross amounts received by the servicers. The servicing costs for these portfolios are reported as an expense on our income statement. In addition, with respect to specific consumer receivable portfolios we acquired, we agreed to a fifty percent profit sharing arrangement with our lender. However, the interest in this profit sharing arrangement held by our lender was sold to us and a third-party in equal amounts in December 2001. The third-party profit allocation was recorded as interest expense over the estimated term of the related note payable. During the year ended September 30, 2003, actual and estimated collections have exceeded our estimates at September 30, 2002, and therefore we have revised our third-party profit allocation. Such change in accounting estimate has resulted in approximately a $1.6 million interest expense charge during the year ended September 30, 2003.

Results of Operations
The following discussion of our operations and financial condition should be read in conjunction with our financial statements and notes thereto included elsewhere in this prospectus. In these discussions, most percentages and dollar amounts have been rounded to aid presentation. As a result, all such figures are approximations.

Year Ended September 30, 2003 Compared to the Year Ended September 30, 2002
Revenues. For the year ended September 30, 2003, finance income decreased $0.9 million or 2.5% to $34.9 million from $35.8 million for the year ended September 30, 2002. The decrease in finance income was primarily due to a decrease in finance income earned on consumer receivables acquired for liquidation, which resulted from a decrease in the average outstanding accounts acquired for liquidation during the first six months of the fiscal year ended September 30, 2003, as compared to the same prior year period. In addition, the sale of most of the factored receivables on November 25, 2002, resulted in a decrease in finance income on these receivables during the year ended September 30, 2003 as compared to September 30, 2002. Based on increases in actual cash flows for the year ended September 30, 2003, and projected future cash flows on certain portfolios as compared to what we estimated at September 30, 2002, we revised our estimate of future collections. Such change in accounting estimate has resulted in approximately an $8.1 million increase in finance income recognized for the year ended September 30, 2003 for these portfolios. Due to what management believed were competitive factors, we only spent $4.4 million on receivable purchases during the first six months in the year ended September 30, 2003, but during the last six months of this same period, we spent $111.2 million on receivable purchases.

General and Administrative Expenses. For the year ended September 30, 2003, general and administrative expenses increased $1.1 million or 16.4% to $7.8 million from $6.7 million for the year ended September 30, 2002, and represented 51.4% of total expenses for the year ended September 30, 2003. The increase in general and administrative expenses was primarily due to an increase in salaries and other servicing costs which was partially offset by a decrease in factoring expenses during the year ended September 30, 2003 as compared to September 30, 2002. Most of the increase in servicing expenses resulted from the operating costs of our call center that was acquired in December 2002 and an increase in court cost expenditures this fiscal year as compared to the same prior year period. The decrease in factoring expenses resulted from the sale of most of the factored receivables on November 25, 2002.

Third-Party Servicing Expenses. For the year ended September 30, 2003, third-party servicing expenses decreased $1.8 million or 24.3% to $5.6 million from $7.4 million for the year ended September 30, 2002, and represented 36.4% of total expenses for the year ended September 30, 2003. The decrease in third-party servicing expenses was primarily due to a reduction in the number of accounts being serviced on a portfolio that was purchased in August 2001 and the elimination of recording third-party servicing expenses on a specific portfolio during the year ended September 30, 2002.

Interest Expense. For the year ended September 30, 2003, interest expense decreased $1.7 million or 47.2% to $1.9 million from $3.6 million for the year ended September 30, 2002, and represented 12.2% of total expenses for the year ended September 30, 2003. Most of the decrease was due to a reduction in the accrual of interest expense that was due to profit participation on a specific portfolio during the year ended September 30, 2003, as compared to the same prior year period. During the year ended September 30, 2003, actual and estimated collections have exceeded our estimates at September 30, 2002, and therefore we have revised our third-party profit allocation. Such change in accounting estimate has resulted in approximately a $1.6 million interest expense charge during the year ended September 30, 2003.

Provision for Credit Losses. For the year ended September 30, 2003, the provision for credit losses decreased $1.0 million or 100.0% to $0.0 from $1.0 million for the year ended September 30, 2002, and represented 0.0% of total expenses for the year ended September 30, 2003. The decrease was due to a decrease in the provision for credit losses on our financed receivables during the year ended September 30, 2003, as compared to the prior year.

Net income. For the year ended September 30, 2003, net income increased $1.2 million or 11.5% to $11.6 million from $10.4 million for the year ended September 30, 2002. Net income per share for the year ended September 30, 2003 decreased $.0.13 per share (diluted) or 5.5% to $2.25 per share (diluted) from $2.38 per share (diluted) for the year ended September 30, 2002. The decrease in earnings per share is a result of a higher weighted average number of shares outstanding (diluted) compared to the prior period, primarily resulting from the secondary stock offering in June 2003.

To view this complete release, including financial data, please visit ASTA Funding Annual Report.