e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 0-26906
ASTA FUNDING, INC.
(Exact Name of Registrant
Specified in its Charter)
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Delaware
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22-3388607
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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210 Sylvan Avenue, Englewood
Cliffs, NJ
(Address of principal
executive offices)
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07632
(Zip
Code)
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Issuers
telephone number, including area code:
(201) 567-5648
Securities registered pursuant to Section 12(b) of the
Exchange Act: None
Securities registered pursuant to Section 12(g) of the
Exchange Act:
Common
Stock, par value $.01 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act Yes o No þ
Indicate by check mark whether the registrant: (1) filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act of 1934 during the preceding 12 months (or
for 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 has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of voting and nonvoting common equity
held by non-affiliates of the registrant was approximately
$25,976,000 as of the last business day of the registrants
most recently completed second fiscal quarter.
As of December 21, 2009, the registrant had
14,272,457 shares of Common Stock issued and outstanding.
FORM 10-K
TABLE OF
CONTENTS
2
Caution
Regarding Forward Looking Statements
This Annual Report on
Form 10-K
contains certain forward-looking statements within the meaning
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,
anticipate, estimate, and similar words,
although some forward-looking statements are expressed
differently. Forward looking statements represent our judgment
regarding future events, but we can give no assurance that such
judgment will prove to be correct. Such statements are subject
to risks and uncertainties that could cause actual results to
differ materially from those projected in such forward-looking
statements. Certain factors which could materially affect our
results and our future performance are described below under
Risk Factors in Item 1A and Critical
Accounting Policies in Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations. Forward-looking statements are
inherently uncertain as they are based on current expectations
and assumptions concerning future events and are subject to
numerous known and unknown risks and uncertainties. We caution
you not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the
date of this report. Except as required by law, we undertake no
obligation to update or publicly announce revisions to any
forward-looking statements to reflect future events or
developments. Unless the context otherwise requires, the terms
we, us, the Company, or
our as used herein refer to Asta Funding, Inc. and
its subsidiaries.
3
Part I
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) and other subsidiaries, not
all wholly owned, and not considered material (the
Company) is engaged in the business of purchasing,
and managing for its own account, distressed consumer
receivables, including charged-off receivables, semi-performing
receivables and performing receivables. Primary 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 and service providers. A
large portion of the Companys distressed consumer
receivables are MasterCard(R), Visa(R) and other credit card
accounts which were charged-off by the issuers or providers for
non-payment. The Company acquires these portfolios at
substantial discounts from their face values. The discounts are
based on the characteristics (issuer, account size, debtor
location and age of debt) of the underlying accounts of each
portfolio.
We acquire these consumer receivable portfolios at a significant
discount to the total amounts actually owed by the debtors. 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 investment after 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, brokered transactions and
auctions in which sellers of receivables seek bids from several
pre-qualified debt purchasers. These receivables consist
primarily of MasterCard(R), Visa(R), private label and credit
card accounts, among other types of receivables. We pursue new
acquisitions of consumer receivable portfolios from originators
of consumer debt, on an ongoing basis through:
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our relationships with industry participants, financial
institutions, collection agencies, investors and our financing
sources;
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brokers who specialize in the sale of consumer receivable
portfolios; and
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other sources.
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We fund portfolios through a combination of internally generated
cash flow and bank debt.
Our objective is to maximize our return on investment in
acquired consumer receivable portfolios. As a result, before
acquiring a portfolio, we analyze the portfolio to determine how
to best maximize collections in a cost efficient manner and
decide whether to use our internal servicing and collection
department, third-party collection agencies, attorneys, or a
combination of all three options.
When we outsource the servicing of receivables, our management
typically determines the appropriate third-party collection
agencies and attorneys based on the type of receivables
purchased. Once a group of receivables is sent to third-party
collection agencies and attorneys, our management actively
monitors and reviews the third-party collection agencies
and attorneys performance on an ongoing basis. Based on
portfolio performance considerations, our management either will
move certain receivables from one third-party collection agency
or attorney to another or to our internal servicing department
if it anticipates that this will result in an increase in
collections, or it will sell portions of the portfolio accounts.
Additionally, we have an internal collection unit, which
currently employs approximately 47 collection-related staff,
including senior management. These employees assist us in
benchmarking our third-party collection agencies and attorneys,
and give us greater flexibility for servicing a percentage of
our consumer receivable portfolios in-house.
4
For the years ended September 30, 2009, 2008 and 2007, our
finance income was approximately $70.2 million,
$115.3 million and $138.4 million, respectively, and
our net (loss) income was approximately $(90.7) million,
$8.8 million and $52.3 million, respectively. During
these same years our net cash collections were approximately
$147.4 million, $208.0 million and
$281.8 million, respectively.
We were formed in 1994 as an affiliate of Asta Group,
Incorporated (the Family Entity), an entity owned by
Arthur Stern, our Chairman Emeritus, Gary Stern, our Chairman,
President and Chief Executive Officer, and other members of the
Stern family, to purchase, at a small discount to face value,
retail installment sales contracts secured by motor vehicles. We
became a public company in November 1995. In 1999, we decided to
capitalize on our managements more than 40 years of
experience and expertise in acquiring and managing consumer
receivable portfolios for the Family Entity. As a result, we
ceased purchasing automobile contracts and, with the assistance
and financial support of the Family Entity and a partner,
purchased our first significant consumer receivable portfolio.
Since then, the Family Entity ceased acquiring consumer
receivable portfolios and, accordingly, does not compete with us.
Industry
Overview
The purchasing, servicing and collection of charged-off,
semi-performing and performing consumer receivables is an
industry that is driven by:
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increasing levels of consumer debt;
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increasing defaults of the underlying receivables; and
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increasing utilization of third-party providers to collect such
receivables.
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Strategy
Although we are in a challenging economic environment, our
primary objective remains to utilize our managements
experience and expertise by identifying, evaluating, pricing and
acquiring consumer receivable portfolios and maximizing
collections of such receivables in a cost efficient manner. Our
strategy includes:
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managing the collection and servicing of our consumer receivable
portfolios, including outsourcing a majority of those activities
to maintain low fixed overhead;
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although reduced pricing has slowed our capabilities, we seek to
sell accounts on an opportunistic basis, generally when our
efforts have been exhausted through traditional collecting
methods, when pricing is at our indifference point, or when we
can capitalize on pricing during times when we feel the pricing
environment is high; and
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although we have purchased fewer consumer receivable portfolios
than in recent years, we remain focused on capitalizing on our
strategic relationships to identify and acquire consumer
receivable portfolios as pricing, financing and conditions
permit.
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Because our purchases of new portfolios of consumer receivables
has been reduced, we expect to see a corresponding reduction in
finance income in future quarters and future years, to the
extent we have not replaced 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 buy at the right price, where we
believe the purchase will yield our desired rate of return.
We believe as a result of our managements experience and
expertise, and the fragmented yet growing market in which we
operate, as we implement this short-term strategy we will be in
position to again grow the business when economic conditions
stabilize.
We are a Delaware corporation whose principal executive offices
are located at 210 Sylvan Avenue, Englewood Cliffs, New Jersey
07632. We were incorporated in New Jersey on July 7, 1994
and were reincorporated in Delaware on October 12, 1995, as
the result of a merger with a Delaware corporation.
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Consumer
Receivables Business
Receivables
Purchase Program
We purchase bulk receivable portfolios that include charged-off
receivables, semi-performing receivables and performing
receivables. These receivables consist primarily of
MasterCard(R), Visa(R) and private label credit card accounts,
among other types of receivables.
From time to time, we may acquire directly and indirectly,
through the consumer receivable portfolios that we acquire,
secured consumer asset portfolios, primarily receivables secured
by automobiles.
We identify potential portfolio acquisitions on an ongoing basis
through:
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our relationships with industry participants, financial
institutions, collection agencies, investors and our financing
sources;
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brokers who specialize in the sale of consumer receivable
portfolios; and
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Other sources.
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Historically, the purchase prices of the consumer receivable
portfolios we have acquired have ranged from less than $100,000
to approximately $15,000,000; however, we acquired one group of
portfolios in March 2007 for $300 million (the
Portfolio Purchase). As a part of our strategy to
acquire consumer receivable portfolios, we have, from time to
time, entered into, and may continue to enter into,
participation and profit sharing agreements with our sources of
financing and our third-party collection agencies and attorneys.
These arrangements may take the form of a joint bid, with one of
our third-party collection agencies and attorneys or financing
sources who assists in the acquisition of a portfolio and
provides us with more favorable non-recourse financing terms or
a discounted servicing commission. Current participation
agreements include a 50% sharing arrangement after the Company
has recouped 100% of the cost of the portfolio purchase plus the
cost of funds.
We utilize our relationships with brokers, third-party
collection agencies and attorneys, and sellers of portfolios to
locate portfolios for purchase. Our senior management is
responsible for:
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coordinating due diligence, including, in some cases,
on-site
visits to the sellers office;
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stratifying and analyzing the portfolio characteristics;
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valuing the portfolio;
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preparing bid proposals;
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negotiating pricing and terms;
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negotiating and executing a purchase contract;
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closing the purchase; and
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coordinating the receipt of account documentation for the
acquired portfolios.
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The seller or broker typically supplies us with either a sample
listing or the actual portfolio being sold, through an
electronic form of media. We analyze each consumer receivable
portfolio to determine if it meets our purchasing criteria. We
may then prepare a bid or negotiate a purchase price. If a
purchase is completed, management monitors the portfolios
performance and uses this information in determining future
buying criteria including pricing. An integral part of the
acquisition process is the oversight by the Investment
Committee. This committee, established in January 2008, must
review and approve all investments above $1 million in
value. Voting criteria are more stringent as the size of the
investment increases. This is a four-member committee composed
of the Chairman Emeritus, the Chief Executive Officer, the Chief
Financial Officer, and the Senior Vice President. As the
Chairman Emeritus and Chief Executive Officer are related family
members, at least one other officer must approve transactions.
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
6
determining a reasonable estimate of collections and the timing
thereof, the following variables are analyzed and factored into
our original estimates:
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the number of collection agencies previously attempting to
collect the receivables in the portfolio;
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the average balance of the receivables;
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the age of the receivables (as older receivables might be more
difficult to collect or might be less cost effective);
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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
cash flow;
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number of months since charge-off;
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payments made since charge-off;
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the credit originator and their credit guidelines;
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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;
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financial wherewithal of the seller;
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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
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the ability to obtain customer statements from the original
issuer.
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We 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.
Once a receivable portfolio has been identified for potential
purchase, we prepare various analyses based on extracting
customer level data from external sources, other than the
issuer, to analyze the potential collectability of the
portfolio. We also analyze the portfolio by comparing it to
similar portfolios previously acquired by us. In addition, we
perform qualitative analyses of other matters affecting the
value of portfolios, including a review of the delinquency,
charge off, placement and recovery policies of the originator as
well as the collection authority granted by the originator to
any third-party collection agencies, and, if possible, by
reviewing their recovery efforts on the particular portfolio.
After these evaluations are completed, members of our Senior
Management discuss the findings, decide whether to make the
purchase and finalize the price at which we are willing to
purchase the portfolio.
We purchase most of our consumer receivable portfolios directly
from originators and other sellers including, from time to time,
our third-party collection agencies and attorneys, through
privately negotiated direct sales and through auction-type sales
in which sellers of receivables seek bids from several
pre-qualified debt purchasers. We also, from time to time, use
the services of brokers for sourcing consumer receivable
portfolios. In order for us to consider a potential seller as a
source of receivables, a variety of factors are considered.
Sellers must demonstrate that they have:
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adequate internal controls to detect fraud;
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the ability to provide post-sale support; and
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the capacity to honor put-back and return warranty requests.
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Generally, our portfolio purchase agreements provide that we can
return certain accounts to the seller within a specified time
period. However, in some transactions, we may acquire a
portfolio with few, if any, rights to return accounts to the
seller. After acquiring a portfolio, we conduct a detailed
analysis to determine which accounts in the
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portfolio should be returned to the seller. Although the terms
of each portfolio purchase agreement differ, examples of
accounts that may be returned to the seller include:
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debts paid prior to the cutoff date;
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debts in which the consumer filed bankruptcy prior to the cutoff
date;
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debts in which the consumer was deceased prior to cutoff
date; and
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fraudulent accounts.
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Accounts returned to sellers for fiscal years 2009 and 2008 have
been determined to be immaterial. Our purchase agreements
generally do not contain any provision for a limitation on the
number of accounts that can be returned to the seller.
Significant accounts returned to sellers for the fiscal year
ended 2007 amounted to approximately $10.0 million of
investment for two portfolio purchases. Such accounts were
non-compliant accounts.
We generally use third parties to determine bankrupt and
deceased accounts, allowing us to focus our resources on
portfolio collections. Under a typical portfolio purchase
agreement, the seller refunds the portion of the purchase price
attributable to the returned accounts or delivers replacement
receivables to us. Occasionally, we will acquire a well-seasoned
or older portfolio at a reduced price from a seller that is
unable to meet all of our purchasing criteria. When we acquire
such portfolios, the purchase price is further discounted beyond
the typical discounts we receive on the portfolios we purchase.
In 2006, we acquired VATIV, located in Sugar Land, Texas. VATIV
provides bankruptcy and deceased account servicing. The
acquisition of VATIV provides the Company with internal
experience and proprietary systems in support of servicing our
own bankruptcy and deceased accounts, while also affording us
the opportunity to enter new markets for acquisitions in the
bankruptcy and deceased account fields.
Receivable
Servicing
Our objective is to maximize our return on investment on
acquired consumer receivable portfolios. As a result, before
acquiring a portfolio, we analyze the portfolio to determine how
to best maximize collections in a cost efficient manner and
decide whether to use a third-party collection agency or an
attorney.
Therefore, if we are successful in acquiring the portfolio, we
can promptly process the receivables that were purchased and
commence the collection process. Unlike collection agencies that
typically have only a specified period of time to recover a
receivable, as the portfolio owners, we have significantly more
flexibility and can establish payment programs.
Once a portfolio has been acquired, we generally download all
receivable information provided by the seller into our account
management system and reconcile certain information with the
information provided by the seller in the purchase contract. We,
or our third-party collection agencies or attorneys, send
notification letters to obligors of each acquired account
explaining, among other matters, our new ownership and asking
that the obligor contact us. In addition, we notify the three
major credit reporting agencies of our new ownership of the
receivables.
We presently outsource the majority of our receivable servicing
to third-party collection agencies and attorneys. Our senior
management typically determines the appropriate third-party
collection agency and attorney based on the type of receivables
purchased. Once a group of receivables is sent to a third-party
collection agency or attorney, our management actively monitors
and reviews the third-party collection agencys and
attorneys performance on an ongoing basis. Our management
receives detailed analyses, including collection activity and
portfolio performance, from our internal servicing departments
for the purpose of evaluating the results of the efforts of the
third-party collection agencies and attorneys. Based on
portfolio performance guidelines, our management will reassign
certain receivables from one third-party collection agency or
attorney to another if we believe such change will enhance
collections.
At September 30, 2009 approximately 29% of our portfolios
were serviced by five collection organizations. We have
servicing agreements in place with these five collection
organizations as well as all other third-party
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collection agencies and attorneys. These servicing agreements
cover standard contingency fees and servicing of the accounts.
We have three main internal servicing departments:
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collection/skiptrace;
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customer service; and
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accounting and finance.
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Collection/Skiptrace. The Collection/Skiptrace
Department is responsible for making contact with the debtors
and collecting on our consumer receivable portfolios that are
not being serviced by third-party collection agencies and
attorneys. This department uses a friendly, customer service
approach to collect on receivables. Through the use of our
collection software and telephone system, each collector is
responsible for:
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contacting customers;
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explaining the benefits of making payment on the
obligations; and
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working with the customers to develop acceptable means to
satisfy their obligations.
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We and our third-party collection agencies and attorneys have
the flexibility to structure repayment plans that accommodate
the needs of obligors by:
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offering obligors a discount on the overall obligation; and/or
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tailoring repayment plans that provide for the payment of these
obligations as a component of the obligors monthly budget.
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We also use a series of collection letters, late payment
reminders, and settlement offers that are sent out at specific
intervals or at the request of a member of our collection
department. When the collection department cannot contact the
customer by either telephone or mail, the account is referred to
the skiptrace department.
The skiptrace department is responsible for locating and
contacting customers who could not be contacted by either the
collection or legal departments. The skiptrace employees use a
variety of public and private third-party databases to locate
customers. Once a customer is located and contact is made by a
skiptracer, the account is then referred back to the collection
or legal department for
follow-up.
The skiptrace department is also responsible for finding current
employers and locating assets of obligors when this information
is deemed necessary.
Customer Service. The Customer Service
Department is responsible for:
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handling incoming calls from debtors and third-party collection
agencies;
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coordinating customer inquiries and assisting the collection
agencies in the collection process;
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handling buy-back and information requests from companies that
have purchased receivables from us;
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working with the buyers during the transition period and
post-sale process; and
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handling any issues that may arise once a receivable portfolio
has been sold.
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Accounting and Finance. In addition to the
customary accounting activities, the Accounting and Finance
department is responsible for:
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making daily deposits of debtor payments;
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posting these payments to each debtors account; and
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in conjunction with the customer service department, providing
senior management with daily, weekly and monthly receivable
activity and performance reports.
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Accounting and Finance employees also assist collection
department employees in handling customer disputes with regard
to payment and balance information. The Accounting Department
also assists the Customer Service Department in the handling of
buy-back requests from companies which have purchased
receivables from us. In
9
addition, the Accounting Department reviews the results of the
collection of consumer receivable portfolios that are being
serviced by third-party collection agencies and attorneys.
Collections
Represented by Account Sales
Certain collections represent account sales to other debt buyers
to help maximize revenue and cash flows. We believe that our
business model of not having a large number of collectors,
coupled with a legal strategy which is focused on attempting to
perfect liens and judgments against obligors, allows us the
flexibility to sell accounts at prices that are attractive to
us, and, just as important, sell the less desirable accounts
within our collection portfolios. There are many factors that
contribute to the decision as to which receivable to sell and
which to service, including:
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the age of the receivables;
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the status of the receivables whether paying or
non-paying; and
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the selling price.
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Net collections represented by account sales for the fiscal
years ended September 30, 2009, 2008 and 2007 were
$8.7 million, $20.4 million and $54.2 million,
respectively. Collections represented by account sales as a
percentage of total collections for the fiscal years ended
September 30, 2009, 2008 and 2007 were 5.9%, 9.8% and
19.2%, respectively.
Marketing
The Company has established relationships with brokers who
market consumer receivable portfolios from banks, finance
companies and other credit providers. In addition, the Company
subscribes to national publications that list consumer
receivable portfolios for sale. The Company also directly
contacts banks, finance companies or other credit providers to
solicit consumer receivables for sale.
Competition
Our business of purchasing distressed consumer receivables is
highly competitive and fragmented, and we expect that
competition from new and existing companies will continue. We
compete with:
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other purchasers of consumer receivables, including third-party
collection companies; and
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other financial services companies who purchase consumer
receivables.
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Some of our competitors are larger and more established and may
have substantially greater financial, technological, personnel
and other resources than we have, including greater access to
the capital market system. We believe that no individual
competitor or group of competitors has a dominant presence in
the market.
We compete in the marketplace for consumer receivable portfolios
based on many factors, including:
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purchase price;
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representations, warranties and indemnities requested;
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timeliness of purchase decisions; and
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reputation of the purchaser.
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Our strategy is designed to capitalize on the markets lack
of a dominant industry player. We believe that our
managements experience and expertise in identifying,
evaluating, pricing and acquiring consumer receivable portfolios
and managing collections, coupled with our strategic alliances
with third-party collection agencies and attorneys and our
sources of financing, give us a competitive advantage. However,
we cannot assure that we will be able to compete successfully
against current or future competitors or that competition will
not increase in the future.
10
Technology
We believe that a high degree of automation is necessary to
enable us to grow and successfully compete with other finance
companies. Accordingly, we continually look to upgrade our
technology systems to support the servicing and recovery of
consumer receivables acquired for liquidation. Our
telecommunications and technology systems allow us to quickly
and accurately process large amounts of data necessary to
purchase and service consumer receivable portfolios. In
addition, we rely on the information technology of our
third-party collection agencies and attorneys and periodically
review their systems to ensure that they can adequately service
the consumer receivable portfolios outsourced to them.
Due to our desire to increase productivity through automation,
we periodically review our systems for possible upgrades and
enhancements.
Government
Regulation
The relationship of a consumer and a creditor is extensively
regulated by federal, state and local laws, rules, regulations
and ordinances. These laws include, but are not limited to, the
following federal statutes and regulations: the Federal
Truth-In-Lending
Act, the Fair Credit Billing Act, the Equal Credit Opportunity
Act and the Fair Credit Reporting Act, as well as comparable
statutes in states where consumers reside
and/or where
creditors are located. Among other things, the laws and
regulations applicable to various creditors impose disclosure
requirements regarding the advertisement, application,
establishment and operation of credit card accounts or other
types of credit programs. Federal law requires a creditor to
disclose to consumers, among other things, the interest rates,
fees, grace periods and balance calculation methods associated
with their accounts. In addition, consumers are entitled to have
payments and credits applied to their accounts promptly, to
receive prescribed notices and to request that billing errors be
resolved promptly. In addition, some laws prohibit certain
discriminatory practices in connection with the extension of
credit. Further, state laws may limit the interest rate and the
fees that a creditor may impose on consumers. Failure by the
creditors to comply with applicable laws could create claims and
rights of offset by consumers that would reduce or eliminate
their obligations, which could have a material adverse effect on
our operations. Pursuant to agreements under which we purchase
receivables, we are typically indemnified against losses
resulting from the failure of the creditor to have complied with
applicable laws relating to the receivables prior to our
purchase of such receivables.
Certain laws, including the laws described above, may limit our
ability to collect amounts owing with respect to the receivables
regardless of any act or omission on our part. For example,
under the Federal Fair Credit Billing Act, a credit card issuer
may be subject to certain claims and defenses arising out of
certain transactions in which a credit card is used if the
consumer has made a good faith attempt to obtain satisfactory
resolution of a problem relative to the transaction and, except
in cases where there is a specified relationship between the
person honoring the card and the credit card issuer, the amount
of the initial transaction exceeds $50 and the place where the
initial transaction occurred was in the same state as the
consumers billing address or within 100 miles of that
address. Accordingly, as a purchaser of defaulted receivables,
we may purchase receivables subject to valid defenses on the
part of the consumer. Other laws provide that, in certain
instances, consumers cannot be held liable for, or their
liability is limited to $50 with respect to, charges to the
credit card credit account that were a result of an unauthorized
use of the credit card account. No assurances can be given that
certain of the receivables were not established as a result of
unauthorized use of a credit card account, and, accordingly, the
amount of such receivables may not be collectible by us.
Several federal, state and local laws, rules, regulations and
ordinances, including, but not limited to, the Federal Fair Debt
Collection Practices Act (FDCPA) and the Federal
Trade Commission Act and comparable state statutes, regulate
consumer debt collection activity. Although, for a variety of
reasons, we may not be specifically subject to the FDCPA or
certain state statutes that govern third-party debt collectors,
it is our policy to comply with applicable laws in our
collection activities. Additionally, our third-party collection
agencies and attorneys may be subject to these laws. To the
extent that some or all of these laws apply to our collection
activities or our third-party collection agencies and
attorneys collection activities, failure to comply with
such laws could have a material adverse effect on us.
11
Additional laws, or amendments to existing laws, may be enacted
that could impose additional restrictions on the servicing and
collection of receivables. Such new laws or amendments may
adversely affect our ability to collect the receivables.
We currently hold a number of licenses issued under applicable
consumer credit laws or other licensing statutes or regulations.
Certain of our current licenses, and any licenses that we may be
required to obtain in the future, may be subject to periodic
renewal provisions
and/or other
requirements. Our inability to renew licenses or to take any
other required action with respect to such licenses could have a
material adverse effect upon our results of operation and
financial condition.
Employees
As of September 30, 2009, we had 105 full-time
employees. We are not a party to any collective bargaining
agreement.
You can visit our web site at www.astafunding.com. Copies
of our
Form 10-Ks,
10-Qs,
8-Ks and
other SEC reports are available there as soon as reasonably
practical after filing electronically with the SEC. The Asta
Funding, Inc. web site is not incorporated by reference in this
section.
You should carefully consider these risk factors in
evaluating the Company. In addition to the following risks,
there may also be risks that we do not yet know of or that we
currently think are immaterial that may also impair our business
operations. If any of the following risks occur, our business,
results of operation or financial condition could be adversely
effected, the trading price of our common stock could decline
and shareholders might lose all or part of their investment.
We
have recently recorded substantial impairments losses in the
value of our portfolios
We have recorded impairments on the value of our portfolios of
$183.5 million in fiscal 2009 and $53.2 million in
fiscal year 2008. The impairments are the primary reason for the
$90.7 million loss in fiscal year 2009. While we believe we
have written down the impaired portfolios to their net
reliazable values, no assurances can be given that we will not
record additional impairments in the future.
Our
current financing facility is a twelve month facility of
$6 million which will limit our ability to purchase larger
portfolios of consumer receivables.
Our revolving credit facility with Israel Discount Bank
(IDB), as agent for a consortium of banks (the
Bank Group), would have been due on
December 31, 2009. The balance of the credit line had been
paid down from a principal balance of approximately
$84 million at September 30, 2008 to
$18.3 million at September 30, 2009 and further
reduced to $6.2 million on November 30, 2009. On
December 14, 2009 the Company entered into a new
$6 million senior revolving credit agreement with Bank
Leumi (New Senior Facility). A portion of the New
Senior Facility was used to pay off the remaining balance of the
IDB credit facility. The New Senior Facility has a maturity date
of December 31, 2010, carries an interest rate of the Bank
Leumi Reference Rate plus 2% with a floor of 4.5%. The New
Senior Facility is fully collateralized by all of the assets of
the Company other than those of Palisades XVI and pledged assets
of GMS Family Investors, LLC an investment company 100% owned by
members of the Stern family (or trusts for their benefit). There
are no financial covenant restrictions for the New Senior
Facility. Approximately $2.4 million was immediately
available on the New Senior Facility after the liquidation of
the credit facility with IDB. Although a line of credit is
important for strategic purposes, a larger facility would not be
a requirement for us to continue to operate and purchase
consumer receivable portfolios. However, we may be limited in
our efforts to make larger purchases without additional
financing.
12
The
Company has risks associated with its purchase of
$6.9 billion in face value of receivables purchased for
$300 million in March 2007 (the Portfolio
Purchase) which has not met our
expectations.
Since the inception of the Portfolio Purchase financed by the
Receivables Financing Agreement, the Receivables Financing
Agreement has been modified four times due to collections not
meeting our expectations. The Portfolio Purchase has not met our
expectations, and the shortfall has been exacerbated by the
general economic down turn. We have recorded impairments on the
Portfolio Purchase totaling $84.2 million
($30.3 million in fiscal year 2008 and $53.9 million
in fiscal year 2009). The Portfolio Purchase was transferred to
the cost recovery method effective with the third quarter of
fiscal year 2008, as collections became increasingly more
difficult to predict. Accordingly, we will recognize income only
after we recover our carrying value, which, as of
September 30, 2009, was approximately $121.5 million.
As a result, our revenue since April 1, 2008 has been and
will continue to be negatively impacted. There can be no
assurance as to when or if the current carrying value will be
recovered. Further, all cash collections from the Portfolio
Purchase are used to repay our loan under the Receivable
Financing Agreement, which had a principal balance of $104.3
million at September 30, 2009.
We may
not be able be to timely satisfy all amounts due to Bank of
Montreal under the Receivables Financing Agreement
Pursuant to the Receivables Financing Agreement, Palisades XVI
borrowed approximately $227 million in March 2007. As of
September 30, 2009 the balance due Bank of Montreal
(BMO) was $104.3 million. The loan matures on
April 30, 2011 unless the outstanding balance is reduced to
$25 million, or less by that date. It is likely we will not
be able to reduce the balance of the facility to
$25 million by April 30, 2011. The collateral held by
Palisades XVI has a book value at September 30, 2009 of
$121.5 million after recent impairments. The Company has
servicing obligations with respect to the collateral as well as
certain obligations to assist BMO in any liquidation of that
collateral. If we are unable to repay the loan due to BMO, or
extend it (automatically for one year if the balance is
$25 million or less, or through negotiation) the Company
may be obligated to BMO on its $8.0 million limited
guarantee (which is not due until 2014 as long as we have a
senior facility, currently the New Senior Facility). The Company
may also be obligated to the Family Entity for $700,000. There
can be no assurance that BMO will not seek to take other action
against the Company if the loan is not repaid when due.
The
Company will be applying for a Federal tax refund of
approximately $46 million upon filing the tax return for
fiscal year 2009 and may not receive such refund in a timely
manner.
Due to the significance of the application request, the Internal
Revenue Service (IRS) process could take a
considerable amount of time and we may not receive the refund in
a timely manner which could impact operations if we were
considering acquiring a portfolio with a significant purchase
price. In addition, there can be no assurance the IRS will not
challenge our refund request.
There
is no assurance the Company will realize the full value of the
deferred tax asset.
Although the carry forward period for income taxes is up to
twenty years, such allowance period is outside a reasonable
period to forecast full realization of the deferred tax asset.
The Company recognized a $4.4 million deferred tax asset
allowance during fiscal year 2009. The Company continually
monitors forecast information to ensure the valuation allowance
is appropriate.
The
current economic environment has slowed our ability to collect
from our debtors.
The recent worldwide financial turmoil has adversely affected
all businesses, including our own. The current collection
environment is particularly challenging as a result of factors
in the economy over which we have no control. These factors
include:
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a slowdown in the economy;
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severe problems in the credit and housing markets;
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higher unemployment;
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reductions in consumer spending;
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changes in the underwriting criteria by originators; and
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changes in laws and regulations governing consumer lending and
the related collections.
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Our litigation strategy is highly dependent on our ability to
locate debtors with jobs
and/or
homes. We believe that our debtors are straining to pay their
obligations owed to us. Higher unemployment rates particularly
impact our debtors ability to pay obligations and our
ability to get wage executions as a source of payment. Problems
in the credit markets and lower home values have reduced the
ability of our debtors to secure financing through second
mortgages and home equity lines to pay obligations owed to us. A
continuation of the current problems in the credit and housing
markets and general slowdown in the economy will continue to
adversely affect the effectiveness of our litigation strategy,
and the value of our portfolios and our financial performance.
We may
not be able to purchase consumer receivable portfolios at
favorable prices or on sufficiently favorable terms or at
all.
Our success depends upon the continued availability of consumer
receivable portfolios that meet our purchasing criteria and our
ability to identify and finance the purchases of such
portfolios. The availability of consumer receivable portfolios
at favorable prices and on terms acceptable to us depends on a
number of factors outside of our control, including:
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the growth in consumer debt;
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the volume of consumer receivable portfolios available for sale;
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availability of financing to fund purchases;
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competitive factors affecting potential purchasers and sellers
of consumer receivable portfolios; and
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possible future changes in the bankruptcy laws, state laws and
homestead acts which could make it more difficult for us to
collect.
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Our
future operating results will be negatively impacted as we have
not replaced our defaulted consumer receivables at historic
levels.
To operate profitably, we must continually acquire a sufficient
amount of distressed consumer receivables to generate continued
revenue. Our buying activities during fiscal year 2009 and the
last three quarters of fiscal year 2008 slowed dramatically. As
the economic environment deteriorated, we felt that pricing of
portfolios had not fallen enough to offset the decline in
ultimate collections. Accordingly, our purchases of receivables
in 2009 were only $19.6 million, compared to
$49.9 million in 2008 and $440.9 million in 2007. In
part, this led to our net cash collections in fiscal 2009
decreasing $60.6 million, or 28.8% from $208 million
in fiscal year 2008 to $147.4 million in fiscal year 2009.
Further, of those collections, $40.7 million for fiscal
year 2009 and $45.3 million for fiscal period 2008 came
from zero basis portfolios (whose carrying value has already
been reduced to zero.) Our decreased level of buying new
portfolios during 2009 and 2008 will likely result in future
reduced net cash collections in 2010 and slow the growth of our
future revenues and operating results. Furthermore, we cannot
predict how our ability to identify and purchase receivables,
and evaluate the quality of those receivables, would be affected
if there is a shift in consumer lending practices whether caused
by changes in regulations or by a sustained economic downturn.
Our
inability to purchase sufficient quantities of receivables
portfolios may necessitate workforce reductions, which may harm
our business.
Because fixed costs, such as personnel costs, constitute a
significant portion of our overhead, we may be required to
reduce the number of employees if we do not continually purchase
receivables acquired for liquidation. Reducing the number of
employees can affect our business adversely and lead to:
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lower employee morale, higher employee attrition rates and fewer
experienced employees;
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disruptions in our operations and loss of efficiency in
collection functions;
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excess costs associated with unused space in collection
facilities; and
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further reliance on our third party collection agencies and
attorneys.
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We
have seen at certain times that the market for acquiring
consumer receivable portfolios has become more competitive,
thereby diminishing from time to time our ability to acquire
such receivables at prices we are willing to pay.
The growth in consumer debt may also be affected by:
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the continuation of a slowdown in the economy;
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continuation of the problems in the credit and housing markets;
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reductions in consumer spending;
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changes in the underwriting criteria by originators; and
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changes in laws and regulations governing consumer lending.
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Any slowing of the consumer debt growth trend could result in a
decrease in the availability of consumer receivable portfolios
for purchase that could affect the purchase prices of such
portfolios.
Any increase in the prices we are required to pay for such
portfolios, in turn, will reduce the profit we generate from
such portfolios.
With
portfolios classified under the interest method, our projections
of future cash flows from our portfolio purchases may prove to
be inaccurate, which could result in reduced revenues or the
recording of impairment charges if we do not achieve the
collections forecasted by our model.
We use qualitative and quantitative analyses to project future
cash flows from our portfolio purchases. There can be no
assurance, however, that we will be able to achieve the
collections forecasted by our analysis. If we are not able to
achieve these levels of forecasted collections, our revenues
will be reduced and we may be required to record additional
impairment charges, which would result in a reduction of our
earnings. For the year ended September 30, 2009, we
recorded impairment charges of $183.5 million, compared to
$53.2 million and $9.1 million for the years ended
September 30, 2008 and 2007, respectively.
As the
mix of our portfolios has shifted to the cost recovery method,
there is a negative impact on finance income as no finance
income is recognized on the cost recovery portfolios until the
carrying value has been recovered.
Historically we have utilized the interest method to recognize
finance income on most consumer receivable portfolios purchased.
As the economy has impacted our business, making collections
more unpredictable, we have transferred portfolios from the
interest method to the cost recovery method, which delays the
recognition of finance until the carrying value has been fully
recovered.
We use
estimates for recognizing finance income on a portion of our
consumer receivables acquired for liquidation and our earnings
would be reduced if actual results are less than
estimated.
We utilize the interest method of revenue recognition for
determining a portion of our finance income recognized, which is
based on projected cash flows that may prove to be less than
anticipated and could lead to reductions in revenue or
additional impairment charges under FASB Accounting Standard
Codification (ASC) 310, Receivables
Loans and Debt Securities Acquired with Deteriorated 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. 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). ASC 310
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. ASC 310 initially
freezes the internal rate of return, (IRR),
estimated
15
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. 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. Any reduction in
our earnings resulting from such a write down could materially
adversely affect our stock price.
We may
not be able to collect sufficient amounts on our consumer
receivable portfolios to recover the costs associated with the
purchase of those portfolios and to fund our
operations.
We acquire and collect on consumer receivable portfolios that
contain charged-off, semi-performing and performing receivables.
In order to operate profitably over the long term, we must
continually purchase and collect on a sufficient volume of
receivables to generate revenue that exceeds our purchase costs.
For accounts that are charged-off or semi-performing, the
originators or interim owners of the receivables generally have:
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made numerous attempts to collect on these obligations, often
using both their in-house collection staff and third-party
collection agencies; and
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subsequently deemed these obligations as uncollectible
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These receivable portfolios are purchased at significant
discounts to the amount the consumers owe. These receivables are
difficult to collect and actual recoveries may vary and be less
than the amount expected. In addition, our collections may
worsen in a weak economic cycle. We may not recover amounts in
excess of our acquisition and servicing costs.
Our ability to recover the purchase costs on our portfolios and
produce sufficient returns can be negatively impacted by the
quality of the purchased receivables. In the normal course of
our portfolio acquisitions, some receivables may be included in
the portfolios that fail to conform to certain terms of the
purchase agreements and we may seek to return these receivables
to the seller for payment or replacement receivables. However,
we cannot guarantee that any of such sellers will be able to
meet their payment obligations to us. Accounts that we are
unable to return to sellers may yield no return. If cash flows
from operations are less than anticipated as a result of our
inability to collect sufficient amounts on our receivables, our
ability to satisfy our debt obligations, purchase new portfolios
and achieve future growth and profitability may be materially
adversely affected.
We are
subject to competition for the purchase of consumer receivable
portfolios.
We compete with other purchasers of consumer receivable
portfolios, with third-party collection agencies and with
financial services companies that manage their own consumer
receivable portfolios. We compete on the basis of price,
reputation, industry experience and performance. Some of our
competitors have greater capital, personnel and other resources
than we have. The possible entry of new competitors, including
competitors that historically have focused on the acquisition of
different asset types, and the expected increase in competition
from current market participants may reduce our access to
consumer receivable portfolios. Aggressive pricing by our
competitors has raised the price of consumer receivable
portfolios above levels that we are willing to pay, which could
reduce the number of consumer receivable portfolios suitable for
us to purchase or if purchased by us, reduce the profits, if
any, generated by such portfolios. If we are unable to purchase
receivable portfolios at favorable prices or at all, our finance
income and earnings could be materially reduced.
We are
dependent upon third parties to service a majority of our
consumer receivable portfolios.
Although we utilize our in-house collection staff to initiate
the collection process to collect some of our receivables, we
outsource a majority of our receivable servicing. As a result,
we are dependent upon the efforts of our third-party collection
agencies and attorneys to service and collect our consumer
receivables. However, any failure by our third-party collection
agencies and attorneys to adequately perform collection services
for us or remit such collections to us could materially reduce
our finance income and our profitability. In addition, our
finance income and profitability could be materially adversely
affected if we are not able to secure replacement third party
collection agencies and attorneys and redirect payments from the
debtors to our new third party collection agencies and attorneys
promptly in the event our agreements with our third-party
collection agencies and attorneys are
16
terminated, our third-party collection agencies and attorneys
fail to adequately perform their obligations or if our
relationships with such third-party collection agencies and
attorneys adversely change. As 29% of our portfolios are
serviced by five organizations, we are dependent on them to
maximize collections.
The
current economic environment has had adverse effects on others
in this industry, including parties providing services to
us.
The current economic environment has had an adverse effect on
others in our industry. One of our five most significant third
party servicers recently filed a bankruptcy proceeding and will
be liquidating. We have taken steps in that servicers
bankruptcy proceeding intended to ensure that our collections
continue to be segregated and timely remitted. We have received
the consent of the Bankruptcy Court to move our accounts to
another servicer. We are in the process of moving our accounts
to another servicer with whom we have experience. In addition, a
law firm used by the bankrupt servicer has advised us that it is
in financial difficulty and will be closing. That law firm is
assisting in transitioning the accounts to the new servicer and
has advised us that it will consent to substitute other counsel
in its place. The replacement servicer will be taking steps to
arrange for the substitution of counsel. Notwithstanding the
efforts of various parties to provide for a conversion of the
accounts to the new servicer, these occurrences could interfere
with the collection of certain of our portfolios including the
ability of judgment debtors to identify Asta, the new servicer
or new counsel as the parties to whom they should direct
payments. In addition, representatives of creditors of the
insolvent servicer and troubled law firm may endeavor to assert
claims with respect to portfolios that those companies
relinquish including our accounts.
We
rely on our third party collectors to comply with all rules and
regulations and maintain proper internal controls over their
accounting and operations.
Because the receivables were originated and serviced pursuant to
a variety of federal
and/or state
laws by a variety of entities and involved consumers in all
50 states, the District of Columbia, Puerto Rico and South
America, there can be no assurance that all original servicing
entities have, at all times, been in substantial compliance with
applicable law. Additionally, there can be no assurance that we
or our third-party collection agencies and attorneys have been
or will continue to be at all times in substantial compliance
with applicable law. The failure to comply with applicable law
and not maintain proper controls in their accounting and
operations could materially adversely affect our ability to
collect our receivables and could subject us to increased costs,
fines and penalties.
We may
rely on third parties to locate, identify and evaluate consumer
receivable portfolios available for purchase.
We may rely on third parties, including brokers and third-party
collection agencies and attorneys, to identify consumer
receivable portfolios and, in some instances, to assist us in
our evaluation and purchase of these portfolios. As a result, if
such third parties fail to identify receivable portfolios or if
our relationships with such third parties are not maintained,
our ability to identify and purchase additional receivable
portfolios could be materially adversely affected. In addition,
if we, or such parties, fail to correctly or adequately evaluate
the value or collectability of these consumer receivable
portfolios, we may pay too much for such portfolios and suffer
an impairment, which would negatively impact our earnings.
Business
issues with a significant third party servicer (the
Servicer) led to the need to secure subordinated
financing, reduced purchases and other disruptions in the
business relationship.
The Servicer that provides servicing for certain portfolios
within the Bank Group Collateral (all portfolios excluding the
Portfolio Purchase), was also engaged by Palisades Collection,
LLC, the Companys servicing subsidiary (Palisades
Collection), after the acquisition of the Portfolio
Purchase, to provide certain management services with respect to
the portfolios owned by Palisades XVI and financed by the BMO
Facility and to provide subservicing functions for portions of
the Portfolio Purchase. Collections with respect to the
Portfolio Purchase, and most portfolios purchased by the
Company, are less than the costs and fees which were expended to
generate those collections, particularly when court costs are
advanced to pursue an aggressive litigation strategy, as was the
case with the Portfolio Purchase.
Start-up
cash flow issues with respect to the Portfolio Purchase were
exacerbated by (a) collection challenges caused by the
economic environment, (b) the fact that Palisades
Collection believed that it
17
would be desirable to engage the Servicer to perform management
services with respect to the Portfolio Purchase which services
were not contemplated at the time of the initial acquisition of
the Portfolio Purchase and (c) Palisades Collection
believed it would be desirable to commence litigation and incur
court costs at a faster rate than initially budgeted. As
previously described in the Companys
Form 10-K
and
Form 10-K/A
for the year ended September 30, 2007, the agreements with
the Servicer call for a 3% 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.
Additionally, the Company paid the Servicer a monthly fee of
$275,000 for 25 months for consulting, asset identification
and skiptracing efforts in connection with the Portfolio
Purchase, ending in May 2009. The Servicer also receives a
servicing fee with respect to those accounts it actually
subservices. As the fees due to the Servicer for management and
subservicing functions and the amounts spent for court costs
were higher than those initially contemplated for subservicing
functions, and as
start-up
collections with respect to the Portfolio Purchase were slower
than initially projected, the amounts owed to the Servicer with
respect to the Portfolio Purchase for fees and advances for
court costs to pursue litigation against debtors, from time to
time, exceeded amounts available to pay the Servicer from
collections received by the Servicer on the Portfolio Purchase
on a current basis. The Company considered the effects of these
trends on the Portfolio Purchase valuation.
Rather than waiting for collections from the Portfolio Purchase
to satisfy sums of approximately $8.2 million due the
Servicer for court cost advances and its fees, the Servicer
set-off that amount against amounts it had collected on behalf
of the Company with respect to the Bank Group Collateral. While
the Servicer disagrees, the Company believes that those sums
should have been remitted to the Bank Group without setoff.
The Company determined to remedy any shortfall in the receipts
under the Bank Group facility by obtaining the $8.2 million
subordinated loan from the Family Entity and causing the
proceeds of the loan to be delivered to the Bank Group and not
to pursue a dispute with the Servicer at that time. The Company
believed that avoiding a dispute with the Servicer was is in its
best interests, as the Servicer should improve collections on
the Portfolio Purchase over time.
On April 29, 2008, the Company entered into a letter
agreement with the Bank Group in which the Bank Group consented
to the Subordinated Loan from the Family Entity. On
January 18, 2009, the Company entered into amended
agreements with the Servicer pursuant to which the Servicer
agreed that it would not make any further set-offs against
collections.
We
have an ongoing dispute with a significant servicer for which we
are currently negotiating a settlement.
The Company has an ongoing dispute with one of its significant
third party servicers regarding certain provisions in the
servicing agreement between the companies. The Company contends
that there are amounts due the Company under a profit-sharing
arrangement. The servicer has acknowledged the profit sharing
arrangement but disagrees with the calculation of the amount
owed. Additionally, the servicer has asserted that the Company
owes the servicer certain amounts with regard to a portfolio
sale and court costs allegedly incurred by the servicer and not
paid to the servicer by the Company. The companies continue to
negotiate a settlement for these items. The Company does not
believe the final settlement will have an adverse material
effect on the Company.
Our
collections may decrease if bankruptcy filings
increase.
During times of economic recession, the amount of defaulted
consumer receivables generally increases, which contributes to
an increase in the amount of personal bankruptcy filings. Under
certain bankruptcy filings, a debtors assets are sold to
repay credit originators, but since the defaulted consumer
receivables we purchase are generally unsecured, we may not be
able to collect on those receivables. We cannot assure you that
our collection experience would not decline with an increase in
bankruptcy filings. If our actual collection experience with
respect to a defaulted consumer receivable portfolio is
significantly lower than we projected when we purchased the
portfolio, our earnings could be negatively affected.
If we
are unable to access external sources of financing, we may not
be able to fund and grow our operations.
The failure to obtain increased financing and capital as needed
would limit our ability to:
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|
|
purchase consumer receivable portfolios; and
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|
achieve our growth plans.
|
18
In addition, our financing sources may impose certain
restrictive covenants, including financial covenants. Failure to
satisfy any of these covenants could:
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cause our indebtedness to become immediately payable;
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|
preclude us from further borrowings from these existing
sources; and
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|
prevent us from securing alternative sources of financing
necessary to purchase consumer receivable portfolios and to
operate our business.
|
The
loss of any of our executive officers may adversely affect our
operations and our ability to successfully acquire receivable
portfolios.
Historically, Arthur Stern, our Chairman Emeritus, Gary Stern,
our Chairman, President and Chief Executive Officer, Robert J.
Michel, our Chief Financial Officer, and Mary Curtin, our Senior
Vice President, were responsible for making substantially all
management decisions, including determining which portfolios to
purchase, the purchase price and other material terms of such
portfolio acquisitions. These decisions are instrumental to the
success of our business. On October 5, 2009, it was
announced that Cameron Williams, who had served as Chief
Operating Officer, will be leaving the Company following a
transition period. Mr. Williams contract expires
December 31, 2009. Additionally, as of January 2009, Arthur
Stern stepped down as an employee of the Company, although he
continues to serve on the Board and to consult with our
executives. Significant losses of the services of our executive
officers or the inability to replace our officers with
individuals who have experience in the industry or with the
Company could disrupt our operations and adversely affect our
ability to successfully acquire receivable portfolios.
The
Stern family effectively controls Asta, substantially reducing
the influence of our other stockholders.
Members of the Stern family including Arthur Stern, Gary Stern
and Barbara Marburger, daughter of Arthur Stern and sister of
Gary Stern, trusts or custodial accounts for the benefit of
minor children of Barbara Marburger and Gary Stern, Asta Group,
Incorporated, and limited liability companies controlled by
Judith R. Feder, niece of Arthur Stern and cousin of Gary Stern,
in which Arthur Stern, Alice Stern (wife of Arthur Stern and
mother of Gary Stern and Barbara Marburger), Gary Stern and
trusts for the benefit of the issue of Arthur Stern and the
issue of Gary Stern hold all economic interests, own, in the
aggregate, approximately 26.0% of our outstanding shares of
common stock. In addition, other members of the Stern Family,
such as adult children of Gary Stern and Barbara Marburger, own
additional shares. As a result, the Stern family is able to
influence significantly the actions that require stockholder
approval, including:
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the election of a majority of our directors; and
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|
the approval of mergers, sales of assets or other corporate
transactions or matters submitted for stockholder approval.
|
As a result, our other stockholders may have reduced influence
over matters submitted for stockholder approval. In addition,
the Stern familys influence could preclude any unsolicited
acquisition of us and consequently materially adversely affect
the price of our common stock.
Current
economic conditions, have had a significant impact on our
ability to sell accounts.
As part of our historic business model, we have sold accounts on
an opportunistic basis. Our ability to sell accounts has been
limited in 2009 and in 2008 and may be limited in the future.
Net collections represented by account sales for 2009 were only
$8.7 million, compared to $20.4 million and
$54.2 million in 2008 and 2007, respectively. Collections
represented by account sales as a percentage of total
collections were 5.9% in 2009, compared to 9.8% and 19.2% in
2008 and 2007, respectively. We had launched a sales effort to
enhance cash flow and pay debt, particularly from the Portfolio
Purchase, but sales have been slower than expected due to a
variety of factors, including a slow resale market, similar to
the decrease in pricing we are seeing in general, as well as
lack of supporting documentation (media) and validation of the
Portfolio Purchase accounts.
Government
regulations may limit our ability to recover and enforce the
collection of our receivables.
Federal, state and local laws, rules, regulations and ordinances
may limit our ability to recover and enforce our rights with
respect to the receivables acquired by us. These laws include,
but are not limited to, the following federal
19
statutes and regulations promulgated thereunder and comparable
statutes in states where consumers reside
and/or where
creditors are located:
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The Fair Debt Collection Practices Act;
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The Federal Trade Commission Act;
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The
Truth-In-Lending
Act;
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The Fair Credit Billing Act;
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The Equal Credit Opportunity Act; and
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The Fair Credit Reporting Act.
|
We may be precluded from collecting receivables we purchase
where the creditor or other previous owner or third-party
collection agency or attorney failed to comply with applicable
law in originating or servicing such acquired receivables. Laws
relating to the collection of consumer debt also directly apply
to our business. Our failure to comply with any laws applicable
to us, including state licensing laws, could limit our ability
to recover on receivables and could subject us to fines and
penalties, which could reduce our earnings and result in a
default under our loan arrangements. In addition, our
third-party collection agencies and attorneys may be subject to
these and other laws and their failure to comply with such laws
could also materially adversely affect our finance income and
earnings.
Additional laws or amendments to existing laws may be enacted
that could impose additional restrictions on the servicing and
collection of receivables. Such new laws or amendments may
adversely affect the ability to collect on our receivables,
which could also adversely affect our finance income and
earnings.
Because our receivables are generally originated and serviced
pursuant to a variety of federal, state laws
and/or local
laws by a variety of entities and may involve consumers in all
50 states, the District of Columbia, Puerto Rico and South
America, there can be no assurance that all originating and
servicing entities have, at all times, been in substantial
compliance with applicable law. Additionally, there can be no
assurance that we or our third-party collection agencies and
attorneys have been or will continue to be at all times in
substantial compliance with applicable law. Failure to comply
with applicable law could materially adversely affect our
ability to collect our receivables and could subject us to
increased costs, fines and penalties.
Class
action suits and other litigation in our industry could divert
our managements attention from operating our business and
increase our expenses.
Originators, debt purchasers and third-party collection agencies
and attorneys in the consumer credit industry are frequently
subject to putative class action lawsuits and other litigation.
Claims include failure to comply with applicable laws and
regulations and improper or deceptive origination and servicing
practices. Being a defendant in such class action lawsuits or
other litigation could materially adversely affect our results
of operations and financial condition.
We may
seek to make acquisitions that prove unsuccessful or strain or
divert our resources.
We may seek to grow Asta through acquisitions of related
businesses. Such acquisitions present risks that could
materially adversely affect our business and financial
performance, including:
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|
|
the diversion of our managements attention from our
everyday business activities;
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|
the assimilation of the operations and personnel of the acquired
business;
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|
the contingent and latent risks associated with the past
operations of, and other unanticipated problems arising in, the
acquired business; and
|
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|
|
the need to expand management, administration and operational
systems.
|
If we make such acquisitions we cannot predict whether:
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|
we will be able to successfully integrate the operations of any
new businesses into our business;
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|
we will realize any anticipated benefits of completed
acquisitions; or
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|
there will be substantial unanticipated costs associated with
acquisitions.
|
In addition, future acquisitions by us may result in:
|
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|
|
potentially dilutive issuances of our equity securities;
|
20
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|
the incurrence of additional debt; and
|
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|
the recognition of significant charges for depreciation and
impairment charges related to goodwill and other intangible
assets.
|
Although we have no present plans or intentions, we continuously
evaluate potential acquisitions of related businesses. However,
we have not reached any agreement or arrangement with respect to
any particular future acquisition and we may not be able to
complete any acquisitions on favorable terms or at all.
Our
investments in other businesses and entry into new business
ventures may adversely affect our operations.
We have and may continue to make investments in companies or
commence operations in businesses and industries that are not
identical to those with which we have historically been
successful. If these investments or arrangements are not
successful, our earnings could be materially adversely affected
by increased expenses and decreased finance income.
If our
technology and phone systems are not operational, our operations
could be disrupted and our ability to successfully acquire
receivable portfolios and receive collections from debtors could
be adversely affected.
Our success depends, in part, on sophisticated
telecommunications and computer systems. The temporary loss of
our computer and telecommunications systems, through casualty,
operating malfunction or service provider failure, could disrupt
our operations. In addition, we must record and process
significant amounts of data quickly and accurately to properly
bid on prospective acquisitions of receivable portfolios and to
access, maintain and expand the databases we use for our
collection and monitoring activities. Any failure of our
information systems and their backup systems would interrupt our
operations. We may not have adequate backup arrangements for all
of our operations and we may incur significant losses if an
outage occurs. In addition, we rely on third-party collection
agencies and attorneys who also may be adversely affected in the
event of an outage in which the third-party collection agencies
and attorneys do not have adequate backup arrangements. Any
interruption in our operations or our third-party collection
agencies and attorneys operations could have an
adverse effect on our results of operations and financial
condition. However, the Company is in the process of
implementing a disaster recovery program which would mitigate
this risk.
Our
organizational documents and Delaware law may make it harder for
us to be acquired without the consent and cooperation of our
board of directors and management.
Several provisions of our organizational documents and Delaware
law may deter or prevent a takeover attempt, including a
takeover attempt in which the potential purchaser offers to pay
a per share price greater than the current market price of our
common stock. Under the terms of our certificate of
incorporation, our board of directors has the authority, without
further action by the stockholders, to issue shares of preferred
stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof. The ability to issue shares
of preferred stock could tend to discourage takeover or
acquisition proposals not supported by our current board of
directors. In addition, we are subject to Section 203 of
the Delaware General Corporation Law, which restricts business
combinations with some stockholders once the stockholder
acquires 15% or more of our common stock.
Future
sales of our common stock may depress our stock
price.
Sales of a substantial number of shares of our common stock in
the public market could cause a decrease in the market price of
our common stock. We had 14,272,457 shares of common stock
issued and outstanding as of December 21, 2009. Of these
shares, 3,669,340 are held by our affiliates and are saleable
under Rule 144 of the Securities Act of 1933, as amended.
The remainder of our outstanding shares is freely tradable. In
addition, options to purchase approximately
1,157,905 shares of our common stock were outstanding as of
September 30, 2009, of which 1,081,912 were vested. In
certain cases, the exercise prices of such options were higher
than the current market price of our common stock. We may also
issue additional shares in connection with our business and may
grant additional stock options or restricted shares to our
employees, officers, directors and consultants under our present
or future equity compensation plans or we may issue warrants to
third parties outside of such plans. As of September 30,
2009 there were 1,150,668 shares available for such purpose
with such shares available under the Equity Compensation Plan
and the 2002 Stock Option Plan. No more options are available
for issuance under the
21
1995 Stock Option Plan. If a significant portion of these shares
were sold in the public market, the market value of our common
stock could be adversely affected.
From time to time, the Companys Chairman Emeritus, Arthur
Stern and President and Chief Executive Officer, Gary Stern have
adopted prearranged stock trading plans in accordance with
guidelines specified by
Rule 10b5-1
under the Securities Exchange Act of 1934, as amended. While no
such plans are in effect at present, significant sales by the
Stern family could have an adverse effect on market price for
our common stock.
The
Company purchased a portfolio in a South American country
exposing the Company to currency rate
fluctuations.
As a result of this $8.6 million purchase in fiscal year
2008, the Company is exposed to currency rate fluctuations as
the collections on this portfolio are denominated in the local
currency of the South American country. Additionally, our
investment could also be exposed to the same currency risk. A
strengthened U.S. dollar could decrease the
U.S. dollar equivalent of the local currency collections,
and the local currency conversion to U.S. dollars would
suffer upon settlement of transactions associated with this
investment with the parent company. The Company has no foreign
currency hedge contracts in place.
Our
quarterly operating results may fluctuate and cause our stock
price to decline.
Because of the nature of our business, our quarterly operating
results may fluctuate, which may adversely affect the market
price of our common stock. Our results may fluctuate as a result
of any of the following:
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the timing and amount of collections on our consumer receivable
portfolios;
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our inability to identify and acquire additional consumer
receivable portfolios;
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a decline in the estimated future value of our consumer
receivable portfolio recoveries;
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|
increases in operating expenses associated with the growth of
our operations;
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general and economic market conditions; and
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prices we are willing to pay for consumer receivable portfolios.
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Item 1B.
|
Unresolved
Staff Comments.
|
The Company has received no written comments regarding its
periodic or current reports from the staff of the Securities and
Exchange Commission that were issued 180 days or more
preceding the end of its 2009 fiscal year and that remain
unresolved.
Our executive and administrative offices are located in
Englewood Cliffs, New Jersey, where we lease approximately
14,500 square feet of general office space for
approximately $23,000 per month, plus utilities. The lease
expires on July 31, 2010. The Company is reviewing its
options with regard to facilities planning.
Our office in Sugar Land, Texas occupies approximately
3,600 square feet of general office space for approximately
$6,000 per month. The lease expires November 30, 2010.
Additionally, we had been leasing approximately
9,000 square feet of general office space in Bethlehem,
Pennsylvania for a call center. In February 2009, the Company
closed the Pennsylvania facility. The lease expires in December
2009. The call center function has been assimilated into our
existing New Jersey facility.
We believe that our existing facilities are adequate for our
current needs.
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|
Item 3.
|
Legal
Proceedings.
|
In the ordinary course of our business, we are involved in
numerous legal proceedings. We regularly initiate collection
lawsuits, using 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 on 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-K,
we were not involved in any material litigation in which we were
a defendant.
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Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None.
22
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Since August 15, 2000, our common stock has been quoted on
the NASDAQ National Market system under the symbol
ASFI. On December 10, 2009 there were 28
holders of record of our common stock. High and low sales prices
of our common stock since October 1, 2006 as reported by
NASDAQ are set forth below (such quotations reflect inter-dealer
prices without retail markup, markdown, or commission, and may
not necessarily represent actual transactions):
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High
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Low
|
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October 1, 2007 to December 31, 2007
|
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$
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39.78
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$
|
24.71
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January 1, 2008 to March 31, 2008
|
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26.29
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12.92
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April 1, 2008 to June 30, 2008
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15.25
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6.74
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July 1, 2008 to September 30, 2008
|
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10.01
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6.76
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October 1, 2008 to December 31, 2008
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$
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10.08
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$
|
1.79
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January 1, 2009 to March 31, 2009
|
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2.75
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|
1.00
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April 1, 2009 to June 30, 2009
|
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6.36
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2.45
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July 1, 2009 to September 30, 2009
|
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9.24
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4.90
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Dividends
During the year ended September 30, 2009, the Company
declared quarterly cash dividends aggregating $1,142,000 ($0.02
per share, per quarter), of which $286,000 was paid
November 2, 2009. During the year ended September 30,
2008 the Company declared quarterly cash dividends aggregating
$2,270,000 ($0.04 per share, per quarter), of which $571,000 was
paid November 3, 2008. Future dividend payments will be at
the discretion of the board of directors and will depend upon
our financial condition, operating results, capital requirements
and any other factors the board of directors deems relevant. In
addition, our agreements with our lenders may, from time to
time, restrict our ability to pay dividends. Currently there are
no restrictions in place.
Securities
Authorized for Issuance under Equity Compensation
Plans
Included in the following table are the number of options
outstanding, the average price and the number of available
options remaining available for future issuance under equity
compensation plans.
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|
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Number of
|
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|
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|
|
Securities
|
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|
|
|
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Remaining Available
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Number of
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|
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for Future Issuance
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|
|
Securities to be
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Under Equity
|
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Issued Upon
|
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Weighted-Average
|
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Compensation Plans
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Exercise of
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Exercise Price of
|
|
|
(Excluding
|
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Outstanding
|
|
|
Outstanding
|
|
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Securities
|
|
|
|
Options, Warrants
|
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|
Options, Warrants
|
|
|
Reflected in Column
|
|
Equity Compensation Plan
|
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and Rights
|
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and Rights
|
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(a))
|
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Information: Plan Category
|
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(a)
|
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(b)
|
|
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(c)
|
|
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Equity compensation plans approved by security holders
|
|
|
1,157,905
|
|
|
$
|
10.76
|
|
|
|
1,150,668
|
|
Equity compensation plans not approved by security holders
|
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0
|
|
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0
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0
|
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|
|
|
|
|
|
|
|
|
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Total
|
|
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1,157,905
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$
|
10.76
|
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1,150,668
|
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|
23
Performance
Graph
Notwithstanding anything to the contrary set forth in any of
our filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might
incorporate by reference this
Form 10-K
Statement, in whole or in part, the following Performance Graph
shall not be incorporated by reference into any such filings.
The following graph compares the cumulative total shareholder
return on our Common Stock since September 30, 2004, with
the cumulative return for the NASDAQ Stock Market (US) Index and
four stocks comprising our peer group index over the same
period, assuming the investment of $100 on September 30,
2003, and the reinvestment of all dividends. We declared
dividends of $0.12 per share in fiscal 2004 of which $0.035 was
paid November 1, 2004. During the year ended
September 30, 2005, we declared quarterly cash dividends
aggregating $0.16 per share, of which $0.04 per share was paid
November 1, 2005. During the year ended September 30,
2006, we declared quarterly cash dividends aggregating $0.56 per
share, of which $0.44 per share was paid November 1, 2006.
Included in the $0.44 was a special dividend of $0.40 per share.
During the year ended September 30, 2007, we declared
quarterly cash dividends aggregating $0.16 per share, of which
$0.04 per share was paid November 1, 2007. During the year
ended September 30, 2008, we declared quarterly cash
dividends aggregating $0.16 per share, of which $0.04 per share
was paid November 3, 2008.
COMPARISON
OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG ASTA FUNDING, INC.,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
ASSUMES $100
INVESTED ON SEPT. 30, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING SEPT. 30, 2009
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2005
|
|
|
|
2006
|
|
|
|
2007
|
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|
2008
|
|
|
|
2009
|
|
ASTA FUNDING, INC.
|
|
|
|
100.00
|
|
|
|
|
188.53
|
|
|
|
|
258.17
|
|
|
|
|
265.03
|
|
|
|
|
49.17
|
|
|
|
|
54.27
|
|
PEER GROUP INDEX(1)
|
|
|
|
100.00
|
|
|
|
|
198.04
|
|
|
|
|
149.19
|
|
|
|
|
130.36
|
|
|
|
|
72.81
|
|
|
|
|
71.92
|
|
NASDAQ MARKET INDEX
|
|
|
|
100.00
|
|
|
|
|
113.76
|
|
|
|
|
120.51
|
|
|
|
|
144.01
|
|
|
|
|
111.56
|
|
|
|
|
112.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Peer Group Index is made up of the following securities: |
Compucredit Corporation
Encore Capital Group
NCO Group Inc. (Through 2006)
Portfolio Recovery Associates
24
|
|
Item 6.
|
Selected
Financial Data.
|
The following tables set forth a summary of our consolidated
financial data as of and for the five fiscal years ended
September 30, 2009. The selected financial data for the
five fiscal years ended September 30, 2009, have been
derived from our audited consolidated financial statements. The
selected financial data presented below should be read in
conjunction with our consolidated financial statements, related
notes, other financial information included elsewhere, and
Item 7. See Managements Discussion and Analysis
of Financial Condition and Results of Operations in this
Annual Report. Certain items in prior years information
have been reclassified to conform to the current years
presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Operations Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income
|
|
$
|
70,156
|
|
|
$
|
115,295
|
|
|
$
|
138,356
|
|
|
$
|
101,024
|
|
|
$
|
69,479
|
|
Other income
|
|
|
134
|
|
|
|
200
|
|
|
|
2,181
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
70,290
|
|
|
|
115,495
|
|
|
|
140,537
|
|
|
|
101,429
|
|
|
|
69,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
25,915
|
|
|
|
29,561
|
|
|
|
25,450
|
|
|
|
18,268
|
|
|
|
15,340
|
|
Interest expense
|
|
|
8,452
|
|
|
|
17,881
|
|
|
|
18,246
|
|
|
|
4,641
|
|
|
|
1,853
|
|
Impairments
|
|
|
183,500
|
|
|
|
53,160
|
|
|
|
9,097
|
|
|
|
2,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
217,867
|
|
|
|
100,602
|
|
|
|
52,793
|
|
|
|
25,154
|
|
|
|
17,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in earnings in venture and income taxes
|
|
|
(147,577
|
)
|
|
|
14,893
|
|
|
|
87,744
|
|
|
|
76,275
|
|
|
|
52,286
|
|
Equity in earnings in venture
|
|
|
65
|
|
|
|
55
|
|
|
|
225
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
(147,512
|
)
|
|
|
14,948
|
|
|
|
87,969
|
|
|
|
76,825
|
|
|
|
52,286
|
|
Provisions for income taxes
|
|
|
(56,787
|
)
|
|
|
6,119
|
|
|
|
35,703
|
|
|
|
31,060
|
|
|
|
21,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(90,725
|
)
|
|
$
|
8,829
|
|
|
$
|
52,266
|
|
|
$
|
45,765
|
|
|
$
|
30,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$
|
(6.36
|
)
|
|
$
|
0.62
|
|
|
$
|
3.79
|
|
|
$
|
3.36
|
|
|
$
|
2.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
$
|
(6.36
|
)
|
|
$
|
0.61
|
|
|
$
|
3.56
|
|
|
$
|
3.13
|
|
|
$
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In millions)
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections
|
|
$
|
147.4
|
|
|
$
|
208.0
|
|
|
$
|
281.8
|
|
|
$
|
214.5
|
|
|
$
|
168.9
|
|
Portfolio purchases, at cost
|
|
|
19.6
|
|
|
|
49.9
|
|
|
|
440.9
|
|
|
|
200.2
|
|
|
|
126.0
|
|
Portfolio purchases, at face
|
|
|
577.0
|
|
|
|
1,456.1
|
|
|
|
10,891.9
|
|
|
|
5,194.0
|
|
|
|
3,445.2
|
|
Return on average assets(1)
|
|
|
(23.5
|
)%
|
|
|
1.7
|
%
|
|
|
12.0
|
%
|
|
|
19.6
|
%
|
|
|
18.3
|
%
|
Return on average stockholders equity(1)
|
|
|
(44.8
|
)%
|
|
|
3.6
|
%
|
|
|
24.8
|
%
|
|
|
27.8
|
%
|
|
|
23.9
|
%
|
Dividends declared per share(2)
|
|
$
|
0.08
|
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
$
|
0.56
|
|
|
$
|
0.14
|
|
At September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
290.8
|
|
|
|
481.1
|
|
|
|
580.3
|
|
|
|
287.8
|
|
|
|
180.0
|
|
Total debt
|
|
|
130.9
|
|
|
|
221.7
|
|
|
|
326.5
|
|
|
|
82.8
|
|
|
|
29.3
|
|
Total stockholders equity
|
|
|
157.4
|
|
|
|
247.9
|
|
|
|
237.5
|
|
|
|
184.3
|
|
|
|
145.2
|
|
Inception to date September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative aggregate purchases, at face
|
|
|
31,626.9
|
|
|
|
31,049.9
|
|
|
|
29,593.8
|
|
|
|
18,701.9
|
|
|
|
13,507.9
|
|
|
|
|
(1) |
|
The return on average assets is computed by dividing net income
by average total assets for the fiscal year. The return on
average stockholders equity is computed by dividing net
income by the average stockholders equity for the fiscal
year. Both ratios have been computed using beginning and
period-end balances. |
|
(2) |
|
Includes a special dividend of $0.40 per share in 2006. |
25
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation.
|
Cautions
Regarding Forward-Looking Statements
This Annual Report on
Form 10-K
contains certain forward-looking statements within the meaning
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,
anticipate, estimate, and similar words,
although some forward-looking statements are expressed
differently. Forward-looking statements represent our judgment
regarding future events, but we can give no assurance that such
judgments will prove to be correct. Such statements are subject
to risks and uncertainties that could cause actual results to
differ materially from those projected in such forward-looking
statements. Certain factors which could materially affect our
results and our future performance are described above under
Item 1A Risk Factors and below under
Critical Accounting Policies in Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Forward-looking statements are
inherently uncertain as they are based on current expectations
and assumptions concerning future events and are subject to
numerous known and unknown risks and uncertainties. We caution
you not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the
date of this report. Except as required by law, we undertake no
obligation to update or publicly announce revisions to any
forward-looking statements to reflect future events or
developments. Unless the context otherwise requires, the terms
we, us the Company, or
our as used herein refer to Asta Funding, Inc. and
our subsidiaries.
Overview
We are primarily engaged in the business of acquiring, managing
for our own account, 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 making partial or irregular monthly payments, but
the accounts may have been written-off by the originators; and
in limited circumstances,
|
|
|
|
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 investment after 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, brokered transactions 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, financial
institutions, collection agencies, investors and our financing
sources;
|
|
|
|
brokers who specialize in the sale of consumer receivable
portfolios; and
|
|
|
|
other sources.
|
Critical
Accounting Policies
We account for our investments in consumer receivable
portfolios, using either:
|
|
|
|
|
The interest method; or
|
|
|
|
The cost recovery method.
|
26
As we believe our extensive liquidating experience in certain
asset classes such as distressed credit card 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 in which we do not possess the same expertise or
history, or we cannot reasonably estimate the timing of the cash
flows, we utilize the cost recovery method of accounting for
those portfolios of receivables.
The Company accounts for its investment in finance receivables
using the interest method under the guidance of 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. As previously mentioned, 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
cash flow;
|
|
|
|
number of months since charge-off;
|
|
|
|
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. 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.
27
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 sales. 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 acquisition costs including servicing expenses.
Additionally, when considering larger portfolio 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 collections, for
portfolio purchases acquired in fiscal year 2009 we have
extended our time frame of the expectation of recovering 100% of
our invested capital within a
24-39 month
period from an
18-28 month
period, and the expectation of recovering
130-140% of
invested capital to a period of 7 years which is an
increase from the previous 5 year expectation. 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.
The Company uses 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.
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 Report
on
Form 10-K.
In these discussions, most percentages and dollar amounts have
been rounded to aid presentation. As a result, all such figures
are approximations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Finance income
|
|
|
99.8
|
%
|
|
|
99.8
|
%
|
|
|
98.4
|
%
|
|
|
|
|
Other income
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
36.9
|
%
|
|
|
25.6
|
%
|
|
|
18.1
|
%
|
|
|
|
|
Interest expense
|
|
|
12.0
|
%
|
|
|
15.5
|
%
|
|
|
13.0
|
%
|
|
|
|
|
Impairments
|
|
|
261.1
|
%
|
|
|
46.0
|
%
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before equity in earnings in venture and income
taxes
|
|
|
(210.0
|
)%
|
|
|
12.9
|
%
|
|
|
62.4
|
%
|
|
|
|
|
Equity in earnings in venture
|
|
|
0.1
|
%
|
|
|
0
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(209.9
|
)%
|
|
|
12.9
|
%
|
|
|
62.6
|
%
|
|
|
|
|
Provision for income taxes
|
|
|
(80.8
|
)%
|
|
|
5.3
|
%
|
|
|
25.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(129.1
|
)%
|
|
|
7.6
|
%
|
|
|
37.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Year
Ended September 30, 2009 Compared to the Year Ended
September 30, 2008
Finance income. For the year ended
September 30, 2009, finance income decreased
$45.1 million or 39.2% to $70.2 million from
$115.3 million for the year ended September 30, 2008.
The average outstanding level of consumer receivable accounts
acquired for liquidation decreased from $497.3 million for
the fiscal year ended September 30, 2008 to
$394.6 million for fiscal year ended September 30,
2009, reflecting a combination of lower collections and lower
portfolio purchases in 2009 compared to the prior period. A
significant reason for the decrease in finance income is the
impact of the Portfolio Purchase being transferred from the
interest method to the cost recovery method effective in the
third quarter of fiscal year 2008. The finance income recorded
on the Portfolio Purchase in fiscal year 2008, prior to the
transfer to cost recovery, was $17.7 million, as compared
to zero finance income recorded in fiscal year 2009. No finance
income will be recognized on the Portfolio Purchase until after
the entire carrying value of $121.5 million, as of
September 30, 2009, is collected.
During the fiscal year ended September 30, 2009, we
acquired consumer receivable portfolios at a cost of
$19.6 million as compared to $49.9 million during the
fiscal year ended September 30, 2008. The portfolios
purchased in fiscal year 2008 include a portfolio purchased that
is domiciled in South America at a cost of $8.6 million.
Further, as we have curtailed our purchases of new portfolios of
consumer receivables during the second, third and fourth
quarters of 2008 and into 2009, finance income was negatively
impacted and will continue to be negatively impacted going
forward since 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.
Finance income recognized from fully amortized portfolios (zero
basis revenue) was $40.7 million and
$45.3 million for the years ended September 30,
2009 and 2008, respectively. There were no accretable yield
adjustments recorded during the fiscal years ended
September 30, 2009 and 2008.
Other income. Other income of $134,000 and
$200,000 for the fiscal year ended September 30, 2009 and
2008, respectively, consisted primarily of service fee income
and interest income from banks.
General and administrative expenses. For the
year ended September 30, 2009, general and administrative
expenses decreased $3.7 million or 12.3% to
$25.9 million from $29.6 million for the year ended
September 30, 2008. Lower general and administrative
expenses is due primarily to lower staffing levels as
collections and purchase of accounts acquired for liquidation
decreased significantly from the prior year. Staffing levels
have decreased, from 158 full time employees as of
September 30, 2008 to 105 full time employees as of
September 30, 2009. Approximately 38 employees were
eliminated in February 2009 as a result of the closing of the
Pennsylvania call center, with a salary cost savings of
approximately $0.8 million during the year ended
September 30, 2009. Lower postage expense in the current
fiscal year is a reflection of fewer mailings resulting from
lower portfolio purchases.
Interest expense. For the year ended
September 30, 2009, interest expense decreased
$9.4 million or 52.7% to $8.5 million from
$17.9 million during the year ended September 30,
2008. The decrease was due to a decrease in our outstanding
borrowings under our line of credit and our Receivables
Financing Agreement, during the year ended September 30,
2009, as compared to the outstanding borrowings during the year
ended September 30, 2008, coupled with lower interest rates
during the year ended September 30, 2009. The average
interest rate (excluding unused credit line fees) for the year
ended September 30, 2009 on the line of credit and the
Receivable Financing Agreement was 4.72% as compared to 6.11%
during the year ended September 30, 2008. The rate on the
subordinated debt related party is fixed at 6.25%.
The average outstanding borrowings decreased from
$274.1 million to $168.1 million for the years ended
September 30, 2008 and 2009, respectively, reflecting the
Companys continuing effort to pay down its debt.
Impairments. Impairments of
$183.5 million were recorded by the Company during the year
ended September 30, 2009 as compared to $53.2 million
for the year ended September 30, 2008. Included in the
current years impairments is approximately
$108.5 million related to the interest method portfolios
and $75.0 million related to cost recovery method
portfolios, including $53.9 applied to the Portfolio Purchase.
For the interest method portfolios, relative collections with
respect to our expectations were deteriorating and this
deterioration was
29
confirmed by our third party collection agencies and attorneys.
The deterioration, which has impacted us throughout the year,
became more significant during the fourth quarter of the fiscal
year ended September 30, 2009. Historically, moving through
the year and into the fourth quarter, collections tend to be
stable or perhaps increase in performance. For cost recovery
portfolios the impairments recorded wrote down the cost recovery
portfolios to their net realizable value. As with the interest
method portfolios, our third party collection agencies and
attorneys confirmed during the fourth quarter of fiscal year
2009, the recent trend of the deterioration of collections.
Although collections on the cost recovery method portfolios are
expected to continue, we have determined the final estimated
collections will not be enough to recover the original cost of
or current carrying value of the portfolio. The impairment
charge for the Portfolio Purchase wrote down the value of the
portfolio to $121.9 million. Impairment charges in 2008
included $30.3 million on the Portfolio Purchase prior to
its transfer to the cost recovery method.
Income tax (benefit) expense Income tax
benefit for fiscal year 2009 of $56.8 million consists of a
federal tax benefit of $46.0 million and a state tax benefit of
$10.8 million. The state deferred tax benefit is inclusive of a
$4.4 million valuation allowance. Although the carryforward
period for state income tax purposes is up to twenty years,
given the economic conditions, such economic environment could
limit growth over a reasonable time period to realize the
deferred tax asset. The Company determined the time period
allowance for carryforward is outside a reasonable period to
forecast full realization of the deferred tax asset, therefore
recognized the deferred tax asset valuation allowance. The
Company continually monitors forecast information to ensure the
valuation allowance is at the appropriate value. In fiscal year
2008 the income tax expense of $6.1 million was comprised
of a net federal tax of $4.6 million (including
$6.6 million current) and a net state tax of
$1.5 million (including $2.1 million current). The
current year tax benefit is driven primarily by the impairment
charges recorded during the fiscal year 2009.
Net (loss) income. For the year ended
September 30, 2009, net income decreased $99.5 million
to $(90.7) million from $8.8 million for the year
ended September 30, 2008, primarily reflecting increased
impairments and reduced finance income in fiscal year 2009,
partially offset by lower income taxes and expenses. Net income
per diluted share for the year ended September 30, 2009
decreased $6.96 per diluted share to $(6.36) per diluted share,
from $0.61 per diluted share for the year ended
September 30, 2008.
Year
Ended September 30, 2008 Compared to the Year Ended
September 30, 2007
Finance income. For the year ended
September 30, 2008, finance income decreased
$23.1 million or 16.7% to $115.3 million from
$138.4 million for the year ended September 30, 2007.
Although the average outstanding level of consumer receivable
accounts acquired for liquidation increased from
$401.4 million for the fiscal year ended September 30,
2007 to $497.3 million for fiscal year ended
September 30, 2008, the decrease in finance income resulted
primarily from the Portfolio Purchase being transferred from the
interest method to the cost recovery method effective in the
third quarter of fiscal year 2008. The finance income recorded
on the Portfolio Purchase during the fiscal year ended
September 30, 2007 was approximately $22.6 million
(which relates to our ownership of the Portfolio Purchase for
only seven 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. As a result of
the transfer to cost recovery, no finance income was recognized
on the Portfolio Purchase during the second half of fiscal year
2008 and no further finance income will be recognized on the
Portfolio Purchase after September 30, 2008 until the
entire carrying value of $207.3 million value as of
September 30, 2008, is collected.
During the fiscal year ended September 30, 2008, we
acquired consumer receivable portfolios at a cost of
$49.9 million as compared to $440.9 million during the
fiscal year ended September 30, 2007, which included the
Portfolio Purchase at a cost of $300 million. The
portfolios purchased in fiscal year 2008 include a portfolio
purchase domiciled in South America at $8.6 million.
Further, as we have curtailed our purchases of new portfolios of
consumer receivables during the second, third and fourth
quarters of 2008, we expect to see a reduction in finance income
in future quarters and future years, since 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. However, purchases in the
first quarter of fiscal 2009 have remained at the reduced 2008
levels. As the environment continues to be challenging, data
received in the
30
second quarter of fiscal year 2009 reflects a continued slowness
of collections, in relation to our estimates. As this data
impacts the first quarter of fiscal year 2009, impairments of
approximately $21.4 million are required in the first
quarter of fiscal year 2009.
There were no accretable yield adjustments recorded during the
fiscal year ended September 30, 2008. Adjustments to
accretable yields on certain portfolios were recorded in the
amount of $44.5 million for the year ended
September 30, 2007. Finance income related to the
accretable yield reclassifications during the year ended
September 30, 2007 was approximately $11.1 million.
Income recognized from fully amortized portfolios (zero based
revenue) was $45.3 million and $23.9 million for the
years ended September 30, 2008 and 2007, respectively. The
increase is due primarily to more pools which were fully
amortized in the fourth quarter of 2007, and were predominantly
derived from credit card purchases from one issuer made in 2003
and 2004 and telecommunications portfolios purchased from 2004
through 2005. Collections with regard to the Portfolio Purchase
were $45.5 million for the fiscal year ended
September 30, 2008 and $55.0 million for the period
owned through September 30, 2007, which includes
approximately $5.5 million collected from the seller for
accounts returned to the seller.
Other income. Other income of $200,000 for the
fiscal year ended September 30, 2008 consisted primarily of
service fee income and interest income from banks. Other income
of $2.2 million for the year ended September 30, 2007
includes interest income from banks and other loan instruments
substantially acquired in 2007, which were collected during the
fourth quarter of 2007.
General and administrative expenses. For the
year ended September 30, 2008, general and administrative
expenses increased $4.1 million or 16.2% to
$29.6 million from $25.5 million for the year ended
September 30, 2007, and represented 29.4% of total expenses
(excluding income taxes) for the year ended September 30,
2008 as compared to 48.2% for the year ended September 30,
2007. The increase in general and administrative expenses was
primarily due to an increase in receivable servicing expenses
during the year ended September 30, 2008, as compared to
the year ended September 30, 2007. The increase in
receivable servicing expenses resulted from the 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 related
expenses, consulting and skiptracing fees (further described
below), 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 December 2007, the
Company negotiated an agreement with a third party servicer, to
assist the Company in the asset location, skiptracing efforts
and ultimately the suing of debtors with respect to the
Portfolio Purchase. 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
collections from the Portfolio Purchase in excess of
$500 million. The fee was agreed to in December of 2007 and
retroactive to March 2007 and we believe this arrangement
enhances our collection efforts. The 3% fee is applied to
collections on the Portfolio Purchase and is not included in
general and administrative expenses. Additionally, the Company
is paying this third party servicer a monthly fee of $275,000
per month for 25 months for its consulting and skiptracing
efforts in connection with the Portfolio Purchase. The $275,000
fee is included in general and administrative expenses. This fee
began in May 2007. During the fiscal year ended
September 30, 2008, $3.3 million was recorded as
collection expense as compared to $1.3 million in fiscal
year 2007.
Interest expense. For the year ended
September 30, 2008, interest expense decreased $365,000 to
$17.9 million from $18.2 million during the year ended
September 30, 2007, and represented 17.8% of total expenses
(excluding income taxes) for the year ended September 30,
2008 as compared to 34.6% for the year ended September 30,
2007. The decrease was due to a decrease in our outstanding
borrowings under our line of credit and our Receivables
Financing Agreement, slightly offset by the increase in the
subordinated debt from a related party, during the year ended
September 30, 2008, as compared to the outstanding
borrowings during the year ended September 30, 2007,
coupled with lower interest rates during the year ended
September 30, 2008. The average interest rate (excluding
unused credit line fees) for the year ended September 30,
2008 on the line of credit and the Receivable Financing
Agreement was 6.11% as compared to 7.34% during the year ended
September 30, 2007. The rate on the subordinated
debt related party is fixed at 6.25%. Although
outstanding borrowings decreased approximately
$104.0 million during the fiscal year ended
September 30, 2008, the average outstanding borrowings
increased from $241.5 million to $274.1 million for
the years ended September 30, 2007 and 2008, respectively.
The increase was caused by the higher levels of borrowing
stemming from the Portfolio Purchase in the second
31
quarter of 2007. Since then, the Company has been limiting
portfolio purchases and concentrating on paying down debt.
Impairments. Impairments of $53.2 million
were recorded by the Company during the year ended
September 30, 2008 as compared to $9.1 million for the
year ended September 30, 2007, and represented 52.8% of
total expenses (excluding income taxes) for the year ended
September 30, 2008, as compared to 17.2% for the year ended
September 30, 2007. Because relative collections with
respect to our expectations on these portfolios were
deteriorating, and this deterioration was confirmed by our third
party collection agencies and attorneys, we believed that
impairment charges 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 collects on existing rental
contracts and the liquidation of inventory. The Companys
share of the income was $55,000 and $225,000 during the years
ended September 30, 2008 and 2007, respectively. The
Company has received approximately $8.1 million in cash
distributions from the inception of the venture through
September 30, 2008.
Net income. For the year ended
September 30, 2008, net income decreased
$43.4 million, or 83.1% to $8.8 million from
$52.3 million for the year ended September 30, 2007,
primarily reflecting the increased impairments recorded in
fiscal year 2008 and the reduced finance income from the
Portfolio Purchase for the last six months of 2008 due to the
switch from the interest method to the cost recovery method. Net
income per share for the year ended September 30, 2008
decreased $2.95 per diluted share, or 83.0% to $0.61 per diluted
share, from $3.56 per diluted share for the year ended
September 30, 2007.
Liquidity
and Capital Resources
Our primary sources of cash from operations include collections
on the receivable portfolios that we have acquired. Our primary
uses of cash include repayment of debt, our purchases of
consumer receivable portfolios, interest payments, costs
involved in the collections of consumer receivables, taxes and
dividends, if approved. In the past we relied significantly upon
our lenders to provide the funds necessary for the purchase of
consumer and accounts receivable portfolios. As of
September 30, 2009, the Eighth Amendment to the Credit
Facility entered into on July 10, 2009, granted an initial
$40 million line of credit from the Bank Group for
portfolio purchases and working capital and was scheduled to
reduce to zero by December 31, 2009. The Credit Facility
bore an interest at the lesser of LIBOR plus an applicable
margin, or the prime rate minus an applicable margin based on
certain leverage ratios, with a minimum rate of 5.5%. The Credit
Facility was collateralized by all assets of the Company other
than the assets of Palisades XVI and contained 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 Credit Facilitys
commitment original termination date was December 31, 2009.
As of September 30, 2009, there was an $18.3 million
outstanding balance on the Credit Facility. This Credit Facility
was repaid on December 14, 2009. As the loan was repaid
there were no covenant requirements on the Credit Facility.
On December 14, 2009 Asta Funding, Inc. and its
subsidiaries other than Palisades XVI, entered into a new
revolving credit agreement with Bank Leumi, which permits
maximum principal advances of up to $6 million. The term of
the agreement is through December 31, 2010. The interest
rate is a floating rate equal to the Bank Leumi Reference Rate
plus 2%, with a floor of 4.5%. The current rate is 5.5%. The
loan is secured by collateral consisting of all of the assets of
the Company other than those of Palisades XVI. In addition,
other collateral for the loan consists of a pledge by GMS Family
Investors, LLC, an investment company owned 100% by members of
the Stern family in the form of cash and securities with a value
of 133% of the loan commitment. On December 14, 2009
approximately $3.6 million of the Bank Leumi credit line
was drawn and used to pay off in full the remaining balance on
the credit facility the Company formerly had with the bank group
with IDB as agent.
In March 2007, Palisades XVI consummated the Portfolio Purchase.
The Portfolio Purchase is made up of predominantly credit card
accounts and includes accounts in collection litigation and
accounts as to which the sellers have been awarded judgments and
other traditional charge-offs. The Companys line of credit
with the Bank Group was fully utilized, as modified in February
2007, with the aggregate deposit of $75 million paid for
the Portfolio Purchase.
The remaining $225 million was paid on March 5, 2007
by borrowing approximately $227 million (inclusive of
transaction costs) under a new Receivables Financing Agreement
entered into by Palisades XVI with a major
32
financial institution as the funding source, and consists of
debt with full recourse only to Palisades XVI, and, as of
June 30, 2008, bore an interest rate of approximately
320 basis points over LIBOR. The term of the original
agreement was three years. All proceeds received as a result of
the net collections from the Portfolio Purchase are applied to
interest and principal of the underlying loan. The Company made
certain representations and warranties to the lender to support
the transaction. The Portfolio Purchase is serviced by Palisades
Collection, LLC, a wholly owned subsidiary of the Company, which
has also engaged several unrelated subservicers.
On February 20, 2009, the Company entered into the Fourth
Amendment Receivables Financing Agreement. The
effect of this Fourth Amendment is, among other things, to
(i) lower the collection rate minimum to $1 million
per month (plus interest and fees) as an average for each period
of three consecutive months, (ii) provide 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 waive 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, the
Company provided BMO a limited recourse, subordinated guaranty,
secured by the assets of the Company, in an amount not to exceed
$8 million plus reasonable costs of enforcement and
collection. Under the terms of the guaranty, BMO cannot exercise
any recourse against the Company until the earlier of
(i) five years from the date of the Fourth Amendment and
(ii) the termination of the Companys existing senior
lending facility or any successor senior facility.
The aggregate minimum repayment obligations required under the
Fourth Amendment to the Receivables Financing Agreement entered
into on February 20, 2009 with Palisades XVI including
interest and principal for fiscal years ending
September 30, 2010 and September 30, 2011 (seven
months), are $12.0 million and $7.0 million,
respectively, plus monthly interest and fees. There is an
additional requirement that the balance of the facility be
reduced to $25 million by April 30, 2011. While the
Company believes it will be able to make all payments due under
the new payment schedule, it is likely we will not be able to
reduce the balance of the facility to $25 million by
April 30, 2011, and there is no assurance the loan will be
extended. We anticipate working with BMO to extend the facility
by the expiration date.
On September 30, 2009 and 2008, the outstanding balance on
the Receivable Financing Agreement loan was approximately
$104.3 million, and $128.6 million, respectively. The
average interest rate of the Receivable Financing Agreement was
4.82% and 6.10% for the fiscal year ended September 30,
2009 and 2008, respectively.
On April 29, 2008, the Company obtained a subordinated loan
pursuant to a subordinated promissory note from the Family
Entity. The Family Entity is a greater than 5% shareholder of
the Company beneficially owned and controlled by Arthur Stern,
the Chairman Emeritus of the Company, Gary Stern, the President,
Chairman and Chief Executive Officer of the Company, and members
of their families. The loan is in the aggregate principal amount
of $8,246,493, bears interest at a rate of 6.25% per annum, is
payable interest only each quarter until its maturity date of
January 9, 2010, subject to prior repayment in full of the
Companys senior loan facility with a consortium of banks.
Interest expense on this loan was $515,000 for the year ended
September 30, 2009.
The Family Entity loan has been extended until December 31,
2010 with a new interest rate (subsequent to January 9,
2010) of 10.0% per annum.
The subordinated loan was incurred by the Company to resolve
certain issues with a significant servicer. Proceeds of the
subordinated loan were used to reduce the balance due on our
line of credit with the Bank Group on June 13, 2008. This
facility is secured by substantially all of the assets of the
Company and its subsidiaries, other than the assets of Palisades
XVI, which was separately financed by BMO.
As of September 30, 2009, our cash decreased
$1.2 million to $2.4 million from $3.6 million at
September 30, 2008, including an $8,000 positive effect of
foreign exchange on cash. The decrease in cash during the fiscal
year ended September 30, 2009, was due to a decrease in net
income for the period, partially offset by an increase in cash
flows from investing and financing activities.
33
Net cash provided by operating activities was $32.5 million
during the fiscal year ended September 30, 2009, compared
to net cash provided by operating activities of
$55.8 million for the fiscal year ended September 30,
2008. The decrease in net cash provided by operating activities
virtually mirrors the change in net income adjusted for non-cash
items. Net cash provided by investing activities was
$57.4 million during the fiscal year ended
September 30, 2009, as compared to net cash used by
investing activities of $44.6 million during the fiscal
year ended September 30, 2008. The increase in net cash
provided by investing activities was primarily due to the
decrease in the purchase of accounts acquired for liquidation
during the fiscal year ended September 30, 2009, partially
offset by a decrease in collections during the same period. Net
cash used in financing activities was $91.1 million during
the fiscal year ended September 30, 2009, as compared to
cash used in financing activities of $101.3 million in the
prior period. The change in net cash used by financing
activities was primarily due to a smaller pay down of debt
during the fiscal year ended September 30, 2009 compared to
that in the prior period.
Our cash requirements have been and will continue to be
significant and we have depended on external financing to
acquire consumer receivables and operate the business.
Significant requirements include repayments under our debt
facilities, purchase of consumer receivable portfolios, interest
payments, costs involved in the collections of consumer
receivables, and taxes. In addition, dividends are paid if
approved by the Board of Directors. Acquisitions have been
financed primarily through cash flows from operating activities
and a credit facility. We believe we will be less dependent on a
credit facility in the short-term as our cash flow from
operations will be sufficient to purchase portfolios and operate
the business. However, as the collection environment remains
challenging, we may seek additional funding.
Our business model affords us the ability to sell accounts on an
opportunistic basis. While we have not consummated any
significant sales from our Portfolio Purchase, we launched a
sales effort in order to attempt to enhance our cash flow and
pay down our debt faster. The results are slower than expected
for a variety of factors, including a slow resale market,
similar to the decrease in pricing we are seeing in general.
The following table shows the changes in finance receivables,
including amounts paid to acquire new portfolios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Balance at beginning of period
|
|
$
|
449.0
|
|
|
$
|
545.6
|
|
|
$
|
257.3
|
|
|
$
|
172.7
|
|
|
$
|
146.1
|
|
Acquisitions of finance receivables, net of buybacks
|
|
|
19.6
|
|
|
|
49.9
|
|
|
|
440.9
|
|
|
|
200.2
|
|
|
|
126.0
|
|
Cash collections from debtors applied to principal(1)(2)
|
|
|
(69.1
|
)
|
|
|
(81.7
|
)
|
|
|
(114.4
|
)
|
|
|
(90.4
|
)
|
|
|
(59.6
|
)
|
Cash collections represented by account sales applied to
principal(1)
|
|
|
(8.1
|
)
|
|
|
(11.0
|
)
|
|
|
(29.1
|
)
|
|
|
(23.0
|
)
|
|
|
(39.8
|
)
|
Impairments/Portfolio write down
|
|
|
(183.5
|
)
|
|
|
(53.2
|
)
|
|
|
(9.1
|
)
|
|
|
(2.2
|
)
|
|
|
|
|
Effect of foreign exchange
|
|
|
0.4
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
208.3
|
|
|
$
|
449.0
|
|
|
$
|
545.6
|
|
|
$
|
257.3
|
|
|
$
|
172.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cash collections applied to principal consists of cash
collections less income recognized on finance receivables plus
amounts received by us from the sale of consumer receivable
portfolios to third parties. |
|
(2) |
|
In 2007, includes put backs of purchased accounts returned to
the seller totaling $5.5 million. |
34
Supplementary Information on Consumer Receivables Portfolios:
Portfolio
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In millions)
|
|
Aggregate Purchase Price
|
|
$
|
19.6
|
|
|
$
|
49.9
|
|
|
$
|
440.9
|
|
Aggregate Portfolio Face Amount
|
|
|
577.0
|
|
|
|
1,605.1
|
|
|
|
10,891.9
|
|
The prices we pay for our consumer receivable portfolios are
dependent on many criteria including the age of the portfolio,
the number of third party collection agencies and attorneys that
have been involved in the collection process and the
geographical distribution of the portfolio. When we pay higher
prices for portfolios which are performing or fresher, we
believe it is not at the sacrifice of our expected returns.
Price fluctuations for portfolio purchases from quarter to
quarter or year to year are primarily indicative of the overall
mix of the types of portfolios we are purchasing.
Schedule
of Portfolios by Income Recognition Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
September 30, 2007
|
|
|
Cost
|
|
Interest
|
|
Cost
|
|
Interest
|
|
Cost
|
|
Interest
|
|
|
Recovery
|
|
Method
|
|
Recovery
|
|
Method
|
|
Recovery
|
|
Method
|
|
|
Portfolios
|
|
Portfolios
|
|
Portfolios
|
|
Portfolios
|
|
Portfolios
|
|
Portfolios
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Original Purchase Price (at period end)
|
|
$
|
442.2
|
|
|
$
|
772.8
|
|
|
$
|
405.9
|
|
|
$
|
789.5
|
|
|
$
|
101.1
|
|
|
$
|
1,045.4
|
|
Cumulative Aggregate Managed Portfolios (at period end)
|
|
|
13,884.5
|
|
|
|
17,725.9
|
|
|
|
12,053.4
|
|
|
|
18,980.0
|
|
|
|
3,961.5
|
|
|
|
25,464.7
|
|
Receivable Carrying Value (at period end)
|
|
|
137.6
|
|
|
|
70.6
|
|
|
|
245.5
|
|
|
|
203.5
|
|
|
|
32.0
|
|
|
|
513.6
|
|
Finance Income Earned (for the respective period)
|
|
|
2.5
|
|
|
|
67.7
|
|
|
|
1.2
|
|
|
|
114.0
|
|
|
|
2.2
|
|
|
|
136.2
|
|
Total Cash Flows (for the respective period)
|
|
|
47.0
|
|
|
|
100.4
|
|
|
|
24.9
|
|
|
|
183.0
|
|
|
|
21.2
|
|
|
|
260.6
|
|
The original purchase price reflects what we paid for the
receivables from 1998 through the end of the respective period.
The cumulative aggregate managed portfolio balance is the
original aggregate amount owed by the borrowers at the end of
the respective period. Additional differences between year to
year period end balances may result from the transfer of
portfolios between the interest method and the cost recovery
method. We purchase consumer receivables at substantial
discounts from the face amount. We record finance income on our
receivables under either the cost recovery or interest method.
The receivable carrying value represents the current basis in
the receivables after collections and amortization of the
original price.
Collections
Represented by Account Sales
|
|
|
|
|
|
|
|
|
|
|
Collections
|
|
|
|
|
Represented
|
|
Finance
|
|
|
By account
|
|
Income
|
Year
|
|
Sales
|
|
Recognized
|
|
2009
|
|
$
|
8,662,000
|
|
|
$
|
3,085,000
|
|
2008
|
|
|
20,395,000
|
|
|
|
9,361,000
|
|
2007
|
|
|
54,193,000
|
|
|
|
25,164,000
|
|
35
Portfolio
Performance (1)
The following table summarizes our historical portfolio purchase
price and cash collections on interest method portfolios on an
annual vintage basis since October 1, 2001 through
September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Net Cash
|
|
|
|
|
|
Estimated
|
|
|
|
|
Collections
|
|
Estimated
|
|
Total
|
|
Collections
|
Purchase
|
|
Purchase
|
|
Including
|
|
Remaining
|
|
Estimated
|
|
as a Percentage
|
Period
|
|
Price(2)
|
|
Cash Sales(3)
|
|
Collections(4)
|
|
Collections(5)
|
|
of Purchase Price
|
|
2001
|
|
$
|
65,120,000
|
|
|
$
|
105,427,000
|
|
|
$
|
|
|
|
$
|
105,427,000
|
|
|
|
162
|
%
|
2002
|
|
|
36,557,000
|
|
|
|
47,955,000
|
|
|
|
|
|
|
|
47,955,000
|
|
|
|
131
|
%
|
2003
|
|
|
115,626,000
|
|
|
|
209,396,000
|
|
|
|
1,392,000
|
|
|
|
210,788,000
|
|
|
|
182
|
%
|
2004
|
|
|
103,743,000
|
|
|
|
177,670,000
|
|
|
|
682,000
|
|
|
|
178,352,000
|
|
|
|
172
|
%
|
2005
|
|
|
126,023,000
|
|
|
|
198,857,000
|
|
|
|
10,931,000
|
|
|
|
209,788,000
|
|
|
|
166
|
%
|
2006(6)
|
|
|
163,392,000
|
|
|
|
225,327,000
|
|
|
|
22,479,000
|
|
|
|
247,806,000
|
|
|
|
152
|
%
|
2007(7)
|
|
|
109,235,000
|
|
|
|
73,602,000
|
|
|
|
37,865,000
|
|
|
|
111,467,000
|
|
|
|
102
|
%
|
2008
|
|
|
26,626,000
|
|
|
|
25,661,000
|
|
|
|
3,936,000
|
|
|
|
29,597,000
|
|
|
|
111
|
%
|
2009
|
|
|
19,129,000
|
|
|
|
3,043,000
|
|
|
|
19,240,000
|
|
|
|
22,283,000
|
|
|
|
116
|
%
|
|
|
|
(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), plus third party commissions |
|
(3) |
|
Cash collections include: net collections from our third-party
collection agencies and attorneys, collections from our in-house
efforts and collections represented by account sales. |
|
(4) |
|
Does not include estimated collections from portfolios that are
zero basis |
|
(5) |
|
Total estimated collections refer to the actual net cash
collections, including cash sales, plus estimated remaining
collections. |
|
(6) |
|
Four portfolios purchased in 2006 with an aggregate purchase
price of $36,845,000 were reclassified from the interest method
to the cost recovery method during fiscal year 2009. The
following table describes the impact of the reclassification on
the year 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Net Cash
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Collections
|
|
|
Estimated
|
|
|
Total
|
|
|
Collections
|
|
|
|
Purchase
|
|
|
Including
|
|
|
Remaining
|
|
|
Estimated
|
|
|
as a Percentage
|
|
|
|
Price
|
|
|
Cash Sales
|
|
|
Collections
|
|
|
Collections
|
|
|
of Purchase Price
|
|
|
As reported 2007
|
|
$
|
200,237,000
|
|
|
$
|
149,368,000
|
|
|
$
|
160,913,000
|
|
|
$
|
310,281,000
|
|
|
|
155
|
%
|
Less: Portfolio purchases transferred to cost recovery method in
2009
|
|
|
36,845,000
|
|
|
|
15,112,000
|
|
|
|
34,539,000
|
|
|
|
49,651,000
|
|
|
|
135
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest method Portfolios
|
|
$
|
163,392,000
|
|
|
$
|
134,256,000
|
|
|
$
|
126,374,000
|
|
|
$
|
260,630,000
|
|
|
|
160
|
%
|
2008 and 2009 Activity
|
|
|
|
|
|
|
91,071,000
|
|
|
|
(103,895,000
|
)
|
|
|
(12,824,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported 2009
|
|
$
|
163,392,000
|
|
|
$
|
225,327,000
|
|
|
$
|
22,479,000
|
|
|
$
|
247,806,000
|
|
|
|
152
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
(7) |
|
The Portfolio Purchase was reclassified from the interest method
to the cost recovery method during the third quarter of fiscal
year 2008. The following table describes the impact of the
reclassification on the year 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Net Cash
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Collections
|
|
|
Estimated
|
|
|
Total
|
|
|
Collections
|
|
|
|
Purchase
|
|
|
Including
|
|
|
Remaining
|
|
|
Estimated
|
|
|
as a Percentage
|
|
|
|
Price
|
|
|
Cash Sales
|
|
|
Collections
|
|
|
Collections
|
|
|
of Purchase Price
|
|
|
As reported 2007
|
|
$
|
384,850,000
|
|
|
$
|
69,409,000
|
|
|
$
|
460,205,000
|
|
|
$
|
529,614,000
|
|
|
|
138
|
%
|
Less: Portfolio Purchase
|
|
|
(275,615,000
|
)
|
|
|
(45,499,000
|
)
|
|
|
(334,701,000
|
)
|
|
|
(380,200,000
|
)
|
|
|
(138
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest method Portfolios without Portfolio Purchase-2007
|
|
$
|
109,235,000
|
|
|
$
|
23,910,000
|
|
|
$
|
125,504,000
|
|
|
$
|
149,414,000
|
|
|
|
137
|
%
|
2008 and 2009 Activity
|
|
|
|
|
|
|
49,692,000
|
|
|
|
(87,639,000
|
)
|
|
|
(37,947,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported 2009
|
|
$
|
109,235,000
|
|
|
$
|
73,602,000
|
|
|
$
|
37,865,000
|
|
|
$
|
111,467,000
|
|
|
|
102
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 finance income from these accounts
acquired for liquidation. Since we purchased these accounts at
significant discounts, we anticipate collecting only a portion
of the face amounts.
For the year ended September 30, 2009, we recognized
finance income of $1.9 million under the cost recovery
method because we collected $1.9 million in excess of our
purchase price on certain of these portfolios. In addition, we
earned $68.2 million of finance income under the interest
method based on actuarial computations which, in turn, are based
on actual collections during the period and on what we project
to collect in future periods. During the year ended
September 30, 2009, we purchased portfolios with an
aggregate purchase price of $19.6 million with a face value
(gross contracted amount) of $577.0 million.
New
Accounting Pronouncements
In June 2009, the FASB issued ASC 105 Generally Accepted
Accounting Principles, (ASC 105). Under
ASC 105, The FASB Accounting Standards Codification
(Codification) is now the source of authoritative
U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under
authority of the federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of
ASC 105, the Codification superseded all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered
non-SEC accounting literature not included in the Codification
is now non-authoritative. ASC 105 is effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. In the FASBs views, the issuance
of ASC 105 and the Codification will not change GAAP, except for
those nonpublic nongovernmental entities that must now apply the
American Institute to Certified Public Accountants Technical
Inquiry Service Section 5100, Revenue
Recognition
paragraphs 38-76.
The adoption of ASC 105 has been reflected in the Companys
consolidated financial statements.
In June 2009, the Financial Accounting Standards Board issued
FASB Statement 167, Amendments to FASB Interpretation
No. 46(R), which is not yet reflected in the FASB ASC, to
improve how enterprises account for and disclose their
involvement with variable interest entities (VIEs), which
are special-purpose entities, and other entities whose equity at
risk is insufficient or lack certain characteristics. Among
other things, Statement 167 changes how an entity determines
whether it is the primary beneficiary of a variable interest
entity (VIE) and whether that VIE should be consolidated. The
new Statement requires an entity to provide significantly more
disclosures about its involvement with VIEs. As a result, the
Company must comprehensively review its involvements with VIEs
and potential VIEs, including entities previous considered to be
qualifying special purpose entities, to determine the effect on
its consolidated financial statements and related disclosures.
Statement 167 is effective as of the beginning of a reporting
entitys first annual reporting period that begins after
November 15, 2009 and for interim periods within the first
annual reporting period. Earlier application is
37
prohibited. The Company does not believe that the adoption of
Statement 167 will have a significant effect on its consolidated
financial statements.
In May 2009, the FASB issued FASB ASC 855, Subsequent Events,
(ASC 855) to incorporate the accounting and
disclosures requirements for subsequent events into GAAP. ASC
855 introduces new terminology, defines a date through which
management must evaluate subsequent events, and lists the
circumstances under which an entity must recognize and disclose
events or transactions occurring after the balance-sheet date.
The Company adopted ASC 855 as of June 30, 2009, which was
the required effective date. The Company evaluated its
September 30, 2009 financial statements for subsequent
events through December 29, 2009.
In April 2009 the FASB issued ASC 718, Compensation
Stock Compensation, (ASC 718). ASC 718 expands
disclosures for fair value of financial instruments that are
within the scope of FASB statement fair value disclosures in
interim period reports. ASC 718 is effective for interim
reporting periods ending after June 15, 2009. ASC 718
expresses the views of the staff regarding the use of a
simplified method in developing an estimate of
expected term of plain vanilla share options. In
particular, the staff indicated in ASC 718 that it will accept a
companys election to use the simplified method, regardless
of whether the company has sufficient information to make more
refined estimates of expected term. At the time ASC 718 was
issued, the staff believed that more detailed external
information about employee exercise behavior (e.g., employee
exercise patterns by industry
and/or other
categories of companies) would, over time, become readily
available to companies. Therefore, the staff stated in ASC 718
that it would not expect a company to use the simplified method
for share option grants after December 31, 2007. The staff
understands that such detailed information about employee
exercise behavior might not have been widely available by
December 31, 2007. Accordingly, the staff will continue to
accept, under certain circumstances, the use of the simplified
method beyond December 31, 2007. This portion of ASC 718
does not have a material impact on the Company.
Inflation
We believe that inflation has not had a material impact on our
results of operations for the years ended September 30,
2009, 2008 and 2007.
Seasonality
and Trends
Our management believes that our operations may, to some extent,
be affected by high delinquency rates and by lower recoveries on
consumer receivables acquired for liquidation during or shortly
following certain holiday periods and during the summer months.
In addition, on occasion the market for acquiring distressed
receivables does become more competitive thereby possibly
diminishing our ability to acquire such distressed receivables
at attractive prices in such periods
|
|
Item 7A.
|
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 September 30, 2009, our Credit Facility, all
of which is variable rate debt, had an outstanding balance of
$18.3 million and our Receivables Financing Agreement, all
of which is variable rate debt, had an outstanding balance of
$104.3 million. A 25 basis-point increase in interest rates
would have increased our annual interest expense by
approximately $400,000 based on the average debt obligation
outstanding during the fiscal year. We do not currently invest
in derivative, financial or commodity instruments.
38
|
|
Item 8.
|
Financial
Statements And Supplementary Data.
|
The Financial Statements of the Company, the Notes thereto and
the Report of Independent Registered Public Accounting Firms
thereon required by this item appears in this report on the
pages indicated in the following index:
|
|
|
|
|
Index to Audited Financial Statements:
|
|
Page
|
|
Reports of Independent Registered Public Accounting Firms
|
|
|
F-2
|
|
Consolidated Balance Sheets September 30, 2009
and 2008
|
|
|
F-4
|
|
Consolidated Statements of Operations Years ended
September 30, 2009, 2008 and 2007
|
|
|
F-5
|
|
Consolidated Statements of Shareholders Equity
Years ended September 30, 2009, 2008 and 2007
|
|
|
F-6
|
|
Consolidated Statements of Cash Flows Years ended
September 30, 2009, 2008 and 2007
|
|
|
F-7
|
|
Notes to Consolidated Financial Statements
|
|
|
F-8
|
|
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
None
|
|
Item 9A.
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
The Companys chief executive officer and chief financial
officer have reviewed and evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in
Exchange Act
Rules 240.13a-15(e)
and
240.15d-15(e))
as of the end of the period ended September 30, 2009. Based
on that evaluation, they have concluded that the Companys
disclosure controls and procedures as of the end of the period
covered by this report are effective in providing them with
timely material information relating to the Company required to
be disclosed in the reports the Company files or submits under
the Exchange Act.
Managements
Annual Report on Internal Control Over Financial
Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting (as defined in
Rule 13a-15(f)
under the Exchange Act). Under the supervision and with the
participation of the Companys management, including its
principal executive officer and principal financial officer, the
Company conducted an assessment of the effectiveness of its
internal control over financial reporting. In making this
assessment, the Company used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control Integrated Framework. Based on
managements assessment the Company believes that, as of
September 30, 2009, the Companys internal control
over financial reporting is effective based on those criteria.
The Companys internal control system was designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles in the U.S. The Companys
internal control over financial reporting includes those
policies and procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally
accepted in the U.S., and that receipts and expenditures of the
Company are being made only in accordance with authorization of
management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of the Companys assets that could have a material effect
on the consolidated financial statements.
39
There are inherent limitations to the effectiveness of any
control system. A control system, no matter how well conceived
and operated, can provide only reasonable assurance that its
objectives are met. No evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions or because the degree of
compliance with the policies and procedures may deteriorate.
Our independent registered public accounting firm, Grant
Thornton LLP, audited the Companys internal control over
financial reporting as of September 30, 2009 and their
report dated December 29, 2009 expressed an unqualified
opinion on our internal control over financial reporting and is
included in this Item 9A.
Changes
in Internal Controls over Financial Reporting
There have not been any changes in the Companys internal
controls over financial reporting identified in connection with
an evaluation thereof that occurred during the Companys
fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect the Companys
internal control over financial reporting.
40
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Asta Funding, Inc.
We have audited Asta Funding, Inc. and subsidiaries (the
Company) internal control over financial reporting
as of September 30, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting. Our responsibility is to express an
opinion on the Companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Asta Funding, Inc. and subsidiaries maintained,
in all material respects, effective internal control over
financial reporting as of September 30, 2009, based on
criteria established in Internal Control-Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Asta Funding, Inc. and
subsidiaries as of September 30, 2009 and 2008 and the
related consolidated statements of operations,
stockholders equity and comprehensive income, and cash
flows for each of the years in the two-year period ended
September 30, 2009, and our report dated December 29,
2009, expressed an unqualified opinion.
New York, New York
December 29, 2009
41
|
|
Item 9B.
|
Other
Information.
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
Directors
and Executive Officers
Information contained under the caption Directors,
Executive Officers, and Corporate Governance in our
definitive Proxy Statement, to be filed with the Commission on
or before January 28, 2010, is incorporated by reference in
response to this Item 10.
We have adopted a Code of Ethics for our Senior Financial
Officers that is incorporated into this
Form 10-K
in Exhibit 14.1.
|
|
Item 11.
|
Executive
Compensation.
|
Information contained under the caption Executive
Compensation in our definitive Proxy Statement, to be
filed with the Commission on or before January 28, 2010, is
incorporated by reference in response to this Item 11.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
Information contained under the caption Security Ownership
of Certain Beneficial Owners and Management in our
definitive Proxy Statement, to be filed with the Commission on
or before January 28, 2010, is incorporated by reference in
response to this Item 12.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Information contained under the caption Certain
Relationships and Related Transactions in our definitive
Proxy Statement, to be filed with the Commission on or before
January 28, 2010, is incorporated by reference in response
to this Item 13.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
Information contained under the caption Principal
Accounting Fees and Services in our definitive Proxy
Statement to be filed with the Commission on or before
January 28, 2010 is incorporated by reference in response
to this Item 14.
Part IV
Item 15. Exhibits,
Financial Statement Schedules.
Exhibits designated by the symbol * are filed with this Annual
Report on
Form 10-K.
All exhibits not so designated are incorporated by reference to
a prior filing as indicated.
Exhibits designated by the symbol are management
contracts or compensatory plans or arrangements that are
required to be filed with this report pursuant to this
Item 15.
The Company undertakes to furnish to any stockholder so
requesting a copy of any of the following exhibits upon payment
to us of the reasonable costs incurred by us in furnishing any
such exhibit.
(a) The following documents are filed as part of this report
1. Financial Statements See Index to
Consolidated Financial Statements in Part II, Item 8
2. Exhibits
42
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
3
|
.1
|
|
Certificate of Incorporation.(1)
|
|
3
|
.2
|
|
Amendment to Certificate of Incorporation(3)
|
|
3
|
.3
|
|
By laws.(2)
|
|
10
|
.1
|
|
Asta Funding, Inc 1995 Stock Option Plan as Amended(1)
|
|
10
|
.2
|
|
Asta Funding, Inc. 2002 Stock Option Plan(3)
|
|
10
|
.3
|
|
Asta Funding, Inc. Equity Compensation Plan(6)
|
|
10
|
.4
|
|
Third Amended and Restated Loan and Security Agreement dated
May 11, 2004, between the Company and Israel Discount Bank
of NY(5)
|
|
10
|
.5
|
|
Fourth Amended and Restated Loan and Security Agreement dated
July 10, 2006, between the Company and Israel Discount Bank
of NY(7)
|
|
10
|
.6
|
|
Lease agreement between the Company and 210 Sylvan Avenue LLC
dated July 29, 2005(8)
|
|
10
|
.7
|
|
Receivables Finance Agreement dated March 2, 2007 between
the Company and the Bank of Montreal(10)
|
|
10
|
.8
|
|
Subservicing Agreement between the Company and the Subservicer
dated March 2, 2007(17)
|
|
10
|
.9
|
|
Purchase and Sale Agreement dated February 5, 2007(11)
|
|
10
|
.10
|
|
Third Amendment to the Fourth Amended and Restated Loan and
Security Agreement dated March 30, 2007, between the
Company and Israel Discount Bank(12)
|
|
10
|
.11
|
|
Fourth Amendment to the Fourth Amended and Restated Loan and
Security Agreement dated May 10, 2007, between the Company
and Israel Discount Bank(13)
|
|
10
|
.12
|
|
Fifth Amendment to the Fourth Amended and Restated Loan and
Security Agreement dated June 27, 2007, between the Company
and Israel Discount Bank(14)
|
|
10
|
.13
|
|
First Amendment to the Receivables Finance Agreement dated
July 1, 2007 between the Company and Bank of Montreal(15)
|
|
10
|
.14
|
|
Sixth Amendment to the Fourth Amended and Restated Loan and
Security Agreement dated December 4, 2007, between the
Company and Israel Discount Bank(16)
|
|
10
|
.15
|
|
Second Amendment to the Receivables Financing Agreement dated
December 27, 2007(18)
|
|
10
|
.16
|
|
Third Amendment to the Receivables Financing Agreement dated
May 19, 2008(19)
|
|
10
|
.17
|
|
Amended and Restated Servicing Agreement dated May 19, 2008
between the Company and The Bank of Montreal(19)
|
|
10
|
.18
|
|
Subordinated Promissory Note between Asta Funding, Inc and Asta
Group, Inc. dated April 29, 2008(20)
|
|
10
|
.19
|
|
Seventh Amendment to the Fourth Amended and Restated Loan
Agreement, Dated February 20, 2009 between the Company and
IDB(21)
|
|
10
|
.20
|
|
Form of Amended and Restated Revolving Note between Asta Funding
and IDB, as lending agent(22)
|
|
10
|
.21
|
|
Fourth Amendment to the Receivables Financing Agreement dated
February 20, 2009 between the Company and Bank of
Montreal(23)
|
|
10
|
.22
|
|
Subordinated Guarantor Security Agreement dated
February 20, 2009 to Bank of Montreal(24)
|
|
10
|
.23
|
|
Subordinated Limited Recourse Guaranty Agreement dated
February 20, 2009(25)
|
|
10
|
.24
|
|
Subordinated Guarantor Security Agreement dated
February 20, 2009 to Asta Group, Inc.(26)
|
|
10
|
.25
|
|
Subordinated Limited Recourse Guaranty Agreement dated
February 20, 2009 to Asta Group.(27)
|
|
10
|
.26
|
|
Form of Intercreditor Agreement between Asta Funding and IDB as
lending agent(28)
|
|
10
|
.27
|
|
Amended and Restated Management Agreement, dated as of
January 16, 2009, between Palisades Collection, L.L.C., and
[*].(29)
|
|
10
|
.28
|
|
Amended and Restated Master Servicing Agreement, dated as of
January 16, 2009, between Palisades Collection, L.L.C., and
[*](30)
|
43
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
10
|
.29
|
|
First Amendment to Amended and Restated Master Servicing
Agreement, dated as of September 16, 2007, by and among
Palisades Collection, L.L.C., and [*], and [*](31)
|
|
10
|
.30
|
|
Consulting Services Agreement dated November 30, 2009
between Cameron E. Williams and the Company.(32)
|
|
10
|
.31
|
|
Loan Agreement Between Asta Funding and Bank Leumi dated
December 14, 2009.(33)
|
|
10
|
.32
|
|
Indemnification agreement between Asta Funding and GMS Family
Investors LLC.*
|
|
14
|
.1
|
|
Code of Ethics for Senior Financial Officers*
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm*
|
|
23
|
.2
|
|
Consent of Independent Registered Public Accounting Firm*
|
|
31
|
.1
|
|
Certification of Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
31
|
.2
|
|
Certification of Registrants Chief Financial Officer,
Robert J. Michel, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
32
|
.1
|
|
Certification of the Registrants Chief Executive Officer,
Gary Stern, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
|
|
32
|
.2
|
|
Certification of the Registrants Chief Financial Officer,
Robert J. Michel, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
(1) |
|
Incorporated by reference to an Exhibit to Asta Fundings
Registration Statement on
Form SB-2
(File No. 33-97212). |
|
(2) |
|
Incorporated by reference to Exhibit 3.1 to Asta
Fundings Annual Report on
Form 10-KSB
for the year ended September 30, 1998. |
|
(3) |
|
Incorporated by reference to an Exhibit to Asta Fundings
Quarterly Report on
Form 10-QSB
for the three months ended March 31, 2002. |
|
(4) |
|
Not used. |
|
(5) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed May 19, 2004. |
|
(6) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed March 3, 2006. |
|
(7) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed July 12, 2006. |
|
(8) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed August 2, 2005. |
|
(9) |
|
Not used |
|
(10) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Quarterly Report on
Form 10-Q
for the three months ended March 31, 2007. |
|
(11) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed February 9, 2007 |
|
(12) |
|
Incorporated by reference to Exhibit 10.2 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended March 31, 2007 |
|
(13) |
|
Incorporated by reference to Exhibit 10.3 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended March 31, 2007 |
|
(14) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended June 30, 2007 |
|
(15) |
|
Incorporated by reference to Exhibit 10.2 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended June 30, 2007. |
|
(16) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed December 10, 2007 |
|
(17) |
|
Incorporated by reference to Exhibit 10.4 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended March 31, 2007 |
44
|
|
|
(18) |
|
Incorporated by reference to Exhibit 10.15 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2007 |
|
(19) |
|
Incorporated by reference to Exhibit 10.15 to Asta
Fundings Quarterly Report on
Form 10-Q
for the three months ended March 31, 2008 |
|
(20) |
|
Incorporated by reference to Exhibit 10.18 to Asta
Fundings Current Report on
Form 8-K
filed May 1, 2008 |
|
(21) |
|
Incorporated by reference to Exhibit 10.19 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(22) |
|
Incorporated by reference to Exhibit 10.20 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(23) |
|
Incorporated by reference to Exhibit 10.21 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(24) |
|
Incorporated by reference to Exhibit 10.22 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(25) |
|
Incorporated by reference to Exhibit 10.23 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(26) |
|
Incorporated by reference to Exhibit 10.24 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(27) |
|
Incorporated by reference to Exhibit 10.25 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(28) |
|
Incorporated by reference to Exhibit 10.26 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(29) |
|
Incorporated by reference to Exhibit 10.27 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(30) |
|
Incorporated by reference to Exhibit 10.28 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(31) |
|
Incorporated by reference to Exhibit 10.29 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(32) |
|
Incorporated by reference to Exhibit 99.1 to Asta Fundings
Current Report on
Form 8-K
filed December 4, 2009 |
|
(33) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed December 18, 2009 |
45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ASTA FUNDING, INC.
Gary Stern
President and Chief Executive Officer
(Principal Executive Officer)
Dated: December 29, 2009
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Gary
Stern
Gary
Stern
|
|
Chairman of the Board, President, and Chief Executive Officer
|
|
December 29, 2009
|
|
|
|
|
|
/s/ Robert
J. Michel
Robert
J. Michel
|
|
Chief Financial Officer
Principal Financial Officer and
Accounting Officer
|
|
December 29, 2009
|
|
|
|
|
|
/s/ Arthur
Stern
Arthur
Stern
|
|
Chairman Emeritus and Director
|
|
December 29, 2009
|
|
|
|
|
|
/s/ Herman
Badillo
Herman
Badillo
|
|
Director
|
|
December 29, 2009
|
|
|
|
|
|
/s/ Edward
Celano
Edward
Celano
|
|
Director
|
|
December 29, 2009
|
|
|
|
|
|
/s/ Harvey
Leibowitz
Harvey
Leibowitz
|
|
Director
|
|
December 29, 2009
|
|
|
|
|
|
/s/ David
Slackman
David
Slackman
|
|
Director
|
|
December 29, 2009
|
|
|
|
|
|
/s/ Louis
A. Piccolo
Louis
A. Piccolo
|
|
Director
|
|
December 29, 2009
|
46
ASTA FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009 and 2008
ASTA
FUNDING, INC. AND SUBSIDIARIES
Contents
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Asta Funding, Inc.
We have audited the accompanying consolidated balance sheets of
Asta Funding, Inc. and subsidiaries (the Company) as
of September 30, 2009 and 2008 and the related consolidated
statements of operations, stockholders equity and
comprehensive income, and cash flows for each of the years in
the two-year period ended September 30, 2009. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Asta Funding, Inc. and subsidiaries as of
September 30, 2009 and 2008 and the results of their
operations and their cash flows for the years ended
September 30, 2009 and 2008, in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Asta
Funding, Inc. and subsidiaries internal control over
financial reporting as of September 30, 2009, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated
December 29, 2009 expressed an unqualified opinion.
New York, New York
December 29, 2009
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Asta Funding, Inc.
We have audited the accompanying consolidated statements of
operations, stockholders equity and cash flows of Asta
Funding, Inc. and subsidiaries for the year ended
September 30, 2007. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above
present fairly, in all material respects, the consolidated
results of operations and consolidated cash flows of Asta
Funding, Inc for the year ended September 30, 2007, in
conformity with accounting principles generally accepted in the
United States of America.
New York, New York
December 27, 2007
F-3
ASTA
FUNDING, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
2.385,000
|
|
|
$
|
3,623,000
|
|
Restricted cash
|
|
|
2,130,000
|
|
|
|
3,047,000
|
|
Consumer receivables acquired for liquidation (at net realizable
value)
|
|
|
208,261,000
|
|
|
|
449,012,000
|
|
Due from third party collection agencies and attorneys
|
|
|
2,573,000
|
|
|
|
5,070,000
|
|
Prepaid and income taxes receivable
|
|
|
47,727,000
|
|
|
|
|
|
Investment in venture
|
|
|
168,000
|
|
|
|
555,000
|
|
Furniture and equipment (net of accumulated depreciation of
$2,758,000 in 2009 and $2,367,000 in 2008)
|
|
|
538,000
|
|
|
|
762,000
|
|
Deferred income taxes
|
|
|
24,072,000
|
|
|
|
15,567,000
|
|
Other assets
|
|
|
2,902,000
|
|
|
|
3,500,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
290,756,000
|
|
|
$
|
481,136,000
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
122,622,000
|
|
|
$
|
213,485,000
|
|
Subordinated debt related party
|
|
|
8,246,000
|
|
|
|
8,246,000
|
|
Other liabilities
|
|
|
2,166,000
|
|
|
|
4,618,000
|
|
Dividends payable
|
|
|
286,000
|
|
|
|
571,000
|
|
Income taxes payable
|
|
|
|
|
|
|
6,315,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
133,320,000
|
|
|
|
233,235,000
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; authorized 5,000,000;
Issued none
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, authorized
30,000,000 shares, issued and outstanding
14,272,357 shares in 2009 and 14,276,158 in 2008
|
|
|
143,000
|
|
|
|
143,000
|
|
Additional paid-in capital
|
|
|
70,189,000
|
|
|
|
69,130,000
|
|
Retained earnings
|
|
|
87,058,000
|
|
|
|
178,925,000
|
|
Accumulated other comprehensive income (loss)
|
|
|
46,000
|
|
|
|
(297,000
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
157,436,000
|
|
|
|
247,901,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
290,756,000
|
|
|
$
|
481,136,000
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-4
ASTA
FUNDING, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income, net
|
|
$
|
70,156,000
|
|
|
$
|
115,295,000
|
|
|
$
|
138,356,000
|
|
Other income
|
|
|
134,000
|
|
|
|
200,000
|
|
|
|
2,181,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,290,000
|
|
|
|
115,495,000
|
|
|
|
140,537,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
25,915,000
|
|
|
|
29,561,000
|
|
|
|
25,450,000
|
|
Interest expense (2009 Related party $515,000;
2008 Related party $154,000)
|
|
|
8,452,000
|
|
|
|
17,881,000
|
|
|
|
18,246,000
|
|
Impairments of consumer receivables acquired for liquidation
|
|
|
183,500,000
|
|
|
|
53,160,000
|
|
|
|
9,097,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,867,000
|
|
|
|
100,602,000
|
|
|
|
52,793,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before equity in earnings in venture and income
taxes
|
|
|
(147,577,000
|
)
|
|
|
14,893,000
|
|
|
|
87,744,000
|
|
Equity in earnings in venture
|
|
|
65,000
|
|
|
|
55,000
|
|
|
|
225,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax (benefit) expense
|
|
|
(147,512,000
|
)
|
|
|
14,948,000
|
|
|
|
87,969,000
|
|
Income tax (benefit) expense
|
|
|
(56,787,000
|
)
|
|
|
6,119,000
|
|
|
|
35,703,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(90,725,000
|
)
|
|
$
|
8,829,000
|
|
|
$
|
52,266,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$
|
(6.36
|
)
|
|
$
|
0.62
|
|
|
$
|
3.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
$
|
(6.36
|
)
|
|
$
|
0.61
|
|
|
$
|
3.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,272,425
|
|
|
|
14,138,650
|
|
|
|
13,807,838
|
|
Diluted
|
|
|
14,272,425
|
|
|
|
14,553,346
|
|
|
|
14,691,861
|
|
See Notes to Consolidated Financial Statements
F-5
ASTA
FUNDING, INC. AND SUBSIDIARIES
For the years ended September 30, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance, September 30, 2006
|
|
|
13,755,157
|
|
|
$
|
138,000
|
|
|
$
|
61,803,000
|
|
|
$
|
122,321,000
|
|
|
$
|
|
|
|
$
|
184,262,000
|
|
Exercise of options
|
|
|
95,001
|
|
|
|
1,000
|
|
|
|
1,328,000
|
|
|
|
|
|
|
|
|
|
|
|
1,329,000
|
|
Restricted stock granted
|
|
|
68,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,140,000
|
|
|
|
|
|
|
|
|
|
|
|
1,140,000
|
|
Tax benefit arising from exercise of non qualified stock options
|
|
|
|
|
|
|
|
|
|
|
759,000
|
|
|
|
|
|
|
|
|
|
|
|
759,000
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,221,000
|
)
|
|
|
|
|
|
|
(2,221,000
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,266,000
|
|
|
|
|
|
|
|
52,266,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
|
13,918,158
|
|
|
|
139,000
|
|
|
|
65,030,000
|
|
|
|
172,366,000
|
|
|
|
|
|
|
|
237,535,000
|
|
Exercise of options
|
|
|
300,000
|
|
|
|
3,000
|
|
|
|
422,000
|
|
|
|
|
|
|
|
|
|
|
|
425,000
|
|
Restricted stock granted
|
|
|
58,000
|
|
|
|
1,000
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,013,000
|
|
|
|
|
|
|
|
|
|
|
|
1,013,000
|
|
Tax benefit arising from exercise of non qualified stock options
and vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
2,666,000
|
|
|
|
|
|
|
|
|
|
|
|
2,666,000
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,270,000
|
)
|
|
|
|
|
|
|
(2,270,000
|
)
|
Other comprehensive loss(net of tax benefit of $202,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(297,000
|
)
|
|
|
(297,000
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,829,000
|
|
|
|
|
|
|
|
8,829,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
|
14,276,158
|
|
|
|
143,000
|
|
|
|
69,130,000
|
|
|
|
178,925,000
|
|
|
|
(297,000
|
)
|
|
|
247,901,000
|
|
Exercise of options
|
|
|
533
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Restricted stock forfeited
|
|
|
(4,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
984,000
|
|
|
|
|
|
|
|
|
|
|
|
984,000
|
|
Tax benefit arising from exercise of non-qualified stock options
and vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
74,000
|
|
|
|
|
|
|
|
|
|
|
|
74,000
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,142,000
|
)
|
|
|
|
|
|
|
(1,142,000
|
)
|
Other comprehensive income (net of tax of $233,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343,000
|
|
|
|
343,000
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90,725,000
|
)
|
|
|
|
|
|
|
(90,725,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
|
14,272,357
|
|
|
$
|
143,000
|
|
|
$
|
70,189,000
|
|
|
$
|
87,058,000
|
|
|
$
|
46,000
|
|
|
$
|
157,436,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) is as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net (loss) income
|
|
$
|
(90,725,000
|
)
|
|
$
|
8,829,000
|
|
Other comprehensive income (loss), net of tax-foreign currency
translation
|
|
|
343,000
|
|
|
|
(297,000
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(90,382,000
|
)
|
|
$
|
8,532,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
46,000
|
|
|
$
|
(297,000
|
)
|
|
|
|
|
|
|
|
|
|
There were no elements of other comprehensive income for the
year ended September 30, 2007.
See Notes to Consolidated Financial Statements
F-6
ASTA
FUNDING, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(90,725,000
|
)
|
|
$
|
8,829,000
|
|
|
$
|
52,266,000
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,664,000
|
|
|
|
1,278,000
|
|
|
|
841,000
|
|
Deferred income taxes
|
|
|
(8,505,000
|
)
|
|
|
(2,634,000
|
)
|
|
|
(4,772,000
|
)
|
Impairments of consumer receivables acquired for liquidation
|
|
|
183,500,000
|
|
|
|
53,160,000
|
|
|
|
9,097,000
|
|
Stock based compensation
|
|
|
984,000
|
|
|
|
1,013,000
|
|
|
|
1,140,000
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes payable and receivable
|
|
|
(54,042,000
|
)
|
|
|
(1,846,000
|
)
|
|
|
(2,216,000
|
)
|
Due from third party collection agencies and attorneys
|
|
|
2,497,000
|
|
|
|
(161,000
|
)
|
|
|
(1,847,000
|
)
|
Other assets
|
|
|
(655,000
|
)
|
|
|
(136,000
|
)
|
|
|
(2,324,000
|
)
|
Other liabilities
|
|
|
(2,193,000
|
)
|
|
|
(3,725,000
|
)
|
|
|
3,390,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
32,525,000
|
|
|
|
55,778,000
|
|
|
|
55,575,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of consumer receivables acquired for liquidation
|
|
|
(19,552,000
|
)
|
|
|
(49,886,000
|
)
|
|
|
(440,895,000
|
)
|
Principal payments received from collection of consumer
receivables acquired for liquidation
|
|
|
71,936,000
|
|
|
|
81,645,000
|
|
|
|
114,421,000
|
|
Principal payments received from collections represented by
sales of consumer receivables acquired for liquidation
|
|
|
5,317,000
|
|
|
|
11,034,000
|
|
|
|
29,029,000
|
|
Effect of foreign exchange on consumer receivables acquired for
liquidation
|
|
|
(542,000
|
)
|
|
|
658,000
|
|
|
|
|
|
Cash distribution received from venture
|
|
|
387,000
|
|
|
|
1,485,000
|
|
|
|
3,925,000
|
|
Purchase of other investments
|
|
|
|
|
|
|
|
|
|
|
(5,777,000
|
)
|
Collections on other investments
|
|
|
|
|
|
|
|
|
|
|
8,251,000
|
|
Capital expenditures
|
|
|
(187,000
|
)
|
|
|
(361,000
|
)
|
|
|
(163,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in investing activities
|
|
|
57,359,000
|
|
|
|
44,575,000
|
|
|
|
(291,209,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,000
|
|
|
|
425,000
|
|
|
|
1,329,000
|
|
Tax benefit arising from exercise of non-qualified stock options
|
|
|
74,000
|
|
|
|
2,666,000
|
|
|
|
759,000
|
|
Change in restricted cash
|
|
|
917,000
|
|
|
|
2,647,000
|
|
|
|
(5,694,000
|
)
|
Dividends paid
|
|
|
(1,427,000
|
)
|
|
|
(2,256,000
|
)
|
|
|
(7,716,000
|
)
|
(Repayments) borrowings of debt, net
|
|
|
(90,695,000
|
)
|
|
|
(113,001,000
|
)
|
|
|
243,655,000
|
|
Advance under subordinated debt related party
|
|
|
|
|
|
|
8,246,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(91,130,000
|
)
|
|
|
(101,273,000
|
)
|
|
|
232,333,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(1,246,000
|
)
|
|
|
(920,000
|
)
|
|
|
(3,301,000
|
)
|
Effect of foreign exchange on cash
|
|
|
8,000
|
|
|
|
18,000
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
3,623,000
|
|
|
|
4,525,000
|
|
|
|
7,826,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
2,385,000
|
|
|
$
|
3,623,000
|
|
|
$
|
4,525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (Related Party: 2009 $472,000
2008
$112,000)
|
|
$
|
9,082,000
|
|
|
$
|
19,784,000
|
|
|
$
|
16,644,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
5,887,000
|
|
|
$
|
8,282,000
|
|
|
$
|
41,932,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-7
ASTA
FUNDING, INC. AND SUBSIDIARIES
September 30,
2009 and 2008
|
|
Note A
|
The Company and its Significant Accounting Policies
|
[1]
The Company:
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) and other subsidiaries, not
all wholly owned, and not considered material (the
Company) is engaged in the business of purchasing,
managing for its own account and servicing distressed consumer
receivables, including charged-off receivables, semi-performing
receivables and performing receivables. The primary 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
the Companys distressed consumer receivables are
MasterCard(R), Visa(R), and other credit card accounts which
were charged-off by the issuers for non-payment. The Company
acquires these portfolios at substantial discounts from their
face values. The discounts are based on the characteristics
(issuer, account size, debtor location and age of debt) of the
underlying accounts of each portfolio.
The consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States (U.S. GAAP) and industry practices.
[1A]
Liquidity:
The Companys cash requirements have been and will continue
to be significant. In the past we have depended upon external
financing to acquire consumer receivables, fund operating
expenses, interest and income taxes. If approved, dividends paid
is also a significant use of cash. As our revolving debt level
decreases, our dependency on external sources to fund the
acquisition of portfolios debt, pay operating expenses,
dividends interest and taxes should be greatly reduced over the
next 12 months. Effective December 14, 2009, the Eighth
Amendment to the Fourth Amended and Restated Loan Agreement (the
Credit Facility) with a consortium of banks
(The Bank Group) has been repaid and replaced with a
short-term credit facility (the Short-Term Credit
Facility) with another lending institution. This Short
Term Credit Facility will limit our ability to acquire
significantly-sized consumer receivable portfolios; however our
ability to purchase small- to medium-sized portfolios can be
funded out of operating cash flows, with the ability of the
Short-Term Credit Facility to fund larger portfolios if the
right opportunity is available. See Note O
Subsequent Events for more information. As of December 29,
2009, the outstanding amount on the Bank of Montreal
(BMO) facility (Receivables Financing
Agreement) that financed the $6.9 billion in face
value receivables for a purchase price of $300 million,
(the Portfolio Purchase) is $99.7 million. We
continue to pay down the balance from the collections of the
Portfolio Purchase.
Net collections decreased $60.6 million or 28.8% from
$208.0 million in fiscal year 2008 to $147.4 million
in fiscal year 2009. Although the Companys collections
deteriorated from the prior year, the Company believes its net
cash collections over the next twelve months will be sufficient
to cover its operating expenses, service debt and pay interest.
See Note D - Debt and Subordinated Debt-related party, for
further information.
[2]
Principles of consolidation:
The 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.
F-8
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[3]
Cash and cash equivalents and restricted cash:
The Company considers all highly liquid investments with a
maturity of three months or less at the date of purchase to be
cash equivalents.
The Company maintains cash balances in depository institutions
mandated by the Companys lenders. Management periodically
evaluates the creditworthiness of such institutions. Cash
balances exceed Federal Deposit Insurance Corporation
(FDIC) limits from time to time.
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, and
other affiliates (collectively, the Sellers), under
which we agreed to acquire the Portfolio Purchase 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, which
recovery has not yet occurred. The Portfolio Purchase (now owned
by Palisades XVI) predominantly consists of credit card
accounts and includes some accounts in collection litigation and
accounts as to which the Sellers have been awarded judgments.
The transaction was consummated on March 5, 2007. To
finance this purchase, the Company entered into a Receivables
Financing Agreement with BMO as the funding source, consisting
of debt with full recourse only to Palisades XVI, and bearing an
interest rate which approximates 170 basis points over
LIBOR. The term of the agreement was originally three years. All
assets of Palisades XVI, principally the Portfolio Purchase, are
pledged to secure such borrowing.
As part of the Receivables Financing Agreement all proceeds
received as a result of the net collections from the Portfolio
Purchase are to be applied to interest and principal of the
underlying loan. The restricted cash at September 30, 2009
represents cash on hand, substantially all of which is
designated to be paid to our lender subsequent to September 30,
2009. The lender has mandated in which depository institutions
the cash is to be maintained.
[4]
Income recognition, Impairments and Accretable yield
adjustments:
Income
Recognition
The Company accounts for its investment in consumer receivables
acquired for liquidation using the interest method under the
guidance of FASB Accounting Standards Codification
(ASC) 310, Receivables Loans and Debt
Securities Acquired with Deteriorated Credit Quality, (ASC
310). In 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.
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). ASC 310 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. ASC 310 initially freezes the internal rate of
return (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.
Under ASC 310, 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.
Finance income is recognized on cost recovery portfolios after
the carrying value has been fully recovered through collections
or amounts written down.
F-9
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[4]
Income recognition, Impairments and Accretable yield
adjustments: (Continued)
Impairments
and accretable yield adjustments
The Company accounts for its impairments in accordance with ASC
310, which provides guidance on how to 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 are recognized prospectively through an adjustment of the
internal rate of return while decreases in expected cash flows
are recognized as impairments. ASC 310 makes it more likely that
impairment losses and accretable yield adjustments for
portfolios performances which exceed original collection
projections 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. As a result of the slower economy and other factors
that resulted in slower collections on certain portfolios,
impairments of $183.5 million were recorded in fiscal year
2009, of which $108.5 million related to the interest
method portfolios and $75.0 million related to cost
recovery method portfolios. During fiscal year 2008 all of the
$53.2 million in impairment charges were recorded to
interest method portfolios. Finance income is not recognized on
cost recovery method portfolios until the cost of the portfolio
is fully recovered. Collection projections are performed on both
interest method and cost recovery method portfolios. With regard
to the cost recovery portfolios, if collection projections
indicate the carrying value will not be recovered a write down
in value is required. There were no accretable yield adjustments
recorded in the fiscal years ended September 30, 2009 and
2008.
In the quarter ended June 30, 2008, the Company
discontinued using the interest method for income recognition
under ASC 310 for the Portfolio Purchase. The recognition of
income under ASC 310 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, ASC
310 permits 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, the lack of reasonable delivery of media
requests, the lack of validation of certain account components,
and the sale of the primary servicer (which was commonly owned
by the seller), the Company determined that it no longer had 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. The Company will
recognize income only after it has recovered its carrying value,
which, as of September 30, 2009 was approximately
$121.5 million. There can be no assurance as to when or if
the carrying value will be recovered. The change to the cost
recovery method was not done to avoid additional impairment
charges. Prior to using the cost recovery method, impairment
charges totaling $30.3 million were recognized during the
first six months of fiscal year 2008.
Our analysis of the timing and amount of cash flows to be
generated by our portfolio purchases are based on the following
attributes:
|
|
|
|
|
the type of receivable, the location of the debtor and the
number of collection agencies previously attempting to collect
the receivables in the portfolio. We have found that there are
better states to try to collect receivables and we factor in
both better and worse states when establishing our initial cash
flow expectations.
|
|
|
|
the average balance of the receivables influences our analysis
in that lower average balance portfolios tend to be more
collectible in the short-term and higher average balance
portfolios are more appropriate for our law suit strategy and
thus yield better results over the longer term. As we have
significant experience with both types of balances, we are able
to factor these variables into our initial expected cash flows;
|
F-10
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[4]
Income recognition, Impairments and Accretable yield
adjustments: (Continued)
|
|
|
|
|
the age of the receivables, the number of days since charge-off,
any payments since charge-off, and the credit guidelines of the
credit originator also represent factors taken into
consideration in our estimation process . For example, older
receivables might be more difficult
and/or
require more time and effort to collect;
|
|
|
|
past history and performance of similar assets acquired. As we
purchase portfolios of like assets, we accumulate a significant
historical data base on the tendencies of debtor repayments and
factor this into our initial expected cash flows;
|
|
|
|
our ability to analyze accounts and resell accounts that meet
our criteria;
|
|
|
|
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
through the lawsuit strategy and, conversely, debtors without
jobs or property are less likely to repay their obligation. We
believe that debtors with jobs or property are more likely to
repay because courts have mandated the debtor must pay the debt.
Ultimately, the debtor with property will pay to clear title or
release a lien. We also believe that these debtors generally
might take longer to repay and that is factored into our initial
expected cash flows; and
|
|
|
|
credit standards of issuer.
|
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 sales. 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 accounted for on the interest method 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 expenses.
Additionally, when considering larger portfolio purchases of
accounts, or portfolios from issuers with whom we have 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
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 collections, for
portfolio purchases acquired in fiscal year 2009 we have
extended our time frame of the expectation of recovering 100% of
our invested capital within a
24-39 month
period from an
18-28 month
period, and the expectation of recovering
130-140%
over 7 years which is an increase from the previous
5 year expectation. 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 is recorded on portfolios
accounted for on the interest method. 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.
F-11
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[5]
Commissions and fees:
Commissions and fees are the contractual commissions earned by
third party collection agencies and attorneys, and direct costs
associated with the collection effort- generally court costs.
The Company expects to continue to purchase portfolios and
utilize third party collection agencies and attorney networks.
[6]
Furniture, equipment and leasehold improvements:
Furniture and equipment is stated at cost. Depreciation is
provided using the straight-line method over the estimated
useful lives of the assets (5 to 7 years). Amortization on
leasehold improvements is provided by the straight line-method
of the remaining life of the respective lease. An accelerated
depreciation method is used for tax purposes.
[7]
Income taxes:
Deferred federal and state taxes arise from (i) recognition
of finance income collected for tax purposes, but not yet
recognized for financial reporting; (ii) provision for
impairments/credit losses, all resulting in timing differences
between financial accounting and tax reporting, and
(iii) amortization of leasehold improvements resulting in
timing differences between financial accounting and tax
reporting.
[8]
Net (loss) income per share:
Basic per share data is determined by dividing net income by the
weighted average shares outstanding during the period. Diluted
per share data is computed by dividing net income by the
weighted average shares outstanding, assuming all dilutive
potential common shares were issued. The assumed proceeds from
the exercise of dilutive options are calculated using the
treasury stock method based on the average market price for the
period.
The following table presents the computation of basic and
diluted per share data for the years ended September 30,
2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
Net
|
|
|
Average
|
|
|
Share
|
|
|
Net
|
|
|
Average
|
|
|
Share
|
|
|
Net
|
|
|
Average
|
|
|
Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic
|
|
$
|
(90,725,000
|
)
|
|
|
14,272,425
|
|
|
$
|
(6.36
|
)
|
|
$
|
8,829,000
|
|
|
|
14,138,650
|
|
|
$
|
0.62
|
|
|
$
|
52,266,000
|
|
|
|
13,807,838
|
|
|
$
|
3.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414,696
|
|
|
|
|
|
|
|
|
|
|
|
884,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(90,725,000
|
)
|
|
|
14,272,425
|
|
|
$
|
(6.36
|
)
|
|
$
|
8,829,000
|
|
|
|
14,553,346
|
|
|
$
|
0.61
|
|
|
$
|
52,266,000
|
|
|
|
14,691,861
|
|
|
$
|
3.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009, 133,250 options at a weighted
average exercise price of $8.30 were not included in the diluted
earnings per share calculation as they were anti-dilutive. At
September 30, 2008, 400,160 options at a weighted average
exercise price of $18.70 were not included in the diluted
earnings per share calculation as they were anti-dilutive. There
were no anti-dilutive securities at September 30, 2007.
[9]
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. With respect to income
recognition
F-12
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
under the interest method, the Company takes into consideration
the relative credit quality of the underlying receivables
constituting the portfolio acquired, the strategy involved to
maximize the collections thereof, the time required to implement
the collection strategy as well as other factors to estimate the
anticipated cash flows. Actual results could differ from those
estimates including managements estimates of future cash
flows and the resultant allocation of collections between
principal and interest resulting therefrom. Downward revisions
to estimated cash flows will result in impairments.
[10]
Stock-based compensation:
The Company accounts for stock-based employee compensation under
FASB ASC 718, Compensation Stock Compensation,
(ASC 718). ASC 718 requires that compensation
expense associated with stock options and vesting of restricted
stock awards be recognized in the statement of operations.
[11]
Impact of Recently Issued Accounting Standards:
In June 2009, the FASB issued ASC 105, (ASC 105).
Under ASC 105, The FASB Accounting Standards Codification
(Codification) is now the source of authoritative
U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under
authority of the federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of
ASC 105, the Codification superseded all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered
non-SEC accounting literature not included in the Codification
is now non-authoritative. ASC 105 is effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. In the FASBs views, the issuance
of ASC 105 and the Codification will not change GAAP, except for
those nonpublic nongovernmental entities that must now apply the
American Institute to Certified Public Accountants Technical
Inquiry Service Section 5100, Revenue
Recognition
paragraphs 38-76.
The adoption of ASC 105 has been reflected in the Companys
consolidated financial statements.
In June 2009, the Financial Accounting Standards Board issued
FASB Statement 167, Amendments to FASB Interpretation
No. 46(R), which is not yet reflected in the FASB ASC, to
improve how enterprises account for and disclose their
involvement with variable interest entities (VIEs), which
are special-purpose entities, and other entities whose equity at
risk is insufficient or lack certain characteristics. Among
other things, Statement 167 changes how an entity determines
whether it is the primary beneficiary of a variable interest
entity (VIE) and whether that VIE should be consolidated. The
new Statement requires an entity to provide significantly more
disclosures about its involvement with VIEs. As a result, the
Company must comprehensively review its involvements with VIEs
and potential VIEs, including entities previous considered to be
qualifying special purpose entities, to determine the effect on
its consolidated financial statements and related disclosures.
Statement 167 is effective as of the beginning of a reporting
entitys first annual reporting period that begins after
November 15, 2009 and for interim periods within the first
annual reporting period. Earlier application is prohibited. The
Company does not believe that the adoption of Statement 167 will
have a significant effect on its consolidated financial
statements.
In May 2009, the FASB issued FASB ASC 855, Subsequent Events,
(ASC 855) to incorporate the accounting and
disclosures requirements for subsequent events into GAAP. ASC
855 introduces new terminology, defines a date through which
management must evaluate subsequent events, and lists the
circumstances under which an entity must recognize and disclose
events or transactions occurring after the balance-sheet date.
The Company adopted ASC 855 as of June 30, 2009, which was
the required effective date.
In April 2009 the FASB issued ASC 718, Compensation
Stock Compensation, (ASC 718). ASC 718 expands
disclosures for fair value of financial instruments that are
within the scope of FASB statement fair value
F-13
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[11]
Impact of Recently Issued Accounting Standards:
(Continued)
disclosures in interim period reports. ASC 718 is effective for
interim reporting periods ending after June 15, 2009. ASC
718 expresses the views of the staff regarding the use of a
simplified method in developing an estimate of
expected term of plain vanilla share options. In
particular, the staff indicated in ASC 718 that it will accept a
companys election to use the simplified method, regardless
of whether the company has sufficient information to make more
refined estimates of expected term. At the time ASC 718 was
issued, the staff believed that more detailed external
information about employee exercise behavior (e.g., employee
exercise patterns by industry
and/or other
categories of companies) would, over time, become readily
available to companies. Therefore, the staff stated in ASC 718
that it would not expect a company to use the simplified method
for share option grants after December 31, 2007. The staff
understands that such detailed information about employee
exercise behavior might not have been widely available by
December 31, 2007. Accordingly, the staff will continue to
accept, under certain circumstances, the use of the simplified
method beyond December 31, 2007. This portion of ASC 718
does not have a material impact on the Company.
[12]
Reclassifications:
Certain items in prior years financial statements have
been reclassified to conform to current years presentation.
|
|
Note B
|
Consumer
Receivables Acquired For Liquidation
|
Accounts acquired for liquidation are stated at their net
estimated realizable value and consist primarily of defaulted
consumer loans to individuals throughout the country and in
Central and South America.
The Company accounts for its investments in consumer receivable
portfolios, using either:
|
|
|
|
|
the interest method; or
|
|
|
|
the cost recovery method.
|
The Company accounts for its investment in finance receivables
using the interest method under the guidance of ASC 310. Under
the guidance of 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.
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). ASC310 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. ASC310 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. 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 impaired, or
written down to maintain the then current 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 until such time as a review results in a change in
the expected cash flows. The estimated future cash flows are
reevaluated quarterly.
F-14
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note B
|
Consumer
Receivables Acquired For Liquidation
(Continued)
|
The Company uses 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.
The Companys extensive liquidating experience is in the
field of distressed credit card receivables, telecommunication
receivables, consumer loan receivables, retail installment
contracts, consumer receivables, and auto deficiency
receivables. The Company uses the interest method for accounting
for asset acquisitions 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 its
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. At September 30, 2009,
approximately $70.7 million of the consumer receivables
acquired for liquidation are accounted for using the interest
method, while approximately $137.6 million are accounted
for using the cost recovery method.
After FASB ASC 310, Receivables Loans and Debt
Securities Acquired with Deteriorated Credit Quality, (ASC
310) was adopted, the Company aggregates 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 receivable; and
|
|
|
|
same type of asset class (credit cards, telecommunication, 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;
|
|
|
|
time 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 better states 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;
|
F-15
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note B
|
Consumer
Receivables Acquired For Liquidation
(Continued)
|
|
|
|
|
|
jobs or property of the debtors found within portfolios. In 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 timely customer statements from the
original issuer.
|
The Company obtains and utilizes, 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 in
evaluating and developing collection strategies and in
evaluating and modeling the expected cash flows for a given
portfolio.
The following tables summarize the changes in the balance sheet
of the investment in receivable portfolios during the following
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2009
|
|
|
|
Interest
|
|
|
Cost
|
|
|
|
|
|
|
Method
|
|
|
Recovery
|
|
|
|
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
203,470,000
|
|
|
$
|
245,542,000
|
|
|
$
|
449,012,000
|
|
Acquisitions of receivable portfolios, net
|
|
|
19,129,000
|
|
|
|
423,000
|
|
|
|
19,552,000
|
|
Net cash collections from collection of consumer receivables
acquired for liquidation
|
|
|
(96,543,000
|
)
|
|
|
(42,204,000
|
)
|
|
|
(138,747,000
|
)
|
Net cash collections represented by account sales of consumer
receivables acquired for liquidation
|
|
|
(4,963,000
|
)
|
|
|
(3,699,000
|
)
|
|
|
(8,662,000
|
)
|
Transfer to cost recovery(1)
|
|
|
(10,128,000
|
)
|
|
|
10,128,000
|
|
|
|
|
|
Impairments
|
|
|
(108,534,000
|
)
|
|
|
(74,966,000
|
)
|
|
|
(183,500,000
|
)
|
Effect of foreign currency translation
|
|
|
|
|
|
|
450,000
|
|
|
|
450,000
|
|
Finance income recognized(2)
|
|
|
68,219,000
|
|
|
|
1,937,000
|
|
|
|
70,156,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
70,650,000
|
|
|
$
|
137,611,000
|
|
|
$
|
208,261,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections
|
|
|
67.2
|
%
|
|
|
4.2
|
%
|
|
|
47.6
|
%
|
|
|
|
(1) |
|
During the 12 months ended September 30, 2009, three
portfolios were transferred from the interest method to the cost
recovery method. Based on the nature of these portfolios and the
recent cash flows, our estimates of the timing of expected cash
flows became uncertain. |
|
(2) |
|
Includes $40.7 million derived from fully amortized pools. |
F-16
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note B
|
Consumer
Receivables Acquired For Liquidation
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2008
|
|
|
|
Interest
|
|
|
Cost
|
|
|
|
|
|
|
Method
|
|
|
Recovery
|
|
|
|
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
508,515,000
|
|
|
$
|
37,108,000
|
|
|
$
|
545,623,000
|
|
Acquisitions of receivable portfolios, net
|
|
|
26,626,000
|
|
|
|
23,260,000
|
|
|
|
49,886,000
|
|
Net cash collections from collection of consumer receivables
acquired for liquidation(1)
|
|
|
(163,494,000
|
)
|
|
|
(24,085,000
|
)
|
|
|
(187,579,000
|
)
|
Net cash collections represented by account sales of consumer
receivables acquired for liquidation
|
|
|
(19,545,000
|
)
|
|
|
(850,000
|
)
|
|
|
(20,395,000
|
)
|
Transfer to cost recovery(1)
|
|
|
(209,518,000
|
)
|
|
|
209,518,000
|
|
|
|
|
|
Impairments
|
|
|
(53,160,000
|
)
|
|
|
|
|
|
|
(53,160,000
|
)
|
Effect of foreign currency translation
|
|
|
|
|
|
|
(658,000
|
)
|
|
|
(658,000
|
)
|
Finance income recognized(2)
|
|
|
114,046,000
|
|
|
|
1,249,000
|
|
|
|
115,295,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
203,470,000
|
|
|
$
|
245,542,000
|
|
|
$
|
449,012,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections
|
|
|
62.3
|
%
|
|
|
5.0
|
%
|
|
|
55.4
|
%
|
|
|
|
(1) |
|
The Company acquired the Portfolio Purchase in March 2007.
During the quarter ending June 30, 2008, the Company
transferred the carrying value of the Portfolio Purchase to the
cost recovery method. |
|
(2) |
|
Includes $45.3 million derived from fully amortized pools. |
As of September 30, 2009 the Company had $208,261,000 in
consumer receivables acquired for liquidation, of which
$70,650,000 are accounted for on the interest method. Based upon
current projections, net cash collections, applied to principal
for interest method portfolios are estimated as follows for the
twelve months in the periods ending:
|
|
|
|
|
September 30, 2010
|
|
$
|
23,518,000
|
|
September 30, 2011
|
|
|
19,508,000
|
|
September 30, 2012
|
|
|
15,073,000
|
|
September 30, 2013
|
|
|
7,761,000
|
|
September 30, 2014
|
|
|
3,856,000
|
|
September 30, 2015
|
|
|
885,000
|
|
September 30, 2016
|
|
|
691,000
|
|
|
|
|
|
|
|
|
|
71,292,000
|
|
Deferred revenue
|
|
|
(642,000
|
)
|
|
|
|
|
|
Total
|
|
$
|
70,650,000
|
|
|
|
|
|
|
Accretable yield represents the amount of income the Company can
expect to generate over the remaining amortizable life of its
existing portfolios based on estimated future net cash flows as
of September 30, 2009. The Company adjusts the accretable
yield upward when it believes, based on available evidence, that
portfolio
F-17
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note B
|
Consumer
Receivables Acquired For Liquidation
(Continued)
|
collections will exceed amounts previously estimated. Projected
accretable yield for the fiscal years ended September 30,
2009 and 2008 are as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
Balance at beginning of period, October 1, 2008
|
|
$
|
58,134,000
|
|
Income recognized on finance receivables, net
|
|
|
(68,219,000
|
)
|
Additions representing expected revenue from purchases
|
|
|
5,980,000
|
|
Transfer to cost recovery
|
|
|
(3,372,000
|
)
|
Reclassifications from non-accretable difference (1)
|
|
|
33,352,000
|
|
|
|
|
|
|
Balance at end of period, September 30, 2009
|
|
$
|
25,875,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
Balance at beginning of period, October 1, 2007
|
|
$
|
176,615,000
|
|
Income recognized on finance receivables, net
|
|
|
(114,046,000
|
)
|
Additions representing expected revenue from purchases
|
|
|
9,569,000
|
|
Transfer to cost recovery
|
|
|
(57,951,000
|
)
|
Reclassifications from non-accretable difference (1)
|
|
|
43,947,000
|
|
|
|
|
|
|
Balance at end of period, September 30, 2008
|
|
$
|
58,134,000
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes portfolios that became zero based portfolios during the
period, removal of zero basis portfolios from the accretable
yield calculation and, other immaterial impairments and
accretions based on the certain collection curves being extended. |
During the year ended September 30, 2009, the Company
purchased $577 million of face value charged-off consumer
receivables at a cost of approximately $19.6 million.
During the year ended September 30, 2008, the Company
purchased $1.5 billion of face value charged-off consumer
receivables at a cost of $49.9 million. This includes a
portfolio with an approximate value of $8.6 million that
was purchased in South America. The estimated remaining net
collections on the receivables purchased and classified under
the interest method, ($19.1 million) during the fiscal year
ended September 30, 2009, are $22.3 million.
The following table summarizes collections on a gross basis as
received by the Companys third-party collection agencies
and attorneys, less commissions and direct costs for the years
ended September 30, 2009, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended, September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Gross collections(1)
|
|
$
|
224,528,000
|
|
|
$
|
332,711,000
|
|
|
$
|
398,432,000
|
|
Commissions and fees(2)
|
|
|
77,119,000
|
|
|
|
124,737,000
|
|
|
|
116,626,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections
|
|
$
|
147,409,000
|
|
|
$
|
207,974,000
|
|
|
$
|
281,806,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross collections include: collections from third-party
collection agencies and attorneys, collections from in-house
efforts and collections represented by account sales. |
F-18
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note B
|
Consumer
Receivables Acquired For Liquidation
(Continued)
|
|
|
|
(2) |
|
Commissions and fees are the contractual commissions earned by
third party collection agencies and attorneys, and direct costs
associated with the collection effort- generally court costs.
The Company expects to continue to purchase portfolios and
utilize third party collection agencies and attorney networks. |
Finance income recognized on net collections represented by
account sales was $3.1 million, $9.4 million and
$25.2 million for the fiscal years ended September 30,
2009, 2008 and 2007, respectively.
|
|
Note C
|
Furniture
and Equipment
|
Furniture and equipment as of September 30, 2009 and 2008
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Furniture
|
|
$
|
310,000
|
|
|
$
|
310,000
|
|
Equipment
|
|
|
2,783,000
|
|
|
|
2,714,000
|
|
Software
|
|
|
117,000
|
|
|
|
|
|
Leasehold improvements
|
|
|
86,000
|
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,296,000
|
|
|
|
3,129,000
|
|
Less accumulated depreciation
|
|
|
2,758,000
|
|
|
|
2,367,000
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
538,000
|
|
|
$
|
762,000
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended September 30,
2009, 2008 and 2007 aggregated $411,000, $319,000 and $279,000,
respectively.
|
|
Note D
|
Debt
and Subordinated Debt Related Party
|
Credit
Facility
On July 11, 2006, the Company entered into the Credit
Facility with the Bank Group. As a result of this agreement, the
loan commitment increased to $175 million, from
$125 million and had an expandable feature which enabled
the Company to increase the line to $225 million with the
consent of the Bank Group. Since the inception of the Credit
Facility on July 11, 2006, material amendments are as
follows:
Second Amendment to the Credit Facility, dated March 2,
2007 Amendment consented to the proposed Portfolio
Purchase by non-credit party affiliates of the Company.
Third Amendment to the Credit Facility, dated March 30,
2007 Amendment granted a temporary over advance of
$16 million from March 30, 2007 through May 17,
2007 to permit the Portfolio Purchase.
Fourth Amendment to the Credit Facility, dated May 10,
2007 Amendment reduced the borrowing base
availability advance rate to $40 million from May 10,
2007 through October 7, 2007, and further reduced to
$20 million effective October 8, 2007 and thereafter.
Fifth Amendment to the Credit Facility, dated June 27,
2007 Amendment established an 80% advance rate on
eligible receivables and further reduced the borrowing base
availability advance rate to $15 million effective
June 27, 2007.
Sixth Amendment to the Credit Facility, dated December 4,
2007 Amendment granted a temporary increase to the
Credit Facility to $185 million. The temporary increase was
never utilized.
Seventh Amendment to the Credit Facility, dated
February 20, 2009 Amendment revises the Credit
Facility to, among other items, reduce the level of the loan
commitment as described below, redefine certain financial
F-19
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note D
|
Debt
and Subordinated Debt Related
Party (Continued)
|
covenant ratios the requirement for an unqualified opinion on
annual audited financial statements, and permit certain
encumbrances relating to restructuring of the BMO Facility (the
Receivables Financing Agreement), as further
described below. Pursuant to the Seventh Amendment, the loan
commitment was revised down from $175.0 million to the
following schedule: (1) $90.0 million until
March 30, 2009, (2) $85.0 million from
March 31, 2009 through June 29, 2009, and
(3) $80.0 million from June 30, 2009 and
thereafter. Beginning with the fiscal year ending
September 30, 2008 (and for each period included in
calculating fixed charge coverage ratio for the fiscal year
ending September 30, 2008) and continuing thereafter
for each reporting period thereafter (and for each period
included in calculating fixed charge coverage ratio for such
reporting period), the earnings before income taxes depreciation
and amortization (EBITDA) and fixed charges attributable to
Palisades XVI as further described below are to be excluded from
the computation of the fixed charge coverage ratio for Asta
Funding and its Subsidiaries. In addition, the fixed charge
coverage ratio was revised to exclude impairment expense of
portfolios of consumer receivables acquired for liquidation and
increase the ratio from a minimum of 1.50 to 1.0 to a minimum of
1.75 to 1.0. The permitted encumbrances under the Credit
Facility were revised to include certain encumbrances incurred
by the Company in connection with certain guarantees and liens
provided to BMO Facility and Asta Group (the Family
Entity). Further, individual portfolio purchases in excess
of $7.5 million now require the consent of the agent and
portfolio purchases in excess of $15.0 million in the
aggregate during any 120 day period required the consent of
the Bank Group.
Eighth Amendment to the Credit Facility, dated July 10,
2009 (and in effect as of September 30, 2009)
Amendment revised the Commitment Termination Date from
July 11, 2009 to December 31, 2009. Also, the Credit
Facility commitment shall not exceed the following amounts:
(1) $40.0 million through July 30, 2009;
(2) $34.0 million from July 31, 2009 through
August 30, 2009; (3) $30.8 million from
August 31, 2009 through September 29, 2009;
(4) $22.9 million from September 30, 2009 through
October 30, 2009; (5) $15.0 million from
October 31, 2009 through November 29, 2009;
(6) $7.4 million from November 30, 2009 through
December 30, 2009; and (7) Zero Dollars on
December 31, 2009. In addition, use of Advances to finance
portfolio purchases in excess of $7.5 million shall require
the consent of the Administrative Agent and use of Advances to
finance portfolio purchases in excess of
(a) $15.0 million in the aggregate as of July 31,
2009 and August 31, 2009; (b) $8.0 million in the
aggregate as of September 30, 2009;
(c) $6.0 million in the aggregate as of
October 31, 2009 and November 30, 2009; and
(d) $2.0 million in the aggregate as of
December 31, 2009, during any 120 day period require
the consent of the Requisite Lenders. In addition, the Company
shall have no net loss on a consolidated basis during any Fiscal
Year, provided however, for Fiscal Year ending
September 30, 2009 only, a net loss not to exceed
$10.0 million was permitted under this Amendment. The
Credit Facility bears interest at the lesser of LIBOR plus an
applicable margin, or the prime rate minus an applicable margin
based on certain leverage ratios, with a minimum rate of 5.5%
per annum.
The Credit Facility is collateralized by all assets of the
Company, other than those of Palisades XVI, the LLC which
contains the Portfolio Purchase, discussed below, and contains
customary financial and other covenants (relative to tangible
net worth, interest coverage, and leverage ratio, as defined)
that must be maintained in order to borrow funds. The applicable
rate at September 30, 2009 and 2008 was 5.5% and 5.00%,
respectively. The average interest rate excluding unused credit
line fees for the fiscal years ended September 30, 2009 and
2008, respectively, was 4.47% and 6.12%. The outstanding balance
on the Credit Facility was approximately $18.3 million on
September 30, 2009 and $84.9 million on
September 30, 2008.
On December 14, 2009, Asta Funding, Inc. and its
subsidiaries other than Palisades XVI, entered into a new
revolving credit agreement with Bank Leumi, which permits
maximum principal advances of up to $6 million. The term of
the agreement is through December 31, 2010. The interest
rate is a floating rate equal to the Bank Leumi Reference Rate
plus 2%, with a floor of 4.5%. The current rate is 5.5%. The
loan is secured by collateral consisting of all of the assets of
the Company other than those of Palisades XVI. In addition,
other collateral for the loan
F-20
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note D
|
Debt
and Subordinated Debt Related
Party (Continued)
|
consists of a pledge by GMS Family Investors, LLC, an investment
company owned by members of the Stern family. On
December 14, 2009 approximately $3.6 million of the
Bank Leumi credit line was drawn and used to pay off in full the
remaining balance on the credit facility the Company formerly
had with the bank group with IDB as agent. As the Credit
Facility was repaid there were no covenant requirements on the
Credit Facility. See Subsequent Events Note O.
Receivables
Financing Agreement
In March 2007, Palisades XVI borrowed approximately
$227 million under the Receivables Financing Agreement, as
amended in July 2007, December 2007, May 2008 and February 2009
with BMO, 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 modification, discussed below, the
debt was full recourse only to Palisades XVI and bore an
interest 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 and Fourth Amendments
to the Receivables Financing Agreement as discussed below. The
Receivables Financing Agreement contains cross default
provisions related to the Credit Facility. This cross default
can only occur in the event of a non-payment in excess of
$2.5 million of the Credit Facility. Proceeds received as a
result of the net collections from the Portfolio Purchase are
applied to interest and principal of the underlying loan. The
Portfolio Purchase is serviced by Palisades Collection LLC, a
wholly owned subsidiary of the Company, which has engaged
unaffiliated subservicers for a majority of the Portfolio
Purchase.
Since the inception of the Receivables Financing Agreement
amendments have been signed to revise various terms of the
Receivables Financing Agreement. The following is a summary of
the material amendments:
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 remains 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, the
Company provided BMO a limited recourse, subordinated guaranty,
secured by the assets of the Company, 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 the Company until the earlier of
(i) five years from the date of the Fourth Amendment and
(ii) the termination of the Companys existing senior
lending facility or any successor senior facility.
The aggregate minimum repayment obligations required under the
Fourth Amendment including interest and principal for fiscal
years ending September 30, 2010 and 2011 (seven months),
are $12.0 million and $7.0 million,
F-21
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note D
|
Debt
and Subordinated Debt Related
Party (Continued)
|
respectively, plus monthly interest and fees. While the Company
believes it will be able to make all payments due under the new
payment schedule, it is likely we will not be able to reduce the
balance of the facility to $25 million by April 30,
2011, and there is no assurance the loan will be extended. We
anticipate working with BMO to extend the facility by the
expiration date.
On September 30, 2009 and 2008, the outstanding balance on
this loan was approximately $104.3 million, and
$128.6 million, respectively. The applicable interest rate
at September 30, 2009 and 2008 was 3.76% and 6.69%,
respectively. The average interest rate of the Receivable
Financing Agreement was 4.82% and 6.10% for the years ended
September 30, 2009 and 2008, respectively.
The Companys average debt obligation (excluding the
subordinated debt related party) for the fiscal
years ended September 30, 2009 and 2008, was approximately
$162.5 million and $283.1 million, respectively. The
average interest rate was 4.72% and 6.11%, respectively, for the
years ended September 30, 2009 and 2008.
In addition, as further credit support under the Receivables
Financing Agreement, the Family Entity provided BMO a limited
recourse, subordinated guaranty, secured solely by a collateral
assignment of $700,000 of the $8.2 million subordinated
note executed by the Company for the benefit of the Family
Entity (See further discussion below on the Family Entity loan
under Subordinated Debt Related Party ). The
subordinated note was separated into a $700,000 note and a
$7.5 million note for such purpose. Under the terms of the
guaranty, except upon the occurrence of certain termination
events, BMO cannot exercise any recourse against the Family
Entity until the occurrence of a termination event under the
Receivables Financing Agreement and an undertaking of reasonable
efforts to dispose of Palisades XVIs assets. As an
inducement for agreeing to make such collateral assignment, the
Family Entity was also granted a subordinated guaranty by the
Company (other than Asta Funding, Inc.) for the performance by
Asta Funding, Inc. of its obligation to repay the
$8.2 million note, secured by the assets of the Company
(other than Asta Funding, Inc.), and the Company agreed to
indemnify the Family Entity to the extent that BMO exercises
recourse in connection with the collateral assignment. Without
the consent of the agent under the senior lending facility, the
Family Entity will not be permitted to act on such guaranty, and
cannot receive payment under such indemnity, until the
termination of the Companys senior lending facility or any
successor senior facility. On September 30, 2009, the
Company was in compliance with the Receivables Financing
Agreement loan covenants.
Subordinated
Debt Related Party
On April 29, 2008, the Company obtained a subordinated loan
pursuant to a subordinated promissory note from the Family
Entity. The Family Entity is a greater than 5% shareholder of
the Company beneficially owned and controlled by Arthur Stern, a
Director of the Company, Gary Stern, the Chairman, President and
Chief Executive Officer of the Company, and members of their
families. The loan is in the aggregate principal amount of
approximately $8.2 million, bears interest at a rate of
6.25% per annum, is payable interest only each quarter until its
maturity date of January 9, 2010, subject to prior
repayment in full of the Companys senior loan facility
with the Bank Group. The subordinated loan was incurred by the
Company to resolve certain issues related to the activities of
one of the subservicers utilized by Palisades Collection LLC
under the Receivables Financing Agreement. Proceeds from the
subordinated loan were used initially to further collateralize
the Companys revolving loan facility with the Bank Group
and was used to reduce the balance due on that facility as of
May 31, 2008. In December 2009, the subordinated
debt-related party maturity date was extended through
December 31, 2010. In addition the interest rate was
changed to 10% per annum. See Note O- Subsequent Events.
The Companys cash requirements have been and will continue
to be significant. The Company has depended on external
financing to acquire consumer receivables. Portfolio
acquisitions are financed primarily through cash flows from
operating activities and with the Companys Credit
Facility. With limited purchases of portfolios for the
F-22
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note D
|
Debt
and Subordinated Debt Related
Party (Continued)
|
current fiscal year, availability under the borrowing base
formula is approximately $4.6 million at September 30,
2009. Our borrowing availability is limited to a formula based
on the age of the receivables. As the collection environment
remains challenging, we may be required to seek additional
funding.
If the Companys collections deteriorate below our lowest
projections, the Company might need to secure another source of
funding in order to satisfy its working capital needs, downsize
its operations, or secure financing on terms that are not
favorable to the Company. However, the Company believes its net
cash collections over the next 12 months will be sufficient
to cover its operating expenses, continue paying down debt to
the extent necessary, purchase additional portfolios and pay
dividends, if declared.
The Companys debt and subordinated debt
related party at September 30, 2009 and 2008 are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Stated
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Interest
|
|
|
|
2009
|
|
|
2008
|
|
|
Rate
|
|
|
Rate
|
|
|
Credit Facility
|
|
$
|
18,301,000
|
|
|
$
|
84,934,000
|
|
|
|
5.50
|
%
|
|
|
4.47
|
%
|
Receivables Financing Agreement
|
|
|
104,321,000
|
|
|
|
128,551,000
|
|
|
|
3.76
|
%
|
|
|
4.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
122,622,000
|
|
|
$
|
213,485,000
|
|
|
|
n/a
|
|
|
|
4.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt related party
|
|
$
|
8,246,000
|
|
|
|
8,246,000
|
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note E
|
Other
Liabilities
|
Other liabilities as of September 30, 2009 and 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,425,000
|
|
|
$
|
3,145,000
|
|
Accrued interest payable
|
|
|
504,000
|
|
|
|
1,135,000
|
|
Other
|
|
|
237,000
|
|
|
|
338,000
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
2,166,000
|
|
|
$
|
4,618,000
|
|
|
|
|
|
|
|
|
|
|
F-23
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
The components of the provision for income taxes (benefit) for
the years ended September 30, 2009, 2008 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(47,062,000
|
)
|
|
$
|
6,567,000
|
|
|
$
|
30,476,000
|
|
State
|
|
|
(1,220,000
|
)
|
|
|
2,152,000
|
|
|
|
9,999,000
|
|
Foreign
|
|
|
|
|
|
|
34,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,282,00
|
)
|
|
|
8,753,000
|
|
|
|
40,475,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,092,000
|
|
|
|
(1,987,000
|
)
|
|
|
(3,593,000
|
)
|
State
|
|
|
(9,597,000
|
)
|
|
|
(647,000
|
)
|
|
|
(1,179,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,505,000
|
)
|
|
|
(2,634,000
|
)
|
|
|
(4,772,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(56,787,000
|
)
|
|
$
|
6,119,000
|
|
|
$
|
35,703,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the statutory federal income tax rate on
the Companys pre-tax income and the Companys
effective income tax rate is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income tax, net of federal benefit
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
5.8
|
|
Deferred tax valuation allowance
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
38.5
|
%
|
|
|
40.9
|
%
|
|
|
40.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized a net deferred tax asset of $24,072,000
and $15,567,000 as of September 30, 2009 and 2008,
respectively. The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred revenue
|
|
$
|
221,000
|
|
|
|
534,000
|
|
Impairments
|
|
|
26,960,000
|
|
|
|
13,930,000
|
|
Compensation expense
|
|
|
1,273,000
|
|
|
|
880,000
|
|
Other
|
|
|
26,000
|
|
|
|
223,000
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
28,480,000
|
|
|
|
15,567,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
|
(4,408,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
24,072,000
|
|
|
$
|
15,567,000
|
|
|
|
|
|
|
|
|
|
|
We file consolidated Federal and state income tax returns. Our
subsidiaries are single member limited liability companies
(LLC) and, therefore, do not file separate tax returns.
We account for income taxes using the asset and liability method
which requires the recognition of deferred tax assets and, if
applicable, deferred tax liabilities, for the expected future
tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and, if applicable,
liabilities. Additionally, we would
F-24
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note F
|
Income
Taxes (Continued)
|
adjust deferred taxes to reflect estimated tax rate changes, if
applicable. We conduct periodic evaluations to determine whether
it is more likely than not that some or all of our deferred tax
assets will not be realized. Among the factors considered in
this evaluation are estimates of future earnings, the future
reversal of temporary differences and the impact of tax planning
strategies that we can implement if warranted. We are required
to provide a valuation allowance for any portion of our deferred
tax assets that, more likely than not, will not be realized at
September 30, 2009. Based on this evaluation, the Company
recorded a deferred tax asset valuation allowance of
$4.4 million during the fourth quarter of fiscal year 2009.
Although the carryforward period for state income tax purposes
is up to twenty years, given the economic conditions, such
economic environment could limit growth over a reasonable time
period to realize the deferred tax asset. The Company determined
the time period allowance for carryforward is outside a
reasonable period to forecast full realization of the deferred
tax asset, therefore recognized the deferred tax asset valuation
allowance. The Company continually monitors forecast information
to ensure the valuation allowance is at the appropriate value.
As required by FASB ASC 740, Income Taxes, we recognize the
financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely
than not sustain the position following an audit. For tax
positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit
that has a greater than 50 percent likelihood of being
realized upon ultimate settlement with the relevant tax
authority.
We expect to receive a Federal tax benefit of approximately
$46 million based on the results of fiscal year 2009 and
recent tax law changes for net operating loss carryback. Income
tax benefits related to states where the Company files tax
returns only apply to future years. No loss carrybacks are
allowed.
The corporate federal income tax returns of the Company for
2006, 2007, and 2008 are subject to examination by the IRS,
generally for three years after they are filed. The state income
tax returns and other state filings of the Company are subject
to examination by the state taxing authorities, for various
periods generally up to four years after they are filed.
|
|
Note G
|
Commitments
and Contingencies
|
Employment
Agreements
On January 25, 2007, the Company entered into an employment
agreement (the Employment Agreement) with the
Companys Chairman, President and Chief Executive Officer,
expiring on December 31, 2009, provided, however, that Gary
Stern is required to provide ninety days prior written
notice if he does not intend to seek an extension or renewal of
the Employment Agreement. In January 2008, the Company entered
into a similar two year employment agreement with Cameron
Williams, the Companys Chief Operating Officer. On
October 5, 2009, it was announced that
Mr. Williams contract was not renewed and will expire
December 31, 2009. On November 30, 2009, the Company
announced that it had entered into a Consulting Services
Agreement with Mr. Williams. Under the terms of the
agreement, the Company will pay Mr. Williams a monthly fee
of $20,833.33 each month from January to November 2010 in
exchange for certain consulting services through
December 31, 2010. In addition, in exchange for a release
of all claims and liabilities, Mr. Williams is to be paid a
fee of $100,000, plus reimbursement of his monthly COBRA costs
of up to $1,000 per month for the next year and the Company
accelerated vesting of 16,667 stock options held by
Mr. Williams at a price of $2.95 per share.
Mr. Williams will also be paid $20,833.37 if he signs
another release in favor of the Company at the end of this
consulting term.
Leases
The Company leases its facilities in Englewood Cliffs, New
Jersey and Sugar Land, Texas. The leases are operating leases,
and the Company incurred related rent expense in the amounts of
$611,000, $553,000 and
F-25
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note G
|
Commitments
and Contingencies (Continued)
|
$526,000 during the years ended September 30, 2009, 2008
and 2007, respectively. The future minimum lease payments are as
follows:
|
|
|
|
|
Year
|
|
|
|
Ending
|
|
|
|
September 30,
|
|
|
|
|
2010
|
|
$
|
320,000
|
|
2011
|
|
|
13,000
|
|
2012
|
|
|
|
|
2013
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
$
|
333,000
|
|
|
|
|
|
|
The Company closed its Bethlehem, Pennsylvania location in
February 2009. The Company is currently reviewing lease
proposals with regard to the Englewood Cliffs, New Jersey
location.
Contingencies
In the ordinary course of its business, the Company is involved
in numerous legal proceedings. The Company regularly initiates
collection lawsuits, using its network of third party law firms,
against consumers. Also, consumers occasionally initiate
litigation against the Company, in which they allege that the
Company has violated a federal or state law in the process of
collecting their account. The Company does not believe that
these matters are material to its business and financial
condition. The Company is not involved in any material
litigation in which it was a defendant.
In July 2009, the New York Attorney General filed a special
proceeding in New York State Supreme Court against certain law
firms and collection agencies, seeking to vacate approximately
100,000 default judgments that were taken in connection with
actions in which a particular process serving company served
process. The Company was not named in the action. Several of the
third-party law firms used by the Company were named as
defendants. These law firms have indicated that they intend to
vigorously defend the action. There are an immaterial number of
the Companys accounts involved.
In settlement of a lawsuit filed by the Minnesota Attorney
General, the National Arbitration Forum announced in July 2009
that it would no longer administer consumer or employment
arbitrations. Later that month, the American Arbitration
Association announced a moratorium on the administration of
certain consumer debt collection arbitration cases. The Company
does not use arbitration as a primary means of collection from
consumers, and these changes are not expected to have a
significant impact on the Company.
The Company has an ongoing dispute with one of its significant
third party servicers regarding certain provisions in the
servicing agreement between the companies. The Company contends
that there are amounts due the Company under a profit-sharing
arrangement. The servicer has acknowledged the profit sharing
arrangement but disagrees with the calculation of the amount
owed. Additionally, the servicer has asserted that the Company
owes the servicer certain amounts with regard to a portfolio
sale and court costs allegedly incurred by the servicer and not
paid to the servicer by the Company. The companies continue to
negotiate a settlement for these items. The Company does not
believe the final settlement will have an adverse material
effect on the Company.
At September 30, 2009, approximately 29% of our portfolios
were serviced by five collection organizations. We have
servicing agreements in place with these five collection
organizations as well as all other third party collection
agencies and attorneys that cover standard contingency fees and
servicing of the accounts.
F-26
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note I
|
Stock
Option Plans
|
Equity
Compensation Plan
On December 1, 2005, the Board of Directors adopted the
Companys Equity Compensation Plan (the Equity
Compensation Plan), which was approved by the stockholders
of the Company on March 1, 2006. 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.
The general purpose of the Equity Compensation Plan is to
provide an incentive to the Companys employees, directors
and consultants, including executive officers, employees and
consultants of any subsidiaries, by enabling them to share in
the future growth of the 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 long
range plans and securing growth and financial success.
The Board believes that the Equity Compensation Plan will
advance the Companys interests by enhancing its 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 the
Companys long-term interests through ownership of the
Companys shares.
The Company has 1,000,000 shares of Common Stock authorized
for issuance under the Equity Compensation Plan and 878,334 were
available as of September 30, 2009. As of
September 30, 2009, approximately 105 of the Companys
employees were eligible to participate in the Equity
Compensation Plan. Future grants under the Equity Compensation
Plan have not yet been determined.
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 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 272,334 were available as
of September 30, 2009. As of September 30, 2009,
approximately 105 of the Companys employees were eligible
to participate in the 2002 Plan. On December 11, 2009, the
Compensation Committee of the Board of Directors of the Company,
granted 25,000 stock options to each director of the Company
other than the chief executive officer, for a total of 150,000
stock options and 8,900 stock options to employees of the
Company, who have been employed at the Company for at least six
months prior to December 11, 2009. The grants to employees
exclude officers of the Company. The exercise price of these
options was $8.07, fair market value on the date of grant. See
Subsequent Events Note O.
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
F-27
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note I
|
Stock
Option Plans (Continued)
|
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 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 to the Company.
The Company authorized 1,840,000 shares of Common Stock 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.
The following table summarizes stock option transactions under
the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding options at the beginning of year
|
|
|
1,037,438
|
|
|
$
|
11.69
|
|
|
|
1,337,438
|
|
|
$
|
9.39
|
|
|
|
1,414,439
|
|
|
$
|
9.45
|
|
Options granted
|
|
|
122,000
|
|
|
|
2.95
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
|
|
28.75
|
|
Options cancelled
|
|
|
(1,000
|
)
|
|
|
28.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(533
|
)
|
|
|
2.95
|
|
|
|
(300,000
|
)
|
|
|
1.42
|
|
|
|
(95,001
|
)
|
|
|
13.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of year
|
|
|
1,157,905
|
|
|
$
|
10.76
|
|
|
|
1,037,438
|
|
|
$
|
11.69
|
|
|
|
1,337,438
|
|
|
$
|
9.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of year
|
|
|
1,081,912
|
|
|
$
|
11.31
|
|
|
|
1,031,438
|
|
|
$
|
11.59
|
|
|
|
1,325,438
|
|
|
$
|
9.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $164,000 of compensation expense related
to stock options in the fiscal year ended September 30,
2009. As of September 30, 2009, there was $142,000 of
unrecognized compensation cost related to unvested stock
options. The Company recognized $92,000 and $141,000 of stock
based compensation expense related to stock option grants in
fiscal year 2008 and 2007, respectively.
The intrinsic value of the options exercised during fiscal year
2009 was not material. The intrinsic value of options exercised
during the fiscal years ended September 30, 2008 and 2007,
was $6.3 million, and $2.1 million, respectively.
There was no intrinsic value of the outstanding and exercisable
options as of September 30, 2009 and 2008. The aggregate
intrinsic value of the outstanding and exercisable options as of
September 30, 2007 was $38.6 million.
The average fair value of 18,000 options granted in fiscal 2007
was $28.75. The fair value was calculated using the Black
Scholes method with a volatility of 36.3%, a risk free interest
rate of 4.94%, dividend yield of 0.47%, and a life as with all
options, of 10 years.
F-28
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note I
|
Stock
Option Plans (Continued)
|
The following table summarizes information about the plans
outstanding options as of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life (In Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$ 0.8100 - $ 2.8750
|
|
|
300,000
|
|
|
|
1.0
|
|
|
$
|
2.63
|
|
|
|
300,000
|
|
|
$
|
2.63
|
|
$ 2.8751 - $ 5.7500
|
|
|
228,134
|
|
|
|
6.6
|
|
|
|
3.78
|
|
|
|
152,141
|
|
|
|
4.19
|
|
$ 5.7501 - $ 8.6250
|
|
|
12,000
|
|
|
|
2.1
|
|
|
|
5.96
|
|
|
|
12,000
|
|
|
|
5.96
|
|
$14.3751 - $17.2500
|
|
|
218,611
|
|
|
|
4.2
|
|
|
|
15.04
|
|
|
|
218,611
|
|
|
|
15.04
|
|
$17.2501 - $20.1250
|
|
|
382,160
|
|
|
|
5.0
|
|
|
|
18.22
|
|
|
|
382,160
|
|
|
|
18.22
|
|
$25.8751 - $28.7500
|
|
|
17,000
|
|
|
|
7.2
|
|
|
|
28.75
|
|
|
|
17,000
|
|
|
|
28.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,157,905
|
|
|
|
4.1
|
|
|
$
|
10.76
|
|
|
|
1,081,912
|
|
|
$
|
11.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about restricted
stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Year Ended
|
|
|
Average
|
|
|
Year Ended
|
|
|
Average
|
|
|
|
September 30, 2009
|
|
|
Grant Date
|
|
|
September 30, 2008
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at the beginning of period
|
|
|
80,667
|
|
|
$
|
22.26
|
|
|
|
45,333
|
|
|
$
|
28.75
|
|
Awards granted
|
|
|
0
|
|
|
|
0.00
|
|
|
|
58,000
|
|
|
|
19.73
|
|
Vested
|
|
|
(40,995
|
)
|
|
|
24.29
|
|
|
|
(22,666
|
)
|
|
|
28.75
|
|
Forfeited
|
|
|
(4,334
|
)
|
|
|
21.81
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at the end of period
|
|
|
35,338
|
|
|
$
|
19.73
|
|
|
|
80,667
|
|
|
$
|
22.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $820,000, $921,000 and $999,000 of
compensation expense during the fiscal years ended
September 30, 2009, 2008 and 2007, respectively. As of
September 30, 2009, there was $382,000 of unrecognized
compensation cost related to unvested restricted stock.
The Company recognized a total of $984,000, $1,013,000 and
$1,140,000 in compensation expense for the fiscal years ended
September 30, 2009, 2008 and 2007, respectively, for the
stock options and restricted stock grants. As of
September 30, 2009, there was a total of $524,000 of
unrecognized compensation cost related to unvested stock options
and restricted stock grants. The method used to calculate stock
based compensation is the straight line pro-rated method.
|
|
Note J
|
Stockholders
Equity
|
During the year ended September 30, 2009, the Company
declared quarterly cash dividends aggregating $1,142,000, which
includes $0.02 per share, per quarter, of which $286,000 was
accrued as of September 30, 2009 and paid November 2,
2009.
During the year ended September 30, 2008, the Company
declared quarterly cash dividends aggregating $2,270,000 which
includes $0.04 per share, per quarter, of which $571,000 was
accrued as of September 30, 2008 and paid November 3,
2008. During the year ended September 30, 2007, the Company
declared quarterly cash dividends aggregating $2,221,000 which
includes $0.04 per share, per quarter, of which $557,000 was
accrued as of September 30, 2007 and paid November 1,
2007.
F-29
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note J
|
Stockholders
Equity (Continued)
|
The Company expects to pay a regular cash dividend in future
quarters, but the amount has not yet been determined. This will
be at the discretion of the board of directors and will depend
upon the Companys financial condition, operating results,
capital requirements and any other factors the board of
directors deems relevant. In addition, agreements with the
Companys lenders may, from time to time, restrict the
ability to pay dividends. As of September 30, 2009, there
were no such restrictions.
The Company maintains a 401(k) Retirement Plan covering all of
its eligible employees. Matching contributions made by the
employees to the plan are made at the discretion of the board of
directors each plan year. Contributions for the years ended
September 30, 2009, 2008 and 2007 were $74,000, $121,000
and $117,000, respectively.
|
|
Note L
|
Fair
Value of Financial Instruments
|
FASB ASC 718, Compensation Stock Compensation,
(ASC 718), requires disclosure of fair value
information about financial instruments, whether or not
recognized on the balance sheet, for which it is practicable to
estimate that value. Because there are a limited number of
market participants for certain of the Companys assets and
liabilities, fair value estimates are based upon judgments
regarding credit risk, investor expectation of economic
conditions, normal cost of administration and other risk
characteristics, including interest rate and prepayment risk.
These estimates are subjective in nature and involve
uncertainties and matters of judgment, which significantly
affect the estimates.
The carrying value of consumer receivables acquired for
liquidation was $208,261,000 at September 30, 2009. The
Company computed the fair value of the consumer receivables
acquired for liquidation using its forecasting model and the
fair value approximated $277,000,000 at September 30, 2009.
The carrying value of debt and subordinated debt (related party)
was $130,868,000 and $221,731,000 at September 30, 2009 and
2008, respectively. The majority of these loan balances are
variable rate and short-term, therefore, the carrying amounts
approximate fair value.
|
|
Note M
|
Related
Party Transaction
|
On April 29, 2008, the Company obtained a subordinated loan
pursuant to a subordinated promissory note from the Family
Entity. The loan is in the aggregate principal amount of
approximately $8.2 million, bears interest at a rate of
6.25% per annum, is payable interest only each quarter until its
maturity date of January 9, 2010, subject to prior
repayment in full of the Companys senior loan facility
with the Bank Group. In December 2009 the promissory
notes maturity date was extended to December 31,
2010, and the interest rate was changed to 10% per annum. See
Note O- Subsequent Events.
F-30
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
Note N
|
Summarized
Quarterly Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Full
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
18,448,000
|
|
|
$
|
18,126,000
|
|
|
$
|
17,238,000
|
|
|
$
|
16,478,000
|
|
|
$
|
70,290,000
|
|
(Loss) income before income taxes
|
|
|
(13,147,000
|
)
|
|
|
(8,674,000
|
)
|
|
|
2,491,000
|
|
|
|
(128,182,000
|
)
|
|
|
(147,512,000
|
)
|
Net (loss) income
|
|
|
(7,837,000
|
)
|
|
|
(5,168,000
|
)
|
|
|
1,478,000
|
|
|
|
(79,198,000
|
)
|
|
|
(90,725,000
|
)
|
Basic net (loss) income per share
|
|
$
|
(0.55
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
0.10
|
|
|
$
|
(5.55
|
)
|
|
$
|
(6.36
|
)
|
Diluted net (loss) income per share
|
|
$
|
(0.55
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
0.10
|
|
|
$
|
(5.55
|
)
|
|
$
|
(6.36
|
)
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
34,275,000
|
|
|
$
|
33,882,000
|
|
|
$
|
23,572,000
|
|
|
$
|
23,766,000
|
|
|
$
|
115,495,000
|
|
Income (loss) before income taxes
|
|
|
22,452,000
|
|
|
|
(12,954,000
|
)
|
|
|
4,102,000
|
|
|
|
1,348,000
|
|
|
|
14,948,000
|
|
Net income (loss)
|
|
|
13,314,000
|
|
|
|
(7,707,000
|
)
|
|
|
2,440,000
|
|
|
|
782,000
|
|
|
|
8,829,000
|
|
Basic net income (loss) per share
|
|
$
|
0.96
|
|
|
$
|
(0.54
|
)
|
|
$
|
0.17
|
|
|
$
|
0.05
|
|
|
$
|
0.62
|
|
Diluted net income (loss) per share
|
|
$
|
0.90
|
|
|
$
|
(0.54
|
)
|
|
$
|
0.17
|
|
|
$
|
0.05
|
|
|
$
|
0.61
|
|
|
|
|
* |
|
Due to rounding the sum of quarterly totals for earnings per
share may not add to the yearly total. |
A significant portion of the $183.5 million of impairments
recorded in fiscal year 2009, $137.0 million, were recorded
in the fourth quarter . Historically, moving through the year
and into the fourth quarter, collections tend to be stable or
perhaps increase in performance. During this fiscal year,
collections increased slightly from the second quarter to the
third quarter, and given historical trends, our expectation was
to have a stable fourth quarter with regard to collections.
However, we were not able to sustain that trend and fourth
quarter collections were lower by approximately 20% as compared
to the third quarter of fiscal year 2009. Subsequent internal
and external forecast models confirmed the trend seen in the
fourth quarter. Our impairment analysis indicated the
amortization schedules established at the time of the
acquisition of the impacted portfolios were not in line with the
economic conditions in which we currently operate. Continued
economic challenges in the fourth quarter, such as the peaking
of the unemployment rate and conditions at a significant
servicer, which ultimately led to a bankruptcy filing, have
impacted the Companys performance in the fourth quarter.
As such we concluded that the significant impairments were
properly recorded in the fourth quarter of fiscal year 2009.
|
|
Note O
|
Subsequent
Events
|
On December 14, 2009, Asta Funding, Inc. and its
subsidiaries other than Palisades XVI, entered into a new
revolving credit agreement with Bank Leumi, which permits
maximum principal advances of up to $6 million. The term of
the agreement is through December 31, 2010. The interest
rate is a floating rate equal to the Bank Leumi Reference Rate
plus 2%, with a floor of 4.5%. The current rate is 5.5%. The
loan is secured by collateral consisting of all of the assets of
the Company except those of Palisades XVI. In addition, other
collateral for the loan consists of a pledge by GMS Family
Investors, LLC, an entity owned by members of the Stern family.
On December 14, 2009 approximately $3.6 million of the
Bank Leumi credit line was drawn and used to pay off in full the
remaining balance on the credit facility the Company formerly
had with the Bank Group with IDB as agent.
F-31
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2009 and 2008
|
|
NOTE O
|
Subsequent
Events (Continued)
|
On December 11, 2009, the Compensation Committee of the
Board of Directors of the Company, granted 25,000 stock options
to each director of the Company other than the chief executive
officer, for a total of 150,000 stock options and 8,900 stock
options to full time employees of the Company, who have been
employed at the Company for at least six months prior to
December 11, 2009. The grants to employees exclude officers
of the Company. The exercise price of these options was $8.07,
the fair market value on the date of grant.
In December 2009, the subordinated debt third party maturity
date was extended from January 9, 2010 to December 31,
2010. Additionally, the interest rate was changed to 10% per
annum from 6.25% per annum.
The Company evaluated its September 30, 2009 financial
statements for subsequent events through December 29, 2009.
F-32